The midterm text week will cover:

1. The midterm text week will cover: • Required reading materials listed on the course website (Weeks 1 – 6) • Material covered in lectures (your own notes plus the ppt slides) • Theoretical material covered in labs (not practical techniques – these will be tested in the lab assignment on Thursday) • Review of the test format and mini-essay questions (posted on the course website last week)

2. Internet Business and Revenue Models MGMT 230

3. Internet Business and Revenue Models - after this class you will be able to: • Define an internet business / revenue model • Explain the main ways in which businesses generate revenue on the Internet • Give examples of each of the main Internet business models • Explain some of the main problems related to doing business on the Internet

4. What is an Internet business / revenue model? • How does a company sustain itself in the long term? • that is, generate revenue and profit • An Internet business model is the method by which a company plans to make money long term by taking advantage of the unique properties of the Internet. • Two types • Pure-Play businesses - internet only • BAM hybrid - combination of traditional “bricks and mortar” business and internet model • Can be either B2B or B2C (or a combination) • Ask yourself “where is the money coming from? Firms often have more than one revenue model

5. Major categories of business model – ways of generating revenue • Most businesses use a combination of revenue models • Categories will vary – some common models (based on Michael Rappa’s taxonomy) • Brokerage • Advertising • Infomediary • Merchant • Manufacturer(Direct) • Affiliate • Community • Subscription • Utility (Net services) Michael Rappa. digitalenterprise.org

6. Brokerage Model • Brokers bring buyers and sellers together by creating markets and facilitating transactions. (B2B, B2C, C2C) • Revenue usually comes from fees or commissions charged to either buyers or sellers (or both) for each transaction • Examples: • auction sites such as eBay (relies on the “network effect”) • transaction broker – PayPal Michael Rappa. digitalenterprise.org

7. Advertising Model: display advertising and search advertising • Web site provides content to users at no (or lower) direct cost in exchange for the viewing of, or interacting with, advertising messages of various types. • How does Google actually make money? • Google’s revenues were US $50.2 billion in 2012 – around 95% from advertising • TV advertising dollars now switching to online video advertising • Advertising is often used in combination with other models • What is the biggest challenge for advertisers? Michael Rappa. digitalenterprise.org

8. Advertising: classifieds • Classifieds – a subset of the advertising model, where typically a listing fee is charged • Examples: Monster.com, Craigslist.com • This shift of classifieds to the web has threatened which traditional industry?

9. Infomediary Model • Businesses that collect and provide information - typically data about user behaviour and preferences that is sold to interested parties • Revenues come from sales of data about consumers that they collect by various means • Examples: advertising networks such as DoubleClick,audience measurement and market research agencies such as Nielsen, and data mining firms like Acxiom Michael Rappa. digitalenterprise.org

10. Merchant Model • Retailers and wholesalers of goods and/or services. • Make money from the profit margin on sale of goods or services • Very commonly used business method on the internet • May be: • Pure-play (virtual merchant) eg. Amazon.com • BAM hybrid (Click and Mortar) eg. Future Shop • Bit vendor - deals in purely digital products (software, music, images, video) egSteam, iTunes • Catalog merchant – eg. Lands’ End, MEC Michael Rappa. digitalenterprise.org

11. What kind of businesses are most suited to eCommerce? Is it a Commodity item? – product or service that is hard to distinguish from the same products or services provided by other sellers. Very well suited to eCommerce. What is the Shipping profile? – collection of attributes that affect how easily a product can be packaged and delivered. Source: Schneider, Electronic Commerce, Course Technology. 4e. 2003.

12. Possible problems for merchants operating both online and in B&M stores Problem: Channel conflict or cannibalization. Solution: Web sites provide product information only – no ecommerce capability - directs customers to physical stores eg. Canadian Tire What is the problem with this strategy? Michael Rappa. digitalenterprise.org

13. Possible problems for merchants operating both online and in B&M stores (2) Problem: Goods purchased on company website can be returned to physical store (customers like this – retailers don’t) Solution: Channel cooperation: Retail stores are credited with inventory and labor costs for each Web site return they handle. Michael Rappa. digitalenterprise.org

14. Manufacturer (Direct) • The manufacturer or "direct model“ is based on the power of the web to allow a manufacturer (i.e., a company that creates a product or service) to reach buyers directly • This compresses (shortens) the distribution channel. • Advantages: efficiency, improved customer service, and a better understanding of customer preferences. eg. Amazon Kindle, Dell

15. Affiliate Model • An affiliate get paid for sending customers to other sites – by providing purchase opportunities wherever people may be • Pay-for-performance model • Incentives offered to third parties to sell from their web sites (no sale, no affiliate commission) • The affiliated sites provide a click-through link to the merchant site in exchange for a percentage of revenue • Very well suited to the nature of the web • Nicholas Carr – Amazon affiliate • With widgets, the experience can be very engaging Michael Rappa. digitalenterprise.org

16. Strategic Alliances • When two or more companies join forces to undertake an activity over a long period of time • Business activities are complementary rather than competitive Example: • Google has partnered with Yellow Pages Group to create Google Local • Probably use some form of revenue sharing model Michael Rappa. digitalenterprise.org

17. Community Model • Relies on user loyalty, social networking and user-generated content (UGC) • Relies heavily on the “network effect” • Users are often also contributors of content and knowledge eg. Music (jamendo.com), book reviews (amazon.com), events listings (mec.ca), photographs (flickr.com), Facebook • Free content for the web site owner / publisher! Free information about users (market intelligence) • Attractive to advertisers • Good for not-for-profit ventures eg. wikipedia.org (where does wikipedia’s revenue come from?) Michael Rappa. digitalenterprise.org

18. Subscription Model • Goods or services available by subscription (all you can eat model) Eg. Netflix, Globe and Mail • Users are charged a periodic -- daily, monthly or annual -- fee to subscribe to a service. • Subscription fees are incurred irrespective of actual usage rates. • Subscription and advertising models are frequently combined. Michael Rappa. digitalenterprise.org

19. “Freemium” • It is quite common for sites to combine free content with "premium" (i.e., subscriber- or member-only) content – also called “freemium” • Basic service available for free • Chris Anderson talking about “Free” (5 minutes) • Users of the web site or internet service are charged for “premium” content or service • Newspapers, magazines, music, video, games etc, egShockwave.com • Photosharing on Flickr Michael Rappa. digitalenterprise.org

20. Utility (Net services) • The utility or "on-demand" model is based on metering usage, or a "pay as you go" approach. • Unlike subscriber services, metered services are based on actual usage rates. • Amazon Web Services (AWS) – “cloud computing” services

21. Revenue Models in Transition • Several companies have changed their revenue models – experimenting with mixed-models • This has happened in particular in industries that are being “disrupted” by the effects of the internet and digitazation • eg. Advertising-Supported to Advertising-Subscription Mixed Model – eg. Globe and Mail Michael Rappa. digitalenterprise.org

22. Multiple Business Model Transitions Encyclopedia Britannica • Print publisher to Advertising-Supported model to Advertising-Subscription Mixed Model (freemium) Michael Rappa. digitalenterprise.org

23. Business models on the web - recap • There are many variants of these models, and each of them relies in some part on the unique properties of the Internet • As bandwidth increases and high-speed access becomes the norm in homes and offices, we will see even more opportunity and innovation Michael Rappa. digitalenterprise.org