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  • 1. Announcements: 3/13/07
    • Class Project Web Page due tonight (3/13).
    • Class Project Write-Up due Thursday (3/15).
    • Final Exam on 3/20, 5pm, this room.
  • 2. Studying for BA345W Final (1 of 2)
    • Recommendations (in suggested rank order ):
      • 1. Review your class notes from the quarter
      • 2. Review slide decks from the quarter
        • Pay greatest attention to notes & decks since Midterm
        • If you have misplaced any of the slide decks, they can be downloaded from the BA345 eReserve
      • 3. Review questions you missed from Midterm Exam.
        • All questions from Midterm are “fair game” and may show up again on the Final (possibly reworded for clarity/precision)
  • 3. Studying for BA345W Final (2 of 2)
      • 4. Review Friedman’s World is Flat, focusing on (p. 259-390), “America and the Flat World”
      • 5. Review Laudon/Traver material as it relates to the information that was presented in class from Chapters 4 through 10, and Chapter 13 .
        • With respect to Chapters 4 through 10, and Ch.13, I will not ask questions from the Laudon/Traver text that are not related to material we covered in class.
      • 6. Review information identified in Prelim and Midterm study guides (even though we skipped Prelim Exam).
  • 4. Chapter 10 Retailing on the Web
  • 5. Analysis: Why did “e-tail” in early years of E-Commerce fail to achieve its original vision? .
  • 6. One view of retail economics
    • Every retailer has fixed costs (costs that do not decrease when sales volume is low)
      • “ Brick and Mortar” Retailer : Cost of physical stores, cost of warehouses, cost of corporate headquarters, CEO’s salary, etc., etc.
      • “ E-tailer”: Cost of “online store” (website, databases, programmers, etc.), cost of distribution infrastructure, etc.
    • Margins on products you sell have to defray fixed costs, and eventually move you “into the black.”
      • Concepts of “ Black Friday ” and “ Black Monday ”
  • 7. Problems with original online retailing B2C (“e-tail”) business model
    • Moving aggressively to gain “ first mover advantage ” worked fairly well for a few companies (e.g. Amazon), but led to failure for most .
      • High initial fixed costs (expensive web site designers, high-end servers, etc.)
      • High “semi-variable” costs , esp. marketing
      • Relatively high variable costs and low margins ; problem aggravated by aggressive, competitive discounting and other “margin killers” (e.g. free shipping).
  • 8. Details: Problems with original online retailing (“e-tail”) business model
    • Many B2C E-Commerce companies failed because of faulty business models . These business models never generated profit and did not convince investors that they ever would (“ cash burn ”).
      • One analyst on eToys (paraphrased): “They are a well-run company, but their business model appears to be profit proof.”
    • B2C arguably evolving away from some classical “e-tail” markets.
    • For example: Economic reality of selling music online (e.g. iTunes) appears far more favorable than selling pet food (RIP pets.com & sock puppet) or furniture online.
  • 9. A 2 nd view of retail economics
    • It will always cost, on average, a certain amount of money to acquire customers.
    • The Lifetime Value of these customers must be greater than the customer acquisition cost.
  • 10. Details: Problems with original online retailing (“e-tail”) business model
    • High customer acquisition cost : Customers acquired via national advertising, which is very expensive, particularly in “traditional” media (TV, radio, publications, etc.)
      • Example: Sock puppet ads on TV; dot-coms advertising on Super Bowl
    • Minimal ability to generate incremental sales from personalization :
      • B2C companies grossly overestimated their abilities in this area.
      • For most e-tailers, “Lifetime Customer Value” turned out to be far less than it was believed to be, and often less than customer acquisition cost.
  • 11. Math 101
    • When customer acquisition costs far exceed Lifetime Customer Value, you are probably headed for bankruptcy.
      • I.E., when the cost of getting a customer is much higher than the lifetime value of that customer, your business is not ever going to make money.
      • When it became clear that many e-tailers had higher customer acquisition costs than Lifetime Customer Value, entire e-tail business model was called into question.
  • 12. Math 101 and Collapse of dot-com bubble
    • Most of initial dot-com “leaders” were bleeding cash, and depended on regular cash infusions from new investors to continue operating.
      • When it became clear that dot-com business model (especially e-tail) did not really work, investors started to walk away .
      • Over-hyped stocks and over-valued stocks were the fuel that had sustained the entire dot-com bubble. Without this fuel, the bubble collapsed, dot-com companies ran out of cash, and many went bankrupt.
  • 13. New online retailing business environment (E-commerce II)
    • “E-tail” Goliaths (e.g. Amazon)
    • “Bricks and Clicks” (Wal-Mart.com, etc.)
    • More smaller, niche players
      • Niche players look to build business slowly ; keep initial costs low. No Venture Capital firms waving large checks; avoid expensive national advertising based on traditional media.
      • Instead, use much less expensive, potentially more effective advertising approaches (e.g. context-based online advertising from Google, Overture, etc.).
    • Many newer, successful e-commerce business are not conventional e-tailers (e.g. Travelocity; no delivery of a physical product).
  • 14. March, 2001: Re-assessing E-Commerce
  • 15. March, 2001: Assessment at end of E-Commerce I
    • “ Everywhere we look, the once-limitless promise of the Internet appears to be fading. The dot-coms that were supposed to topple industry giants have mostly vanished. The last of the Net's bluest-chips are on the ropes . No. 1 e-tailer Amazon.com Inc. can't extract a profit from its $2.8 billion in sales, leading some to predict it will run out of money . And on Mar. 7, one of the few profitable Web companies, portal Yahoo! Inc. (YHOO ), said it would badly miss sales projections for the first quarter. Internet stocks are in free fall , many of them lucky to top a buck a share--sending billions of dollars of investment up in smoke.” (Michael Mandel and Robert Hof in Business Week, March 26, 2001)
  • 16. March, 2001: Re-assessing E-Commerce
    • In this article, Mandel & Hof argue that:
      • The Internet is fundamentally a tremendous communications tool .
      • Industries are likely to be impacted by the Internet to the degree that they are information-centric . Example: Financial Services
      • Initial projections of the impact of the Internet on retail industry (i.e. “e-tailers”) did not take this fully into account.
      • Retail is not as information-centric as many think; retail is largely moving a physical item from Point A to B to C (e.g. manufacturer to warehouse to customer, known as “ fulfillment ”).
  • 17. March, 2001: Re-assessing E-Commerce
    • “ First, the Internet was supposed to change everything. That's just plain wrong . The reality is, there was no way that a single technology could fulfill such an extravagant promise...
    • But clearly in much of the economy , the Internet offers incremental payoffs without substantially altering core businesses ...
    • Strip away the highfalutin talk, and at bottom, the Internet is a tool that dramatically lowers the cost of communication . That means it can radically alter any industry or activity that depends heavily on the flow of information .” (Michael Mandel and Robert Hof in Business Week, March 26, 2001)
  • 18. Chapter 13 Auctions, Portals & Search , and Communities
  • 19. Learning Objectives
    • Describe dynamic pricing in context of auctions
    • Recognize the potential for auction abuse and fraud
    • Understand the business models of portals
    • Understand the business value of communities
  • 20. Major Trends in Auctions, Portals, and Communities—2006
    • Auctions
      • eBay continues to expand but more slowly
      • Use of fixed price platform increases
    • Portals
      • Portal business model, driven by advertising revenues , experiences resurgence
    • Communities
      • MySpace fastest growing community in history
      • News Corp. intends to migrate MySpace to portal
      • Commercial sponsorship and advertising-supported business models increase
  • 21. Auctions
    • Online auction sites among the most popular consumer-to-consumer sites on the Internet
    • eBay.com – market leader
    • Several hundred different auction sites in U.S. alone
  • 22. Defining and Measuring the Growth of Auctions and Dynamic Pricing
    • Auctions – markets in which prices are variable and based on the competition among participants who are buying or selling products and services
    • Dynamic pricing – price of product varies , depending directly on demand characteristics of customer and supply situation of seller
    • Fixed pricing – one national price, everywhere, for everyone (example: iPods on Apple.com).
    • Trigger pricing – adjusts prices based on location of consumer (used in m-commerce)
    • Utilization pricing – adjust prices based on utilization of product
    • Personalization pricing – adjusts prices based on merchant’s estimate of how much the customer values product
  • 23. Insight on Society: Dynamic Pricing : Is This Price Right?
    • New forms of dynamic pricing include:
      • Time-based dynamic pricing: Adjusts price to different points in the product life cycle
      • Peak-load dynamic pricing: Adjusts prices to times of day
      • Clearance dynamic pricing: Used when products lose value over time (plus, “perishables”):
        • Produce, Airplane seats, Hotel Rooms, “old” technology
    • Dynamic pricing is opposed by some consumer groups and individuals
      • Amazon example
      • Some forms appear to be more acceptable than others
  • 24. Defining and Measuring the Growth of Auctions and Dynamic Pricing (cont’d)
    • Most widely known auctions are consumer-to-consumer (C2C) auctions in which auction house is simply an intermediary market maker (eBay model)
      • By functioning simply as an intermediary , eBay and similar sites avoid many of the costs incurred by a typical e-tailer.
  • 25. Costs eBay avoids as “market maker”
      • Inventory holding costs; opportunity cost of capital (“inventory is the enemy”).
      • Inventory risk ; e.g. liquidating inventory that has lost value
      • Processing product returns.
      • Warehouses, with associated real estate costs, etc.
      • Transportation and shipping of products; maintaining vehicles, fuel costs, etc.
      • Employees to pick, pack, and ship products (as Amazon does when functioning as e-tailer).
  • 26. Benefits of Auctions
    • Liquidity – Sellers can find willing buyers and buyers can find sellers (or particular auction venue is likely to fail)
      • Importance of liquidity rewards “1 st movers” in C2C
    • Price discovery – Buyers and sellers can quickly and efficiently develop prices for items that are difficult to access , where price depends on demand and supply, and where product is rare
    • Price transparency – Allow everyone in world to see the asking and bidding prices for items
    • Market efficiency – Auctions can and often do lead to reduced prices, leading to an increase in consumer welfare
  • 27. Greek Oil Lamp, circa 550 B.C.
    • Page 786
  • 28. Benefits of Auctions (cont’d)
    • Lower transaction costs – Online auctions can lower cost of selling and purchasing products, benefiting both merchants and consumers
    • Consumer aggregation – Sellers benefit from large auction sites’ ability to aggregate large number of consumers who are motivated to purchase
    • Network effects – The larger an auction site becomes in terms of visitors and products for sale, the more valuable it becomes as a marketplace for everyone
      • “ Sellers go where the buyers are, and buyers go where the sellers are.” Why eBay is so “valuable.”
  • 29. IBM Thinkpad Offered on eBay.com
    • Page 793
  • 30. Types of Auctions (cont’d)
    • Name Your Own Price Auctions
      • Pioneered by Priceline
      • Users specify what they are willing to pay for goods or services and multiple providers bid for their business
      • Prices do not descend and are fixed
      • Priceline received a business method patent for the “name your own price” approach
  • 31. Priceline’s Name-Your-Own-Price Offerings
    • Table 13.4, Page 795
  • 32. Issues with auctions and markets
    • “ Buyer’s lament”:
      • Buyer gets so caught up in competitive element of auction that he/she ends up substantially overbidding just to “win” the auction.
    • Auction/Market Fraud: “Pump and Dump”
      • “Bidders” who do not really want to own the item being purchased; sellers pretending to be bidders?
      • In some auctions, confederate bidders work as team to artificially drive up price of an item
      • Internet chat rooms used as vehicles for stock “pump and dump” schemes.
      • Dot-com bubble: “Greater fool” theory
  • 33. eBay’s List of Auction Frauds
    • Table 13.8a, Page 805
  • 34. eBay’s List of Auction Frauds (continued)
    • Table 13.8b, Page 806
  • 35. E-commerce in Action: eBay.com
    • World’s largest and most popular online auction
    • Major e-commerce success story
    • Business model ideally suited to Web
    • Derives all revenue from movement of information
    • Excellent financial performance
    • Business strategy based on expansion in both geography and scope
      • Major issue : can eBay sustain a growth rate that meets investor expectations?
    • Auction fraud and abuse a major challenge
    • Also, new concerns about eBay as preferred method for “fencing” stolen items (“e-fencing”).
  • 36. Changes in eBay strategy
    • eBay has launched “eBay Express,” a conventional e-tail site linked to eBay.
    • eBay Express intended for users who want to make a simple, fast purchase (fixed price, no bidding, immediate purchase).
  • 37. eBay stock since IPO (note Y-axis)
  • 38. The Growth and Evolution of Portals
    • Portals – most frequently visited sites on the Web
    • Are gateways to the more than 8 billion Web pages
    • Most of top portals today began as search engines
    • Today provide navigation of the Web, commerce, content (own and others’), and services (Google’s spreadsheet).
    • Top four portal/search engine sites 2003:
      • Google
      • Yahoo (including Overture and AltaVista)
      • MSN (Microsoft Network)
      • AOL (America Online) (including Netscape)
    • Second tier: AskJeeves, Infospace, Lycos, Earthlink, Looksmart (MySpace poised to become true “portal” and “break out” into 1 st tier?)
  • 39. Reach of the Top Portals and Search Engine Sites in the United States
    • Figure 13.4, Page 779
    SOURCE: Based on data from eMarketer, Inc., September 2005.
  • 40.
    • December 2006 Web site traffic data
  • 41. Yahoo, MySpace visitors, 9/06
    • Yahoo still #1 web destination in US, with 130 million users.
    • (Yahoo has over 400 million users worldwide.)
  • 42. Brief Digression: Search .
  • 43. Search: Limitations & future horizons
    • “ The Search problem is only about 5% solved” (paraphrase from John Battelle, “The Search”)
      • Search engines still generally poor at understanding what users mean , as opposed to what they say.
        • Bill Gates’ example: “fast chips”
      • Natural language understanding still poor ; progress has been very slow (Apple’s Knowledge Navigator in early 90s).
      • Yahoo and others intend to eventually use information gathered about the user to improve quality of search results.
      • But … gathering information about users is controversial, due to privacy issues and commercial applications.
  • 44. Additional Search Resources
    • Toolbars from Google, Yahoo, A9, etc.
      • Google’s toolbar also an effective popup blocker
    • Location-based search, i.e. “local search” (powerful, but challenging to keep information current)
      • Perhaps an eventual replacement for Yellow Pages ?
      • Major area for future growth with m-commerce
  • 45. What’s new in Search?
    • Desktop and integrated search (free beta from Google, Yahoo Desktop Search , also Microsoft)
    • Search beginning to expand beyond Web to include books, manuscripts, etc.
      • Google, others: Begin working towards making all information ever published available online (although publishers have filed lawsuit).
    • Video search : Major technical challenge to go beyond “tagged” pictures .
      • Example: “I want to see pictures and sketches of Abraham Lincoln.”
      • Example: “Historian wants to view all video where Dick Cheney mentions Saddam Hussein.”
    • New emphasis on “specialized search” (vertical).
  • 46. End of Brief Digression on Search .
  • 47. Battle of the Portals
    • Major problem facing Yahoo, MSN, and AOL.
      • “ How do we catch up to Google?”
    • Google’s context sensitive advertising system is extremely effective, and generates tremendous profit.
    • Google’s highflying stock is a “currency” Google can use to acquire other companies (e.g. YouTube, for $1.7b).
      • Yahoo is working actively with newspapers to strengthen local coverage and local advertising .
      • AOL repositioning itself as a free portal to attract advertising dollars.
      • MSN is leading effort at Microsoft to adapt to new business model (web-centric, advertising-supported, free services).
  • 48. Google stock since IPO ($85 - $490)
  • 49. Portal Business Models
    • Major portal revenue sources include:
      • ISP services (AOL, MSN)
      • General advertising revenue/tenancy deals
      • Commissions on sales
      • Subscription fees
  • 50. Strength of online advertising
  • 51. Strengths of Google’s ad model
    • Google’s context sensitive advertising model:
      • Is generating tremendous profits
      • Makes use of sophisticated algorithms which determine placement of ads (Yahoo struggling to match with “Panama”).
      • May be extensible to other media (TV, radio, newspapers, etc.)
      • Is turning into a type of distribution channel
        • Many small companies who had never purchased advertising services before are purchasing them via Google’s web site.
        • Google is using this “channel” to sell ads for other companies (e.g. NY Times), with plans to eventually charge commission.
  • 52. Limitation: Context-Sensitive Ads
    • Basic logic of context-sensitive ads, whether on a search site or with Gmail-type service:
      • “If user is searching for information about a topic, or discussing it in an e-mail , he/she is probably interested in that topic, and therefore predisposed to click on an ad related to that topic.”
    • This approach often effective, but likely to be much less effective when introducing new product category (“digital camera” in 1990s).
  • 53. Types of Online Communities and Their Business Models
    • General communities – Offer members opportunities to interact with a general audience organized into general topics
    • Practice communities – Offer members focused discussion groups, help and knowledge related to an area of shared practice
    • Interest communities – Offer members focused discussion groups based on a shared interest in some specific subject
    • Affinity communities – Offer members focused discussion and interaction with other people who share the same affinity (self or group identification)
    • Sponsored communities – Online communities created by government, non-profit or for-profit organizations for purpose of pursuing organizational goals
  • 54. Types of Online Commercial and Non-Commercial Communities
    • Table 13.13, Page 833
  • 55. Community Features and Technologies
    • Table 13.14, Page 837
  • 56. Commercially Sponsored Communities: Business Uses of Community
    • Sponsored commercial communities can play an important role as customer relationship management tools
      • Can gather customer feedback and suggestions
    • Cisco created a community for its users, and they often help each solve technical problems.
      • For Cisco, much cheaper than having the customers call Cisco technical support line.
      • Also, “selling point” for future sales situations.
    • BUT, must be willing to relinquish control .
  • 57. Economic Benefits of Commercially Sponsored Communities
    • Table 13.15, Page 840