Case Studies

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Case Studies
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Auction How it starts (E-Bay I)

• Started out as an auction community
• Fees on transactions
• Success from careful attention to seller's needs
• Investment in improving the site's functionality
• Category Total sales
• Collectibles 25,400,000
• Automobiles 23,700,000
• Antiques 11,200,000
• Electronics 9,800,000
• Music, Movies, Books 9,800,000
• Jewelry 9,400,000
• Toys 8,200,000
• Computers 7,700,000

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E-Bay Expectations

• In 1/2001 E-Bay growing 72 a year (hot!)
• 129M on 740M revenues 37M customers
• (current earnings about 100M wheres that
  72?!)

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E-Bay Company Strengths

• Ebay managers
• Seasoned retail/marketing execs from e.g. PG,
  Pepsico, GE etc.
• Forward looking technology emphasis
• Leverage web technology
• Analyse customer behavior/trends etc.
• Collect every click, monitor/analyse continuously
• Strong Combination 

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E-Bay Vision/Success

• Careful attention to Seller needs
• Opportunity
• Reach large market w/ neglibible startup costs
• Well-supported infrastructure sophisticated,
  continuously monitored and improved marketing UI
• (works for Ebay bottom line win/win for
  Ebay/sellers buyers different issue)
• Self-rating system supported by ebay technology
  encourages quality seller goods/service
• Sellers very enthusiastic oppty is equivalent to
  having a dozen stores in prime locations w/
  negligible overhead

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E-Bay Seller Community

• A significant new phenomenon
• Small operators bring in 10,000/mo.
• How popular? E-Bay Seller clubs/forums
• Democratic Economy Business benefit is highly
  distributed
• Example of web-site on users side

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E-Bay Problems

• Company cannot reach growth/volume shareholders
  want from dot.com w/ collectible auctions
• Going after bigger fish
• Plan
• Ebay is the place to buy all things
• Current implementation partner w/ major
  producers who will use Ebay as a significant
  sales channel
• From list of sale categories, observe that
  collectibles has largest share
• Approach angers old-timers who came to Ebay for
  egalitarian approach now big-time is goal for
  Ebay

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E-Bay Analysis

• Failure of growth indicative of customer
  saturation
• Real power of Ebays success democratic seller
  community innovation
• a new empowerment of the small guy/everybody wins
• More standard, large producer items can only
  market to the buyer side, -- no innovation
• Result saturated market

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E-Bay Epilogue (for now)

• From Seller democracy to Wall Street greed
• analysts/shareholders want more growth
  performance, so the Co. is expanding into
  new/fixed price items and is targeting the total
  shopping milieu.
• Growth at prev. rate from this strategy remains
  to be seen . . .

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Subscription/Service Consumer/Retail

• Key Concepts
• Disintermediation
• Switching Costs
• Community Leverage
• Similar to E-Bay seller community but reverse

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Comp-U-Card Basic Concept

• CEO Walter Forbes idea Disintermediation
• Database of Producer Goods
• Customers interact w/ info only
• Producer ships directly to customer
• Started before PC used telephone membership
  sales catalog
• Customer pays flat membership fee
• e.g. 49
• CUC doesnt make profit on sales
• Doesnt report ? low profile

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CUC Financial Performance

• IPO in 1983
• 50M customers
• Turnover of 2B within 10 years
• On-line version launched in 1995
• Sold 150M in 1996 more than almost any other
  on-line venture

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Beyond Disintermediation

• Whos side is CUC on? Company or Customer?
• Forbes compares his company to Wall-Mart, a
  classic retailer.
• The average Wal-Mart sells about 50,000 items.
  CUC has over 1 million, growing to 2 or 3 million
• Wal-Mart is a retailer. They sell. We don't sell.
  
• You pay us a membership fee, and we help you buy.
  
• We're on your side.
• They have inventory. We don't.
• As retailer, if we have 100 Panasonics sitting in
  my back room, Ill say, 'Hey guys, push the
  Panasonics. We don't do that. No one is going to
  pay a membership fee if they get the hard sell.

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CUC web twists

• Retailing on web Low switching cost
• Customer always finds lowest price
• ?prices must be rock-bottom
• ? achieved only with advantage of scale
• The million items on sale do not reflect needs of
  Sellers, CUC gets only a membership fee.
• NetMarket currency NetMarket Cash
• Technique to raise cost of switching elsewhere
• Customers get back 5 of their purchase in points
  to use for later purchases

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Hospitality Franchise Systems

• Merger announced CUC/HFS May 1997
• Both Companies approx 2B revenues, approx 10B
  market cap
• Created new company Cendant

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HFS Business Concept

• HFS Franchise Operator
• Owns
• Brand name
• Reservations system
• Global customer data derived from reservations
• Operates inspectors to maintain standards.
• Franchisee responsible for
• Real estate
• All services, maintenance
• All related labor costs

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HFS Financial Performance

• Franchise brands acquired
• Hotels
• Ramada, Howard Johnson, Super 8, Travelodge
  others
• Real Estate Brokerage
• Century 21, ERA, Coldwell Banker
• Car Rental
• purchased Avis, sold stock public and sold all
  physical assets to franchisees
• Estimated 1997 financials for HFS
• 475M profit on 2B revenues

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Merger Compatibility Concept

• Both companies
• Avoid physical assets
• Own reservations/transaction networks and
  associated customer records
• Actual product is provided by others
• Profit is a flat fee

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Merger Advantage Concept

• Synergy between services
• CUC has about 20 consumer memberships
• E.g. travel, shopping, dining, auto
• HFS has about 10 brands of services
• E.g. hotel, real estate, car rental
• Example cross marketing
• Buy a house thru Century 21
• Get a discount membership in the CUC Welcome
  Wagon
• Welcome Wagon a club that selects merchandise
  of interest to new home buyers.
• Rent a car w/ Avis
• Get offer on CUC Entertainment discount book.

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Cendant Vision

• Merger idea in one sentence
• Take all the customers that use HFS services ?
  sign them up on CUC memberships.
• Perceived as giant marketing opportunity
• Lasted a very short time . . .

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Cendant Problems

• Cendant chairman Forbes resigned mid-1988 amid
  investigations of fraud and mis-representation
• Post-mortem audit by Andersen reveals, over 3
  year period
• 500M in fabricated revenues
• Overstatement of 200M earnings
• Cendant considering suing Ernest Young
  accountants

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Cendant Behind the Problems

• Q If fundamentals of the merger are sound . . .
• Cant some accounting problems be overlooked?
• A Analysts are questioning the underlying
  business model
• Model
• Earnings are from fees
• Limited assets/liabilities ? high return on
  equity
• New members and new franchisees drive growth
• ? Works if existing members can be retained
• But, it turns out, CUC misrepresented renewal
  rate
• Not as good as hoped over recent period.
• At HFS, actual renewal rate of franchisees not
  clear
• Visible growth was from acquisitions

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Cendant Analysis

• Who gets primary benefit of Merger?
• First benefit is to shareholders
• Sign up a captive customer population as CUC
  members
• Benefit to customers?
• True large membership numbers improves price
  efficiency ? benefits customer
• But this was not the goal.
• To achieve goal, must sell memberships extra-hard
  ? exactly the opposite of CEO stated goal.
• Could fall-off in renewals be due to this focus?

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Subscription/Service (contd)

• How the CUC/HFS deal is faring
• See http//www.cfo.com/article/1,5309,14980,0
  0.html (Interesting part is end of p.4, p.5)