Lecture 1: History and Business Models

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Lecture 1 History and Business Models

• Assignment 1 Auction Registration and bidding
• Assignment 2 Turn in profiles

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Assignment 2 Internet Profile

• On an Excel Spreadsheet, provide on separate
  rows
• 1. DO NOT(!!!!) PROVIDE YOUR NAME ON THE
  SPREADSHEET
• 2. Gender Male/Female
• 3. Married Yes / No
• 4. Children Yes/ No
• 5. Currently Full-time employed Yes/No
• A list of 20 Internet sites you visited last
  month. They must each be on a separate row. Also,
  they must be distinct. http//www.cnn.com/2002/WO
  RLD/europe/08/19/chechnya.helicopter/index.html
  and http//www.cnn.com/2002/US/08/19/mckinsey.repo
  rt/index.html would not be counted as separate
  sites.
• Email the spreadsheet to me at eharuvy_at_utdallas.ed
  u

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• WHAT DO WE USE THE INTERNET FOR?
• Email
• Chat
• Personal web pages
• Banking
• Look for a job. Post resume.
• News, weather and stock quotes
• Brokerage services and retirement portfolio
• Movie shows and times
• Airline tickets, hotel reservations, car rental
• Finding information about products. Feature and
  price comparison.
• Buying books and CDs and misc.
• Finding information for the class
• Finding information to settle disputes
• Dictionary and thesaurus

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Was the Internet Revolution over-hyped?
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WHAT WENT WRONG?

• The Gold Rush of E-Commerce. Capital foolishly
  invested. E.g., Dot-coms are able to raise
  capital without having to demonstrate
  profitability or viability
• Lots of new economy startup millionaires and
  billionaires with no understanding of business
  models
• Common assumption that old business rules are
  obsolete
• Companies jump in, undermining own competitive
  advantage and industry profitability (airilines,
  cars, books, toys, computers)
• Companies forfeiting proprietary advantages in
  misguided relationships and partnerships
• Distorted signals
• subsidized revenues (Amazon, eToys) When price
  is artificially low, demand is artificially high
• Some revenues were in terms of stock rather than
  cash. Much of the 450 million of revenues Amazon
  reported one year were from partners in stock
  (stock shows in revenue but not in cost).
• subsidized inputs in terms of free content from
  content providers (Yahoo!). Some content
  providers paid portals to distribute their
  contents
• Some suppliers agreed to accept stock in lieu of
  cash (stock does not appear as cost)
• Fuzzy new performance metrics
• Price competition becomes more intense as search
  costs decline
• Barriers to entry reduced or eliminated in many
  instances

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What have Internet intensive companies done wrong?

• 1. Stretch resources.
• RD
• Acquisitions
• Executive compensation
• 2. Accounting
• Swaps of products
• Sales for stocks
• Loans for buyers
• Focus on stock price
• 2. Demand Assessment
• 3. Products and target segments
• 4. Defensible position
• 5. Identification of competitors and substitutes

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A Brief History of Internet

• 1969 - first link UCLA to Stanford Research
  Institute
• 1971 - email and use of _at_ symbol
• 1972 - remote access of computers -telnet
• 1973 - multiple person chat sessions
• 1973 - file transfer protocol
• Was meant to be an emergency military
  communication and sharing of ideas among academic
  community - funded by NSF
• 1994 - NSF withdrew funding - private web
  browsers and servers - WWW hypertext
• Possible to mix pictures, sound, and video with
  simpler text.
• Clickable links

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Jupiter Communications (2000), 336 billion of B2B
in 2000. 6.3 trillion by 2005 Goldman Sachs
(2000) projected 4.5 trillion by 2005.
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Types of E-Commerce

• B2C Business-to-Consumer
• B2B Business-to-Business
• C2C eBay Market maker involved
• P2P (Legal) Music sharing
• M-Commerce (mobile)--- PDAs, cellphones
• Other buzz words
• Brick and Mortar
• Click and Mortar

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Internet Advertising

• Consumer Advertising By Dot-Com Brands(Percent
  change over previous year)
• Universal McCann, Insiders Report, December
  2003

• TNS Media Intelligence/CMR reported that
  advertisers spent 4.7 billion in the first nine
  months of this year on Internet ads, representing
  a 13.8 percent gain over the same period in 2002.
  

Year Ad expenditures (in millions) change
1998 654 77.00
1999 3,086 372
2000 5,597 81
2001 2,662 -52
2002 2,150 -19
2003 2,200 2.30
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Ad Revenues, 2000-present (in millions) Source Internet Ad Revenue Report, IAB and PwC
Year Revenue
2000 7,087
2001 7,134
2002 6,010
2003 5,037 (3rd Q)
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OTHER DIMENSIONS

• growth in
• Web content
• Internet communication.
• Internet auctions
• Rethinking of basic business principles and
  models
• Ability to collect individual level data
• Ability to customize products, services, and
  information

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Strategy Basics
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Porters 5 forces framework
Bargaining Power of suppliers
Threat of new Entrants Entry barriers
Industry competitors Rivalry
Threat from Substitutes
Bargaining power of Buyers
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Porters Five forces framework

• Supplier bargaining power
• Increased or decreased?
• Internal rivalry - increased
• Inability to monopolize network due to common
  standards
• Differentiation difficult to maintain
  proprietary offerings
• Buyer power increased or decreased?
• -INCREASED
• Shop bots Price sensitivity increases
• Differentiation decreased
• Switching costs decrease
• Information and comparability increase
• -DECREASED
• Competition between buyers
• Threat of entry increased
• Entry and exit barriers
• Economies of scale sales force, access to
  channels, physical locations

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First Mover Advantage?

• Pioneer Leader
• Browser -- Mosaic Explorer
• Search Directory -- Yahoo Google / Yahoo
• Free Email -- Hotmail Hotmail
• E-tailing -- ISN Amazon
• Books -- Amazon Amazon
• Music -- CDNow! CDNow, Amazon
• C2C Auctions -- Ebay Ebay
• B2B eProcurement -- Ariba Ariba
• B2B Auctions -- FreeMarkets FreeMarkets

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Is there pioneering advantage on internet?
(Porter thinks not)

• Unique assets accumulate
• Number of members, member content
• Barriers to new allegiances get higher
• Relationship and trust grows
• Adapt to technology
• Factor costs increase
• shortage of skilled hosts of bulletin boards and
  chat rooms
• Acquisition becomes expensive
• High stock prices and deep pockets