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  1. internet business models text and cases tom eisenmann

  2. Chapter One Access Provider Lecture

  3. Get Big Fast • Accelerated investment in customer acquisition • Premise: first-mover advantage • Tactics • Massive marketing campaigns • Giveaways, subsidies, deep discounts • Mergers

  4. Get Big Fast When... 1. Businesses exhibit “Winner-Take-All” structural characteristics • Strong network effects, scale economies, and customer retention rates • In Netspeak: viral, scalable, sticky! 2. Competitive risks are “reasonable” • Avoid full-frontal assault on entrenched leader • Avoid wars of escalation and attrition 3. Lifetime value of a customer is positive 4. Capital markets reward first movers (or you have cash on hand) • Euphoria, overtrading, revulsion

  5. Get It Right First When... 1. Ensuring reliability is crucial to customers 2. Learning-by-doing is important

  6. GBF Payoff for Access Providers • TCI • Teledesic • Geocast • EarthLink • 48% of 2000 revenue on sales and marketing • 1.7 million subs B.O.Y. ‘99  4.8 million B.O.Y. ‘01 • Stock price down 91% • NetZero stock price down 96% from 52-week high • AOL stock price down 10%

  7. Network Effects • Connectivity-related • Communications: chat, IM, videoconference, IP phone • Collaboration: document sharing, calendars • Community-generated: multi-player games, photos, message boards • Commerce: auctions, exchanges, classifieds, bill payment, wallets, loyalty programs • Software-supply related

  8. Strength of Network Effect • Proprietary networks (walled gardens) • Joint: boost industry demand • Risk: stall • Sensitivity to aggregate participation rates Probability of Prospect Joining Network Probability of Prospect Joining Network % of Prospect’s Existing Offline Partners Already Active in Online Network % of Prospect’s Existing Offline Partners Already Active in Online Network

  9. Comparison Scale Economies

  10. Scale Economies • Variable contribution margin • 80% of revenue for content provider, portal, market maker • 20% of revenue for online retailer • 34% of revenue for ISP • ISP Economics • Revenue $20.00 • Variable costs 13.20 • customer support 5.80 • network (½ POPs; ½ leased lines) 7.40

  11. Retention • Network effects • Differentiation (sustainable??) • Skills/execution • Different tastes • Switching costs • ISP churn: 4% per month, so keep 61.3% of customers after one year • Average life of customer relationship = where x = annual retention rate • For ISPs, = 2.6 years • Reintegration of information systems • Forfeiture on transaction profile • Risk of disruption • Hassles opening/closing accounts • Retraining • Cost of data re-entry

  12. Lifetime Value of ISP Customer • Variable contribution margin = [($20-13.20) per month  12] = $81.60/year • 2.6 years @ 10%  NPV is $134 • For EarthLink, average customer acquisition cost for 2001 projected to be $168 (down from $200 in late 2000!) • So, LVC is negative!