Lecture 1: History and Business Models

Lecture 1: History and Business Models • Assignment 1: Auction Registration and bidding • Assignment 2: Turn in profiles

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/WORLD/europe/08/19/chechnya.helicopter/index.html and http://www.cnn.com/2002/US/08/19/mckinsey.report/index.html would not be counted as separate sites. • Email the spreadsheet to me at eharuvy@utdallas.edu

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

Was the Internet Revolution over-hyped?

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

What have Internet intensive companies done wrong? • 1. Stretch resources. • R&D • 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

A Brief History of Internet • 1969 - first link UCLA to Stanford Research Institute • 1971 - email and use of @ 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

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

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

Internet Advertising • Consumer Advertising By Dot-Com Brands(Percent change over previous year) • Universal McCann, “Insider’s 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.

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

Strategy Basics

Porter’s 5 forces framework Bargaining Power of suppliers Threat of new Entrants Entry barriers Industry competitors Rivalry Threat from Substitutes Bargaining power of Buyers

Porter’s 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 • Substitutes – new approaches to meeting needs and performing functions

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 First Mover Advantage?

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

Lecture 1: History and Business Models