Classification of E-Commerce Firms

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Classification of E-Commerce Firms

Professor Joshua Livnat, Ph.D., CPA

311 Tisch HallNew York University

40 W. 4th St.NY NY 10012

Tel. (212) 998-0022 Fax (212) 995-4230jlivnat@stern.nyu.edu

Web page: www.stern.nyu.edu/~jlivnat

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Classifications

• Classification by seller/buyer• Classification by product or activity• Classification by sources of revenues

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Classification by seller/buyer• Business to Consumer (B to C)

– Southwest Airlines generates over 15% of its revenues from its online site. http://www.southwestairlines.com/

• Business to Business (B to B)– Automobile manufacturers organizing an

exchange to buy components from suppliers. http://www.generalmotors.com/cgi-bin/pr_display.pl?1202

• Consumers to Consumers (C to C)– Auctions sites like E-Bay. http://www.ebay.com/

• Consumers to Business (C to B)– Selling information to businesses like gorefer.

http://www.gorefer.com/

– http://www.mercata.com/

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Classification by product or activity

Media Metrix Report - Dec 1999 Category Domain Digital Media Reach %

SEARCH ENGINE YAHOO.COM 52.6COMMERCIAL ONLINE MSN.COM 47.3MARKETING/CORPORATE MICROSOFT.COM 36.8WEB SERVICES GEOCITIES.COM 31.1SHOPPING BLUEMOUNTAINARTS.COM 26.1NEWS INFO/ENTERTAINMENT ABOUT.COM 15DIRECTORIES INFOSPACE.COM 10INTERNET SERVICE PROVIDER EARTHLINK.NET 6.7ADULT CONTENT PORNCITY.NET 5.1TRAVEL/TOURISM MAPQUEST.COM 5GOVERNMENT NASA.GOV 3.3EDUCATION BERKELEY.EDU 2.4All Other DASH.COM 2AIRLINE SITES AA.COM 1.7

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Classification by Revenue Sources• Revenues from selling products or services

– Traditional sales http://www.amazon.com

– Commissions http://www.priceline.com/

– Per-transaction fees http://www.nytimes.com/

• Advertising revenues - See Appendix A

• Referral fees: See Appendix B

– per referral– fixed amount– percentage of transaction

• Market creation fees http://www.ebay.com/

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Advantages of Classifications• Classifications by seller/buyer emphasize the

markets in which the firm operates.• Classifications by product/activity emphasize

the nature of the business.• Classifications according to revenue sources

focus on the underlying business model.• An E-Commerce company is likely to be in

more than one category.• The analysis of categories helps in profiling the

business (segments).

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Warning

• The Following Definitions of Various Business Models are not mine.

• They were developed by Professor Michael Rappa:

• http://ecommerce.ncsu.edu/business_models.html

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Brokerage• Bringing buyers and sellers together

– Buy/sell fulfillment• Online stock trading

– Market exchange• B2B (metals exchange)

– Virtual mall• Internet fashion mall

– Auction broker• E-Bay

– Search agent• My Simon, Dealtime

• Fee per transaction

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Advertising• Free content or services to users. Content

(service) providers get advertising revenues.• Model in existence for radio and TV.• Need very high volume or very specialized

audience.– Generalized portals.– Personalized and specialized portals.– Attention/incentive marketing.– Free products or services.– Bargain discounters.

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Infomediary

• Collecting and selling data about consumers, interests and buying habits.

• Sharing information among consumers– Book reviews on Amazon

• Registration– Collecting information on users in exchange for

access to content (newspapers, free phone services).

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Merchants

• Wholesalers and retailers on the Web.– Web-based only, with no brick and mortar

operations.– Catalog services

• New form of direct mail– B&M on the Web

• Staples– Digital content

• Music• Software

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Manufacturer

• Manufacturer bypasses the wholesaler to reach final customer.– Dell

• Personalization– Flowerbud

• Faster delivery

• May cause distribution channel conflicts– Airlines and travel agents

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Affiliate

• Referring to other sites• Similar to Yellow Pages or referral fees for

lawyers.• Hitting the customer when the purse is

open.• Using information on current purchases to

induce further purchases of complementary products and services.

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Community

• Creating a community of similar users.– Soliciting donations from users and foundations

• Creating knowledge networks– Collection of experts who can respond to

questions– Sometimes experts get paid directly per

question.

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Subscription

• Pay for content• General reluctance to pay for content on the

Web. • Exceptions:

– Wall Street Journal– Premium content (detailed stock research

reports)– Archived information

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Utility

• Pay per use or per time• Similar to Pay Per View movies• Renting software and applications• Payment per data extracted

– Credit reports– Retrieving old publications

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Mixture of Business Models

• Most E-Commerce firms have a mixture of business models– Community and advertising– Merchant and affiliate

• Business models change and continue to evolve– The environment is very dynamic– The need to remain flexible

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The Business Model

• Identify the value drivers:– Number of visitors– Number of members– Number of transactions

• Assess the required long-term volume to make a profit

• Assess the reasonableness of the required volume and costs to achieve it.

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Sources of Information• Forms filed with the SEC (http://www.sec.gov/ ) :

– Registration statement– Form 10-K– Form 10-Q– Proxy statement– Special reports

Company’s own Web site http://www.aol.com/ http://www.corp.aol.com/

• Investment research • Tracking organizations http://www.mediametrix.com

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Long-Term Business Models

• Surviving advertising models– High volume free content services

• The broadcasting model– Personalized and specialized content services

• Free tourist guides– Interactive models

• Surviving community models– Right demographics

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Long-Term Business Models

• Surviving brokerage models– Only if B&M do not offer their own services

• Merchants– Only if reduces transaction costs or increases

the “pie”• Affiliates

– Will it be pay per referral? Pay per listing (like Yellow Pages)?

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Long-Term Survival

• Depends on the long-term tradeoff between revenues and costs.

• Cheap initial financing masks true long-term costs.

• The recent decline in prices of Internet stocks can force people to think through more carefully of the long-term viability of the business model.

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Summary

• Classifications help think about the business model.

• Classifications also help in assessing the long-term viability of the business.