Social Networks,

Auctions & Portals.

Chapter 11
Social Networks & Online
Communities
 The Internet was designed originally as a
communications medium to connect
scientists in computer science
departments around the continental United
States.

 The early online communities involved a

relatively small number of web aficionados,
and users with intense interests in
technology, politics, literature, and ideas.
Social Networks & Online
Communities
 By 2002 the nature of online
communities had begun to change
 Cell phones and mobile internet
devices provided widespread access,
making it possible to communicate
with friend and relatives and keep
track of one another in a way not
possible before.
Social Networks & Online
Communities
 Currently, social network
participation is one of the most
common usages of the internet.
 about 44% of all internet users in the
united states have at one time or
another gone online to social network
site.
The growth of social networks
and online communities
 Myspace, with 60 million visitors a month, was the largest
social network in terms of unique visitors, while social
networks originally attracted mostly internet users under 35,
(with average incomes of more than $75,000),and most
have college degrees(eMarketer,Inc,2008).
 By 2011, Facebook has taken over its competitors and
now is the most popular Social Networking website:
• More than 500 million active users
• 50% of active users log on to Facebook in any given day
• Average user has 130 friends
• People spend over 700 billion minutes per month on
Facebook
The growth of social networks
and online communities
 The top 4 portals (Yahoo, Google,
AOL and MSN) generate about $12
billion annually in revenue.
 Social networking sites in the United
States in 2008 were expected to
generate a total of about $1.4 billion
in advertising revenue, up from about
$920 million in 2007 (eMarketer,Inc,2008).
Types of social networks
and their business models
1. General communities offer
members opportunities to interact
with a general audience organized
into general topics.
2. Practice networks ,offer members
focused discussion groups, help,
information, and knowledge relating
to an area of shared practice.
Types of social networks
and their business models
3. Interest-based social networks ,offer
members focused discussion groups
based on a shared interest in some
specific subject, such as business careers,
boats, horses, health, skiing, and
thousands of other topics.
4. Affinity communities, offer members
focused discussions and interaction with
other people who share the same affinity.
Types of social networks
and their business models
5. Sponsored communities, are online
communities created by government,
nonprofit, or for-profit organizations for
the purpose of pursuing organizational
goals.
Social network features and
technologies
 Social networks have developed
software applications that allow users
to engage in a number of activities.
Not all sites have the same features,
but there is an emerging feature set
among the larger communities.
 Chat
 Messaging
 Photo tag
Online Auctions

 Online auction sites are among the

most popular consumer-to consumer
(C2C) e -commerce sites on the
internet, the market leader in C2C
auctions is e Bay.
Defining & Measuring The
Growth of Auctions and Dynamic
Pricing
 Auctions are markets in which prices are
variable and based on the competition
among participants who are buying or
selling products and services.
 Auctions are one types of dynamic pricing,
in which the price of the product varies,
depending directly on the demand
characteristic of the customer and the
supply situation of the seller.
Forms Of Dynamic Pricing
On The Internet
 Trigger Pricing: used in m-commerce
applications, adjusts prices based on the
location of the consumer.
 Utilization Pricing: adjusts prices based on
utilization of the product.
 Personalization Pricing: adjusts prices
based on the merchants estimate of how
much the customer truly values the product.
Types of Auctions
 The most widely known auctions are
consumer-to consumer (C2C)auctions, in
which the auction house acts as an
intermediary market maker, providing a
forum where a consumers can discover
prices and trade.
 Business –to Consumer (B2C) auctions,
in which auction house sells goods it owns,
or controls using various dynamic pricing
models.
Why are auctions so
popular?
 The internet provides a global
environment and very low fixed
and operational cost for the
aggregation of huge buyer
audiences composed of millions of
consumers worldwide who can use
a universally available technology.
 Benefit of Auctions
 Liquidity: the internet enormously increased the liquidity of
traditional auctions that usually required all participants to be in a
single room. Now sellers and buyers can be located anywhere
around the globe.

 Price discovery: Public Internet auctions allow everyone in the

world to see the asking and bidding prices for items. Still may be
more than one world price for a given item (there are inter-market
price differences).

 Market efficiency: Auctions can, and often do, lead to reduced

prices, and hence reduced profits for merchants, measure of
market efficiency. Provide consumers the chance to find real
bargains at potentially give-away, provide access to a very wide
selection of goods that would be impossible for consumers to
physically access by visiting stores.
Benefit of Auctions
 Lower transaction costs: Online auctions can lower the cost
of selling and purchasing products, benefiting both
merchants and consumers. Internet auctions have very low
(but not zero) transaction costs.

 Consumer aggregation: Sellers benefit from large auctions

sites ability to aggregate a large number of consumers who
are motivated to purchase something in one market space.

 Network effects: Here are a lot of people from all world,

lower transaction costs, higher efficiency, and better price
transparency.
Risk and cost of auctions of
customers and business
 Delayed consumption costs: Shipping will take
additional time.
 Monitoring costs: Participation in auctions
requires your time to monitor bidding.
 Equipment costs: Internet auctions require you to
purchase a computer system, pay for internet
access, and learn a complex operating system.
 Trust risks: Online auctions are the single largest
source of Internet fraud. Using auctions
increases the risk of experiencing a loss.
 Fulfilment costs: The buyer pays fulfilment costs
of packing, shipping, and insurance, whereas at
a physical store these costs are included in the
retail price.
Risk and cost of auctions of
customers and business
 Auction fraud is the leading source
of commerce complaints to federal
law enforcement officials.
 Merchants face considerable risks
and costs as well. Non payment, false
bidding, bid rigging, monitoring,
transaction fees charged by the
auction site, credit card transaction
processing fees
Market-Maker Benefits
 There are only 1-3 large auction sites (eBay, BidZ,
Amazon) which dominate, and hundreds of smaller auction
sites being barely profitable, because they lack sufficient
sellers and buyers to achieve liquidity.
 Auction sites carry no inventory and do not perform any
fulfilment activities – they need no warehouses, shipping
or logistical facilities.
 For example, eBay has expended into three lines of
business:
• marketplaces (the original business),
• payments (PayPal),
• and communications (Skype).
 Which means eBay earns revenue in several ways:
transaction fees, listing fees, financial service and
advertising fees
 Types and examples of
auctions
Internet auctions are very different from
traditional auctions.
 Traditional auctions are relatively short-
lived, and have a fixed number of
bidders, usually present in the same
room.
 Online Internet auctions, in contrast,
can go on much longer (a week), and
have a variable number of bidders who
come and go from auction arena.
 Types and examples of
auctions
One/Few BUYERS
One/Few Many
Market Neutral Seller Bias
(Negotiation) (eBays Auction)

SELLERS

Many Buyer Bias Market Neutral

(Priceline and Sealed (Stock Exchanges)
Bidding)
Public Vs. Private Information In
Dynamically Priced Markets
 Private information – in some dynamic markets, the
price being is secret , and are known only to one party,
bidders don’t know what other are bidding, and must
bit their ‘best’ price;
 Public information - in auction bid price usually is
public information. Here the risks are that bidders
agree offline to limit their bids, that sellers use shills to
submit false bids, or that seller’s use driving price up.
In matching price sellers don’t sell bellow floor prices
on auction items which they will not sell.
Major auction types
1. English auctions:
Features:
• single item up for sale to single seller
• multiple buyers
• time limit
 ascending-price auction, starting from a low price;
 highest bidder wins (bidding increases until no bidder
is willing to bid higher).

Reserve price: minimum bid

Major auction types

2. Traditional Dutch auction:

(Dutch flower market)
Features:
① descending-price auctions:
starting from a high price, bidding
automatically decreases until the bidder
accepts the price.
② good for moving large numbers of items.
Major auction types

3. Dutch Internet auction:

 Multiple units (perfect for sellers that have

many identical items to sell);
 Public ascending price;
 Final price is lowest successful bid, which
sets price for all higher bidders;
 Bidders also specify the quantity they
want to buy.
Major auction types

4. First-price sealed-bid
auctions:
Features:
• secret bidding process
• the highest bidder pays the amount of the
highest bid.
• Bidders submit their bids independently and
don’t share information with each other.
Major auction types

5. Second-price sealed-bid
auctions
Features:
• secret bidding process
• the highest bidder pays the amount
of the second-highest bid
Major auction types

6. Name your own price

auctions
 Users specify what they are willing to
pay for goods or services and multiple
providers bid for their business
 Prices do not descend and are fixed
Major auction types

7. Group buying auctions

(demand aggregators)
Group buying of products at dynamically adjusted
discount prices based on high volume purchases
Two principles
Sellers more likely to offer discounts to buyers
purchasing in volume
Buyers increase their purchases as prices fall
Major auction types

8. Professional service auctions

Example: Elance.com (a sealed-bid,
dynamic-priced market for freelance
professional services; a reverse
Vickrey-like auction)
Major auction types

9. Auction aggregators (Mega

auctions)
• Use Web-crawlers to search thousands
of Web auction sites and accumulate
information on products, bids, auction
duration, etc.
When to use online auctions
(for what) in business.
 There are many different situations in which auctions
are an appropriate for business to consider. The
objective of consumers is to receive the greatest value
for the lowest cost. Switch perspectives now to that of
a business.
 Remember the objective the objective for business
using auctions is to maximize their revenue (their
share of consumers surplus) by finding the true
market value of products and services, a market value
that hopefully is higher in the auction channel than in
fixed-price channels.
 Factors to consider when
choosing auctions
Factors to consider when choosing auctions
Consideration Description
Type of product Rare, Unique, Commodity, perishable.

Stage of product life cycle Early, Mature , Late

Channel Management issues Conflict with retail distributors;
differentiation
Type of auction Seller vs Buyer bias
Initial pricing Low vs High
Bid increment amounts Low vs High
Auction Length Short vs long
Number of items Single vs Multiple
Price allocation rule Uniform vs Discriminatory
Information sharing Closed vs open bidding
Online Auctions
 Type of product: Online Auctions are most commonly used for rare and
unique products for which prices are difficult to discover, and there may have
been no market for the goods.

 Product Life cycle: for the most part business have traditionally used
auctions for goods at the end of their life cycle and for products where auctions
yield a higher price than fixed-price liquidation sales.

 Channel management: established retailers such as JCPenney, Wall-Mart,

and manufacturers in general, must be careful not to allow their auction
activity to interfere with their existing profitable channels. For this reason items
found on established retail-site auctions tend to be late in their product life
cycle, or have quantity purchase requirements.

 Type of auctions: Several types of online auctions are possible. In an

English auction the initial price starts low and is bid up by successive bidders.
In a Dutch auction, multiple identical items are offered in one auction, with all
winning bidders paying the same price -- the highest price at which all items
will be sold (treasury bills, for example, are auctioned this way). Currently
almost all online auctions use the English auction method.

 Initial pricing: research suggests that auction items should start out with law
initial bid prices in order to encourage more bidders to bid . The lower the
price, the larger the number of bidders will appear. The larger the number of
bidders, the higher the prices move.
Online Auctions
 Bid Increments: Its generally safest to keep bid increments low so as to
increase the number of the bidders and the frequency of their bids.

 Auction Length: The longer auctions are scheduled, the larger the
number of bidders and the higher prices can be go. However once the
new bid arrival rate drops off and approaches zero, bid prices stabilize.

 Number of items: when business has a number of items to sell, buyers

usually expect a ”volume discount” and this expectation can be cause
lower bids in return. Therefore, sellers should consider breaking up very
large bundles into smaller bundles auctioned at different time.

 Price allocation rule: Most Buyers believe it is “fair” that everyone pey
the same price in a multi-unit auction, and a uniform pricing rule is
recommended. The idea that some buyers should pay more based on
their differential need for the product is not widely supported. Therefore
sellers who want to price discriminate should do so by by holding
auctions for the same goods on different auctions markets, or at different
times, to prevent direct price comparison.

 Closed vs Open bidding: Closed bidding has many advantages for the
seller, and sellers should use this approach whenever possible because it
permits price discriminations without offending buyers. However, open
bidding carries the advantage of “herd effects” and “winning effects” in
which consumers competitive instincts to “win” drive prices higher then
even secret bidding would achieve.
Auction Prices: Are they
the lowest?
 It is widely assumed that auction prices are lower than
prices in other fixed-price markets.
 There are many reasons why auction prices might be
higher than those fixed-price markets for items of
identical quality, and why auction prices in one
auction market may be higher than those in other
auction markets.
 A considerable body of previous research has shown
that consumers are not driven solely by value
maximization, but instead are influenced by many
situational factors, irrelevant and wrong information,
and misperception when they make market decisions.
Consumer trusts in
Auctions
 Auction sites have the same difficulties
crating a sense of consumers trust as all
other e-commerce web sites, although in
the case of auction sites, the operators of
the market place do not directly control the
quality of goods being offered and can not
directly vouch for the integrity of customers.
This opens the possibility for criminal actors
to appear as either the sellers or buyers.
When Auction Markets fail:
Fraud and Abuse in Auctions
 Markets fail to produce socially desirable outcomes
(maximizing consumer welfare) in 4 situations:
 Information Asymmetry.
 Monopoly Power.
 Public Goods
 Externalities.
 Online and offline auction market are particularly prone
to fraud, which produces information asymmetries
between seller and buyer and among buyers, which in
turn causes auction markets to fail.
E-COMMERCE PORTALS
 Portals are the most frequently visited sites on
the web.
 The top portals such as yahoo, aol, and msn they
have hundreds of millions visitors worldwide
each month.
 50 billion web pages available on the internet to
help the people to find the information they are
looking for on the web. Portals are places where
people linger for a long time.
 Portals also serve important function within a
business or organization.
 Most corporations universities and other formal
organizations have enterprise portals, for example
university has a portal through which u can register
4 courses , find out class rooms assignments, and
perform and host of other important activities.
The growth and evaluations
of portals
 Web portals have changed a great deal from their
initial function and rule.
 Early portals expected visitors to stay only a few
minutes at the site.
 At the first few people understood how a web search
site could make money by passing customers onto
other destinations
 Advertising search sites recognizing the potential for
e-commerce, expanded their offerings from simple
navigation to include commerce
 Investment Game-Health these three characteristics
have become the basic definition of portal sites since
2006.
Types of Portals
 General Purpose Portals: some general pusposes such as
msn.com, and AOL.com offers,
 telecommunications providers
 Web search engines
 Free emails
 Personal homepages
 Chat rooms
 Community building software
 Vertical Market: vertical content channels on general purpose
portal sites offer contents such as ESPN.com, and
Bloomberg.com offers,
 Sport scores
 Automobile Infogormations
 Auctions
 Stock Takers
 Health Tips
Top 5 Portal/ Search
Engines in the US
Battle of the portals
 What is the difference between AOL, MSN, YAHOO,
and GOOGLE?
 Google does not have its own content and all the
others do, and google has google earth, google
maps, images, and videos.

 Google is a place you visit on your way somewhere

else the other portals are places you go to and hang
around for awhile, google is not a content company
but an indexer of all other people’s contents, they all
have decided to become the primary gateway to the
internet for the entire world.
Portal Business Models
 Portal receives income from a number of different
sources. The revenue base of portals is changing and
dynamic with some of the largest sources of revenue
declining.
 The business strategies of both general and vertical
portals have changed greatly because of the rapid
growth in search engine advertising and intelligent ad
placement networks
 Ex. Google’s AdSense, which can place ads on
thousands of web sites based on the content of the
web site.
 The general portal sites (AOL, MSN, and Yahoo)
did not have well developed search engines. But
attempting to provide more premium content focused
on sub-communities of their portal audience.
Typical Portal Revenue
Sources
The table below summarizes the major portal revenue sources.

TYPICAL PORTAL REVENUE SOURCES

PORTAL REVENUE SOURCE DESCRIPTION

ISP services Providing web access and email
services for monthly fee
General advertising Charging for impressions
delivered
Tenancy deals Fixed charge for guaranteed
number of impressions, exclusive
partnership, “sole provider”

Commission on sales Revenue based on sales at the

site by independent providers
Subscription fees Changing for premium content
E-COMMERCE IN ACTION
YAHOO! INC
 Was found as a search engine in 1994 by 2
Stanford students David Filo and Jerry Yang.
It has grown into a $7billion online brand
name juggernaut.
 Yahoo has had unprofitable periods in the
past but in 2002 to 2005, their net income
grew in leaps and bounds from 42million to
$1.89billion driven resurgence in internet
advertising , the spread of broadband
connections and information
E-COMMERCE IN ACTION
YAHOO! INC
 The Vision
 Yahoo vision was an investor relations
documents and securities filing as a leading
global internet brand and one of the most
trafficked internet destinations worldwide.
 Seeks to provide internet services that are
essential and relevant to users and business
through its global audience of users and
advertisers
E-COMMERCE IN ACTION
YAHOO! INC
 Business Model
 Yahoo gives away some user service for free
such as search, basic photo and videos
sharing, maps local weather etc and earns
money from marketing services mostly
advertising and subscription fees for
premium content. Approximately 88% of
yahoo’s revenue in 2007 was from the sale
of advertising. 12% from other fees.
E-COMMERCE IN ACTION
YAHOO! INC
 Financial Analysis
 Yahoo net revenue grew into $6.9billion. Its revenue
doubled. It was aided by the general acceptance of
the internet in the broader population producing King
size Audience which has expanded internet
advertising. Yahoo main source of revenue is
advertising .
 They maintain this level of growth-
• Yahoo cost of Revenue consist mainly of traffic
acquisition cost – which involves payment made to
affiliates who have integrated its search and or display
any advertising into their website and payment made to
companies that direct traffic to yahoo websites.
• Fees paid to third party content provider
• Internet connection charges
• Expenses for website production and delivery costs
E-COMMERCE IN ACTION
YAHOO! INC
 Yahoo’s cost of revenue has slowly
increased and its gross margin from
2006-2007.
 Yahoo’s operating margins are
positive but failing.
 In
2005 their net margin was 36%
while in 2007 it has fallen to 9.5%.

How could this happen?

E-COMMERCE IN ACTION
YAHOO! INC
 The revenue growth in 2005-2007 was an acceptable 36%
(but it was not spectacular when compared to Google) and
the cost of producing its services proportionately not
changing by looking at operational expenses. Sales and
marketing went up 56%
 Yahoo doubled its R&D budget in an effort to build a more
powerful search engine and a new display advertising
system called APT.
 Yahoo got sloppy and let its corporate bureaucracy
(general and administrative ) cost balloon by 85%
 Yahoo free cash flow remained $1.7b to $1.9b in 2007 it
ended with $12.2billion total assets . 2billion was cash and
short term investments, $2.4billion in current liabilities
 Yahoo balance sheet is strong and could support
aggressive expansion plans. This makes yahoo an attractive
take over target
E-COMMERCE IN ACTION
YAHOO! INC
 COMPETITION
 Yahoo’s primary competition is
Google, Microsoft and to a lesser
extent, Time Warner (AOL)
• Yahoo lacks the direct billing relationship
with the user which is a threat to yahoo
and a strength to AOL/Time Warner
operation and Microsoft MSN.
• Google’s acquisition on YouTube makes it
even more dangerous competitor.
E-COMMERCE IN ACTION
YAHOO! INC
 SOCIAL AND LEGAL CHALLENGES
 As a portal, the main legal challenge faced by yahoo
is the nature of the content it makes available and the
ownership of content posted by others on its servers.
 The digital copy right ACT is intended to reduce the
liability of online service provider for listing or linking
the third party web sites.
 It may be held liable s online activities of individuals
utilizing its services.
 Changes in regulation and user privacy and
protection of user data could affect Yahoo market
efforts.
E-COMMERCE IN ACTION
YAHOO! INC
 TECHNOLOGY
 Yahoo licensed technology and related databases
from a variety of third party providers for various
functionality e.g. technology underlying the delivery of
news, stock quotes and other financial information,
chat services, street mapping, telephone listing,
streaming capabilities and other services.
 Outsourcing the bulk of its technical operations
lessens the risk of a major malfunction.
 Maintenance of the internet Infrastructure is one of
yahoo success and growth.
 Online securities issues like Spyware, Viruses and
worms, denial of services attacks, could negatively
impact yahoo.
E-COMMERCE IN ACTION
YAHOO! INC
 FUTURE PROSPECTS OF YAHOO
 Yahoo turned to Google for a lifeline agreement
that will pour out $500 million a year into yahoo
in return for allowing Google to place text ads
on Yahoo’s search pages.
 Yahoo great strength is, it is still the world’s
leader in Online Content and online audience
size.
 It has assumed leadership in Asia, and done
far better there than Google, eBay, or MSN.
 Yahoo future depends on developing an alliance
with Google on search (and search engine
marketing), and extending its lead in content.
Thank you!