MD253 / MK252 Electronic Commerce

Feb. 15, 2006 Channel flux: channel pressure, digital music network effects, CEIs, and auction systems

Issues Covered
• Channel Pressure
– Power & partners, pressure & innovation limits

• New Channels & Media Industry Disruption • Network Effects
– the secret sauce of tech markets

• New Intermediaries
– examples, impact, threats, market creation

• Auction Models
– markets of first choice and last resort

Channel Conflict Internet Retailers customer supplier Distributors Traditional Retailers (small) customer Traditional Retailers (big box) customer customer .

“We recognize that a vendor has the right to sell through whatever distribution channels it desires.” HomeDepot memo to suppliers . However. we too have the right to be selective in regard to the vendors we select and we trust that you can understand that a company may be hesitant to do business with its competitors.

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Major Labels in Crisis 3 Years: 26% Sales Drop • Online piracy • CD piracy • Shrinking retail space • Competition from other media • Music Quality .

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Traditional Client/Server vs. BitTorrent More Computers Require More Bandwidth Customers Distribute Content .

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monopolistic tendencies ‘Best’ products don’t always win. game titles) members . Why? Users crave… • Exchange opportunities • Stability • Extrinsic Benefits Characteristics: Early competition. Innovation effect • Lowers competition with established standard • Increases innovation within standard buyers sellers Users (Windows. Metcalfe’s Law) When present.Understanding Network Effects (a. bandwagons. PS2) Developers (programs. Network Externalities.a.k. product or services become more valuable as its installed base expands.

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high customer search costs.g. .Channel Extending Intermediaries supplier supplier CEI supplier supplier customer customer customer customer Search for opportunities to add value: e. switching costs. Become the first-line interface with consumers. low customer satisfaction Wield new power by consolidating traditional buyers & customers.

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g. eBay) Auction format is favored over the inefficiency of existing channels suppliers customers Seek access to unique / rare products or services auction incentives to use auction increase supply over time .g. Priceline) Seek first to maximize existing channels & reduce inventory suppliers customers Seek lowest price on widely available goods and services auction disincentives to use auction shrink supply over time Market Efficiency Auctions: (e.Auction Formats Liquidation Auctions: (e.

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Leading Global Retailers .

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Communicate Search.Shop. Buy/Transact. Be Entertained .

Dependent on paid & natural search .

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400.157.854.000 77.000 2/15/2002 5.051.000 29.000 5/1/2001 4.000 37.45 $21.000 Initial Offer Price $27 $13 $16 $13 $20 $12 First Day Close Share Price $45.500 84.IPO Inefficiencies pays a 7% fee $27/share $45/share small Investors The Firm Underwriting syndicate Institutions & large investors small Investors small Investors Shares Date Underwritten 4/12/2002 5.200.000 5/17/2001 7.350.000.800.20 Percent Undervalued 67% 54% 48% 46% 57% 77% Company JetBlue PayPal NetScreen Technologies Magma Design Automation Global Power Equipment Simplex Solutions $ $ $ $ $ $ Difference 99.850.500.000 12/11/2001 10.000 .99 $31.500 36.000.01 $23.000.000 11/19/2001 4.00 $20.72 $18.

000 $ 112.000 3.000.000.000 6.000 $ 228.000 7.000 $27 $13 $16 $13 $20 $12 $21 $23 $17 $27 $30 $14 $28 $15 $15 $20 $16 $20 $24 $14 $23 $15 $16 $8 $17 $9 $45 $20 $24 $19 $31 $21 $45 $63 $53 $90 239 1/4 $52 $63 $53 $40 $67 $24 $77 $56 $28 $40 $28 $45 $31 $48 $64 Difference Percent Undervalued 67% 54% 48% 46% 57% 77% 115% 174% 210% 234% 698% 272% 126% 253% 167% 236% 50% 285% 133% 102% 75% 88% 184% 292% 182% 606% JetBlue PayPal NetScreen Technologies Magma Design Automation Global Power Equipment Simplex Solutions Transmeta CoSine Active Power StorageNetworks VA Linux Red Hat mp3.500.000 8.500 $ 36.000.000 $ 920.000 3.com Efficient Networks Tibco Software China.000.000 $ 569.300.700.000 $ 286.850.100.000 $ 315.000 5.000 $ 77.600.950.000.250.040.300.000 $ 473.000 $ 182.750 $ 152.000.830.500.500.000 $ 197.375.350.com CommTouch eToys iVillage AutoWeb Auto-by-Tel Prodigy VerticalNet Healtheon Pacific Internet Theglobe.200.051.000.000 8.000 $ 168.000 $ 71.100.000.157.000 5.000 .000 4.000.000 4.000 4.000.375.000.900.000 7.000 3.Company Date Shares Underwriting First Day Close Underwritten Share Price Share Price 5.200.000 4.000.000 10.000.000 $ 434.000 $ 37.000 $ 105.000 3.000.800.000 $ 102.000 4.000 $ 93.000 13.000.000.000 3.000 $ 60.500.862.400.500.343.000 $ 400.com 4/12/2002 2/15/2002 12/11/2001 11/19/2001 5/17/2001 5/1/2001 11/7/2000 9/26/2000 8/8/2020 6/30/2000 12/9/1999 8/11/1999 7/20/1999 7/15/1999 7/14/1999 7/13/1999 7/13/1999 5/19/1999 3/18/1999 3/23/1999 3/24/1999 2/11/1999 2/11/1999 2/11/1999 2/5/1999 11/13/1998 $ 99.000 5.000 3.400.000 8.000 $ 29.000.854.000.300.250.500 $ 84.000 9.000 10.000 $ 24.000 $ 116.000.000 12.250.

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