The Internet and E-Business

1. The Internet and E-Business AIMS 2710 R. Nakatsu

2. Overview • Origins and Evolution of the Internet • How does it work? • Architecture • The DNS (Domain Name System) • Creating a web presence • Internet Business Models • Pure Play vs. Clicks-and-Mortar • Dominant Revenue Model • Provider/Consumer Model • Pricing Model

3. History Of The Internet: Origins The Internet has its roots in the U.S. military, which funded a network in 1969 called ARPANET. Computers at colleges and universities were interconnected. • Web did not exist • Largely a linear text-based medium • Little interactivity

4. History Of The Internet: Evolution • In the late 1980’s ISP (Internet Service Providers) began offering dial-up Internet accounts for a monthly fee, giving users access to email, discussion groups, and file transfers. • In 1989, the World Wide Web was born. • By the early 1990s the combination of email, the Web, and interactive services such as online chat propelled the Internet to international prominence. • Today, Web 2.0 sites offer increased interactivity (social media, blogging)

5. How does the Internet work? • Packet-switched network: information is broken into packets by TCP/IP. • Dynamic routing: even if one part of the network is knocked out, packets can be rerouted around the problem. Demo • High-speed backbones are fiber-optic trunk lines. • Highly decentralized: millions of servers reside all over the world; nobody really “owns” the Internet

6. High-Speed Backbones http://www.youtube.com/watch?v=dOyKdJWPlZY

7. DNS (Domain Name System) The DNS was created in 1983. Its purpose is to map text (web addresses) to IP addresses automatically. Question: What is an IP address? IP addresses are usually displayed as a string of four numbers between 0 and 255, separated by three periods. E.g., 17.255.64.123

8. How do you create a web presence? Domain name registrar: you need to register your web site’s name. You pay a fee for the right to use that name. Web hosting companies: these companies run your web site on their servers for a fee. ICANNis the governing body that manages IP addresses and domain names.

9. Internet Business Models A business model is a broad plan for what products or services a company plans to sell and how it plans to earn its revenue. Why did so many of the dot com companies of the 1990s fail?

10. Overview How do we describe Internet business models? • Pure Play vs. Clicks-and-Mortar • Revenue Model • Provider/Consumer Model • Pricing Model

11. Pure Play or Hybrid? Pure Play: an Internet company devoted primarily to its online business. Clicks-and-Mortar: a company that not only has a Web presence, but also has a physical storefront. Which are the advantages of each approach?

12. Seven Revenue Models • Commission • Advertising • Markup-Based • Manufacturer • Referral • Subscription • Fee-for-Service Source: Afuah and Tucci (2002) and Rappa (2010)

13. 1. Commission (Brokerage Model) A commission is a fee that is levied on a transaction by a third party. Brokers are market makers: they bring together buyers and sellers Examples: • Ebay (auction broker model) • E*Trade (financial brokerage model) • Travelocity (marketplace for travel)

14. 2. Advertising Some Web companies earn revenue primarily by selling advertising. The advertising model works best when the volume of viewer traffic is large or highly specialized. Many Web portals follow a pure advertisement revenue model. How does Google advertising work? What are the advantages and disadvantages of Web advertising (compared to traditional media)?

15. 3. Markup-Based (Merchant Model) Markuprefers to the amount added to the cost of producing a product or service in order to create a profit. This model is traditionally used by wholesalers and retailers. Examples: • Amazon.com (pure play or e-tailer) • Barnes & Noble (clicks and mortar) Question: What is the downside to this model?

16. 4. Manufacturer (Direct Seller Model) Manufacturers and producers try to reach customers directly through the Internet. Benefits: efficiency, lower cost, better understanding of customer preferences. Examples: • Dell and other PC manufacturers • Levi’s jeans • Car manufacturers (What are the problems with this model?) Question: What are some problems with this model?

17. Direct Seller Model: Disintermediation Manufacturers or producers can sell their products and services directly to customers, bypassing intermediaries such as distributors or retail outlets. A distribution channel can have several intermediary layers. Manufacturer->Distributor->Retailer->Cust. Manufacturer->Retailier->Cust. Manufacturer->Cust.

18. 5. Referral (Affiliate Model) A web site receives a fee for steering visitors to another web site. Variations of this model include banner exchange, pay-per-click, and revenue sharing (i.e, a web site receives a percentage of sales). Examples: • Amazon Associates program • Google’s AdSense program The disadvantages of this model are similar to the advertising model. What are they?

19. 6. Subscription Users are charged a periodic—daily, monthly or annual—fee to subscribe to a service. Examples: • Wall Street Journal, NY Times • Netflix • Online dating services Questions: How does Shopify use this model? What are some problems with this model?

20. 7. Fee-for-Service (Utility Model) Activities are metered and users pay for their actual usage (“pay as you go” approach). Examples: • Users pays for metered Internet service • Customers pay for long-distance telephone service and are charged by the minute. What are some other examples of this model? The disadvantages of this model are similar to the subscription model.

21. Provider/Consumer Model • B2C (business-to-customer): businesses offering goods and services to customers over the internet • B2B (business-to-business): e-business that takes place between business organizations. • C2C (customer-to-customer): customers deal directly with other customers • C2B (customer-to-business): customers provide a service to businesses

22. B2B Marketplaces Some web sites are online marketplaces for businesses to buy and sell goods and services from other businesses. Two questions: What are some examples of B2B web sites? How do B2B web sites differ from B2C web sites?

23. C2C Business Models Business models in the twenty-first century have to take into account the capabilities of Web 2.0, such as collective intelligence, network effects, user generated content, and the possibility of self-improving systems.1 A good example is Waze. How does it work? Source: Chen, T. F. 2009. Building a platform of Business Model 2.0 to creating real business value with Web 2.0 for web information services industry. International Journal of Electronic Business Management 7 (3) 168-180.

24. Community Model This model involves building community with users. Revenue can based on the sale of products and services, voluntary contributions, advertising, or subscriptions for premium services. Examples: • Open source (software developed collaboratively by a global community of programmers—e.g., Linux) • Open content (content developed by a global community of contributors—e.g. Wikipedia) • Social networking (sites that provide individuals with the ability to connect with other individuals—e.g., Facebook, LinkedIn, Vine)

25. Pricing Model How do you price your product or service? • fixed pricing • auction • reverse auction • free (Question: How can we make the free model a viable business model?)

26. Online Auction Example: Ebay.com People can make online bids for items such as computer equipment, antiques, jewelry. The system evaluates the bids and notifies the highest bidder. How does a reverse auction differ? Can you think of an example?