1. MD253 - E-Commerce Module 3: E-Commerce & Distribution Channels Spring 2003

2. Issues Covered Collapsing Channels –failures, successes, the role of value gaps Shifting Channels –marketplace to marketspace, channel pressure, innovation New Intermediaries –examples, impact, threats, market creation Auction Models –markets of first choice and last resort

3. Source: Benjamin & Wigand (1995) Disintermediation

4. Value Gaps customersretailerdistributorsource firm Value Added = A, Expense = X Value Added = B, Expense = Y Expense Savings = (X+Y) - Cost of New Effort Value Gap = (A+B) - Value Added by New Effort

8. Channel Shifts Shifts from physical to virtual –human intermediaries replaced by interfaces to back-end systems (internal disintermediation) –physical distribution replaced by virtual distribution –physical stores replaced by virtual stores –physical content replaced by virtual content - atoms to bits

12. Channel Pressure supplierdistributor retailer customer manufacturer Traditional Channels Online Channels suppliercustomer manufacturer supplier manufacturer customer new intermediaries

13. “We recognize that a vendor has the right to sell through whatever distribution channels it desires. 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.” HomeDepot memo to suppliers

16. “The music industry will be out in five years – kaboom, gone.” Tim White Editor, Billboard Magazine Wired, Feb. 2003

17. “The business will implode once you can download a movie, give it to your friends and not have a moral problem with doing it. Then we’re screwed. Literally, our very lives are at stake now. George and I are just praying that we can finish ‘Episode III’ in time, before it’s all over.” Rick McCallum Producer, Star Wars Movies CNN, October 17, 2002

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

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

22. IPO Inefficiencies The Firm small Investors $45/share Underwriting syndicate 7% fee$27/share Institutions & large investors

23. CompanyDate Shares Underwritt en Underwritin g Share Price First Day Close Share PriceDifference Percent Undervalu ed JetBlue4/12/20025,500,000$27$45 $ 99,000,00067% PayPal2/15/20025,400,000$13$20 $ 37,854,00054% NetScreen Technologies12/11/200110,000,000$16$24 $ 77,200,00048% Magma Design Automation11/19/20014,850,000$13$19 $ 29,051,50046% Global Power Equipment5/17/20017,350,000$20$31 $ 84,157,50057% Simplex Solutions5/1/20014,000,000$12$21 $ 36,800,00077% Transmeta11/7/200013,000,000$21$45 $ 315,250,000115% CoSine9/26/200010,000,000$23$63 $ 400,600,000174% Active Power8/8/20208,000,000$17$53 $ 286,000,000210% StorageNetworks6/30/20009,000,000$27$90 $ 569,250,000234% VA Linux12/9/19994,400,000$30239 1/4 $ 920,700,000698% Red Hat8/11/19996,000,000$14$52 $ 228,375,000272% mp3.com7/20/199912,300,000$28$63 $ 434,343,750126% Efficient Networks7/15/19994,000,000$15$53 $ 152,000,000253% Tibco Software7/14/19997,300,000$15$40 $ 182,500,000167% China.com7/13/19994,200,000$20$67 $ 197,862,000236% CommTouch7/13/19993,000,000$16$24 $ 24,000,00050% eToys5/19/19998,300,000$20$77 $ 473,100,000285% iVillage3/18/19993,500,000$24$56 $ 112,000,000133% AutoWeb3/23/19995,000,000$14$28 $ 71,250,000102% Auto-by-Tel3/24/19993,500,000$23$40 $ 60,375,00075% Prodigy2/11/19998,000,000$15$28 $ 105,040,00088% VerticalNet2/11/19993,500,000$16$45 $ 102,830,000184% Healtheon2/11/19995,000,000$8$31 $ 116,900,000292% Pacific Internet2/5/19993,000,000$17$48 $ 93,000,000182% Theglobe.com11/13/19983,100,000$9$64 $ 168,950,000606%