1. Copyright © 2004 Pearson Education, Inc. Slide 13-1 E-commerce Kenneth C. Laudon Carol Guercio Traver business. technology. society. Second Edition

2. Copyright © 2004 Pearson Education, Inc. Slide 13-2 Chapter 13 Auctions, Portals, and Communities

3. Copyright © 2004 Pearson Education, Inc. Slide 13-3 Learning Objectives Describe the major types of auctions, their benefits and costs, and how they operate Understand when to use auctions in a business Recognize the potential for auction abuse and fraud Describe the major types of Internet portals Understand the business models of portals Explain the difference between a virtual community and a traditional community, and understand how an online community differs from a portal Describe the different types of online communities and their business models Understand the business value of communities

4. Copyright © 2004 Pearson Education, Inc. Slide 13-4 Opening Case: Auction Fever Sam’s Club auction site built by FairMarket Inc., an excess-inventory solutions provider Auction marketing: Use of auctions to promote products, sell off remaindered and out-of-date goods, introduce new products, for award programs, and to create interactive one-to-one relationships with consumers eBay investment in FairMarket promotes uses of auctions to market products and for loyalty programs

5. Copyright © 2004 Pearson Education, Inc. Slide 13-5 Auction Fever Page 777

6. Copyright © 2004 Pearson Education, Inc. Slide 13-6 Auctions Online auction sites among the most popular consumer-to-consumer sites on the Internet eBay.com – market leader Several hundred different auction sites in U.S. alone Established portals and online retail sites increasingly are adding auctions to their sites

7. Copyright © 2004 Pearson Education, Inc. Slide 13-7 Defining and Measuring the Growth of Auctions and Dynamic Pricing Auctions – markets in which prices are variable and based on the competition among participants who are buying or selling products and services Dynamic pricing – price of product varies, depending directly on demand characteristics of customer and supply situation of seller Fixed pricing – one national price, everywhere, for everyone Trigger pricing – adjusts prices based on location of consumer (used in m-commerce) Utilization pricing – adjust prices based on utilization of product Personalization pricing – adjusts prices based on merchant’s estimate of how much the customer values product

8. Copyright © 2004 Pearson Education, Inc. Slide 13-8 Insight on Society: Dynamic Pricing: Is This Price Right? New forms of dynamic pricing include:  Time-based dynamic pricing: Adjusts price to different points in the product life cycle  Peak-load dynamic pricing: Adjusts prices to times of day  Clearance dynamic pricing: Used when products lose value over time Dynamic pricing is opposed by some consumer groups and individuals  Amazon example  Some forms appear to be more acceptable than others

9. Copyright © 2004 Pearson Education, Inc. Slide 13-9 Defining and Measuring the Growth of Auctions and Dynamic Pricing (cont’d) Most widely known auctions are consumer-to- consumer (C2C) auctions in which auction house is simply an intermediary market maker 2005: C2C auction sites projected to generate $15.4 billion; B2C auction sites, $11.4 billion

10. Copyright © 2004 Pearson Education, Inc. Slide 13-10 Projected Growth in Revenues from C2C Auctions and B2C Dynamic Pricing Figure 13.1, Page 784

11. Copyright © 2004 Pearson Education, Inc. Slide 13-11 Leading Online Auction Sites Table 13.1, Page 785

12. Copyright © 2004 Pearson Education, Inc. Slide 13-12 Benefits of Auctions Liquidity – Sellers can find willing buyers and buyers can find sellers Price discovery – Buyers and sellers can quickly and efficiently develop prices for items that are difficult to access, where price depends on demand and supply, and where product is rare Price transparency – Allow everyone in world to see the asking and bidding prices for items Market efficiency – Auctions can and often do lead to reduced prices, leading to an increase in consumer welfare

13. Copyright © 2004 Pearson Education, Inc. Slide 13-13 Benefits of Auctions (cont’d) Lower transaction costs – Online auctions can lower cost of selling and purchasing products, benefiting both merchants and consumers Consumer aggregation – Sellers benefit from large auction sites’ ability to aggregate large number of consumers who are motivated to purchase Network effects – The larger an auction site becomes in terms of visitors and products for sale, the more valuable it becomes as a marketplace for everyone

14. Copyright © 2004 Pearson Education, Inc. Slide 13-14 Greek Oil Lamp, circa 550 B.C. Page 786

15. Copyright © 2004 Pearson Education, Inc. Slide 13-15 Risks and Costs of Auctions Delayed consumption costs – Internet auctions can go on for days, and shipping takes additional time Monitoring costs – participating in auctions requires time to monitor bidding  Possible solutions include:  fixed pricing  watch lists that permit consumers to monitor specific auctions of interest  proxy bidding, which allows consumer to enter maximum price and auction software will automatically bid for goods up to that maximum price in small increments Equipment costs – Requires access to computer system and Internet

16. Copyright © 2004 Pearson Education, Inc. Slide 13-16 Risks and Costs of Auctions (cont’d) Trust risks – Online auctions are single largest source of Internet fraud Possible solution – rating systems (not always successful) Fulfillment costs – Buyers pay fulfillment costs of packing, shipping and insurance

17. Copyright © 2004 Pearson Education, Inc. Slide 13-17 Internet Auction Basics Internet auctions are different from traditional auctions  Tend to go on much longer (usually a week)  Have a variable number of bidders who come and go from auction arena Market power and bias in dynamically priced markets  Where number of buyers and sellers is few or equal – neutral  Where one or small number of sellers and many buyers – seller bias  Where many sellers and few buyers – buyer bias

18. Copyright © 2004 Pearson Education, Inc. Slide 13-18 Bias in Dynamically Priced Markets Figure 13.2, Page 789

19. Copyright © 2004 Pearson Education, Inc. Slide 13-19 Internet Auction Basics (cont’d) Price Allocation Rules Uniform pricing rule: Multiple winners who all pay the same price Discriminatory pricing rule: Winners pay different amount depending on what they bid

20. Copyright © 2004 Pearson Education, Inc. Slide 13-20 Types of Auctions English auctions:  Easiest to understand and most common  Single item up for sale to single seller  Highest bidder wins Traditional Dutch auction  Uses a clock visible to all that displays starting price, ticks down until buyer stops it Dutch Internet auction  Public ascending price, multiple units  Final price is lowest successful bid, which sets price for all higher bidders

21. Copyright © 2004 Pearson Education, Inc. Slide 13-21 Types of Auctions, Dynamic Pricing Mechanisms, and Bias Table 13.2, Page 792

22. Copyright © 2004 Pearson Education, Inc. Slide 13-22 IBM Thinkpad Offered on eBay.com Page 793

23. Copyright © 2004 Pearson Education, Inc. Slide 13-23 A Multi-Unit Dutch Internet Auction Table 13.3, Page 794

24. Copyright © 2004 Pearson Education, Inc. Slide 13-24 Types of Auctions (cont’d) Name Your Own Price Auctions  Pioneered by Priceline  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

25. Copyright © 2004 Pearson Education, Inc. Slide 13-25 Priceline’s Name-Your-Own-Price Offerings Table 13.4, Page 795

26. Copyright © 2004 Pearson Education, Inc. Slide 13-26 Types of Auctions (cont’d) Group Buying Auctions (Demand Aggregators)  Facilitate group buying of products at dynamically adjusted discount prices based on high volume purchases  Based on two principles  Sellers are more likely to offer discounts to buyers purchasing in volume  Buyers increase their purchases as prices fall Professional Service Auctions – Elance.com Auction Aggregators – use Web crawlers to search thousands of Web auction sites and accumulate information on products, bids, auction duration, etc  Unlicensed aggregators opposed by eBay

27. Copyright © 2004 Pearson Education, Inc. Slide 13-27 Auction Aggregators: Elance.com Page 797

28. Copyright © 2004 Pearson Education, Inc. Slide 13-28 Leading Auction Aggregators Table 13.5, Page 798

29. Copyright © 2004 Pearson Education, Inc. Slide 13-29 Auction Solution Providers Some provide software that enable firm to host auctions on their own Web site Some have developed tools that allow a business to transfer information from its product database directly to multiple auction sites automatically

30. Copyright © 2004 Pearson Education, Inc. Slide 13-30 Solutions for Listing in Multiple Auctions and Holding Auctions Table 13.6, Page 799

31. Copyright © 2004 Pearson Education, Inc. Slide 13-31 When to Use Auctions (And For What) In Business Factors to consider in determining whether an auction is appropriate channel for a business  Type of product  Product life cycle  Channel management  Type of auction  Initial pricing  Bid increments  Auction length  Number of items  Price allocation rule  Closed vs. open bidding

32. Copyright © 2004 Pearson Education, Inc. Slide 13-32 Factors to Consider When Choosing Auctions Table 13.7, Page 800

33. Copyright © 2004 Pearson Education, Inc. Slide 13-33 Seller and Consumer Behavior at Auctions Seller profits – function of arrival rate, auction length and number of units at auction Auction prices not necessarily the lowest  Reasons include herd behavior (tendency to gravitate toward, and bid for, auction listing with one or more existing bids Unintended results of participating in auctions:  Winner’s regret  Seller’s lament  Loser’s lament Consumer trust also an important motivating factor in auctions

34. Copyright © 2004 Pearson Education, Inc. Slide 13-34 Auctioneer Profits Figure 13.3, Page 802

35. Copyright © 2004 Pearson Education, Inc. Slide 13-35 When Auction Markets Fail: Fraud and Abuse in Auctions Auction markets are particularly prone to fraud 2002 Internet Fraud Complain Center statistics:  87% of Internet fraud occurred at online auctions according to IFCC  Median lost: $320  Most common fraudulent payment mechanism – money orders and credit cards

36. Copyright © 2004 Pearson Education, Inc. Slide 13-36 eBay’s List of Auction Frauds Table 13.8a, Page 805

37. Copyright © 2004 Pearson Education, Inc. Slide 13-37 eBay’s List of Auction Frauds (continued) Table 13.8b, Page 806

38. Copyright © 2004 Pearson Education, Inc. Slide 13-38 E-commerce in Action: eBay.com World’s largest and most popular online auction Major e-commerce success story Business model ideally suited to Web Derives all revenue from movement of information Excellent financial performance Business strategy based on expansion in both geography and scope Auction fraud and abused a major challenge Track record of more than 5 years of growth and profitability suggest a bright future

39. Copyright © 2004 Pearson Education, Inc. Slide 13-39 eBay’s Consolidated Statements of Operations and Summary Balance Sheet Data 1998-2002 Table 13.9, Page 808

40. Copyright © 2004 Pearson Education, Inc. Slide 13-40 The Growth and Evolution of Portals Portals – most frequently visited sites on the Web Are gateways to the more than 6 billion Web pages Most of top portals today began as search engines Today provide navigation of the Web, commerce, and content (own and others’) Top four portal/search engine sites 2003:  Google  Yahoo (including Overture and AltaVista)  MSN (Microsoft Network)  AOL (America Online) (including Netscape) Second tier: AskJeeves, Infospace, Lycos, Earthlink, Looksmart

41. Copyright © 2004 Pearson Education, Inc. Slide 13-41 Portal Services Table 13.10, Page 814

42. Copyright © 2004 Pearson Education, Inc. Slide 13-42 Reach of the Top Portals and Search Engine Sites in the U.S. Figure 13.4, Page 815

43. Copyright © 2004 Pearson Education, Inc. Slide 13-43 Insight on Business: Battle of the Portals Major problems facing portal industry leaders  How to differentiate themselves from their competitors  How to convert their large audiences into higher revenue AOL, MSN, Yahoo all appear to be pursuing same strategy – broadband connectivity and enriched fee-based services

44. Copyright © 2004 Pearson Education, Inc. Slide 13-44 Types of Portals: General Purpose and Vertical Market General purpose portals: Attempt to attract a very large general audience and then retain it on-site by providing in-depth vertical content channels Vertical market portals: Attempt to attract highly focused, loyal audiences with a deep interest in either community (affinity group) or specialized content

45. Copyright © 2004 Pearson Education, Inc. Slide 13-45 Two General Types of Portals: General Purpose and Vertical Market Portals Figure 13.5, Page 819

46. Copyright © 2004 Pearson Education, Inc. Slide 13-46 Portal Business Models Major portal revenue sources include:  ISP services (AOL, MSN)  General advertising revenue/tenancy deals  Commissions on sales  Subscription fees

47. Copyright © 2004 Pearson Education, Inc. Slide 13-47 Typical Portal Revenue Sources Table 13.11, Page 820

48. Copyright © 2004 Pearson Education, Inc. Slide 13-48 Revenue per Customer and Market Focus Figure 13.6, Page 821

49. Copyright © 2004 Pearson Education, Inc. Slide 13-49 Percentage of Online Consumers Who Use General Portals Figure 13.7, Page 822

50. Copyright © 2004 Pearson Education, Inc. Slide 13-50 E-commerce in Action: Yahoo! Inc. Vision – Global Internet communications, commerce and media company Earns money from advertising, premium content sales, commissions and corporate services Financial performance – rebounded from loss in 2001 to show profit in 2002 2003: Acquired Inktomi and Overture – return to search engine roots, and new emphasis on pay-for- placement search engine marketing Future prospects depend in part on ability to convert customers who now receive free services into paying customers who will utilize premium content

51. Copyright © 2004 Pearson Education, Inc. Slide 13-51 Yahoo Results of Operations and Summary Balance Sheet Data 1998-2002 Table 13.12, Page 825

52. Copyright © 2004 Pearson Education, Inc. Slide 13-52 Online Communities Communities involve:  A group of people  Shared social interaction  Common ties among members  People who share an area for some period of time Communities do not necessarily have shared goal, purposes or intentions Virtual community – an area online where people who share common ties can interact with one another Debate about relative merits of virtual communities versus ordinary communities

53. Copyright © 2004 Pearson Education, Inc. Slide 13-53 Communities: Well.com Page 829

54. Copyright © 2004 Pearson Education, Inc. Slide 13-54 The Groups That Cybergroupies Belong To Figure 13.8, Page 831

55. Copyright © 2004 Pearson Education, Inc. Slide 13-55 Types of Online Communities and Their Business Models General communities – Offer members opportunities to interact with a general audience organized into general topics Practice communities – Offer members focused discussion groups, help and knowledge related to an area of shared practice Interest communities – Offer members focused discussion groups based on a shared interest in some specific subject Affinity communities – Offer members focused discussion and interaction with other people who share the same affinity (self or group identification) Sponsored communities – Online communities created by government, non-profit or for-profit organizations for purpose of pursuing organizational goals

56. Copyright © 2004 Pearson Education, Inc. Slide 13-56 Types of Online Commercial and Non-Commercial Communities Table 13.13, Page 833

57. Copyright © 2004 Pearson Education, Inc. Slide 13-57 Community Features and Technologies Table 13.14, Page 837

58. Copyright © 2004 Pearson Education, Inc. Slide 13-58 Insight on Technology: InfoPop and the Ultimate Bulletin Board InfoPop a pioneer of bulletin board technology Ultimate Bulletin Board software first released in 1996 as freeware Today being used by over 300,000 Web sites Commercial users see message boards as way to  increase brand loyalty,  increase stickiness of site  help a company understand its customers better  provide customer service

59. Copyright © 2004 Pearson Education, Inc. Slide 13-59 Commercially Sponsored Communities: Business Uses of Community Sponsored commercial communities can play an important role as customer relationship management tools Can extend an existing brand name Can gather customer feedback and suggestions

60. Copyright © 2004 Pearson Education, Inc. Slide 13-60 Economic Benefits of Commercially Sponsored Communities Table 13.15, Page 840

61. Copyright © 2004 Pearson Education, Inc. Slide 13-61 E-commerce in Action: Alloy Inc. Media, direct marketing and marketing services company targeting Generation Y boys and girls Business model – commerce driven by content, with community an important aspect 1 st profitable year for fiscal year ending January 2003 Growth strategy focused on acquiring complementary media channels

62. Copyright © 2004 Pearson Education, Inc. Slide 13-62 Alloy, Inc. Results of Operations and Summary Balance Sheet Data 1999-2003 Table 13.16, Page 843

63. Copyright © 2004 Pearson Education, Inc. Slide 13-63 Case Study: iVillage Struggles to Find Its Marketspace iVillage an e-commerce community Web site focused on women Mixes community, commerce, content Has good demographics, but has not yet figured out how to make a profit

64. Copyright © 2004 Pearson Education, Inc. Slide 13-64 iVillage.com Struggles to Find Its Marketplace Page 850