1. E-Business Eighth Edition Chapter 6 Online Auctions, Virtual Communities, and Web Portals

2. E-Business, Eighth Edition22 Learning Objectives In this chapter, you will learn about: Origins and key characteristics of the seven major auction types Strategies for Web auction sites and auction-related businesses Virtual communities and Web portals

3. E-Business, Eighth Edition3 Auction Overview Business use of the Web –Improve existing processes –New items Running auctions Creating virtual communities Operating Web portals Online auctions provide business opportunity –Charge buyers and sellers –Sell targeted advertising Strength of Internet –Brings people together: common narrow interest

4. E-Business, Eighth Edition4 Origins of Auctions From Babylon to the Roman Empire to Buddhists Common activity of 17th century England –Sotheby’s (1744), Christie’s (1766), colonial auctions Auction: seller offering item for sale –Bids: price potential buyer willing to pay –Bidders: potential buyers –Private valuations: amounts seller willing to pay –Auctioneer: manages auction process –Shill bidders: bidder who seller or auctioneer employees May artificially inflate price

5. E-Business, Eighth Edition5 English Auctions Bidders publicly announce successively higher bids –Stop at highest bid Item sold to highest bidder (at bidder’s price) Also known as: –Ascending-price auction –Open auction (open-outcry auction) Bids publicly announced Minimum bid –Beginning price –If not met: item removed (not sold)

6. E-Business, Eighth Edition6 English Auctions (cont’d.) Reserve price (reserve) –Seller’s minimum acceptable price –Not announced –If not exceeded: item withdrawn (not sold) Yankee auction –Multiple item units offered for sale Bidders specify quantity –Highest bidder allotted bid quantity –Remaining items allocated to next highest bidders Until all items distributed –Bidders pay lowest successful bidder price

7. E-Business, Eighth Edition7 English Auctions (cont’d.) English auction seller drawback –May not obtain maximum possible price English auction buyer drawback –Winner’s Curse Psychological phenomenon Caught up in competitive bidding excitement Bidders risk bidding more than their private valuations

8. E-Business, Eighth Edition8 Dutch Auctions Open auction –Bidding starts at a high price Drops until bidder accepts price Also called descending-price auctions Seller offers number of similar items for sale Common implementation –Use a clock (price drops with each tick) If items remain: clock restarted

9. E-Business, Eighth Edition9 Dutch Auctions (cont’d) Advantages –Seller obtains close to highest private valuation –Quickly move large numbers of commodity items Disadvantages –Sales or product interest generated: does not justify cost of operation –Customer confusion Successful examples –Google initial public offering stock sale (2004) –LookSmart stock repurchase (2008)

10. E-Business, Eighth Edition10 First-Price Sealed-Bid Auctions Sealed-bid auctions –Bidders submit bids independently Prohibited from sharing information First-price sealed-bid auction –Highest bidder wins –If multiple items auctioned: next highest bidders awarded remaining items At their bid price

11. E-Business, Eighth Edition11 Second-Price Sealed-Bid Auctions Second-price sealed-bid auction –Same as first-price sealed-bid auction Exception –Highest bidder awarded item at second-highest bidder price Vickrey auctions –William Vickrey: 1996 Nobel Prize in Economics Yields higher seller returns Encourages all bidders to bid private valuation amounts Reduces tendency for bidder collusion

12. E-Business, Eighth Edition12 Open-Outcry Double Auctions Open-outcry double auctions –Sealed bid or open outcry –Good for: items of known quality traded in large quantities –No item inspection before bidding Example –Chicago Board of Trade: commodity futures and stock options –Buy and sell offers shouted by traders in trading pit Each commodity, stock option traded in own pit Quite frenzied

13. E-Business, Eighth Edition13 Sealed-Bid Double Auctions Double auction –Buyers, sellers submit combined price-quantity bids Auctioneer –Matches sellers’ offers Starting with lowest price and then goes up –To buyers’ offers Starting with highest price and then goes down until all quantities offered are sold Operation format –Sealed bid or open-outcry Example: New York Stock Exchange

14. E-Business, Eighth Edition14 Reverse (Seller Bid) Auctions Reverse auction (seller-bid auction) –Multiple sellers submit price bids Auctioneer represents single buyer –Bids for given amount of specific item to purchase –Prices go down as bidding continues Until no seller is willing to bid lower Used by consumers Largest dollar volume –Businesses: both buyers and sellers Buyer acts as auctioneer Screens sellers before participation

15. E-Business, Eighth Edition15

16. E-Business, Eighth Edition16 Online Auctions and Related Businesses Online auction business is rapidly changing Three auction Web site categories –General consumer auctions –Specialty consumer auctions –Business-to-business auctions Consumer auctions –Considered business-to-consumer e-commerce –E-commerce Considered Consumer-to-business Bidders might be businesses

17. E-Business, Eighth Edition17 General Consumer Auctions eBay –Registration required, seller fees, rating system –Seller’s risk Stolen credit cards; buyer fails to conclude transaction –Buyer’s risk No item delivery; misrepresented item –Most common auction format: English auction Seller may set reserve price Bidders listed: bids not disclosed (until auction end) Continually updated high bid amount displayed Private auction option

18. E-Business, Eighth Edition18 General Consumer Auctions (cont’d.) eBay (cont’d.) –Minimum bid increment Amount by which one bid must exceed previous bid –Proxy bid Bidder specifies maximum bid May cause bidding to rise rapidly eBay stores –Integrated into auction site –Sellers generate additional profits

19. E-Business, Eighth Edition19

20. E-Business, Eighth Edition20 General Consumer Auctions (cont’d.) eBay’s success –No specific audience –Advertises widely ($800 million yearly: mass media outlets) Major determinants of Web auction –Attracting enough buyers and sellers Creating markets in many different items Yahoo! (closed in 2007) Amazon.com (“Auctions Guarantee”: closed in 2006) –Offered buyer protection through Escrow service Overstock.com (still active)

21. E-Business, Eighth Edition21 General Consumer Auctions (cont’d.) Lock-in effect –Economic structure of markets Based against new entrants –Markets become more efficient As number of buyers and sellers increases –Example: Japanese general consumer auction Yahoo! dominates (97%) eBay maintains low market share (3%)

22. E-Business, Eighth Edition22 Specialty Consumer Auctions Specialized Web auction sites –Meet special-interest market needs –No need to compete with eBay Early Web auction sites (first wave) –Featured technology items Doug Salot: Haggle Online (now uBid) Other specialized auction sites (second wave) –JustBeads.com, StubHub –Cigarbid.com, Golf Club Exchange, Winebid Strong market segments; readily identifiable products Desired by people with high disposable incomes

23. E-Business, Eighth Edition23

24. E-Business, Eighth Edition24 Consumer Reverse Auctions and Group Purchasing Sites Reverse bid –Visitor describes desired items or services –Site routes visitor to participating merchants Reply to visitor by e-mail Offer item at particular price –Buyer accepts Lowest offer Offer best matching buyer’s criteria All these types of sites now closed

25. E-Business, Eighth Edition25 Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) Priceline.com –Considered a seller-bid auction site –Visitor states desired airline ticket, car rental, hotel room price If sufficiently high price: transaction completed –Many transactions come from inventory Priceline operates more as a liquidation broker

26. E-Business, Eighth Edition26

27. E-Business, Eighth Edition27 Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) Group purchasing site –Similar to consumer reverse auction –Seller posts item with price –Individual buyers enter bids Agreement to buy one unit (no price provided) Site can negotiate with item’s provider for better price –Posted price decreases As number of bids increases (only if number of bids increases) –Result: buyers force seller to reduce price Like consumer reverse auction

28. E-Business, Eighth Edition28 Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) Well-suited product types –Branded products, well-established reputations Produces buyer confidence of good bargain –High value-to-size ratio –Non-perishable Disadvantages –Difficulty attracting sellers’ interest –Well-suited companies Find no advantage, fear sites cannibalize product sales, reluctant to offend current distributors Group purchasing sites fell apart

29. E-Business, Eighth Edition29 Business-to-Business Auctions Evolved to meet specific existing need –Excess inventory disposal (manufacturing) Two traditional methods –Large companies Liquidation specialists find buyers for unusable items –Small companies Liquidation broker firms find buyers for items

30. E-Business, Eighth Edition30 Business-to-Business Auctions (cont’d.) Emerging business-to-business Web auction models –Direct descendants of traditional methods –Large-company model Business creates its own auction site – Small-company model Third-party Web auction site instead of liquidation broker Resembles consumer online auctions

31. E-Business, Eighth Edition31 Business-to-Business Auctions (cont’d.) Large-company model example –Ingram Micro’s Auction (1997) Computer and VAR equipment distributor Auctions surplus items to established customers Removes liquidation brokers from value chain (disintermediation) Smaller firm example –Sell excess inventory using independent third-party auction site –Dove Bid site (Ross-Dove Company) Traditional liquidation broker

32. E-Business, Eighth Edition32 Business-to-Business Auctions (cont’d.) Gordon Brothers Group (1903) example –Liquidation broker –Helps others launch liquidation Web sites –Separate subsidiary created Dot-com company failures (2001) Sells entire Web sites, software, hardware, intellectual property Temporary employment example –Hospitals (and other companies) –BidShift Sells software to employers to operate shift auctions

33. E-Business, Eighth Edition33 International Securities Exchange (ISE) –New York Stock Exchange, Chicago Board of Trade –Fully electronic options exchange –Threatens existing physical securities exchanges Lower fees attract most lucrative large trades Existing exchanges: introducing electronic trading

34. E-Business, Eighth Edition34 Business-to-Business Reverse Auctions Examples: Owens Corning, U.S. Navy, General Services Administration –Acquire billions of dollars worth of materials, supplies –Agilent, BankOne, Bechtel, Boeing, Raytheon, Sony Disadvantages –Suppliers compete on price alone Cut corners on quality, miss delivery dates –Replaces trusting relationships with a bidding activity Pits suppliers against each other (backward step) Advantages –Useful for nonstrategic commodity items

35. E-Business, Eighth Edition35 Business-to-Business Reverse Auctions (cont’d.) If suppliers do not agree to participate: –Impossible to conduct reverse auctions If high degree of competition among suppliers: –Reverse auctions provides efficient way to conduct, manage price bidding

36. E-Business, Eighth Edition36

37. E-Business, Eighth Edition37 Auction-Related Services Entrepreneurs encouraged by eBay and other auction site growth Provide various kinds of auction-related services –Escrow services –Auction directory and information services –Auction software Sellers and buyers –Auction consignment services

38. E-Business, Eighth Edition38 Auction-Related Services (cont’d.) Auction escrow services –Buyers’ common concern: seller reliability Buyers protect interests in high-value items –Independent party holds payment until: Buyer receives item Buyer is satisfied item is as expected –May take delivery of item from seller Perform buyer inspection (qualified to do so) –Charge fees Percent of item’s cost; subject to minimum fee

39. E-Business, Eighth Edition39 Auction-Related Services (cont’d.) Auction escrow services (cont’d.) –Examples: Escrow.com, eDeposit, Square Trade –May sell auction buyer’s insurance Protect buyers from nondelivery and quality risks –Avoid escrow fraud Determine if licensed, bonded (licensing agency) Avoid offshore escrow companies entirely –Other buyer protections Check seller’s rating Use Web site listings of unreliable sellers

40. E-Business, Eighth Edition40 Auction-Related Services (cont’d.) Auction directory and information services –Example: Auctionguide.com Guidance for new auction participants Helpful hints and tips Directories of online auction sites –Example: AuctionBytes Publishes e-mail newsletter Online auction industry articles

41. E-Business, Eighth Edition41 Auction-Related Services (cont’d.) Auction directory and information services (cont’d.) –Example: PriceWatch Advertiser-supported site Advertisers post current selling prices Computer hardware, software, electronics –Example: PriceSCAN Similar price-monitoring service Also includes books, movies, music, sporting goods

42. E-Business, Eighth Edition42 Auction-Related Services (cont’d.) Auction software –Target: sellers Helps manage online auctions –Example: AuctionHawk and Vendio Seller management software and services Automate tasks Create attractive page layouts Manage hundreds of auctions

43. E-Business, Eighth Edition43

44. E-Business, Eighth Edition44 Auction-Related Services (cont’d.) Auction software (cont’d.) –Target: buyers Helps manage online auctions –Sniping software Observes auction progress until last second As auction expires: places bid high enough to win (unless bid exceeds sniping software owner’s limit) Snipe: act of placing winning bid at the last second Almost always wins out over human bidder

45. E-Business, Eighth Edition45 Auction-Related Services (cont’d.) Auction software (cont’d.) –Example: Cricket Sniping Software site Created in 1997 by David Eccles –Companies offer sniping service Sniping software runs on company Web site Customer enters instructions on site Company may offer subscriptions Company may offer mixed-revenue model –Sniping software and services business information AuctionBytes Web site

46. E-Business, Eighth Edition46

47. E-Business, Eighth Edition47 Auction-Related Services (cont’d.) Auction consignment services –Target: people and small businesses Want to use online auction Do not have skills, time to become a seller –Auction consignment services Take item and create online auction for that item Handle transaction Remit proceeds balance (after deducting fee) –Main auction consignment businesses AuctionDrop, ePowerSellers, iSold It

48. E-Business, Eighth Edition48 Auction-Related Services (cont’d.) Auction consignment services (cont’d.) –Key to success Convenient locations for customer drop off Open own stores, franchise stores Electronic commerce first wave –Online auction business made possible by the Web Electronic commerce second wave –Online auction business created opportunities For even more entirely new types of business

49. E-Business, Eighth Edition49 Virtual Communities: Web Portals and Social Networks Money-making Internet and Web approaches –Virtual communities –Web portals For on-demand Internet services: –Three key required elements Cellular-satellite (mobile) communications technology Electronic marketplaces Software agents –All exist today Not yet integrated

50. E-Business, Eighth Edition50 Mobile Communications Technology Cellular-satellite communications technology –Internet linking capability Notebook computers, personal digital assistants (PDAs), mobile phones WAP –Allows HTML-formatted Web pages to display on small-screen devices –Example: Palm Treo and other smart phones Another approach –Possible by increased screen resolution Display normal Web page on the device

51. E-Business, Eighth Edition51

52. E-Business, Eighth Edition52 Mobile Communications Technology (cont’d.) Apple iPhone –Includes touch screen controls –Easy to view; navigate normal Web page on small handheld device Web-enabled devices including other features –Open doors to second wave of electronic commerce –Examples: Global Positioning Service (GPS) receivers Integrating wireless Internet connectivity with GPS tools Technology convergence provides opportunities for innovative businesses

53. E-Business, Eighth Edition53 Mobile Business Revenue models for mobile business –Requires interconnection Mobile phones Wireless Internet connected Notebook computers Online marketplaces –People switch among access modes seamlessly Interconnection between mobile devices has not occurred yet, but is close Example: AvantGo –Revenue earned by selling ads

54. E-Business, Eighth Edition54 Mobile Business (cont’d.) Wherify Wireless generating revenue –Mobile technology convergence with GPS Sell small mobile phone with five programmable buttons for outgoing calls Phone continually reports its location to Wherify tracking center Subscribers obtain location information (phone call or Internet)

55. E-Business, Eighth Edition55 Intelligent Software Agents Intelligent software agents (software robots, bots) –Programs search the Web –Find items for sale meeting buyer’s specifications Software agents focus on particular product category –Example: Best Book Buys Now developing software agents to: –Track ratings of buyer and seller reputations

56. E-Business, Eighth Edition56 Intelligent Software Agents (cont’d.) Intelligent software agent development leaders –MIT Media Lab Software Agents Group –Carnegie Mellon Intelligent Software Agents Lab BotSpot Web site –Good source: software agents information –Includes links to downloadable bot programs Simon (mySimon Web site) –Best shopping agents currently available Major search engine sites have shopping agents –Google product search page

57. E-Business, Eighth Edition57 Virtual Communities Virtual community (Web community, online community) –Gathering place for people and businesses Does not have physical existence –Various forms of Internet existence Usenet newsgroups, chat rooms, Web sites –People connect and discuss common issues, interests –Considerable social interaction –Relationship-forming activities Similar to physical communities

58. E-Business, Eighth Edition58 Virtual Communities (cont’d) Virtual learning community –Distance learning platforms (Blackboard) –Open-source software (Moodle and uPortal) Web portal sites –Allow site visitors to interact with each other Combine search engines, directories, free e-mail, chat rooms, games Fulfill individual social interaction needs Help companies, customers, suppliers –Plan, collaborate, transact business, interact

59. E-Business, Eighth Edition59 Early Web Communities 1985 (predates the Web) –WELL (“whole earth ‘lectronic link”) Monthly fee to participate in forums and conferences –1999 bought by Salon.com Monthly subscription fee or premium subscription 1995: Beverly Hills Internet virtual community site –Offered webcams, free Web site space –Grew into GeoCities Revenue: advertising, pop-up pages 1999: purchased by Yahoo! ($5 billion)

60. E-Business, Eighth Edition60 Early Web Communities (cont’d.) 1995: Tripod virtual community –Offered free Web page space, chat rooms, news, weather updates, health information pages –Revenue: sold advertising –1998: purchased by Lycos ($58 million) 1995: Theglobe.com Cornell University class project –Included bulletin boards, chat rooms, discussion areas, personal ads Added more features –Revenue: sold advertising –2001: closed

61. E-Business, Eighth Edition61 Web Community Consolidation Consumer virtual community success as money- making proposition –Must offer something of sufficient value Justifies membership charge Example: WELL community members –Obtain access to interesting members Most virtual communities unable to support themselves –Closed –Sold to sites with other revenue-generating activities

62. E-Business, Eighth Edition62 The Second Wave of Electronic Commerce: Social Networking As the Internet and Web grew: –Experiences of online communication faded –New phenomenon in online communication began Internet no longer focus of community (became a tool) Enabled communication among community members Social networking sites –New Web site category designed to facilitate interactions among people

63. E-Business, Eighth Edition63 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Friendster: Jonathan Abrams (2002) Facebook, LinkedIn, Tribe.net –Tools to make new local friends, establish acquaintances, obtain advice YouTube: popularized video inclusion MySpace: popular with younger Web users Basic idea –People invited to join by existing members –Site provides directory Member offers to communicate with any other member Intended recipient must approve contact

64. E-Business, Eighth Edition64 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Web logs (Blogs) –Web sites containing individual commentary on current events or specific issues –Form of social networking site Encourage interaction among people Visitors add comments Early blogs focused on technology topics 2004: blogs used as political networking tool 2008: all major candidates using blogs –Communicating messages, organizing volunteers, raising money

65. E-Business, Eighth Edition65 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Retailers embracing blogs –Bluefly.com: online discount apparel retailer Flypaper blog (2005) –Ice.com: online jeweler Operates several blogs Business use –CNN, newspapers Inviting information and opinion contributions Target 18- to 35-year-old generation Blogs can become businesses in themselves –Must generate financial support (fees, advertising)

66. E-Business, Eighth Edition66 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Social networking Web sites for shoppers –Sense of community to generate revenue –Social shopping Practice of bringing buyers and sellers together in a social network to facilitate retail sales –Example: Craigslist Operated by not-for-profit foundation All postings free (except help wanted ads) –Example: Etsy Web site Marketplace for selling handmade items We Love Etsy: Etsy buyers, sellers share information

67. E-Business, Eighth Edition67 The Second Wave of Electronic Commerce: Social Networking (cont’d.) Idea-based social networking –Idea-based virtual communities Create communities based on connections between ideas More abstract, participants more engaging –Example: del.icio.us site One-word bookmarks tags describe Web pages Focus: ideas, contributions of all community members –Example: 43 Things –Show promise for re-creating essence of original Internet communities

68. E-Business, Eighth Edition68 Revenue Models for Social Networking Sites 1990 –Virtual communities, search engine sites, Web directories selling advertising Generate revenue 1998 –Purchases and mergers occurred –New sites still used advertising-only revenue- generation model Included features offered by virtual community sites, search engine sites, Web directories, other information- providing and entertainment sites –Goal: be every Web surfer’s doorway to the Web

69. E-Business, Eighth Edition69 Revenue Models for Social Networking Sites (cont’d.) Advertising-supported social networking sites –Smaller with specialized appeal Draw enough visitors to generate significant advertising revenue –Example: I Can Has Cheezburger site –Rough measure of stickiness Time each user spends at site (popularity) Figure 6-10 and Figure 6-11 Social networking sites –Members provide demographic information Potential for targeted marketing: very high

70. E-Business, Eighth Edition70

71. E-Business, Eighth Edition71

72. E-Business, Eighth Edition72 Revenue Models for Social Networking Sites (cont’d.) Mixed-revenue and fee-for-service social networking sites –Most successful Web portals: Time Warner’s AOL Charged fee and ran advertising –Yahoo!: now charges for Internet phone service, “premium” e-mail service Increased its revenues from non-advertising sources –New strategy: monetizing Converting existing regular site visitors seeking free information or services into fee-paying subscribers Backlash concerns –Examples: The Motley Fool and TheStreet.com

73. E-Business, Eighth Edition73 Revenue Models for Social Networking Sites (cont’d.) Fee-based social networking –2002 to 2006: Google Answers site (fee based) Attempt to monetize social networking –Similar sites: Yahoo! Answers, Amazon (Askville) Volunteers answer questions (no fees) Services generate advertising revenue –Uclue (researchers earn 75 percent of total fee) Advantages: higher-quality answers, questions more serious, better formulated –Web sites generate revenue by providing virtual community interaction

74. E-Business, Eighth Edition74 Revenue Models for Social Networking Sites (cont’d.) Microlending Sites –Function as clearinghouses for microlending activity –Microlending (became famous in 2006) Practice of lending very small amounts of money People starting or operating small businesses (especially in developing countries) –Microlending key element Working within social network of borrowers Provide support, element of pressure to repay –Example: Kiva

75. E-Business, Eighth Edition75

76. E-Business, Eighth Edition76 Revenue Models for Social Networking Sites (cont’d.) Internal virtual communities –Company-based; for employees Communities and opportunities for social interaction –Run on intranets –Save money with Web site (reduce paper) –Provide easy access to employee information –Good for geographically dispersed employees –Adding wireless connectivity for traveling employees –Combines second-wave technology with first-wave business strategy Wireless communications with internal Web portals

77. E-Business, Eighth Edition77 Summary Look at how companies using the Web to do entirely new things –Running auctions, creating virtual communities, operating Web portals Key characteristics of seven major auction types Consumer online auction business dominated by eBay (United States) New industries to meet needs of auction participants

78. E-Business, Eighth Edition78 Summary (cont’d.) Ways sellers and buyers can protect themselves New approaches to making money on the Internet and the Web –Virtual communities and Web portals Social networking sites –Emerging as important parts of electronic commerce