1. ELC 498 Course Overview DAY 1

2. Agenda WebCT Review Syllabus Class time and location? MR Powell 120 11-12:20PM Course overview Business Model Overview Get Big Fast Customer Lifetime values Access Providers Intro

3. Guiding Beliefs … Let the buyer beware … Current popular view: Internet gold rush of ’99 was an illusion fabricated by foolish speculators, greedy venture capitalists and investment bankers, and callow entrepreneurs. Get Big Fast strategies at center of so many dot com business plans were inherently flawed. As failures mount and valuations plummet, everybody’s getting exactly what they deserved

4. If that’s correct, why are we here?? My belief: It’s true that dot coms were overvalued due to speculative excess in the capital markets, and many were funded without a clear view of how they’d make money. But just as overreaction marked the Internet’s rise, the popular view of its precipitous decline is oversimplified and too extreme. Consider: Internet is not going away; we aren’t dealing with tulip bulbs. We’re 5 years into a 20 year process of rewiring the world economy. Lots of work left to do in building the Evernet Yes, lots we’ve seen lots of internet failures, but that’s normal with new businesses. 60% fail across the economy, including 1/3 of VC- backed firms Along with failures, we’ve seen some brilliant successes: AOL, Yahoo!, RealNetworks, CNET, Monster.com, eBay, E*Trade

5. Get Big Fast strategies are: not (always) flawed; not new; not unique to the Internet; and not going to disappear

6. Kindelberger’s three phases to Manias, Panics, and Crashes: euphoria, overtrading, and revulsion Babies go out with the bathwater during revulsion phase VCs are now flush with cash. We’ve already seen post-crash run ups in valuations for wireless, optical networking, XML software (VC message in those sectors: Get Big Fast!) Important to understand how product market and capital market strategies interact during different phases Overtrading phase brings risks for everyone Revulsion phase offers opportunities for those with cash and courage Money seems scarce now (an illusion) and revulsion grips the capital markets, but cycles will repeat themselves

7. Why we’re here Notwithstanding Michael Porter’s recent pronouncements (“The Internet is just a tool; does not require a radical new approach”), networked businesses have very different economics than traditional manufacturing and service businesses Almost all of you will spend most of your careers managing in networked businesses. You’ll need new frameworks to help understand New Economy businesses. That’s why we’re here!

8. COURSE OBJECTIVES UNDERSTAND INTERNET BUSINESS MODELS UNDERSTAND “GET BIG FAST” (GBF) STRATEGIES UNDERSTAND HOW FIRMS APPROACH DECISIONS ABOUT SCOPE UNDERSTAND CAUSES AND CURES FOR INERTIA IN ESTABLISHED COMPANIES

9. UNDERSTAND INTERNET BUSINESS MODELS Customer needs (e.g., easy navigation; deep selection); how do companies satisfy needs? Micro-economics, e.g., Do pure play Web companies have inherent cost advantages over bricks-and-mortar competitors? Is model subject to increasing returns? How do costs scale?

10. UNDERSTAND INTERNET BUSINESS MODELS Are customer retention rates intrinsically high? What is customer lifetime value? Implications for target customer acquisition costs? Strategy issues, e.g., How important is first mover advantage? Is diversification an attractive option? How crucial are alliances with bricks-and- mortar companies?

11. UNDERSTAND “GET BIG FAST” (GBF) STRATEGIES GBF = massive upfront spending on customer acquisition and brand building How does GBF payoff vary for different business models? (Consider differences in cost economies; increasing returns; retention rates) Issues: When is first mover vulnerable to displacement? What happens when several companies simultaneously pursue GBF strategies? To what extent is payoff dependent on speculative excess in capital markets?

12. UNDERSTAND HOW COMPANIES APPROACH DECISIONS ABOUT SCOPE Internet companies are ‘blank slates’: few fixed ideas about what they can and cannot do Capital markets often push the early movers of the ‘euphoria’ phase to expand Four opportunities to expand scope Breadth of customer segments served (DLJdirect) Product line diversification (Amazon.com) Vertical integration (TCI) Business model ‘hybridization’ (CNET)

13. UNDERSTAND CAUSES AND CURES FOR INERTIA IN ESTABLISHED COMPANIES Causes of Inertia Concerns about cannibalization Concerns about stock price impact of funding GBF strategies Slow, dysfunctional planning processes “Hawk” versus “Dove” organizational structures Hawk separates the Internet unit from the core businesses; staffs it with outsiders; seeks little functional integration Dove seeks high level of operational integration between Internet and core business Use of tracking stock

14. DELIMITATIONS Porter: “Strategy renders choices about what not to do as important as choices about what to do.” THIS COURSE DOES NOT PROVIDE AN IN-DEPTH EXPLORATION OF: Specific operating tactics (e.g., how to pick a web design firm; how to negotiate a portal deal) Companies that provide enabling technologies and services (e.g., Cisco; Inktomi; Razorfish) “Back office” functions like integrated logistics and supply chain management International opportunities

15. COURSE ORGANIZATION ACCESS PROVIDERS TCI Teledesic Geocast Network Systems HORIZONTAL PORTALS Yahoo! StarMedia Tellme Networks CONTENT PROVIDERS CNET Boston.com BET.com BMG Entertainment RETAILERS Staples.com Petstore.com Sendwine.com BROKERS DLJdirect Microsoft Carpoint Rosenbluth Travel Wit Capital MARKET MAKERS Priceline Webhousee Bricks.com Sothebys.com NETWORKED UTILITY PROVIDERS Adobe APPLICATION SERVICE PROVIDERS Everdream DoubleTwist