1. Electronic Commerce Eighth Edition
Chapter 6 Online Auctions, Virtual Communities, and Web Portals 1 1

2. 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
Electronic Commerce, Eighth Edition 2 2

3. 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
Electronic Commerce, Eighth Edition

4. 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
Electronic Commerce, Eighth Edition

5. Electronic Commerce, Eighth Edition

6. 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
Electronic Commerce, Eighth Edition

7. 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
Electronic Commerce, Eighth Edition

8. 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
Electronic Commerce, Eighth Edition

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10. 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)
Electronic Commerce, Eighth Edition

11. 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%)
Electronic Commerce, Eighth Edition

12. 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
Electronic Commerce, Eighth Edition

13. Electronic Commerce, Eighth Edition

14. 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
Offer item at particular price
Buyer accepts
Lowest offer
Offer best matching buyer’s criteria
All these types of sites now closed
Electronic Commerce, Eighth Edition

15. 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
Electronic Commerce, Eighth Edition

16. Electronic Commerce, Eighth Edition

17. Consumer Reverse Auctions and Group Purchasing Sites (cont’d.)
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
Electronic Commerce, Eighth Edition

18. 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
Electronic Commerce, Eighth Edition

19. 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
Electronic Commerce, Eighth Edition

20. 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
Electronic Commerce, Eighth Edition

21. 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
Electronic Commerce, Eighth Edition

22. 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
Electronic Commerce, Eighth Edition

23. 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
Electronic Commerce, Eighth Edition

24. 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
Electronic Commerce, Eighth Edition

25. 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
Electronic Commerce, Eighth Edition

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27. 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
Electronic Commerce, Eighth Edition

28. 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
Electronic Commerce, Eighth Edition

29. 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
Electronic Commerce, Eighth Edition

30. 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 newsletter
Online auction industry articles
Electronic Commerce, Eighth Edition

31. 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
Electronic Commerce, Eighth Edition

32. 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
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34. 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
Electronic Commerce, Eighth Edition

35. 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
Electronic Commerce, Eighth Edition

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37. 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
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
Electronic Commerce, Eighth Edition

38. 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
Electronic Commerce, Eighth Edition

39. 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
Electronic Commerce, Eighth Edition

40. 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
Electronic Commerce, Eighth Edition

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42. 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
Electronic Commerce, Eighth Edition

43. 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
Electronic Commerce, Eighth Edition

44. 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)
Electronic Commerce, Eighth Edition

45. 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
Electronic Commerce, Eighth Edition

46. 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
Electronic Commerce, Eighth Edition

47. 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
Electronic Commerce, Eighth Edition

48. 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 , chat rooms, games
Fulfill individual social interaction needs
Help companies, customers, suppliers
Plan, collaborate, transact business, interact
Electronic Commerce, Eighth Edition

49. 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)
Electronic Commerce, Eighth Edition

50. 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
2001: closed
Electronic Commerce, Eighth Edition

51. 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
Electronic Commerce, Eighth Edition

52. 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
Electronic Commerce, Eighth Edition

53. 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
Electronic Commerce, Eighth Edition

54. 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
Electronic Commerce, Eighth Edition

55. 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)
Electronic Commerce, Eighth Edition

56. 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
Electronic Commerce, Eighth Edition

57. 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
Electronic Commerce, Eighth Edition

58. 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
Electronic Commerce, Eighth Edition

59. 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
Electronic Commerce, Eighth Edition

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62. 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” 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
Electronic Commerce, Eighth Edition

63. 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
Electronic Commerce, Eighth Edition

64. 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
Electronic Commerce, Eighth Edition

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66. 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
Electronic Commerce, Eighth Edition

67. 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
Electronic Commerce, Eighth Edition

68. 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
Electronic Commerce, Eighth Edition