e-BUSINESS
MODELS
.last updated 2004 Oct 13
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For the students of Prof. W. Tim G. Richardson, Toronto, Canada
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.. This unit is used in
  • MGTD06
  • MRK610
  • MRK410
  • BCS555
. Not all of the material in this unit will be used in each of these courses; the amount of material covered will be indicated by the actual lecture given in class by the professor. Some courses cover this topic extensively, some courses deal with it briefly.
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In this unit on Business Models, we will refer to material from the following texts
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Schneider/Perry
Electronic Commerce
3rd Edition
Chapter 8 (in 2nd edition)
Chapter 3 (in 3rd edition) 
. Hanson: Principles of Internet Marketing   Chpt 5 
Turban: Electronic Commerce: A Managerial Perspective 2002 Edition Internet Business Models : Text and Cases
by Dr. Thomas R. Eisenmann, Harvard Business School

If we had the time for several lectures on business models, this would be a good book to use.

Internet Business Models and Strategies: Text and Cases
Dr. Allan Afuah, Dr. Chris Tucci

we used Chpts 4 and 5
- has a good taxonomy of business models

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"There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things"

Nicollo Machiavelli sixteenth century Florentine philosopher
 

. I decided to open this unit with a quote from Machiavelli since it reminds us that the consideration of new business in a "challenging" environment is not just something we hadin the 1990's, it goes way way back.

The quote from this philosopher also suggests that when it comes to business models, it is always difficult to be the one to go first - which is often what is happening in 2001, 2002, 2003 - many companies are the "first" to do something new.

Going first can be very "uncertain" - but, it you succeed, it can also mean you have a head start on everyone else and it can be hard for the competition to catch up.

WTGR

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. "According to www.dotcomfailures.com, the number one reason (47%) dot com owners stated for failing is a faulty business model. (A business model is the strategy by which a company plans to make and sustain its income.)
 
The e-commerce business model is a direct result of the drastic changes effecting the previously well known versions of traditional business models - these versions are being stretched by many "exceptions" caused by globalization and technology - this stretching has caused the traditional business model to be almost unrecognizable due to the many additional allowances we have to make for the "e" age

WTGR

"it is getting harder for companies to deliver profitable growth on a sustained basis. It is also more difficult for many companies to hold their  ground and not fall behind. The key reasons include the dramatic increase in complexity in managing business and the increasing premium put on innovation. The complexity is due to significant and irreversible changes in  the business environment. The pace of business is accelerating beyond the ability of most corporations to  adjust. "
 http://www.strategy-business.com/research/96201/page1.html
this article from the well-known consulting firm
Booz-Allen & Hamilton about changing business models, is divided into 7 pages online, which print out to about 12 pages if you want a hard copy

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.Introduction Several of the texts we use in this course discuss Web Business Models. Some discuss the model in terms of 
  • what type of business they do, 
  • some discuss it in terms of how they are structured, 
  • some in terms of how they make money.(eg. provider based, user based) 
  • Some even go so far as to say the goal is not to make money, but capture market share and the model is based on that assumption.
The table below lists the names of each model discussed in each text -  you can see, even the experts cannot agree on some simple commonalities for this topic; perhaps this is because the variations in e-business models are as varied as brick & mortar businesses !!!

WTGR

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Provider based revenue models
User pay based revenue models
The Web Catalog
Advertising-Supported
Advertising-Subscription Mixed
Fee-for-Transaction
Fee-for-Services Revenue
Direct Marketing vs Indirect Marketing
Full Cybermarketing vs Partial Cybermarketing
Electronic Distributor vs Electronic Broker
Electronic Store vs Electronic Shopping Mall
Generalized E-malls/stores vs Specialized E-malls/stores
Proactive vs Reactive Strategic Posture toward Cybermarketing
Global vs Regional Marketing
Sales vs Customer Service
Internet Access Providers
Online Portals
Online Content Providers
Online Retailers
Online Brokers
Online Market Makers
Networked Utility Providers
Application Service Providers
Brokerage model
Advertising model
Infomediary model
Merchant model
Manufacturing model
Affiliate model
Community Model
Subscription Model
Utility Model
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Witiger's summary of all the e-Business Models

First, divide the list according to whether it is a physical product or a service - many services can be sold online and areunique to the Internet world, many of the products sold online simply use the Internet as another form of advertising and the "model" is not so special.

The second thing to do is divide the list according to whether the product/service is for business2business purposes, or for consumers direct - the differences are huge. An online website listing plastic autoparts will require a completely different model than a website selling DVD movies to individual customers.
 

  • Product
    • Consumer Product
      • The Web Catalog Model
      • Through a Broker, or Portal
    • Industrial Product
      • Through a Broker, or Portal
      • Through an Industry Association Portal
      • Through a Third-Party Intermediary
  • Service
    • Consumer Service
      • Advertiser pays, viewer sees content free model 
      • Subscription based revenue models
      • Advertising-Subscription Mixed Model
      • Fee-for-Transaction/Services Models
    • Industrial Service
      • Subscription based revenue models
      • Fee-for-Transaction/Services Models
      • Through an Industry Association Portal
      • Through a Third-Party Intermediary
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Hanson: Principles of Internet Marketing   Chpt 5   Web Business Models (not a required text)
 http://simi.stanford.edu/hanson/chapter5.html

Revenue based business models p. 131- 132 Hanson text
Hanson says of revenue based models, "the major split is between cases where providers pay for service and those where users pay"

  • Provider based revenue models
    • fees are paid to the web site by the companies wanting to read the people using the site
    • advertisers who want to target a demographic that goes to a particular site
    • examples are the search engines that have become portals and have income driven by selling advertising space on their page which will be seen by people using the search engine to find information
  • User pay based revenue models
    • Hanson says revenues from transactions are the fastest growing benefits of being online (p. 137)
    • Hanson connects user based models to B2B sales
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Internet Business Models and Strategies: Text and Cases
Dr. Allan Afuah, Dr. Chris Tucci

Afuah and Tucci's Taxonomy of Business Models
 

  • Brokerage Model
    • "firms act as market makers who bring buyrs and sellers together for a fee for the transactions they enable"
  • Advertising model
    • a company provides some attractive content to bring in browsers. "The website owner usually makes money by charging advertisers fees for banners, permanent buttons and other ways.."
  • Infomediary model
    • "a firm collects valuable information on consumers and their buying habits and sells it to firms which in turn mine it for important patterns and other useful information to help them better serve their customers"
  • Merchant model
    • "the e-tailer model in which wholesalers and retailers sell goods and services over the Internet"
  • Manufacturing model
    • "manufacturers try to reach end users directly through the Internet instead of going through a wholesaler or retailer" (in a B2B context)
  • Affiliate model
    • "each time a visitor to an affiliate's site clicks through to the merchant's site and buys something, the affiliate is paid a fee". Sometimes the affiliate earns a fee just for the "click through" even if the customers does not end up buying
  • Community Model
    • "rests on community loyalty rather than traffic. Users have invested in developing relationships with other members of the community and are likely to visit the website frequently"
  • Subscription Model
    • "Members pay a subscription price and in return receive high-quality content". In reality, this model has not been too successful in 2001 and 2002 due to many alternative sites providing similar content free using the Advertising model. The only way this model works is if the content is VERY VERY good and cannot be seen for free on other sites.
  • Utility Model
    • "activities are metered and users pay for the services that they consume"
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Business
Models

3rd edition

Schneider/Perry Electronic Commerce
 
. In both their First Edition and their Second edition, Schneider and Perry have three chapters that are titled with the word "Strategy ..."

For this section of the course, we will concentrate on Chapter #8 
Strategies for Marketing, Sales, and Promotion  there is a section (also on the web site) titled 
Business Models for Selling on the Web  see        www.course.com/downloads/sites/ecommerce/ch08main.html
WTGR

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If you want to get the powerpoints for this chapter - from the 2nd Edition, they are on the witiger.com site under the sub-directory powerpoints, click on   www.witiger.com/powerpoints/schneiderperry2edition/ to get them
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1st edition
http://www.course.com/downloads/sites/ecommerce/ch08main.html
 

Business
Models
 
 

2nd edition

Business
Models

3rd edition

Schneider/Perry Electronic Commerce
Chapter 8 (in 2nd edition), Chapter 3 (in 3rd edition)

The 3rd Edition opens with an example of Apparel Retailers using the web
- have a look at www.larkhill.com

the models described herein are

  • The Web Catalog Model

  • ( in the 2nd edition they called this "Sell Goods and Services")
    • following the hope that a small company could sell product to people anywhere in the world, just as long as Fedex or UPS ship there, and if the credit card they gave for the purchase is good
  • Advertising-Supported (page 95 in 3rd edition)
    • commonly used by TV, newspapers and magazines
    • Schneider and Perry comment that this model was seen, in the early years to have great possibilities, but since then it has been "hampered by two major problems"
    • no consensus reached on how to measure and charge for site visitor views
    • very few web sites have sufficient numbers of visitors to interest large advertisers
  • Advertising-Subscription Mixed Model (page 98 in 3rd edition)
    • subscribers pay a small fee, and accept a modest level of advertising
    • New York Times newspaper www.newyorktimes.com  is a good example - most of the content is free online, but if you want to access the crossword puzzles, you pay a small fee
  • Fee-for-Transaction Models
    • common with travel agencies 
    • the structure works when someone provides a service to another business of gathering disparate information, consolidating it, filtering it, and re-selling it to another business so that easier and faster decisions can be made
    • also starting to be used in the automotive industry among wholesalers and parts suppliers
    • common also with online stock brokerage firms
  • Fee-for-Services Revenue Models (page 105 in 3rd edition)

  • (called "Sell Information or Other Digital Content" in the 2nd edition)
    • this model has been very successful for some companies since they do not have to worry about shipping product (a weakness of many companies selling physical goods online) - but they do have to pay high costs for bandwidth charges if thousands of people are downloading content off the site
    • some of these business are completely new to the information age eg. web sites selling screensavers and wallpaper, others are reconfigurations of older businesses, eg. stock market info or sports teams info or dating services
. You could also further subdivide these models into 
  • business to business, 
  • business to consumers, 
  • business to government, 
  • government to consumers, 
  • government to government, 
  • government to business.
WTGR
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Channel Conflict
and
Cannibalization

3rd edition

 
 
 
 
 

 

Schneider/Perry Electronic Commerce
 
. Channel conflict and cannibalization are increasingly important for marketing students to understand in the context of an increasingly competitive marketplace employing so many new technologies.

Additionally, there are retail conglomerates which are very desirable for manufacturers and vendors and there is developing intense competition for access to these. If you can't get into the major chains, you will not have the volume of sales to grow from a medium sized company to a large sized company.
WTGR

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"Companies that have existing sales outlets and distribution networks often worry that their web sites will take away sales from those outlets"
page 90 Schneider, 3rd Edition

Example of how you avoid cannibalization

Larkhill.com gets many more hits on its website that does the small stores carrying the product - however Larkhill does not sell its clothing online

  • by not selling online you avoid the hassles of dealing direct with the public
  • you do not have to worry about payment systems
  • your retail customers do not see you as competition
larkhill however does use the web site to promote sales to the public by listing all the stores where you can go to buy the clothing
- see http://www.larkhill.com/retailers.htm
Cannibalization
article in BusinessWeek, July 5, 1999
 http://www.businessweek.com/ebiz/9907/ep0705.htm

"There's a reason that retailers are so hesitant to push their online channels. They're
worried about cannibalizing their existing store traffic. And it's no small concern. To the
consumer, a dollar spent at a Web store is the same as a dollar spent at the traditional
store. But the retail community isn't ready to see it that way. Many retailers -- and their
employees -- see even their own Web sites as new competition. "Retailer CEOs have
to cope with the fact that their downtown store may take a hit when the online store
opens,... Many companies, even as they forge ahead online, are clearly treading lightly to avoid this problem. Home Depot's relaunch of its Web site is designed to "drive traffic into
our stores," execs say."

written by ellen_neuborne@ebiz.businessweek.com
 

. Tim Richardson cites the example of one Toronto store that bought Larkhill Lingerie, but then cut out all the labels that say www.larkhill.com and affixed a sticker with the website of the store.
WTGR
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main link for the books web site

 

Turban: Electronic Commerce: A Managerial Perspective, is not a required purchase, but it does have several chapters that mirror topics we discuss from other texts in this course + it has an accompanying web site + dowloadable .ppt slides for each chapter

Internet Business Models 
- series on online Powerpoint slides at
 http://www.prenhall.com/divisions/bp/app/turban/cw/ppt/
 go to Chapter 2, slide 9

The following are the "perspectives" that compose the e-business models, according to the book's authors

  • Direct Maketing vs Indirect Marketing
  • Full Cybermarketing vs Partial Cybermarketing
  • Electronic Distributor vs Electronic Broker
  • Electronic Store vs Electronic Shopping Mall
  • Generalized E-malls/stores vs Specialized E-malls/stores
  • Proactive vs Reactive Strategic Posture toward Cybermarketing
  • Global vs Regional Marketing
  • Sales vs Customer Service
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Virtual companies as a business model
 
. Virtual companies as a concept are not new, in fact they are very old - the only thing that is the use of the adjective "virtual" and the technology which facilitates communication among the corporate components.

Virtual companies are essentially a special way that people provide capability to clients. Instead of having to possess all the capability that all your clients need all the time, virtual organizations consist of networks of affiliated people (specialists) and organizations which, depending on the project, will get together to provide a solution to a client which one of the people in the virtual network has.

The reason this type of structure has become spoken off in the category of business models in the year 2000 is because it allows individuals and small sized organizations to bid on tasks that may be beyond the capability of the originating consultant - yet, can still be "handled" because the consultant has, through affiliations, friendships and alliances, a virtually larger capability which can be brought in to handle a larger situation.

WTGR

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http://album.yahoo.com/shop?d=ha&id=1801682881&cf=10 Virtual companies as a business model
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Virtual companies are not just contained to the IT business world but exist in many types of formats in business throughout the globe. One example of the diversity in applying virtual companies as a concept is the famous rap group Wu-Tang Clan.
 
. The reason for mentioning Wu-Tang Clan is to prove, by example, that business is not just the circumstances of widgets and auto parts,- business is very diverse and the entertainment industry is definitely big business - with all the commensurate business considerations, such as business models.

WTGR

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As TIME magazine noted, (Dec 11th issue, 2000) "The Wu-Tang "brand" blossomed in 1993. Each member of the group periodically goes off and does some solo project from which they develop additional capability and experience, at the same time keeping public their alliance and affiliation with Wu-Tang. The "brand", in the form of the bands members, continue to also put out products under the bands name as well in order to maintain the value of the "base" of their individual reps.

The strength of the company, as explained in TIME, is "... maintaining just a small core and outsourcing everything else."
Wu-Tang is a conglomeration of rappers that includes

  • Robert Diggs AKA RZA
    • his interview with TIME www.time.com/time/sampler/article/0,8599,88614,00.html 
    • for those of you that don't know much about the "business" of rap and hip hop, this is a fascinating interview which exposes just how "business" oriented these people are to market share, branding building, product diversification etc.
    • Diggs "my original strategy to have artists placed in different locations, then get those different labels to work together for my brand"
  • Michael Diggs AKA Divine
  • Method Man
  • Masta Killa
  • U-God
  • Raekwon
  • Inspectah Deck
  • GZA
  • Ghostface Killah
  • ODB AKA Ol' Dirty Bastard
  • Cappadonna
The band members have so many sites devoted to their activities that Yahoo has devoted an entire Yahoo category to them 
http://dir.yahoo.com/Entertainment/Music/Artists/By_Genre/
Rap_and_Hip_Hop/Wu_Tang_Clan/Band_Members/

"Everything else" is their forays into video games, clothing, comics, movies and many other constantly new and evolving merchandise crossing over and back into music, video, movies and the internet.
 

http://www.activision.com/games/wutang/ Wu-Tang website for their kung fu game
 http://www.activision.com/games/wutang/
Disclaimer:
The author of this web page, [witiger]  does not necessarily advocate or subscribe to the lyrics, imagery or lifestyle associated with Wu-Tang Clan, [which some may find objectionable] or any other musical group noted herein. The purpose of noting this organization is strictly in the context of exploring the great diversity of business activity which is online, and reflects the diversity of business globally. The entertainment industry is often the particular area of business that adopts new technologies for creating "content" and sharing "content", yet many traditional business academics still choose to use examples from consumer product companies when discussing new ideas. The author of this website chooses to explain examples a bit differently !
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link to ppt menu
Chapter 2
Amazon's competitive Structure p. 39 - 40 in text

? "Is the cooperating model of Amazon and Ingram more ffective than the cyber book-retailing channel barnesandnoble.com with the traditional nationwide store network"
 

. Basically, the question asked by Turban et al, is
"which is better, a pure-play, or a click and mortar?".

WTGR

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Additional information above and beyond the text reference to Amazon is linked below.
http://www.witiger.com/ecommerce/Amazon.htm
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Business
models 
and the patenting 
of them
Business models and the patenting of them

"Patents on Internet Business Models"
 www.webpr.co.uk/news/patents.asp
Nicholas Schmidt's article March 2000 on the Cybersavvy website is good reading because it explains the consequences if patent protection becomes to extreme.

"Why should you care?"

Why? Because you'll find out, that most, if not all of the business practices that are completely common and obvious on the Internet today... will have been PATENTED by corporate behemoths like Amazon.com or Priceline.com... making it outright ILLEGAL for you to:

1.) Set up an affiliate program on your own;

 2.) Create a site that conductions auctions or reverse auctions;

 3.) Create a site where the customer will name their own price on items;

 4.) Create a Web site with a button that allows one-click ordering;

 5.) Create a Web site that does any kind of e-commerce at all?

   ...unless you ask Amazon.com for permission to do so;

   ...unless you buy the software from the single (or one of few) vendors that have been licensed by Amazon.com or Priceline.com, etc. to legally sell such software;

 ...unless you pay a hefty MONOPOLY PREMIUM because all competition in the Web software market has been virtually eliminated;"
 
 

. Schmidt's article may seem a bit sensationalistic but the concern is that the U.S. Patnet Office may grant Patents in situations where it would be againstthe best interests of future competition and good business practices for consumers and vendors. In the offline world, Patents are given only after a very rigorous process. For example; McDonald's make a lot of money from drive through service - but they cannot patent that since they could establish that they were first to do it, and it would be considered unenforceable since so many other businesses adopted that model for fast food retail.

However in the online world, companies are seeking patents for particular process of payment execution, product information, web page layout etc. and they are trying to justify protection by claiming they are the originators of the concept.

WTGR

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Schmidt explains

"What damage has been done?

Amazon.com owns a patent on their "groundbreaking" idea of one-click ordering: This is the idea of placing a button on your Web site that allows ordering without entering  credit card details every time you place the order.

 The USPTO should have said: DUH! Instead, they granted patent number 5,960,411 on 9/28/99.

Now Amazon.com received a patent on "affiliate programs": The idea of issuing  someone commissions as a reward for all sales that have been generated by a hyperlink  from their site to yours.

Again, anybody who ever created just one Web page would say: DUH! But the USPTO granted patent number 6,029,141 on 2/22/00.

BOTH IDEAS ARE PLAIN AND OBVIOUS. But, due to a loophole in U.S. patent law, you, me, or anyone, could have applied for a "patent" on these business processes, so as to extort royalties, or impose a de-facto e-commerce tax on virtually all transactions made anywhere on the Web, from anyone in the world who ever chooses to create Web sites that employ the same, inevitable, and obvious IDEAS."
 

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Business
models 
and the patenting 
of them
Business models and the patenting of them - the Law Firms Involvement

 www.jonesaskew.com/articles/99/0499patpro.html
Jones and Askew - which we noted in IEC 719, has an article on their web site discussing Patent Protection for E-Commerce Business Models 
 
. A number of law firms are trying to substantiate themselves as being able to offer e-businesses protection for their idea - and of course billing out large fees for this advice.

WTGR

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The premise, that Jones and Askew operate on is based on attracting traffic. They explain...

"To succeed in this competitive e-commerce market, a business must attract as many consumers as possible to its Web site, while building and retaining consumer loyalty. Sometimes, a Web site is more attractive
to consumers because it is built with cutting edge technology that provides advanced audio/visual user interfaces, services and security measures. E-commerce proprietors have recognized that a competitive advantage may be gained by securing patent protection for such technological innovations. Other times, the appeal of a Web site does not lie in cutting edge technology, but rather is due to an innovative business model. E-commerce proprietors may be surprised to learn that patent protection also may be available to protect innovative business models embodied in computer software."

"To obtain a patent, an inventor must demonstrate that an invention is directed to patentable subject matter and is useful, novel and non-obvious over the prior art. An invention must fall into one of four classes of patentable subject matter: machines, articles of manufacture, compositions of matter, and processes. For example, a computer software invention can be viewed as a machine when combined with a computer, an article of manufacture when distributed on a diskette or a CD-ROM, or a computer-implemented process. An improvement to an invention included in these classes may also be patentable. Examples of
"unpatentable" subject matter include a mere idea, printed matter, an inoperable device, e.g., perpetual motion machine, and an obvious improvement of an old device. Typically, any arguable use for an invention will suffice to meet the usefulness requirement. To qualify for patent protection, an invention must be novel when compared to prior solutions to the problem solved by that invention, i.e., the prior art. Two broad categories of prior art which may destroy novelty include (1) events which occur prior to the date of invention and (2) events which occur more than one year prior to the filing date of a patent application directed to the invention. If an event satisfies either requirement, it is considered prior art. "
 


 
. "A Business Model of One's Own"
Author: Leigh Buchanan 
Source: Inc. magazine - November 01, 1998 
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"Can you actually patent a business model? A recent (1998) decision from the (U.S.) patent and trademark office says you can. And that isn't good news for entrepreneurs"
 http://www.inc.com/incmagazine/article/0,,ART1031,00.html
Not a particularly easy to read article but it does cover the issues
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