SENECA COLLEGE, TORONTO
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As Taught by Tim Richardson School of Marketing and e-Business, Faculty of Business
DETAILED OUTLINE©
SECTION on Internet Business Models

In this section, we'll use the following texts
Principles of Internet Marketing
by
Prof. Ward Hanson

Chapter 5

http://www.course.com/downloads/sites/ecommerce/ch08main.html Electronic Commerce
by
Schneider/Perry

Chapter 8

main link for the books web site Electronic Commerce: A Managerial Perspective
by Turban et al

Chapter 2

Internet Business Models and Strategies
by
Afuah and Tucci

Chapter 4
Chapter 5
Chapter 10


 

"There is nothing more difficult to take in hand, more perlious 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

 
. The understanding is that people studying this material will either be involved with a new company that is just developing its business model, or has an existing business model that needs to be changed to fit online environment. Therefore it will be helpful to study the various business models (which are constantly being revised) so that you personally may be able to be involved in the decision making re: strategic planning : - which requires knowing what business model you'll adopt.

WTGR

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. 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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Class
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Jan
16

Hanson: Principles of Internet Marketing
Chpt 5   Web Business Models
 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
    • 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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. 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.


WTGR

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Class
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Jan
16


http://www.course.com/downloads/sites/ecommerce/ch08main.html

 

Schneider/Perry Electronic Commerce
Chapter 8 titled
 Strategies for Marketing, Sales, and Promotion  there is a section (also on the web site) titled 
Business Models for Selling on the Web 
                       see         http://www.course.com/downloads/sites
/ecommerce/ch08main.html
the models described herein are
  • Sell Goods and Services
  • Sell Information or Other Digital Content
  • Advertising-Supported
  • Advertising-Subscription Mixed Model

 
Class
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Jan
16

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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Class
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Jan
16

Internet
Business
Models
link to Electronic Commerce Resource Center
Successful Internet Business Models - series on online Powerpoint slides at
 http://www.becrc.org/education/ibplinfo.htm
the first slide is  at
 http://www.becrc.org/education/ibpl_3/ppframe.htm
by Bill Bandrowski of the 
 Electronic Commerce Resource Center,   Bremerton, WA  USA
  http://www.becrc.org/education/onlineseminars.htm online seminars

 
Class
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Jan
16


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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.

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.ninerings.net/ Wu-Tang website for their new comic book
 http://www.ninerings.net/
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, and website 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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Chapter 10 in this text is all about Amazon.com as a business model

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Jan 
31
We will watch a video about the biography of Jeff Bezos, founder and current Chairman of Amazon.com.

The purpose of the video

  • to solicit discussion of some of the key personal characteristics which allow a person to "conduct E-commerce successfully" 
  • understand some of the environmental circumstances that allowed Amazon.com to create a successful brand out of nowhere
    • opportunity
    • timing
    • growth of related technologies
    • original idea
  • to see how the success of the brand allows Amazon.com to get involved in other business areas apart from its core competency.
    • Amazon's toy business, recently merged with the online ventures of 

    • Toys R Us
    • Amazon.com claims that up to one-third of its 23 million customers are not yet aware of the company's latest offerings, such as home improvement, toys and cooking,
  • look at an example of the dot.com business model that does not turn a profit, and how they can continue to "get away with it"


On Amazon.com's own web site is a bio of Jeff Bezos, which can augment some of the information you would have seen in the beginning of the video.
 www.amazon.com/exec/obidos/subst/misc/bio-bezos.html/107-0666044-7561336.

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Feb
6th

Let's look at what the irreverent people at the Motley Fool.com site have to say about the future directions of Bezos and Amazon.com

 http://www.fool.com/news/2000/amzn001009.htm

In an October 2000 article on Fool.com, staff writers suggested
"Is Amazon Overgrown? "

"Amazon.com was criticized last week [Oct 2000]  for over-expanding its product offerings. Today, Amazon's Chairman and Chief  Executive Officer Jeff Bezos answered the charges, and said his company intends to expand into many more product categories."

"In an interview with Reuters, [Oct 2000] Amazon's Chairman and Chief Executive Officer Jeff Bezos said: "We will continue to do deals like the photo deal and we'll also continue to enter new product categories." "This model works," continued Bezos. "Selection is an advantage, not a  disadvantage." He went on the say that he was sure his company would be profitable eventually, but wouldn't disclose when that might actually occur."

Brian Lund, Co-manager of the Rule Breaker Portfolio 
" Amazon has gotten itself in trouble in the past through diversifying into new product categories. Part of the problem was that they got into categories that they didn't fully understand, causing inventory inefficiencies in departments like toys and electronics, which wreaked  havoc on their working capital management. Another problem is that some of the categories didn't fit Amazon's medium very well. It's just not easy to sell table saws profitably on the Internet.".

Paul Commins, Rule Breaker Portfolio Writer 
"Amazon has become the ultimate risky stock bet. Now featuring a negative book value and junk-bond class debt, Amazon has never been closer to not making it."
 

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Feb
6th
On January 31, 2001, one of the biggest stories in the online media community was the news that Amazon.com would lay off a large number of people. E-commerce Times had a good article which explains the situation

"The Amazon Question: Will Investors Trade Growth for Profits?"
by Keith Regan
 www.ecommercetimes.com/perl/printer/7138

"News that Amazon.com is slashing 1,300 jobs continued to  rattle the e-commerce world  Wednesday, as analysts said reduced sales forecasts from the  bellweather company are a signal that the era of spectacular growth may have ended for the e-tail sector.  Amazon chief executive officer  Jeff Bezos and other executives blamed a cooling U.S. economy for the slowing sales. However, analysts said the more likely  culprit is the company's core business in books, music and videos, which has matured to a  point where earlier growth rates are no longer possible."

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Feb
6th

When you become a celebrity, whether it be in government, sports, entertainment or business [and Jeff Bezos has definitely become a celebrity] people will want to stick in their "two cents worth" and give you unsolicited advice.

Read the humorous, and inciteful article by Sean Carton 
titled "An Open Letter to Jeff Bezos "
 http://clickz.com/print.jsp?article=2354

"Hello! Earth to Bezos! What the hell are you doing? 

You've built a great company based on the premise that stellar service, a great brand experience, and judicious application of your users' information can make an incredible site that millions of us can't do without. In a world where commodity-based dot-coms die out faster than gnats around a bug-light, you've figured out how to stand out from the crowd, sell kajillions of books, and inspire customer loyalty just this side of fanaticism. 

And you did it all by creating a system that gathers some basic preference information from us, puts it together with information about our basic shopping habits, and then combines it with the behavior of all other users in order to help us loyal customers find new products that consistently delight and inform us. You've even taken the rarely heard customer's voice  and incorporated it into the site, allowing customers to see what other people like and don't like in order to make better buying decisions. The result? The dot-com poster-child that the  rest of us mere mortals can only aspire to. 

And now you're throwing it all away."

Carton's ponts are based on the fact that Amazon.com made a point of collecting info from the customer to allow them to to better satisfy customer interests during repeat visits to the site - yet the good will created by that might be lost of Amazon goes ahead and starts sharing that private profile info with othe Amazon.com group member companies.



An interesting "unflattering" article about a speech Bezos gave. The writer mentions Amazon.com's patents.
 http://www.holtuncensored.com/members/column157.html

"Amazon.com's two controversial software patents - one of which he's used to sue his main competitor, Barnesandnoble.com. Nor did he mention the latest  patent, issued only days ago for collaborative filtering, a method of sorting millions of customer  preferences electronically to help new customers choose products and services. 
This third patent has been called by CNET news sources the kind of development that could "spell trouble for dozens of e-commerce sites that use similar technology to recommend books, videos or  other products to customers." .

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Cl 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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Cl 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. "
 


 
Class
4

Jan
17

"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