MP3 / MD740 Strategy & Information Systems Nov. 10, 2004 Information Systems and Distribution Channel Structure

Issues Covered Collapsing Channels –failures, successes, the role of value gaps Shifting Channels –multiple channels, channel pressure, innovation, media industries New Intermediaries –examples, impact, threats, market creation Auction Models –markets of first choice and last resort

Source: Benjamin & Wigand (SMR) Disintermediation

Value Gaps customersretailerdistributorsource firm Value Added = A, Expense = X Value Added = B, Expense = Y Expense Savings = (X+Y) - Cost of New Effort Value Gap = (A+B) - Value Added by New Effort

"Mark has this microcosm of the jewelry market online. I know what is moving fast and what I should be discounting, but I still don't have to discount for my other retailers because they don't have this kind of view into the market" Anonymous Blue Nile Wholesaler

Mitigating Risk in ‘Re-Routing’ Understand channel economics –‘true cost’ beyond raw margins: loyalty, frequency, acquisition costs, freight, returns, service Incentives to guide customers to the right channel –“carrots & sticks” Provide a safety net Communication program –for internal & external constituencies

Channel Pressure supplierdistributor retailer customer manufacturer Traditional Channels Online Channels suppliercustomer manufacturer supplier manufacturer customer new intermediaries

“We recognize that a vendor has the right to sell through whatever distribution channels it desires. However, we too have the right to be selective in regard to the vendors we select and we trust that you can understand that a company may be hesitant to do business with its competitors.” HomeDepot memo to suppliers

“The music industry will be out in five years – kaboom, gone.” Tim White Editor, Billboard Magazine Wired, Feb. 2003

“The business will implode once you can download a movie, give it to your friends and not have a moral problem with doing it. Then we’re screwed. Literally, our very lives are at stake now. George and I are just praying that we can finish ‘Episode III’ in time, before it’s all over.” Rick McCallum Producer, Star Wars Movies CNN, October 17, 2002

“Why is a record company any more qualified to send an MP3 to iTunes than I am?” Moby – Fall 2003

Channel Extending Intermediaries suppliercustomer CEI supplier customer Search for opportunities to add value: e.g. high customer search costs, switching costs, low customer satisfaction Wield new power by consolidating traditional buyers & customers. Become the first-line interface with consumers.

Auction Formats Liquidation Auctions: (e.g. Priceline) supplierscustomers auction Market Efficiency Auctions: (e.g. eBay) Seek lowest price on widely available goods and services auction disincentives to use auction shrink supply over time Seek first to maximize existing channels & reduce inventory supplierscustomers Seek access to unique / rare products or services incentives to use auction increase supply over time Auction format is favored over the inefficiency of existing channels

IPO Inefficiencies The Firm small Investors $45/share Underwriting syndicate pays a 7% fee $27/share Institutions & large investors

CompanyDate Shares Underwritt en Underwritin g Share Price First Day Close Share PriceDifference Percent Undervalu ed JetBlue4/12/20025,500,000$27$45 $ 99,000,00067% PayPal2/15/20025,400,000$13$20 $ 37,854,00054% NetScreen Technologies12/11/200110,000,000$16$24 $ 77,200,00048% Magma Design Automation11/19/20014,850,000$13$19 $ 29,051,50046% Global Power Equipment5/17/20017,350,000$20$31 $ 84,157,50057% Simplex Solutions5/1/20014,000,000$12$21 $ 36,800,00077% Transmeta11/7/200013,000,000$21$45 $ 315,250,000115% CoSine9/26/200010,000,000$23$63 $ 400,600,000174% Active Power8/8/20208,000,000$17$53 $ 286,000,000210% StorageNetworks6/30/20009,000,000$27$90 $ 569,250,000234% VA Linux12/9/19994,400,000$ /4 $ 920,700,000698% Red Hat8/11/19996,000,000$14$52 $ 228,375,000272% mp3.com7/20/199912,300,000$28$63 $ 434,343,750126% Efficient Networks7/15/19994,000,000$15$53 $ 152,000,000253% Tibco Software7/14/19997,300,000$15$40 $ 182,500,000167% China.com7/13/19994,200,000$20$67 $ 197,862,000236% CommTouch7/13/19993,000,000$16$24 $ 24,000,00050% eToys5/19/19998,300,000$20$77 $ 473,100,000285% iVillage3/18/19993,500,000$24$56 $ 112,000,000133% AutoWeb3/23/19995,000,000$14$28 $ 71,250,000102% Auto-by-Tel3/24/19993,500,000$23$40 $ 60,375,00075% Prodigy2/11/19998,000,000$15$28 $ 105,040,00088% VerticalNet2/11/19993,500,000$16$45 $ 102,830,000184% Healtheon2/11/19995,000,000$8$31 $ 116,900,000292% Pacific Internet2/5/19993,000,000$17$48 $ 93,000,000182% Theglobe.com11/13/19983,100,000$9$64 $ 168,950,000606%