1 Classification of E-Commerce Firms Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY Tel. (212) Fax (212) Web page:

2 Classifications Classification by seller/buyer Classification by product or activity Classification by sources of revenues

3 Classification by seller/buyer Business to Consumer (B to C) –Southwest Airlines generates over 15% of its revenues from its online site. Business to Business (B to B) –Automobile manufacturers organizing an exchange to buy components from suppliers. Consumers to Consumers (C to C) –Auctions sites like E-Bay. Consumers to Business (C to B) –Selling information to businesses like gorefer. / / –

4 Classification by product or activity

5 Classification by Revenue Sources Revenues from selling products or services –Traditional sales –Commissions –Per-transaction fees Advertising revenues - See Appendix A Referral fees: See Appendix B –per referral –fixed amount –percentage of transaction Market creation fees

6 Advantages of Classifications Classifications by seller/buyer emphasize the markets in which the firm operates. Classifications by product/activity emphasize the nature of the business. Classifications according to revenue sources focus on the underlying business model. An E-Commerce company is likely to be in more than one category. The analysis of categories helps in profiling the business (segments).

7 Warning The Following Definitions of Various Business Models are not mine. They were developed by Professor Michael Rappa:

8 Brokerage Bringing buyers and sellers together –Buy/sell fulfillment Online stock trading –Market exchange B2B (metals exchange) –Virtual mall Internet fashion mall –Auction broker E-Bay –Search agent My Simon, Dealtime Fee per transaction

9 Advertising Free content or services to users. Content (service) providers get advertising revenues. Model in existence for radio and TV. Need very high volume or very specialized audience. –Generalized portals. –Personalized and specialized portals. –Attention/incentive marketing. –Free products or services. –Bargain discounters.

10 Infomediary Collecting and selling data about consumers, interests and buying habits. Sharing information among consumers –Book reviews on Amazon Registration –Collecting information on users in exchange for access to content (newspapers, free phone services).

11 Merchants Wholesalers and retailers on the Web. –Web-based only, with no brick and mortar operations. –Catalog services New form of direct mail –B&M on the Web Staples –Digital content Music Software

12 Manufacturer Manufacturer bypasses the wholesaler to reach final customer. –Dell Personalization –Flowerbud Faster delivery May cause distribution channel conflicts –Airlines and travel agents

13 Affiliate Referring to other sites Similar to Yellow Pages or referral fees for lawyers. Hitting the customer when the purse is open. Using information on current purchases to induce further purchases of complementary products and services.

14 Community Creating a community of similar users. –Soliciting donations from users and foundations Creating knowledge networks –Collection of experts who can respond to questions –Sometimes experts get paid directly per question.

15 Subscription Pay for content General reluctance to pay for content on the Web. Exceptions: –Wall Street Journal –Premium content (detailed stock research reports) –Archived information

16 Utility Pay per use or per time Similar to Pay Per View movies Renting software and applications Payment per data extracted –Credit reports –Retrieving old publications

17 Mixture of Business Models Most E-Commerce firms have a mixture of business models –Community and advertising –Merchant and affiliate Business models change and continue to evolve –The environment is very dynamic –The need to remain flexible

18 The Business Model Identify the value drivers: –Number of visitors –Number of members –Number of transactions Assess the required long-term volume to make a profit Assess the reasonableness of the required volume and costs to achieve it.

19 Sources of Information Forms filed with the SEC ( / ) : / –Registration statement –Form 10-K –Form 10-Q –Proxy statement –Special reports Company’s own Web site Investment research Tracking organizations

20 Long-Term Business Models Surviving advertising models –High volume free content services The broadcasting model –Personalized and specialized content services Free tourist guides –Interactive models Surviving community models –Right demographics

21 Long-Term Business Models Surviving brokerage models –Only if B&M do not offer their own services Merchants –Only if reduces transaction costs or increases the “pie” Affiliates –Will it be pay per referral? Pay per listing (like Yellow Pages)?

22 Long-Term Survival Depends on the long-term tradeoff between revenues and costs. Cheap initial financing masks true long- term costs. The recent decline in prices of Internet stocks can force people to think through more carefully of the long-term viability of the business model.

23 Summary Classifications help think about the business model. Classifications also help in assessing the long-term viability of the business.