1 Evaluation of Business Models 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 Overview –The underlying logic for an E-Commerce company. –A five-step process to assess the business model. –Classifications of E-Commerce companies. –Various business models. –Implications of the business model. –Long-term viability of business models.

3 The Underlying Logic “Old Economy” contains market failures or transaction costs: –Examples: Information is not freely available, and is costly to gather and process. Markets may be too fragmented and too dependent on local population (personal items for sale). The “New Economy” company eliminates or reduces market failure or transaction cost.

4 The Underlying Logic Note: The deficiency in the “old” economy is actually the opportunity for the “new” economy company. However, for the opportunity to be profitably exploited: –It should be significant. –The company should have adequate resources. –The company should have the ability to generate revenues from customers. –The company should be able to deter competition, or differentiate itself from its competitors.

5 Sellers’ Transaction Costs Order Taking Costs: –Reduce physical facilities and number of employees dedicated to process orders by accepting and processing orders electronically. Recording Costs: –Avoid the manual data recording process by connecting the users electronically and allowing them to enter the data themselves. Display Costs: –Eliminate stores, employees in these stores, and paper catalogues, by maintaining a virtual store. Mailing Costs: –Reduce physical mail sent to customers by sending instead. Marketing costs: –Replace mass marketing channels by direct marketing to relevant customers only.

6 Buyers’ Transaction Costs Transportation Costs: –Avoid waste of time and money spent on travel to a physical store. Timing of Transactions: –Buyers do not need to change their schedule according to the opening hours of the business. Web access to the entity’s virtual site is available 24 hours a day, seven days a week. Information Gathering Costs: –Avoid the costly activity of gathering information, by using information on the Web and Shopbots. Information Processing Costs: –Buyers can save time and effort in understanding and processing information, or by using online software and tools.

7 Other Benefits of E-commerce Personalization: –By identifying customers, it is possible to offer each individual customer a personalized service and special offerings. Price Transparency: –The Web allows consumers to compare prices more efficiently and more effectively, anywhere and at any time. Market Making: –The Web allows the creation of efficient new markets by the ability to aggregate cheaply many buyers and sellers from different locations and time zones. Network Externalities: –The larger is a network the more valuable it may be to its members, rather than a smaller network.

8 The Five-Step Process What market failures or transaction costs are addressed by the business model? How effective can the E-Commerce firm be in reducing the market failures or transaction costs? Will the E-commerce company be able to expropriate benefits from customers? What are the necessary resources to conduct the business? Can competitors erode profits?

9 Application Egreetings Network, Inc. (EGRT) EGRT is in the E-Card business: –Customer selects a card from an online selection of cards. –Customer personalizes the card. –Customer specifies a recipient. –EGRT delivers the card, which can be opened by the recipient. –EGRT also notifies the customer that the E-Card was sent. Compare EGRT to paper card companies.

10 EGRT – Transaction Costs Buyers (customers) save the following transaction costs: –Transportation to a physical store. –Timing of transaction (24/7). –Mailing costs. –EGRT retains recipient’s address, so there is lower data-entry costs.

11 EGRT – Transaction Costs EGRT saves the following transaction costs (as compared to a paper card company): –Display costs (no need for a retailer). –Order-taking costs (no need to communicate with a retailer). –Data-entry costs (customer enters the data directly). –Inventory costs (no need for physical inventory). –Printing costs (same card can be used by more than one customer).

12 EGRT – Transaction Costs Marketing costs: –Savings through personalization (customer tastes). –Complementary products. No network externalities. No price transparency. No creation of a new market.

13 EGRT – Ability to Generate Revenues Customers are willing to pay for paper cards. They should also be willing to pay for E-Cards. However, the marginal cost of an E-Card is very low! Fixed costs of content and systems are high. Competition may drive the price of an E-Card to zero. –Over 100 E-Card companies!

14 EGRT – Ability to Generate Revenues Revenues: 1997$ 505, , ,100, (6 mon.) 5,900,000 Converted from fee-paying customers to free service in November Advertising revenues in 1999 and 2000! E-commerce sales negligible in 1999.

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16 EGRT – Traffic and Expenses In December 1999, a high traffic month: –21 million visitors –184 million web pages viewed –10 million E-Cards sent Spent about $50 million through the end of Selling and marketing $20 million Operations and development (R&D) $15 million in

17 EGRT - Content Gibson supplied 34% of cards and held 20% of equity. In March 2000, Gibson was purchased by American Greetings, which has its own E- Card business. NBC owns stock in return for advertising. EGRT can use NBC shows in content.

18 EGRT - Resources Raised $60 million through preferred shares in Raised $54 million in issuance of common stock in December Had about $58 million cash and liquid assets as of the most recent public filing (6/30/2000).

19 EGRT - Survival EGRT generates most of its revenues from advertising. Can it survive for the long run on advertising? Which companies are likely to generate higher advertising rates? Does EGRT have a comparative advantage in E-commerce?

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21 Summary Understand well the current business model. Assess the opportunities for changes and transformation in the business model. Assess long-term revenue sources for the E- business. Assess long-term costs to operate the business. Is the business viable? Can competitors erode profits?