Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices SWIMMING IN THE VIRTUAL COMMUNITY POOL WITH PLENTYOFFISH Jason C. H. Chen, Ph.D. Professor of MIS School of Business Administration Gonzaga University Spokane, WA USA

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 2 Purpose Learning objective: This case deals with the burgeoning social networking phenomenon as seen through the eyes of a recent, highly- successful new entrant. The case provides the following multi-dimensional disciplines: –Finance (if the option to sell the business is chosen) –Marketing (if the option chosen is to grow the market by segments) –Strategy, and –MIS course with Entrepreneurship enrichment (if the option to grow the business' capacity is chosen).

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 3 The Case Description: PlentyofFish.com is the world's most profitable website on a per capita basis, the 96th most popular website in terms of page views, and the most popular online dating site in existence. Remarkably, it is managed by its owner and founder and only one other employee. It is a free dating site that generates $10 million in ad revenues per year, and a profit to the owner in excess of $9 million. The case describes PlentyofFish.com's stellar growth in the face of stringent competition, and asks students to consider whether it is sustainable. A number of possible alternatives are offered for analysis.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 4 The Case Subjects Covered: Information systems; Internet; The context is rather unique, as the company in question is a recent, highly- successful entrant in the online social networking sphere. Setting: Canada; Industry: Internet services

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 5 Organizational Strategy Business Strategy IS/IT Strategy Business Strategy: 1. Free Advantage 2.Business Growth 3.Revenue increase IS/IT Strategy: SQL SERVER (2005 or 2008) or Oracle Organizational Strategy: 1.User-driven environment (self- governing community) 2.Virtual Community

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 6 Question What are (in general) the three strategic alternatives (next move) for any company? –This is for #2 (a)

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 7 1. What is the nature of competition in this industry? Describe and explore your answer with the following: a) Describe the “Revenue Model” normally used in the e- Business industry. b) What is the “specific” revenue model adopted by the company? c) Analyze and describe the PoF competitive industry using “Porter’s Five Competitive Forces Model”.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 8 Business ModelRevenue Model Value It describes the way in which a company enables transactions that create value for all participants, including partners, suppliers and customers. It can be realized through a combination of (e.g., fixed transactional fees, referral fees, fixed/variable commissions, etc) Business vs. Revenue Model creationappropriation -subscription fees, - advertising fees - transactional income

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 9 a) Today, e-business succeed by one or more of the following means: –Direct sales of goods or services at a profit (differentiated from bricks- and-mortar stores) – Subscription revenues (charging customers to access the site) – Ad revenues Of these three, advertising has emerged as the newest and most important (relies solely on AdSense revenue from Google, and on commissions from third-party vendors who advertise on his site) b) It is also the basis for Frind’s business. –PoF does not directly sell anything to any of its members, –it does not charge subscription fees, and – it does not re-sell customer information. All of Frind’s revenue is derived from members viewing and clicking ads on the PoF site – Affiliate Marketing

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 10 c) Analyze and describe the PoF competitive industry using “Porter’s Five Competitive Forces Model”. THE FIRM INDUSTRY COMPETITORS NEW MARKET ENTRANTS SUPPLIERS SUBSTITUTE PRODUCTS & SERVICES CUSTOMERS Threats Bargaining power N Dr. Chen, The Trends of the Information Systems Technology TM -10 Switching cost Access to distribution channels Economies of scale Redefine products and services Improve price/performance Selection of suppler Threat of backward integration Buyer selection Switching costs Differentiation Cost-effectiveness Market access Differentiation of product or service

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 11 c) 1) Entry into this industry is cheap and easy. –The Internet’s viral nature allows unique sites to grow rapidly in terms of page views (e.g. YouTube). However, it becomes more challenging and daunting to provide good customer service. Frind has managed to get around this challenge by having his members do this. A new site or new entrant might not be so lucky. – Thus, while the hardware and software costs are low, human resource costs for technical and customer support might be prohibitive to all but larger players. 2) There are many competitors, with no single site dominating in the social networking/dating space. –Competitors include the other dating sites, but also all the other sites who may not have dating as their primary market, but include it directly or indirectly as an ancillary product (for example, Craigslist). –Customers are loyal, but may belong to more than one site. Belonging to one site.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 12 c) conti. 3) There are a number of substitutes available, not the least of which are the plethora of face-to-face activities that people might participate in to meet other people. 4) Customers (advertisers and user like you) are important entities for the force as they generate revenue for the company 5) Suppliers, probably, is not really meaningful force in this industry. First Mover Advantage and “Free Advantage” (also known as “The Future of a Radical Price”) - One thing to note is that successful sites rely on the “network effect” — gaining a critical mass of users early on, keeping these users, and gaining more. In order to do so, sites tend to specialize (by region, language, age, religion, etc.).

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 13 Network Externalities Definition - The phenomenon whereby a service becomes more valuable as more people use it, thereby encouraging ever-increasing numbers of adopters. –Network effects While the word-of-mouth method is often more influential in the beginning, analysis may play a significant role later in the cycle. In other words, you may adopt a service initially because someone you know uses it; later, you may adopt a service because "everyone" uses. –IT Role? –Network Externality offers a reason for value derived from plentitude (Era IV & V) – chapter 2

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 14 Keen’s Six-Stage Competitive Advantage Model Stimulus for action First-mover expansion movesCompetitor catch-up moves N Commoditization First major moveCustomer acceptance

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 15 When to Perform Activities First Movers Advantages Build brand recognition Control scarce resources Establish networks Early Economies-of-Scale Disadvantages Newer technology Higher development costs Reverse engineering by competitors

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices Does Frind have a solid, sustainable business model for PlentyofFish (in other words, was he good or lucky, or both)? Describe and illustrate your answer with the following: a) What are and should be his strategic goals for the business going forward? (Hint: in general there are three alternatives – what are they?) b) Based on the three alternatives identified in (a) above suggest the best (or better) one for Frind and why?

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 17 Frind’s annual (generous) operating costs and revenues, net of salary, are estimated to be ($000s): Revenue $10,000 Expenses  One staff member (all-in)$100  Hardware (amortization or replacement)$150  Software upgrades$50  Misc operating costs (fees, SG&A)$50$350 Estimated Net Income $9,650

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 18 a) We should recognize the precarious position Frind finds himself in. On the plus side, he has a large number of loyal members. On the minus, there is little preventing an existing or new competitor from stealing them away. The website is primitive and relies on members’ goodwill for its maintenance. With revenues of $10 million annually, Frind could probably sell the business to a competitor for $50 million to $100 million (5 times-10 times earnings - a conservative multiple in the dot.com industry). As such, any alternative plan should be compared to this exit strategy.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 19 The case presents three strategic alternatives, though more likely exist. –i) The first alternative consists of to a competitor. In presenting this option, we should also consider what might need to be done to the business to put it in better shape in order to sell it (focus on cleaning-up the operation in order to make it the most attractive to a buyer.). This includes, but is not limited to, securing intellectual property rights, smoothing maintenance operations, and presenting a solid balance sheet. However, selling the business would allow Frind to move on to another venture. –ii) The second alternative is the traditional An argument could be made that the site has a strong base of loyal customers that like things just the way they are. Any change might alienate them. Moreover, PoF’s founding philosophy is that it is first and foremost free. Frind’s operating costs are minimal, so even if revenues decrease substantially, he will still be making a sound profit. As a privately owned company, Frind does not have the reporting pressures and revenue-growth impetus that publicly listed organizations have. selling the business “do nothing.”

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 20 ii) DO NOTHING (cont.) Frind’s annual (generous) operating costs and revenues, net of salary, are estimated to be ($000s): Revenue $10,000 Expenses  One staff member (all-in) $100  Hardware (amortization or replacement) $150  Software upgrades $50  Misc operating costs (fees, SG&A) $50$350 Estimated Net Income $9,650 The argument “if it ain’t broke, don’t fix it” resonates here. Advertising sales would have to go down by a factor greater than 30 before costs could not be covered (independent of carrying a loss forward and covering with retained earnings). There is a lot of room here, and as a result, Frind does not necessarily need to do anything in the short run. However, there are a number of pressing technology issues. Students pursuing this option should present a bundle that creates a stable and sustainable IT environment — the operating system, DBMS, and server architecture.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 21 –iii) The last alternative is to This is consistent with what Frind has done in the past, that is, ongoing innovation to keep ahead of the competition. As it is action-oriented, it is likely to be the one chosen by us. As noted, Frind enjoys strong lock- in and loyalty from his customer base. His website is highly-successful and has tapped into an otherwise disaffected market. This alternative could take one of two forms (or combinations of these options): –First, he could choose to scale up, that is, invest in additional hardware and software in order to drive more traffic to his site (this would be different, and more extensive than those presented in Option 2 - do nothing). – Second, Frind could choose to scale out, that is, maintain the existing model, but scale to a wider base. This might mean expanding geographically (to Asia, for example) or to a different, niche-oriented demographic. In doing so, the nature and extent of the competition’s reaction needs to be carefully considered. b) So, what is the best alternative? grow the business.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 22 b) Short-term: –PoF is a successful business that returns its sole owner net revenues in the order of $9 million per year. As such, any alternative to “do nothing - it isn’t broken” should present a more desirable outcome (i.e. an NPV greater than $9 million ). Long-term: –“Grow the Business” as it is consistent with what Frind has done in the past, that is, ongoing innovation to keep ahead of the competition.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices Based on the findings/answers stated from (2) above, what is the best model going forward? Describe and explain your answer clearly and thoroughly. a) Continue with a free site b) Expand traffic (more members, more page views, more countries or niches) c) Expand offerings (different products and services) d) Offer subscriptions at one or more service levels.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 24 3) conti. For “short-term” strategy of “do nothing” –Continue with a free site so that no investment is needed and those loyal customers can be retained For “long-term” strategy of “grow the business” –i) Expand traffic and offerings by investing additional hardware and software so that more (and new) members, more page views and more countries or niches markets can be explored, certainly, –ii) Continue with a free site, but –iii) No subscriptions at one or more service levels as it would likely alienate a large proportion of PoF’s members, who might in turn switch to a free provide like Craigslist.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices What Information Technology (IT) should he invest in for the site? (Hint: Cost/Benefit analysis) a) SQL/SERVER (2005) or migrate to SQL/SERVER (2008) or Oracle? Open source? Why? b) More servers, more staff to perform the functions currently performed by members?

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 26 a) PoF currently runs on Microsoft’s SQL Server Most competitors’ sites use Oracle. The advantage of Oracle is its ability to build, store, and manipulate a large database more easily. This is important if the database’s user wishes to run complicated queries and/or parcel client information for sale to a third party. The main disadvantage of Oracle is that it is substantially more complex to install, maintain and administer than a SQL database due to these additional functionalities (and “learning curve”). Frind does not engage in selling information to third parties, and in fact, guarantees members he will not do so. Any engagement with a third-party is up to the individual member. This is a key point. Sites such as Match.com rely on third-party data sales for a substantial part of their revenues, in addition to subscription sales. Frind’s model, on the other hand, relies solely on AdSense revenue from Google, and on commissions from third-party vendors who advertise on his site. Frind is not interested at all in competing with Match.com and other sites on re-packaging and selling data. As such, it makes no sense whatsoever for him to migrate to Oracle. Moreover, doing so would also radically alter his business model.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 27 The best thing that can be said about SQL Server 2005 is that it works. This is a robust and well-tested platform in wide use. Migrating to the 2008 version is unnecessarily risky, and contravenes the followership stance Frind has taken with regards to IT. As such, it is reasonable to conclude that he will not be migrating. b) We can debate long and hard about adding additional server capacity, but the point is somewhat moot. Adding hardware is a minor expense, and easily done. Frind’s servers are kept offsite at a secure colocation facility. He has 24/7/365 access. Adding an additional server to his array would be a matter of hours, not days as generic servers are easily obtained in Vancouver. The server array he now has offers considerable excess capacity and multiple redundancies. It easily manages the traffic the site receives. Hardware isues are a red herring in this case.

Dr. Chen, Information Systems – Theory and Practices  John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices 28 “Free” Advantage Free! Why $0.00 is the Future of Business re=results_video&playnext=1&list=PLA6F965159BB973 18http:// re=results_video&playnext=1&list=PLA6F965159BB973 18