1. MI021 / CS021 Computers in Management Oct. 3, 2006 Network Effects, eBay case, W.R. Hambrecht’s OpenIPO www.gallaugher.com

2. Issues Covered Network Effects –Defined –Characteristics of markets & competition when present –Examples Auction Models –liquidation vs. market efficiency auctions Priceline vs. eBay –eBay case – growth, comp. adv., and challenges –IPO markets & struggles of WR Hambrecht

3. Effect on innovation Lowers competition with established standard Increases innovation within standard buyers sellers Users (Windows, PS2) Developers (programs, game titles) members Understanding Network Effects (a.k.a. Network Externalities, Metcalfe’s Law) When present, product or services become more valuable as its installed base expands. Why? Users crave… Exchange opportunities Stability Extrinsic Benefits Characteristics: Early competition, bandwagons, monopolistic tendencies ‘Best’ products don’t always win.

4. 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

7. Leading Global Retailers

9. Shop, Buy/Transact, Communicate Search, Be Entertained

10. Dependent on paid & natural search

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

13. 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$30239 1/4 $ 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%