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 99258 USA
chen@jepson.gonzaga.edu
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
Purpose
• Learning objective:
• This case deals with the burgeoning social networking
phenomenon as seen through the eyes of a recent, highlysuccessful 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).
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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The Case
• Subjects Covered: Information systems;
Internet; The context is rather unique, as the
company in question is a recent, highlysuccessful entrant in the online social
networking sphere.
• Setting: Canada;
• Industry: Internet services
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Business Strategy
Business Strategy:
1. Free Advantage
2.Business Growth
3.Revenue increase
Organizational Strategy:
1. User-driven
environment (selfgoverning community)
2. Virtual Community
Organizational
Strategy
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
IS/IT Strategy:
SQL SERVER (2005 or
2008) or Oracle
IS/IT Strategy
5
Question
• What are (in general) the three strategic
alternatives (next move) for any company?
– This is for #2 (a)
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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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 eBusiness 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”.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Business vs. Revenue Model
Business Model
Value
creation
It describes the way in
which a company
enables transactions
that create value for
all participants,
including partners,
suppliers and
customers.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
Revenue Model
Value appropriation
It can be realized through a
combination of
-subscription fees,
- advertising fees
- transactional income
(e.g., fixed transactional fees,
referral fees, fixed/variable
commissions, etc)
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a) Today, e-business succeed by one or more of the following
means:
– Direct sales of goods or services at a profit (differentiated from bricksand-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
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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c) Analyze and describe the PoF competitive industry using
“Porter’s Five Competitive Forces Model”.
NEW
MARKET
ENTRANTS
•Switching cost
•Access to
distribution channels
•Economies of scale
INDUSTRY
COMPETITORS
THE FIRM
•Selection of suppler
•Threat of backward
integration
SUPPLIERS
SUBSTITUTE
PRODUCTS
& SERVICES
Threats
•Cost-effectiveness
•Market access
•Differentiation of
product or service
Bargaining power
•Redefine products
and services
•Improve
price/performance
•Buyer selection
•Switching costs
•Differentiation
CUSTOMERS
10
John WileyDr.
& Sons,
Dr. Chen,
Information
Theory and Practices
Chen,Inc.
The&Trends
of the
InformationSystems
Systems–Technology
10
TM -10
N
• 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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 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.).
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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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
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John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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Keen’s Six-Stage Competitive Advantage
Model
Stimulus for action
First major move
Customer acceptance
Competitor catch-up moves
First-mover expansion moves
Commoditization
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John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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When to Perform Activities
• First Movers
Advantages
Disadvantages
• Build brand recognition
• Newer technology
• Control scarce resources
• Higher development costs
• Establish networks
• Reverse engineering by
competitors
• Early Economies-of-Scale
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John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 2. 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?
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 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
Estimated Net Income
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
$350
$9,650
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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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• The case presents three strategic alternatives, though more
likely exist.
– i) The first alternative consists of selling the business 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 “do nothing.”
• 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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 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
Estimated Net Income
$350
$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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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– iii) The last alternative is to grow the business.
• 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 lockin 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?
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 3. 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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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4. 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?
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• a) PoF currently runs on Microsoft’s SQL Server 2005. 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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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• 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.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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“Free” Advantage
• Free! Why $0.00 is the Future of Business
• http://www.youtube.com/watch?v=RZkeCIW75CU&featu
re=results_video&playnext=1&list=PLA6F965159BB973
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John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices
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