AIMS 2710
R. Nakatsu

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Origins and Evolution of the Internet
How does it work?
– Architecture
– The DNS (Domain Name System)
– Creating a web presence
Internet Business Models
1.
Pure Play vs. Clicks-and-Mortar
2.
Dominant Revenue Model
3.
Provider/Consumer Model
4.
Pricing Model

The Internet has its roots in the U.S. military, which funded a network in 1969 called
ARPANET . Computers at colleges and universities were interconnected.
 Web did not exist
 Largely a linear text-based medium
 Little interactivity

 In the late 1980’s ISP (Internet Service
Providers) began offering dial-up Internet accounts for a monthly fee, giving users access to email, discussion groups, and file transfers.
 In 1989, the World Wide Web was born.
 By the early 1990s the combination of email, the Web, and interactive services such as online chat propelled the Internet to international prominence.
 Today, Web 2.0 sites offer increased interactivity (social media, blogging)

 Packet-switched network : information is broken into packets by TCP/IP.
 Dynamic routing : even if one part of the network is knocked out, packets can be rerouted around the problem. Demo
 High-speed backbones are fiber-optic trunk lines.
 Highly decentralized : millions of servers reside all over the world; nobody really “owns” the
Internet

http://www.youtube.com/watch?v= dOyKdJWPlZY

The DNS was created in 1983 . Its purpose is to map text (web addresses) to IP addresses automatically.
Question: What is an IP address ?
IP addresses are usually displayed as a string of four numbers between 0 and
255, separated by three periods. E.g.,
17.255.64.123

Domain name registrar : you need to register your web site’s name. You pay a fee for the right to use that name.
Web hosting companies : these companies run your web site on their servers for a fee.
ICANN is the governing body that manages IP addresses and domain names.

A business model is a broad plan for what products or services a company plans to sell and how it plans to earn its revenue.
Why did so many of the dot com companies of the 1990s fail?

How do we describe Internet business models?
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2.
3.
4.
Pure Play vs. Clicks-and-Mortar
Revenue Model
Provider/Consumer Model
Pricing Model

Pure Play: an Internet company devoted primarily to its online business.
Clicks-and-Mortar: a company that not only has a Web presence, but also has a physical storefront.
Which are the advantages of each approach?

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2.
3.
4.
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7.
Commission
Advertising
Markup-Based
Manufacturer
Referral
Subscription
Fee-for-Service
Source: Afuah and Tucci (2002) and Rappa (2010)

A commission is a fee that is levied on a transaction by a third party.
Brokers are market makers: they bring together buyers and sellers
Examples:
 Ebay (auction broker model)
 E*Trade (financial brokerage model)
 Travelocity (marketplace for travel)

Some Web companies earn revenue primarily by selling advertising. The advertising model works best when the volume of viewer traffic is large or highly specialized.
Many Web portals follow a pure advertisement revenue model.
How does Google advertising work?
What are the advantages and disadvantages of Web advertising (compared to traditional media)?

Markup refers to the amount added to the cost of producing a product or service in order to create a profit. This model is traditionally used by wholesalers and retailers.
Examples:
 Amazon.com (pure play or e-tailer)
 Barnes & Noble (clicks and mortar)
Question: What is the downside to this model?

Manufacturers and producers try to reach customers directly through the Internet. Benefits: efficiency, lower cost, better understanding of customer preferences.
Examples:
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Dell and other PC manufacturers
Levi’s jeans
 Car manufacturers (What are the problems with this model?)
Question: What are some problems with this model?

Manufacturers or producers can sell their products and services directly to customers, bypassing intermediaries such as distributors or retail outlets.
A distribution channel can have several intermediary layers.
Manufacturer->Distributor->Retailer->Cust.
Manufacturer->Retailier->Cust.
Manufacturer->Cust.

A web site receives a fee for steering visitors to another web site. Variations of this model include banner exchange, pay-per-click, and revenue sharing (i.e, a web site receives a percentage of sales).
Examples:
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Amazon Associates program
Google’s AdSense program
The disadvantages of this model are similar to the advertising model. What are they?

Users are charged a periodic —daily, monthly or annual —fee to subscribe to a service.
Examples:
 Wall Street Journal, NY Times
 Netflix
 Online dating services
Questions:
How does Shopify use this model?
What are some problems with this model?

Activities are metered and users pay for their actual usage (“pay as you go” approach).
Examples:
 Users pays for metered Internet service
 Customers pay for long-distance telephone service and are charged by the minute.
What are some other examples of this model?
The disadvantages of this model are similar to the subscription model.

 B2C (business-to-customer): businesses offering goods and services to customers over the internet
 B2B (business-to-business): e-business that takes place between business organizations.
 C2C (customer-to-customer): customers deal directly with other customers
 C2B (customer-to-business): customers provide a service to businesses

Some web sites are online marketplaces for businesses to buy and sell goods and services from other businesses.
Two questions:
What are some examples of B2B web sites?
How do B2B web sites differ from B2C web sites?

Business models in the twenty-first century have to take into account the capabilities of Web 2.0
, such as collective intelligence, network effects, user generated content, and the possibility of selfimproving systems.
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A good example is Waze. How does it work?
Source: Chen, T. F. 2009. Building a platform of Business Model 2.0 to creating real business value with
Web 2.0 for web information services industry. International Journal of Electronic Business
Management 7 (3) 168-180.

This model involves building community with users.
Revenue can based on the sale of products and services, voluntary contributions, advertising, or subscriptions for premium services.
Examples:
 Open source (software developed collaboratively by a global community of programmers —e.g., Linux)
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Open content (content developed by a global community of contributors —e.g. Wikipedia)
Social networking (sites that provide individuals with the ability to connect with other individuals — e.g., Facebook, LinkedIn, Vine)

How do you price your product or service?
 fixed pricing
 auction
 reverse auction
 free (Question: How can we make the free model a viable business model?)

Example: Ebay.com
People can make online bids for items such as computer equipment, antiques, jewelry.
The system evaluates the bids and notifies the highest bidder.
How does a reverse auction differ? Can you think of an example?