Internet Business Models

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The Internet and
E-Business
AIMS 2710
R. Nakatsu
Overview

Origins and Evolution of the Internet
How does it work?

–
–
–

Architecture
The DNS (Domain Name System)
Creating a web presence
Internet Business Models
1.
2.
3.
4.
Pure Play vs. Clicks-and-Mortar
Dominant Revenue Model
Provider/Consumer Model
Pricing Model
History Of The Internet: Origins
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
History Of The Internet: Evolution
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)

How does the Internet work?

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
High-Speed Backbones
http://www.youtube.com/watch?v=
dOyKdJWPlZY
DNS (Domain Name System)
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
How do you create a web presence?
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.
Internet Business Models
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?
Overview
How do we describe Internet business models?
1.
2.
3.
4.
Pure Play vs. Clicks-and-Mortar
Revenue Model
Provider/Consumer Model
Pricing Model
Pure Play or Hybrid?
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?
Seven Revenue Models
1.
2.
3.
4.
5.
6.
7.
Commission
Advertising
Markup-Based
Manufacturer
Referral
Subscription
Fee-for-Service
Source: Afuah and Tucci (2002) and Rappa (2010)
1. Commission (Brokerage Model)
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)
2. Advertising
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)?
3. Markup-Based (Merchant Model)
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?
4. Manufacturer (Direct Seller Model)
Manufacturers and producers try to reach customers
directly through the Internet. Benefits: efficiency,
lower cost, better understanding of customer
preferences.
Examples:
 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?
Direct Seller Model: Disintermediation
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.
5. Referral (Affiliate Model)
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:
 Amazon Associates program
 Google’s AdSense program
The disadvantages of this model are similar to the
advertising model. What are they?
6. Subscription
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?
7. Fee-for-Service (Utility 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.
Provider/Consumer 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
B2B Marketplaces
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?
C2C Business Models
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.1
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.
Community Model
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)
 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)
Pricing Model
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?)
Online Auction
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?
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