The document discusses the services sales business model. It defines services sales as providing a one-time, direct service over the web, such as tax return services or human translation. It differentiates services sales from advertising or commission models where intermediaries help connect service providers and customers. While services sales can work, the model often poses scalability and customer acquisition challenges unless the service is recurring, acquisition costs are low, or customers are locked in. Skype is cited as one of the most successful services sales companies.
The Coffee Bean & Tea Leaf(CBTL), Business strategy case study
Seven Ways to Create a Sustainable Internet Business Workshop
1. SimplySeven Dr. Niko Waesche
Not for distribution - Personal copy only for participants of the workshop.
SimplySeven - Seven Ways to Create a Sustainable Internet Business
Workshop at General Assembly, London, 19.02.12
Who buys what and how.
2. SimplySeven Dr. Niko Waesche
Business models are not the most important thing in your business,
but it makes sense to systematically look at them all.
Creating a sustainable internet business
“SimplySeven.”
• Seven models – a finite number, but far more than most internet
entrepreneurs and managers consider for their business.
• “Who buys what and how.”
• Business models are a deep part of customer experience.
“Evolution, not revolution.”
• It is about systematically evaluating all the options, continually.
• War stories and business model design… Measurement, experimentation
and continuous development along seven paths.
Never forget “People Power.”
• “Free” means to give back and cherish the contribution of the users.
>> Today’s workshop: Discuss, protest, complain, participate <<
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
3. SimplySeven Dr. Niko Waesche
SimplySeven is the product of many joint brainstorming sessions
by an entrepreneur, an academic and an investor.
SimplySeven authors
The Entrepreneur
Jörg Rheinboldt: Founder of eBay Germany, Founder internet design
company, Co-Initiator and Board Betterplace.org, Founder M-10, active angel
and entrepreneur.
The Marketing Professor
Erik Schlie: Associate Dean and Professor of Marketing and General
Management and Associate Dean of MBA Programs at IE Business School,
Madrid.
The Investor
Niko Waesche: Founder GMPVC, media for equity investment pool.
Previously Partner at global tech firm, VP at US VC fund, angel in Alando
(acquired by eBay), Triphunter (acquired by Brands4Friends), Dealvertise and
Linguee.com. Previous book: “Internet Entrepreneurship in Europe.”
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
4. SimplySeven Dr. Niko Waesche
One reason why SimplySeven framework is useful is that it’s
finite, people like models they understand from real world.
Introducing the (finite) SimplySeven
# Model Description Flagship Common mistake
1 Services A onetime charge for a service Skype Not being able to scale
provided directly
2 Subscription Collecting a recurring payment Blizzard/ Believing that people like to
stream from your customers Thomson be held captive
Reuters
3 Retail Selling real goods in an Amazon.com Treating online like offline
internet shop
4 Commission Taking a cut on a transaction eBay Thinking your clients won’t
between a buyer and a seller deal behind your back
5 Advertising Collecting a fee for an Google Invading people's screen
advertisement or referral space or their privacy.
6 Licence Selling digital goods in an Apple Going it alone
sales internet shop
7 Financial risk Making money with financial Emerging, too Ignoring additional risks such
management risk positions. early as fraud and regulators.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
5. SimplySeven Dr. Niko Waesche
While the seven basic business models have remained, but the rate
of evolution within these models is astonishing.
Types of business models and their rapid evolution
Ideo USWeb
(1991) Kabel (1995) iXL
new
New (1996) Denkwerk Skillberry Skype Gazelle
Services Razorfish
Media Lava (1998) (2001) (2003) (2007)
Pixelpark (2004)
(1996)
(1991) (1994)
Linden
Blizzard
AOL Celera Jamba Lab 2nd Spotify
Subscription (1985) (1998) (2000)
WOW
Life Xing (2008)
Bloomber (2000)
(2003) (2003)
g (1981)
Doc Vente
Amazon Boo.com Priveé
Retail ABC (1994) (1998)
Morris
(2000) (2004)
Telebuch Stumbleu
MySpace
(1992) craigslist pon
(2003) MyVideo
Netscape (1995) GoTo.co Google (2002)
LinkedIn YouTube (2006)
Advertising (1994) m (1997) (1998) (2002) (2005)
Twitter
Facebook
Friends (2005)
PayPal Alando Commis- (2005)
United
eBay (1998) (1999) sion Smaava Plastic Groupon
Commissions (1995)
eLance LastMinut Questico
(2000)
Junction (2005) Jungle (2007/08)
(1998) e (1998) (2000)
(2004) (2006)
Macro-
Microsoft
media
Blizzard RealPlay
(1975)
Oracle Intershop iTunes
License Sales (1996)
Ent er Store AppsStor
Adobe
(1977) (1997) (2003)
(1991) (2004) e (2006)
(1982)
Party- ING Prosper.c
Financial Risk Direct
Gaming Weather-
om(2006)
Management (1997) (2000) bill (2006)
Source: Internet research 1995 2001
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
6. SimplySeven Dr. Niko Waesche
As an entrepreneur, you need five things to get started (courtesy of
Guy Kawasaki).
The right business model is important – but it is definitely not everything
This is what
entrepreneurs
Make meaning should do 80% of
1 (Something that inspires
you, not the idea to make
their time…
2 Make mantra
money or gain power) (Guidance for your company
– every day)
3 Get going (You should
always be selling, not Define your
strategizing about selling) 4 business model
(You must know how you
will make money, but you
don’t need to be original)
Project management
skills are important for
5 Weave a MAT
survival in every single (Define milestones, This is the core of the workshop.
career – I don’t know assumptions, tasks) Be able to identify and analyze
any exception. business models continually
helps you make the right choices
Source: Guy Kawasaki, “The Art of the Start,” 2004, pages 3 -26. in a changing world.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
7. SimplySeven Dr. Niko Waesche
Success in digital business depends on mixing the right cocktail
containing business model, skills, finance and organization.
Getting the cocktail right
Fit with skill set? Fit with
location of company? What skills do you
have? Which skills do Is the organization
Maturity of business model?
you need to source effective? Do you have to
Financing from cash Barriers to entry? Growth
externally? How do you reinvent the wheel each
flow? Expansion opportunities? Positioning in
upgrade your skills? time? Are you scalable?
constraints? value chain?
Can you plug new hires in
Involvement with easily? Ability to
financiers? internationalize?
Organization
Financing Resources and
model
Business Model and
skills processes
Competition Customers Partners
Are my competitors Do I have the most demanding customers Am I dependent on my
helping me to define my in the world? Are my customers resilient partners? Are they
market? Or are they to mistakes? Is my customer base dependent on me?
eating my lunch? growing? Can my customer afford me? What is the legal
framework?
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
8. SimplySeven Dr. Niko Waesche
Every company has its own approach to business success factors.
Here, the 37Signals way, as presented in the book “Rework.”
An “intentionally small company” making software for small companies and three
million people
Start a business, not a Good enough is fine
startup Do it yourself first
Hire when it hurts Don’t be a hero
Why grow? Building to flip is building
to flop Forget about formal Meetings are toxic
Outside money is Plan Z
education Send people home at five
Organization
Financing Resources and
model
Business Model and
skills processes
Competition Customers Partners
Don’t copy
Say no by default Welcome obscurity
Out teach the competition
Build an audience Press releases are spam
Underdo the competition
Go behind the scenes Start at the epicenter
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
9. SimplySeven Dr. Niko Waesche
“Europeans – in particular Germans - don’t innovate, they can
only clone.”
The myths and truths of the internet clone machines
! One of the most common criticisms about Europe – in particular Germany - is that no original internet
companies exist, only clones.
! Indeed, there have been some spectacular clone stories from the very beginning, for example, eBay
clones:
QXL (UK, Poland), Alando (Germany), Ricardo (Germany)
And many, many more…
! This continues today, with Groupon acquiring CityDeal and Google buying DailyDeal in Germany.
! There are several “clone factories,” started by successful serial entrepreneurs: Rocket Internet,
Project A Ventures, Team Europe Ventures, White Bear Yards, Rheingau Ventures, FoundFair...
They would never call themselves “clone factories.”
! These companies are actually offering “internationalization oursourcing” to US companies. Rocket
Interet for Groupon, Springstar for AirBnB.
! However, people also claimed the Japanese could only copy in the 60s and 70s, then they invented
the Walkman, without which there would be no iPod.
! Talent and capabilities are being built up in these environments… school for many entrepreneurs.
! Some very unique global internet successes come out of Europe today: SoundCloud, Vente Privee,
Research Gate, Linguee.com, Statista, Betterplace, Transferwise… and many more.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
10. SimplySeven Dr. Niko Waesche
Service Sales
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
11. SimplySeven Dr. Niko Waesche
Services sales is a straightforward model – a company
providing a one-off and direct service over the web.
Definition of services sales
! Very straightforward - you can set up a services
business on the web tomorrow.
! Services sales have two main characteristics: They
are one-off and direct.
One-off means they aren’t subscriptions, for example, through
which a service is bought over a longer period of time.
Example: Tax tax return services. Offshore tax return services
were the most thought provoking case cited in Thomas
Friedman’s 2005 bestseller “The World is Flat.”
Example 2: 23andMe, technology pioneer Esther Dyson’s genome
service founded in 2006.
Direct means that services are sold directly by the company or
person providing the service. They can be brokered by an agent –
but they are using a different business model.
! One of the first internet service businesses was to
create web sites for businesses – the interactive
agencies.
Much of this business was marketed over the web, but sold in Web-based human translation service
person.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
12. SimplySeven Dr. Niko Waesche
It is important to differentiate Services Sales from the ad or
commissions business models.
Definition of services sales
! It is important to understand the differences to
End customer for
what agents and intermediaries do.
translation, plumbing
! Agents help sell services too; as aggregators they service
create marketplaces connecting providers to
buyers of services. Agents make money through
the advertising or commissions business Aggegator
models… examples ate eLance, Craigslist or (Craigslist,
Groupon. They are scalable. eLance,
oDesk…)
! On the back of these aggregators, services are
Services Sales
sold. Services make up a huge part of some
economies, for example, 70% of the US economy. Translator or plumber
! Service sales are made by the service provider selling her/ his
directly, this can be to an end customer or through service over the
an aggregator. internet
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
13. SimplySeven Dr. Niko Waesche
Maturity: What did not work initially was the sale of a substantial
quantity of e-services over the internet - apart from agency work.
The re-invention of eLance
! eLance was founded in 1998 and initially financed in the Dot Com boom with US$60m
as an „eBay for outsourcing.“
! It survived the years after 2001 selling B2B software to manage subcontractors for large
companies such as American Express, BP, FedEx and GE.
! It sold this software to Click Commerce to refocus on the orginal vision – create a
marketplace for freelance projects.
! The services business model applies to the freelancers, whereas eLance or oDesk
takes a commission.
! Groupon works in a similar way, matching demand with localized services offers such as
Whalewatching. Most of these are offline services, but they don‘t have to be.
! With new initiatives such as Groupon and mobile commerce, the sale of services over
the internet will be increased in the next years.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
14. SimplySeven Dr. Niko Waesche
Companies in the “re-commerce” segment buy used media or
goods from consumers and re-sell them for a profit.
Services Sales example “Re-commerce”
! Gazelle buys back used electronics.
! SecondSpin buys used media.
! These companies exist because it takes a lot of effort for consumers to sell items on
eBay.
! They have inventory risk and require working capital.
! From the Gazelle web site: “To date, more than 100,000 consumers have used the
service as a way to clean out closets, get cash and help out a good cause. In addition,
Gazelle empowers consumers to avoid time consuming and risky online experiences
associated with peer-to-peer selling.“
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
15. SimplySeven Dr. Niko Waesche
Often a problem model, however. Not scalable, high customer
acquisition costs and very little lock in.
Despite efforts by the agencies, there are few truly scalable services companies
! Yes, services sales are much more straightforward than subscriptions or
agent-based models.
! The business model poses several problems, however: It is not recurring, it is
not scalable and it does not benefit from aggregation.
! Services sales only makes sense if one or more of these criteria apply:
1. It is scalable
2. Customer acquisition costs are low
3. Customers are somehow “locked in” and keep coming back.
! The communications service Skype manages to tick all these boxes. It is the
most successful service sales internet company we know. Its main business
model is charging for call services into fixed lines or mobiles.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
16. SimplySeven Dr. Niko Waesche
From the very beginning, Skype’s scalability was based on
the power of peer-to-peer. It did not have a business model.
The search for a business model
! Skype took more than a year to get any funding. 20 different venture
capital funds refused to invest in 2003. Mangrove in Luxembourg
was one of the few to see the potential.
! It did not help that the founding team was notorious for having
founded Kazaa – and was being sued.
! Skype used peer-to-peer technologies for voice over IP. This meant
that it could scale massively.
! In fact, Skype proved later that it could add 150,000 new users each
day without spending anything on new hardware or connectivity
(“The meaning of free speech,” The Economist, 15.09.2005).
! This also meant that Skype had a very low break even point. And it
could be a massive threat to the telecommunications industry if it got
the technology right.
! It did not have a business model yet, only an idea (which was bad on
top of it for this company): “Maybe advertising.”
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
17. SimplySeven Dr. Niko Waesche
The ability to massively scale and virally grow saved Skype: It
did not need a great business model, just a good enough one.
Skype has a severe impact on the telecommunications industry
! The impact of Skype on the telecommunications industry cannot be
overstated. Skype has over 500m user accounts. 13% of all long distance
phone calls in 2009 were made with Skype, a whopping 54bn minutes,
according to the telecommunications analysis company TeleGeography. This
makes Skype the largest long distance phone carrier in the world, by far
(“International Phone Traffic Growth Slows, while Skype Accelerates,”
TeleGeography Press Release, 19.01.2010).
! While internet communication is free, Skype charges for calls to mobiles or
fixed lines. There is a subscription, too, but Skype made most of its $551m in
2008 revenue through pre-paid phone credits (“Investor Group to Acquire
Majority Stake in Skype,” Skype press release, Menlo Park, CA, 01.09.2009).
This is the services sales model.
! Skype has so many users and such a low cost base, that it can afford to make
money on only 5% or less of its calls with a basically very challenged business
model (one time and not recurring).
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
18. SimplySeven Dr. Niko Waesche
A comparison of AT&T and Skype shows that AT&T actually
cannot compete with Skype with its current structure.
Snapshot from 2007: Real world vs. the internet
AT&T Skype
Age 122 years 4 years
Revenue $119 billion $382 million
Number of customers 14 million broadband, 276 million registered
70 million mobile users
Employees 309,000 700
Revenue/ employee $385,000 $546,000
Customers/ employee 272 394,286
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
19. SimplySeven Dr. Niko Waesche
Subscriptions
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
20. SimplySeven Dr. Niko Waesche
Subscriptions are the heaviest weapon in the arsenal. It is like
asking people if they like to be chained to a wall.
A simple sanity check
! Sales people hate subscriptions because they are such a tough sell.
! There normally only is one person who really likes subscriptions: The CFO. In
contrast to other business models, subscription creates a constant and
predictable revenue stream for the company.
! Potential subscribers actually think deeply about predictability. A simple sanity
check is made by most people before signing up: With what certainty will I use
the service how many times during the subscription period to justify the price?
1. Necessity: Utilities, mobile phone services or internet access fit into this category. If there is
competition, these services quickyl become a commodity with rock bottom pricing.
2. Unmatched attractiveness. The service has to be so compelling and one-of-a-kind that your
customers will do anything for it, even sign up for a subscription.
! If you happen to offer such a truly compelling service, then you have lucked
out. Not only can you offer premium prices, you may actually want to charge
more just to underline your status as an exclusive service
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
21. SimplySeven Dr. Niko Waesche
It is difficult to stay in the top box, it is a position many
companies will envy.
Justifications for subscriptions
! It is very hard to hold the premium position forever.
Some services move into commodity and were
premium previously.
! If services are only a necessity and not compelling
or one-of-a-kind they become a commodity…. Rock
bottom pricing.
! Although the subscription business model insures
some sustainability and is thus loved by CFOs,
services are not immune to becoming a commodity
and thus loosing value.
! This is what happened to AOL.
These services have turned Psychologically, people who want to
into commodities. Little subscribe to a unique service
differentiation means low usually justify this as being
margins. necessary. This box is uninhabited.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
22. SimplySeven Dr. Niko Waesche
An interesting psychological fact is that people who
subscribe to a compelling service also feel it is necessary.
Selling subscriptions with the Apple iPhone
! Remember the greyed out box – unique but
not necessary. This box is uninhabited.
! Psychologically, people who want to
subscribe to a unique service usually justify
their subscription as being necessary.
! Some services, such as a golf club
membership or an iPhone subscription,
however, are not necessities, but when
asked, people will say they are.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
23. SimplySeven Dr. Niko Waesche
The subscription model is one of the oldest in the online
business – it began its life as premium access provision.
The beginnings of the subscription model and competition with the ISPs
! Compuserve (founded 1969) was one of the first providers
of online access for private businesses.
! AOL was started in 1985.
! Since the 1990s, there was tension between the online
service providers and ISPs, or internet service providers.
Online services tried to provide premium services – exclusive forums,
AOL Time Warner had
content, games – to its users and were late to offer direct internet to conduct a goodwill
access. write off resulting in a
ISPs were low-cost providers which offered only internet access - where 2002 loss of $99bn
due to the AOL
the user-created content was.
acquisition.
! The high value of Compuserve and AOL (leading to AOL Finally, in 2009, AOL
acquiring Time Warner) was based on the elusive belief in was spun off from
Time Warner - as a
exclusive content and the sustainability of the subscription shadow of ist former
existence.
business model.
Source: “Kill AOL” number plate found on the internet.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
24. SimplySeven Dr. Niko Waesche
Truly exclusive content is very, very difficult to find. Subscription
companies discovered that providing exclusive access was the key.
Lessons of the survivors of the subscription business model
! Financial Times (FT.com) successfully offers a
tiered access model with some free and some
subscription content – but to a specialist audience.
! Companies such as Bloomberg and Reuters do
the same. They need to keep investing to offer
timely information specially prepared for
investment professionals.
! What keeps financial customers on these services
is the understanding that their competitors are
using the same information sources.
! In fact, most brokers have both screens from
Reuters and Bloomberg!
! It is not really exclusive content – all the content
exists elsewhere almost real time as well – but Reuters screen for financial professionals.
exclusive access to a place where your You are competing against the market – so
competitors are. you need to access the same information
place as all other market players have.
Source: Reuters Knowledge 2.5.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
25. SimplySeven Dr. Niko Waesche
Here come the MMORPGs. Just when all thought subscription
was dead, it was reinvented again.
The boom of Massively Multiplayer Online Role-Playing Games (MMORPGs)
! About 10m people worldwide play MMORPGs.
! The boom of subscription-based multiplayer online
games is not obvious…
There were free multiplayer environments in the internet from the
very beginning. The first (text based) Multi-User Domain, MUD,
dates from 1978.
There are many licensed games you can put on your computer and
you need to pay only once.
! The first graphical MMORPG actually ran on AOL
from 1991 to 1997 and cost US$6 per hour. It was
too expensive.
! It was the combination of other game participants
with the premium content of licensed games that
resulted in the rebirth of the subscription model.
! Kids wanted to be in the place where their friends
(and competitors) were. Exclusive access with
premium content was the key. Heavy guidance and a game objective with your
friends online – not user created content - is the
! The model is very similar to FT.com, Bloomberg secret of World of Warcraft (WoW). 7m customers
and Reuters… the customer wants to be in the play WoW globally. It is the most popular
same place as his or her friends and enemies. MMORPG with a market share of over 50%.
Image: World of Warcraft, Developer: Blizzard Entertainment, Publisher: Vivendi Universal. Source: Wikipedia entry.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
26. SimplySeven Dr. Niko Waesche
The zombie business model subscription is back: Spotify is
challenging Apple’s licence sales model for music.
Music subscription web sites
! After being forsaken as a business
model for most internet companies,
subscription is back.
! Apple has revolutionised music on
the internet by successfully
establishing their iTunes store in
combination with their hardware iPod
sales.
! New contenders such as Spotify,
however, are offering “all you can
eat” music services based on Spotify on the web and mobile phones
advertising and exclusive member
subscriptions.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
27. SimplySeven Dr. Niko Waesche
The subscription model seemed dead… user created content
was better and “free…”
The subscription business model developed the “bouncer principle”
Access to doctors as
(1) People exclusive content
need to be
where the
competition (3) Health
The “bouncer is in services
principle:” Some financial Software as
First experiments
The dream of services started to services
such as
exclusive content
Hellohealth
participation and
exclusive understand that charge a
exclusive access to
interactivity
content a virtual “place”
subscription
(2) Gaming rate for
was more companies doctor (4) Software as
successful than understand access a Service
trying to develop that kids companies such
exclusive content. want to as
share their Salesforce.com
experience use subscription
(4) Music successfully
services (1m
Bouncer principle to such as subscribers)
make content more Grooveshark
attractive and Spotify
Image of bouncer: Not for commercial use. introducing
subscriptions
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
28. SimplySeven Dr. Niko Waesche
Retail
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
29. SimplySeven Dr. Niko Waesche
The early online pioneers looked for retail categories that could be
sold better on the internet than in a shop. Books were ideal.
Only a small proportion of books can ever be in a shop
! ABC Bücherdienst – founded in 1992 in Germany on BTX
“*TELEBUCH#” - featured 700.000 books in its online database,
200.000 could be sent within 24 hours of ordering.
! Even though the price of books was fixed in Germany, the sheer size of
the database as well as free postal service over a purchase price of
DM80 made the offering competitive against conventional retail shops.
! Amazon was founded two years after ABC Bücherdienst by Jeff Bezos,
an employee of a hedge fund who had researched the different
business models of internet ventures. Books seemed perfect because
of the impossibility to carry a large book stock in a retail store.
! The average Borders bookstore in the US carries 100.000 titles. Jeff
Bezos founded Amazon with the vision of offering a million books.
! Other successful online retail examples exist as well: DocMorris
founded an online pharmacy in Holland for the German market, thus
bypassing strict German pharmacy regulation.
Amazon example: Chris Anderson, „The Long Tail. The New Economics of Culture and Commerce,“ Random House, 2006, p. 48.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
30. SimplySeven Dr. Niko Waesche
Internet retail seems straightforward. But there is a lot to
watch out for.
Internet retail is anything but easy
! At first, internet retail seems straightforward. It is about selling your own inventory in an
internet shop. These are real things we can touch. There are a multitude of shops on the
internet selling almost everything one can imagine.
! It is far less fancy than its closest relative, digital license sales, because it does not
require formats, interfaces or devices.
! However, selling in an internet shop is anything but easy. Retail knowledge is not
necessarily sufficient. There are a multitude of aspects which need to be considered
unique to internet selling.
Some retail categories require detailed In some retail categories,
information about items on the web site or return rates can be 70% or
even customer service involvement. higher.
Discovery of Completion
Discovery of Engagement Return of
shop on the of check out Shipment
item in shop with the item item to shop
internet process
Exposing content directly to Google
Process flow in internet retail from customer perspective
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
31. SimplySeven Dr. Niko Waesche
Retail start-ups failed if they did not focus systematically on
the right product categories, costs and fulfillment.
Boo.com was the most spectacular retail flop ever - RIP May 18, 2000
! Started by a Swedish model and friends, backed by the luxury goods
company LVMH and throwing fantastic parties all over the world.
! The spectacular flop of Boo.com showed how sexy the internet economy
could be – by celebrating it’s own rise and fall. Its story “capture[s] all the
fever, glamour and broken dreams of the dot.com era” (Malmsten).
! Boo.com famously spent its way through $120 million during its frequent
delays and brief existence from 1998 to 2000.
! The web site actually was online for only half a year.
! A very high number of products returned by the customer… a service that
was offered for free, but charged for by their logistics supplier Deutsche
Post. Boo.com founders
Patrik Hedelin, Kajsa
! Tristan Louis, Interim CTO of Boo.com: “Boo was the first company to Leander and Ernst
launch from the ground up in multiple countries from day one. This Malmsten
represented a set of challenges that were previously unaddressed, ranging
from technology challenges to more traditional issues in generating a global Boo.com burned
brand. While I was working for Boo, I was in charge of developing the back- through a huge sum of
end fulfillment system, a platform that allowed us to handle multiple money making every
currencies, multiple languages, on the fly tax calculation, and integration with possible internet retail
multiple fulfillment partners.” mistake in the book
Tristan Louis‘ web site: http://www.tnl.net/; Ernst Malmsten, Erik Portanger, Charles Drazin, „Boo Hoo,“ Random House, 2001, p. vii.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
32. SimplySeven Dr. Niko Waesche
Despite its scale advantages, Amazon is systematically reducing inventory
cost and risk by allowing Third Parties to sell over the web site.
Shifting warehouse costs and risk to suppliers and distributors
! For some of its inventory, Amazon introduced its “Marketplace”
program for “ProMerchants” in 1999 for used books where it
shifts cost and risk to small suppliers who keep their own stock.
This represents about 28% of Amazon’s units sold.
! Amazon.com needs to react to its competitor eBay, which in its
original business model carried no fulfillment costs. Wall Street
is watching closely which models promise higher growth and
better margins.
! eBay, specialized on the commission business model and
connecting buyers and sellers of used goods, has also moved
into new goods. But it immediately begun with the concept of no
warehouse. All of the warehouse costs and risks are held by the
supplier partners. Amazon’s partner program
! In cases where rapid delivery is required, warehouse and
fulfillment costs may be reduced further by outsourcing the
function to distribution experts such as FedEx, UPS or DHL.
! As a consequence, medium sized warehouses are
disappearing… either they are very small with a very specialized
selection or they are very large to benefit from scale.
eBay’s partner program
Amazon example: Chris Anderson, „The Long Tail. The New Economics of Culture and Commerce,“ Random House, 2006, p. 92 - 97.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
33. SimplySeven Dr. Niko Waesche
Digital books are inspiring internet book retailers. Here is the chance for
zero inventory costs and a new license based business model.
Forsaking the retail business model and going digital
! Books on demand are becoming cheaper and cheaper to
produce. To be economical, it is still a requirement to print
more than just one book, but this will be realized soon.
! Amazon owns “Booksurge” a print-on-demand company:
“Headquartered in Charleston, South Carolina,
BookSurge’s state of the art book manufacturing facility
produces one book or 100 books profitably for authors and
publishers and fulfills retail book orders in most cases
within 24 hours.” Amazon’s Kindle and Fire family
! This is happening in many other areas as well – especially
audio and film production. Lower production costs are
leading to a participant information culture which further
moves away from mainstream.
! In February 2009, Amazon launched the second version of
Kindle, its digital book reader.
! Further Kindles and the Fire followed with Amazon
investing significantly to capture license revenues and
develop its own ecosystem and platform.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
34. SimplySeven Dr. Niko Waesche
The internet has become such an important source of product information
and brand experience that “bricks and clicks” are a must-have.
Creating brand experience through flagship stores and the internet
! Internet sites are a must have for retail:
Research information on products in shops
Search for shop locations
Order in advance
Experience the flavor and culture of the brand
! Many purchasing decisions in shops are researched in
advance on the internet.
! This explains the great demand for product information on
the internet and is leading to increased sophistication of the
consumer in purchasing decisions from cars to olive oil.
! Luxury brands are evolving in their store concepts as well.
“The product is not enough.” Brands are moving away from
third-party presence in department stores to their own stores.
Each global city has their own store look...
! The new Gucci store in Tokyo, Prada's New York store, with
its cultural performance space, and Louis Vuitton's Champs-
Elysees flagship, with its art gallery and bookstore.
! "We think it is the second stage of globalization," says
Francois-Henri Pinault, chief executive of PPR, Gucci
Group's parent company. "First all stores looked the same,
now they are tailored to their local markets.“
! It is the “desire for experience” (Future Laboratory, a London-
based consulting firm) and the “selling ceremony” (Financial
Times) which leads to both extravagant flagship stores
combined with an extensive experience-based internet
presence. Gucci new Ginza Flagship Store and internet Site
Images from the Gucci Japan site: http://www.gucci.com/; Vanessa Friedman, „Gucci opens Tokyo flagship store,” Financial Times, 13.11.06, page 9.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
35. SimplySeven Dr. Niko Waesche
The early online bookshop founders were the first to
understand the benefit of the “long tail” concept.
Selling the “long tail” of books – near zero distribution costs
! When online pioneers selected books as their retail category
because of the vast selection advantages available on the
internet, they had discovered “the long tail.”
! Chris Anderson described the “long tail” as a central concept
for internet business in his influential book.
! The thesis of “The Long Tail” is that the reduction of fulfillment
costs through the internet resulted in a nearly unlimited
demand for specific items far from the mainstream.
! This applies to many categories: Books, music, etc.
! Demand for these specific items surprised most consumer
companies. Anderson cites that 98% of all online music tracks
are sold at least one time a quarter by an online music
company. Hardly any songs in its huge database - 2% - never The demise of hit albums 1957 - 2005
get requested.
! These specific items may be bought only one or two times a
year, however, together they result in sales that can surpass
the sales figures for mainstream items.
! Anderson declared that the era of mainstream music and
mainstream taste is finally over as people are able to cultivate
very individualistic and fragmented tastes. A virtuous circle
because large availability of variety installs demand for even
more specific items. “The Long Tail”
Chris Anderson, „The Long Tail. The New Economics of Culture and Commerce,“ Random House, 2006, p. 7, hit album image is on p. 32.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
36. SimplySeven Dr. Niko Waesche
How does one find very specific niche products? Smart
aggregation and lots of diverse opinions are the answer.
Recommendations based on the “wisdom of crowds”
! If you are selling very specialized niche products in
the “long tail,” how do you make sure your
customers find them?
! Amazon.com tracks purchases of products and
makes aggregated recommendations based on the
choice of thousands of other consumers.
! This system taps the “wisdom of crowds” (James
Surowiecki) Diverse sets of people allowed to make
decisions independently can be remarkably
intelligent. More than most experts. Amazon.com recommendation for Herbert’s Scale
! While the TV show “Who Wants To Be a Millionaire”
is not scientific evidence, the expert opinion is on
average 60% right whereas the crowd opinion has a
success rate of 91%.
! A diverse group of smart and not-so-smart people is
always better than a group made up of just smart
people. Diversity erodes group pressure – which
leads to wrong choices.
! Large groups require an aggregation mechanism,
which Amazon provides.
! We will see more of this when we discuss Google. Amazon.de recommendation for Herbert’s Scale
James Surowiecki, „The Wisdom of Crowds. Why the Many Are Smarter Than the Few,“ Abacus, 2004, p. 4, 28 - 49.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
37. SimplySeven Dr. Niko Waesche
Google search and new viral models are enabling new micro
shops with may be a threat to Amazon.
The future of internet retail
! Opening shops is really cheap through Open Source SW. In the 1990s, an e-shop could cost one
million US$.
! PayPal and other payment mechanisms are available. Logistics companies such as FedEx, DHL
and UPS have developed special services for online retailers, making shipping costs more
affordable.
! Through the crowd-powered search mechanism of Google, small, very specialized niche players
can today be successful on the internet.
! The new niche players can rely on global reach to create the customer size they require to survive.
! New club-based concepts take niche retail further still into the area of viral marketing. Companies
such as Brands for Friends use club concepts to allow manufacturers to sell excess inventory for
much lower prices. The club concept allows an artificial separation between the regular retail
channels of the manufacturers and the club members. The concept is viral, because these players
rely on word of mouth to pass on the advantages of the club.
! We see from these innovative club concepts that innovation in the internet retail model has not
ended – on the contrary, new ideas are appearing continuously.
Viral club concept vente-
privee.com – Members have
to sign in
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
38. SimplySeven Dr. Niko Waesche
In their quest to improve their margin and reduce inventory costs
further, online retail is actually transforming its business model…
The transformation of online retail… a revolution in inventory costs
Fulfillment seeks
scale advantages.
Bricks and Print on demand
Clicks: removes
Offline retail Reduced inventory.
moves inventory Amazon and eBay
online and become the front
seeking a distribution end of thousands
complete Reduced
Moving into costs… production of small shops and
consumer from scale
experience
categories costs turn producers-sellers.
where to virtual
consumers
online has goods
into
immediate “The Long Tail” producer-
Selling things advantages sellers
Intelligent
online to real
filters take
shops… eg.
books advantage Threat for Amazon:
of the Emergence of
wisdom of independent micro
crowds to shops and viral
locate niche models
products
Aggregation and filters are
complementing or replacing expert Google has enabled countless small
opinion and are enabling further micro shops because they can set up
fragmentation and individualistic taste independently from eBay or Amazon.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
39. SimplySeven Dr. Niko Waesche
Commissions
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
40. SimplySeven Dr. Niko Waesche
The upcoming two business models, commissions and
advertising are both agents-based models.
Agents-based business models
! Previous business models, services, subscriptions and retail always include
two parties, a seller and a buyer.
! The upcoming two business models, commissions and advertising, include at
least three parties: A seller, a buyer and an agent.
! Often, there are even four or more different parties.
How it works: The agent
places a cookie on the
Seller Publisher Seller computer of the potential
buyer, registering that she/
70%
he saw a product or
service described on a
publisher site (such as a
Marketplace Agent price comparison service).
100% When the person then a
Time week later actually buys
the product, the agent
receives his commission.
Buyer 30%
Buyer He splits it with the
publisher – the publisher
getting the higher share.
Three party commissions Four party commissions model:
model: eBay Commissions Junction
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
41. SimplySeven Dr. Niko Waesche
The two agent-based models share similarities, but also an
important difference.
Agents-based business models
! Agents thrive in complex, rich environments (like the internet) with a lack of complete transparency.
! Due to a lack of information, parties which are potentially interested in a transaction cannot find each other. If agents
do their job right, they serve as intelligent traffic coordinators through the chaos of the internet.
! Agents working with commissions often serve companies or freelancers working with other internet business models,
for example eLance, a marketplace for internet services, or eBay, which is a marketplace for items sold using the
internet retail business model.
! Agents have to strike a delicate balance, however. They have to watch out they that are not too obtrusive. At the
same time, they have to keep proving to their clients that they are worth their money.
! There is an important difference between the two agent-based models, however.
The commission model only generates cash when the transaction actually is successful, when an item is bought
or a service purchased. The sales risk is spread among the agent, the seller and the buyer. The agent accepts
this risk because the reward is potentially higher. The higher the value of the sale, the higher the proceeds from
the commission.
Advertising models generate cash regardless if the actual sale goes through or not.
Some companies, such as Commissions Junction, offer both models adjusting to the current sales situation.
! Commission models are therefore particularly appropriate when the agent is a significant part in the whole sales
process.
Agents thrive in complexity
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
42. SimplySeven Dr. Niko Waesche
The eBay business model worked instantly… based on three simple
concepts: Power of C2C, the fun of auctions, payment model.
Birth of the global consumer marketplace in 1995
! Power of the C2C: Matching consumers with consumers.
Connecting 30m buyers and sellers around the world.
Millions of collectibles, appliances, computers, furniture, equipment, vehicles,
and other miscellaneous items are listed, bought, and sold daily.
In many ways, success of C2C marketplaces foreshadowed success of Web 2.0.
! Fun with auctions.
People actually enjoy the competition of auctions, even though they often end up
paying more.
The marmalade jar of Axel Ockenfels at the University of Cologne. Students
always end up paying more than the !12 on average in the glass jar.
eBay.com web site
! Payment model: The seller pays.
eBay generates revenue from a number of fees. The eBay fee system is quite
complex; there are fees to list a product and fees when the product sells, plus
several optional fees, all based on various factors and scales.
The U.S.-based ebay.com takes $0.20 to $80 per listing and 2–8% of the final
price (as of 2006).
The business took off from the founding year 1995 – “Unstoppable.”
eBay HQ in San Jose, CA
Source for commission fees in US: Wikipedia.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
43. SimplySeven Dr. Niko Waesche
eBay’s C2C business model generated revenues and profits early and its
share price was never pushed up and down like its contenders.
Does eBay simply have a perfect business model that does not have to evolve?
! eBay was never hyped as much as the other big internet players.
! eBay’s business model was an instant success and required the
least refinement – like no other player.
Low cost base due to C2C – Better than Amazon.com or Yahoo!
Monetization intrinsic element – Much like Google AdWords.
Morgan Stanley identifies three crucial drivers for eBay revenue (Gross Merchandise
Volume GMV)
listings * average sales prices (ASPs) * conversion rates = GMV
! “For most of its existence, eBay has enjoyed a sort of virtual
monopoly. It now commands more than 90 percent of the online
auction market, and from 1999 to 2004 it posted at least 40
percent annual profit growth every year, even as strong
competitors like Amazon and Yahoo were taking runs at its core
business.”
! Raffi Amit of the Wharton School and Christoph Zott of Insead Share price development
argue in a recent paper that the internet opened up “opportunities graph from The Economist
to be very creative in the design of the business model”.
In e-commerce, they say, most value is created by business models—the way in which
firms conduct their affairs with suppliers and partners, as well as customers—rather
than (as is largely the case in the offline world) the products or services themselves.
! The eBay business model seemed to be perfect from the very
beginning – this is may be a problem for growth.
Source: Graph and Amit and Zott mention: „Happy e-Birthdays. After ten years, what has been learnt about succeeding as an e-business?“ The Economist,
21.07.05. eBay statistisics auction market: Michael V. Copeland, The Big Guns' Next Target: eBay, Business 2.0 Magazine on CNNMoney.com, 31.01.06.
Mary Meeker, David Joseph, “Listings * ASPs * Conversion Rates = GMV eBay US Historical Trends,” Morgan Stanley, 11.01.07.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
44. SimplySeven Dr. Niko Waesche
C2C economics only works if abuse is limited to reasonable levels.
The most important fraud prevention mechanisms is user feedback.
Fraud prevention through user feedback and supported by eBay staff
! Pierre Omidyar began with user feedback as fraud prevention mechanism very early…
he could not handle answering all the dispute emails directly himself.
! In general, user feedback works excellently as a fraud prevention mechanism.
! There are only a few potential weak aspects:
Small and large transactions carry the same weight in the feedback summary.
Feedback may be provided by partners of the fraudulent seller.
A user may be reluctant to leave honest feedback out of fear of negative retaliatory
feedback (including "negative" in retaliation for "neutral").
! Without feedback, eBay would not work and collapse under fraud instantly.
! In addition, eBay have a staff of 1,000 people focused on fraud and payment issues.
! Fraud heavily impacts other commissions-based marketplaces, for example freelance
platforms providing access to software coders.
Source: Adam Cohen, „The Perfect Store,“ Little, Brown and Company, New York, 2002, pages 27 - 29
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
45. SimplySeven Dr. Niko Waesche
Moving off site: The danger every agent faces, is that buyers and
sellers carry out their business directly.
eBay is threatened by big sellers moving off site, and now from big buyers, too
! In some eBay categories, big sellers are gaining power – they can “go solo”
enabled by Google search.
The threat of moving off site is a challenge for eBay. Between 10 and 20 sellers account for 80%
of the golfing goods sold via eBay.
Google is using its advertising business model to steer specialist buyers straight to specialist
sellers — in effect disintermediating eBay.
! “Big buyers” have emerged, too, using the service business model and buying
back standardized items like used media and electronics. The model is called
“ReCommerce.”
SecondSpin
Gazelle
Even P2P is not an endless source of growth. One third of eBay‘s revenues
today already comes from an alternative business model, from PayPal. In
2011, eBay presented a software platform for merchants as a strategic
growth area.
Source for Golf statistic. Dominic Rushe, „Ebay rivals bid to put the boot in,” The Sunday Times, 05.02.06.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
46. SimplySeven Dr. Niko Waesche
If eBay could be wildly successful with a global virtual flee
market, what about the same model in hotels and tourism?
AirBnB
! AirBnB team founded its company based on an
idea having emerged from a couple of design
school students offering their apartment as a
place to stay.
! The payments system actually became one of the
main advantages of the services. Staying at
people‘s places was not compromised by
awakwardness of payments situation.
! Company growing fast with complete focus on
product.
! Internationalization outsourced to Springstar in
Berlin.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
47. SimplySeven Dr. Niko Waesche
Companies that tried to copy eBay in B2B did not succeed. Some
have put a huge amount of effort into search and standardization.
The spectacular failures of the B2B marketplaces – Some exceptions
! With the success of eBay, many entrepreneurs thought that the
same business model aspects – low costs and intrinsic
monetization – could bring them great success in B2B.
! They set up commission-based marketplaces for businesses to buy
and sell goods from building supplies (Build Online or http://
www.ctspace.com/), engineering supplies and services
(techpilot.net) to used machines (Surplex.com).
! Venture capitalists thought success here was obvious and poured
money into this category. Companies like Verticalnet were listed on
NASDAQ. Verticalnet offers software and
! Most failed miserably. Many of those involved still wonder exactly complete solutions
why. The answers are not obvious…
A real large-scale C2C market never existed, whereas companies have been optimizing
B2B procurement for decades.
Procurement at companies is part of complex supply chain processes. Optimization of
these processes often brings more value than a better B2B marketplace.
Goods procured by businesses are often accompanied by services such as installation or
integration services or requires substantial explanation. This limits the number of sellers
and makes an open marketplace less useful.
! Today, the focus of B2B market players like Verticalnet is on
complete solutions for businesses and on software.
! B2B markets did not entirely disappear, survivors have put a huge
amount of work into standardization and search… Mercateo.com. Mercateo has 4m articles
They now enjoy significant barriers to entry. standarized and comparable
Source of graphic: http://www.verticalnet.com/
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
48. SimplySeven Dr. Niko Waesche
In China, B2B platforms were highly successful because of
the transformation to a partially capitalist economy.
B2B in China – Right place, right time
! Alibaba – Huge success story as the biggest B2B wholesale marketplace in
China
! In the meantime, Alibaba.com has launched international versions to facilitate
global trade
! The Alibaba founder then also went into other areas:
TaoBao (B2C, C2C)
ZhiFuBao (Electronic Payments, Escrow Services)
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
49. SimplySeven Dr. Niko Waesche
Groupon grew in turbo mode by offering daily deals in cities
and taking a 50% commission (but dropping).
The star among new commission-based models – but not P2P
! Using a straightforward approach of offering a daily deal in a specific city available to
people if a sufficient number is reached, Groupon proves that urban classifieds market
can be tapped through innovative schemes.
! The main asset of Groupon is it’s mailing list of millions of consumers.
! Groupon keeps 50% of every deal sold and also benefirs from coupons which are
bought but not used (recently dropping to 38% - triggering a cost programme).
! Groupon is offered in 300 local areas in 29 countries.
! Sales may top $500m in 2010. Growth has slowed down somewhat.
! The company requires additional financing because it is powered by sales teams
acquiring the daily deals.
! Groupon was founded in November 2008… IPO on Nov 4th, 2011.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
50. SimplySeven Dr. Niko Waesche
The original C2C marketplace model has not evolved since its
conception, attempts to adapt it have mostly failed.
The remarkable longevity of the original C2C model – But how to grow?
eBay bought
StubHub in 2007
for $310m
Benefits or synergies between
conventional auction house ? C2C Segments
Butterfield and Butterfield and eBay New AirBnB
did not materialize.
specialized C2C Services
Conventional auction house C2C markets
Services
PayPal Payments Business Model
eBay Challengers:
C2C goods markets
Marketplace “ReCommerce”
Affiliate
Communications system Marketing
(Commissions
B2B Junction)
Marketplace B2C
s
? Commissions
Use both
Corporate procurement is a wide area including
consulting services, business processes,
software technologies and yes, to a limited extent
? commissions and
advertising based
business models
also internet marketplaces.
Success of B2B
Alibaba.com in China
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
51. SimplySeven Dr. Niko Waesche
Advertising
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
52. SimplySeven Dr. Niko Waesche
Like the commissions model, the advertising business model
involves at least three different parties.
The challenges and opportunities of advertising
! The three parties involved in the advertising business model are: The publisher selling
the ads, the advertising client buying the ads and the consumer engaging with the ad.
! Sometimes, the publisher and the agent are separate entities. Now we have four
parties: The publisher providing the reach, the agent selling the ads, the advertising
client and the end consumer.
Client Client
Publisher/ Ad Ad
Publisher Agent
agent
Consumer Consumer
Three party advertising Four party advertising model: Google AdSense, DoubleClick
model: Craigslist, Google
AdWords, Facebook
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
53. SimplySeven Dr. Niko Waesche
The publisher of the web site and the advertising agent do
not carry the risk of sale – as in the commissions model.
Seller’s risk and price of an ad
! In the traditional media model, the publisher does not assume sales risk.
For example, TV broadcasters and their agents received money whether the advertisement was
successful or not – in the sense that the company advertising a product actually sells more of the
product due to the ad.
In part, this is because the success of a TV ad cannot be measured. Proxies are used. Ads are
measured with panels reporting on reach and frequency (GRP: Gross Rating Points).
! This difference between the commission and advertising models exists also on
the internet – the advertiser does not carry the risk of the sale.
The advertising agent fee is due whether the ad actually is successful or not in the sense that a
product actually is sold.
The fee usually is some form of fixed fee related to the value of the ad – not the value of the
product (like a commission).
Internet advertising is often sold with some success element, for example, Google AdWords only
have to be paid if a consumer clicks on the ad.
! When you think of commissions, think of “selling,” when you think of
advertising, think of “information.”
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
54. SimplySeven Dr. Niko Waesche
Advertisers are always in a Catch 22 situation.
Catch 22
! To attract more clients and ask for higher prices, publishers and
their agents always seek to make their ad space more valuable.
! The more they push their ads on the visitors of their web sites and
try to force engagement, the higher the likelihood of achieving the
opposite effect.
! People will find the ads horribly annoying or, worse still, an
intrusion on their privacy.
! This is not just the case with banner ads. People are very
suspicious if their private information is being used for targeting,
too. This challenge was faced by Facebook in 2007.
! The best ads are those that are seen as a service by users.
People don‘t seem to mind ads on Google, and they actually
voluntarily visit sites composed only of ads, for example,
Craigslist.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
55. SimplySeven Dr. Niko Waesche
In the beginning, advertising was very much designed as if
we were still in a traditional print world. Users hated it.
The unloved banner ad
! Imagination was missing about the possibilities
of being in an interactive space of thousands of
clicks.
! Some innovation was present in banner
advertising, such as floating, moving and large
banners, however, mostly to the annoyance of
internet users.
! Google differentiated itself not just in terms of a
new advertising business model as we will see,
but also in terms of its look and feel, which
represented a counter reaction to the banner
ad.
! Many did not understand that this simple
rebellion against the banner ad itself was a
contribution to Google’s success.
Banner ad on Spiegel Online
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
56. SimplySeven Dr. Niko Waesche
But Google did not just simplify the interface, it perfected
search by using the “Wisdom of Crowds.”
Using the “Wisdom of Crowds” to improve search
! The power of Google is the power of information aggregation of
thousands and millions of links.
! Google PageRank works with complex algorithms:
Links on a page
Anchor text around links
The popularity of pages that link to a page
! When these algorithms are periodically adjusted to reduce click
fraud, page rankings are changed, sometimes heavily… this is
called the “Google Dance.”
Battelle’s example of Niel Moncrief and the web site 2bigfeet.com… he lost his Search on Google for “big feet”
Christmas business 2003.
This is unlikely to happen today, as search algorithms have improved considerably.
! John Battelle describes in his book the search phenomenon as a
cultural artifact… how Google mirrors our culture and has built
the “Database of Intentions…” “Google knows what our culture
wants.”
! Google “Zeitgeist” is a must-see showing the top searches each
month in each Google country.
! Google has an incredible market position, for example, in the UK,
Google “Zeitgeist” for Germany
Google has a market share in search of 78% (Financial Times, October 2006
“Yahoo is starting to think out of the box,” 08.12.06, page 18.)
Source: John Battelle, „The Search,“ New York, 2005, 2-3, 20-37, 153-188.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
57. SimplySeven Dr. Niko Waesche
While Google tapped the “Wisdom of Crowds,” GoTo.com had already
found another solution against spam… the “Wisdom of Capital.”
The true business model innovation in advertising came from GoTo.com
! Bill Gross, the genius behind LA-based IdeaLabs developed “one idea per month”
This resulted in many web sites (such as CitySearch, Tickets.com, eToys.com) which
required user traffic.
! Gross developed the idea of organizing search results according to who paid the most
per click.
! Gross: “The true value of the internet was in its accountability… performance
guarantees had to be the model for paying for media.”
! Gross calculated that it took 5-10¢ a click to buy traffic through banner advertising
from major web sites. In the beginning he decided to subsidize GoTo.com by selling
traffic for 1¢ a click… Gross believed that the cost of acquiring traffic would go down
as GoTo would gain popularity and the price for a click would go up… because it was
the right traffic!
! When GoTo.com was launched in 1998 it had 15 advertisers, by 1999 it had
thousands.
! Gross was right… targeted traffic would be valued at about 50¢ in early 2005. Bill Gross
! GoTo.com realised it could extend its reach by syndication and decided in September
2001 to transform itself into syndication-only… it was renamed Overture.
! Gross met Google founders Larry Page and Sergey Brin in 2001, but they decided to
copy and further improve the business model of GoTo.com (Google’s AdWords).
! The well-known venture capitalist Bill Gurley called this business model “the salvation
of the internet.”
! Bill Gross is working on his next idea… “SNAP” uses pay on conversion
Source: John Battelle, „The Search,“ New York, 2005, 95-121; Image from Fortune web site, “Idealab Reloaded Surprise!.”
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
58. SimplySeven Dr. Niko Waesche
What is killing the newspapers are online classifieds and
especially the lean operating model they have.
Running a top 10 web site with 23 people… craigslist classifieds
http://www.craigslist.org/about/ http://sfbay.craigslist.org/
pages.and.peeps.html (Oct 2006)
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
59. SimplySeven Dr. Niko Waesche
Can everyone benefit from Google economics? Internet players
have completely different cost structures established competitors.
Google economics allows it to pour money into development
! Part of the Google advantage are
its fantastic margins.
! Deutsche Telekom has !61.4bn
sales with an EBIT margin of 15%.
! Google has revenues of US$7.2bn
with an EBIT margin of 50%.
! Google revenue growth 75.8%
CAGR (2004A-2007E) compared to
DTAG’s 2.3% in the same period.
! Deutsche Telekom has 250,000 Google financials (UBS, “Google Inc,” 07.11.06)
employees, Google has 2,600.
! Google invested US$2.8bn in R&D
in 2008, DTAG !422m.
Everyone is invited to suggest and rate Google product ideas
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
60. SimplySeven Dr. Niko Waesche
Google has announced that it is expanding into internet and
streaming based TV and interstitial advertising.
Interstitial ads in streaming video – Google, Apple TV, Hulu
! The global TV advertising market is $180bn. As TV moves
online, will new contenders be able to tap this large market?
! AppleTV has already been very successful in launching its TV
device.
! Media players have responded to internet TV by successfully
launching Hulu, a service owned by several large media
companies and financed by a Private Equity fund.
! Google is also seeking to enter this market, having made an
announcement in September 2010.
! Google has discovered that major advertisers will not place
their ads next to user generated YouTube content, but they do
go for premium content on Hulu.
! It is widely expected that tablet PCs – especially the iPad will
accelerate this development.
Seven Ways to Create a Sustainable Internet Business London, 19.02.12
61. SimplySeven Dr. Niko Waesche
Google needs to move beyond search to grow… the battlefield that Google
is concentrating on right now is mobile.
Beyond search
! Google’s excursions into conventional advertising
were not successful:
Extended into traditional print advertising through placement in
local US newspapers.
Google has acquired a radio-based ad network.
! The first move beyond search advertising was
integrating third parties into the Google ad network:
AdSense Local Google AdWords
! Software as a Service was the next area. SaaS
(email, office programs) extend the amount of
advertising space and capture the consumer.
! Most important is mobile computing, however, in a
challenge to Apple’s iPhone
Google Maps with ads
Google street view and augmented reality The growth of search: Internet
expenditures by type
Android mobile phone OS with with the Android Marketplace
Statistics: Zenith OptiMedia, “Online advertising to grow seven times faster than offline advertising in 2007,” Press Release, 04.12.2006
Seven Ways to Create a Sustainable Internet Business London, 19.02.12