simplyseven workshop_general assembly_ dreamstake

SimplySeven Dr. Niko Waesche

SimplySeven - Seven Ways to Create a Sustainable Internet Business Workshop at General Assembly, London, 19.02.12

Who buys what and how.

Not for distribution - Personal copy only for participants of the workshop.


Seven Ways to Create a Sustainable Internet Business London, 19.02.12

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 <<



SimplySeven is the product of many joint brainstorming sessions by an entrepreneur, an academic and an investor.

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.”

SimplySeven authors



One reason why SimplySeven framework is useful is that it’s finite, people like models they understand from real world.

# Model Description Flagship Common mistake

1 Services A onetime charge for a service provided directly

Skype Not being able to scale

2 Subscription Collecting a recurring payment stream from your customers

Blizzard/ Thomson Reuters

Believing that people like to be held captive

3 Retail Selling real goods in an internet shop

Amazon.com Treating online like offline

4 Commission Taking a cut on a transaction between a buyer and a seller

eBay Thinking your clients won’t deal behind your back

5 Advertising Collecting a fee for an advertisement or referral

Google Invading people's screen space or their privacy.

6 Licence sales

Selling digital goods in an internet shop

Apple Going it alone

7 Financial risk management

Making money with financial risk positions.

Emerging, too early

Ignoring additional risks such as fraud and regulators.

Introducing the (finite) SimplySeven



Xing (2003)

Friends United (2000)

craigslist (1995)

Macro-media (1996)

PayPal (1998)

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

Subscription

Retail

Advertising

Commissions

License Sales

Jamba (2000)

Adobe (1982)

Celera (1998)

AOL (1985)

Netscape (1994)

Microsoft (1975)

GoTo.com (1997)

Alando (1999) Questico

(2000) LastMinute (1998)

Linden Lab 2nd

Life (2003)

eBay (1995)

MyVideo (2006)

Blizzard Ent

(1991)

LinkedIn (2002)

Stumbleupon

(2002)

1995 2001 Source: Internet research

MySpace (2003)

Blizzard WOW (2000) Bloomber

g (1981)

Boo.com (1998) ABC

Telebuch (1992)

Amazon (1994)

RealPlayer Store (2004)

iTunes (2003)

Doc Morris (2000)

Intershop (1997)

Google (1998)

Oracle (1977)

Financial Risk Management

ING Direct (2000)

Party-Gaming (1997)

Spotify (2008)

Vente Priveé (2004)

Commis-sion

Junction (2004)

Twitter (2005)

Smaava (2005)

Ideo (1991)

Services Lava (1996)

Skillberry (2001) Pixelpark

(1991)

Denkwerk (1998)

USWeb (1995) iXL

(1996) Kabel New

Media (1994)

new Razorfish

(2004)

eLance (1998)

Groupon (2007/08)

Prosper.com(2006) Weather-

bill (2006)

AppsStore (2006)

Plastic Jungle (2006)

Skype(2003)

YouTube (2005)

Facebook (2005)

Gazelle (2007)



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

Make meaning (Something that inspires you, not the idea to make

money or gain power) Make mantra

(Guidance for your company – every day)

Weave a MAT (Define milestones, assumptions, tasks)

Define your business model

(You must know how you will make money, but you don’t need to be original)

Get going (You should always be selling, not

strategizing about selling)

12

3

4

5

Source: Guy Kawasaki, “The Art of the Start,” 2004, pages 3 -26.

This is the core of the workshop. Be able to identify and analyze

business models continually helps you make the right choices

in a changing world.

This is what entrepreneurs should do 80% of their time…

Project management skills are important for survival in every single career – I don’t know

any exception.



Customers

Success in digital business depends on mixing the right cocktail containing business model, skills, finance and organization. Getting the cocktail right

Business Model Financing model

Organization and

processes

Resources and skills

Financing from cash flow? Expansion

constraints? Involvement with

financiers?

Fit with skill set? Fit with location of company?

Maturity of business model? Barriers to entry? Growth

opportunities? Positioning in value chain?

What skills do you have? Which skills do you need to source

externally? How do you upgrade your skills?

Is the organization effective? Do you have to reinvent the wheel each time? Are you scalable?

Can you plug new hires in easily? Ability to internationalize?

Competition Partners

Are my competitors helping me to define my

market? Or are they eating my lunch?

Do I have the most demanding customers in the world? Are my customers resilient

to mistakes? Is my customer base growing? Can my customer afford me?

Am I dependent on my partners? Are they dependent on me? What is the legal

framework?



Customers

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

Business Model Financing model

Organization and

processes

Resources and skills

Why grow?

Outside money is Plan Z

Start a business, not a startup

Building to flip is building to flop

Do it yourself first

Hire when it hurts

Forget about formal education

Good enough is fine

Don’t be a hero

Meetings are toxic

Send people home at five

Competition Partners

Don’t copy

Out teach the competition

Underdo the competition

Say no by default

Build an audience

Go behind the scenes

Welcome obscurity

Press releases are spam

Start at the epicenter



“Europeans – in particular Germans - don’t innovate, they can only clone.”

!  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.

The myths and truths of the internet clone machines



Service Sales



Services sales is a straightforward model – a company providing a one-off and direct service over the web.

!  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

person.

Definition of services sales

Web-based human translation service



It is important to differentiate Services Sales from the ad or commissions business models.

!  It is important to understand the differences to what agents and intermediaries do.

!  Agents help sell services too; as aggregators they create marketplaces connecting providers to buyers of services. Agents make money through the advertising or commissions business models… examples ate eLance, Craigslist or Groupon. They are scalable.

!  On the back of these aggregators, services are sold. Services make up a huge part of some economies, for example, 70% of the US economy.

!  Service sales are made by the service provider directly, this can be to an end customer or through an aggregator.

Definition of services sales

End customer for translation, plumbing service

Aggegator (Craigslist, eLance, oDesk…)

Translator or plumber selling her/ his service over the internet

Services Sales



Maturity: What did not work initially was the sale of a substantial quantity of e-services over the internet - apart from agency work.

!  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.

The re-invention of eLance



Companies in the “re-commerce” segment buy used media or goods from consumers and re-sell them for a profit.

!  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.“

Services Sales example “Re-commerce”



Often a problem model, however. Not scalable, high customer acquisition costs and very little lock in.

!  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.

Despite efforts by the agencies, there are few truly scalable services companies



From the very beginning, Skype’s scalability was based on the power of peer-to-peer. It did not have 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.”

The search for a business model



The ability to massively scale and virally grow saved Skype: It did not need a great business model, just a good enough one.

!  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).

Skype has a severe impact on the telecommunications industry



A comparison of AT&T and Skype shows that AT&T actually cannot compete with Skype with its current structure.

AT&T Skype

Age 122 years 4 years

Revenue $119 billion $382 million

Number of customers 14 million broadband,

70 million mobile

276 million registered

users

Employees 309,000 700

Revenue/ employee $385,000 $546,000

Customers/ employee 272 394,286

Snapshot from 2007: Real world vs. the internet



Subscriptions



Subscriptions are the heaviest weapon in the arsenal. It is like asking people if they like to be chained to a wall.

!  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

A simple sanity check



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 into commodities. Little differentiation means low margins.

Psychologically, people who want to subscribe to a unique service usually justify this as being necessary. This box is uninhabited.



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.



The subscription model is one of the oldest in the online business – it began its life as premium access provision.

!  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,

content, games – to its users and were late to offer direct internet access.

-  ISPs were low-cost providers which offered only internet access - where the user-created content was.

!  The high value of Compuserve and AOL (leading to AOL acquiring Time Warner) was based on the elusive belief in exclusive content and the sustainability of the subscription business model.

The beginnings of the subscription model and competition with the ISPs

AOL Time Warner had to conduct a goodwill write off resulting in a 2002 loss of $99bn due to the AOL acquisition.

Finally, in 2009, AOL was spun off from Time Warner - as a shadow of ist former existence.

Source: “Kill AOL” number plate found on the internet.



Truly exclusive content is very, very difficult to find. Subscription companies discovered that providing exclusive access was the key.

!  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 exclusive access to a place where your competitors are.

Lessons of the survivors of the subscription business model

Source: Reuters Knowledge 2.5.

Reuters screen for financial professionals. You are competing against the market – so you need to access the same information place as all other market players have.



Here come the MMORPGs. Just when all thought subscription was dead, it was reinvented again.

!  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.

!  The model is very similar to FT.com, Bloomberg and Reuters… the customer wants to be in the same place as his or her friends and enemies.

The boom of Massively Multiplayer Online Role-Playing Games (MMORPGs)

Image: World of Warcraft, Developer: Blizzard Entertainment, Publisher: Vivendi Universal. Source: Wikipedia entry.

Heavy guidance and a game objective with your friends online – not user created content - is the secret of World of Warcraft (WoW). 7m customers play WoW globally. It is the most popular MMORPG with a market share of over 50%.



The zombie business model subscription is back: Spotify is challenging Apple’s licence sales model for music.

!  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 advertising and exclusive member subscriptions.

Music subscription web sites

Spotify on the web and mobile phones



(4) Software as a Service

companies such as

Salesforce.com use subscription

successfully (1m

subscribers)

First experiments participation and

interactivity

The subscription model seemed dead… user created content was better and “free…” The subscription business model developed the “bouncer principle”

The dream of exclusive content

(1) People need to be where the

competition is in

financial services

(2) Gaming companies understand

that kids want to

share their experience

The “bouncer principle:” Some services started to understand that exclusive access to a virtual “place” was more successful than trying to develop exclusive content.

Image of bouncer: Not for commercial use.

(3) Health services such as

Hellohealth charge a

subscription rate for doctor access

Software as exclusive content

Access to doctors as exclusive content

Bouncer principle to make content more attractive

(4) Music services such as

Grooveshark and Spotify introducing

subscriptions



Retail



The early online pioneers looked for retail categories that could be sold better on the internet than in a shop. Books were ideal.

!  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.

Only a small proportion of books can ever be in a shop

Amazon example: Chris Anderson, „The Long Tail. The New Economics of Culture and Commerce,“ Random House, 2006, p. 48.



Internet retail seems straightforward. But there is a lot to watch out for.

!  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.

Discovery of shop on the

internet

Discovery of item in shop

Engagement with the item

Completion of check out

process Shipment Return of

item to shop

Process flow in internet retail from customer perspective

Internet retail is anything but easy

Exposing content directly to Google

In some retail categories, return rates can be 70% or higher.

Some retail categories require detailed information about items on the web site or even customer service involvement.



Retail start-ups failed if they did not focus systematically on the right product categories, costs and fulfillment.

!  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.

!  Tristan Louis, Interim CTO of Boo.com: “Boo was the first company to launch from the ground up in multiple countries from day one. This represented a set of challenges that were previously unaddressed, ranging from technology challenges to more traditional issues in generating a global brand. While I was working for Boo, I was in charge of developing the back-end fulfillment system, a platform that allowed us to handle multiple currencies, multiple languages, on the fly tax calculation, and integration with multiple fulfillment partners.”

Boo.com was the most spectacular retail flop ever - RIP May 18, 2000

Tristan Louis‘ web site: http://www.tnl.net/; Ernst Malmsten, Erik Portanger, Charles Drazin, „Boo Hoo,“ Random House, 2001, p. vii.

Boo.com founders Patrik Hedelin, Kajsa Leander and Ernst Malmsten

Boo.com burned through a huge sum of money making every possible internet retail mistake in the book



Despite its scale advantages, Amazon is systematically reducing inventory cost and risk by allowing Third Parties to sell over the web site.

!  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.

!  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.

Shifting warehouse costs and risk to suppliers and distributors

Amazon example: Chris Anderson, „The Long Tail. The New Economics of Culture and Commerce,“ Random House, 2006, p. 92 - 97.

Amazon’s partner program

eBay’s partner program



Digital books are inspiring internet book retailers. Here is the chance for zero inventory costs and a new license based business model.

!  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.”

!  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.

Forsaking the retail business model and going digital

Amazon’s Kindle and Fire family



The internet has become such an important source of product information and brand experience that “bricks and clicks” are a must-have.

!  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.

Creating brand experience through flagship stores and the internet

Images from the Gucci Japan site: http://www.gucci.com/; Vanessa Friedman, „Gucci opens Tokyo flagship store,” Financial Times, 13.11.06, page 9.

Gucci new Ginza Flagship Store and internet Site



The early online bookshop founders were the first to understand the benefit of the “long tail” concept.

!  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 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.

Selling the “long tail” of books – near zero distribution costs

The demise of hit albums 1957 - 2005

“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.



How does one find very specific niche products? Smart aggregation and lots of diverse opinions are the answer.

!  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.

!  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.

Recommendations based on the “wisdom of crowds”

James Surowiecki, „The Wisdom of Crowds. Why the Many Are Smarter Than the Few,“ Abacus, 2004, p. 4, 28 - 49.

Amazon.com recommendation for Herbert’s Scale

Amazon.de recommendation for Herbert’s Scale



Google search and new viral models are enabling new micro shops with may be a threat to Amazon.

!  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

The future of internet retail



Selling things online

In their quest to improve their margin and reduce inventory costs further, online retail is actually transforming its business model…

Moving into categories

where online has immediate

advantages to real

shops… eg. books

Reduced inventory

and distribution

costs… from scale to virtual goods

Reduced production costs turn consumers

into producer-

sellers

Bricks and Clicks:

Offline retail moves online

seeking a complete consumer experience

The transformation of online retail… a revolution in inventory costs Fulfillment seeks

scale advantages. Print on demand

removes inventory.

Amazon and eBay become the front end of thousands

of small shops and producers-sellers.

“The Long Tail”

Aggregation and filters are complementing or replacing expert

opinion and are enabling further fragmentation and individualistic taste

Threat for Amazon: Emergence of independent micro shops and viral models

Intelligent filters take advantage

of the wisdom of crowds to

locate niche products

Google has enabled countless small micro shops because they can set up independently from eBay or Amazon.



Commissions



How it works: The agent places a cookie on the

computer of the potential buyer, registering that she/

he saw a product or service described on a

publisher site (such as a price comparison service). When the person then a week later actually buys the product, the agent

receives his commission. He splits it with the

publisher – the publisher getting the higher share.

The upcoming two business models, commissions and advertising are both agents-based 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.

Agents-based business models

Marketplace

Seller

Buyer

Three party commissions model: eBay

Publisher Seller

Buyer

Time

Agent

Four party commissions model: Commissions Junction

100%

70%

30%



The two agent-based models share similarities, but also an important difference.

!  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-based business models

Agents thrive in complexity



The eBay business model worked instantly… based on three simple concepts: Power of C2C, the fun of auctions, payment model.

!  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.

!  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.”

Birth of the global consumer marketplace in 1995

Source for commission fees in US: Wikipedia.

eBay.com web site

eBay HQ in San Jose, CA



eBay’s C2C business model generated revenues and profits early and its share price was never pushed up and down like its contenders.

!  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 argue in a recent paper that the internet opened up “opportunities 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.

Share price development graph from The Economist

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.

Does eBay simply have a perfect business model that does not have to evolve?



C2C economics only works if abuse is limited to reasonable levels. The most important fraud prevention mechanisms is user feedback.

!  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.

Fraud prevention through user feedback and supported by eBay staff

Source: Adam Cohen, „The Perfect Store,“ Little, Brown and Company, New York, 2002, pages 27 - 29



Moving off site: The danger every agent faces, is that buyers and sellers carry out their business directly.

!  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

eBay is threatened by big sellers moving off site, and now from big buyers, too

Source for Golf statistic. Dominic Rushe, „Ebay rivals bid to put the boot in,” The Sunday Times, 05.02.06.

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.



If eBay could be wildly successful with a global virtual flee market, what about the same model in hotels and tourism?

!  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.

AirBnB



Companies that tried to copy eBay in B2B did not succeed. Some have put a huge amount of effort into search and standardization.

!  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.

!  Most failed miserably. Many of those involved still wonder exactly 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. They now enjoy significant barriers to entry.

The spectacular failures of the B2B marketplaces – Some exceptions

Verticalnet offers software and complete solutions

Source of graphic: http://www.verticalnet.com/

Mercateo has 4m articles standarized and comparable



In China, B2B platforms were highly successful because of the transformation to a partially capitalist economy.

!  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)

B2B in China – Right place, right time



Groupon grew in turbo mode by offering daily deals in cities and taking a 50% commission (but dropping).

!  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.

The star among new commission-based models – but not P2P



AirBnB

Alibaba.com

Services Business Model

Challengers: “ReCommerce”

B2B Marketplace

s

New specialized

C2C markets

The original C2C marketplace model has not evolved since its conception, attempts to adapt it have mostly failed.

eBay Marketplace C2C goods markets

PayPal Payments

?

Communications system

C2C Services

?

?

Conventional auction house

Corporate procurement is a wide area including consulting services, business processes, software technologies and yes, to a limited extent also internet marketplaces.

Benefits or synergies between conventional auction house Butterfield and Butterfield and eBay did not materialize.

The remarkable longevity of the original C2C model – But how to grow?

Affiliate Marketing

(Commissions Junction)

C2C Segments

eBay bought StubHub in 2007 for $310m

Use both commissions and advertising based business models

Success of B2B in China

B2C Commissions



Advertising



Like the commissions model, the advertising business model involves at least three different parties.

!  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.

The challenges and opportunities of advertising

Publisher/ agent

Client

Three party advertising model: Craigslist, Google AdWords, Facebook

Publisher Agent

Four party advertising model: Google AdSense, DoubleClick

Ad Ad

Consumer Consumer

Client



The publisher of the web site and the advertising agent do not carry the risk of sale – as in the commissions model.

!  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.”

Seller’s risk and price of an ad



Advertisers are always in a Catch 22 situation.

!  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.

Catch 22



In the beginning, advertising was very much designed as if we were still in a traditional print world. Users hated it.

!  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.

The unloved banner ad

Banner ad on Spiegel Online



But Google did not just simplify the interface, it perfected search by using the “Wisdom of Crowds.”

!  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

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 has a market share in search of 78% (Financial Times, “Yahoo is starting to think out of the box,” 08.12.06, page 18.)

Using the “Wisdom of Crowds” to improve search

Source: John Battelle, „The Search,“ New York, 2005, 2-3, 20-37, 153-188.

Search on Google for “big feet”

Google “Zeitgeist” for Germany October 2006



While Google tapped the “Wisdom of Crowds,” GoTo.com had already found another solution against spam… the “Wisdom of Capital.”

!  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. !  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

The true business model innovation in advertising came from GoTo.com

Source: John Battelle, „The Search,“ New York, 2005, 95-121; Image from Fortune web site, “Idealab Reloaded Surprise!.”

Bill Gross



What is killing the newspapers are online classifieds and especially the lean operating model they have.

http://www.craigslist.org/about/pages.and.peeps.html (Oct 2006)

http://sfbay.craigslist.org/

Running a top 10 web site with 23 people… craigslist classifieds



Can everyone benefit from Google economics? Internet players have completely different cost structures established competitors.

!  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 employees, Google has 2,600.

!  Google invested US$2.8bn in R&D in 2008, DTAG !422m.

Google financials (UBS, “Google Inc,” 07.11.06)

Google economics allows it to pour money into development

Everyone is invited to suggest and rate Google product ideas



Google has announced that it is expanding into internet and streaming based TV and interstitial advertising.

!  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.

Interstitial ads in streaming video – Google, Apple TV, Hulu



Google needs to move beyond search to grow… the battlefield that Google is concentrating on right now is mobile.

!  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

!  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 -  Android mobile phone OS with with the Android Marketplace

Beyond search

Statistics: Zenith OptiMedia, “Online advertising to grow seven times faster than offline advertising in 2007,” Press Release, 04.12.2006

Local Google AdWords

The growth of search: Internet expenditures by type



Facebook struggled to find the right approach to advertising – making the wrong moves in 2007.

!  Facebook has been experimenting for a long time with approaches to monetize its huge number of members.

!  The PR disaster in 2007 occurred because Facebook was trying to match private social media content with advertising.

!  Bloggers highlighted to partnership between Facebook and the movie ticket site Fandango. Facebook listed the feed: “Nick bought No Country for Old Men on Fandango.”

!  In the meantime, some brands were actually being presented extremely positively on Facebook by the members of Facebook themselves.

!  A private Coca Cola fan page created by an actor and a writer in Los Angeles attracted 3.4m fans, the second-most of any page in 2007. Only Barack Obama had more Facebook fans. The creators of the page started to cooperate with Coca Cola… The company posted items on the page, such as a behind-the-scenes video tied to a new marketing campaign.

!  The fact that people actually want to engage with brands but want to do this own their own accord inspired Facebook’s thinking about ads.

Facebook launched social ads in November 2007

Blog on Fandango and Facebook by Nick Antosca 09.11.07 on Huffington Post. See also Ian Lotinsky‘s blog from 20.11.07.

Facebook – Fandango link

http://www.facebook.com/coca-cola#



Today, Facebook is reported to be profitable through advertising and has found nonintrusive formats.

!  The potential of Facebook is huge with its more than 500m members. In March 2010, Hitwise showed that Facebook beat Google to become the largest web site in the US. 1 in 4 pageviews in the US are on Facebook.

!  After the problems in 2007, Facebook has strategically approached advertising step by step: -  Privacy controls and involvement of privacy groups -  The universal “Like” button simplified engagement across Facebook – the “Fan”

button was removed. -  Difference between so-called engagement ads that let Friends “like” the ads and

conventional, discrete ads.

!  Facebook claims that the social media environment is far stronger to establish brands than advertising in search. If friends “like” a service or product, this could be a more powerful endorsement than TV or even a celebrity. It seeks to be the TV of the internet in terms of advertising attractiveness.

!  Some companies have been really savvy about attracting people to their Facebook presence (2010 numbers). -  16.8m people like Starbucks. -  16.6m like Coca Cola

Facebook as the new branding medium?

Engagement ad

Standard Facebook ad



Real-time ad bidding takes the Google principle to the next level, actually auctioning not ad slots but ad viewers.

!  AppNexus and others offer real time auctions setting a price for placing an ad on a web site in the moment a person is browsing the site.

!  That same person may have viewed products on a retailer’s web site before, then she/ he will be served with an ad featuring those products.

!  They are like “banner ads on steroids.” !  What is actually being auctioned is the price of a consumer visiting a web site,

in that real time moment.

“Banner ads on steroids:” Real-time ad bidding



Search is the largest internet advertising area, but other areas are dynamic and changing as well.

“Wisdom of Crowds…” First

Google

The banner advertisement on a catalogue

site… Yahoo.com

AdWords, AdSense, Google Places, Gmail, Android and mobile computing

Social ads on social networks – Facebook’s

800m

Advertising and information discovery

“Wisdom of Capital…” GoTo.com

Banners

Search

Classifieds for example craigslist

Classifieds

“Spamdexing” almost killed search

Perfection of search and targeting

Real time ad bidding is

“banners on steroids”

“Organic Search”



License Sales



The licence sales business model is the dream model of the global “Creative Class.”

!  The licence sales business model allows a pure digital creative process including creation, distribution and consumption.

!  Works, such a books, films or software, are produced on a computer, distributed globally on the internet and bought using electronic payment systems.

!  Richard Florida argues that we live in an era where creativity has more value than ever before.

!  Independently working producers – the “Creative Class” - live in environments suited to their creativity - which are diverse, tolerant cities.

!  The digital licence sales model needs to be enabled, however: 1.  Through copyright law (which has to be balanced). 2.  Through platform and ecosystem providers (which provide a simple

discovery and payment system compatible with devices).

Pure global digital creation, distribution and consumption

Richard Florida’s book The Rise of the Creative Class



System/360 was the most complete computing platform ever developed and sold by single company. It can’t happen again.

!  IBM‘s System/360 was launched in 1964. !  Software applications were not sold separately, but

as a part of the computer hardware. !  Everything came from IBM: Periphery components

such as keyboards, punch cards and power supplies as well as maintenance and financing.

!  The S/360 was an enormous product development effort by the most powerful computer company at the time. The S/360 also was a huge risk for IBM - it cost more than $4 billion to develop and 50.000 IBM employees worked on it.

!  This was the last time a single company would be able to develop and deliver a complete computing platform alone – Apple included.

Platforms and the vertical computing model

IBM System 360



In 1980s, license sales of software and horizontal platforms became the status quo business model for the computer industry.

!  No company could provide everything alone by itself any more. IBM went through its so-called “near death” experience in the early 1990s.

!  Like IBM, Apple tried, but ultimately failed. Apple remained a niche computer system for publishing and graphic designers until it reinvented itself in 2003 with a new variation on the license sales business model...

!  Microsoft masterfully understood how to shift to a horizontal model… to sell value in software licenses separately from hardware… the operating system DOS.

!  In the “Wintel” partnership of the 1990s this was continued successfully, Microsoft focused on software and Intel on hardware. Both were business model innovators in their industry.

!  The SW license business model became dominant from the 1980s onward. Chesbrough calls this period from 1980 to 1992 the era of “Shifting Sands.”

!  A boom of innovation was triggered through the mechanism of the software license business model… not just Microsoft… WordPerfect, Oracle databases, Lotus 1-2-3 spreadsheets, CoralDraw, Adobe publishing software… etc.

The rise of ecosystems: Horizontal software platforms

Source for computer industry eras: Henry Chesbrough, Open Innovation. New Imperative for Creating and Profiting from Technology, 2003; MS-DOS image from Wikipedia.

MS-DOS's command-line interface



Copyright laws provide a framework protecting intellectual property and enabling the sale and ownership of licences.

!  The first copyright law was the “Statute of Anne,” named after Queen Anne. It came into force in 1710 and protected authors for 14 years.

!  In 1710, creative works always had physical form. The licence suggests we “own” a work once we buy it.

!  It made no practical sense to try to prevent someone from selling a used book, music record or a painting.

!  A physical book also does not expire and does not normally disintegrate after a year.

!  A buyer can also not easily make seven books out of one and give these copies to their friends.

!  Three hundred years later, things are more complicated. The good news is that digital licences can be designed to reflect the exact business needs of the content owners and creators. The concept of “owning” a licence remains.

The role of copyright law and licence “ownership”

The first copyright law in the world: The Statute of Queen Anne 1710



Copyright is not always good: In 1980s, innovative computer programmers began to experiment with an open copyright.

!  In the 1970s, AT&T was running a variety computer systems and was seeking one operating system for different computers. UNIX was created.

!  AT&T gave out UNIX freely to universities because they were prevented from commercializing it itself under the telecommunications monopoly.

!  When the use of UNIX was later restricted due to changes in regulation (AT&T and others began to commercialize the code), programmers looked for an alternative “free” code base.

!  Richard Stallman began the Free Software Foundation and the GPL (General Public Licence) in 1984. Small groups began developing a compiler (GNU C) and an editing program (EMACS) jointly. ("What's GNU? GNU's Not Unix.“).

!  The genius of Richard Stallman was that he did not just allow open copying and use of his code – to simulate the AT&T environment of the 1970s – but with GNU, he created a legal framework regulating open use.

!  GNU triggered a wave of innovation and development, culminating in Linux.

!  Linux had a different legal framework (Open Source), but retained the spirit of open innovation and non-restrictive copyright.

The speed of innovation improves by opening up property protection

Source: Lawrence Lessig, „The Future of Ideas,“ 2001, pp. 49 – 61; image Stallman not for commercial use from „Educar, El portal educativo del Estado argentino;” statement about complexity which required centralised approach from Eric S. Raymond, “The Cathedral and the Bazaar,” O’Reilly, 1999, p. 29.

You can’t not love this guy: Richard Stallman



Outside the internet, too, cultures of rapid experimentation in open environments are thriving – if the law overlooks it.

!  The copyright law expert Lawrence Lessing provides interesting examples of innovative cultures in open environments.

!  Disney has a long tradition of taking other peoples work (Grimm Brothers) and adapting it.

!  Self-published Doujinshi imitate manga cartoons to make fun. About half have adult content.

!  Doujinshi are formally breaking the law, but there is no enforcement. They actually make manga culture much more innovative.

Manga and Doujinshi (同人誌)

Source: Lawrence Lessig, „Free Culture,“ The Penguin Press, New York, 2004, pp. 23 – 28.

“Snow Flake” by Sorahiko Mizusima and Sora Aoi



By design, copyright laws do not offer complete protection (especially not for SW). Microsoft could not rely on copyright.

!  Critical legal ruling: To protect its a Lotus 1-2-3 spreadsheet, Lotus tried to sue a number of imitators from 1987 onwards, in the so-called "look and feel" cases. It lost the case in the Supreme Court.

!  Microsoft did not, therefore, break the law when it developed its own spreadsheet program, MS Excel.

!  The software market is characterized by relatively weak intellectual property protection and short times to market. Companies like Microsoft have numerous competitors and have to keep innovating.

!  To protect itself from newcomers in a cutting edge market, Microsoft perfected its business model around a platform strategy: Hardware partnerships (“Wintel”) and a link between its Windows operating system and its MS Office SW (which displaced WordPerfect) and later the MS Explorer browser (which displaced Netscape).

!  Just how tight is this link was became subject of a hot debate as part of anti-trust policy especially in Europe against Microsoft. Novell, a competitor to Microsoft, argued that the Seattle-based company abused its dominant position in its Windows operating system to establish its new application software such as the internet browser against its competitors.

!  The Microsoft business model allowed it to remain in a dominant position for years. Microsoft had to carry out relatively few acquisitions, instead, it could simply use its platform power. Once it had its base covered, the limited protection of SW copyright actually was helpful for Microsoft.

!  The biotech industry works very differently. Here, we see a more balanced interaction between small and large companies. This does not mean there is more innovation is biotech… it simply is a different model. This is because in biotech there is strong intellectual property protection and a long time to market (US Supreme Court laid the groundwork for biotech patents in a fundamental decision in 1980… drug development time and testing can take up to 14 years). In biotech, small companies own their patents and large companies license them.

Copyright is not enough: Microsoft used the platform approach to succeed

Source for biotech facts: Tom Abate, „The Biotech Investor,“ Henry Holt and Company, 2003, pages 10 -17; cartoon from http://antonella.beccaria.org/.

European Union against Microsoft



The subscription business model is slowly starting to replace the license sales model for software – especially for business use.

!  Especially businesses have significant costs by “owning” software. They need to upgrade, maintain and custom-adapt software code. The license-based business model implies “ownership.”

!  Established license-based companies such as Microsoft and Oracle are being attacked by new software business models, for example advertising based software (Google Docs), free software (Linux) or subscription software (Salesforce.com).

!  As a response, traditional software companies have became a lot more clever about how to use the internet to their advantage. The showcase of this scheme is Adobe, which give away free software over the internet but makes money using conventional license approach in a mixed free/ license model. Adobe strikes a good balance between simplicity of use and protection of its copyright.

!  These mixed business models may prove to be more enduring than the pure models. It will be interesting to see if the Microsoft model can survive or if it has to seriously reinvent itself.

Salesforce.com has shifted SW sales from licences to subscription

Software as a service campaign – Salesforce.com has 1m subscribers

Adobe is moving Flash onto the desktop with Air. eBay application built with Air with triggered event alerts.



The real battle in the music industry was not illegal vs. legal but simple vs. protected.

!  Music was sold very much like some software in the 1990s, on shrink-wrapped CDs in stores. Music could be copied for personal use, but not resold.

!  Like the publishing industry, the music industry experimented with Digital Rights Management (DRM) and license sales over the internet. These first attempts failed because of extreme user unfriendliness.

!  Napster, KaZaA and others allowed internet users to offer music to other users in a peer-by-peer approach without centralized servers. They were simple to use.

!  Because of the peer-to-peer technology, the start-ups thought they were safe from the music industry. They had not expected the massive pressure that the music industry was able to apply.

!  While peer-to-peer music sharing is impossible to suppress, it has gone underground und the music industry could crush Napster and KaZaA (now Napster is reborn as a subscription service).

!  The KaZaA founders Niklas Zennstrom und Janus Friies and the company they sold KaZaA to (Sharman Networks) agreed to pay over US$100m to Universal Music, Sony BMG, EMI and Warner Music (luckily the founders had made some nice cash by selling Skype to eBay).

!  The global retail value of of music sold in 1999 was US$39 billion, in 2008 it was merely US$28 billion.

!  But what is important to remember about the peer-to-peer download networks is not just that they were free, and thus effectively illegal, but that they were easy to use.

!  Only Steve Jobs and Apple recognized the importance of ease of use – no one else saw this, because everybody else focused on the legal/ illegal discussion.

Another industry which uses the license model is the music industry

The recording industry against Napster, Inc.

Cartoon from The Daily (The University of Washington student newspaper), http://archives.thedaily.washington.edu/2001/021301/N7.napster.TOON.jpg. Retail value statistics according to the music industry association IFPI - the International Federation of the Phonographic Industry.

KaZaA logo



Apple showed that consumers would buy music if the process was simple enough. It actually could scrap DRM.

!  The magic behind Apple iTunes online store was not the digital music download – which was available for free everywhere - or even the upload onto an iPod, but rather the whole package and its simplicity.

!  Because of the simplicity, people actually started to pay for online music. !  In the beginning Apple was still required to install Digital Rights

Management (DRM) in its shop to reduce the chances of copying. In the mid 00s, proprietary Digital Rights Management (DRM) SW on iTunes, T-Online Musicload, Napster, Real Networks Rhapsody were not compatible. In 2006, music downloads over internet or mobile phone has actually stagnated in the USA at 140m songs (Q1 – Q3 2006 to 2005).

!  To increase simplicity of use even further, Apple opened up DRM – relying on its simple to use and powerful platform ecosystem.

!  Simplicity has been discovered, but the remaining challenge for the music industry is that people now download single songs instead of CD packages for a higher price. In the past, several bad songs could wrapped in a package with a few good ones.

!  It also remains to be seen if bands can market themselves over the internet directly without the music industry as a intermediary.

Apple iTunes shows how important simplicity is to music sales over the internet

Source for market figures: Arndt Ohler, „Kopierschutz behindert Musikmarkt,“ Financial Times Deutschland, 22.01.07, page 5; MySpace deal: Emiko Terazono, „Music labels sign MySpace deal,“ The Financial Times, 22.01.07, page 15.

The original Apple iPod Shuffle



The real battle of the new platform owners is for partners. Apple Apps is hugely successful using the iMode model.

!  New mobile platforms such as iPhone Apps, Blackberry and Google Android Marketplace are based on devices. The platforms enable license sales for content and gaming partners.

!  These new platforms feature shops where intellectual property such as SW can be bought.

!  A critical success factor is a fair revenue share model such as 70% (for content owners) / 30% (for the platform provider)

!  The real battle now is for partners. Steve Jobs: “Customers are voting and the iPhone is winning.”

Apple Apps downloads (Wikipedia)

New, extremely successful shop- and device-platforms for licence sales

Steve Jobs quote: John Gapper, „Apple‘s network helps prevent a fall,“ Financial Times, 25.06.09, page 11.



The success of Apple with the licence sales business model is due to three factors:

1.  Simple devices at an affordable, but not cheap price. -  Critical details such as the fly wheel navigation on the iPod and the special touch screen

on the iPhone which monitors the movement of electric current caused by your fingertips. -  The price has to be affordable for an entry-level model. To make sure that the iPad was

priced at under $500, it had to leave out several items such as a built-in camera for communications.

2.  End-to-end superior user experience. -  It seems obvious today, but many previous portable devices did not come with a good

shop, meaning content or software partners had to sell their licences separately to consumers in some other way.

-  It includes many things with great love for detail, such packaging. -  Apple even launched its own flagship stores, something every consultant would have

warned against. -  Strict selection of partners and software suppliers.

3.  The revenue share model for licence sales. -  70% goes to the owner of the content or the developer of the software, 30% to Apple. -  This fair share model was extremely successful early in the 00’s by a NTT in Japan. This

was at a time when telcos all over the world were using the inverse share – 70% or more for themselves. Launched in 1999, iMode was DoCoMo's data service at the time. It attracted 40 million subscribers in Japan as well as 3.000 official content suppliers and many more unofficial ones.

Three success factors for Apple

iMode from NTT DoCoMo payed the way with its balanced payments model

Sure, Apple conferences with Steve Jobs were stunning, but there must be more



The license sales business model works best for providers of platforms for licensed content.

The horizontal PC computer industry – SW license model

The vertical mainframe computer industry – HW packages

Publishing Music industry

Getting platforms to work

Apple iTunes Adobe

AIR

Apple Apps

Amazon Kindle

Open vs. closed

Nintendo Wii

Extending through collaborators Games

The shop- and device-based licence sales platform

Google Android

New shop- and device-based platforms enabling license sales

Battle for partners on the platform

Black-berry

Tim O’Reilly: “The War for the Web.”



Financial Risk Management



Financial risk management involves taking a financial position based on expected outcomes, even if very small.

!  Welcome to the world of investors and loans, but also to hedge funds and derivatives. And welcome to the gambling casino, too.

!  The approaches we are concerned with in this Chapter share one common trait: They are always about taking a financial position in anticipation of a predicted outcome.

!  What we are not talking about are agents earning a commission or fee on a financial transaction with no position themselves. This is the commission business model we spoke about already previously.

!  We will not try to differentiate by the amount of risk exposure, as long as there is one, even if tiny and well managed.

!  But taking a financial position does not always mean an involvement in the acquisition or sale of an asset. Derivates work like “bets” on predicted outcomes. Derivatives are contracts between two parties with a value linked to an expected price of an asset. The underlying asset actually is not touched, it is neither bought nor sold, it merely provides an outcome which then triggers the contractual obligation.

Definition of financial risk management model – distinct to commissions



Financial Risk Management is an exciting emerging internet business model where innovation is at the very beginning.

!  The financial risk management business model takes advantage of liquidity on the internet – in terms of new groups of investors or new sources of investment (or gamblers in the case of online gambling).

!  Companies or people taking financial positions can build up losses. Investment assets could potentially experience financial bubbles or a crash.

!  But the financial risk management business model offers exciting opportunities for experimentation. We are still at the very beginning.

!  New payments systems, virtual currencies and mobile micropayments may kick-start many innovative uses of this business model by raising liquidity.

!  However, where there is financial risk, there also is government regulation. Government has regulated financial transactions since the Middle Ages.

Financial risk management as an internet opportunity



Domain registration and auctions are a simple form of internet investment - like “virtual real estate.”

!  Oversee.net estimates the domain name market to be $500m a year. !  Some domain names have always been attractive, especially generic ones.

Generic domain names cannot be retrieved by brand owners. $7.5m was paid for business.com in 1999 and $16m paid for insure.com in 2009.

!  Alhtough search engines should make expensive domain names obsolete, there remains a strong interest in trading domain names.

Domain registrations and sales

Source: „Domain name investing,“ Financial Times, 01.08.2010.



The first online banking boom in the late 1990s did not result in a sustainable internet-only banking business.

!  Online banking boomed during the New Economy. The segment was one of the favourites of venture capitalists, next to B2B platforms.

!  Investors believed online banking was perfectly suited to the internet – being an information-based service with benefits (results) that can be transparently communicated.

!  Numerous online-only banks were founded during the New Economy. Some, such as Egg in 1998, were established as online-only services by established financial groups (in this case, Prudential).

!  Egg was sold to Citigroup in 2007 and in 2010 was resold. Very few parties were interested in the Egg auction that took place in 2010.

Problematic start to online only banking



One has to look very hard: There are a only a few online only banks and payments providers around today.

!  Most financial services on the web are actually offline services simply sold with a commission. There are some exceptions.

!  ING Direct is one of very few pure online banks in the United States with a government banking licence. Elsewhere in the world, ING is a retail bank, a huge one.

!  Online only has not proven to be successful in financial services… To build trust, ING Direct has opened “cafes” in several US cities such as New York, Philadelphia, LA.

!  Finance and the internet will be a sustainable channel in the long term: MSN Trader was launched in the UK by Microsoft and Saxo Bank of Denmark in November 2010.

!  The online broker E*Trade in the US weathered the storm as well, and is back on track.

After the boom, only a few Internet-based financial services survive

ING Direct Café



The financial business model was constrained during the New Economy due to a lack of liquidity on the internet.

!  Internet penetration was low during the New Economy. -  Internet penetration in the USA in 2000 was 44%, compared to 77% in 2010 (according to

Internet World Stats citing ITU.int).

!  Trust is critical for the success of a financial business. -  Early online banks were not able to attract a lucrative customer base. Early customers for online

banks were not the wealthy client base that drive a bank’s profitability. -  Scams made headlines – such as investments in very small cap stocks pushed by investment

recommendations made over the internet. -  It furthermore became apparent that people actually like to be able to walk into their bank. ING

Direct, actually launched “Cafés,” to have a physical presence.

!  Innovative payment mechanisms did not exist yet, which would contribute to liquidity.

!  Government regulation is a barrier to entry which does not exist for other internet business models.

Sources of liquidity and trust



The story of PartyGaming: The financial risk management business model is highly dependent on regulation.

!  From 2001 to 2005, online gambling grew worldwide from $3.1bn to $12.1bn - most of the market was in the United States.

!  The SAFE Port Act signed by George W. Bush in October 2006 banned U.S. based banks and credit card companies from processing payment transactions associated with online gambling. This put an end to the U.S. online gambling market growth overnight.

!  One of the largest players in the space, Gibraltar-based PartyGaming faced a huge, instant revenue loss due to the SAFE Port Act bill.

!  Other companies, such as payments provider Netteller.com, were pulled into financial difficulties, too. !  In 2006, PartyGaming had revenues of $1.1bn (PartyGaming Plc., Annual Report 2006, page 2) . In

2007, annual revenue was $458m (PartyGaming Plc., Annual Report 2006, page 3). !  Online gaming companies needed to refocus on markets outside of the U.S.. In order to more

effectively address these opportunities, PartyGaming and Vienna-based Bwin merged in July 2010, creating a $890m unified poker, casino, bingo and sports betting group – still not the level reached by PartyGaming in 2006.

!  Innovation has not stopped, however, and momentum is increasing…

How George Bush “spoiled the party:” Online gambling and regulation

Estimates from Christiansen Capital Advisors quoted in: “Bush signs port-security, Internet gaming bill,” USA Today, 13.10.2006. Roger Blitz, “Online gambling groups seal link-up,” Financial Times, 30.07.10, page 1



Movement: Spread betting companies launched sports gambling sites, gambling sites have gone into spread bets.

!  Founded in 1974, IG Group was one of UK’s first spread betting companies. Spread betting allows investors, for example, to place bets on movements in foreign exchange rates. In the UK, spread betting is not taxed – same as gambling returns.

!  IG Group moved into offering internet services in the New Economy, but stayed and now 90% of its trades are placed over the internet.

!  IG Group claims they are selective in their client base. It has moved from a client base consisting only of financial experts to dentists, doctors, accountants and IT specialists. IG Group offices in 11 countries. IG Group has 120,000 clients worldwide.

!  Technology is a crucial success factor, of 900 people at IG group, 230 work in IT. !  Lisa Baum at Cantor Fitzgerald Europe says FX trades at Cantor Index rose nearly

threefold, from 51,000 in the first half of 2008 to 135,000 in 2010: “Our clients are not City workers but people interested in current affairs,” she said. “Everyone’s got an option these days.”

!  To compete against IG Group and others, the online gambling company Betfair launched LMAX in 2010, an internet based spread betting service. Goldman Sachs holds a small share in LMAX.

!  IG Group launched its own sports betting company Extrabet.com in 2006.

Increasing momentum in betting as companies move into adjacent areas

Rose Jacobs and Patrick Jenkins, „Spread bet groups scout for punters,“ Financial Times, 17.09.2010.

IG Group

(Spread betting)

Extrabet(Sports betting)

Betfair(Sports betting)

LMAX(Spread betting)



Payments systems increase liquidity on the internet – while they themselves are a commission business.

!  PayPal, owned by eBay, facilitates financial transactions on the internet. This supports many businesses, including financial business models.

!  Escrow.com (founded in 1999 by Fidelity National Financial), provides safe payments to pay for investments in internet domains. Internet domains are investments in “virtual real estate.”

!  In China, payments provider Zhi Fu Bao supports payments for mother businesses Alibaba and Tao Bao, but also uses funds to invest on its own right.

!  In Kenia, mobile payments have facilitated a significant volume of real world business (next slide).

!  The exact role of virtual currencies, online coupon trade and loyalty programs remains to be seen – but could significantly increase liquidity, too (as well as reduce transparency over internet-based financial transactions).

The role of payments system providers



Mobile micropayments have been a success in countries where payments systems have been constrained in the past.

!  The internet is especially strong as a liquid financial marketplace when it enables microfinance and micro-transactions.

!  Innovative mobile micropayments schemes have triggered impressive wave of small business activity.

!  The most successful is M-PESA in Kenya. -  M for mobile, pesa is Swahili for money. -  About $2m M-PESA transactions are made through

Kenyan mobile phones each day. -  This has led to an estimated increase of rural household

income by those have adopted mobile payments by about 5% - 30%.

M-PESA in Kenya

“Beyond voice. New uses for mobile phones could launch another wave of development,” The Economist, 24.09.2009.

M-PESA announcement



New currencies are forming on the internet creating new economic systems.

!  Offerpal, Social Gold and Facebook Credits are going to fight a „virtual money war“ (Dean Takahashi, „Offerpal Media Launches Virtual Money War with Facebook,“ Fast Company, 05.04.10).

!  Offerpal was started in 2007 offering virtual currency for people to reward people to watch special advertising and complete surveys. The ability to earn credits has now been increased substantially with new alliances, for example, with the gift card exchange Plastic Jungle.

!  Launched in June 2010, Facebook Credits is scaled to „millions of dollars of transactions“ (Tomio Geron, „Giving Credits when Credits are Due: Facebook to Aid Developers,“ Wall Street Journal, 10.04.10).

!  Facebook pockets 30% royalty payments on all transactions. !  Facebook Credits will be available through a loyalty scheme with a Chase credit

card and Plastic Jungle. !  These alliances help Plastic Jungle and other partners, because they conceal the

fact that the gift card exchange pockets a commission of 20% for each gift card sold and bought. Plastic Jungle and others are facing stiff competition from a no-commissions gift card social exchange based on Facebook friends.

!  Virtual currencies carry the same risks as normal currencies… inflation and deflation, asset bubbles, security and fraud prevention (“Monetizing Dual Currency Economies In Online Games,” Offerpal White Paper, October, 2009)

Virtual monetary systems – decreasing transparency and new risks

Examples of virtual

currencies

Fallen Sword – FS Points

Fish Wrangler – Red Love, Love Chum

Mouse Hunt – Super Brie,

Cheese



Providing peer to peer lending is a commissions-based model – but people loaning money are taking financial risk.

!  Especially during the financial crisis in the late 00s, peer-to-peer lending grew. !  Lenders bear financial risk, but their returns are sizeable: About 10%. !  Platforms are very selective about who receives a loan. Lending Club claims that it

denies 86 per cent of its loan applications. !  People provided other people with loans enabled by commission-based internet

platforms such as Prosper.com, Lending Club, Zopa (UK) or Smava (Germany). !  As of December 2010, one million lenders funded $211m in loans on Prosper.com.

Major venture capitalists and angels have funded Prosper.com, including eBay’s Pierre Omidyar and Accel’s Jim Breyer.

!  Some peer-to-peer lending sites have actually created secondary markets for debts, allowing lenders to offload their own debt to further third parties.

Peer-to-peer lending

„Peer to peer lending,“ Financial Times, 09.12.08. Disclosure: Jörg Rheinboldt, Co-Author, is an investor in Smava.



Peer-to-peer lending has moved into social responsibility by supporting small businesses in poor countries.

!  Micro-loans have been proven in their ability to jump-start small business activity in poor countries.

!  The idea of peer-to-peer loans has been extended into the area of social responsibility, attracting a large number of lenders.

!  Kiva.org, supported by , is the dominant player in this area. !  Kiva provides daily data on the volume of its loans. As of

04.12.10, Kiva enabled $177m in loans provided by 508 thousand people to 463 thousand people.

!  The main benefit of these platforms is to move personal loans into the open, on a transparent platform. There has been a lot of abuse in the past.

Micro-loans in poor countries

From Kiva.org web site



Wonga acts directly as a bank and offers short term loans to consumers over the internet.

!  Wonga offers short term loans to consumers over the internet. !  Wonga has sophisticated technology to check credit worthiness of a consumer instantly

before providing the loan. 1,500 data points are checked; money is transferred 24 hours and can be on your account – even at 2AM.

!  The company is very selective. Only about 20% of applicants are successful. !  The target group are not long term lenders, but rather people with a short term cash flow

problem. To fix a boiler or to go on vacation. !  In early 2009, Wonga made 100,000 loans and lent £20m in the 6 months since launch. !  Interest rates are an significant 1 per cent a day – a £100 loan for two weeks costs £14.

Wonga – Am internet company with the financial risk management model

Maija Palmer, „Wonga pushes web loan innovation,“ Financial Times, 24.05.2010.



Weatherbill uses the internet to provide weather insurance to customer groups which previously never had coverage.

!  Founded by ex Google employees, Weatherbill provides weather insurance products to new client groups, such as farmers or Dutch construction companies.

!  Weatherbill itself uses a weather database containing 20 000 years of weather to protect itself.

!  In the past, only large companies could insure themselves from weather through weather derivatives.

!  Example of frost leave: Dutch construction companies are obliged by law to send workers home when the temperature sinks under a certain point.

!  Weatherbill: "We're primarily a technology company and we've built a platform that allows us to write any sort of weather contract for any sort of business to protect against their specific risks," he said. "We're really trying to bring these products to the masses.”

Weatherbill provides weather insurance

Sources: „Weather risk hedging seen boosting global economy” Reuters 26.08.08, Stacy-Marie Ishmael, „Cover against a rainy day,“ Financial Times, 18.11.2007.



Internet Business Model Design and „Free“



All internet business models have been combined with free services. Internet „free“ is different from „free“ in the past.

!  In the real world, consumers are suspicious of „free“ because it meant they had to pay in the end... think „free“ service at a car dealer.

!  In the real world, companies can only afford to give away 5% for free and need to charge for 95%. !  Because of near zero processor, storage and distribution costs, this rule has been inverted. !  Chris Anderson cites the „Freemium“ model and tells us the 95%/ 5% rule has been turned around. Now it is possible

to give away 95% and only charge 5%. This changes everything (Chris Anderson, "Free. The Future of a Radical Price" Hyperion, New York, pages 26 – 27).

!  95%/ 5% is not to be confused with giving away razors, Nespresso machines or oil lamps and then charging for blades, capsules and oil. This is old world – the value of the razor, machine and the lamp probably only amounts to only 5% over the lifetime of total costs.

!  On the internet, if a company sells just 5% and gives away 95% for free, it may already make a killing. Today’s internet has 1.8 billion users (global user number according "Internet World Stats," December 31, 2009).

!  But „free“ is much more than that, too, it is an enabler for experimentation and innovation with all seven internet business models.

Anderson’s 95%/ 5% rule

95% / 5% According to Anderson, people above 30 will never get it. The “oldies” have spent too much time in the real economy (page 5).



On the internet, „free“ is the basis of business. There are many combinations of „free“ with internet business models.

!  Subscriptions: Skype only charges for the calls going into fixed lines, Skype to Skype calls are free. Club Penguin is a virtual world for kids in which subscribers get special benefits - but you can play for free.

!  Advertising: Advertising is free for consumers by definition, because the clients are the advertisers. But companies also get “free” advertising. Facebook Pages for companies are free – the hope is that some will pay for ads in Facebook. Craigslist charges only for a fraction of its classifieds ads such as real estate, most are free.

!  Commissions: Commissions is similar to advertising. For all consumers, Mint.com is free. The site makes money with the commissions it charges on recommending financial services to its users. Mint.com is an agent recommending and selling third party financial services such as mortgage offers. But Alibaba.com offers a marketplace for goods and does not charge a commission at all – in order to ramp up volume. It finances itself through advertising.

!  License Sales: For doctors, Practice Fusion is free, too. Practice Fusion sells licenses to access its patient data and provides software functionality for free. This is similar to what music bands such as NIN and Radiohead do, combining free offers with license sales. Depending on what license you want to get, you either pay nothing or a lot for a luxury version with expensive booklet and art.

“Freemium” Models: Powered by “free”



Thank you for participating and please keep the discussion going… Twitter and Facebook

Any questions whatsoever: [email protected] is the best way to contact me…

Web Site for SimplySeven: http://SimplySeven.Net

Facebook.com/SimplySeven Twitter: @cafelido



People on public health care have faced a deterioration of service in the last years – it won’t get better.

!  Long waiting times at GPs !  GPs have less and less consulting time – need to optimize the time they

spend with patients !  Information management process between doctors and hospitals highly

ineffective leading to errors !  New approaches such as personalized medicine or remote monitoring in

range only as part of pilot programs or private health care

Health care system burdened with costs



Innovations in health care are available, but they depend on an open platform for exchanging data.

!  Personalized medicine -  Mapping of personal genetic data -  Comparison of personal condition with peers

!  Remote monitoring of devices -  Diabetes, heart conditions monitoring

Health care innovations



Governments have been for years addressing the inefficiencies surrounding personal health records.

!  Personal health records process is very inefficient. Retained in general by GP, who cannot keep detailed documentation such as X-rays.

!  Referral process not effective. Switch from one GP to another or to a hospital often results in loss of relevant data.

!  People sensitive about privacy. Introduction of personal electronic health records viewed skeptically from privacy perspective.

Personal health data



Approaches to introducing e-health platforms in the consumer area have been constrained by two issues.

!  Massive gridlock of different interest groups -  Pharma companies seek access to high value customers with health conditions -  Government wants to control costs of healthcare but cannot invest -  GPs are work overloaded and cannot participate in additional activities -  Commercial initiatives launched by single players viewed very skeptically by other industry

participants

!  Approaches are far too complex to meet specific requirements -  Projects start out with far too ambitious objectives -  Device monitoring mobile data exchange -  Highly secure personal health records meeting stringent privacy requirements

Constraints to e-health



In the United States, most new approaches are moving ahead with simple self-service ideas.

!  Consumer to doctor remote consultation with internet based video link -  Hellohealth.com – “Neighborhood-based doctors for a monthly subscription fee”

!  Health communities containing self help information -  RealAge.com – “Live life to the youngest” -  PatientsLikeMe.com – “Share your health profile” -  Revolutionhealth.com – “Your home for health and balance” -  ReliefInsite.com – “Secure online pain management services” -  Ovusoft.com – “Taking charge of your fertility”

!  Genetic data databases -  DNA Direct – “Your genes in context” -  23andme.com – “Genetics just got personal”

!  Doctor and pharmacist social communities to exchange information -  PharmQD.com – “Top social community for pharmacists”

Simple self-service ideas

“The biggest point, in a sense, is we need to focus not just on health care but on health. And that ranges all the way from helping people to change their own behavior—so that they end up healthier and need less care and also enjoy more health—to going to the bowels of the health care system and helping hospitals to become more efficient and avoid mistakes.” [Esther Dyson in McKinsey interview 12 June 2009]

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