Changing Business Models Economics and Drivers

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Changing Business Models - Economics and Drivers

• Provide an economic framework for using these
  changes
  
• Conjectures about the changing business models

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Economic Background
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Areas Impacted

• Search costs
• Information imperfections
• Bundling
• Network externalities

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Search Costs

• View searching as a capital budgeting decision
• People search until it is no longer worth the
  effort
  
• Easy to find sites have an advantage
• Advantage to search aids, banners, etc.
• Advantage to adding products to desired targets
  (thus reducing search costs)

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Information Imperfections

• Vendors make artificial profits because of
  imperfect information
  
• Another way of looking at search costs
• Web reduces profits by
• Facilitating searches
• Use of intelligent agents
• Need to build other information and
  non-information imperfections

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Bundling (Bakos/Brynjolfsson)

• Vendors make artificial profits by bundling
  desired and undesired products
  
• Another way of looking at search costs
• Web impact uncertain
• Relate to search costs

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Findings

• Multi-product monopolists get higher profits by
  offering a single bundle of information goods
  
• Bundling captures customers who might otherwise
  avoid some products
  
• Mixed bundling increases sellers profits if
  seller can enforce a bundle price greater than
  the sum of the components

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Empirical Evidence - Alternative Approaches Found

• AOL, Reuters bundle large sets of goods
• What will AOL/TW do?

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Empirical Evidence - Cable and Direct Satellite

• Base vs. Premium vs. Pay-Per-View

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Empirical Evidence - Microsoft

• Suites
• Incorporate functionality from other firms in its
  operating systems
  
• Internet Explorer

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The Information Superhighway -- A Network
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Components

• Complementary -- not substitutes
• Compatible -- can be combined to produce demanded
  goods
  
• Compatibility may be either inherent or the
  result of technical compatibility standards

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Compatibility -- Illustrations

• ATT prior to the breakup
• IBM in the 80s

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Network Externalities

• Value of a unit of goods increases with the
  expected number of units sold.
  
• Sources
• Extra customer of telephone services increases
  value to all
  
• Availability of a broker increases both buyer and
  seller value
  
• Larger market size impacts both price and risk

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Network Externality Implications

• Shift from normal concept of supply and demand
• Focus is on expectations of other peoples
  behavior
  
• What is the value of a fax machine?
• Potential for predatory profits
• Issues and concerns
• Anderson consulting Bargainfinder to find CDs
• Participating sellers dropped out or made it
  harder to search
  
• Airline industry - complex fares and frequent
  traveler programs raise search costs and increase
  cost of change

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Network Externality Implications - More

• Firm has higher profits if its standards get
  adopted
  
• Compatibility is a strategic decision
• If incompatibility -- loss of profits is higher
  since systems (rather than component) sales are
  lost
  
• Profit more responsive to price

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Managing the Competitive Environment

• Technology and costs make it possible for anyone
  to establish electronic markets
  
• Sellers can lock out competition by creating
  their own intermediaries
  
• Amazon.com
• Charge for price information
• Airlines -- easy flight information, hard to find
  lowest cost

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Additional Strategies

• Sellers control type of system introduced
• Emphasize product over price information
• Increasingly difficult price comparisons
• Airline fares, restrictions, ticket availability
• Differentiate commodity products
• Frequent travelers programs

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Research Agenda

• Role of buyer heterogeneity
• Impact of buyers who have search systems on
  buyers who do not
  
• focus on search cost of sellers to find buyers
• Multi-period models -- role of history,
  reputation, lock-in, installed base, customer
  loyalty, knowledge about customers

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Standards Provide

• Ease of market entry
• Basis for reliance
• New and related products
• Basis for
• Network externalities
• Lower costs
• Bundling

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Key Assets to Manage

• Control over installed base
• Intellectual property rights
• Ability to innovate
• First mover advantages
• Strength of complementary products
• Reputation

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The Message
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Focus on the Network

• Look for network externalities
• Look of virus-like applications
• More begets more begets..

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Evaluate the Lock-In Factors

• Linked applications
• High switching costs
• Personalization

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Make Effective Use of Versioning

• Migrate users
• Lock in
• Razor blade strategy
• Basis for bundling

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Buyer Management of Lock-In

• Bargain at the outset
• Minimize switching costs
• Keep options open
• Avoid monopolistic exploitation later
• Avoid creeping lock-in

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Seller Management of Lock-In

• Seek buyers with high switching costs
• Seek influential customers
• Build multiplayer strategies
• Sell lists to others (network externalities)
• Build loyalty programs, e.g., frequent traveler

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The Business Model Changes
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From Publishing

• Sales of banner space

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To Traditional Business (Enhanced by Web
Characteristics

• End-to-End Control
• Category Killer
• Portal
• .