Get Big Fast

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(No Transcript)
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Overview

• Definition of the Online Broker Business Model
• How online brokers create value
• Economic model for online brokers
• GBF Strategies
• Choices
• Online Broker vs. Online Retailer or Online
  Market Maker
• Challenges to going online

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Definitions

• Broker
• A person hired to act as an agent or intermediary
  in making Contracts or sales
• Help clients by identifying potential
  transactions partners and sometimes help
  negotiate the transaction
• Client
• Person or entity that engages a broker
• Broker examples
• Real estate agents, independent insurance agents,
  talent agents, stock brokers, travel agents

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Categories of Brokers

• Ongoing relationship with clients
• One time transactions
• Representing sellers or buyers
• Representing both can lead to conflicts of
  interest
• Conflicts of interest existed in travel agencies,
  stock brokerage and real estate

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Determining Business Models

• Realtor.com
• Provides home sales listing
• Content provider or broker
• The Key is intent since the intent is
  facilitating the sale gtgt Realtor.com is a broker
• CNET?
• Provide editorial content that facilities a
  purchase
• Market Maker vs. Broker
• Market maker organize and manage a marketplace
• Brokers represent clients
• Some market makers have a brokerage role
• Some brokerages have a market maker role
• Priceline.com is a Market MakerWhy?
• Travelocity is a broker
• Carpoint.com is a Broker Why?

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Creating Value

• Reduction of search cost for clients
• 24/7 Database Access
• Parameterized searches
• Personalization of transactional media
• Remembers
• Facilitate communications

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Online brokerages Success factors

• Industries that Have
• Information-Rich, complex products and services
• Inventory is perishable, Supply and demand
  conditions are highly dynamic
• High Search Costs
• Proprietary information
• Real estate listing
• Airline reservations

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Revenue Streams

• Commissions and other transactions related fees
• Subscriptions fees
• Advertising
• System integration fees
• Three Big questions
• Who pays who?
• Where does the revenue come from?
• Where do loyalties lie?

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Cost Categories

• Cost of Revenue
• Vary directly with transactional volume
• Product development
• Website development tends to be fixed
• Sales and Marketing
• Heavy spending
• Large customer acquisition costs

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LTV of Broker Customers

• Discounted present value of the variable
  contribution generated by the customer minus the
  cost of acquiring the customer
• ETrade
• 263 AC
• 600 revenue per year
• LTV of 1,843
• Autobytel
• Negative value due to large acquisition costs
• InsWeb
• Same dilemma as Autobytel

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Economics1st 3 quarters of 2000
Autobytel Homestore InsWeb Travelocity Etrade
in millions
Revenue 49.7 151 18.8 127.2 1122.3
Cost of Revenue 0 40.0 0 51.5 408.5
Gross profit 49.7 110.9 18.8 75.7 713.8
Sales amd marketing 50.4 90.4 31.0 80.8 402.0
Product Development 18.1 9.8 7.2 13.8 106.6
G A 10.0 39.5 15.8 12.4 171.0
Operating Income (28.8) (28.8) (35.2) (31.3) 34.2
of Revenue
Cost of revenue 0 26.5 0 40.5 36.4
Gross profit 100 73.4 100 59.5 63.6
Sales and marketing 101.4 59.9 164.9 63.5 35.8
Product Development 36.4 6.5 38.3 10.8 9.5
GA 20.1 26.2 84.0 9.7 15.2
Operating income -57.9 -19.1 -187.2 -24.6 3.0
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GBF??

• Network effects
• More clients gtgt more trading partners?
• Depends on
• Buyer and Seller Heterogeneity
• Idiosyncratic preferences vs. Commoditization
• Client Exclusivity
• Sole representation of a group
• Not strong for same brokers
• Scale economies
• Large fixed costs
• Customer retention
• Depends on Brokerage type
• Website usability stickiness
• GBF for online brokers
• ??

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Referral, Retailing and Reverse Auctions

• Competitors are often not other brokerages but
  alternative business models
• Online retailers (disintermediation)
• Online market makers (reverse auctions)
• Referral agencies
• 3 factors
• Expected price realizations
• Level of Consumer
• Convenience
• Referrals are two step
• Need for Consultative selling
• Complexity of transactions

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Challenges facing incumbents

• Self-Cannibalization
• Stock brokerage
• Efficiency gains challenge cost structures
• Online MLIS for Real-estate
• Intermediation by Clients
• Why pay brokers at all
• Orbitz
• Joint effort by American, United, Delta,
  Continental and Northwest

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TRACKING STOCKS, SPINOFFS, AND CARVEOUTS

• Advantages to a separate security for Internet
  unit
• Capital to fund growth
• Options to attract/retain employees
• Currency for acquisitions
• Separate metrics, so easier to invest in growth
  without fear of stock price penalty
• Valuation boost
• Different investors with risk preferences that
  match risk profile of Internet unit
• Better disclosure reduced agency costs focused
  incentive plans
• Tracking stock
• Shareholders have a limited claim on future
  dividends and distributions from a line of
  business they have no claim on assets
• Advantages of tracking stock vs. carveouts or
  spinoffs
• Tax efficient can offset parent profits with
  losses of Internet unit
• Maintain control of unit governed by a single
  board
• Can unwind security
• Disadvantages of tracking stock
• Shareholders have few rights must accept "trust
  me" promise with respect to potential conflicts
  of interest over transfer pricing, proceeds of
  liquidation, etc.
• Complex security may deter some investors
• Control by parent eliminates takeover premium