e - Business and

e - Business Models – Part 1[«Business and business models in the Internet»]

Higher School of Economics , Moscow 2011

www.hse.ru

Ian MilesResearch Laboratory for the Economics of Innovation, HSE

(and Manchester Institute of Innovation Research)

June 2011

Outline – 4 sets of lectures

• Framing the topic: • A historical perspective• Business Models and Plans• e-Business Models• e-Business Activities (Services) and Models• Finance and Revenue• Launch and Growth

Higher School of Economics, June 2011

eBusiness Models are very diverse!

• Retail– Physical products– Service products

• Information content– Experience– Intelligence

• Networking• Transactions• Processing• And many more…

– Some commentators describe dozens of models! Vary in terms of offering, market (B2B, B2C, P2P…) and income source

Today

• Historical Perspectives: e-Business before the Web

• The Shock of the New (Economy) and the rise of Business Model analysis

• Business Models versus Business Plans• Elements of a Business Model

• First, then, a little Historical Perspective

Back in the Stone Age

• G Thomas and I Miles 1989, Telematics in Transition: the emergence of new interactive services, Harlow: Longmans

• Telematics = computers + computing

• Before the Web - Time Berbers-Lee was developing this in 1989 at CERN, and it took several years to take off (first browser was 1993)

TELEMATICS IN TRANSITION

The emergence of new interactive services

Graham Thomas and Ian Miles

Longmans

Now we have many “telematics” services (with many Business Models)

Some are runaway successes: MOST ARE NOT

Three Types of Telematic Service

INFORMATION

TRANSACTIONCOMMUNICATION

Online Databases

News, Weather, Timetables

“Home and office” banking

Shopping, ticketing

Electronic mail

Bulletin boards, chatlines

Before web, browsers.

Some were stand-alone, dial-up; some were hosted on a common platform (we discuss videotex later)

Competing with established – and new - services

INFORMATION

TRANSACTIONCOMMUNICATION

Faster publications

CD-ROM, teletext, etc.

Telephonebanking

Telesales (call centres)

Fax

Pagers

There were huge anticipations of take-off;

But in many cases this was slow, limited to niches Often

other solutions prevailed; many new entrants went bust.

Much disappointment

• Relatively low levels of computer penetration, even fewer online• Slow access to networks via telephone lines

• [exceptions in a few industries – niches]• No common design standards for services – interfaces continually

reinvented, much learning required, not user-friendly*• Innovators faced complex environment – “swarming” of

competing IT-based innovations (e.g. fax exploded in 1990s), rapid technological change in hardware and software, need for new combinations of skills, need to address very different sets of stakeholders

• Incumbents often had substantial lock-in of consumers and supply chains.

• How to understand? Useful ideas from David Teece* When the web did appear, many services had to migrate to this model – or die!

Two ideas from David Teece

http://www2.haas.berkeley.edu/faculty/teece_david.aspx

• Stabilisation of design paradigms

• Complementary assets– Innovations are rarely

unique; first-comers often do not succeed in creating substantial markets; life is tough

Design Paradigm

• Innovation begins when an idea is commercialised: we can offer this new/better service

• But just what form does this take?• Often other firms will be trying to offer similar

services – or if not, and if your idea is a good one, they soon will.

• Competition at the outset is often about what design will prevail.

• This may come to be seen as the “natural” solution – e.g. car or PC keyboard layout.

Diffusion of innovation

• Examples: use of mobile phones, ecommerce

Typical Model: uptake of an innovation: percentage of market adopting

Network effects: more people using compatible systems makes it easier to learn, easier to communicate, share

Stabilisation of paradigm

• Examples: PC; web pages as standard interface

Design flux

Dominant Design(s)

New models? Product differentiation?

Increasing user-friendliness, less need for skill, economies of scale

Competition over

functionality Competition over efficiency

So who wins?

• Note necessarily the person with the technically best design!

• Not necessarily the cheapest!• Who can mobilise Complementary Assets –

– Brands, marketing, distribution channels– Supply chain connections (e.g. hardware, content

providers)– Intellectual property,

intellectual assets– Links to users, etc.

Sometimes even a major player fails

Videotex: Prestel from BT• Another story from prehistory:• “Web 0.1”launched early ‘80s• Set-top box, plug into

TV and telephone• Small keyboard• Simple menus• Request “pages” of information• Many (centralised) content providers• Target markets vast: consumers,

offices, businesses: but the millions stayed away (as pilots had warned)

Unless you can mobilise powerful stakeholdersMinitel DesignMinitel / Teletel: French videotex service. The rare success. Terminal

provided free.

Design features: Minitel terminal meant TV/phone not tied up.

Payment hourly reduced anxiety over charges.

Use prompted by withdrawal of phone book Hit critical mass – tens of millions of users by ‘90s (many purchases of superior terminals)

Much scope in system to innovate and plug in private services; messagerie and minitel rose very popular, a cultural phenomenon

Established a dominant design that may have led to slow French adoption of Web!

Lessons from history?

• Many conclusions still relevant today.• Complementary assets are vital, to establish winning

formula, or just to survive among big players – this takes us into business model issues.

• Need tactics to survive complex and turbulent environments (they have not got less complex and turbulent!). In 1989 we noted the need to:– Create or work within design paradigm. – Determine relevant service packages and bundles. – Establish trust. – Enlist users. – Decide on the target market.– Encourage loyalty but beware other parties’ lock-in. – Ensure you have the right mix of skills and capabilities.

COMING MORE UP TO DATE- THE DOT.COM BOOM, BUBBLE, BUST

The “Telematics in Transition” study, the videotex experience, etc. were in the 1980s. But in the 1990s the web took off, with high uptake of PCs and better internet connections.

Moving On

The “Dot Com Bubble” brought business model thinking to the fore

Higher School of Economics, June 2011

1995 to 2000, accelerating in the latter period;

Rapid growth of hopes and hypes about internet businesses

Major levels of investment

Highly speculative, based on hopes of technology-based future returns from new business models

People began talking about New Business Models – prompting upsurge of debate about Business Models

Explosion of analysis

0

100

200

300

400

500

600

700

800

Period 5 5 5 5 2 2 2 2 2 1.5 1980-84 1985-90 1990-94 1995-99 2000; -02 -04 -06 -08 -10

-1 -3 -5 -7 -9 -11part

Source: Harzing’s Publish or Perish; analysis of articles and books (Google Scholar, cleaned) with “Business Model” in title

6 June 2011

[Google results – May 2000 – 107k hits;

June 2011 - 25.3m hits]

5 8 15

396

208

590

490

466

697

409

The “New Economy”

• Was a new form of business – e-business, internet business, business2.0 – emerging?

• Did it play by quite different rules?• What were the rules, anyway?

• As so often, it is “the other” that leads us to reflect on just who and what we are.

• Firms were apparently flourishing – certainly attracting huge investments – without doing any of the things that firms normally do.

What were the new “models”?• Exploit Network externalities

(Metcalfe’s Law)• “Get Big Fast”: lock in users now, worry about

making profits later• Operate at a loss now to gain and retain

market share – often free (and very fancy) service offerings; huge advertising spend

• Cover expenses (sometimes huge - $100ms) with funds invested by venture capital, IPOs, etc. (There was plenty of money around.)

• Get rich quick feeding frenzy• Yet many of the ideas were unconvincing, the

entrepreneurs untested.

Graphic from Wikipedia

The view from Doonesbury

Gary Trudeau ©

Other people

saw the humour,

too

The Dot Bombs

• Example: Pets.com• Idea: disintermediation - sell pet food and

supplies directly to consumers• Feb 1999-Nov 2000• IPO raised $82.5m; over $300m investment• Huge advertising spend ($12m in 1999 – revenue<$1m,

break-even expected at $300m) • → brand recognition• But no market research supporting idea of demand• Selling at a loss to capture market• Investment in warehouses• Bubble burst meant no-one would continue to pour money in.

Inevitable crash

(Almost) everyone hurt – including suppliers (e.g. network and server firms), public bodies (e.g. cities building internet hubs), and small investors.

Already there were many warning voices, and several “false stops”

One interpretation

A more general lesson?

Gartner’s Trajectory of Hype

Technology Trigger

Peak of Inflated ..Ex

pectations

Trough of Disillusionment

Source: Gartner Group, who regularly update with various technologies: it may not be scientific, but it captures a familiar dynamic

Plateau of Productivity

Slope of Enlightenment

Time

Ho

pes

Behind the Hyperbole

• We should beware of the hype of others – and watch out for doing it ourselves

• Some “great ideas” never make it – usually because there are better ideas out there, sometimes because incumbents can use complementary assets to stop disruptive innovation

• But there sometimes is a great idea which simply requires a lot of other things falling into place before it can sweep the world (or at least, grab a solid niche).

Though the bubble burst…

• Some estimates have it that as many as 50% of the dot com firms started up in the bubble were still active in 2004 (which makes half “dot bombs”

• Many major success stories were established then: Amazon, eBay, Google

• E-business has steadily recovered from the bubble• Though there may be other bubbles ahead

Business Model Thinking

• Efforts to understand these new businesses came from enthusiasts and sceptics alike.

• The notion of a business model came to the fore as the new entrepreneurs dismissed concerns about their viability – “you just don’t get it”

• And there certainly were efforts to raise funds in original ways, and envision sustainable future business based on different revenue streams

Business Model Fever

• Often seen as essentially about how you make money • Here is the basic idea from the BUSINESS MODELS

ON THE WEB page by Michael Rappa, at http://digitalenterprise.org/models/models.html

• But is this just the revenue model, only part of the whole Business Model?

• And why a “model”,

anyway?

LATER LECTURES WILL CONSIDER: BUSINESS PLANS and MODELS; ELEMENTS OF BMs; e-BN designs

Many bad business models went down in the dot com crash, and so did some good ones. Some achieved enormous success, others have just hung on. There are many reasons for failure, and a poor Business Model is only one. Whether you can survive in a competitive environment without an effective Business model is another question!

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www.hse.ru

Higher School of Economics, June 2011