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MI021 / CS021Computers in Management
Oct. 3, 2006Network Effects,
eBay case,W.R. Hambrecht’s OpenIPO
www.gallaugher.com
Issues Covered
• Network Effects– Defined– Characteristics of markets & competition when
present– Examples
• Auction Models– liquidation vs. market efficiency auctions
• Priceline vs. eBay
– eBay case – growth, comp. adv., and challenges– IPO markets & struggles of WR Hambrecht
Effect on innovation• Lowers competition with
established standard• Increases innovation within
standard
buyers
sellers
Users (Windows, PS2)
Developers(programs, game titles)
members
Understanding Network Effects(a.k.a. Network Externalities, Metcalfe’s Law)
When present, product or services become more valuable as its installed base expands.
Why? Users crave…• Exchange opportunities• Stability• Extrinsic Benefits
Characteristics: Early competition, bandwagons, monopolistic tendencies
‘Best’ products don’t always win.
Auction FormatsLiquidation Auctions: (e.g. Priceline)
suppliers customersauction
Market Efficiency Auctions: (e.g. eBay)
Seek lowest price on widely available goods and services
auction
disincentives to use auction shrink supply over time
Seek first to maximize existing
channels & reduce inventory
suppliers customersSeek access to unique / rare products or services
incentives to use auction increase supply over time
Auction format is favored over the
inefficiency of existing channels
IPO Inefficiencies
The Firm small Investors
small Investors
small Investors
$45/share
Underwriting syndicate
pays a 7% fee $27/share
Institutions& large
investors
Initial Offer First Day ClosePrice Share Price Difference
Under Armour 11/18/2005 12,100,000 $13.00 $25.30 148,830,000$ 95%Electro-optical sciences 10/28/2005 4,000,000 $5.00 $7.71 10,840,000$ 54%IntercontinentalExchange 11/16/2005 16,000,000 $26.00 $39.25 212,000,000$ 51%Saifun Semiconductors 11/9/2005 5,000,000 $23.50 $35.30 59,000,000$ 50%CBOT Holdings 10/19/2005 3,200,000 $54.00 $80.30 84,160,000$ 49%Baidu.com 8/5/2005 4,000,000 $27.00 $122.54 382,160,000$ 354%Salesforce.com 6/23/2004 10,000,000 $11.00 $17.20 62,000,000$ 56%JetBlue 4/12/2004 5,500,000 $27.00 $45.00 99,000,000$ 67%PayPal 2/15/2002 5,400,000 $13.00 $20.01 37,854,000$ 54%
Company DateShares
UnderwrittenPercent
Undervalued
Company Date
Shares Underwritt
en
Underwriting
Share Price
First Day Close
Share Price Difference
Percent Undervalu
ed
JetBlue 4/12/2002 5,500,000 $27 $45 $ 99,000,000 67%
PayPal 2/15/2002 5,400,000 $13 $20 $ 37,854,000 54%
NetScreen Technologies 12/11/2001 10,000,000 $16 $24 $ 77,200,000 48%
Magma Design Automation 11/19/2001 4,850,000 $13 $19 $ 29,051,500 46%
Global Power Equipment 5/17/2001 7,350,000 $20 $31 $ 84,157,500 57%
Simplex Solutions 5/1/2001 4,000,000 $12 $21 $ 36,800,000 77%
Transmeta 11/7/2000 13,000,000 $21 $45 $ 315,250,000 115%
CoSine 9/26/2000 10,000,000 $23 $63 $ 400,600,000 174%
Active Power 8/8/2020 8,000,000 $17 $53 $ 286,000,000 210%
StorageNetworks 6/30/2000 9,000,000 $27 $90 $ 569,250,000 234%
VA Linux 12/9/1999 4,400,000 $30 239 1/4 $ 920,700,000 698%
Red Hat 8/11/1999 6,000,000 $14 $52 $ 228,375,000 272%
mp3.com 7/20/1999 12,300,000 $28 $63 $ 434,343,750 126%
Efficient Networks 7/15/1999 4,000,000 $15 $53 $ 152,000,000 253%
Tibco Software 7/14/1999 7,300,000 $15 $40 $ 182,500,000 167%
China.com 7/13/1999 4,200,000 $20 $67 $ 197,862,000 236%
CommTouch 7/13/1999 3,000,000 $16 $24 $ 24,000,000 50%
eToys 5/19/1999 8,300,000 $20 $77 $ 473,100,000 285%
iVillage 3/18/1999 3,500,000 $24 $56 $ 112,000,000 133%
AutoWeb 3/23/1999 5,000,000 $14 $28 $ 71,250,000 102%
Auto-by-Tel 3/24/1999 3,500,000 $23 $40 $ 60,375,000 75%
Prodigy 2/11/1999 8,000,000 $15 $28 $ 105,040,000 88%
VerticalNet 2/11/1999 3,500,000 $16 $45 $ 102,830,000 184%
Healtheon 2/11/1999 5,000,000 $8 $31 $ 116,900,000 292%
Pacific Internet 2/5/1999 3,000,000 $17 $48 $ 93,000,000 182%
Theglobe.com 11/13/1998 3,100,000 $9 $64 $ 168,950,000 606%