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Electronic Commerce Eighth Edition Chapter 6 Online Auctions, Virtual Communities, and Web Portals Learning Objectives In this chapter, you will learn about: • Origins and key characteristics of the seven major auction types • Strategies for Web auction sites and auction-related businesses • Virtual communities and Web portals Electronic Commerce, Eighth Edition 2 Auction Overview • Business use of the Web – Improve existing processes – New items • Running auctions • Creating virtual communities • Operating Web portals • Online auctions provide business opportunity – Charge buyers and sellers – Sell targeted advertising • Strength of Internet – Brings people together: common narrow interest Electronic Commerce, Eighth Edition 3 Origins of Auctions • From Babylon to the Roman Empire to Buddhists • Common activity of 17th century England – Sotheby’s (1744), Christie’s (1766), colonial auctions • Auction: seller offering item for sale – – – – – Bids: price potential buyer willing to pay Bidders: potential buyers Private valuations: amounts seller willing to pay Auctioneer: manages auction process Shill bidders: bidder who seller or auctioneer employees • May artificially inflate price Electronic Commerce, Eighth Edition 4 Electronic Commerce, Eighth Edition 5 Online Auctions and Related Businesses • Online auction business is rapidly changing • Three auction Web site categories – General consumer auctions – Specialty consumer auctions – Business-to-business auctions • Consumer auctions – Considered business-to-consumer e-commerce – E-commerce • Considered Consumer-to-business • Bidders might be businesses Electronic Commerce, Eighth Edition 6 General Consumer Auctions • eBay – Registration required, seller fees, rating system – Seller’s risk • Stolen credit cards; buyer fails to conclude transaction – Buyer’s risk • No item delivery; misrepresented item – Most common auction format: English auction • • • • Seller may set reserve price Bidders listed: bids not disclosed (until auction end) Continually updated high bid amount displayed Private auction option Electronic Commerce, Eighth Edition 7 General Consumer Auctions (cont’d.) • eBay (cont’d.) – Minimum bid increment • Amount by which one bid must exceed previous bid – Proxy bid • Bidder specifies maximum bid • May cause bidding to rise rapidly • eBay stores – Integrated into auction site – Sellers generate additional profits Electronic Commerce, Eighth Edition 8 Electronic Commerce, Eighth Edition 9 General Consumer Auctions (cont’d.) • eBay’s success – No specific audience – Advertises widely ($800 million yearly: mass media outlets) • Major determinants of Web auction – Attracting enough buyers and sellers • Creating markets in many different items • Yahoo! (closed in 2007) • Amazon.com (“Auctions Guarantee”: closed in 2006) – Offered buyer protection through Escrow service • Overstock.com (still active) Electronic Commerce, Eighth Edition 10 General Consumer Auctions (cont’d.) • Lock-in effect – Economic structure of markets • Based against new entrants – Markets become more efficient • As number of buyers and sellers increases – Example: Japanese general consumer auction • Yahoo! dominates (97%) • eBay maintains low market share (3%) Electronic Commerce, Eighth Edition 11 Specialty Consumer Auctions • Specialized Web auction sites – Meet special-interest market needs – No need to compete with eBay • Early Web auction sites (first wave) – Featured technology items • Doug Salot: Haggle Online (now uBid) • Other specialized auction sites (second wave) – JustBeads.com, StubHub – Cigarbid.com, Golf Club Exchange, Winebid • Strong market segments; readily identifiable products • Desired by people with high disposable incomes Electronic Commerce, Eighth Edition 12 Electronic Commerce, Eighth Edition 13 Consumer Reverse Auctions and Group Purchasing Sites • Reverse bid – Visitor describes desired items or services – Site routes visitor to participating merchants • Reply to visitor by e-mail • Offer item at particular price – Buyer accepts • Lowest offer • Offer best matching buyer’s criteria • All these types of sites now closed Electronic Commerce, Eighth Edition 14 Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) • Priceline.com – Considered a seller-bid auction site – Visitor states desired airline ticket, car rental, hotel room price • If sufficiently high price: transaction completed – Many transactions come from inventory • Priceline operates more as a liquidation broker Electronic Commerce, Eighth Edition 15 Electronic Commerce, Eighth Edition 16 Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) • Group purchasing site – Similar to consumer reverse auction – Seller posts item with price – Individual buyers enter bids • Agreement to buy one unit (no price provided) • Site can negotiate with item’s provider for better price – Posted price decreases • As number of bids increases (only if number of bids increases) – Result: buyers force seller to reduce price • Like consumer reverse auction Electronic Commerce, Eighth Edition 17 Consumer Reverse Auctions and Group Purchasing Sites (cont’d.) • Well-suited product types – Branded products, well-established reputations • Produces buyer confidence of good bargain – High value-to-size ratio – Non-perishable • Disadvantages – Difficulty attracting sellers’ interest – Well-suited companies • Find no advantage, fear sites cannibalize product sales, reluctant to offend current distributors • Group purchasing sites fell apart Electronic Commerce, Eighth Edition 18 Business-to-Business Auctions • Evolved to meet specific existing need – Excess inventory disposal (manufacturing) • Two traditional methods – Large companies • Liquidation specialists find buyers for unusable items – Small companies • Liquidation broker firms find buyers for items Electronic Commerce, Eighth Edition 19 Business-to-Business Auctions (cont’d.) • Emerging business-to-business Web auction models – Direct descendants of traditional methods – Large-company model • Business creates its own auction site – Small-company model • Third-party Web auction site instead of liquidation broker • Resembles consumer online auctions Electronic Commerce, Eighth Edition 20 Business-to-Business Auctions (cont’d.) • Large-company model example – Ingram Micro’s Auction (1997) • Computer and VAR equipment distributor • Auctions surplus items to established customers • Removes liquidation brokers from value chain (disintermediation) • Smaller firm example – Sell excess inventory using independent third-party auction site – Dove Bid site (Ross-Dove Company) • Traditional liquidation broker Electronic Commerce, Eighth Edition 21 Business-to-Business Auctions (cont’d.) • Gordon Brothers Group (1903) example – Liquidation broker – Helps others launch liquidation Web sites – Separate subsidiary created • Dot-com company failures (2001) • Sells entire Web sites, software, hardware, intellectual property • Temporary employment example – Hospitals (and other companies) – BidShift • Sells software to employers to operate shift auctions Electronic Commerce, Eighth Edition 22 • International Securities Exchange (ISE) – New York Stock Exchange, Chicago Board of Trade – Fully electronic options exchange – Threatens existing physical securities exchanges • Lower fees attract most lucrative large trades • Existing exchanges: introducing electronic trading Electronic Commerce, Eighth Edition 23 Business-to-Business Reverse Auctions • Examples: Owens Corning, U.S. Navy, General Services Administration – Acquire billions of dollars worth of materials, supplies – Agilent, BankOne, Bechtel, Boeing, Raytheon, Sony • Disadvantages – Suppliers compete on price alone • Cut corners on quality, miss delivery dates – Replaces trusting relationships with a bidding activity • Pits suppliers against each other (backward step) • Advantages – Useful for nonstrategic commodity items Electronic Commerce, Eighth Edition 24 Business-to-Business Reverse Auctions (cont’d.) • If suppliers do not agree to participate: – Impossible to conduct reverse auctions • If high degree of competition among suppliers: – Reverse auctions provides efficient way to conduct, manage price bidding Electronic Commerce, Eighth Edition 25 Electronic Commerce, Eighth Edition 26 Auction-Related Services • Entrepreneurs encouraged by eBay and other auction site growth • Provide various kinds of auction-related services – Escrow services – Auction directory and information services – Auction software • Sellers and buyers – Auction consignment services Electronic Commerce, Eighth Edition 27 Auction-Related Services (cont’d.) • Auction escrow services – Buyers’ common concern: seller reliability • Buyers protect interests in high-value items – Independent party holds payment until: • Buyer receives item • Buyer is satisfied item is as expected – May take delivery of item from seller • Perform buyer inspection (qualified to do so) – Charge fees • Percent of item’s cost; subject to minimum fee Electronic Commerce, Eighth Edition 28 Auction-Related Services (cont’d.) • Auction escrow services (cont’d.) – Examples: Escrow.com, eDeposit, Square Trade – May sell auction buyer’s insurance • Protect buyers from nondelivery and quality risks – Avoid escrow fraud • Determine if licensed, bonded (licensing agency) • Avoid offshore escrow companies entirely – Other buyer protections • Check seller’s rating • Use Web site listings of unreliable sellers Electronic Commerce, Eighth Edition 29 Auction-Related Services (cont’d.) • Auction directory and information services – Example: Auctionguide.com • Guidance for new auction participants • Helpful hints and tips • Directories of online auction sites – Example: AuctionBytes • Publishes e-mail newsletter • Online auction industry articles Electronic Commerce, Eighth Edition 30 Auction-Related Services (cont’d.) • Auction directory and information services (cont’d.) – Example: PriceWatch • Advertiser-supported site • Advertisers post current selling prices • Computer hardware, software, electronics – Example: PriceSCAN • Similar price-monitoring service • Also includes books, movies, music, sporting goods Electronic Commerce, Eighth Edition 31 Auction-Related Services (cont’d.) • Auction software – Target: sellers • Helps manage online auctions – Example: AuctionHawk and Vendio • • • • Seller management software and services Automate tasks Create attractive page layouts Manage hundreds of auctions Electronic Commerce, Eighth Edition 32 Electronic Commerce, Eighth Edition 33 Auction-Related Services (cont’d.) • Auction software (cont’d.) – Target: buyers • Helps manage online auctions – Sniping software • Observes auction progress until last second • As auction expires: places bid high enough to win (unless bid exceeds sniping software owner’s limit) • Snipe: act of placing winning bid at the last second • Almost always wins out over human bidder Electronic Commerce, Eighth Edition 34 Auction-Related Services (cont’d.) • Auction software (cont’d.) – Example: Cricket Sniping Software site • Created in 1997 by David Eccles – Companies offer sniping service • • • • Sniping software runs on company Web site Customer enters instructions on site Company may offer subscriptions Company may offer mixed-revenue model – Sniping software and services business information • AuctionBytes Web site Electronic Commerce, Eighth Edition 35 Electronic Commerce, Eighth Edition 36 Auction-Related Services (cont’d.) • Auction consignment services – Target: people and small businesses • Want to use online auction • Do not have skills, time to become a seller – Auction consignment services • Take item and create online auction for that item • Handle transaction • Remit proceeds balance (after deducting fee) – Main auction consignment businesses • AuctionDrop, ePowerSellers, iSold It Electronic Commerce, Eighth Edition 37 Auction-Related Services (cont’d.) • Auction consignment services (cont’d.) – Key to success • Convenient locations for customer drop off • Open own stores, franchise stores • Electronic commerce first wave – Online auction business made possible by the Web • Electronic commerce second wave – Online auction business created opportunities • For even more entirely new types of business Electronic Commerce, Eighth Edition 38 Virtual Communities: Web Portals and Social Networks • Money-making Internet and Web approaches – Virtual communities – Web portals • For on-demand Internet services: – Three key required elements • Cellular-satellite (mobile) communications technology • Electronic marketplaces • Software agents – All exist today • Not yet integrated Electronic Commerce, Eighth Edition 39 Mobile Communications Technology • Cellular-satellite communications technology – Internet linking capability • Notebook computers, personal digital assistants (PDAs), mobile phones • WAP – Allows HTML-formatted Web pages to display on small-screen devices – Example: Palm Treo and other smart phones • Another approach – Possible by increased screen resolution • Display normal Web page on the device Electronic Commerce, Eighth Edition 40 Electronic Commerce, Eighth Edition 41 Mobile Communications Technology (cont’d.) • Apple iPhone – Includes touch screen controls – Easy to view; navigate normal Web page on small handheld device • Web-enabled devices including other features – Open doors to second wave of electronic commerce – Examples: • Global Positioning Service (GPS) receivers • Integrating wireless Internet connectivity with GPS tools • Technology convergence provides opportunities for innovative businesses Electronic Commerce, Eighth Edition 42 Mobile Business • Revenue models for mobile business – Requires interconnection • Mobile phones • Wireless Internet connected Notebook computers • Online marketplaces – People switch among access modes seamlessly • Interconnection between mobile devices has not occurred yet, but is close • Example: AvantGo – Revenue earned by selling ads Electronic Commerce, Eighth Edition 43 Mobile Business (cont’d.) • Wherify Wireless generating revenue – Mobile technology convergence with GPS • Sell small mobile phone with five programmable buttons for outgoing calls • Phone continually reports its location to Wherify tracking center • Subscribers obtain location information (phone call or Internet) Electronic Commerce, Eighth Edition 44 Intelligent Software Agents • Intelligent software agents (software robots, bots) – Programs search the Web – Find items for sale meeting buyer’s specifications • Software agents focus on particular product category – Example: Best Book Buys • Now developing software agents to: – Track ratings of buyer and seller reputations Electronic Commerce, Eighth Edition 45 Intelligent Software Agents (cont’d.) • Intelligent software agent development leaders – MIT Media Lab Software Agents Group – Carnegie Mellon Intelligent Software Agents Lab • BotSpot Web site – Good source: software agents information – Includes links to downloadable bot programs • Simon (mySimon Web site) – Best shopping agents currently available • Major search engine sites have shopping agents – Google product search page Electronic Commerce, Eighth Edition 46 Virtual Communities • Virtual community (Web community, online community) – Gathering place for people and businesses • Does not have physical existence – Various forms of Internet existence • Usenet newsgroups, chat rooms, Web sites – People connect and discuss common issues, interests – Considerable social interaction – Relationship-forming activities • Similar to physical communities Electronic Commerce, Eighth Edition 47 Virtual Communities (cont’d) • Virtual learning community – Distance learning platforms (Blackboard) – Open-source software (Moodle and uPortal) • Web portal sites – Allow site visitors to interact with each other • Combine search engines, directories, free e-mail, chat rooms, games • Fulfill individual social interaction needs • Help companies, customers, suppliers – Plan, collaborate, transact business, interact Electronic Commerce, Eighth Edition 48 Early Web Communities • 1985 (predates the Web) – WELL (“whole earth ‘lectronic link”) • Monthly fee to participate in forums and conferences – 1999 bought by Salon.com • Monthly subscription fee or premium subscription • 1995: Beverly Hills Internet virtual community site – Offered webcams, free Web site space – Grew into GeoCities • Revenue: advertising, pop-up pages • 1999: purchased by Yahoo! ($5 billion) Electronic Commerce, Eighth Edition 49 Early Web Communities (cont’d.) • 1995: Tripod virtual community – Offered free Web page space, chat rooms, news, weather updates, health information pages – Revenue: sold advertising – 1998: purchased by Lycos ($58 million) • 1995: Theglobe.com Cornell University class project – Included bulletin boards, chat rooms, discussion areas, personal ads • Added more features – Revenue: sold advertising – 2001: closed Electronic Commerce, Eighth Edition 50 Web Community Consolidation • Consumer virtual community success as moneymaking proposition – Must offer something of sufficient value • Justifies membership charge • Example: WELL community members – Obtain access to interesting members • Most virtual communities unable to support themselves – Closed – Sold to sites with other revenue-generating activities Electronic Commerce, Eighth Edition 51 The Second Wave of Electronic Commerce: Social Networking • As the Internet and Web grew: – Experiences of online communication faded – New phenomenon in online communication began • Internet no longer focus of community (became a tool) • Enabled communication among community members • Social networking sites – New Web site category designed to facilitate interactions among people Electronic Commerce, Eighth Edition 52 The Second Wave of Electronic Commerce: Social Networking (cont’d.) • Friendster: Jonathan Abrams (2002) • Facebook, LinkedIn, Tribe.net – Tools to make new local friends, establish acquaintances, obtain advice • YouTube: popularized video inclusion • MySpace: popular with younger Web users • Basic idea – People invited to join by existing members – Site provides directory • Member offers to communicate with any other member • Intended recipient must approve contact Electronic Commerce, Eighth Edition 53 The Second Wave of Electronic Commerce: Social Networking (cont’d.) • Web logs (Blogs) – Web sites containing individual commentary on current events or specific issues – Form of social networking site • Encourage interaction among people • Visitors add comments • Early blogs focused on technology topics • 2004: blogs used as political networking tool • 2008: all major candidates using blogs – Communicating messages, organizing volunteers, raising money Electronic Commerce, Eighth Edition 54 The Second Wave of Electronic Commerce: Social Networking (cont’d.) • Retailers embracing blogs – Bluefly.com: online discount apparel retailer • Flypaper blog (2005) – Ice.com: online jeweler • Operates several blogs • Business use – CNN, newspapers • Inviting information and opinion contributions • Target 18- to 35-year-old generation • Blogs can become businesses in themselves – Must generate financial support (fees, advertising) Electronic Commerce, Eighth Edition 55 The Second Wave of Electronic Commerce: Social Networking (cont’d.) • Social networking Web sites for shoppers – Sense of community to generate revenue – Social shopping • Practice of bringing buyers and sellers together in a social network to facilitate retail sales – Example: Craigslist • Operated by not-for-profit foundation • All postings free (except help wanted ads) – Example: Etsy Web site • Marketplace for selling handmade items • We Love Etsy: Etsy buyers, sellers share information Electronic Commerce, Eighth Edition 56 The Second Wave of Electronic Commerce: Social Networking (cont’d.) • Idea-based social networking – Idea-based virtual communities • Create communities based on connections between ideas • More abstract, participants more engaging – Example: del.icio.us site • One-word bookmarks tags describe Web pages • Focus: ideas, contributions of all community members – Example: 43 Things – Show promise for re-creating essence of original Internet communities Electronic Commerce, Eighth Edition 57 Revenue Models for Social Networking Sites • 1990 – Virtual communities, search engine sites, Web directories selling advertising • Generate revenue • 1998 – Purchases and mergers occurred – New sites still used advertising-only revenuegeneration model • Included features offered by virtual community sites, search engine sites, Web directories, other informationproviding and entertainment sites – Goal: be every Web surfer’s doorway to the Web Electronic Commerce, Eighth Edition 58 Revenue Models for Social Networking Sites (cont’d.) • Advertising-supported social networking sites – Smaller with specialized appeal • Draw enough visitors to generate significant advertising revenue – Example: I Can Has Cheezburger site – Rough measure of stickiness • Time each user spends at site (popularity) • Figure 6-10 and Figure 6-11 • Social networking sites – Members provide demographic information • Potential for targeted marketing: very high Electronic Commerce, Eighth Edition 59 Electronic Commerce, Eighth Edition 60 Electronic Commerce, Eighth Edition 61 Revenue Models for Social Networking Sites (cont’d.) • Mixed-revenue and fee-for-service social networking sites – Most successful Web portals: Time Warner’s AOL • Charged fee and ran advertising – Yahoo!: now charges for Internet phone service, “premium” e-mail service • Increased its revenues from non-advertising sources – New strategy: monetizing • Converting existing regular site visitors seeking free information or services into fee-paying subscribers • Backlash concerns – Examples: The Motley Fool and TheStreet.com Electronic Commerce, Eighth Edition 62 Revenue Models for Social Networking Sites (cont’d.) • Fee-based social networking – 2002 to 2006: Google Answers site (fee based) • Attempt to monetize social networking – Similar sites: Yahoo! Answers, Amazon (Askville) • Volunteers answer questions (no fees) • Services generate advertising revenue – Uclue (researchers earn 75 percent of total fee) • Advantages: higher-quality answers, questions more serious, better formulated – Web sites generate revenue by providing virtual community interaction Electronic Commerce, Eighth Edition 63 Revenue Models for Social Networking Sites (cont’d.) • Microlending Sites – Function as clearinghouses for microlending activity – Microlending (became famous in 2006) • Practice of lending very small amounts of money • People starting or operating small businesses (especially in developing countries) – Microlending key element • Working within social network of borrowers • Provide support, element of pressure to repay – Example: Kiva Electronic Commerce, Eighth Edition 64 Electronic Commerce, Eighth Edition 65 Revenue Models for Social Networking Sites (cont’d.) • Internal virtual communities – Company-based; for employees • Communities and opportunities for social interaction – – – – – – Run on intranets Save money with Web site (reduce paper) Provide easy access to employee information Good for geographically dispersed employees Adding wireless connectivity for traveling employees Combines second-wave technology with first-wave business strategy • Wireless communications with internal Web portals Electronic Commerce, Eighth Edition 66 Summary • Look at how companies using the Web to do entirely new things – Running auctions, creating virtual communities, operating Web portals • Key characteristics of seven major auction types • Consumer online auction business dominated by eBay (United States) • New industries to meet needs of auction participants Electronic Commerce, Eighth Edition 67 Summary (cont’d.) • Ways sellers and buyers can protect themselves • New approaches to making money on the Internet and the Web – Virtual communities and Web portals • Social networking sites – Emerging as important parts of electronic commerce Electronic Commerce, Eighth Edition 68