EBusiness Eighth Edition Chapter 6 Online Auctions Virtual

E-Business 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 E-Business, 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 E-Business, Eighth Edition 3

Origins of Auctions • From Babylon to the Roman Empire to Buddhists • Common activity of 17 th 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 E-Business, Eighth Edition 4

English Auctions • Bidders publicly announce successively higher bids – Stop at highest bid • Item sold to highest bidder (at bidder’s price) • Also known as: – Ascending-price auction – Open auction (open-outcry auction) • Bids publicly announced • Minimum bid – Beginning price – If not met: item removed (not sold) E-Business, Eighth Edition 5

English Auctions (cont’d. ) • Reserve price (reserve) – Seller’s minimum acceptable price – Not announced – If not exceeded: item withdrawn (not sold) • Yankee auction – Multiple item units offered for sale • Bidders specify quantity – Highest bidder allotted bid quantity – Remaining items allocated to next highest bidders • Until all items distributed – Bidders pay lowest successful bidder price E-Business, Eighth Edition 6

English Auctions (cont’d. ) • English auction seller drawback – May not obtain maximum possible price • English auction buyer drawback – Winner’s Curse • Psychological phenomenon • Caught up in competitive bidding excitement • Bidders risk bidding more than their private valuations E-Business, Eighth Edition 7

Dutch Auctions • Open auction – Bidding starts at a high price • Drops until bidder accepts price • Also called descending-price auctions • Seller offers number of similar items for sale • Common implementation – Use a clock (price drops with each tick) • If items remain: clock restarted E-Business, Eighth Edition 8

Dutch Auctions (cont’d) • Advantages – Seller obtains close to highest private valuation – Quickly move large numbers of commodity items • Disadvantages – Sales or product interest generated: does not justify cost of operation – Customer confusion • Successful examples – Google initial public offering stock sale (2004) – Look. Smart stock repurchase (2008) E-Business, Eighth Edition 9

First-Price Sealed-Bid Auctions • Sealed-bid auctions – Bidders submit bids independently • Prohibited from sharing information • First-price sealed-bid auction – Highest bidder wins – If multiple items auctioned: next highest bidders awarded remaining items • At their bid price E-Business, Eighth Edition 10

Second-Price Sealed-Bid Auctions • Second-price sealed-bid auction – Same as first-price sealed-bid auction • Exception – Highest bidder awarded item at second-highest bidder price • Vickrey auctions – William Vickrey: 1996 Nobel Prize in Economics • Yields higher seller returns • Encourages all bidders to bid private valuation amounts • Reduces tendency for bidder collusion E-Business, Eighth Edition 11

Open-Outcry Double Auctions • Open-outcry double auctions – Sealed bid or open outcry – Good for: items of known quality traded in large quantities – No item inspection before bidding • Example – Chicago Board of Trade: commodity futures and stock options – Buy and sell offers shouted by traders in trading pit • Each commodity, stock option traded in own pit • Quite frenzied E-Business, Eighth Edition 12

Sealed-Bid Double Auctions • Double auction – Buyers, sellers submit combined price-quantity bids • Auctioneer – Matches sellers’ offers • Starting with lowest price and then goes up – To buyers’ offers • Starting with highest price and then goes down until all quantities offered are sold • Operation format – Sealed bid or open-outcry • Example: New York Stock Exchange E-Business, Eighth Edition 13

Reverse (Seller Bid) Auctions • Reverse auction (seller-bid auction) – Multiple sellers submit price bids • Auctioneer represents single buyer – Bids for given amount of specific item to purchase – Prices go down as bidding continues • Until no seller is willing to bid lower • Used by consumers • Largest dollar volume – Businesses: both buyers and sellers • Buyer acts as auctioneer • Screens sellers before participation E-Business, Eighth Edition 14

E-Business, Eighth Edition 15

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 E-Business, Eighth Edition 16

General Consumer Auctions • e. Bay – 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 E-Business, Eighth Edition 17

General Consumer Auctions (cont’d. ) • e. Bay (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 • e. Bay stores – Integrated into auction site – Sellers generate additional profits E-Business, Eighth Edition 18

E-Business, Eighth Edition 19

General Consumer Auctions (cont’d. ) • e. Bay’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) E-Business, Eighth Edition 20

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%) • e. Bay maintains low market share (3%) E-Business, Eighth Edition 21

Specialty Consumer Auctions • Specialized Web auction sites – Meet special-interest market needs – No need to compete with e. Bay • Early Web auction sites (first wave) – Featured technology items • Doug Salot: Haggle Online (now u. Bid) • Other specialized auction sites (second wave) – Just. Beads. com, Stub. Hub – Cigarbid. com, Golf Club Exchange, Winebid • Strong market segments; readily identifiable products • Desired by people with high disposable incomes E-Business, Eighth Edition 22

E-Business, Eighth Edition 23

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 E-Business, Eighth Edition 24

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 E-Business, Eighth Edition 25

E-Business, Eighth Edition 26

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 E-Business, Eighth Edition 27

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 E-Business, Eighth Edition 28

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 E-Business, Eighth Edition 29

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 E-Business, Eighth Edition 30

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 E-Business, Eighth Edition 31

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) – Bid. Shift • Sells software to employers to operate shift auctions E-Business, Eighth Edition 32

• 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 E-Business, Eighth Edition 33

Business-to-Business Reverse Auctions • Examples: Owens Corning, U. S. Navy, General Services Administration – Acquire billions of dollars worth of materials, supplies – Agilent, Bank. One, 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 E-Business, Eighth Edition 34

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 E-Business, Eighth Edition 35

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Auction-Related Services • Entrepreneurs encouraged by e. Bay 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 E-Business, Eighth Edition 37

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 E-Business, Eighth Edition 38

Auction-Related Services (cont’d. ) • Auction escrow services (cont’d. ) – Examples: Escrow. com, e. Deposit, 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 E-Business, Eighth Edition 39

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: Auction. Bytes • Publishes e-mail newsletter • Online auction industry articles E-Business, Eighth Edition 40

Auction-Related Services (cont’d. ) • Auction directory and information services (cont’d. ) – Example: Price. Watch • Advertiser-supported site • Advertisers post current selling prices • Computer hardware, software, electronics – Example: Price. SCAN • Similar price-monitoring service • Also includes books, movies, music, sporting goods E-Business, Eighth Edition 41

Auction-Related Services (cont’d. ) • Auction software – Target: sellers • Helps manage online auctions – Example: Auction. Hawk and Vendio • • Seller management software and services Automate tasks Create attractive page layouts Manage hundreds of auctions E-Business, Eighth Edition 42

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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 E-Business, Eighth Edition 44

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 • Auction. Bytes Web site E-Business, Eighth Edition 45

E-Business, Eighth Edition 46

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 • Auction. Drop, e. Power. Sellers, i. Sold It E-Business, Eighth Edition 47

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 E-Business, Eighth Edition 48

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 E-Business, Eighth Edition 49

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 E-Business, Eighth Edition 50

E-Business, Eighth Edition 51

Mobile Communications Technology (cont’d. ) • Apple i. Phone – 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 E-Business, Eighth Edition 52

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: Avant. Go – Revenue earned by selling ads E-Business, Eighth Edition 53

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) E-Business, Eighth Edition 54

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 E-Business, Eighth Edition 55

Intelligent Software Agents (cont’d. ) • Intelligent software agent development leaders – MIT Media Lab Software Agents Group – Carnegie Mellon Intelligent Software Agents Lab • Bot. Spot Web site – Good source: software agents information – Includes links to downloadable bot programs • Simon (my. Simon Web site) – Best shopping agents currently available • Major search engine sites have shopping agents – Google product search page E-Business, Eighth Edition 56

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 E-Business, Eighth Edition 57

Virtual Communities (cont’d) • Virtual learning community – Distance learning platforms (Blackboard) – Open-source software (Moodle and u. Portal) • 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 E-Business, Eighth Edition 58

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 Geo. Cities • Revenue: advertising, pop-up pages • 1999: purchased by Yahoo! ($5 billion) E-Business, Eighth Edition 59

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 E-Business, Eighth Edition 60

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 E-Business, Eighth Edition 61

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 E-Business, Eighth Edition 62

The Second Wave of Electronic Commerce: Social Networking (cont’d. ) • Friendster: Jonathan Abrams (2002) • Facebook, Linked. In, Tribe. net – Tools to make new local friends, establish acquaintances, obtain advice • You. Tube: popularized video inclusion • My. Space: 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 E-Business, Eighth Edition 63

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 E-Business, Eighth Edition 64

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) E-Business, Eighth Edition 65

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 E-Business, Eighth Edition 66

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 E-Business, Eighth Edition 67

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 E-Business, Eighth Edition 68

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 E-Business, Eighth Edition 69

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E-Business, Eighth Edition 71

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 The. Street. com E-Business, Eighth Edition 72

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 E-Business, Eighth Edition 73

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 E-Business, Eighth Edition 74

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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 E-Business, Eighth Edition 76

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 e. Bay (United States) • New industries to meet needs of auction participants E-Business, Eighth Edition 77

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 E-Business, Eighth Edition 78