Slide 1

I'll give a number of examples of how firms are making money on the Internet. Most of these firms are smaller, more entrepreneurial firms which bypass traditional sales channels and interface directly with their customers electronically.

However, I'll also give you examples of successful use of the technology among larger firms. These uses typically focus on cost savings and service increases.

By the end of the lecture it should be clear that both large & small firms have a lot to gain by exploiting the benefits of networked technologies.

It is important to view what people say about the Internet with a degree of skepticism. The Internet is _NOT_ the Information Superhighway, it's more like the Information Dirt Path. Quite simply, the Internet is a 25 year old University research tool. However, its current uses provide insight to opportunities which exist when leveraging widely accessible network computing. Some benefits can be realized now, while a greater potential awaits in the future.

Slide 2

Slide 3

The Internet is nothing more than a Network of computer networks. These networks, although they are made up of all kinds of computers, share a kind of common language, a communication protocol, which allows them to exchange data and communicate.

The growth of the Internet is phenomenal, the number of participating networks continues to triple every year. 1,000 networks in 1990 - over 1 million networks today.

These networks service over 30 million users, larger than the population of Canada. Volume of growth driven by commercial organizations (.com). There are over 50,000 N.Amer. businesses on line. 500 join each week.

The Internet itself is nothing more than an infrastructure. It is the services which run on top of it which are valuable.

These services include Electronic Mail, a service available in virtually every nation world wide

FTP or file transfer protocol which allows computers to exchange files and programs

Usenet Newsgroup or world wide bulletin boards. There are over 15,000 such groups, the more useful of which carry job postings or allow for the discussion of technical and business issues.

Voice & Video are also beginning to proliferate over the Net & this is threatening traditional service providers such as telephone companies

Slide 4

Of course, hi-tech companies are going to be the first to take advantage of the infrastructure. These are two examples of products which use the Internet to maintain a personal computer.

The product in the back, OilChange by Cybermedia, scans a user's computers and checks to see if any of the user's programs, or elements of the user's operating systems need to be kept current. Keeping a machine current, with the latest software updates can be a difficult and time-consuming task, even for technically savvy users. OilChange automates the task which benefits both vendors of software (bug fixes are distributed automatically, lowering support costs) and users (time savings).

The product in front is Norton's Anti-Virus utility. By clicking on 'Live Update', I can have Norton go out on the Internet and update itself with the latest virus definitions.

also:

Internet Game Play

Story about how WebChess saved a life

Slide 5

The following seven items are typically cited as reasons why firms choose to go on-line.

To access a desirable and growing customer demographic group

To lower transaction costs

To lower information dissemination costs

To broaden buyer/supplier reach

To increase customer service

To gather stronger customer feedback

and to access a wealth of research materials.

I'll provide some concrete examples of how firms are using each of these to either increase their sales or reduce their costs. All the examples shown involve the World Wide Web.

Slide 6

Some studies have shown that the typical Internet user spends more time on-line than watching rented videos and nearly as much as they spend watching television. Any figures one reads about the Internet should be interpreted with a degree of skepticism and an understanding that the figures will change along with the technology.

A number of studies have been conducted and while their methodologies may differ, all of these studies indicate that the average Internet user is more affluent and better educated that the average American.

These demographics indicate a more attractive consumer. A more affluent consumer may translate into increased sales of higher ticket items. For example, Dial-A-Mattress claims its average bedding and mattress sales to on-line customers are $557, 27% higher than the firm's average phone order of $450. So on-line customers are purchasing the 'Rolls Royces of Mattresses'.

The Sharper Image sells upscale gadgets to a predominantly male, 28-40 year old audience. Computerworld has reported that the firm has seen online sales double each month since introducing its web site in October 1994.

How much business is being done on-line? Well, again the numbers vary, but for reference, the Yankee Group estimates that $730 million in consumer goods orders were taken on-line last year. All estimates for consumer and business-to-business transactions are in the multi-billion dollar range by the turn of the century - still small, but growing rapidly given the young state of the technology.

Slide 7

By using technology to interface directly with the customer, firms can dramatically lower transaction costs and decrease response times.

Reduced processing costs can increase margins. However, over the long run in a competitive market, excess profits will eventually be whittled away. The firm can still benefit if it gains market share by passing on gains from lower transaction costs to the consumer in terms of a lower price.

PC-driven transactions reduce processing costs, including paper, phone calls, and the salary, benefits, and real estate consumed by a human intermediary. Sundance, Robert Redford's catalog company, has reported 2/3 savings with on-line vs. phone orders, while an IBM study puts savings at 25% and the cycle time reduction at 60%

Even law firms are getting into the act. Boston-based Hale & Dorr is using the Net to speed up and cut the costs of some routine work. If a client company needs a contract for a foreign distributor, say, it can fill out an electronic questionnaire and send it over the Internet to a Hale & Dorr computer. Expert-system software then constructs a draft document from boilerplate text. A lawyer reviews the document, makes necessary changes, and ships it back over the Net to the client--complete with a list of recommended lawyers in the other country. Cost savings from the combined technologies are then passed on to the customers while expanding the firm's total billable hours.

It's important to note that any cycle time gains are highly dependent on the execution of the Interface. Anyone who has used a phone-automated system knows they can be more frustrating than a human. The same thing can happen on the Web - if a Web site is poorly designed, customers will be frustrated & won't return. Therefore attention to Interface design and human/computer interaction issues is critical in achieving any of these benefits. (note global design - Thumbs up/OK)

Next I'll show a couple of slides of firms using the Web to reduce error rates & pass on additional savings to customers.

Slide 8

Flowers

PC Gifts & Flowers is one of the more successful firms in the already competitive market of on-line floral sales. The firm processed over 28,000 orders (over $1/2 million) in the five days preceding Mother's Day 1995.

PC Gifts & Flowers on-line error rate is over 200 times less than the floral industry average of almost 5%. This delivers reduced cost and increased customer service

The above slide shows how the system works - a user specifies all the information, so it's impossible for an intermediary clerk to mess this up. This should reduce errors on the order side to zero - any errors which occur will happen on the delivery side.

1-800-Flowers, a PC Gifts competitor, charges on-line customers a 45% less surcharge than the firm's own phone customers, again because savings are achieved through automation & eliminating people from the process.

The floral industry was one of the earliest to embrace on-line commerce. This is because the product is easier to sell over the Web than over the phone. If I dial 1-800-FLOWERS, someone has to speak through a list of options, describing the products & prices. But if I dial into a Web site, I can see pictures of the floral displays & my purchasing experience is richer and my purchase uncertainty is greatly reduced.

Also: point out the broken vs. non-broken key, broken being the symbol for secure, encrypted transaction. This technology will be discussed later.

Slide 9

Financial Services Cost Reductions Passed on to Consumers:

This next slide show how a number of financial firms are using cost savings to make their products more competitive. Financial products are well suited for such reductions because the essence of transactions can be entirely digital.

Two of these banks are offering very competitive Internet-only CD rates. It costs $150+ to set up a traditional

Slide 10

National Discount Brokerage

NDB, the 9th largest disc. broker in the country, has seen Web trading take up 7% of its business since it began offering the service in Sept.

The firm passes on a 20% savings to its customers who use the web. It charges $25/trade over phone, but only $20 on Web & still turn a profit.

The commission

Slide 11

Here is another example of a firm cutting out distribution costs - Amazon.com.

Amazon.com did $15.7 million in book sales last year - all of it on-line. The firm has no store and hence no overhead for sales reps, decor, security, lighting, cappuccino bars, etc.

The firm gets some 50,000 'visits' each day for folks looking for books online. The firm offers a number of advantages:

Book reviews by customers (which you can add to)

An extensive stock of rare & out of print books

A searchable database

Online excerpts & interviews with authors

Recent threats of openings by larger chains (notably Barnes & Nobel) have forced the firm to discount a number of its higher volume products by 40% - savings which are likely much greater than you'll get at your local superstore.

Amazon filed for an IPO last week, valued at $229 million. It's a bad time for an IPO, but mounting pressure is affecting the firm's market. They're rushing to solidify their brand name by expanding awareness through advertising & other partnerships. They're also expanding services - using technology called 'collaborative filtering' which can actually help you select a book you'd most likely be interested in. I'll talk more about collaborative filtering later.

Slide 12

Ajit Kambil at NYU suggests that the marginal cost of distributing a 30 page document is less than one cent. This can translate into dramatic savings, both for distributing information to customers and in distributing information internally

Some of the most dramatic savings, and those which are easily calculated, have been achieved through the use of Intranets. Intranets use Internet technologies such as Web browsers, servers, and the TCP/IP communication protocol, to distribute documents which can be viewed only by members of an organization. They exist behind a barrier, or firewall, which prevents them from being seen by others. The Intranet phenomenon has been embraced more rapidly than electronic commerce over the Web (show Business Week magazine cover story). This technology is an order of magnitude cheaper than other technologies such as Lotus Notes. It also runs across several different computing platforms, making integration easier. There are more web servers sold for internal use than for external commercial use.

In the first 18 months of its Intranet project, Morgan Stanley has saved $1 million in paper handling and storage costs by publishing everything from phone directories to SEC filings on-line.

Los Alamos National Laboratory - 10,000 employees spread out over 50 miles & 2,000 bldgs spent $250,000 to put documents on-line, saved $500,000 in printing & dist. in its first year. It previously cost over $100,000 to print the procedures manual for all employees. (note: who uses such manuals anyway? limited reference docs are perfect candidates) Electronically distributed information can also be immediately updated, making the medium perfect for frequently updated items such as employee phone lists, publications which would otherwise become immediately outdated.

For systems professionals, the Web can act as a larger repository for source code from multiple packages. HP offers a 'software vending machine' where developers can check for pre-written routines. CAP Gemini has used similar technology to cut project time in half. Visa is expanding its Intranet to let customers access fraud warnings & other data previously distributed on disk.

Slide 13

General Electric:

The GE Web site is dedicated to serving a variety of clientele

Investors - annual report, video

Consumers - product information & repair center listings

Industrial Customers - like GE Plastics & Lighting

The Plastics group has thousands of pages of online documentation

Engineers worldwide can immediately access searchable product specifications and data sheets for the entire product line

GE services its customers better and lowers its costs. Distribution time for documents goes from 3 days to mail this stuff to just minutes to access it online. All mailing costs are cut out of this cycle.

GE also offers a reason for engineers to come back such as a Plastics newsletter and product usage tips

Is all this effort working? It's tough to say, but during the first few months, GE Plastics alone was averaging over 12,000 accesses a month.

Slide 14

The growth and global reach of the Internet are enabling firms to access a broader market of suppliers and customers. It's estimated that currently over 17% of US adults are on-line, while only a portion of those are active on the Net, this figure was only 6% a year earlier.

Of those on-line, 32% of consumers have purchased something and 92% expect to soon.

For firms seeking to issue competitive

Slide 15

Aberdeen Group

Aberdeen Group, Inc. - a Boston-based market research firm posts profiles, viewpoints, & white papers on-line. The firm previously sold this material at $400/yr. but is now hoping free info will attract more potential clients to their site.

Previous promotional pieces are $1.50 - $2.00 each, but by attracting people to its site the firm hopes to decrease its direct sales effort.

Aberdeen won't release numbers, but claims this effort has greatly expanded their reach, with clients coming from all over the world

[Smith, Laura B., Freebies, PC Week Executive, 3/25/96, p. 34]

Slide 16

Wit Beer - given that you're graduate students I had to work a beer company into this lecture some how.

Spring Street Brewing - makers of Wit Beer - raised $1.6 million in an SEC approved Internet IPO. Through Wit-Trade, persons interested in buying or selling shares of Spring Street Brewing Company's Common Stock can find prospective trading partners. In addition, persons can access recent trading activity in Spring Street's Common Stock as well as Spring Street's recent financial reports. Spring Street Brewing Company does not impose any fees or charges upon transactions in its Common Stock and thus parties may trade shares through Wit-Trade without having to pay any brokers' fees or commissions.

I asked Andrew Klein of Spring Street why his firm elected to in effect create their own market. He said:

Most small company stocks available through the pink sheets don't really get much attention or play because the marketmakers have little interest in promoting particular stocks and the small companies have too little money to invest in promoting the tradeability of their own securities. In addition, there's too little financial data easily accessible so public investors would be hard pressed to even have a basis for making an informed decision.

Through the Internet, in contrast, Spring Street has been able to promote their shares and distribute information and all at a remarkably low cost.

It should be pointed out that Spring Street is successful in large part because it is the first mover in this area It remains to be seen how many other firms can leverage these benefits over time.

[Personal Correspondence, 4/7/96]

Slide 17

The Web can also provide a supplementary

Slide 18

Gateway 2000 is the nation's leading mail-order PC supplier. Systems can be custom configured with a number of options. The Gateway web site provides product information & a configuration utility so customers can come here & experiment with options to see what is in their price range. If a user clicks on the underlined links to the left, they can get more detailed information on each component including a glossary of terms and detailed technical description.

You'll note that the cow says "Audio". It uses real-time audio-streaming technology to deliver a welcome & informative message as users visit the site.

I recently used this site to determine what kind of specifications I wanted on my own PC. I would have executed the transaction on-line, however one option was not offered on the site - the option of eliminating the monitor - so I ended up phoning my order in. As a knowledgeable computer purchaser, I found the on-line shopping experience to be superior to traditional

Slide 19

Package Tracking:

With the GE Plastic's site we've already seen an example of how document distribution can reduce the cycle time to get product information out to the customers.

Federal Express (as well as UPS and other major competitors) offer package tracking over the Internet. This site hooks FedEx customers directly into the firm's database, so customers can check the status of their package even more quickly and reliably, and perhaps most importantly from FedEx's standpoint, less costly than they can by dealing with a human.

BusinessWeek reported that the FedEx site receives 12,000 visits a day and has saved an estimated $2 million a year with this system. The software is an ideal fit with the customer because a sizable number of FedEx customers are businesses with PCs and links to the Internet.

Also note that FedEx uses the site for promotion & to gather customer feedback. They've got an on-line sales presentation in their 'Learning Lab' labeled 'Use Distribution as a Strategic Weapon'. They also actively solicit visitor's feedback so they can constantly improve the site so it remains compelling and useful.

[Source - BW: Cover story on Intranets]

Slide 20

Purchasing Compact Discs:

Earlier we showed examples of buying Flowers on-line. That product is also ideally suited for the Net because customers ordering over the phone, the traditional order taking method, couldn't see the product and in most cases didn't know what they were buying. Using the Net they can view items and make a more informed decision.

On-line music vendors are also able to do this. The site above shows several pages from a popular on-line vendor called CD-Now! The firm has links which will actually play samples of music so you can hear before you purchase. You can see this above in the window showing Juliana Hatfield's album cover & the play list for the album. The playback rate can be as good as AM quality with 14.4kbps or last year's modem technology, it can be received at FM quality with current 28.8Kbps modem technology and can be CD-Quality when using newer, faster speed connections such as ISDN, which I'll talk about later.

The little playback box is neat, I can actually fast forward or rewind what I'm playing by sliding the lever you see there.

They also provide a searchable database which you see in another window that allows a customer to search on artist, title, song, or record label & can show the newest or the 'best' rated recordings searched on. The window which shows influences & similar

Slide 21

In additional to the direct selling of content, you'll also note that many TV advertisements from Volkswagen to Disney, are beginning to display Web addresses in their ads. By analyzing increases in traffic on a site, a firm gains one crude but nearly immediate indicator of how compelling an advertisement is. This may be particularly important if you're going after the young, wealthier demographic embodied by the typical web user.

Many sites including firms such as Fidelity Investments

Slide 22

Pathfinder - this is Time Warner's Pathfinder site, another one of the Internet's most popular destinations. It provides full text and archival searches for many of the firm's magazines including Time, Money, and Fortune, daily supplements

Slide 23

Pointcast released a beta in Feb. & the final version in May. By the end of the year over 1.7 million users downloaded their software - a phenomenal diffusion rate.

There are now 1 million regular viewers and 15,000 register with the service each day. At 30-50 million viewer hours a month, PointCast is comparable to a mid-sized TV network. This all came about virtually out of nowhere. PointCast is free, it makes money by selling ads on its network. There are currently 4 dozen advertisers. Each pays $10-50K for one month's worth of 30 second spots. Ad revenues are shared with its 'partner' channels. By examining channel popularity it can create a formula for rev. sharing.

The service is a direct marketers dream - allowing firms to approach live prospects within a targeted demographic. Users give initial demographic information about themselves before installing the software. Then PointCast 'watches you', paying attention to when you tune in and what you click on for interest. The ad above is for allergy medicine. This is likely related to the fact that I asked PointCast to show me 'air quality' as part of my weather configuration. By looking at my PointCast configuration on the left of the screen you can also tell that:

- I have an affinity for Boston (Boston Globe)

- I am a tech geek (all the tech press)

- I monitor high-tech stocks.

This gives a level of accountability that other advertising media can't touch. PointCast for example can say: "We had 2,000 people from Microsoft view your ad yesterday"

Pfizer Inc. claims PointCast has increased traffic to the firm's web site 10 fold.

Microsoft will offer PointCast on its new OS. The firm is diversifying, allowing for custom broadcast (internal corporate info, community events, school information, etc.)

Slide 24

The Web provides a remarkable amount of content on-line - tens of millions of documents, and content continues to double in size every two months, particularly as many magazines, newspapers, and trade publications publish their corporate libraries on-line. This makes finding content more difficult. The proverbial needle in a haystack is much tougher to locate if your haystack doubles in size every two months.

Although all this information is 'free', note that even free information carriers a price. The average knowledge worker with a PC on their desk costs a firm $120,000, so they're spending $1 a minute on company time each time they access something.

Firms with employees who need critical and timely information from the Internet can seek two options for maximizing their access: subscribing to an information-push service or hiring a dedicated Internet librarian. Information push services take a user's profile & key words and delivers content to the user as it becomes available. Librarians are helpful because they are able to keep current on Internet technologies and can eliminate inefficiencies associated with an entire firm's work population trying to conquer the Internet search learning curve. Draper Labs in Boston has 4 such researchers who gather information related to the aerospace industry for the firm's executives, engineers, and customers.

A number of firms are stepping up to the challenge of making the web easier to access. One I'd recommend is www.search.com. It provides an easy-to-access index of 250 specialized search engines. I recently used it to locate all of the bed and breakfast inns in Cambridge, MA that were in my price range. My wife & I are headed there this weekend. I conducted the searching about 5 minutes using search.com. When I finally get this lecture on-line I'll include a link to a Fortune article which describes how to efficiently search the Web.

Slide 25

The page above shows some of the offerings of the GEMs service of the US Department of Commerce. This service puts a significant amount of trade expertise and data freely in the hands of anyone with access to the Net. It is a particular boon to smaller exporters.

Firms can search regional databases on NAFTA, the former Soviet Union, and other emerging markets and find out if there is a need for products in their area. They will get specific trade-lead advise on customers as well as cables from US commercial offices abroad. The site is chock full of legal advice, current legislation, export restrictions, and other important info.

Slide 26

This is another example of a filtering service. In fact, the competition among Internet software has really benefited users because this service is free to any Netscape user. By going to Netscape's home page you can register with the Inbox Direct service for free. In here you can select from over 40 different content providers - including more obscure ones like this Spanish business daily or these papers from the UK.

In the lower window you can see that I get 'Mercury Morning', a summary of the day's 'Geek News' as reported in the San Jose Mercury News (Silicon Valley's Daily). If I want more news, I simply click on the story.

Now the beauty of this technology is that it can employ something called a 'learning agent'. Learning agents watch my actions and build a database about me. By using this database, my agent can better select what types of articles I'm likely to be interested in.

We haven't even scratched the surface with agent technologies, but this raises a number of fascinating possibilities for service improvement.

It also raises a number of troubling questions regarding individual privacy.

Slide 27

Info Superhighway is really an Info Dirt Path

Lack of Org. - Finding & monitoring cites is more difficult. Publicity remains important. Net-specific PR firms have sprung up. Some firms advertise heavily, others leverage Usenet newsgroups, the trade press, give-away services, or existing brand names.

Speed. Studies have shown graphics and other types of multimedia can be effective tools, particularly when the objective is to persuade or inform, however the low bandwidth available to most shoppers places practical limits on on-line content. A survey of the Yahoo directory showed over 50% of the visitors accessed at rates of 14.4Kbps or lower. Most folks accessing at faster rates are doing so from work or school, areas not conducive to shopping. As I'll describe later, access speeds are increasing, however a catch 22 between richness of content & accessibility

Slide 28

There has been a lot of talk about security issues on the Net, particularly the security of sending credit card data on-line. However, much of the concern has so far proved to be without merit.

Although a number of flaws have been found in popular software such as the Netscape Navigator, these flaws have been quickly corrected and there have been no reports of the interception and abuse of credit cards resulting from such problems. Most abuses you're likely to hear about on the Net involve fraud, the same type of problem which plagues telephone sales. In fact, as the figures above show, the rate of Internet fraud is estimated to be dramatically lower than other transaction mediums.

Internet security mechanisms are actually remarkably secure. It is possible to send your card encrypted over the Internet, so that the only entity to read it will be a computer program on the other end which will verify the number, charge your account, then remove it from its hard disk. I'd contend your card is much more vulnerable when there are humans which intervene and can read your paper carbons and see your signature.

Demonstrate how encryption works using box & key metaphor. Server-side is 'real' weak link.

Now it should be noted that these 'boxes' can be broken. A french student was the first to break the Int'l version of Netscape using 40 workstations & two super computers over 8 days. The domestic (purchased) version is significantly more secure. However, US security concerns are limiting the wide-spread available of more complex encryption. The only difference is that more numbers are used to scramble your number. It's like having thicker 'walls' to a locked box. The more numbers, the thicker the wall, and the longer it will take to break in. These security mechanisms are so secure that the US government has declared them to be munitions which can not be exported. Of course, this is nearly unenforceable, as the technology is widely posted on the Internet. In fact, a popular geek T-shirt lists the three lines of code required to encrypt at the 'munitions' rate & says in bold print 'this T-Shirt is classified by the U.S. government as a munition and can not be exported without violating federal customs law'. [Also mention Term Quote & Moldova 900 # scam]

Net culture is public & constantly scrutinizes technology. Note Netscape's bugs bounty.

Slide 29

Another rats nest exists in the unresolved issues, particularly those associated with our legal infrastructure's inability to keep up with technology.

For example, the Internet allows for on-line gambling. Internet casinos and sports betting parlors are located off-shore and although most state laws prohibit gambling, this is virtually unenforceable in cyberspace.

Decency laws also present a problem. In an effort to censor unwanted discussions on American Online, the firm banned a list of indecent words. One of the words was 'breast'. Of course, they hadn't counted on the uproar from users when the breast-cancer discussion forum was deemed 'inappropriate

Slide 30

Importance of understanding Net culture & that most folks access the Net for productivity gains & at a fee.

Greencard Lawyers were tortured when they 'spamed' the Net, posting an advertisement on all newsgroups. They claim to have gained $100,000 in new customers & wrote a book, but the price was having their mail swamped with bogus magazine subscriptions, their fax machine assaulted with blank or offensive messages, and their E-Mail service cut when their ISP's disk crashed from filling up with hate mail.

AOL users now regularly get junk E-Mail, but remember that most users with private accounts pay for access. As such, any direct solicitation is like sending junk mail postage due. Some states are creating 'anti-spam' laws, but constitutionality & interpretation is difficult to assess.

Establish a corporate policy relative to account usage - what is valid to spend time on, what topics one can post on, consider alternate domain names for employees, etc. (fakename.com vs. ibm.com). Remember, the firm's name travels with all employees who post messages & send E-Mail from corporate accounts. Also set up firewalls to gauge & block spam bombs (BC, 'Hey Macaroni' re-route)

Understand that the Net will naturally low prices for commodity based goods. This is because lower search costs mean users will execute more searches. For commodity products, users will obviously choose the lowest price products. Differentiated goods, however, may actually see their market expand, particularly if price is less of a factor in a typical user's comparison (see Bakos 1991). Ex. Bookstacks unlimited, personal experience buying CDs.

Slide 31

If you are a vendor of a commodity product, you're looking at your worst nightmare. This is the BargainFinder prototype developed by Andersen Consulting. BargainFinder allows an individual to search out a compact disk through some 10 on-line superstores - showing the product's price & shipping costs.

Now clearly - if given a choice, anyone in this room would select the lowest price product.

It would be naïve to assume that such web-based businesses will eliminate the need for real 'brick & mortar' record stores, but competition among the vendors is likely to be extremely fierce and almost entirely price based. Some preliminary studies have demonstrated that most on-line purchases are not impulse buys - folks shopping on the web know what they want. As such, they're likely to go to the place that can get it to them for the cheapest.

Possible tactics for avoiding price-based competition include creating switching costs (frequent buyer programs akin to the airlines frequent flyer programs which came about after CRS were deployed & competition increased).

Slide 32

A firm's position in the distribution chain may also indicate it's likelihood of long term success on-line.

The curve above is the typical price-based demand curve which applies to most products. As price goes down, demand goes up.

The diagram below that is from Benjamin & Wigand's article in the Winter 1995 Sloan Management Review. This shows how eliminating middlemen can reduce the price of goods to consumers (this example draws from actual prices in the Japanese retailing sector, notorious for being distribution-heavy, and notes how catalog retailers such as LL Bean have captured markets by circumventing typical distribution channels). Also it's critical to note that the vendor's profit margin per product does not change as the price drops since all price savings come from eliminating the distribution costs. BUT the vendor enjoys greater sales because demand increases as price drops.

We've already seen an example of how a firm is trying to eliminate the middleman - Liberty Financial's Annuities are put out by the direct marketing arm of Independence Life & Annuities (see earlier slide). The firm noted that expenses could be reduced to <1% vs. the 4-8% commission charged by agents.

As another example, consider Sunburst Farms, a Miami-based floral grower group. This group has established a web site called FlowerNet which eliminates the traditional FTD delivery mechanism & instead sends flowers via FedEx. FlowerNet's price for a dozen roses is $29.95 vs. $59.95 charged by the PC Gifts & Flowers, a firm cited earlier which uses the traditional distribution chain of local flower shops.

Slide 33

I feel its important to tone down the euphoria around the web. There are a number of initial success stories, but many more flops. Some stories also start out sounding successful, only to have mixed results later on.

A good example is the Vermont Teddy Bear Company. The firm was doing $50,000 in on-line sales a month during its first two months of business - it seemed web sales would be a coup. But then interest dropped off.

The reason? The firm got a lot of early mover press, but then had difficulty staying in the public eye. Their site also was not updated & hence seemed flat, offering purchasers no reason to return.

The experience of the Vermont Teddy Bear company & many other firms is expressed by the first graph - an initial run up in interest, then a dramatic drop in demand.

The challenge for web-based stores is to continue to push this curve upward, so that interest in a firm's site expands as the web expands. Ways to do this include:

- move first to establish a brand. Users will undoubtedly gravitate toward a known entity and may avoid searching (example: Yahoo in search market)

- advertise, promote, & use PR to stay in the public eye. Web firms have to keep awareness high. It may be more important, given that I'll always walk by Borders when I'm at Carousel Mall, but I may not remember Amazon.com or CDNow.

- offer users a way to return. Build a community (Amazon's web reviews, Parents' Place parent forums, Fidelity's Guess the Dow contest), reel.com's alternative service creation (a store is draped within a recommendation service)

Slide 34

Reel.com is an excellent example of offering a great on-line service which is also associated with a commercial enterprise.

Reel.com offers information about the movie industry. Featured here is something called the Reel Genius, software which can acutally suggest which movies you are likely to enjoy. Reel Genius first gives you a selection of 10 movies and asks you to rate those which you've seen on a 1 (worst) to 10 (best) scale. (you can rate more than 10 movies if you'd like). It then makes suggestions of other movies you're likely to enjoy.

Reel Genius is an example of a 'collaborative filtering agent'. It amasses a database of individuals with like tastes and demographics. It can then use this database to make informed suggestions as to the types of movies you one is likely to enjoy.

Note on the left side of the screen there is a 'store' button. Users are likely to come to Reel genius to get ideas, then they may be inspired to purchase new or used videos in their on-line store.

Now what is reel.com's biggest asset? It's database! If reel.com can capitalize on being a first mover & having a large database of registered users before competition comes on-line, their brand will be established and they will have created a barrier to entry.

Think of the other vendors who might be interested in this technology? Video stores like Blockbuster (which will likely suffer as video-on-demand becomes a reality). Theatre chains like Lowes. They could seek advertising from production houses as well. I suspect that their business plan is to amass a database and then be acquired by one of these other types of firms.

You can try out other collaborative filters at www.firefly.com (MIT-Patty Maes' firm)

Slide 35

It is important to note that we are at the iceberg's tip of a cultural and economic revolution, akin to the Industrial revolution. New technologies on the horizon will increase the potential of leveraging digital communications in ways which are impossible today. In anywhere from 1-10 years you'll be seeing:

Faster Access Rates:

- ISDN quadruples todays' modem speeds

- xDSL will offer video-on demand over phone lines

- Cable modems offer 40mbps vs. 33.6kpbs used at SU (I'll have one this fall when I move to Boston).

Possibilities increase the level of interactivity - video on demand, video conferencing.

Broadband satellite offers high speed, wireless access to digital information. Current technologies can blast uni-directional Internet data via DBS. Bill Gates & Craig McCaw intend to blanket the planet with 840 satellites in low orbit by 2002. The promise of this technology is wireless info on demand (imagine having a textbook read to you from your school's library while you jog).

Component Applications - most major productivity software shipped in 1997 will be Web aware including the next update of Windows (scheduled for Fall 1996).

Supplier race - telecom deregulation (long distance, OLS, cable, power/NiMo).