Transcript No Slide Title

ABCD
Customer Data and eCommerce
John Julius Sviokla
October 99
ABCD
© 1999
The Opportunity
Business to business ecommerce receives far less press than
the consumer side, yet it is expected to be 10 to 20 times
larger.
Projected eCommerce Revenue Growth
Growth Drivers
• Internet promises low cost
solution, replacing expensive
EDI, and multiplying transaction
volume
• Companies are ready for ‘the
next big thing’- BPR done, Y2K
winding down
• Customers’ professional
expectations are set by their
personal EC experiences
Under Estimated
• Cisco alone did $8 billion in
1998
• $1.3 trillion is only 9.4% of total
‘03 sales transactions
ABCD
© 1999
$1,331
$1,400
$1,200
$1,000
$843
$800
$499
$600
$400
$200
$251
$43$8
$109
$18
$33
$52
$108
$76
$1998
1999
2000
Source: Forrester Research, 11/98
2001
2002
2003
Projected B2B revenue in
billions $ B2C revenue in
Projected
billions $
1
The
Drivers
Before the Internet,
it cost $50k to
connect a trading
partner to an EDI
VAN, so only core
partners were
added.
This opportunity is the result of three converging drivers. First,
technology is only now enabling fully-integrated ecommerce.
Manufacturer
Manufacturer
Site A
Site B
ABCD
Customer
Site B
Private
WAN
Private
WAN
Now, connecting to
the Internet costs
under $1000, so
it’s economical to
add virtually
everyone.
Customer
Site A
EDI/EFT
Internet
Logistics
Supplier
© 1999
Bank
2
The
Drivers
Third, a rich venture capital market is providing needed liquidity
to new ideas and innovations.
• A total of $6.5 billion was invested in the Internet during
the 5-year period from 1994 - 1998.
• Half of that amount, $3.3 billion, was invested in 1998
alone.
• Over 700 companies received some stage of VC
financing in 4Q98.
ABCD
Source: National Venture Capital Association
© 1999
3
Industry
Structure
Rich information access gives customers the ability to quickly
compare specifications and prices of complex industrial
products.
DC motors can be searched
along 44 attributes from
maximum rotary inertia to
English v. metric design
Product
Will this ability bring out the
uniqueness of your products
or reveal them to be
commodity like substitutes?
ABCD
© 1999
Process Suppliers
Time
Searched Required
HOT WATER TIMER
1 web site
at a time
5
2hrs
33
10sec
4
New
Economics
These changes to industry structure will not only remove the
systematic barriers that many suppliers have relied upon to
increase margin, but will result in new pricing mechanisms.
Old Rules
Xaction
Margin
Cost
Product
Service
Tech Info
Transaction
•Supplier and customer each paid for own internal transaction costs
•Shipping cost responsibility was negotiated
Margin
•Suppliers benefited from product and pricing information
asymmetries, volume-based discrimination and channel leverage
•Based upon a “cost plus” formula versus true value added
Cost
•Services and technical support aggregated into product costs as
allocated overhead
ABCD
© 1999
5
New
Economics
Pricing in business to business ecommerce will have to meet
the demands of customers and the abilities of the Internet
medium.
New Rules
Margin 3
Transaction
•The transaction changes from a cost item into a revenue stream
•Third parties process the transaction, for a fee
Services
Margin 2
Information
Margin
•Unique margins will be allocated according to value added
•Customers will only pay margins on unique products, not
commodities
•Customers will pay for services and infomation
Margin 1
Product
Margin 0
Transaction
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© 1999
Cost
•Technical information and services will become the “wrappers”
on products to add uniqueness
6
New
Economics
This new pricing creates opportunities for new players,
particularly for the transaction and service piece of the pie.
These new players are called infomediaries.
Supplier
Margin 3
Services
Margin 2
Information
Margin 1
Product
Infomediary
Customer
Suppliers
•New revenue streams from
services and information
•Margin loss on products
•Cost savings on transactions
Infomediary
•New revenue streams from
services, information &
transactions
Customer
•Cost saving on purchases and
transactions
Margin 0
Transaction
ABCD
© 1999
7
The
Winners
Ariba looks like a winner because it is becoming a Reed
network, more option value than Sarnoff and Metcalfe
networks
Sarnoff Model
Metcalfe Model
Reed Model
Value= N*
Value= N2
Value= 2N
Network 1
Network 1
Commerce
Venue
Network 1 Network 2
Network 2
‘Broadcast’, high
quality content
ABCD
© 1999
Network 2
Interactions and
transactions
Source: Adapted from David Reed
Collaboration and
new content
creation
*N= the number of terminals/ users on the
network
8
Virtually all B2B firms exploit only the first two network
models...
The
Winners
SARNOFF MODEL
Delivery Approach
Communication
Forum
Offering
METCALFE MODEL
Push
Push; some pull
Company-customer
One-way media, physical or virtual relationship via interactive
media
Product
Service
REED MODEL
(Venue-Based)
Pull; with push capability
Hosted venues via online
media
Solutions and Experience
Platform
Transaction
Relationship
Community-like interactions
Communication
One-to-many
Primarily pair-wise
Collaborative groups
Metric
Conversion rate
Lifetime value
Size and share of time
Reach and frequency with
best content
Broadcast television, radio,
newspaper
‘Growth at any cost’- total
connections on the network
Value of facilitated
communication
B2B: VerticalNet, Consumer:
ivillage, AOL, eBay
Driver of Value
EXAMPLES
ABCD
© 1999
Telephone, Internet
9
…However, the third is the most powerful. Firms that
achieve scale in a Reed model capture the most value from
the network
Based on number of potential
interconnections
Value of Network
The Value of Facilitated Venues...
Best Content Most Members
(Increase a)
(Increase N)
...Dominates Network Value as Users
100%
Increase
Best
Facilitation
(Increase c)
~2N
90%
80%
REED
c2N
70%
% of network
value
The
Winners
60%
50%
50%
bN2
40%
~N2
METCALFE
30%
20%
SARNOFF
aN
10%
0%
~N
1
Number of Users
2
3
4
5
6
7
8
9 10 11 12 13 14 15
Number of Users
Total Network Value = aN + bN2 + c2N
a=20, b=5, c=1
• This value is realized and shared by members and the host. To maximize network value, firms
must increase the “c” coefficient of the network value equation
ABCD
© 1999
10
Summary
New Venues, New Messages
• Senior Executives need to unlock the value of their
customer’s data
• It is not about loss of control
• New margins, new relationship
• It will happen anyway
ABCD
Source: National Venture Capital Association
© 1999
11