© 1999

Customer Data and eCommerce

John Julius Sviokla

October 99

2© 1999

Business to business ecommerce receives far less press than the consumer side, yet it is expected to be 10 to 20 times larger.

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 $43

$109

$251

$499

$843

$1,331

$8 $18 $33 $52 $76 $108

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

1998 1999 2000 2001 2002 2003

Projected eCommerce Revenue Growth

Projected B2B revenue in billions $Projected B2C revenue in billions $

Source: Forrester Research, 11/98

Under Estimated• Cisco alone did $8 billion in

1998• $1.3 trillion is only 9.4% of

total ‘03 sales transactions

The Opportunity

3© 1999

This opportunity is the result of three converging drivers. First, technology is only now enabling fully-integrated ecommerce.

TheDrivers

CustomerSite B

LogisticsBankSupplier

CustomerSite A

Manufacturer

Site A

Manufacturer

Site B

PrivateWAN

PrivateWAN

EDI/EFT

Before the Internet, it cost $50k to connect a trading partner to an EDI VAN, so only core partners were added.

Now, connecting to the Internet

costs under $1000, so it’s economical

to add virtually everyone.

Internet

4© 1999

Third, a rich venture capital market is providing needed liquidity to new ideas and innovations.

TheDrivers

• 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.

Source: National Venture Capital Association

5© 1999

Rich information access gives customers the ability to quickly compare specifications and prices of complex industrial products.

IndustryStructure

DC motors can be searched along 44 attributes from maximum rotary inertia to English v. metric design

Will this ability bring out the uniqueness of your products or reveal them to be commodity like substitutes?

Product Process Suppliers Time Searched Required

HOT WATER TIMER

1 web site at a time 5 2hrs

33 10sec

6© 1999

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.

NewEconomics

Old Rules

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

CostProductService

Tech Info

Margin

Xaction

7© 1999

Pricing in business to business ecommerce will have to meet the demands of customers and the abilities of the Internet medium.

NewEconomics

New Rules

Transaction•The transaction changes from a cost item into a revenue stream•Third parties process the transaction, for a fee

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

Cost•Technical information and services will become the “wrappers” on products to add uniqueness

Product

Margin 1

Information

Margin 2

Services

Margin 3

Transaction

Margin 0

8© 1999

This new pricing creates opportunities for new players, particularly for the transaction and service piece of the pie. These new players are called infomediaries.

NewEconomics

Supplier Infomediary Customer

Product

Margin 1

Information

Margin 2

Services

Margin 3

Transaction

Margin 0

Suppliers•New revenue streams from services and information•Margin loss on products•Cost savings on transactionsInfomediary•New revenue streams from services, information & transactionsCustomer•Cost saving on purchases and transactions

9© 1999

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 ModelValue= N* Value= N2 Value= 2N

Network 1Network 2

Network 1

Network 2

Source: Adapted from David Reed*N= the number of terminals/ users on the network

Network 1

Network 2

Commerce Venue

‘Broadcast’, high quality content

Interactions and transactions

Collaboration and new content creation

TheWinners

10© 1999

Virtually all B2B firms exploit only the first two network models...

REED MODEL(Venue-Based)

REED MODEL(Venue-Based)METCALFE MODELMETCALFE MODELSARNOFF MODELSARNOFF MODEL

Delivery ApproachDelivery Approach

Communication Forum

Communication Forum

OfferingOffering

PlatformPlatform

MetricMetric

EXAMPLESEXAMPLES

CommunicationCommunication

Push

One-way media, physical or virtual

Product

Transaction

Conversion rate

Broadcast television, radio, newspaper

One-to-many

Push; some pullCompany-customer

relationship via interactive media

Service

Relationship

Lifetime value

Telephone, Internet

Primarily pair-wise

Pull; with push capability

Hosted venues via online media

Solutions and Experience

Community-like interactions

Size and share of time

B2B: VerticalNet, Consumer: ivillage, AOL,

eBay

Collaborative groups

Driver of ValueDriver of ValueReach and frequency

with best content

‘Growth at any cost’- total connections on the

network

Value of facilitated communication

TheWinners

11© 1999

…However, the third is the most powerful. Firms that achieve scale in a Reed model capture the most value from the network

Number of Users

~2NREED

METCALFE

SARNOFF

~N2

~N

Valu

e o

f N

etw

ork

Base

d o

n n

um

ber

of

pote

nti

al

inte

rconnect

ions

Total Network Value = aN + bN2 + c2N

a=20, b=5, c=1

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

% o

f n

etw

ork

valu

e

c2N

bN2

aN

Number of Users

50%

The Value of Facilitated Venues...

• 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

Best Content(Increase a)

Most Members

(Increase N)

Best Facilitation(Increase c)

...Dominates Network Value as Users Increase

TheWinners

12© 1999

New Venues, New MessagesSummary

• 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

Source: National Venture Capital Association