MP3 / MD740Strategy & Information Systems

Nov. 10, 2004

Information Systems and Distribution Channel Structure

Issues Covered• Collapsing Channels

– failures, successes, the role of value gaps

• Shifting Channels– multiple channels, channel pressure, innovation,

media industries

• New Intermediaries– examples, impact, threats, market creation

• Auction Models– markets of first choice and last resort

Source: Benjamin & Wigand (SMR)

Price

Unit Sales

Producer Wholesaler Retailer Consumer

Producer Wholesaler Retailer Consumer

Producer Wholesaler Retailer Consumer

Price/Shirt Savings

$52.72

$41.34

$20.45

0%

28%

62%

Disintermediation

Value Gaps

customersretailerdistributorsource firm

Value Added = A,Expense = X

Value Added = B,Expense = Y

Expense Savings = (X+Y) - Cost of New EffortValue Gap = (A+B) - Value Added by New Effort

"Mark has this microcosm of the jewelry market online. I know what is moving fast and what I should be discounting, but I still don't have to discount for my other retailers because they don't have this kind of view into the market"

Anonymous Blue Nile Wholesaler

Mitigating Risk in ‘Re-Routing’

• Understand channel economics– ‘true cost’ beyond raw margins: loyalty, frequency,

acquisition costs, freight, returns, service

• Incentives to guide customers to the right channel– “carrots & sticks”

• Provide a safety net• Communication program

– for internal & external constituencies

Channel Pressure

supplier distributor retailer customermanufacturer

Traditional Channels

Online Channels

supplier customermanufacturer

suppliermanufacturer customernew intermediaries

“We recognize that a vendor has the right to sell through whatever distribution channels it desires. However, we too have the right to be selective in regard to the vendors we select and we trust that you can understand that a company may be hesitant to do business with its competitors.”

HomeDepot memo to suppliers

“The music industry will be out in five years – kaboom, gone.”

Tim WhiteEditor, Billboard Magazine

Wired, Feb. 2003

“The business will implode once you can download a movie, give it to your friends and not have a moral problem with doing it. Then we’re screwed. Literally, our very lives are at stake now. George and I are just praying that we can finish ‘Episode III’ in time, before it’s all over.”

Rick McCallum Producer, Star Wars Movies

CNN, October 17, 2002

“Why is a record company any more qualified to send an MP3 to iTunes than I am?”

Moby – Fall 2003

Channel Extending Intermediaries

supplier customer

CEIsupplier

supplier

supplier

customer

customer

customer

Search for opportunities to add value: e.g. high customer search costs, switching costs, low customer satisfaction

Wield new power by consolidating traditional buyers & customers. Become the first-line interface with consumers.

Auction FormatsLiquidation Auctions: (e.g. Priceline)

suppliers customersauction

Market Efficiency Auctions: (e.g. eBay)

Seek lowest price on widely available goods and services

auction

disincentives to use auction shrink supply over time

Seek first to maximize existing

channels & reduce inventory

suppliers customersSeek access to unique / rare products or services

incentives to use auction increase supply over time

Auction format is favored over the

inefficiency of existing channels

IPO Inefficiencies

Company DateShares

UnderwrittenInitial Offer

PriceFirst Day Close

Share Price DifferencePercent

UndervaluedJetBlue 4/12/2002 5,500,000 $27 $45.00 99,000,000$ 67%PayPal 2/15/2002 5,400,000 $13 $20.01 37,854,000$ 54%NetScreen Technologies 12/11/2001 10,000,000 $16 $23.72 77,200,000$ 48%Magma Design Automation 11/19/2001 4,850,000 $13 $18.99 29,051,500$ 46%Global Power Equipment 5/17/2001 7,350,000 $20 $31.45 84,157,500$ 57%Simplex Solutions 5/1/2001 4,000,000 $12 $21.20 36,800,000$ 77%

The Firm small Investors

small Investors

small Investors

$45/share

Underwriting syndicate

pays a 7% fee $27/share

Institutions& large

investors

Company Date

Shares Underwritt

en

Underwriting

Share Price

First Day Close

Share Price Difference

Percent Undervalu

ed

JetBlue 4/12/2002 5,500,000 $27 $45 $ 99,000,000 67%

PayPal 2/15/2002 5,400,000 $13 $20 $ 37,854,000 54%

NetScreen Technologies 12/11/2001 10,000,000 $16 $24 $ 77,200,000 48%

Magma Design Automation 11/19/2001 4,850,000 $13 $19 $ 29,051,500 46%

Global Power Equipment 5/17/2001 7,350,000 $20 $31 $ 84,157,500 57%

Simplex Solutions 5/1/2001 4,000,000 $12 $21 $ 36,800,000 77%

Transmeta 11/7/2000 13,000,000 $21 $45 $ 315,250,000 115%

CoSine 9/26/2000 10,000,000 $23 $63 $ 400,600,000 174%

Active Power 8/8/2020 8,000,000 $17 $53 $ 286,000,000 210%

StorageNetworks 6/30/2000 9,000,000 $27 $90 $ 569,250,000 234%

VA Linux 12/9/1999 4,400,000 $30 239 1/4 $ 920,700,000 698%

Red Hat 8/11/1999 6,000,000 $14 $52 $ 228,375,000 272%

mp3.com 7/20/1999 12,300,000 $28 $63 $ 434,343,750 126%

Efficient Networks 7/15/1999 4,000,000 $15 $53 $ 152,000,000 253%

Tibco Software 7/14/1999 7,300,000 $15 $40 $ 182,500,000 167%

China.com 7/13/1999 4,200,000 $20 $67 $ 197,862,000 236%

CommTouch 7/13/1999 3,000,000 $16 $24 $ 24,000,000 50%

eToys 5/19/1999 8,300,000 $20 $77 $ 473,100,000 285%

iVillage 3/18/1999 3,500,000 $24 $56 $ 112,000,000 133%

AutoWeb 3/23/1999 5,000,000 $14 $28 $ 71,250,000 102%

Auto-by-Tel 3/24/1999 3,500,000 $23 $40 $ 60,375,000 75%

Prodigy 2/11/1999 8,000,000 $15 $28 $ 105,040,000 88%

VerticalNet 2/11/1999 3,500,000 $16 $45 $ 102,830,000 184%

Healtheon 2/11/1999 5,000,000 $8 $31 $ 116,900,000 292%

Pacific Internet 2/5/1999 3,000,000 $17 $48 $ 93,000,000 182%

Theglobe.com 11/13/1998 3,100,000 $9 $64 $ 168,950,000 606%