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
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%
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