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Studieren oder Gründen? BEIDES!

mit Informationsmanagement und Wirtschaftsinformatik an der Universität Koblenz-Landau

Mario Schaarschmidt (University of Koblenz-Landau / University of Cologne) Harald von Korflesch (University of Koblenz-Landau)

Web Science Summer School, June 29th – July 6th, 2016

Tutorial: Web Entrepreneurship

05.07.2016

Web Entrepreneurship | Web Science Summer School 2016 2

Looks delicious – but what to do if the restaurant does not deliver?

Motivation


Online reservation of traditional services

§  Digitization permeates many traditional businesses

§  Such systems have the potential to turn established businesses upside down!

Motivation


2.633

2.960 2.900,0

0

500

1000

1500

2000

2500

3000

3500

Quandoo Book a table Seat me

Con

nect

ed W

ebsi

tes

mar

ket l

eade

rs

#restaurants 13,500 (+117%) #seated diners 22 Mio (+266%) #reviews 145.000 (+262%) #employees 250 (+30%) #countries 16 (+23%)*

*Figures as of Feb 2016, compared to Feb 2015 Source: PR Newswire, 2016

Example: Online reservation of restaurants

Other (more or less) recent examples of Web Start-Ups


…and more mature ones…

Web Entrepreneurship


§  Web Entrepreneurship - Definition

Web Entrepreneurship


Where is Entrepreneurship „on the Web“ different?

§  User Involvement? §  Scalability? §  Business Model? §  Content? §  …more?


Give yourself 5 min (in groups) and try to find other differences! …or isn’t it different at all?

User involvement: Online reservation


Involvement in booking process in less-digitized

service (e.g. gastronomy)

Risk

Usefulness

This research investigates how involvement in different booking channels affects perceived booking risk and subsequently, the evaluation of the

booking channel’s usefulness and the intention to use

Conceptual model


Service complexity (Restaurant vs. Dentist)

Usefulness

Perceived risk

Involvement (Phone vs. Online)

Attitude toward online reserv.

H3

Intention to use

Dependent variables

H1 / H2

H4 / H5

Controls

Attitude toward Employee int.

Experimental factors

Moderators

H6 / H7

Hypotheses


Hypothesis 1: A high (vs. low) involvement in booking processes, in terms of online (vs. phone) reservations, will negatively (vs. positively) affect the intention to use the booking system.

Hypothesis 2: A high (vs. low) involvement in booking processes, in terms of online (vs. phone) reservations, will negatively (vs. positively) affect the perceived usefulness of the booking system.

Method


Setting Pre-Study Main Survey

§  Literature analysis §  Unformal interviews with

people working in online reservation business

§  Developing of an experimental online survey design

§  To assess which forms of less-technical services are associated with complexity, we collected data via Amazon Mechanical Turks (e.g., dentist, restaurant, car workshop, hairdresser)

§  Goal: Get an idea of which service is perceived as the most / least complex service concerning involvement

à N=72 respondents

§  With the help of student assistants a link to an online survey was distributed.

§  Scenario-based between-group experimental survey design

§  Measurement with multi-item scales except dependent variables

§  Good psychometric validity (CMV, AVE, convergent validity, etc.)

à N=282 respondents

Experimental conditions


Phone reservation dentist

Online reservation dentist

Phone reservation restaurant

Online reservation restaurant

Involvement

Ser

vice

com

plex

ity

low high

low

high

Results


Involvement (I) F Service Complexity (C) Low: Phone High: Online C I C × I

High: Dentist

6.21 (1.30) 5.26 (1.89)

0.16 13.302*** 1.78 Low: Restaurant

5.88 (1.56) 5.44 (1.63)


High: D entist

5.45 (1.30) 5.17 (1.33)

0.392 1.688 0.299 Low: Restaurant

5.46 (1.22) 5.34 (1.12)


High: Dentist

1.86 (1.05) 2.82 (1.40)

5.010* 26.323*** 1.016 Low: Restaurant

2.36 (1.39) 3.01 (1.41)

DV: Intention to use

DV: Usefulness

DV: Booking risk

Source: Schaarschmidt, Höber & Von Korflesch (2016)

Results


Interaction Booking Channel X ATOR

H6: The relationship between high (vs. low) involvement and the perceived booking risk is moderated by attitudes towards online reservation such that the relationship is stronger for customers scoring low on attitudes towards online reservations.

Imagine you run a restaurant. What would you learn from this findings?


Do you trust consumer ratings on physician rating platforms?

Online Experiment - Jameda


Implication: Better profile = More patients?

Source: Schaarschmidt, Homscheid & Ivens (forthcoming)

Jameda


New challenges!

Brief summary

§  No accepted definition of Web Entrepreneurship §  Many new business models based on Web applications §  User integration and rating systems are important (and make

the business different) §  New phenomena – and lots of research possibilities

§  …it‘s more than simply „selling things via Internet“ !!!



Entrepreneurship

Introduction


§  Frederick W. Smith studied economics at Yale University in the 1960s

§  His father was rich and made his fortune in founding a bus company

§  Frederick inherited his father’s affluence

§  But: Why does an entrepreneur with a $ 10 million inheritance need more capital to get his company of the ground?

§  Answer: To found FedEx!

Getting the idea


§  The professor of one of Smith’s classes was a staunch supporter of the system of air fright handling in the 1960s

§  Cargo packages could only be transported in unused space on a passenger flight

§  Fred Smith saw things differently and, in a paper, described the concept of a freight-only airline that would fly all packages to one central point

§  Goods would be distributed and flown out again to their destinations

§  This operation could take place at night, when airports are less crowded, so that packages could be delivered the next day

§  The company would not need a duplicate investment in inventory to store freight in regional warehouses, waiting for unused passenger capacity

§  Smith earned a C for his paper

The challenge


§  Many success stories started in a garage with initial investment of a few hundred dollars

§  But none of these companies needed a nationwide distribution system in place, complete with a fleet of airplanes and trucks, before accepting its first order!

§  Smith needed a lot of money to reach the required level of service §  After a period of frustration he got $ 5 million from New Court

Securities, a venture capital investment bank §  After this first step, five other institutions got involved §  In the end, Smith acquired $ 71 million; The largest venture

capital start-up deal in the history of American business (in 2005)

§  One month after the official start-up, Federal Express was shipping a total of 186 packages to 25 destinations

The success


§  By the end of 2005 FedEx had grown into a $31 billion* network of companies, offering a wide variety of services

§  In 2005, FedEx averaged: -  More than 6 million shipments for express, ground and freight a day -  More than 260.000 employees and contractors worldwide -  More than 220 countries and territories, including every address in the

US -  677 aircrafts serving more than 375 airports worldwide -  More than 70.000 motorized vehicles

At the heart of Smith’s success story is the creativity and uniqueness of the initial business concept!

*$47.5 bn in 2015

What is Entrepreneurship?


Root of the Word

§  From the French word entreprendre, which refers to individuals who “undertook” the risk of a new enterprise

Today’s Meaning

§  The process of planning, organizing, operating, and assuming the risk of a business venture

What is Entrepreneurship?


Today’s Meaning cont. §  More than just the creation of a business; it also

includes the generation and implementation of an idea.

§  It is about being a dynamic thinker and operator which includes effective communication to all of your stakeholders

§  It is not about being a maverick; entrepreneurs must think tactically and strategically, and operate in a similar fashion

Quick facts


§  Annual creation of 600,000 to 800,000 new companies (as of 2013)

§  No sector of the U.S., and world, economy has been as vital, dynamic, and creative as entrepreneurship

§  Think:

The Ups and Downs ....


Ecstasy

Time

Despair

Enth

usia

sm

Vision Commercialization

Have an idea!

It works!

No it doesn’t

Yes it does!

Not proprietary

Yes it is!

Customers like it!

Cost too high

New cost modellooks good!

Yields are low

Have a fix

Doesn’t work

New fix works

Qualification

Orders

Approvals

Entrepreneurship is usually a Roller-Coaster Ride

Some Reasons to Become an Entrepreneur


Entrepreneurs learn to think differently. Triggers to start your own venture: §  Independence and Freedom from the

restrictions and bureaucracy of corporate life §  Being able to “do your own thing” §  Plateauing in current job §  Opportunity for sustained growth and mobility §  Flexibility §  Financial reward §  Loss of Current Employment “Looking back, the day that I got fired was the best day of my life”

……successful entrepreneur.

Types of Entrepreneurs


The Choice §  As the economy has shifted to place a premium on

portable skills and knowledge, as well as effective networks, entrepreneurship has become a viable career alternative.

§  Entrepreneurs are classed into several categories:

§  Serial Entrepreneur—Someone who starts, grows, and sells several businesses over the course of their career.



Types of Entrepreneurs – 2 §  Aspiring Entrepreneurs—Dream of starting a business;

they hope for the chance to be their own bosses, but have not yet made the leap from their current employment into the uncertainty of a startup. Research indicates that, at any given time, 7 million adults are trying to start businesses in the U.S.



Types of Entrepreneurs – 3 §  Lifestyle Entrepreneurs—Have developed an enterprise

that fits their individual circumstances and style of life. Intention is to earn income for themselves and their families. Sometimes referred to as “small businesses” or “mom-and-pop shops”. 13 million Americans (25 million if you count part-timers) run their own business from home.



Types of Entrepreneurs – 4

§  Growth Entrepreneurs—Have both the desire and ability to grow as fast and as large as possible. Their firms are the most dynamic job generators in the U.S. economy. There are over 300,000 entrepreneurial companies with more than 50 employees that are growing at a rate of 20 percent per year.



§  One of the major mistakes aspiring entrepreneurs make when starting out is NOT to closely question what they want to be when “they grow up”.

§  Each type of entrepreneur is a control and lifestyle choice with many advantages and disadvantages that must be considered

§  Decide early on what is most important to you – control, wealth, lifestyle…..

Ask Yourself “What Type am I”?

Business model


§  An architecture for the product, service and information flows, including a description of the various business actors and their roles,

§  A description of the potential benefits for the various business actors,

§  A description of the sources of revenues.

Many definitions exist: Here is one…

Example: eBay


§  Business model type: „Commerce“ §  Aquisitions and bargaining of business transactions §  Area: Online-Auctions §  Main area of work: E-Bargaining/E-Negotiation: §  (In a wider sense also e-transactions, e.g., by integration of

PayPal)

§  No own products! §  as Facebook (no own media), Uber (no own cars) or AirBnB

(no own rooms or appartments)

Business model analysis


Basic, later more…

Business Model

Value Proposition What value does the firm offer? -  For

customers -  For other

firms

Value generation architecture How is that value genrated?

Revenue model How do we generate money? Who pays?

Value Propostition: Ebay


Seller Buyer Logistics

Payment

What kind of value does eBay deliver?

Value Proposition: Ebay


Provision of platform for offering goods, which – per auction or direct buy – can be bought §  Bargaining is mediated by the platform §  Logistics and payment is done with partners §  Customers can be sellers and buyers

Revenue model


•  Revenue exclusively generated with sellers •  Multilayer revenue model

•  Fix fee •  Price-dependent sales commission •  Monthly payment

•  Complex fee system •  Additional revenue from PayPal

Two Sided Markets


§  Platforms with two (or more) user groups §  Provide each other with

-  beneficial network effects

Market

Side 1 Market Side 2

Multi-Sided Platform (MSP)

indirect Interaction

Two-sided market


Market Side 1

Market Side 2

Cross-Side Network Effect

Same-Side Network Effect

Multi-Sided Platform (MSP)

Network Effects


§  Same side -  Positive – more players => more online interaction -  Negative – more sellers => more competition

§  Cross side -  Positive – more games available to players -  Negative – more adverts in programs

§  Must capture cross-side network effects -  Avoid: subsidize a side that uses someone else’s paid -  E.g. Netscape browser NOT tied to servers

Network Effects – Chicken and Egg problem


§  The supply side won’t engage until there is sufficient volume on the demand side, and vice versa. Also known as “cross-side network effects”.

§  Whether it’s is a chicken-and-egg or a chicken-or-egg problem depends on whether participation adjusts more rapidly downward toward equilibrium or upward.

Pricing in Two-sided Markets


§  In TSM one side can subsidize the other §  Traditionally price is bounded

-  Min: Marginal cost per unit -  Max: Customer’s willingness to pay

§  Look for the biggest rectangle under the demand curve P

rice

Quantity

Independently maximize each market


Pric

e

Quantity

Pric

e

Quantity

Side 1: Consumer Side 2: Business

Collectively maximize both markets


Pric

e

Quantity P

rice

Quantity

Side 1: Consumer Side 2: Business

Network Effects

Total of red boxes must exceed blue

Examples


Newspaper Low price for newspaper à more reader à higher prices for advertising

Bars/clubs Give women free admission à more men pay charge and alcohol

Examples


Product/Intermediate/Plattform Market A Market B Games Consoles Players Games writers Mall Shopper Store Credit Card Card holder Vendor Dating agencys Female Users Male Users Newspaper Readers Advertiser Free TV Viewer Advertiser Mobilphone User Programmer of apps

More on TSP


§  Networks are becoming akin to services -  Evolving from physical to virtual infrastructures -  Helped by progress in new technologies

-  e.g. Virtualization, Cloud computing, IP Multimedia Subsystem platform -  Network platforms to serve as software ecosystems -  Growing number of Internet intermediaries are providing different kinds of

development platforms -  Google and Microsoft want to build web platform -the powerful layer of basic services

on top of which everyone else builds their web sites and services

§  Network Platforms are characterized by two customer segments or market sides

-  Application (Service) Developers -  Consumers

§  Platforms providers have to provide built-in functionalities in the platform -  e.g., API, tool boxes, software modules -  Availability of these software modules, APIs help to reduce app development

costs of developers -  But adding functionalities comes at a cost -  A trade-off between functionality-rich versus minimalist design exists

Two-sided markets


Pla$ormInfrastructure

ServiceProviders Users

NetworkProvider

F

bd pc

nd xc

Two-sided markets


31

29

5,1

3,4

0

5

10

15

20

25

30

35

Google Play Apple App Store Windows Phone Store BlackBerry World

Num

ber o

f App

Dow

load

s in

201

5 in

Bn

US

$

0 2 4 6 8 10 12

Revenue per Store in 2013 in Bn US $

Source: Statista, 2015

TSP: Economic problem formulation


§  Monopolist Platform Provider §  Two-sides: Application Developers and Consumers

§  Each market sides benefits from the participation of the other side -  Cross-side externality benefits (e.g., Android, Xbox)

§  Platform provider invests in platform functionalities -  basic functionalities to `niche’ functionalities

§  Trade-offs between platforms with functionality-rich and minimalist designs §  Charges flat-fees to both market sides

Functionality Rich Design: Pros:

Attractive to developers Indirect benefits to consumers Allows platform to charge higher fees

Cons: Expensive to build

Minimalist Design: Pros:

Cheaper to build Cons:

Less attractive to developers Indirectly less attractive to consumers Lowers the platform’s profit potential

TSP: Economic problem formulation (2)


§  In innovating apps, Developers will:

-  Use the functionality as is, if already provided by the platform

-  Otherwise, write their own software code to enable that functionality for their service

-  The latter comes at an application development cost for developers (presence of cost heterogeneity)

§  Consumers are application (service) users

-  Benefit from the number of available applications (developers) on the platform (can be heterogeneous)

-  Are oblivious to who provided the code for the functionality (i.e. do not experience any difference in the quality of platform provided verses developer provided functionalities)

-  App downloads are transaction free

Model formulation


§  Timeline for a three stage sequential decision process is considered:

§  Design Stage

§  Platform decides the level of functionalities, F

§  Pricing Stage

§  Platform decides on the flat fees (prices) to be charged to the two sides, pc (consumers) and bd (developers)

§  Adoption Stage

§  A xc fraction of consumers and a nd fraction of developers join the network

§  Consumers and developers who join are those that enjoy positive utility from joining the platform

Design Stage (Platform provider

chooses F)

Pricing Stage (platform chooses flat

fees pc and bd)

Adoption Stage (nd developers and xc consumers join the

platform)

DecisionTimeline

Direc9on

ofsolu9

on

Model: Platform utility


§  Platform charges flat fees to both market sides -  Users pay subscription fees -  Developers pay certification and licensing fees

§  Platform provider incurs a functionality development cost, C(F) -  Functionalities are added from most basic to `niche’ ones -  C(F) is monotonically increasing in F -  C(F) is convex (concave) if the marginal cost of adding sophisticated (niche) functionalities is

increasing (decreasing)

§  Consider F to be large, so the set of F is mapped onto an interval [0, Fmax] such that C(F) is continuous on the interval

)(FCnbxpU ddccp −+=

Model : Developer Utility (2)


§  α captures value that a consumer generates for the developer (cross-externality) §  It accounts for advertising revenue (e.g. Facebook app iLike gets revenue from iTunes,

Ticketmaster)

§  bd is the flat fee developers pay to the platform -  Android charges $25 market developer fee, Apple charges $99 licensing fee to distribute apps and $299 for

‘enterprise programmers’ (iOS developer program)

§  K(F) captures the baseline app development cost when F functionalities are provided by the platform (developers have similar baseline expertise in developing apps)

§  φτ captures the heterogeneity among developers in development cost for apps (e.g., fixed costs, employee benefits)

§  All system parameters are normalized w.r.t. τ §  Assume §  Development cost, K(F)

-  More built-in functionalities, lower is this cost -  K(F) is monotonically decreasing in F -  K(F) is concave (convex) if the marginal cost of developing sophisticated (niche)

functionalities is increasing (decreasing)

§  Developer utility when same side externalities are considered

))(( ϕτα +−−= FKbxU dcd

))(( ϕτηα +−−−= FKbnxU ddcd

Model : Consumer Utility (3)


§  q captures stand-alone benefits the platform provides to consumer

§  β captures the value that a developer generates for the consumer (cross-externality) §  θ captures the heterogeneity among consumers in how much they value the available apps,

§  pc is the flat fee consumers pay to the platform

§  All system parameters are normalized

§  In some platforms, consumers may value the stand-alone qualities or brand name more §  We consider the following alternative utility function to account for the case where users are

heterogeneous in their evaluation of stand-alone benefits, while valuing their cross-externalities equally

§  e.g. most players of games platform value the available number of games but can be more subjective about the console characteristics and hardware features (captured by q)

cdc pnqU −+= θβ

cdc pnqU −+= βθ

]1,0[∈θ

Model : Examples - Amazon Web Services


§  Amazon Web Services provides a variety of functionalities with available APIs

-  EC2 (computing), SimpleDB (database) Amazon S3 (storage), CloudFront (content delivery)

§  API complexity is a proxy for platform’s cost of building-in the functionality

§  Forum Activity levels is a proxy for usefulness of the functionalities

§  Functionalities that are most useful to developers are most difficult for platform to provide, `niche’ functionalities can be added at decreasing marginal cost to the platform.

-  Note the correlation in EC2, FPS, SimpleDB, RDS, SQS, SNS, DevPay

Source:h=p://www.elas9cian.com/2010/06/aws-by-numbers.html

Conclusion


§  Web Entreprenership has different forms §  Many characteristics of traditional Entrepreneurship are present in

WE, too §  Web start-ups have the potential to turn established businesses

upside-down §  WE often involves two-sided markets à difficult to price

Question for lunch break: Is the Web a threat for media and TV companies? Afternoon: Try to answer with business model canvas!

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