Context

This case is about a social network, Facebook. According

to its owners,
Facebook is a social utility that helps people communicate
more efficiently with their friends, family and
coworkers. The company develops technologies that
facilitate the sharing of information through the social
graph, the digital mapping of people’s real-world
social connections. Anyone can sign up for Facebook
and interact with the people they know in a trusted
environment.
The case illustrates some of the challenges for an owner
of a social network managing growth and decline in
usage. It also highlights the challenges for partners and
advertisers considering working with a social network.
The case is presented through key events during the
development of Facebook
Facebook launched and extended –
4 February 2004
Facebook was founded while Mark Zuckerberg was a
student at Harvard University. Initially membership was
limited to Harvard students. The initial viral effect of the
software was indicated since more than half of the undergraduate
population at Harvard registered on the service
within the first month!
Zuckerberg used open source-software PHP and the
MySQL database to create the original ‘TheFacebook.
com’ site and these technologies are still in use today.
When Facebook first launched in February 2004,
there were just three things that users could do on the
site, although they are still core to the functionality of the
site. Users could create a profile with your picture and
information, view other people’s profiles, and add
people as friends.
Since 2004, Facebook has introduced other functionality
to create the Facebook experience. Some of the
most significant of these include:
A wall for posting messa/ges
News feeds
Messages
Posting of multiple photos and videos
Groups
Applications
Facebook or social ads.
Intellectual property dispute – September
2004 ongoing
There has been an ongoing dispute on ownership of
Facebook since another Harvard-originated social
networking site ‘HarvardConnection’, which later
changed its name to ConnectU, alleged in September
2004 that Zuckerberg had used their source code to

develop Facebook when they originally contracted him

to help in building their site.
It is also alleged that another system predated
Facebook. Aaron J. Greenspan, a Harvard student, in
2003 created a simple web service that he called
houseSYSTEM. It was used by several thousand
Harvard students for a variety of online college-related
tasks – six months before Facebook started and eight
months before ConnectU went online. Mark Zuckerberg
was briefly an early participant. No suit has been filed by
Greenspan, instead he has published a book about his
experience. This service later expanded to include any
university student, then high school students, and eventually
to anyone aged 13 and over.
Brand identify established – 23 August 2005
In August, Facebook bought the domain name facebook.
com from the Aboutface Corporation for $200,000
and dropped ‘the’ from its name.
International expansion – 11 December
2005
Throughout 2005, Facebook extended its reach into
different types of colleges and by the end of 2005
included most small universities and junior colleges in
the United States, Canada and Mexico. It was also made
available in many universities in the UK and Ireland and
by December, Australia and New Zealand were added to
the Facebook network, bringing its size to more than
2000 colleges and over 25,000 high schools.
Initial concerns about privacy of member
data – 14 December 2005
Two MIT students downloaded over 70,000 Facebook
profiles from four schools (MIT, NYU, the University of
Oklahoma, and Harvard) using an automated script, as
part of a research project on Facebook privacy.
Facebook receives $25 million in funding –
April 2006; Microsoft invests October 2007
In May 2005 Facebook received a $13 million cash infusion
from venture firm Accel Partners, followed in April
2006 by a further $25 million from a range of partners
including Greylock Partners, Meritech Capital Partners,
and investor Peter Thiel, the co-founder of PayPal.
Facebook spokesman Chris R. Hughes explained the
rationale for the investment when he said:
This investment supports our goal to build an industryleading
company that will continue to grow and evolve
with our users. We’re committed to building the best
utility to enable people to share information with each
other in a secure and trusted environment.
Paul S. Madera, Meritech’s managing director, said his
firm was impressed by Facebook’s rapid growth and its
potential for further expansion in the coveted collegeage
market. ‘They’ve been designated by their community
as the chosen community portal,’ Madera said.
‘This is a company that the entire venture community
would love to be a part of.’
In October 2007 Microsoft took a $240 million equity
stake in Facebook. This stake was based on a $15
billion valuation of Facebook. Under the terms of this
strategic alliance, Microsoft would be the exclusive
third-party advertising platform partner for Facebook,
and begin to sell advertising for Facebook internationally
in addition to the United States.
New feed functionality launched –
September 2006
New information feeds were launched in mid-2006 and
these show the challenges of balancing the benefit of
new functionality against disrupting existing user habits.
Writing in the Facebook blog in September 2006
Mark Zuckerberg said:
We’ve been getting a lot of feedback about Mini-Feed
and News Feed. We think they are great products, but
we know that many of you are not immediate fans,
and have found them overwhelming and cluttered.
Other people are concerned that non-friends can
see too much about them. We are listening to all your
suggestions about how to improve the product; it’s
brand new and still evolving.
Later, in an open letter on the blog dated 8 September
2006, Zuckerberg said:
We really messed this one up. When we launched
News Feed and Mini-Feed we were trying to provide
you with a stream of information about your social
world. Instead, we did a bad job of explaining what
the new features were and an even worse job of
giving you control of them. I’d like to try to correct
those errors now.
Categorizing friends into different types (Friends Lists –
December 2007) is one approach that has helped to
manage this.
Facebook Platform for applications
launched – 24 May 2007
The Facebook Platform provides an API (Application
Programming Interface) which enables software developers
to create applications that interact with core
Facebook features.
The Facebook developers resource (http://developers.
facebook.com) explains there are three main components
used to build FB apps:

1 Interface (API). The Facebook API uses a REST-based

interface. This means that our Facebook method calls
are made over the Internet by sending HTTP GET or
POST requests to our REST server. With the API, you
can add social context to your application by utilizing
profile, friend, photo, and event data.
2 Query (FQL). Facebook Query Language, or FQL,
allows you to use an SQL-style interface to more
easily query the same data that you can access
through other Facebook API methods.
3 Facebook Markup (FBML). FBML enables you to
build full Facebook Platform applications that deeply
integrate into a user’s Facebook experience. You can
hook into several Facebook integration points,
including the Profile, Profile Actions, Canvas, News
Feed and Mini-Feed.
By January 2008, over 18,000 applications had been
built on Facebook Platform with 140 new applications
added per day. More than 95% of Facebook members
have used at least one application built on Facebook
Platform.
According to the Facebook Applications Directory
(www.facebook.com/apps), listing, in February 2008,
the most popular FB applications were:
1 FunWall. Videos, photos, graffiti, greeting cards,
flash embeds and more! 2,254,075 daily active users
2 Who’s in your Top Friends? Add your Best Friends to
your profile! 1,956,803 daily active users
3 Super Wall. Share videos, pictures, graffiti and more
with your friends! 915,832 daily active users
4 Bumper Sticker. Stick your friends with funny
stickers! 891,230 daily active users
5 Friends For Sale! Buy and sell your friends as pets!
585,153 daily active users
6 Scrabulous. Play Scrabulous (Scrabble) within
Facebook. 632,372 daily active users
7 Texas Hold’Em Poker. Play Texas Hold’Em with your
FB friends. 557,671 daily active users
8 Movies. Compare your taste in movies with friends.
528,996 daily active users
9 Compare people. Find out who stands where in
various categories: cutest, sexiest, smartest and
many more. 428,432 daily active users
10 Are YOU Interested? FUN application to see who is
interested in YOU! 486,459 daily active users
Some applications have been accused of FB
Application Spam, i.e. ‘spamming’ users to request that
the application be installed.
Facebook Platform for mobile applications was
launched in October 2007, although many Facebook
users already interacted with their friends through
mobile phones.
Facebook passes 30 million active users –
July 2007
Facebook active users passed 30 million according to
the Facebook blog in July 2007. Mashable (http://
mashable.com/2007/07/10/facebook-users-2) reported
that this represented a doubling in the first half of 2007).
Data produced by querying the Facebook ad
targeting tool (www.facebook.com/ads) completed in
November 2007 by blogger P.K. Francis suggests that
the majority of Facebook users in many countries are
female: http://midnightexcess.wordpress.com/2007/11/
23/facebook-member-stats-an-update.
In terms of user engagement metrics, Facebook
(www.facebook.com/press/info.php?statistics) shows
there are:
68 million active users
An average of 250,000 new registrations per day
since January 2007
Sixth-most trafficked site in the United States
(comScore)
More than 65 billion page views per month
More than half of active users return daily
People spend an average of 20 minutes on the site
daily (comScore).
Advertisers assess reputational damage –
Summer 2007
In August 2007, the BBC announced that six major mainly
financial services firms (First Direct, Vodafone, Virgin
Media, the AA, Halifax and the Prudential) had withdrawn
advertisements from the networking web site Facebook,
after they appeared on a British National Party page.
At a similar time, bank HSBC was forced to respond
to groups set up on Facebook criticizing them for introduction
of new student banking charges (although not
until the case had been featured in the national media).
Facebook Ads launched – 7 November
2007
Some of the features of Facebook ads (www.facebook.
com/ads) include:
Targeting by age, gender, location, interests, and more.
Alternative payment models: cost per click (CPC) or
impression-based (CPM).
‘Trusted Referrals’ or ‘Social Ads’ – ads can also be
shown to users whose friends have recently engaged
with a company’s Facebook page or engaged with
the company web site through Facebook Beacon.
At the time of the launch the Facebook blog made these
comments, which indicates the delicate balance in getting

the balance right between advertising revenue and user

experience. They said first of all, what’s not changing:
‘Facebook will always stay clutter-free and clean.
Facebook will never sell any of your information.
You will always have control over your information
and your Facebook experience.
You will not see any more ads than you did
before this.’
And what is changing:
‘You now have a way to connect with products, businesses,
bands, celebrities and more on Facebook.
Ads should be getting more relevant and more meaningful
to you.
You now have the option to share actions you take on
other sites with your friends on Facebook’ (these
were originally implemented as ‘social ads’ and were
based on a piece of technology known as ‘Beacon’
that tracks purchases or reviews made by Facebook
users on outside sites, then reports these purchases
to those users’ friends).
Commercial companies or more commonly not-for-profit
organizations (e.g. www.facebook.com/joinred) can also
create their own Facebook pages (currently free).
Facebook users can then express their support by
adding themselves as a fan, writing on the company Wall,
uploading photos, and joining other fans in discussion
groups. When users become fans, they can optionally
agree to be kept up-to-date about developments which
then appear in their news feeds.
Privacy concerns sparked by ‘Beacon
technology’ – November 2007
Facebook received a lot of negative publicity on its new
advertising format related to the ‘Beacon’ tracking
system which Mark Zuckerberg was forced to respond
to on the Facebook blog (5 December 2007). He said:
About a month ago, we released a new feature called
Beacon to try to help people share information with
their friends about things they do on the web. We’ve
made a lot of mistakes building this feature, but we’ve
made even more with how we’ve handled them. We
simply did a bad job with this release, and I apologize
for it. While I am disappointed with our mistakes, we
appreciate all the feedback we have received from
our users. I’d like to discuss what we have learned
and how we have improved Beacon.
When we first/. thought of Beacon, our goal was to
build a simple product to let people share information
across sites with their friends. It had to be lightweight
so it wouldn’t get in people’s way as they browsed
the web, but also clear enough so people would be
able to easily control what they shared. We were
excited about Beacon because we believe a lot of
information people want to share isn’t on Facebook,
and if we found the right balance, Beacon would give
people an easy and controlled way to share more of
that information with their friends.
But we missed the right balance. At first we tried to
make it very lightweight so people wouldn’t have to
touch it for it to work. The problem with our initial
approach of making it an opt-out system instead of
opt-in was that if someone forgot to decline to share
something, Beacon still went ahead and shared it with
their friends. It took us too long after people started
contacting us to change the product so that users had
to explicitly approve what they wanted to share.
Instead of acting quickly, we took too long to decide
on the right solution. I’m not proud of the way we’ve
handled this situation and I know we can do better.
New friends list functionality launched –
December 2007
A criticism leveled at Facebook has been the difficulty
in separating out personal friends and business
acquaintances.
In December 2007, Facebook launched a significant
new functionality called Friend Lists to enhance the user
experience. Friend Lists enables users to create named
groups of friends in particular categories, e.g. business
or personal and these private lists can be used to
message people, send group or event invitations, and to
filter updates from certain groups of friends.
December 2007/January 2008 – First drop
in numbers using Facebook and new data
centres to manage growth in users
Application spam has been considered one of the
possible causes to the drop in visitors to Facebook at the
beginning of 2008. The fall in visitors between December
2007 to January 2008 was its first drop since the website
first launched.
To put this in context, the Facebook blog reported at
the end of 2007, that nearly two million new users from
around the world sign up for Facebook each week. This
creates technical challenges – the blog reported that at
end of 2007 full capacity was reached in their California
data centres. They explained that in the past they had
handled this problem by purchasing a few dozen
servers, but this time they had run out of physical space
in our data centres for new machines. But now
Facebook assigns a user logging on to a relevant data
centre – users in Europe and the eastern half of the US

are connected direct to a new Virginia data centre whenever

they’re browsing the site and not making any
changes otherwise users are connected to California.
Facebook expands internationally –
February 2008
Despite the hype generated amongst English speakers,
Facebook only announced the launch of a Spanish site
in February 2008 with local language versions planned
for Germany and France. It seems that Facebook will
inevitably follow the path taken by other social networks
such as MySpace in launching many local language
versions.
Sources: Facebook (www.facebook.com), Facebook press room
(www.facebook.com/press.php), Facebook blog
(http://blog.facebook.com), Wikipedia (2008)
Wikipedia (2008) Wikipedia Pages for Facebook
(http://en.wikipedia.org/wiki/Facebook) and Mark Zuckerberg
(http://en.wikipedia.org/wiki/Mark_Zuckerberg).
Chapter 1 Introduction to e-business and e-commerce 21
Questions
1 As an investor in a social network such as Facebook,
which financial and customer-related
metrics would you use to assess and benchmark
the current business success and future
growth potential of the company?
2 Complete a situation analysis for Facebook
focusing on an assessment of the main business
risks which could damage the future
growth potential of the social network.
3 For the main business risks to Facebook identified
in Question 2, suggest approaches the
company could use to minimize these risks.

Case Study 1.2 North West Supplies extends its reach online
NorthWest Supplies (Figure 1.11) was launched as a business
in March 1999 when Andrew Camwell, a member of
the RAF Volunteer Reserve at the time, spotted a gap in
the UK market for mail-order supplies of military garments
to people active in the Volunteer Reserve and the Air
Cadet Force. Andrew, his wife Carys, and her sister Elaine
Hughes, started running a mail order business out of shop
premises in the village of Cemaes Bay.
The web store at www.northwestsupplies.co.uk has
been online since November 2002. As it can take several
months for a web site to be indexed by search engines,
NWS used pay-per-click advertising (PPC – see Chapter 9)
as a method of very quickly increasing the web site’s presence
in the major search engines. This marketing method
proved successful. The directors were pleasantly surprised
as they had previously been somewhat dubious about the
prospect of the Internet generating sales in their sector.
Within six months of running the web site, the company
had increased turnover by £20,000, but further advances
would incur a high advertising cost. Following an
eCommerce Review by Opportunity Wales, the company
decided to tackle the issues by implementing search
engine optimization (SEO – see Chapter 9) and a site
redesign which included:
Improved graphic design – this was to be changed to
a more professional and up-to-date look.
Best, featured and latest products – the introduction of
a dynamic front page to entice customers to revisit the
site on a regular basis. The contents of this page would
feature the best sellers, and latest or featured products.
Reviews and ratings – to provide confidence to
consumers and allow some kind of interaction with
them, this would allow users to review products they
have purchased and give them a star rating.
Cross-selling – when customers view a product there
may be other products or categories that may be of
interest or complementary, hence there was a proposal
to allow staff to link products and categories so that
these would be displayed.
Segmentation – the site would be split into two
sections emphasizing the segmentation of product
lines into military wear and outdoor wear sectors,
thus being less confusing, and easier to use for the
respective users (see Figure 1.11 section labelled
‘Best, featured and latest products’).
Navigation by sub-categories – as the product range
had expanded, the additional pages created in each
category made it harder for customers to find specific
items or made them have to browse many pages
before finding a suitable product. The introduction of
sub-categories would provide a clear link to the areas
of interest and contain fewer pages to browse, thus
helping the customer to make a choice more easily and
more quickly. A new search tool and order tracking
were also seen as important parts of the online
customer experience (Chapter 8).
Benefits
The owners describe the benefits of the improvements
to the site as follows:
Increased direct sales – ‘The new launch increased
sales and appealed to a broader audience – young
and old.’ The annual turnover of the business has
increased from £250,000 to £350,000 and this is
mainly attributable to the new web site. The highprofile
launch aimed at existing customers, the
greater visibility in search engines, and the greater
usability of the site have all contributed to this.
Improved promotion of the whole range of stock – ‘We
started selling stuff that we hadn’t sold before.’ The
changes in navigation, particularly division into two
market segments (military and outdoors) and greater
use of sub-categories, meant that products were easier
to find and hence easier to buy, leading to increased
sales of products that had previously been slow sellers.

New Customers – ‘We now send more items abroad.’

The better performance of the site in search engines
has led to an increase in orders from new customers
and from abroad. The company now has regular
sales to Canada, Australia, New Zealand and various
European states. 60% of orders are from new
customers – not bad for a business that initially set
up on the premise of a niche market for UK-based
cadet forces.
Adding value to the brand – ‘New corporate clients
could look at our Web site and see we weren’t fly-bynight
and that we meant business.’ Improvements to
the design have raised confidence levels in visitors
and this has led to increased sales. But perhaps
more significantly, the professional image of the site
was a good boost to confidence for potential business
partners in the emerging business-to-business
division that started to trade as North Star Contracts.
Question
Discuss the new opportunities and risks that need to
be managed by North West Supplies with the
increased importance of its online channel to market.

Case Study 1.3 eBay – the world’s largest e-business

This case summarizes the strategic approach used by
eBay to take advantage of increased consumer adoption
of the Internet. It summarizes its objectives, strategy and
proposition and some of the risks that need management.
Context
It’s hard to believe that one of the most celebrated dotcoms
has now celebrated its tenth birthday. Pierre
Omidyar, a 28-year-old French-born software engineer
living in California coded the site while working for another
company, eventually launching the site for business on
Monday, 4 September 1995 with the more direct name
‘Auction Web’. Legend reports that the site attracted no
visitors in its first 24 hours. The site became eBay in 1997.
Mission
eBay describes its purpose as to ‘pioneer new communities
around the world built on commerce, sustained
by trust, and inspired by opportunity’.
At the time of writing eBay comprises three major
businesses:
1 The eBay marketplaces (approximately 70% of net
revenues in 2007). The mission for the core eBay
business is to ‘create the world’s online marketplace’.
The marketplace platforms include an average
of 100 million products for sale on each day! eBay’s
SEC filing notes some of the success factors for this
business for which eBay seeks to manage the functionality,
safety, ease-of-use and reliability of the
trading platform.
2 PayPal (approximately 25% of net revenues in
2007). The mission is to ‘create the new global standard
for online payments’. This company was
acquired in 2003.
3 Skype Internet telephony (5% of net revenues in
2007). This company was acquired in 2005. eBay has
suffered an ‘impairment charge’ from valuing the
company too highly, but more recently it has started
to provide the service for MySpace users.
Advertising and other net revenues represented 4% of
total net revenues during 2007. This case focuses on the
best-known eBay business, the eBay marketplace.

Revenue model
The vast majority of eBay’s revenue is for the listing and
commission on completed sales. For PayPal purchases
an additional commission fee is charged. Margin on
each transaction is phenomenal since once the infrastructure
is built, incremental costs on each transaction
are tiny – all eBay is doing is transmitting bits and bytes
between buyers and sellers.
Advertising and other non-transaction net revenues
represent a relatively small proportion of total net
revenues and the strategy is that this should remain the
case. Advertising and other net revenues totalled $94.3
million in 2004 (just 3% of net revenue).
Proposition
The eBay marketplace is well known for its core service
which enables sellers to list items for sale on an auction
or fixed-price basis giving buyers the opportunity to bid
for and purchase items of interest. At the end of 2007,
there were over 532,000 online storefronts established
by users in locations around the world.
Software tools are provided, particularly for frequent
traders including Turbo Lister, Seller’s Assistant, Selling
Manager and Selling Manager Pro, which help automate
the selling process; the Shipping Calculator, Reporting
tools, etc. Today over sixty per cent of listings are facilitated
by software, showing the value of automating
posting for frequent trading.
Fraud is a significant risk factor for eBay. BBC (2005)
reported that around 1 in 10,000 transactions within the
UK were fraudulent. 0.0001% is a small percentage, but
scaling this up across the number of transactions, this is
a significant volume.
eBay has developed ‘Trust and Safety Programs’
which are particularly important to reassure customers
since online services are prone to fraud. For example,
the eBay feedback forum can help establish credentials
of sellers and buyers. Every registered user has a feedback
profile that may contain compliments, criticisms
and/or other comments by users who have conducted
business with that user. The Feedback Forum requires
feedback to be related to specific transactions There is
also a Safe Harbor data protection method and a standard
purchase protection system.
According to the SEC filing, eBay summarizes the
core messages to define its proposition as follows:
For buyers:
Selection
Value
Convenience
Entertainment.
In 2007, as part of the social media revolution eBay introduced
Neighbourhoods (http://neighborhoods.ebay.com)
where groups can discuss brands and products they
have a high involvement with.
For sellers:
Access to broad markets
Cost-effective marketing and distribution
Access to large buyer base
Good conversion rates.
In January 2008, eBay announced significant changes to
its marketplaces business in three major areas: fee structure,
seller incentives and standards, and feedback. These
changes have been controversial with some sellers, but
are aimed at improving the quality of experience. Detailed
Seller Ratings (DSRs) enable sellers to be reviewed in four
areas: (1) item as described, (2) communication,
(3) delivery time and (4) postage and packaging charges.
This is part of a move to help increase conversion rate by
increasing positive shopping experiences, for example by
including more accurate descriptions with better pictures
and avoiding excessive shipping charges. Power sellers
with positive DSRs will be featured more favourably in the
search results pages and will gain additional discounts.
Competition
Although there are now few direct competitors of online
auction services in many countries, there are many indirect
competitors. SEC (2008) describes competing channels as
including online and offline retailers, distributors, liquidators,
import and export companies, auctioneers, catalogue
and mail-order companies, classifieds, directories, search
engines, products of search engines, virtually all online and
offline commerce participants (consumer-to-consumer,
business-to-consumer and business-to-business) and
online and offline shopping channels and networks.
BBC (2005) reports that eBay is not complacent
about competition. It has already pulled out of Japan
due to competition from Yahoo! and within Asia and
China is also facing tough competition by Yahoo! which
has a portal with a broader range of services more likely
to attract subscribers.
Before the advent of online auctions, competitors in
the collectables space included antique shops, car boot
sales and charity shops. Anecdotal evidence suggests
that all of these are now suffering at the hands of eBay.
Some have taken the attitude of ‘if you can’t beat ‘em,
join ‘em’. Many smaller traders who have previously run
antique or car boot sales are now eBayers. Even charities
such as Oxfam now have an eBay service where
they sell high-value items contributed by donors. Other
retailers such as Vodafone have used eBay as a means
to distribute certain products within their range.

Objectives and strategy

The overall eBay aims are to increase the gross
merchandise volume and net revenues from the eBay
Marketplace. More detailed objectives are defined to
achieve these aims, with strategies focusing on:
1 Acquisition – increasing the number of newly registered
users on the eBay Marketplace.
2 Activation – increasing the number of registered
users that become active bidders, buyers or sellers
on the eBay Marketplace.
3 Activity – increasing the volume and value of transactions
that are conducted by each active user on the
eBay Marketplace. eBay had approximately 83 million
active users at the end of 2007, compared to approximately
82 million at the end of 2006. An active user is
defined as any user who bid on, bought, or listed an
item during the most recent 12-month period.
The focus on each of these three areas will vary according
to strategic priorities in particular local markets.
eBay Marketplace growth is also driven by defining
approaches to improve performance in these areas.
First, category growth is achieved by increasing the
number and size of categories within the marketplace,
for example: Antiques, Art, Books and Business &
Industrial. Second, formats for interaction. The traditional
format is auction listings, but it has been refined
now to include the ‘Buy-It-Now’ fixed price format.
Another format is the ‘Dutch Auction’ format, where a
seller can sell multiple identical items to the highest
bidders. eBay Stores was developed to enable sellers
with a wider range of products to showcase their products
in a more traditional retail format. eBay says it is
constantly exploring new formats, often through acquisition
of other comapnies, for example through the
acquisition in 2004 of mobile.de in Germany and
Marktplaats.nl in the Netherlands, as well as investment
in craigslist, the US-based classified ad format. Another
acquisition is Rent.com, which enables expansion into
the online housing and apartment rental category. In
2007, eBay acquired StubHub an online ticket marketplace,
and it also owns comparison marketplace
Shopping.com. Finally, marketplace growth is achieved
through delivering specific sites localised for different
geographies as follows. You can see there is still potential
for greater localisation, for example in parts of
Scandinavia, Eastern Europe and Asia.
Localised eBay marketplaces:
Australia France Italy
Austria Germany Malaysia
Belgium Hong Kong Netherlands
Canada India New Zealand
China Ireland Philippines
Singapore Sweden United Kingdom
South Korea Switzerland United States
Spain Taiwan
In its SEC filing, success factors eBay believes are important
to enable it to compete in its market include:
ability to attract buyers and sellers;
volume of transactions and price and selection of
goods;
customer service; and
brand recognition.
eBay stresses the importance of developing its ‘Value-
Added Tools and Services’ which are ‘pre-trade’ and
‘post-trade’ tools and services to enhance the user experience
and to make trading faster, easier and safer.
It also notes that in the context of its competitors,
other factors it believes are important are:
community cohesion, interaction and size;
system reliability;
reliability of delivery and payment;
web site convenience and accessibility;
level of service fees; and
quality of search tools.
This implies that eBay believes it has optimized these
factors, but its competitors still have opportunities for
improving performance in these areas which will make
the market more competitive.
Risk management
The SEC filing lists the risks and challenges of conducting
business internationally as follows:
regulatory requirements, including regulation of
auctioneering, professional selling, distance selling,
banking, and money transmitting;
legal uncertainty regarding liability for the listings and
other content provided by users, including uncertainty
as a result of less Internet-friendly legal
systems, unique local laws, and lack of clear precedent
or applicable law;
difficulties in integrating with local payment providers,
including banks, credit and debit card associations,
and electronic fund transfer systems;
differing levels of retail distribution, shipping, and
communications infrastructures;
different employee–employer relationships and the
existence of workers’ councils and labour unions;
difficulties in staffing and managing foreign operations;
longer payment cycles, different accounting practices,
and greater problems in collecting accounts receivable;
potentially adverse tax consequences, including
local taxation of fees or of transactions on web sites;
higher telecommunications and Internet service
provider costs;

strong local competitors;

different and more stringent consumer protection,
data protection and other laws;
cultural ambivalence towards, or non-acceptance of,
online trading;
seasonal reductions in business activity;
expenses associated with localising products,
including offering customers the ability to transact
business in the local currency;
laws and business practices that favour local
competitors or prohibit foreign ownership of certain
businesses;
profit repatriation restrictions, foreign currency
exchange restrictions, and exchange rate fluctuations;
volatility in a specific country’s or region’s political or
economic conditions; and
differing intellectual property laws and taxation laws.

Results
eBay’s community of confirmed registered users has
grown from around 2 million at the end of 1998 to more
than 94 million at the end of 2003 and to more than 135
million at 31 December 2004. It is also useful to identify
active users who contribute revenue to the business as
a buyer or seller. eBay had 56 million active users at the
end of 2004 who are defined as any user who has bid,
bought or listed an item during a prior 12-month period.
Financial results are presented in the above tables.
Question
Assess how the characteristics of the digital media
and the Internet together with strategic decisions
taken by its management team have supported
eBay’s continued growth.

Case Study 2.2 lastminute.com – an international dot-com survivor

This case illustrates the fortunes of lastminute.com, a
start-up which used the Internet to introduce an innovative
service. The case describes the service and its growth.
Success factors in achieving growth and threats to growth
throughout the history of the company are described.
lastminute.com was a European innovation, since at
launch, no equivalent site existed in the USA. Its business
model is based on commission from selling
‘distressed inventories’ which will have no value if they
are not sold immediately. This includes hotel rooms,
airline and theatre tickets. In the first half of 2005, the
breakdown of product sales (total transaction value on
which lastminute gain commission) was as follows:
Hotels £96 million
Holidays £163 million
Flights £158 million
Car hire £71 million
Non-travel, e.g. theatre tickets £24 million
Total £512 million
lastminute explain TTV as follows: Total transaction
value (‘TTV’) does not represent statutory turnover.
Where lastminute.com acts as agent or cash collector,
TTV represents the price at which products or services
have been sold across the Group’s various platforms. In
other cases, for example the reservation of restaurant
tables, a flat fee is earned, irrespective of the value of
products or services provided. In such cases TTV represents
the flat fee commission earned. Where lastminute.
com acts as principal, TTV represents the price
at which goods or services are sold across the Group’s
various platforms.
Turnover for H1 2005 was £222 million with gross
profit of £83 million. For the Group as a whole, the
number of active customers increased in the half year to
1.69 million compared with 0.99 million in the first half of
2004 (71 per cent growth). There were over 10 million
e-mail subscribers and 7 million cumulative customers,
although not all were active customers. Active customers
purchased 3.6 million items in the half-year, an increase
of 49 per cent over the previous year. This gives an
average order value of £142 (512 divided by 3.6).
Although the turnover and gross profit of lastminute.
com did improve until the point of takeover, it did
not achieve profitability in all markets (it did in the UK for
its travel business). It did make great steps in reducing
its customer acquisition costs which were £7.30 prior to
takeover (£5.69 in the UK) in its final financial report as
an independent company. Note ‘customer acquisition
costs’ are calculated in the financial report as all external
media spend divided by the number of unique
customers. This is effectively media spend per customer,
not customer acquisition costs. Since this figure includes
repeat customers it would be expected that this number
would fall naturally in more mature markets.
In 2005, lastminute had relationships with 13,600
suppliers including Lufthansa, Air France, Alitalia, bmi
british midland, United Airlines, Virgin Atlantic Airways,
Starwood Hotels and Resorts Worldwide, The Savoy
Group, Sol Melia, Six Continents, JMC, Disneyland Paris,
Kempinski Hotels, English National Ballet, The Royal Albert
Hall, The Way Ahead Box Office and Conran Restaurants.
In terms of its brand, lastminute says:
lastminute.com seeks to differentiate itself by generating
some of the lowest prices for many travel and
entertainment deals, and by packaging and delivering
products and services, such as restaurant reservations,
entertainment tickets and gifts, in convenient, novel and
distinctive ways. It also aims to inspire its customers to
try something different. Since 1998 the company
believes that it has developed a distinctive brand, which
communicates spontaneity and a sense of adventure,
attracting a loyal community of registered subscribers.
At 30 September 2001, there were over 4 million registered
subscribers, with a total transaction value on the
site of £124 million. Of these subscribers, there have
only been 536,000 customers since inception. However,
lastminute.com is working hard at increasing the
conversion rate of new subscribers to customers. This
increased from 5.5% to 13.9% between 2000 and 2001.
The preferences of users for the type of service required
are held on a database and then matched against the
offers of suppliers to the site. The choice of suppliers is

one of the key differences between an intermediary site

such as this and one hosted by a single supplier or
travel agency. Enhancements in 2001, to help increase
conversion rate included:
9 times faster image download time;
completely redesigned home page and navigation;
smarter search capability including a mapping search
tool to find restaurants, hotels and entertainment
options in your local area;
200% product supply increase with over 100,000
offers available at any given time;
new ‘MySpace’ category with personalized offers
and e-mail alerts;
new ‘Staying In’ category with food and in-home
entertainment delivery options.
The company was founded by Brent Hoberman, 31, and
Martha Lane-Fox, 27, both Oxford graduates. Hoberman
suggested the idea in 1996 while working at Spectrum, a
company specializing in new media strategies. At the
time, Lane-Fox said that the idea was too complex and
would need thousands of suppliers to be effective.
Hoberman and Lane-Fox raised £600,000 to get the
company going and achieved many high-profile backers
such as France Telecom, Deutsche Telecom, Sony Music
Entertainment, the British Airports Authority and Intel
and venture capital company Arts Alliance Advisers. One
problem was the domain name which had been registered
by a Sardinian businessman. Both founders were
adamant that their site had to be called this and the
Sardinian was happy to sell it for several hundred thousand
pounds. This can be compared to the owner of
Jungle.com, a Californian who sold it for £235,000 to the
site’s founder.
The company hoped to use the money from flotation
to increase access to the service by offering access to
its service by WAP mobile and has signed deals with BT
Cellnet and Orange to help achieve this. Other site
improvements will also be made – Lane-Fox has been
quoted as saying ‘We’ve spent a lot of money improving
the back-end, but we want to do more with the frontend.’
The improvements to the ‘back-end’ have been
necessary to avoid problems with customer service.
Writing in Computer Weekly, 2 March 2000, Anne
Hyland reported that several customers had money
deducted from their account without purchasing any
products from the site. For example, Charlotte Brett, a
London customer has had £50 deducted from her
account on three occasions in January and February
2000. The money was recredited to her account, but Ms
Brett was quoted as saying ‘I am a very angry customer;
in my experience they have failed on the three key areas
of technology, customer service and Internet capability’.
Brent Hoberman said the problems were caused by its
third-party credit-authority firm.
What of the future threats and opportunities for the
company? In a Guardian interview with Jamie Doward
on 27 February 2000 Lane-Fox was asked about the
threat of a major ticket site setting up its own site. Lane-
Fox dismissed this possibility: ‘Companies can’t do it on
their own web site because they fear cannibalization’,
and she says of first-mover advantage: ‘you still have to
set the company up and we’re starting to get critical
mass in Europe’. lastminute.com have opened offices in
London, Paris, Munich and Stockholm to help achieve
this. Towards the end of 2001, nine European airlines
including Air France, BA, KLM and Lufthansa responded
to lastminute.com with the launch of Opodo (which
stands for OPportunities tO DO (www.opodo.com) which
has been set up by nine European airlines. By April
2002, Opodo had become the third most important
travel site in the UK, but it appears that the lastminute.
com brand is now well established and it is
unlikely to be displaced.
To help counter this competition, lastminute.com
completed 14 acquisitions between 2003 and 2005,
lastminute.com now owns and operates online
brands including holidayautos.com, travelprice.com,
degriftour.com, travel-select.com, travel4less.co.uk,
eXhilaration.co.uk, medhotels. com, first-option.co.uk,
gemstonetravel.com, onlinetravel.com and lastminute.de.
2005: The end of lastminute.com as an
independent organization
In July 2005, lastminute.com was purchased by Sabre
Holdings Corporation (www.sabre-holdings.com/investor),
best known as the world’s largest electronic global distribution
system (GDS), connecting travel agents and travel
suppliers with travellers and also the owner of online travel
service Travelocity (www.travelocity.com). It was acquired
for £577 million, including gross debt of approximately
£79 million and estimated cash at bank of £72 million.
Lastminute is now an international e-business with
separate web sites for the UK, Ireland, France, Belgium,
the Netherlands, Germany, Italy, Spain, Sweden, Australia,
New Zealand, Japan, USA, Norway and Denmark.
Source: lastminute.com Investors Relations web site (http://cws.
huginonline.com/L/131840/last_index.html)

Questions
1 Explain the business and revenue model for
lastminute.com and assess the potential for
profitability.
2 Summarize the measures which are used to
assess the effectiveness of an e-business such as
lastminute.com (such as subscribers, conversion
rate and total transaction value). How do they
relate to each other?
3 Explain the relative success of lastminute.com and
Thomson Travel using the six criteria listed above.
4 What action do you consider the founders of the
company should take to ensure the future success
of lastminute.com?

The dot-com bubble bursts

The media played a key role in the dot-com story. Initially the media helped produce
stratospheric prices for dot-coms by tempting investors with instant gains when companies
went through IPOs (independendent public offerings). The media could then also report on
the newsworthy spectacle of the failure of many of these businesses. As failure of more and
more dot-coms was reported this also impacted on the share prices of the more successful
dot-coms such as Yahoo! and even other technology stocks. Popular analogies for the dotcom
collapse are the bursting of the South Sea Company’s bubble in 1720 and the wilting of
the fortunes invested in tulips in the 17th century.
Why dot-coms failed
At the end of Chapter 5 we review the reasons for failed e-business strategies and, in Case
Study 5.3, examine the reasons for one of the most spectacular dot-com failures – Boo.com.
We will see that in many cases it was a case of an unsound business strategy, or ideas before
their time. Many of the dot-coms were founded on innovative ideas which required a large
shift in consumer behaviour. A rigorous demand analysis would have shown that, at the
time, there were relatively few Internet users, with the majority on dial-up connections, so
there wasn’t the demand for these services. We see in the Boo.com example that there were
also failings in implementation, with technology infrastructure resulting in services that
were simply too slow with the poor experience leading to sales conversion rates and returning
customer rates that were too low for a sustainable business.
Remember, though, that many companies that identified a niche and carefully controlled
their growth did survive, of which ‘boys’ toys site’ Firebox (Mini Case Study 2.3) is a
great example.

Mini Case Study 2.3 Firebox.com survives the dot-com boom and bust
Firebox.com (Figure 2.17) opened its virtual doors in 1998 as hotbox.co.uk, an Internet retailer which was
founded by university flatmates Michael Smith and Tom Boardman. Initially operating out of Cardiff, the
company saw rapid initial growth due to the success of the founders’ invention, the Shot Glass Chess Set.
In the summer of 1999 the company moved to London and relaunched as Firebox.com.
eSuperbrands (2005) describes Firebox products as ‘unique, unusual and quirky products from around
the world’. Examples include glowing alarm clocks, light sabres, duct tape wallets and, of course, lava
lamps. With many traditional retailers and other niche players operating in this sector now, Firebox positions
itself as being one of the first outlets for innovative products. Firebox makes use of the collaborative nature
of the web with C2C interactions where Firebox.com customers describe their experiences with products
and even send in photos and videos of them in action!
Initially a ‘pureplay’ Internet-only business, Firebox is now a multi-channel retailer, providing a mail-order service
via its catalogue, corporate products (sales promotion and staff incentives for Yahoo!, Oracle, Five, Siemens and
Abbey and wholesale and trade suppliers) who distribute niche products to other online and offline e-retailers.
Firebox received £500,000 of investment from New Media Spark, with further funding from private
investors. Sales have grown 156% a year from £262,000 in 2000 to £4.4m in 2003 and £8 million in 2004 from
175,000 orders. In the same year, it received 4.5 million page impressions and 680,000 monthly unique visitors,
according to the Nielsen//Netratings panel (eSuperbrands, 2005). Firebox.com became profitable in 2001.
One of the reasons for the success of Firebox is the way it has embraced traditional channels to market.
Silicon.com (2004) reports that head of PR Charlie Morgan explained:
In a market place that was fast becoming cluttered there was a strong need to both expand the customer
base and ensure that Firebox itself grew as a brand. By building in a programme of catalogue drops,
Firebox aimed to recruit many new customers who had not thought of the internet as a purchasing
medium, increase turnover and of course grow the brand.
At Christmas 2003, Firebox.com sent out more than 1 million catalogues, resulting in 10,000 new customers
which the company regards as an impressive return, since several hundred thousand of these catalogues
were sent to already-existing customers. During a three-month promotion the catalogues drove more than
£600,000-worth of sales.
Source: Company web site, About Us, eSuperbrands (2005) and Silicon.com (2004). With thanks to www.firebox.com