Last revised 12/12/1999The Mindo TeamWhat Business Are You In?Business Model VariationsMindo.comBusiness Models in the New EconomyMini-case prepared for Stanford Technology Ventures ProgramTrevor Loy ([email protected])with assistance from Tom Byers and Fern Mandelbaum.Last revised 12/12/1999The Mindo TeamKerri Chang, a senior economics major at Stanford University, gazed out from her table in the corner of the Coffee House. Kerri was waiting for Daniel Jackson and Reza Prajapati, co-founders with Kerri of “Mindo.com” and her partners in the “E-Challenge,” Stanford’s annual business plan competition. Daniel, a co-terminal computer science student, was the technical genius in the group. His work in collaborative filtering algorithms led to the team’s Internet business that recommended web sites to users based on other web sites they liked. Essentially, the technology monitored user activity on a site, looking at where they clicked, what other sites they visited, what they bought, what they read, etc. Based on this activity, the technology could make increasingly sophisticated recommendations for other sites, content, and products that the user might be interested in. Additionally, as the recommendations improved, users began to view them less as advertisements and more as a helpful service. The “recommendations as a service” quality was ultimately what compelled Reza and Kerri to join Daniel in creating a business plan based on the technology. Reza was a senior art history major who had spent the past summer in a marketing internship with a major e-commerce retailer. While all three team members were talented and Internet savvy, Kerri’s background was the only one with any financial experience. As a result, the team had quickly assigned to Kerri the task of creating the business model for their new venture. Kerri wanted to move quickly, but she had encountered difficulty in defining the best business model due to conflicting results from her initial market research. She had called this meeting to present the various options to Daniel and Reza with the hope of reaching a group solution.What Business Are You In?Daniel and Reza joined Kerri with sodas and burritos in tow, and they proceeded to parcel out the food as they beganthe discussion. Kerri asked the team to recall the lecture from E145, “Introduction to High Technology Entrepreneurship,” during which they had been asked to answer the question, “What Business Are You In?” Daniel’s opinion was that they were in the business of making recommendations to users; hence, a consumer-oriented business which charged those users for the service would be most appropriate. Reza felt, however, that the marketing strategy would be more successful if they were in the business of delivering targeted traffic to business partners; in that case, they should offer the service free to users, and obtain referral revenue from customers. Kerri’sopinion was less clear-cut. She felt that a “recommendation portal” strategy was the best approach, and therefore that they were in the business of aggregating users on their own site and selling advertising to customers who wanted to target those users. As the team members finished their burritos, the conversation continued to go around the table, but no clear strategy appeared.Business Model VariationsAs the group grew frustrated, Reza asked Kerri to outline the various business model alternatives she had discoveredduring her initial research. “Just lay out all the options, and don’t tell us which ones are more appropriate,” suggested Reza. “We might be able to combine them in new ways and create an entirely new business model.” Daniel concurred. “Remember that Professor Byers covered this in E145. In the new Internet economy, he suggested that business model innovation is as important as technology innovation.” Encouraged by her teammates,Kerri began to outline the various business models she had studied.1 Business Models in the New Economy, v.2.0 01/14/19“I’ll start with Business-to-Consumer, or ‘B2C’ models,” said Kerri. “Here are the variations I found.”- Traditional e-commerce. These are retail sites where the business sells a product to a customer, and makes money by selling the product for more than it cost to make the product. A classic example of this business model is E-Toys, the online toy retailer.- Auction. On an auction site, the business sells its products for a variable price to consumers. OnSale is an example of this strategy. Related to this is Ebay, which brings together third-party sellers and allows them to auction their products to consumers; in this model, Ebay takes a transaction fee from the seller.- Portals. Sites such as Yahoo! and Excite, both of which were founded by Stanford students, are general media portals which make money primarily by aggregating users and then selling advertising and sponsorships to other companies who want to reach those users. Some Internet companies are also becoming vertical or specialized portals, such as cooking.com and garden.com. They provide content and information that attracts users within a particular interest area, and also sell products within their specialized markets.- Content. While the Internet has brought about an enormous revolution in the delivery of information, most of that information is free. A few sites, such as TheStreet.com and the Wall Street Journal, have succeeded with business models based on charging a subscription fee to consumers for access to the site’s content.- Services. Many companies provide users with the ability to perform a task. These sites, such as Preview Travel, typically make money by charging a fee for each service.Reza commented that she was familiar with these business models, having spent time in a consumer-oriented marketing job the past summer. She was beginning to feel, however, that this business plan might be more effective as a business-to-business (B2B) venture. Since she had less background on the ‘B2B’ side, she asked Kerri to continue with her analysis. “Here are the business model categories I discovered during my research,” outlined Kerri:- E-commerce. Like their consumer counterparts, these businesses, like Staples.com, make money by selling products to other businesses.- Auction. These web businesses, such as e-Steel, bring together buyers and sellers of a