NBA 600: Day 14Online Communities

From Shopping to Gaming11 March 2004

Daniel Huttenlocher

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Today’s Class

Quiz resultsOverview of remaining topicsFinish discussion of online community

Reading for next week– Tech Review “Beyond Google”www.technologyreview.com/articles/print_version/roush0304.asp(Free registration required)

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Quiz

DNS lookup– Directory mapping host names to IP addresses

• Analogous to phone directory

Speed of Internet– “Tier 1” ISP’s around 60-80 msec, comparable

to interactive speeds of <100 msec

Sending data– Routing decisions made locally along the way

• Analogous to driving without map but with traffic reports at each intersection

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Quiz

Cluster models have several drawbacks– Lose detail/fidelity in small number of segments– Offline process, can be “stale”– Difficulty clustering sparse data

PageRank voting– Weight of vote proportional to PageRank of

linking page• “chicken and egg” problem

Item popularity– Batting average (conversion ratio) can go up or

down over time

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Change in Focus for Course

Completed material specifically covering relationship between strategy and IT– Porter/Tapscott debate– Carr debate– Business models– Productivity growth and IT– Necessary vs. differentiating IT– Case illustrations

Now consider some technologies and trends in more depth– Relate them to business strategy

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Remaining Topics

3/15 Search, navigation, browsing– Customer value, new entrants, substitutes

3/29 Digital goods and services– Economics of digital goods, control of content– Music and movie industries

4/5 Darknets and copy protection– Business models for digital content

4/12 Open source and Linux– Software as a business, other business models

4/19 Emerging tech: Web services, RFID– Changes to inter-firm connectivity

4/26 Security and privacy

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Community Trust

Ebay’s initial challenge– Building trust to trade with strangers online

• Focused on sense of community and “inherent goodness of people”

Means of running cheaters out of town – Reputation scores based on completed

transactions (+,0,-)• Number of positives minus negatives• About half of transactions result in ratings

High reputation scores – “best citizens”– Ebay rewards its highest reputation sellers

• 85,000 points

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Maintaining Trust

Ebay says fraud less than 1/100th percent– But still moving beyond “community policing”– Highly visible case involved real world too

• Merchant who fled with over $200K also had shop and employees

Poor experiences more common than outright fraud– Sellers verified through credit card or other

information

Works in sense that fraud off Ebay higher– E.g., case of fake cashiers check and used Mac’s

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Reputation

Reputation mechanisms commonly used to build trust online– Need to trust the provider of the reputations

• The site, e.g., Ebay, Amazon

Rankings of reviewers, rankings of transaction experience– Only works if people provide rankings

• They do, even though not of immediate value– Studies show people more likely to provide

positive than negative ratings• So either having very good experiences or bias

in reporting

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Value of Reputation to Participants

Resnick (UMich) study shows price effect– Controlled study with “matched pairs” of

vintage postcards• Done in conjunction with established seller who

had high reputation• Sold one of each pair as relatively new seller

with little reputation

– High reputation seller received closing bids on average 7.6% higher than unknown sellers

A few negative scores had little effect– Treated similar to unknown with a few positives

and no negatives

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What Do Reputation Scores Mean?

Is a seller on Ebay with a high score more trustworthy?Is it rational to pay a price premium to a higher ranked seller?What sellers are most motivated to provide a good experience?What kind of reputation would be good for a fraudster to create?– What are significant fraud cases on Ebay?

Ritual “tipping” behavior

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Value of Reputation to Provider

If participants could take reputations elsewhere would threaten provider– Verifiably high eBay score might make people

willing to shop directly at merchant site– Similar for gaming sites

Reputations are “owned” by the providers, as they are conferring their trust on the participants– All restrict the use in their terms of service

• Ebay monitors quite actively

– Not transferred when shut down or merged

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Value of Community Product

An active community produces information that can be of substantial value– Currently open auctions on eBay– Reviews on Amazon

Substantive new legal decisions being made in this arena– New cyber-trespassing rulings

• Based on several hundred year old laws on “trespass to chattels”

– Prohibits unauthorized access to networked computer systems

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Epinions and “Pure” Community

Goal to provide unbiased reviews of products and services– Contributed by visitors to site

• Small payments for reviews based on views• Rated for accuracy and value by other visitors

– Intent to be better than sites such as Amazon by having more of a community• Not restricted to items sold on one site

Initial revenue model – advertisingDeveloped active community– But not clearly larger or more informative than

say Amazon reviewers

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Evolution of Epinions

Changed model to being a shopping comparison site– Combining prices and user reviews– Similar to Bizrate which started with more of

focus on price comparison

Revenue model changed to include merchant fees for listings and/or referralsAcquired by DealTime in 2003– Dealtime re-launched as shopping.com– Privately held company

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Dynamics of Communities

Need balance of creators and consumers– Can be difficult to get started

• Each requires other

– Can also be difficult to maintain• Imbalances arise, much as in markets

Hard to “bootstrap”– In traditional businesses can choose to lose

money while building up• E.g., content creation not done by employees

Yet online community remains a major potential of Internet over other channels

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Examples of Community Dynamics

Auction sites have tended to exhibit strong all-or-none properties– Seller seeks largest possible audience

Despite eBay’s estimated 85% share in US, Yahoo and uBid both still activeIn Japan, Yahoo auctions dominates– Ebay closed their Japanese site due to lack of

volume

In UK, eBay dominates– To extent that Yahoo closed their auction site

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Online Gaming

Degree to which community beyond time spent playing game itself– Socializing, teaching, etc.

Role of experts and expertise– Challenge, policing– Matching levels of play

Transferability of identity and artifacts– Reputation or achievement for sale– Negative effect on gaming experience

• Hard to buy talent

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Internet Chess Club

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Internet Chess Club

25,000 members paying $50/yrHas held up well against large sites such as Yahoo offering free chess– Many experts

• External ratings and on-site ratings

– Offline events, teaching– Identities not effectively transferable

Network effect– Value of a place where can reliably find a

“good game”– Early mover, attracted good players

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Network Effects

Online communities often exhibit network effects– Value proportional to number of other people

Metcalfe’s law– Value of network proportional to square of its

number of users, n2

• Value to each user is (proportional to) n• Times n users = n2

Network effects were often claimed in the Internet bubble– But did not materialize

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Classical Network Effects

Telephone network– Value higher if more subscribers– But inter-operability across providers means

individual firm does not benefit from effect

Standard interchange formats– Fax, MS Word, Adobe Acrobat, VHS video tape– Again often standardized with little return to a

given firm unless license fees for standard• License fees may inhibit adoption however

Value because “everyone uses it”

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Switching Costs

Network effects lead to high collective switching costs– Worse than individual switching cost because

of incompatibility with others

Online communities can exhibit this– Auctions?– Gaming?– Reviews?

What other Internet services exhibit this?Amazon vs Ebay?

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Initiating Network Effects

“Chicken and egg” problem– Value comes from critical mass– First mover can be important

• But still need to get boot-strapped

Financial markets have similar issue– Enough participants to get liquidity

If enough improvement an old network can be displaced– E.g., standards-based networks VHS to DVD

Alliance of those who stand to benefit