In recent years, there’s been an increased amount of scrutiny on online gambling and in particular, online poker. The states of Nevada, Delaware and earlier this week, New Jersey have approved and launched online gaming markets.

POLITICAL CONTEXT
There has been increased scrutiny from government players with Republican politician, Joe Barton advocating the roll out of nationwide law that will help regulate and legalize online gaming. Barton had introduced a bill in the US Congress that would help create a licensing system for online poker companies. Whilst, this was welcomed by many, it was also simultaneously opposed by many and this can be seen by the fact that the bill was introduced in July and has not made any progress in the last 4 months. Making things illegal can increase the price of the illegal activities – there have been instances in the past where the prohibition of marijuana or the prohibition of texting & driving, went on to increase the occurrence of the prohibited activity post the passage of the law. Pro-online gamers have supported a controlled and closely monitored legalized online poker world. Whilst this is easier said than done, the golden question is whether the government can help the online poker companies to take baby steps in the near future?

ECONOMIC AND ETHICAL CONTEXT
Whilst we are still recovering from an economic recession, arguments can be made to support banning online poker – gambling can easily become an addiction and cause serious mental and economic harm. Having access to online poker via the internet can provide easy access to the wrong individuals which can only exacerbate the current economic condition. But one can argue that similar addictions currently already exist in the form of the lottery, cigarettes, alcohol, drugs etc. Furthermore, the underground gambling market without access to casinos can potentially operate in an open monitored environment and hence enable the government to collect taxes on winnings while enforcing necessary regulations to protect consumers. There are ways to curb abuse of IP addresses, credit cards, age of players etc. by monitoring patterns of play among many other sophisticated security measures. However, is this enough to give parents the comfort that underage children will not have easy access to online poker?

 

COMPETITION
The best form of innovation eliminates wastage in the system and removes inefficiencies. We have seen e-commerce disrupt the traditional brick and mortar retail model benefiting consumers tremendously. E-retailers are able to pass down costs savings from zero physical store rent to consumers in the form of lower prices, better selection of products and quicker & convenient service. This very concept can be applied to online poker — the casino business is a high fixed cost business which runs continuously regardless of the occupancy rate or utilization level. By providing consumers with the ability to play poker online, consumers are able to save money on travel and hotel charges and casino companies can save on rent and other fixed/variable costs. It’s a win-win for both sides of the network. Also, legalization of online poker will be a breath of fresh air for dynamic and entrepreneurial companies such as Zynga, thereby enabling and supporting innovation in the gaming industry.


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Human consumption has altered the environment and disrupted ecosystems on a global scale. As research indicates, production, logistics, and waste caused by consumerism have, over time, undoubtedly negatively impacted the environment. As e-commerce increasingly becomes the preferred form of commerce, the sector’s impact on the environment must be considered. Particularly the packaging of goods for shipping is of concern. A large portion of shipping materials, mainly corrugated material (cardboard) and plastic, associated with the fulfillment of e-commerce orders, ends up in landfills rather than being properly recycled. Recycling initiatives alone do not have the capacity to address e-commerce’s negative impact on the environment. How environmentally sustainable are current fulfillment operations in e-commerce ventures and what can be done to improve them?

When a customer orders a product online, the item can be manually or automatically packaged for shipping, depending on the product and the scope of a given venture’s operations. Let us consider fashion e-tailers such as Net-A-Porter, Moda Operandi, Zappos, or Barneys New York’s Online, all of which ship an array of fashion and beauty items ranging from shoes and clothing to mascara and jewelry daily. What is the likelihood that these companies ship goods in packaging materials that are adequate for the product, while creating the lowest impact on the environment, i.e. by avoiding disproportionally large packaging materials? Unfortunately, the likelihood is relatively high.

I conducted a test over the past two months to see whether or not excess packaging was a legitimate concern and an area in e-commerce that needs to be addressed. I tested the above-mentioned e-tailers, as well as several others, to see how the packaging of items compares to the products’ actual packaging needs. With the exception of one company, the above mentioned e-tailers sent goods in shipping packaging at an inadequate size, meaning that the boxes were much larger than the goods themselves, thereby creating an exorbitant amount of packaging waste. In one instance, a tube of mascara arrived in a box large enough to fit a pair of shoes. In the case of Net-A-Porter, although their boxes were adorned with the “Sustainable Forestry Initiative” logo, the contents of the package were significantly smaller than the allocated shipping box. Using post-consumer product materials or sustainably sourced packaging materials are only part of the commitment to environmentally friendly packaging. The size of the product and the size of the box matter.

Fulfillment strategies must be created to address the product-to-box ratio problem in order to mitigate the packaging waste created by e-commerce purchases. E-commerce ventures should streamline their packing design to better suit products, while adopting a cradle-to-cradle model, meaning utilizing packaging materials that can be recycled or re-used. Surveys show that the sustainability of a brand’s packaging, both in terms of material and quantity, can influence a customer’s decision to make future purchases. It is in the interest of e-commerce ventures to invest in order fulfillment and packaging strategy, whether automated or manual, in order to limit the negative environmental impact that the distribution of their goods create.


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The Anti-Social Networks

Text and photo messaging apps such as WhatsApp, WeChat and Snapchat have seen explosive growth. WhatsApp and WeChat have 300 and 400 million users, respectively, and Snapchat sees 350 million photos per day on its app [1]. But not everyone has been a winner as more players have entered the space. For instance, GroupMe, which acquired millions of users and was sold to Microsoft for a reported $40-$80M, has stalled [2]. As the messaging app space becomes crowded, how will the market evolve?

In the shadow of the giant(s)

The success of messaging apps begs the question – could Facebook or Google simply take advantage of their massive existing user bases to crush the competition? In fact, Facebook already has its own separate mobile messenger application, which had 56 million users as of last November (more recent stats are not available) [3].

While a massive user base like Facebook’s 1 billion+ active users is usually a trump card in most instances, I believe it is actually a disadvantage in the messaging space. Users have gravitated towards direct messaging apps not just to avoid SMS charges, but also to have a more immediate and intimate mode of communication. While large social networks such as Facebook may connect users with the world, messaging apps connect users with the much smaller subset of people they actually want/need to communicate regularly with. Messaging apps allow users to create smaller groups (“anti-social” networks, if you will) that do not include that Facebook “friend” we met once years ago or that acquaintance who over shares. Facebook’s messenger app attempts to address this by allowing users to create groups, but it is unclear whether this is helping adoption. A recent article by venture capitalist Josh Elman supports this view, attributing the popularity of messaging apps in part due to the fact that Millennials are looking for a way to engage in real conversations against “a noisy world of social sharing” and hyper-connectedness [4]. If this is true, then Facebook’s legions of users may be more of a liability than an asset when it comes to messaging apps.

Winner takes all?

That said, even if we believe large incumbents are not an unconquerable threat, one still wonders how the market will evolve given the many competitors already in the space. Is this a winner-takes-all (WTA) market or is there room for multiple players to succeed?

As I recently learned in class, WTA markets typically exhibit 1) high multi-homing costs, 2) limited demand for differentiated product and 3) strong positive network effects. I believe that although the messaging app market satisfies the first two criteria, the network effects may not be strong enough to tip the market towards a single player. Let’s consider each predictor in turn:

  1. Multi-homing costs: Having to manage conversations and contacts across different apps is inconvenient. Users are likely to prefer a single service, making a WTA market more likely.
  2. Demand for differentiated product: The current product landscape has some differentiation, largely based on whether the app focuses on photo or text. However, I think we are already seeing and will continue to see product convergence. Many apps are moving towards offering both photo and text, as well as video and even voice messaging capabilities [5]. I believe users ultimately want a single app to allow multiple forms of communication. This limited demand for a truly differentiated product makes a WTA market more likely.
  3. Network effects: Here’s where the answer becomes less clear. Although users derive more value from a messaging app when more people from his/her network join, there is a limit to this. Given the private & immediate nature of direct messaging discussed in the prior section, users tend to interact with small groups in predictable manners, similar to how they use Skype. This actually leads to weaker network effects, making a WTA less likely.

This last characteristic is important because it implies that messaging apps are not unequivocally winner takes all. Since each user has a small number of interaction partners, it is not difficult to move as a group from one service to another for messaging apps. As we’ve seen in the case of GroupMe, even messaging apps with seemingly large user bases can stagnate when new services come along.

Show me the money

While the messaging app space may not be WTA in theory, whether or not multiple competitors will actually succeed also depends on how many players can build a sustainable business. We have seen a few different early approaches to monetization. WhatsApp charged users 99 cents per download (before moving to a free model), GroupMe tried unsuccessfully to sell offers in-app, international players are selling stickers (e.g. large-scale emoticons) and others are considering freemium models that charge for additional functionality [6]. While the path to monetization is unclear for many apps, it seems particularly challenging in this market. Most messaging apps are positioned as a free alternative to traditional services such as SMS, thereby priming consumers to expect the services at no charge.

Ironically, if there is not a straightforward way to monetize quickly as a standalone business, I think we may start to see more messaging apps consider exit strategies like GroupMe’s: sell to a larger player who wants a foothold in the market and has the cash to support the business while it figures out monetization. In other words, this means the giants may still be in the game after all, and I for one am excited to see how the messaging app wars will play out…

[1] Erin Griffith, “Can GroupMe Still Compete in the Messaging Wars?,” Pandodaily.com, October 8, 2013, http://pandodaily.com/2013/10/08/can-groupme-still-compete-in-the-messaging-wars/, accessed October 2013

Billy Gallagher, “Snapchat Now Sees 350M Photos Shared Daily, Up From 200M in June,” TechCrunch.com, September 9, 2013, http://techcrunch.com/2013/09/09/snapchat-now-sees-350m-photos-shared-daily-up-from-200m-in-june/, accessed October 2013

[2] Griffith, “Can GroupMe Still Compete in the Messaging Wars?”

[3] Josh Constine, “Facebook Mobile User Counts Revealed,” TechCrunch.com, January 4 2013, http://techcrunch.com/2013/01/04/how-many-mobile-users-does-facebook-have/, accessed October 2013

[4] Josh Elman, “Generation Touch Will Redraw Consumer Tech,” TechCrunch.com, September 29, 2013, http://techcrunch.com/2013/09/29/generation-touch-will-redraw-consumer-tech/, accessed October 2013

[5] Liz Gannes, “The Quite Mobile Giant: With 300M Active Users, WhatsApp Adds Voice Messaging,” AllThingsD.com, August 6, 2013, http://allthingsd.com/20130806/the-quiet-mobile-giant-with-300m-active-users-whatsapp-adds-voice/, accessed October 2013

[6] Griffith, “Can GroupMe Still Compete in the Messaging Wars?”


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According to eMarketer, U.S. advertising spend on mobile platforms will reach $7.65 billion in 2013, nearly doubling its 2012 size of $4.36 billion. Smartphones, of course, store all kinds of personal information, ranging from deliberate storage of information like contacts to less intentional storage of information like products purchased and topics searched. However, unlike desktop computers, mobile devices cannot always rely on cookies to assess a user’s behavior. Mobile apps, for example, do not hold cookies. We can thus infer that much of the $7.65 billion spent on mobile advertising has a lot of room left for improvement when it comes to targeting end-users, and thus also significant potential for market growth. Smarter technology to track users’ tastes on mobile phones would likely be worth big bucks in the online retail world.

Drawbridge is one start-up making inroads in this space. As discussed in a recent NYTimes article, “Selling Secrets of Phone Users to Advertisers” (5 Oct. 2013), one of Drawbridge’s main goals is to connect a user across multiple devices. Since cookies gleaned from desktop browsing can reveal highly coveted information to merchants, consider how valuable it would be for a merchant to also know which mobile devices are connected to that desktop. If I search for “Best restaurants in Cambridge, MA” on my desktop, Drawbridge’s technology might allow advertisers from Grafton Street to display a message on my smartphone shortly thereafter because it would know which smartphone was mine.

This type of behavioral tracking and connecting, I am sure, is just the beginning of companies looking to piece together and profit from all of our online usage. Even if current privacy laws allow companies like Drawbridge to collect and share information, where are the users’ rights? The onset of mobile technology has been rapid and convenient for millions of users, but any relevant education of long-term implications has been heavily ignored, if not entirely absent. Is the challenge to make users more aware of the types of information they are making public and profitable for third parties? Or are the conveniences offered so great that users do not really care about the tradeoff? I consider myself a fairly educated consumer when it comes to privacy laws, but any fears I have of creating an entire cyber footprint of my life are outweighed by the benefits that come with using technologies like social media and online shopping.

As we continue to become a world that is less private, my biggest concern is that the monetary rewards of this alleged transparency will fall into the hands of only a few. What if, instead, the mobile revolution could lead to a new era of self-empowerment for users? What if users could sell their buying behavior and personal information directly to interested parties? Though the cost implications would undoubtedly be higher, the quality of the information would inevitably be much richer and more accurate, likely leading to a higher lifetime customer value.

 


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E-commerce: An Online to Offline Swap – The Race to Omni-channel

E-commerce is a tough market for fashion retailers.

On one hand, it is fraught with obvious opportunity. People are spending more time and money online than ever before. E-Commerce currently represents 6.5% of total retail sales and is estimated to grow to 9.8% by 2016, creating a $1 trillion market. Margins on these revenues are typically higher and achieving scale is easier than in brick-and-mortar retail.

On the other hand, the obstacles are plentiful. For starters, the entire shopping process and “experience” is changed. Size, fit, and quality are difficult to communicate online and, as a result, the percentage of returns is higher. Accessibility makes it difficult for retailers to choose the target customers that will uphold their brand value. Information becomes a quick neutralizer and customers are able to exploit pricing differences (including shipping costs, which are under pressure from Amazon / Zappos) in a matter of minutes. Customer acquisition is highly competitive and digital marketing strategies are in a constant state of innovation, as new technologies to support them are released at a faster and faster pace. New aggregator and affiliate websites (such as shopbop.com, fab.com, gilt.com) are popping up all the time, increasing competition and often squeezing margins.

As we look at the criteria for a winner take all market: 1) strong network effects, 2) high multi-homing costs, 3) undifferentiated products, e-commerce doesn’t really fit the bill. So how exactly should fashion retailers compete in a growing online economy that doesn’t appear to be slowing anytime soon?

Let’s look at the two types of strong e-commerce players and analyze their approaches.

Large, legacy fashion retailers (Gap, Limited Brands, Ralph Lauren, etc.): Offline to Online Migration

Most senior executives of these Companies have old school brick-and-mortar marketing and merchandising backgrounds and they aren’t historically used to flexing all kinds of tech savvy muscles. When e-commerce started its rise in the early 2000s, these companies invested in big technologies to setup online storefronts that attempted to mirror the in-store shopping experience. Today, these technologies are vastly outdated, difficult to remove (entrenched in so many other systems), and don’t integrate well with in-store technologies to get the most out of customer data. The migration from offline to online has been clunky for most and the tools necessary to be innovative in customer acquisition are rusty.

  • Has: Established brands, high quality products, institutionalized knowledge.
  • Lacks: Technology flexibility, Innovative DNA, large, less profitable store-fronts.
  • Evaluation: They’re stuck.

Smaller, innovative fashion retailers (Bonobos, Warby Parker, Nasty Gal): Online to Offline Migration

Smaller, up and coming innovative fashion retailers flipped retail and e-commerce on its head. These companies started completely online using a disruptive business models, the latest technologies, and innovative digital marketing strategies to acquire customers and grow sales fast. They had the benefit of building on a clean slate, without having to put on and rip off pre-existing infrastructure band-aids. And in the process, reset the status quo for the customer shopping experience. However, growth has started to slow without the tangible benefits and credibility that a store front provides. As a result, many of these online-only companies have focused the next stages of their growth on brick-and-mortar.

  • Has: Innovation, latest and most flexible technologies, digital marketing prowess.
  • Lacks: Institutional knowledge, brand wherewithal, physical presence.
  • Evaluation: They need to get sticky.

So, offline retailers shakily move online. Online retailers start building storefronts. What’s the better strategy? How does the consumer think about shopping today – which touch point is first? What’s next?

Will we see smaller square footage stores, more showroom-style locations ala Bonobos and Warby Parker, ordering through tablets and window shops facilitated by EBAY now, m-commerce and t-commerce connected to everything else? I think so. It’s a race to omni-channel. And we’ll see who comes out ahead.

 

 


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