epinions report by CjSFU42y



               Executive Summary

        This report examines the business model of Epinions.com; identifies key success
factors for the new company; and makes recommendations to the management.

        Epinions.com is a shopping guide powered by consumer opinions that helps
consumers make the right buying decisions. In other words, Epinions.com is based on
the power of word-of-mouth recommendations and provides "everything from product
specifications and images to professional and user reviews, buying guides, and where-to-
buy resources."1

        Key success factors for the company include: Brand awareness, brand loyalty,
click-through frequency, community strength, convenience, credibility, interactivity, user
friendliness, and user traffic.

          We recommend Epinions.com to:
           Advertise aggressively to generate brand awareness, credibility, and new user
           Promote participation campaigns to generate new users reviews, build
            community strength, and increase repeat visits.
           Add new web enhancements to improve convenience, interactivity, and user
           Be a moving target by continuing to quickly add more features and products
            that enhance the communities.

    www.epinions.com/pressrelease.html-July 12, 1999


              Company Profile

        Founded in April 1999 by several of the founding engineers of Netscape and
Internet professionals from Yahoo, AOL, and @Home, Epinions.com is a shopping guide
powered by consumer opinions that helps consumers make the right buying decisions.
This "all-star" team envisions Epinions.com to become “The only shopping resource
you’ll ever need…and focus on bringing you honest and relevant information.”2 In
addition, they argue that Epinions.com is not just another shopping guide because it
provides what most of the shopping guides do not: trusted information. Epinions.com
delivers trust in the following ways3:

         1.You get the good, the bad and the lemons.
         Most shopping guides make every product sound good. Often, they all sound so
good that it's hard to tell the difference between the choices. At Epinions.com we tell it
like it really is, and we don't hold back. We don't just tell you what to buy, but we warn
you what to avoid.

        2.You are the hero.
        Although we also provide professional reviews, we know that the best source for
shopping advice is often people who own and use the products you are shopping for.
Everyone is an expert at something because everyone is passionate about something.
Some of those experts have opinions that are relevant to you, and you have opinions that
are relevant to others. We offer a place for you to share your expertise with the people
who need it most.

       3.We tell the whole story.
       Epinions.com offers a comprehensive shopping experience, providing everything
from hard product facts to brutally honest advice. We take people through the whole
shopping process, stopping just short of the cash register.

       4.Web of Trust.
       As you rate just a few opinions, or select a few members, the Epinions.com Web of
Trust automatically builds an entire community of trusted members for you. The Web of
Trust ensures that the opinions of your trusted members are always at the top of your list.

        Currently, most people rely on the advice of a few friends and experts to help
influence their buying decisions. Epinions.com extends this network of trusted sources
by enabling shoppers to collect advice and recommendations from product users
everywhere. Users who write reviews will earn recognition and rewards based on
qualitative reviews rather than quantitative rankings. “Everybody is an expert at



something,” said chief executive officer Naval Ravikant. “We are building a service that
recognizes and rewards user-experts, just as professional reviewers are recognized and

         More insightfully, Epinions.com is an attempt to create a marketplace for content
that is based on a scalable model for many-to-many communications.4 Following is an
excerpt of an interview by Webworld.com with Epinions.com chief technical officer,
Ramanathan Guha.

      Marketplace for Content: The goal is to make it very easy to earn money off one's
      creative efforts, however small they may be. Almost everyone is an expert in
      something, but given the high barrier to monetizing that expertise, most of that
      expertise is never fully made available to those who might want it.

      So, for example, Jane Doe might know a lot about baby strollers, but it is unlikely
      that she is going to find the time and energy to either join the staff of a magazine or
      even become a freelance writer. As a result, the only people who benefit from her
      expertise are her friends. The hope is that if she can earn some potentially serious
      money by writing about strollers on epinions.com, more people are likely to benefit
      from her knowledge.

      Scalable many-to-many communications. Usenet is still the only real many-to-
      many communication medium. Usenet however has scaled very poorly with
      volume and noise.

      In many-to-many communication, who is saying something is at least as important as
      what is being said. In the real world, we use "word of mouth " as a filter/attractor
      for information. Word of mouth recommendations provide "branding" for individuals.
      When one sees a thousand varieties of a product and don't know which one to choose,
      one is likely to choose a brand that is recommended to them. Similarly, when you are
      looking for advice on a topic, you don't rush out to the street and ask the first five
      people for advice. You ask people you know and trust or people they recommend for
      advice. We call this your "Web Of Trust".

      The epinions.com site is trying to provide an online version of this important real-
      world phenomenon. Any information we present to you is potentially reshaped by
      your Web of Trust. Everything from the search results to product recommendations is
      generated and modulated by the web of trust.

      Real world phenomenon are limited by the spatio-temporal constraints of the real
      world. You have to catch your friend on the phone, it takes him/her time, you don't
      know all your friend's friends, etc. At least some of these constraints can be removed
      from the online version of the Web Of Trust. So, for example, the system can easily

    www.webword.com/interviews/guha.html, An Inside View of Epinions, September 27, 1999.


    calculate everyone trusted by those you trust and percolate up reviews from them and
    reviews they have rated highly. This corresponds in the real world to keeping
    complete track of all your friend's friends --- something that is pretty impossible to
    do. We have many thousands of trust statements in the system. Based on anecdotal
    evidence, those who have started using it end up completely depending on it to
    navigate the site.

    The next step is to introduce other related real world entities such as groups ---
    everything from high school peer groups to organizations such as the Sierra Club.
    Ratings and value judgments by these groups deeply affect what information we
    consume. The online version of groups should be interesting!

        The key here is to make Epinions.com participatory. As Ebay is a marketplace
for products, Epinions.com is a marketplace for ideas. If it catches on, like Ebay, then
everything snowballs, and these hobbyist-reviewers function as sliver-time virtual
employees who do all the work[for you]5.

         Revenue is generated from targeted advertising and click-through referrals.
Epinions.com itself will sell nothing at all—it has no warehouse, no trucks on the back
end. The money would come from deals that Epinions.com cuts with companies that do
sell things: every time an “Epinion” prompts a reader to click “Buy,” the company will
earn a commission on the resulting sale.6

       In short, Epinions.com integrates the 3C's—commerce, content, and
community—that are requisite for any Internet company. Its commerce is the advertising
and referral revenues generated through its shopping guide; its content is the member-
generated reviews and opinions; and its community is the Web Of Trust. Additionally,
the company has an excellent technology team led by ex-Yahooer Naval Ravikant and
ex-AOLer Ramanathan Guha. This team is "built for speed" and is capable of quickly
converting ideas into codes for new web enhancements. Operating in an environment
where "Speed is God, and time is the devil"7, this team has the make-up to become the
master of the opinions universe.

  Hagel & Armstrong, Net Gain, p7.


               Industry Analysis

         Product review sites provide product information and buying advice. These sites
generally specialize in either expert reviews or peer reviews. Expert review sites build on
the North American tradition of reading reviews in monthly print magazines before
making major purchases, such as buying a refrigerator8. These sites have an editorial
staff that evaluates products and writes reviews. The leading expert product review sites
are CompareNet.com, ConsumersDigest.com, and ConsumerReports.com. Peer review
sites build on people providing and seeking word-of-mouth purchase influence. These
sites rely on enthusiasts to evaluate products and write reviews. Currently, the leading
peer review sites are Deja.com, ConsumerREVIEW.com, and Epinions.com. In general,
peer review sites provide the following benefits to the users:
        Make it easy and convenient for users to research and buy products.
        Give users the opportunity to serve the community and feel good about it.
        Let the users who write reviews become heroes.
        Allow users to be part of a like-interest community.

Porter Five Forces
Rivalry in the industry
Rivalry is expected to intensify as these sites go to war to increase user reviews and build
the community. Because the site with the biggest and "stickiest" communities will be the
winner, we can expect market share wars for the next few years.
Bottom-line: Competition will be intense.

 Writers of reviews: experts and/or end users, depending on the type of the site.
 Producers who provide the actual description of the product.
 Web designers if the actual design is outsourced.
Bottom-line: Suppliers have no bargaining power over the sites.

There are two distinct types of customers:
 Advertisers and producers of products on which review sites provide reviews and
   referrals. These customers may exert significant bargaining power if they account for
   a big percentage of revenues of a site. However, this scenario is unlikely. Industry
   incumbents do not have bargaining power over customers due to proliferation of
   competition. But some manufacturers are likely to backward integrate and establish a
   site that would sell their goods. This results in an increase in bargaining power.
 End users who use shopping guides to make purchasing decisions. For them
   switching costs are minimal, but they do not have any bargaining power.
Bottom-line: Some customers have bargaining power over industry incumbents.

    Patricia Seybold Group's E-Business Strategies & Solutions Service-Aug 11, 1999.


Substitutes are reviews by paper-based magazines and catalogues. These magazines
provide expert opinions. However, unlike sites that provide on-line reviews these
magazines have higher costs, and they are not free. Therefore, buyers' propensity to
substitute is low. Also, these magazines are becoming new entrants as they try to shift
content to the Internet. Further substitute is TV, especially HDTV that would allow an
interactive subscreen.

A totally different type of substitutes is sites of manufacturers that sell their merchandize
on-line. Loyal users will go to their sites directly and avoid using shopping guides,
especially if those manufacturers copy some of the value propositions (such as reviews).

Bottom-line: Threat of substitutes is high, increasing with HDTV and entry of
manufacturers on-line.

New entrants
Barriers to entry are low, industry is still growing. If potential new entrants think that
they can accumulate brand identity then they will enter.
Bottom-line: Threat of new entry is significant.

Bottom-line on Porter Analysis
The online peer review industry is young, and there is no clear winner yet. Brand and
credibility are important; therefore, we can expect significant investments in advertising
and promotion from all players to generate traffic and user reviews. We can also expect a
variety of creative tactics to build "stickiness" into the communities.

Key success factors for the industry are:
 Brand Awareness. 52% of all households with a PC said that knowing the on-line
   retailer is very important in the online purchasing decision. Moreover, 82% stated
   that product’s brand name is important in the decision to buy online9.
 Brand Loyalty. Since competition in the industry is intense, it is important that users
   come back to the site. It is more costly to acquire new customers than to retain repeat
 Strength of the created on-line community. In the environment characterized by
   intense competition, the only way to survive is to have a loyal base of users who
   frequently revisit the site. In our case, where the main value proposition is consumer
   generated product reviews, creation of on-line community should be given top
   priority. It is estimated that the value of a community increases exponentially with
   the linear increase in the number of participants.
 Credibility of the site. Users want to know whom they are dealing with. They also
   want to be sure that shopping guide refers them to trustable companies, since up to
   now 97% of households who did not purchase over the web site credit card data
   concerns as a reason for their decision.

    The Second Annual Ernst & Young Internet Shopping Study, 1999, p.11


   User Traffic. The higher the traffic, the higher is the ad revenue, since banners are
    paid on CPM basis.
   Click-Through Frequency. It is already a common knowledge that advertising
    revenues alone are not sufficient to cover all costs of a site. Since shopping guide’s
    business model has two revenue sources – ad revenues and product referral fees –
    revenue from both sources should be maximized.
   User friendliness, interactivity, and convenience of the site. These three factors
    translate into higher traffic, as users are likely to come back if they enjoyed the
    experience. Higher traffic means higher revenues. This is also important for new
    users who are on a trial and repeat mindset.

In summary, we expect a full-scale marketing battle among the players to win market
shares. In addition, we expect "Internet-time product development" as sites speedily add
new enhancements to provide more convenience and user friendliness to garner better
user satisfaction. Last and most importantly, we expect large-scale promotions and
significant investments from players to build bigger and "stickier" communities.


           Competitive Analysis

       Although numerous competitors exist in the current market, we focus our
evaluation and analysis on the two most significant competitors under each category,
namely Consumer Reports and CompareNet for the expert product reviews, and
Consumer REVIEW.com and Deja.com for the consumer-generated product reviews.
We believe that only the top players will survive.

       Following are strengths and weaknesses of each site:

        Name of Site                   Strengths                      Weaknesses
  (& Mission Statement)
Epinions.com                     Web Of Trust. A                Low brand awareness.
"Epinions is a shopping           unique technology              Small communities and
guide powered by consumer         (patent pending) that           market share at this
opinions. It offers a             automatically builds an         moment.
comprehensive shopping            entire community of            Insufficient sortability
experience, providing             trusted members for             and interactivity.
everything from hard              you. The Web of Trust
product facts to brutally         ensures that the
honest advice. The                opinions of your trusted
company's aim is to take          members are always at
people through the whole          the top of your list.
shopping process, stopping       Ability to profile the
just short of the cash            reviewers.
register"                        Consistent format across
                                  different product
                                 User friendliness – good
                                  categorization and easy
                                 The only site that
                                  provides both peer and
                                  expert reviews.
                                 Strategic alliance with

Consumer REVIEW                  Entrenched                     No standard format,
"Our mission is to provide        communities targeted at         content and look, across
consumers the opportunity         hobbyists (E.g. Golf and        different communities.
to review and learn about         flyfishing enthusiasts.)       No profile of reviewers
the products they use, as        Wide range of products         Low sortability of
well as have a forum to           (22,000) and large              features/criteria.


interact with people who             database of reviews           Low credibility due to
share a common interest in           (105,000).                     inconsistency of
a hobby or recreational             Strategic alliance with        reported number of
activity."                           Alta Vista.                    reviews versus actual
                                                                    number of reviews.

Deja.com                            Higher brand                  Profile of reviewers not
"Deja.com is a leading               recognition.                   available.
Internet destination                Highest traffic.              Cluttered site.
dedicated to empowering             Largest communities           Trying to be everything
consumer decision-making             with 700,000 consumer-         to everybody – they
through the exchange of              driven ratings on more         have become sort of a
user-generated information,          than 30,000 products           portal site where you
knowledge and opinion.10"            and services in over 800       can do job search,
                                     categories                     auction, etc
                                    Strategic alliance with

Consumer Reports                    Brand recognition and         Need to pay
Consumer Reports Online's            credibility– 63 years of       subscription fee of
mission is to test products,         consumer reporting             $3.95/month.
inform the public and                experience.                   Expert reviews only.
protect consumers...11              Very comprehensive
                                     and easy to use.

CompareNet                          Brand Recognition –           No consumer-generated
"CompareNet is now part of           part of MSN eShop.             content.
MSN eShop. It provides              Financial clout and
product information and              ample resources from
decision-making tools in             Microsoft.
making buying decisions.12"

      While Epinions is not the first company to provide peer reviews, it certainly has
competitive advantage in the followings:

1)   The first and only site to provide both expert and peer reviews.
2)   The first and only site to allow profiling of reviewers.
3)   The patent-pending Web Of Trust technology.
4)   An "all star" team. The team comprises of Internet veterans from Yahoo, Netscape,
     AOL, and @Home. This team brings valuable Internet knowledge, experience, and
     speed of development.

   Hompage of Deja.com
   Homepage of Consumer Reports Online
   Homepage of CompareNet/MSN eShop


         We believe that Epinions.com is well positioned to compete against the current
players in the industry. The company has developed a superior site than its incumbent
rivals' sites in an amazingly short time period. With this track record of rapid
development and a strong support from venture capitalists, Epinions.com has the human
and financial resources to win new users and build the all-important communities.

Value Net
Create more suppliers. Epinions actively tries to increase the number of reviewers.
Current attraction is the $1,000,000 that will be divided among reviewers at the end of
the ear proportionate to the number of reviews written. We could use further incentives
such as “Reviewer of the Year” award, where the winner would get a trip to Academy
Awards Ceremony or Grammy Awards Ceremony.
Added values:
Invest in community – trigger increasing returns.
Invest in user-friendliness and ease of use. Every novice should be able to figure out
how to obtain relevant information. Moreover, the more ways there are to obtain the
same information the better.
Increase the number of categories of the products. The more information the sites
provide the more valuable it becomes to users.
Promote the Web of Trust initiative. End-users like to know whom they are dealing with.
Since we patented Web of Trust we should take advantage of it and make it one of our
key selling propositions.
Our current partnership with LYCOShop is an exclusive agreement.
Active cobranding and use of partnership agreements is an important tactic using which
can increase our brand awareness.
Too early to expand scope.

Bottomline of Value Net: Clearly, Epinions.com should change players by creating more
suppliers (reviewers). Additionally, it should add value by building community,
investing in user-friendliness and ease of use, increasing the number of categories, and
promoting the Web Of Trust.

       Accordingly, the following additions will increase added value.

 1) Add a drop-down-list box for each main product category on the Homepage.
- The drop list serves to show all the sub-categories listed under the main category
    instead of having to click under the "and more" button to due to lack of space for all
- Advantages: This additional feature will enhance the user friendliness of the web-site,
    increase convenience, and ultimately increase traffic.


2) Add forums and discussions.
- As mentioned in the company profile, community is one of the requisite 3Cs that are
   essential for the survival of an Internet company. By including the feature to allow
   on-line forums and discussions of the products reviewed on the company’s website,
   Epinions will be able to generate and build stronger communities for its product
- Advantage: Strengthens the community.

3) Insert an overall comparison on 2nd click-through (Appendix)
- Currently the page does not allow an overall comparison based on certain criteria.
   This over-all comparison feature should allow the users to sort or rank each criterion
   based on his/her preference. In addition, each user will also be able to sort and rank
   multiple criteria concurrently.
- Advantage: Ease of use, convenience, and high level of interactivity for users and
   ease of comparison. These added values will lead to higher user satisfaction that
   ultimately will strengthen the community.

4) Add related services on the same page for all click-throughs. (Appendix)
- As soon as users click on the main category “Auto”, all subsequent clicks/pages
   related to auto should include a line to related services. This will enable the user to
   search all auto-related services should he decide to buy a car.
- Advantages: Ease of use, convenience, and "one-stop-shop”. Generate more click-
   throughs, which lead to higher revenues.

5) Add rating for each key criterion on individual reviews. (Appendix)
- This is the page where consumers will get to read the write-up by individual
   reviewers. We suggest that all individual reviews should start off with the same
   criteria as in point #3 above.
- Advantage: Ease of use, convenience, and ease of comparison.

        As a newcomer, Epinions.com lacks the most important criterion for a site with
member-generated content—the community. The additional features that we recommend
above are aimed at overcoming this issue by enhancing the value of the site thereby
enhancing the value of the community. However, we believe that these additional
features by themselves will not generate enough user traffic and content and that
Epinions must advertise aggressively to build brand awareness and increase traffic to
compete successfully.



   Advertise aggressively to generate brand awareness, credibility, and new user traffic.
We propose to combine TV, billboard, radio and magazine advertising. Since
Epinions.com is a shopping guide, our revenues are directly related to the number of
users that use our site. In the highly competitive environment, brand and market share
are keys to success.

We propose allocating an additional $10 million to advertising and promotions. Such an
increase in the budget is needed in order to advertise on highly rated TV shows because
they offer the lowest cost per thousand and the widest viewership. An example of such
show can be ER or Friends. A single episode of ER or Friends reaches an audience of 18
million viewers and demands $500,000 per 30-second advertising pot. We propose
advertising at least three times per episode because it typically requires three exposures
for a viewer to register a message. As a result, our spending per episode would be
approximately $1.5 million. Thus, with a budget of $10 million, we can select at least
four episodes that would reach a total of 72 million viewerships, and spend the remaining
$4 million on other media such as radio, billboards, newspapers and magazines.

Our calculations show that if we combine the proposed additional features with the
aggressive advertising campaign then even at a conservative rate of 2% for ad
effectiveness and a 20% repeat rate, we will generate positive profits starting from the
third year of operation. More importantly, at these rates, we will have a total of 1.52
million users annually.(See Appendix)

   Promote participatory campaigns to generate new user reviews, build community
strength, and increase repeat visits. Community is what differentiates Epinions from
substitutes, addresses the threat of imitation, and guarantees long-term success. We want
to stimulate active participation of users in our community. Since people love to give
their opinions and love to argue on different matters, we already have intrinsic motivation
on the part of the audience. In addition we can put monetary and non-monetary rewards
as extrinsic motivators. We recommend to create a number of prizes, such as “Best
reviewer of the year”, “Most useful review”, etc. as well as to maintain our current
practice of distributing a one million dollar prize fund among the reviewers.

   Add new web enhancements to improve convenience, interactivity, and user
friendliness. Convenience, interactivity and user friendliness will not only increase
satisfaction of our current users and strengthen the community but also increase repeat
rate among first-time users. Currently, an average user generates $18.00 per year in
revenues. The expected effects of introducing these new features are:


    1. Increase in traffic by 10%, or additional 7,150 users
    2. Increase in the number of visits per user per year by 10% (from 3 visits per month
       to 3.3 visits)
    3. Increase in the percentage of pages viewed per visit by 5% (from current 10 to
    4. Increase in the percentage of click-throughs by 10% (currently 10% of visitors
       click-through, which we expect to increase to 11% of visitors)
    5. Increase in the number of click-throughs per visit by 10% (from 2 to 2.2).

These changes will increase revenues per user per year to $22.06, contribution per user
per year from $14.04 to $18.10, and total revenue from $1,287,000 to $1,734,799. In
sum, the net gain (decrease in net loss) is $266,239.

   Be a moving target by continuing to add more features and products that will enhance
the communities. The biggest threat to our competitive position comes from imitation.
In order to address this threat we need to continually introduce new features and cover
more product categories. Our long-term survival depends on staying ahead of the
competition. In addition to current product-based shopping guide, we propose to
introduce an occasions-based shopping guide. It will offer tips, ideas and gift suggestions
to different occasions (an example can be a first date). Moreover, we recognize that we
face significant competition, and therefore we need to constantly monitor our competitors
and copy their innovative introductions if they come out with some product category or
feature that we do not have. Our superior competence in web-development gives us a
significant edge in speed of development of the site.

For example, we recommend that Epinions add "Ecasions" to its web site. Ecasions
would encompass events such as wedding anniversaries, graduations, first dates, and
birthdays. In our example of a "first date" Ecasion, services would resemble the
following list.

    ·   Advice/shared experiences from peers
    ·   Advice from experts (for example, should you take flowers for a first date)
    ·   Places to go
    ·   Pre-departure checklist
    ·   Tips for men and women (things to do and things not do on the first date)
    ·   Card shop
    ·   Romance Guide/tips
    ·   Epoems
    ·   Dinner and wine suggestions
    ·   Kissing tips
    ·   Astrology readings
    ·   Gift guide (gifts to be delivered after the first date)
    ·   Discussion/message board or "Idea room"


We believe that this will add value to the overall community and will increase click-
throughs and ultimately revenues. More importantly, this example demonstrates the
scalability of the business model.

        Finally, we conclude by addressing the critical issue of sustainability. Ease of
imitation is a competitive concern for all E-commerce sites, including Epinions.com.
Therefore, erecting barriers to imitation is critical in the long run. We believe the most
feasible barriers are speed and community. Speed of development allows continual
improvements that make it difficult for imitators; meanwhile, speed to market affords
first-mover advantage that typically results in higher market share. Community is not
portable and provides stickiness, which builds loyalty. And, because the value of the
community increases exponentially with each additional new user, it is very difficult to
catch up to a site that has an entrenched community.

        We believe that Epinions.com has both speed and community. Its founders built
the company around speed. The site was developed from idea to launch preview in a
mere 12 weeks. The business model is built around community. Insiders boast that total
user reviews has already reached "five figures", and the site has not even officially
launched yet! And with the buzz circling around the "Valley" these days that picks
Epinions.com to be a long-term winner, this site is getting lots of free publicity in the
media. We expect that a combination of free publicity and an aggressive marketing blitz
will propel Epinions.com past its competitors in the next year or two in total user
reviews. Thus, we expect Epinions.com to not only succeed but also sustain.


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