The Online Economy: Strategy and Entrepreneurship
Course Number 1760
Associate Professor Benjamin G. Edelman
Fall; Q1Q2; 3 credits
This course equips students whose career paths will be closely connected to online businesses. In particular, the course is appropriate for:
- Students planning entrepreneurial ventures in online businesses
- Students whose careers as managers, investors, or consultants will focus on online businesses
Technical expertise or prior online business experience is neither necessary nor expected.
Online businesses attract entrepreneurs with their low capital requirements, ease of experimentation, well-known successes, and possibility of quickly achieving scale. These opportunities are equally attractive to existing businesses seeking growth and innovation potential in the internet. Yet online ventures pose distinctive management challenges. For one, they are often grounded in network effects, requiring mobilizing many participants in order to deliver value. Second, while payoffs can be spectacular for winners, network effects also invite strategic blunders. When network effects are strong, industries have room for only a few platforms; often, a single platform prevails. Rivals sometimes persist in fighting too long, as in the recent battle over high-definition DVD formats. Likewise, firms miss chances to profitably share their platforms with rivals. The Online Economy offers a perspective to capture these opportunities and avoid similar mistakes.
In many industries, powerful firms already control key online platforms: Google, Facebook, Apple, Amazon, Microsoft, and others. We will explore two opposing perspectives on market power: how dominant providers can expand their positions and respond to threats, and how upstarts can find opportunities in the face of seemingly-omnipotent incumbents.
Online businesses are also unusual in their revenue sources, as users often receive service for "free." For some businesses, advertising can sustain no-charge service. Others support free or subsidized service to one set of users by attracting another group willing to pay to reach the first. But these free and subsidized strategies have their limits: All too many online businesses have failed due to business models grounded in unrealistic revenue plans. The Online Economy arms students with a framework to identify realistic revenue sources.
Course Content and Organization
The course consists of four modules:
- Launch strategy. How to reach critical mass? We consider strategies including penetration pricing, permanently subsidizing one set of users, creating "stand-alone" value, and securing exclusive relationships with marquee users.
- Implementation. What if you have a great idea but no technical capability? We explore practical questions ranging from hiring a CTO to building in the cloud to accepting online payments.
- Scaling up. We explore strategies for expansion, including attracting users through online advertising, hiring intermediaries to broaden distribution, and offering price promotions.
- Design. What structures, rules, and incentives will create a well-functioning online ecosystem? We examine review and reputation systems, dynamic marketplace pricing, and institutions to create a safe environment for users, while at the same time protecting a site from liability.
Grading and Further Projects
Grades are determined by class participation and a final paper or HBS-style case and analysis. Prof. Edelman advises limited Independent Projects, during both fall and winter term, of students enrolled in this course.