How Google copy-pasted its way to success

 John Mullins, an associate professor at London Business School and most recently the co-author of Getting to Plan B: Breaking Through To a Better Business Model

 DNA 

Can you give us an example?
eBay is a good example. Their genius was how they set up the system. They thought there was an opportunity to use the web to bring buyers and sellers together because there was already a very large market of people running classified advertisements for things they wanted to sell that were used and that they had. How do you do that? The way it used to work was, you run a classified ad in the newspaper and maybe you would find a customer. Pierre Omidyar, the guy who founded eBay, said maybe we could be more efficient here and use the web to organise the market place. It turned out there was another web-based business called Onsale doing this. It sought to ensure that the things bought and sold were of good quality. So had a warehouse where they clean the stuff, checked it and then shipped it on.

But that would have cost a lot of money?
Yeah that cost a lot of money. So there gross margins were maybe 10% at best. eBay said, what if we do this without a warehouse. Could we build some kind of web-based system to ensure that there is enough trust, that the buyer would know that, even though we have never looked at the goods, there is a system built in to ensure that there will be trust and that the goods you receive, Mr Buyer, are actually goods that are working. They put in place customer feedback systems so that, if they were fraudulent sellers, other buyers could warn, and that would weed out any bad seller from the system. And because
now they did not need any warehouse they didn’t have all those costs. eBay’s only cost is to facilitate a transaction between you and me. You want to sell your kids’ bicycle because they have outgrown it and I want to buy it because it’s the right size bike for my kids. eBay’s only cost is to host that ad on their website, which costs practically nothing. And to push the electrons back and forth when we communicate with each other in the auction and close the sale. eBay’s costs are practically nothing and of course they take a little money from the seller when he lists it and from the buyer-seller transaction when the deal is closed. The cost of that sale is pretty close to zero for eBay.

What kind of gross margins do they have?
Nearly a 100%. There is another very interesting gross-margin model that we talk about in the book. It’s a company called Shanda in China, an online multiplayer game company. They used to charge their Chinese consumers to play the game. So you go to an internet cafe in Beijing or Shanghai and you would sit down on a terminal and you would pay a scratch or something to play the game. Well, they said, what if we could make the game free to play. Maybe we will get lots more consumers playing. But how can we get the revenues? So, instead of charging people to play the game, let’s charge them for the weapons that their avatar uses or for costumes their avatar needs or for other things. All of these things are purely digital in nature. So the cost of selling that digital something to the game player is essentially zero. It’s what they call today virtual goods. It costs virtually nothing to sell that but the consumer is willing to pay something. That’s another example of close to 100% gross margin.