INSIGHT ON BUSINESS ROCKET INTERNET

By now, most people have heard the story of Mark Zuckerberg dropping out of college to start Facebook.

 These days, tech startup founders are less likely to build businesses on their own, and instead often seek the help of an incubator.

 Incubators have become essential in helping new tech startups grow from the kernel of a great idea into an established, vibrant business.

 Rocket Internet is one such incubator.

 Founded in 2007 by German entrepreneurs Oliver Samwer and his brothers Alexander and Marc, Rocket Internet launches e-commerce and other Internet startups in emerging markets, with the goal of becoming the world’s largest Internet platform outside the United States and China.

 Headquartered in Berlin and with offices around the globe, Rocket Internet has launched over 200 companies with more than 33,000 employees in 120 countries.

 In 2014, Rocket went public on the Frankfurt Stock Exchange in the largest German technology IPO in the past decade.

 The initial pricing valued the company at around €۶.۵ billion.

 However, since its IPO, the company’s stock price has steadily fallen from a high of nearly €۶۰ to about €۲۰ per share as of September 2020, reducing the company’s market capitalization to about €۲.۵ billion.

 In October 2020, Rocket applied to delist its shares from the Frankfurt and Luxembourg Stock Exchanges, with its investment division, Global Founders Capital, and CEO Oliver Samwer continuing to hold the majority stake.

 Rocket’s struggles illustrate the perils of chasing growth at all costs above profitability.

 Rocket bills itself as more than a venture capital firm or typical incubator.

 Rocket has a variety of teams that work closely with each of its ventures, including teams focused on engineering and product development, online marketing, CRM, business intelligence, operations, HR, and finance.

 Rocket also helps its startups by providing access to centralized logistics and other back-office functions to help them cut down on operational costs. Rocket also handles the acquisition of venture capital on behalf of its startup companies, freeing them to focus on rapidly growing the business.

 Rocket is a data-driven company, and its startups collect and analyze as much data on their markets and customers as possible, allowing them to quickly make changes to spur growth.

 In many emerging markets, the most talented workers end up in established industries, but Rocket is ensuring that e-commerce also captures top talent in those regions.

 Prominent companies launched via Rocket Internet include Germany’s Zalando, India’s Jabong, Russia’s Lamoda, Australia’s The Iconic and Zanui, Pakistan’s Daraz, and Southeast Asia’s Zalora.

 However, critics of Rocket Internet claim that the company is less concerned with innovation than it is with launching clones of successful U.S.-based businesses in other markets.

 Rocket counters that it improves upon established businesses by refining their business processes and by localizing them to better fit specific areas.

 Investors have also long been concerned about the profitability of Rocket’s portfolio.

Many of Rocket’s companies have market-leader status in their respective areas, but few of them are profitable.

 Rocket has contended that by focusing on growth in emerging markets first, profits will come in time. In 2018, the company finally made good on that promise, recording a net profit of €۱۹۶ million for the year, up dramatically from a loss of €۶ million in 2017.

 It continued in that vein in 2019, generating a consolidated profit of €۲۸۰ million. However, those profits were largely due to the successful IPOs of a number of its most prominent startups, including food delivery companies Delivery Hero and HelloFresh; home goods retailers Home24 and WestWing; African e-commerce retailer Jumia; and Global Fashion Group.

 However, in 2020, the Covid-19 pandemic negatively impacted both the company’s revenues and stock market performance, leading to the decision to delist its shares.

 According to Samwer, Rocket Internet will be better positioned and able to focus on longer-term results without having to deal with the stock market’s typical focus on short-term results.

 Rocket has had the most success launching companies modeled after established businesses in emerging markets and then selling these ventures to those established businesses.

 eBay’s acquisition of Germany’s leading auction site, Alando, where the Samwers got their start, is an example, and the company sold a controlling stake in Southeast Asian Amazon clone Lazada to Alibaba for $1 billion in 2016, a price exceeding investor valuations of the company, and representing a profit of over 20 times its initial investment.

 In 2017, Rocket sold half of its shares of Delivery Hero for €۶۶۰ million, as well as Germany-based beauty retailer Glossybox and Dubai-based fashion retailer Namshi.

 These sales and the IPOs have helped Rocket stay afloat as it continues to support its other businesses.

 Going forward, Rocket is focusing more on sustainable companies and less on selling their companies to market leaders.

Oliver Samwer believes that in the past, it may have sold some businesses, such as Alando, too early, but that it was necessary in order for Rocket to build a track record.

Now that it has one, it can afford to take a longer-term view.

 However, Samwer has not totally turned his back on the opportunities afforded to public companies.

 In March 2021, he and a team including members of Rocket’s leadership created a special purpose acquisition company (referred to as a “SPAC”) named Rocket Internet Growth Opportunities and listed its shares on the New York Stock Exchange in a $250 million IPO.

SPACs, also sometimes called “blank check” firms, raise money in an IPO to acquire companies without actually identifying them to the SPAC’s investors.

 Rocket Internet Growth Opportunities intends to focus on the disruption of outdated business models, particularly on Internet marketplaces, e-commerce companies, fintech companies, startups in the healthcare industry, and artificial intelligence.Namshi.

 These sales and the IPOs have helped Rocket stay afloat as it continues to support its other businesses. Going forward, Rocket is focusing more on sustainable companies and less on selling their companies to market leaders.

Oliver Samwer believes that in the past, it may have sold some businesses, such as Alando, too early, but that it was necessary in order for Rocket to build a track record.

Now that it has one, it can afford to take a longer-term view.

However, Samwer has not totally turned his back on the opportunities afforded to public companies.

In March 2021, he and a team including members of Rocket’s leadership created a special purpose acquisition company (referred to as a “SPAC”) named Rocket Internet Growth Opportunities and listed its shares on the New York Stock Exchange in a $250 million IPO.

SPACs, also sometimes called “blank check” firms, raise money in an IPO to acquire companies without actually identifying them to the SPAC’s investors.

 Rocket Internet Growth Opportunities intends to focus on the disruption of outdated business models, particularly on Internet marketplaces, e-commerce companies, fintech companies, startups in the healthcare industry, and artificial intelligence.

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e-commerce during the next decade.

 The Internet scales well. The “e” in e-commerce has been an overwhelming success.

From a business perspective, though, the early years of e-commerce were a mixed success, and offered many surprises.

Only a very small percentage of dot-coms formed in those early years have survived as independent companies.

Yet online retail sales of goods and services are still growing very rapidly.

Contrary to economists’ hopes, however, online sales are increasingly concentrated.

For instance, Amazon accounted for 37% of all U.S. online sales via direct sales and sales by third-party sellers using Amazon’s platform, as well as more than 60% of the growth of U.S. e-commerce retail sales in 2019.

 In addition, according to eMarketer, the top 10 U.S. e-commerce retailers grew their market share to over 60% in 2020, while the top 1000 retailers accounted over 90% of all U.S. online retail sales in 2019 (Digital Commerce 360 Research, 2020; eMarketer, Inc., 2020j).

 No one foresaw that Google/YouTube and Facebook/Instagram would dominate the online advertising marketplace, accounting for almost 55% of worldwide digital advertising revenues, (eMarketer, Inc., 2020k).

And of course, no one anticipated that a pandemic would occur in early 2020, forcing broadscale and widespread changes in consumer shopping behavior, changes that are likely to persist even once the crisis passes, fueling increased growth of retail e-commerce, particularly from the top 1000 online retailers.

So thousands of firms have failed, and now, a few of those that have survived dominate the market.

The idea of many thousands of firms competing on price has been replaced by a market dominated by giant firms. Consumers use the Web as a powerful source of information about products they often actually purchase through other channels, such as at a traditional bricks-and-mortar store, a practice sometimes referred to as “webrooming,” “ROBO” (research online, buy offline), or O2O (online-to-offline). One survey found that 80% of consumers said they had webroomed in the past 12 months. This is especially true of expensive consumer durables such as automobiles, appliances, and electronics (Netsertive, 2018).

 This offline “Internet-influenced” commerce is very difficult to estimate, but definitely significant. For instance, Forrester Research estimates that half of all U.S. retail sales (about $2.6 trillion) in 2018 were influenced by consumers’ use of digital devices prior to or during a physical shopping trip and expects this percentage to grow to almost 60% by 2023 (Forrester Research, 2018).

 The “commerce” in e-commerce is basically very sound, at least in the sense of attracting a growing number of customers and generating revenues and profits for large e-commerce players. Although e-commerce has grown at an extremely rapid pace in customers and revenues, it is clear that many of the visions, predictions, and assertions about e-commerce developed in the early years have not been fulfilled.

For instance, economists’ visions of “friction-free” commerce have not been entirely realized. Prices are sometimes lower online, but the low prices are sometimes a function of entrepreneurs selling products below their costs.

 In some cases, online prices are higher than those of local merchants, as consumers are willing to pay a small premium for the convenience of buying online (Cavallo, 2016).

Consumers are less price sensitive than expected; surprisingly, the websites with the highest revenue often have the highest prices. There remains considerable persistent and even increasing price dispersion:

online competition has lowered prices, but price dispersion remains pervasive in many markets despite lower search costs (Levin, 2011; Ghose and Yao, 2011).

In a study of 50,000 goods in the United Kingdom and the United States, researchers found Internet prices were sticky even in the face of large changes in demand, online merchants did not alter prices significantly more than offline merchants, and price dispersion across online sellers was somewhat greater than traditional bricks-and-mortar stores (Gorodnichenko et al., 2014).

 The concept of one world, one market, one price has not occurred in reality as entrepreneurs discover new ways to differentiate their products and services.

Merchants have adjusted to the competitive Internet environment by engaging in “hit-and-run pricing” or changing prices every day or hour (using “flash pricing” or “flash sales”) so competitors never know what they are charging (neither do customers); and by making their prices hard to discover and sowing confusion among consumers by “baiting and switching” customers from low-margin products to high-margin products with supposedly “higher quality.” Finally, brands remain very important in e-commerce—consumers trust some firms more than others to deliver a high-quality product on time and they are willing to pay for it (Rosso and Jansen, 2010).

The “perfect competition” model of extreme market efficiency has not come to pass.

Merchants and marketers are continually introducing information asymmetries.

Search costs have fallen overall, but the overall transaction cost of actually completing a purchase in e-commerce remains high because users have a bewildering number of new questions to consider: Will the merchant actually deliver?

What is the time frame of delivery?

 Does the merchant really stock this item?

How do I fill out this form?

Many potential e-commerce purchases are terminated in the shopping cart stage because of these consumer uncertainties.

 Some people still find it easier to call a trusted catalog merchant on the telephone than to order online.

 Finally, intermediaries have not disappeared as predicted.

Although many manufacturers do sell online directly to consumers, they typically also make use of major e-commerce marketplaces, such as Amazon, eBay, Walmart, and Wish.com.

 If anything, e-commerce has created many opportunities for middlemen to aggregate content, products, and services and thereby introduce themselves as the “new” intermediaries.

Third-party travel sites such as Travelocity, Orbitz, and Expedia are an example of this kind of intermediary.

 The visions of many entrepreneurs and venture capitalists for e-commerce have not materialized exactly as predicted either.

 First-mover advantage appears to have succeeded only for a very small group of companies, albeit some of them extremely well-known, such as Google, Facebook, Amazon, and eBay.

Getting big fast sometimes works, but often not.

Historically, first movers have been long-term losers, with the early-to-market innovators usually being displaced by established “fast-follower” firms with the right complement of financial, marketing, legal, and production assets needed to develop mature markets, and this has proved true for e-commerce as well.

Many e- commerce first movers, such as eToys, FogDog (sporting goods), Webvan (groceries), and Eve.com (beauty products), failed.

Customer acquisition and retention costs during the early years of e-commerce were extraordinarily high, with some firms, such as E*Trade and other financial service firms, paying up to $400 to acquire a new customer.

The overall costs of doing business online—including the costs of technology, site and mobile app design and maintenance, and warehouses for fulfillment—are often no lower than the costs faced by the most efficient bricks-and-mortar stores.

A large warehouse costs tens of millions of dollars regardless of a firm’s online presence. The knowledge of how to run the warehouse is priceless.

 The startup costs can be staggering.

Attempting to achieve or enhance profitability by raising prices has often led to large customer defections. From the e-commerce merchant’s perspective, the “e” in e-commerce does not stand for “easy.” On the other hand, there have been some extraordinary and unanticipated surprises in the evolution of e-commerce.

Few predicted the impact of the mobile platform.

Few anticipated the rapid growth of social networks or their growing success as advertising platforms based on a more detailed understanding of personal behavior than even Google has achieved.

And few, if any, anticipated the emergence of on-demand e-commerce, which enables people to use their mobile devices to order up everything from taxis, to groceries, to laundry service.

   ۱.۶ UNDERSTANDING E-COMMERCE:

ORGANIZING THEMES Understanding e-commerce in its totality is a difficult task for students and instructors because there are so many facets to the phenomenon.

No single academic discipline is prepared to encompass all of e-commerce.

 After teaching the e-commerce course for a number of years and writing this book, we have come to realize just how difficult it is to “understand” e-commerce.

We have found it useful to think about e-commerce as involving three broad interrelated themes: technology, business, and society.

We do not mean to imply any ordering of importance here because this book and our thinking freely range over these themes as appropriate to the problem we are trying to understand and describe.

Nevertheless, as in previous technologically driven commercial revolutions, there is a historic progression. Technologies develop first, and then those developments are exploited commercially.

 Once commercial exploitation of the technology becomes widespread, a host of social, cultural, and political issues arise, and society is forced to respond to them.

  TECHNOLOGY: INFRASTRUCTURE

 The development and mastery of digital computing and communications technology is at the heart of the global digital economy we call e-commerce.

To understand the likely future of e-commerce, you need a basic understanding of the information technologies upon which it is built.

E-commerce is above all else a technologically driven phenomenon that relies on a host of information technologies as well as fundamental concepts from computer science developed over a 60-year period.

At the core of e-commerce are the Internet and the Web, which we describe in detail in Chapter 3. Underlying these technologies are a host of complementary technologies:

cloud computing, desktop computers, smartphones, tablet computers, local area networks, relational and nonrelational databases, client/server computing, data mining, and fiber-optic switches, to name just a few.

These technologies lie at the heart of sophisticated business computing applications such as enterprise-wide information systems, supply chain management systems, manufacturing resource planning systems, and customer relationship management systems.

 E-commerce relies on all these basic technologies—not just the Internet.

The Internet, while representing a sharp break from prior corporate computing and

 FIGURE 1.11 THE INTERNET AND THE EVOLUTION OF CORPORATE COMPUTING

 The Internet and Web, and the emergence of a mobile platform held together by the Internet cloud, are the latest in a chain of evolving technologies and related business applications, each of which builds on its predecessors.

communications technologies, is nevertheless just the latest development in the evolution of corporate computing and part of the continuing chain of computer-based innovations in business.

 Figure 1.11 illustrates the major stages in the development of corporate computing and indicates how the Internet and the Web fit into this development trajectory.

 To truly understand e-commerce, you will need to know something about packet-switched communications, protocols such as TCP/IP, client/server and cloud computing, mobile digital platforms, web servers, HTML5, CSS, and software programming tools such as JavaScript on the client side, and Java, PHP, Ruby on Rails, and ColdFusion on the server side.

All of these topics are described fully in Part 2 of the book (Chapters 3–۵).

BUSINESS: BASIC CONCEPTS

While technology provides the infrastructure, it is the business applications—the potential for extraordinary returns on investment—that create the interest and excitement in e-commerce.

New technologies present businesses and entrepreneurs with new ways of organizing production and transacting business.

 New technologies change the strategies and plans of existing firms: old strategies are made obsolete and new ones need to be invented.

 New technologies are the birthing grounds where thousands of new companies spring up with new products and services.

New technologies are the graveyard of many traditional businesses.

To truly understand e-commerce, you will need to be familiar with some key business concepts, such as the nature of digital markets, digital goods, business models, firm and industry value chains, value webs, industry structure, digital disruption, and consumer behavior in digital markets, as well as basic concepts of financial analysis.

We’ll examine these concepts further in Chapters 2, 6, 7, and 9 through 12.

SOCIETY: TAMING THE JUGGERNAUT

With around 4 billion people worldwide now using the Internet, many for e-commerce purposes, the impact of the Internet and e-commerce on society is significant and global.

Increasingly, e-commerce is subject to the laws of nations and global entities.

 You will need to understand the pressures that global e- commerce places on contemporary society in order to conduct a successful e-commerce business or understand the e-commerce phenomenon.

The primary societal issues we discuss in this book are individual privacy, intellectual property, and public policy.

 Because the Internet and the Web are exceptionally adept at tracking the identity and behavior of individuals online, e-commerce raises difficulties for preserving privacy— the ability of individuals to place limits on the type and amount of information collected about them, and to control the uses of their personal information.

Read the Insight on Society case, Facebook and the Age of Privacy, to get a view of some of the ways e-commerce sites use personal information.

 Because the cost of distributing digital copies of copyrighted intellectual property— tangible works of the mind such as music, books, and videos—is nearly zero on the Internet, e-commerce poses special challenges to the various methods societies have used in the past to protect intellectual property rights.

 The global nature of e-commerce also poses public policy issues of equity, equal access, content regulation, and taxation.

 For instance, in the United States, public telephone utilities are required under public utility and public accommodation laws to