Maf 635 E Commerce

PART 1 CHAPTER 1 The revolution Is dear germ CHAPTER 2 E- avocation Business Models and Concepts Introduction to E-commerce C H A P T E R 1 The diversity Is provided Beginning LEARNING OBJECTIVES afterward reading this chapter, you leave be capable to Define e-commerce and set forth how it differs from e- origin. separate and describe the st localise features of e-commerce engineering and discuss their business signifi nookyce. Describe the study causas of e-commerce.Discuss the origins and growth of e-commerce. Understand the vision and forces operating during the tour one five years of e-commerce, and assess its successes, surprises, and failures. Identify close to(prenominal) factors that will define the conterminous five years of e-commerce. Describe the major themes lowlying the study of e-commerce. Identify the major academic disciplines contri unlessing to e-commerce research. A m a z o n a t 1 0 Profitable At Last A mazon. com is one of the meshs approximately exciting and instructive stories.Started in a garage by Jeff Bezos in 1995, it has since big(p) to give-up the ghost the largest meshwork retailer, with the highest levels of customer atonement, the fastest revenue growth rates, and finally, after nine years, profitable. One of the net profit Big tetrad companies, along with yokel, eBay and Google, few would wee aspect it possible when virago first opened for business that an online bookstore would become one of the premiere general retailers in the world. But viragos aptitude to maintain operations at a sufficiently profitable level is a fact that continues to worry investors in 2005.Critics be of two minds either Amazon will become the online Wal-Mart (and suffer from its huge size full as WalMart does) or it will fail to deliver tops(predicate)iorior growth and acquire beca character it has break up itself too thin, taken on too m either product lines, and given away too frequently revenue to cust omers by offering release conveyance and superior service. Supporters, and Bezos himself, counter that Amazon has become the meshings largest retailer on a revenue basis by accenting on the customer, non short-term profits, and that it will ultimately become one of the most profitable by following the equal strategy.Amazon certainly has had a roller coaster ride in its ten brief years. In December 1999, Jeff Bezos graced the cover of Time magazine as its Person of the Year. In the same(p) month, Amazons stock reached a peak of $113 per share. In January 2001, Amazon reported a whopping $1. 411 jillion as its overall loss for the year. Its stock hit a low of $6 a share. Amazon laid off 1,300 employees, constituting intimately 15% of its workforce. Questions virtually its long-run viability abounded. Bezos promised he would make the companionship profitable in two years, but few believed this was possible.But, in 2003, Amazon reported soaring gross sales it achieved its first annual profit ever (about $35 Amazon. coms first meshwork order 3 4 CHAPTER 1 The Revolution Is Just Beginning million), and its stock hurt ofttimes than doubled to $25 a share. The good pertlys keep into 2004 when Amazon reported profits of $588 million on $6. 92 billion in revenue. How was Amazon able to turn around its business from a $1. 4 billion annual loss to a $588 million profitable operation disrespect the dot. om stock market crash and the withdrawal of venture capital keep for e-commerce companies? The story of Amazon. com, the most easily-known e-commerce company in the United States, in some(prenominal) ways mirrors the story of e-commerce itself. So, lets take a enveloping(prenominal) look at Amazons path to pre get wind many of the issues well be discussing through and throughout this book. In 1994, Jeff Bezos, then a 29-year-old senior vice death ch post at D. E. Shaw, a argue pass investment bank, read that Internet usage was growing at 2,300% per year.To Bezos, that bite represented an extraordinary opportunity. He repudiate his job and investigated what products he might be able to sell successfully online. He quickly hit upon bookswith over 3 million in shanghai at any one cadence, no physical bookstore could stock more than(prenominal) than than a small percentage. A virtual bookstore could offer a much great selection. He withal felt consumers would feel less need to actually touch and feel a book before purchasing it. The comparative dynamics of the book publishing, distributing, and retailing industry were to a fault favorable.With over 2,500 publishers in the United States, and the two largest retailers, Barnes and Noble and Borders, covering for lonesome(prenominal) 12% of kernel sales, there were no 800-pound gorillas in the market. The existence of two large distributors, Ingram Books and Baker and Taylor, meant that Amazon would feed to stock only minimal blood. Bezos easily raised several(pren ominal) million dollars from private investors and in July 1995, Amazon. com opened for business on the Web. Amazon offered consumers four compelling reasons to shop there (1) selection (a data junior-grade of 1. million titles), (2) convenience (shop anytime, anywhere, with order simplified by Amazons patented 1-Click express shopping engine room), (3) cost (high discounts on bestsellers), and (4) service (e-mail and telephone customer support, automated order confirmation, track and shipping teaching, and more). In January 1996, Amazon moved from a small 400-square-foot office into a 17,000-square-foot wareho subroutine. By the determi estate of 1996, Amazon had almost 200,000 customers. Its revenues had climbed to $15. 6 million, but the company posted an overall loss of $6. 24 million.In May 1997, Amazon went public, raising $50 million. Its initial public offering documents identified several ways in which Amazon anticipate to have a lower cost structure than conventio nal bookstores it would not need to invest in expensive retail real(a) estate, it would have reduced personnel requirements, and it would not have to carry extensive inventory, since it was relying in large part on book distributors. During 1997, Amazon continued to grow. It served its millionth unique customer, expanded its Seattle warehouse, and reinforced a second 200,000-square-foot scattering center in Delaware.By the end of 1997, revenues had expanded to $148 million for the year, but at the same time, losses also grew, to $31 million. In 1998, Amazon expanded its product line, first adding music CDs and then goggle boxs and DVDs. Amazon was no long-life satisfied with merely sell books. Its business strategy was now to become the best place to buy, find, and discover any product or Amazon at 10 Profitable At Last 5 services on hand(predicate) online. It also opened Web sites in Great Britain and Germany. Amazon, pundits noted, was planning to be the online Wal-Mart. R evenues for the year increased significantly, to $610 million, but the osses also continued to mount, quadrupling to $125 million. The year 1999 was a watershed year for Amazon. Bezoss announced goal was for Amazon to become the Earths Biggest Store. In February, Amazon borrowed over $1 billion, using the funds to finance expansion and cover operating losses. During the year, it added electronics, toys, home alterment products, software, and video games to its product lines. It also introduced several marketplaces, including Amazon. com Auctions (similar to that offered by eBay), zShops (online storefronts for small retailers), and sothebys. amazon. om, a joint venture with the auction house Sothebys. To service these new product lines, Amazon significantly expanded its warehouse and distribution capabili restricts, adding eight new distribution centers comprising approximately 4 million square feet. By the end of 1999, Amazon had more than doubled its 1998 revenues, put down sal es of $1. 6 billion. But at the same time, Amazons losses showed no signs of abating, reaching $720 million for the year. Although Bezos and Amazon were still riding high at the end of December 1999, in hindsight, its possible to say that the handwriting was on the wall.Wall Street analysts, previously willing to overlook continuing and mounting losses as long as the company was expanding into new markets and attracting customers, began to wonder if Amazon would ever show a profit. They pointed out that as Amazon built more and more warehouses brimming with goods, and hired more and more employees (it had 9,000 by the end of 2000), it strayed farther and farther from its original vision of being a virtual retailer with escape inventories, low headcount, and significant cost savings over traditional bookstores.The year 2000 ended on a much different note than 1999 for Amazon. No longer the darling of Wall Street, its stock price had fallen significantly from its December 1999 high. In January 2001, it struggled to put a positive spin on its financial upshots for 2000, noting that trance it had recorded a staggering $1. 4 billion loss on revenues of $2. 7 billion, its fourth-quarter loss was slightly less than analysts projections. For the first time, it also announced a target for profitability, promising a pro seducea operating profit by the fourth quarter of 2001.Few analysts were impressed, pointing out that the method by which Amazon was suggesting its profit be calculated was not in accordance with generally accepted accounting principles. They also noted that growth had slowed in Amazons core books, music, and video business, and profit margins were slim in the faster-growing categories, such(prenominal) as consumer electronics. In 2001 and 2002, Bezos and fellow executives began to implement their strategy for profitability cut prices, offer free shipping, and leverage Amazons investment in infrastructure and consumer brands, while lowering cost of operation significantly.By evolving and leveraging the existing business model, Amazon hoped to do what analysts thought was impossible. The indulgent part of the strategy was driving business revenues higher by offering customers the lowest possible prices for a broad range of goods, providing free shipping for orders greater than $25, and then multiplying sources of revenue. Amazons 6 CHAPTER 1 The Revolution Is Just Beginning SOURCES Amazon Announces Free Cash Flow Surpassed $500 Million for the prototypic Time Customers Joined Amazon Prime at an Accelerated Rate, Amazon. com, February 2, 2006 Amazon. om Form 10-Q for the nine months ended September 30, 2005, filed with the Securi draw pokers and Ex incline Commission on October 27, 2005 Amazon Faces the Challenges of Its imprimatur Decade, by Paul Festa, Cnetnews. com, July 15, 2005 A sell Revolution Turns 10, by Gary Rivlin, New York Times, July 10, 2005 Tabs on Tech The Internet, by Laurie Kawakami, Wall Street Journal, June 1, 2005 Internet Big Four Worth a Look As Growth Stocks, by James B. Stewart, Wall Street Journal, May 4, 2005 Amazon Net Falls As Rivals reserve Toll, by Mylene Mangalindan, Wall Street Journal, April 27, 2005 Amazon. om, Inc. Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission on March 11, 2005 Amazon Gets the Last Laugh, by Chip Bayers, Business 2. 0, September 2002. emailprotected and Amazon Marketplace allow oppositewise businesses to fully integrate their Web sites into Amazons site to sell their mark goods, but use Amazons fulfillment and handment infrastructure. Nordstrom, Toys R Us, Gap Inc. , Target, and many separate retailers use Amazon to sell their goods and then pay Amazon commissions and fees.Amazon also offers its expertise in Web site hosting through its Merchant. com program to national brands such as Target. In the Amazon Marketplace program, individuals are encouraged to sell their employ or new goods on Amazons Web site even when they repugn directly with Amazons sales of the same goods. Amazon reports that sales by third parties now represent 27% of revenues and that it makes as much profit on commissions from other vendors as it does from its own sales. Lowering cost proved difficult, but not impossible.In early 2001, Amazon closed two of its eight warehouses and laid off 15% of its workforce. It hired 35-year-old engineer Jeffrey Wilke and a half-dozen mathematicians to figure out how to cut be. The team found a way to redistribute book inventory among the warehouses to reduce shipping costs utilise Six Sigma quality measures to reduce errors in fulfillment consoli leaved orders from around the country foregoing to shipping (adding an extra day to fulfillment of free shipping orders) and further lowered shipping costs by using its own trucks to deliver orders to postal system centers.Wilke and his team reduced fulfillment costs from 15% of revenue in 2000 down to 10 % by 2003. The safari contributed to Amazons first ever annual profit in 2003 $35. 3 million on revenues of $5. 26 billion. The results were even better in 2004 a $588. 5 million profit on revenues of $6. 92 billion. Looking back on the last ten years, its clear that Wall Street and Main Street have differing views on Amazon. Amazon has been a tremendous Main Street e-commerce success story even if it took nine years to achieve profitable operations.It has changed its business model several times, focused on improving the efficiency of its operations, and maintained a steady commitment to keeping its 49 million customers satisfied. In 2005, Amazon was one of the leaders in a survey of customer satisfaction with retail Web sites, while traditional bricks-and-mortar retailers such as Target and Costco received low marks for their online offerings. Right now, Amazon must be counted as an online retailing success story. Few would have predicted this outcome in 1995, or even in 2000.Fo r the future, however, Amazon faces powerful competitors who keep innovating, such as eBay and Yahoo Shopping. eBay has been profitable from its first day, while Yahoo achieved profitability in 2002. But despite Wall Street critics, Bezos has not changed his original vision in 2005, for instance, he announced additional expenditures to increase customer convenience, such as a flat-fee shipping membership program (Amazon Prime). And although Amazons revenues continue to grow, profits in 2005 were down compared to 2004.So the Amazon roller coaster ride continues, and whats around the next curve remains to be seen. E-commerce The Revolution Is Just Beginning 7 T 1. 1 he Amazon story is emblematic of the e-commerce environment of the past ten years an early period of business vision, inspiration, and experimentation, followed by the realization that establishing a successful business model ground on those visions would not be easy, which then ushered in a period of retrenchment and ree valuation, ultimately leading to a more finely tuned business model that actually produces profits.During the last two years, the fortunes of the ecommerce revolution once again have been contrary to what many people thought would happen after the stock market crash of March 2001, when the stock market respect of e-commerce, telecommunications, and other technology stocks plummeted by more than 90%. After the bubble burst, many people were quick to write off ecommerce and predicted that e-commerce growth would stagnate, and the Internet audience itself would plateau. But they were wrong. E-COMMERCE THE REVOLUTION IS JUST BEGINNING The e-commerce revolution is just generator.For instance Online consumer sales expanded by more than 23% in 2005 to an estimated $142$172 billion (eMarketer, Inc. , 2005a Shop. org and Forrester Research, 2005). The number of individuals online in the United States increased to 175 million in 2005, up from 170 million in 2004 (The total population of t he United States is about 300 million. ) (eMarketer, Inc. , 2005b U. S. Census Bureau, 2005). Of the total 112 million households in the United States, the number online increased to 71 million or 63% of all households (U. S.Census Bureau, 2005 eMarketer, Inc. , 2005b Pew Research Center, 2005). On an average day, 70 million people go online. some 140 million send e-mail, 8 million have created a blog, 4 million share music on peer-to-peer networks, and 3 million use the Internet to rate a person, product, or service (Pew Research Center, 2005 Pew Internet & American Life Project, 2004). The number of people who have purchased something online expanded to about 110 million, with additional millions shopping (gathering education) but not purchasing (Pew Research Center, 2005). The demographic profile of new online shoppers broadened to become more like ordinary American shoppers (Pew Research Center, 2005 Fallows, 2004). B2B e-commerceuse of the Internet for business-to-busines s commerce expanded about 30% in 2005 to more than $1. 5 trillion (U. S. Department of Commerce, 2005). The Internet technology base gained greater depth and power, as more than 42 million households had broadband cable or DSL access to the Internet in 2005about 38% of all households (eMarketer, Inc. , 2005c). 8 CHAPTER 1 The Revolution Is Just Beginning Initial public offerings (IPOs) returned, with 233 IPOs in 2004more than the number of IPOs in 2002 and 2003 combined. The Internet stock conclave rebounded in value, along with the entire NASDAQ stock exchange, which is primarily composed of technology stocks. The rebound in Internet stocks was led by Googles IPO, which raised $1. 67 billion. Googles stock opened at $85 on the first day and has since rocketed to the $300 range (Hoovers, 2005 Rivlin, 2005 Elgin, 2005). These developments signal many of the themes in the new pas seul of this book (see Table 1. 1).More and more people and businesses will be using the Internet to c onduct commerce the e-commerce channel will deepen as more products and services come online more industries will be trans radiation patterned by e-commerce, including travel reservations, music and entertainment, news, software, education, and finance Internet technology will continue to induce these changes as broadband telecommunications comes to more households pure e-commerce business models will be refined further to achieve higher levels of profitability and traditional retail brands such as Sears, J.C. Penney, and Wal-Mart will further extend their multichannel, bricks-and-clicks strategies and retain their dominant retail positions. At the societal level, other trends are apparent. The major digital copy objurgate owners have increased their pursuit of online file-swapping services states have successfully moved toward taxation of Internet sales and sovereign nations have expanded their surveillance of, and control over, Internet communications and content. In 1994, e-comm erce as we now know it did not exist.In 2005, just ten years later, around 110 million American consumers are expected to spend about $142$172 billion purchasing products and services on the Internets human grand Web (eMarketer, Inc. , 2005b Shop. org and Forrester Research, 2005 Rainie, 2005). Although the terms Internet and World Wide Web are often used interchangeably, they are actually two very different things. The Internet is a worldwide network of computer networks, and the World Wide Web is one of the Internets most popular services, providing access to over 8 billion Web pages.We describe both more fully later in this section and in Chapter 3. In 2005, businesses are expected to spend over $1. 5 trillion purchasing goods and services from other businesses on the Web (U. S. Department of Commerce, 2005). From a standing start in 1995, this type of commerce, called electronic commerce or e-commerce, has experienced growth rates of well over 100% a year although the rate has slowed and is now growing at about 25% a year. These developments have created the first widespread digital electronic marketplaces. Even more impressive than its spectacular initial growth is its future predicted growth.By 2008, analysts estimate that consumers will be spending around $232 billion and businesses about $3 trillion in online transactions (eMarketer, Inc. , 2005a 2003 U. S. Department of Commerce, 2005). E-commerce The Revolution Is Just Beginning 9 TABLE 1. 1 BUSINESS MAJOR TRENDS IN E-COMMERCE, 2006 Retail consumer e-commerce continues to grow at double-digit rates. The online demographics of shoppers continues to broaden. Online sites continue to strengthen profitability by refining their business models and leveraging the capabilities of the Internet. The first wave of e-commerce transformed the business world of books, music, and air travel. In the second wave, eight new industries are facing a similar transformation telephones, movies, goggle box, jewelry, real estate, hotels, bill payments, and software. The breadth of e-commerce offerings grows, especially in travel, entropy clearinghouses, entertainment, retail apparel, appliances, and home furnishings. Small businesses and entrepreneurs continue to flood into the e-commerce marketplace, often riding on the infrastructures created by industry giants such as Amazon, eBay, and Overture. Brand extension through the Internet grows as large firms such as Sears, J. C. Penney, L. L. Bean, and Wal-Mart pursue integrated, multi-channel bricks-and-clicks strategies. B2B supply chain transactions and collaborative commerce continue to strengthen and grow beyond the $1. 5 trillion mark. TECHNOLOGY Wireless Internet connections (Wi-Fi, Wi-Max, and 3G telephone) grow rapidly. Podcasting takes off as a new media format for distribution of radio and user-generated commentary. The Internet broadband foundation becomes stronger in households and businesses.Bandwidth prices fall as telecommuni cations companies re-capitalize their debts. RSS (Really Simple Syndication) grows to become a major new form of user-controlled information distribution that rivals e-mail in some applications. Computing and networking component prices continue to fall dramatically. New Internet-based models of computing such as . NET and Web services expand B2B opportunities. SOCIETY Self-publishing (user-generated content) and syndication in the form of blogs, wikis and social networks grow to form an entirely new self-publishing forum. Newspapers and other traditional media adopt online, interactive models. Conflicts over copyright management and control grow in significance. Over half the Internet user population (about 80 million adults) join a social group on the Internet. Taxation of Internet sales becomes more widespread and accepted by large online merchants. Controversy over content regulation and controls increases. Surveillance of Internet communications grows in significance. Concerns over expert and governmental privacy invasion grow. Internet fraud and abuse occurrences increase. First Amendment rights of free speech and association on the Internet are challenged. Spam grows despite new laws and promised technology fixes. Invasion of personal privacy on the Web expands as marketers find new ways to track users. 10 CHAPTER 1 The Revolution Is Just Beginning THE FIRST THIRTY SECONDS It is important to realize that the rapid growth and change that has occurred in the first ten years of e-commerce represents just the beginningwhat could be called the first thirty seconds of the e-commerce revolution.The same technologies that drove the first decade of e-commerce (described in Chapter 3) continue to evolve at exponential rates. Changes in down the stairslying information technologies and continuing entrepreneurial innovation promise as much change in the next decade as seen in the last decade. The twenty-first nose candy will be the age of a digital ly alterd social and moneymaking(prenominal) life, the outlines of which we can barely perceive at this time. It appears likely that e-commerce will eventually impingement near all commerce, or that most commerce will be e-commerce by the year 2050.Business fortunes are madeand lostin periods of extraordinary change such as this. The next five years hold out extraordinary opportunitiesas well as risksfor new and traditional businesses to exploit digital technology for market advantage. For society as a whole, the next few decades offer the possibility of extraordinary gains in social wealth as the digital revolution works its way through larger and larger segments of the worlds economy, offering the possibility of high rates of productivity and income growth in an inflation-free environment.This book will help you perceive and down the stairsstand the opportunities and risks that lie ahead. By the time you finish, you will be able to identify the technological, business, and so cial forces that have molded the first era of e-commerce and extend that understanding into the years ahead. WHAT IS E-COMMERCE? e-commerce the use of the Internet and the Web to transact business. More formally, digitally enabled commercial transactions between and among organizations and individuals Our focus in this book is e-commercethe use of the Internet and the Web to transact business.More formally, we focus on digitally enabled commercial transactions between and among organizations and individuals. Each of these components of our working commentary of e-commerce is important. Digitally enabled transactions include all transactions mediated by digital technology. For the most part, this means transactions that occur over the Internet and the Web. moneymaking(prenominal) transactions involve the exchange of value (e. g. , money) across organizational or individual boundaries in return for products and services.Exchange of value is important for understanding the limits of e-commerce. Without an exchange of value, no commerce occurs. THE DIFFERENCE mingled with E-COMMERCE AND E-BUSINESS There is a debate among consultants and academics about the meaning and limitations of both e-commerce and e-business. Some argue that e-commerce encompasses the entire world of electronically based organizational activities that support a firms market exchangesincluding a firms entire information systems infrastructure (Rayport and Jaworksi, 2003).Others argue, on the other hand, that e-business encompasses the entire world of internal and external electronically based activities, including e-commerce (Kalakota and Robinson, 2003). E-commerce The Revolution Is Just Beginning 11 FIGURE 1. 1 THE DIFFERENCE BETWEEN E-COMMERCE AND E-BUSINESS E-commerce primarily involves transactions that cross firm boundaries. E-business primarily involves the application of digital technologies to business processes within the firm. We think that it is important to make a working mark between e-commerce and e-business because we believe they refer to different phenomena.For purposes of this text, we will use the term e-business to refer primarily to the digital enablement of transactions and processes within a firm, involving information systems under the control of the firm. For the most part, in our view, e-business does not include commercial transactions involving an exchange of value across organizational boundaries. For example, a companys online inventory control mechanisms are a component of e-business, but such internal processes do not directly generate revenue for the firm from outside businesses or consumers, as e-commerce, by definition, does.It is true, however, that a firms e-business infrastructure provides support for online e-commerce exchanges the same infrastructure and skill sets are involved in both e-business and e-commerce. Ecommerce and e-business systems spot together at the business firm boundary, at the point where internal business systems link up with suppliers or customers, for instance. E-business applications turn into e-commerce precisely when an exchange of value occurs (see Mesenbourg, U. S. Department of Commerce, August 2001 for a similar view).We will examine this intersection further in Chapter 12. e-business the digital enablement of transactions and processes within a firm, involving information systems under the control of the firm WHY STUDY E-COMMERCE? Why are there college courses and textbooks on e-commerce when there are no courses or textbooks on TV Commerce, radio Commerce, Direct Mail Commerce, Railroad Commerce, or Highway Commerce, even though these 12 CHAPTER 1 The Revolution Is Just Beginning information asymmetry any disparity in relevant market information among parties in a transaction echnologies had profound impacts on commerce in the twentieth century and account for far more commerce than e-commerce? The reason, as you shall see, is that e-commerce technology (discussed in deta il in Chapters 3 and 4) is different and more powerful than any of the other technologies we have seen in the past century. While these other technologies transformed economic life in the twentieth century, the evolving Internet and other information technologies will shape the twenty-first century. Prior to the development f e-commerce, the process of marketing and interchange goods was a mass-marketing and sales force-driven process. Consumers were viewed as passive targets of advertising campaigns and branding blitzes intended to influence their long-term product perceptions and immediate purchasing behavior. Selling was conducted in well-insulated channels. Consumers were considered to be trapped by geographical and social boundaries, unable to search astray for the best price and quality. Information about prices, costs, and fees could be hidden from the consumer, creating profitable information asymmetries for the selling firm.Information asymmetry refers to any disparity i n relevant market information among parties in a transaction. It was so expensive to change national or regional prices in traditional retailing (what are called menu costs) that one national price was the norm, and dynamic pricing to the marketplace changing prices in real timewas unheard of. E-commerce has challenged much of this traditional business thinking. Table 1. 2 lists seven unique features of e-commerce technology that both challenge traditional business thinking and explain why we have so much interest in e-commerce. SEVEN extraordinary FEATURES OF E-COMMERCE TECHNOLOGYEach of the dimensions of e-commerce technology and their business significance listed in Table 1. 2 deserves a brief exploration, as well as a comparison to both traditional commerce and other forms of technology-enabled commerce. marketplace physical space you visit in order to transact Ubiquity In traditional commerce, a marketplace is a physical place you visit in order to transact. For example, telev ision and radio typically motivate the consumer to go someplace to make a purchase. E-commerce, in secernate, is characterized by its ubiquity it is available just about over, at all times.It liberates the market from being restricted to a physical space and makes it possible to shop from your desktop, at home, at work, or even from your car, using mobile commerce. The result is called a marketspacea marketplace extended beyond traditional boundaries and removed from a secular and geographic location. From a consumer point of view, ubiquity reduces transaction coststhe costs of participating in a market. To transact, it is no longer necessary that you spend time and money traveling to a market. At a broader level, the ubiquity of e-commerce lowers the cognitive energy required to transact in a marketspace.Cognitive energy refers to the mental effort required to complete a task. Humans generally seek to reduce cognitive energy outlays. When given a choice, humans will ubiquity ava ilable just about everywhere, at all times. marketspace marketplace extended beyond traditional boundaries and removed from a temporal and geographic location E-commerce The Revolution Is Just Beginning 13 TABLE 1. 2 SEVEN UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY BUSINESS SIGNIFICANCE The marketplace is extended beyond traditional boundaries and is removed from a temporal and geographic location. Marketspace is created shopping can take place anywhere.Customer convenience is enhanced, and shopping costs are reduced. Commerce is enabled across cultural and national boundaries seamlessly and without modification. Marketspace includes potentially billions of consumers and millions of businesses worldwide. There is one set of technical media standards across the globe. Video, audio, and text marketing subjects are integrated into a single marketing message and consuming experience. Consumers are engaged in a dialog that dynamically adjusts the experience to the individual, and makes th e consumer a co-participant in the process of delivering goods to the market.Information processing, storage, and communication costs drop dramatically, while currency, accuracy, and timeliness improve greatly. Information becomes plentiful, cheap, and accurate. Personalization of marketing messages and customization of products and services are based on individual characteristics. E-COMMERCE TECHNOLOGY DIMENSION UbiquityInternet/Web technology is available everywhere at work, at home, and elsewhere via mobile devices, anytime. Global reachThe technology reaches across national boundaries, around the earth. Universal standardsThere is one set of technology standards, namely Internet standards.RichnessVideo, audio, and text messages are possible. InteractivityThe technology works through interaction with the user. Information niggardlinessThe technology reduces information costs and raises quality. Personalization/CustomizationThe technology allows personalised messages to be delive red to individuals as well as groups. choose the path requiring the least effortthe most convenient path (Shapiro and Varian, 1999 Tversky and Kahneman, 1981). Global Reach E-commerce technology permits commercial transactions to cross cultural and national boundaries far more conveniently and cost-effectively than is true in traditional commerce.As a result, the potential market size for e-commerce merchants is roughly equal to the size of the worlds online population (over 1 billion in 2005, and growing rapidly, according to the Computer Industry 14 CHAPTER 1 The Revolution Is Just Beginning reach the total number of users or customers an e-commerce business can obtain Almanac) (Computer Industry Almanac, Inc. , 2006). The total number of users or customers an e-commerce business can obtain is a measure of its reach (Evans and Wurster, 1997). In contrast, most traditional commerce is local anaesthetic or regionalit involves local merchants or national merchants with local outlets .Television and radio stations, and newspapers, for instance, are primarily local and regional institutions with limited but powerful national networks that can attract a national audience. In contrast to e-commerce technology, these older commerce technologies do not easily cross national boundaries to a global audience. Universal Standards One strikingly unusual feature of e-commerce technologies is that the technical standards of the Internet, and therefore the technical standards for conducting e-commerce, are universal standardsthey are shared by all nations around the world.In contrast, most traditional commerce technologies differ from one nation to the next. For instance, television and radio standards differ around the world, as does cell telephone technology. The universal technical standards of the Internet and e-commerce greatly lower market entry coststhe cost merchants must pay just to bring their goods to market. At the same time, for consumers, universal standards re duce search coststhe effort required to find fitted products.And by creating a single, one-world marketspace, where prices and product descriptions can be inexpensively displayed for all to see, price discovery becomes simpler, faster, and more accurate (Bakos, 1997 Kambil, 1997). And users of the Internet, both businesses and individuals, experience network externalitiesbenefits that stick up because everyone uses the same technology. With e-commerce technologies, it is possible for the first time in history to easily find many of the suppliers, prices, and delivery terms of a specific product anywhere in the world, and to view them in a coherent, comparative environment.Although this is not necessarily realistic today for all or many products, it is a potential that will be exploited in the future. universal standards standards that are shared by all nations around the world Richness splendour the complexity and content of a message Information well-to-doness refers to the com plexity and content of a message (Evans and Wurster, 1999). Traditional markets, national sales forces, and small retail stores have great richness they are able to provide personal, face-to-face service using aural and visual cues when making a sale.The richness of traditional markets makes them a powerful selling or commercial environment. Prior to the development of the Web, there was a trade-off between richness and reach the larger the audience reached, the less rich the message (see Figure 1. 2). interactivity technology that allows for two-way communication between merchant and consumer Interactivity Unlike any of the commercial technologies of the twentieth century, with the possible exception of the telephone, e-commerce technologies allow for interactivity, meaning they enable two-way communication between merchant and consumer.Television, for instance, cannot ask viewers any questions or enter into conversations E-commerce The Revolution Is Just Beginning 15 FIGURE 1. 2 T HE CHANGING TRADE-OFF BETWEEN RICHNESS AND REACH E-commerce technologies have changed the traditional tradeoff between richness and reach. The Internet and the Web can deliver, to an audience of millions, rich marketing messages with text, video, and audio, in a way not possible with traditional commerce technologies such as radio, television, or magazines. SOURCE Evans and Wurster, 2000. ith them, and it cannot request that customer information be entered into a form. In contrast, all of these activities are possible on an e-commerce Web site. Interactivity allows an online merchant to engage a consumer in ways similar to a face-to-face experience, but on a much more massive, global scale. Information Density The Internet and the Web vastly increase information densitythe total amount and quality of information available to all market participants, consumers, and merchants alike. E-commerce technologies reduce information collection, storage, processing, and communication costs.At the same time, these technologies increase greatly the currency, accuracy, and timeliness of informationmaking information more useful and important than ever. As a result, information becomes more plentiful, less expensive, and of higher quality. A number of business consequences result from the growth in information density. In e-commerce markets, prices and costs become more transparent. Price transparency refers to the ease with which consumers can find out the variety of prices in a market cost transparency refers to the ability of consumers to discover the actual costs merchants pay for products (Sinha, 2000).But there are advantages for merchants as well. Online merchants can discover much more about consumers this allows merchants to segment the market into groups willing to pay different prices and permits them to engage in price discriminationselling the same goods, or nearly information density the total amount and quality of information available to all market participan ts 16 CHAPTER 1 The Revolution Is Just Beginning the same goods, to different targeted groups at different prices.For instance, an online merchant can discover a consumers avid interest in expensive exotic vacations, and then pitch expensive exotic vacation plans to that consumer at a premium price, knowing this person is willing to pay extra for such a vacation. At the same time, the online merchant can pitch the same vacation plan at a lower price to more price-sensitive consumers (Shapiro and Varian, 1999). Merchants also have enhanced abilities to split up their products in terms of cost, brand, and quality. Personalization/Customization ersonalization the targeting of marketing messages to specific individuals by adjusting the message to a persons name, interests, and past purchases customization changing the delivered product or service based on a users preferences or prior behavior E-commerce technologies permit personalization merchants can target their marketing messages t o specific individuals by adjusting the message to a persons name, interests, and past purchases. The technology also permits customization changing the delivered product or service based on a users preferences or prior behavior.Given the interactive nature of e-commerce technology, much information about the consumer can be gathered in the marketplace at the moment of purchase. With the increase in information density, a great make of information about the consumers past purchases and behavior can be stored and used by online merchants. The result is a level of personalization and customization unthinkable with existing commerce technologies. For instance, you may be able to shape what you see on television by selecting a channel, but you cannot change the contents of the channel you have chosen.In contrast, the online verson of the Wall Street Journal allows you to select the type of news stories you want to see first, and gives you the opportunity to be alerted when certain even ts happen. Now, lets return to the question that incite this section Why study e-commerce? The answer is simply that e-commerce technologiesand the digital markets that resultpromise to bring about some fundamental, unprecedented shifts in commerce. One of these shifts, for instance, appears to be a large reduction in information asymmetry among all market participants (consumers and merchants).In the past, merchants and manufacturers were able to prevent consumers from learning about their costs, price discrimination strategies, and profits from sales. This becomes more difficult with e-commerce, and the entire marketplace potentially becomes highly price competitive. In addition, the unique dimensions of e-commerce technologies listed in Table 1. 2 also suggest many new possibilities for marketing and sellinga powerful set of interactive, personalized, and rich messages are available for delivery to segmented, targeted audiences.E-commerce technologies make it possible for mercha nts to know much more about consumers and to be able to use this information more effectively than was ever true in the past. Potentially, online merchants could use this new information to develop new information asymmetries, enhance their ability to brand products, charge premium prices for high-quality service, and segment the market into an endless number of subgroups, each receiving a different price. To complicate matters further, these same technologies make it possible for merchants to know more about other merchants than was ever true in the past.This presents the possibility that merchants might collude on prices rather than compete and drive overall average prices up. This strategy works especially well when there are just a E-commerce The Revolution Is Just Beginning 17 TABLE 1. 3 MAJOR TYPES OF E-COMMERCE EXAMPLE Amazon. com is a general merchandiser that sells consumer products to retail consumers. ChemConnect. com is a chemical substance industry exchange that creates an electronic market for chemical producers and users. eBay. com creates a marketspace where consumers can auction or sell goods directly to other consumers.Gnutella is a software application that permits consumers to share music with one another directly, without the intervention of a market maker as in C2C e-commerce. Wireless mobile devices such as PDAs (personal digital assistants) or cell phones can be used to conduct commercial transactions. TYPE OF E-COMMERCE B2CBusiness-to-Consumer B2BBusiness-to-Business C2CConsumer-to-Consumer P2PPeer-to-Peer M-commerceMobile commerce few suppliers (Varian, 2000b). We examine these different visions of e-commerce friction-free commerce versus a brand-driven imperfect marketplacefurther in constituent 1. 2 and throughout the book.TYPES OF E-COMMERCE There are a variety of different types of e-commerce and many different ways to characterize these types. Table 1. 3 lists the five major types of e-commerce discussed in this book. 1 For the most part, we distinguish different types of e-commerce by the nature of the market relationshipwho is selling to whom. The exceptions are P2P and m-commerce, which are technology-based distinctions. Business-to-Consumer (B2C) E-commerce The most commonly discussed type of e-commerce is Business-to-Consumer (B2C) e-commerce, in which online businesses attempt to reach individual consumers.Even though B2C is comparatively small ($140$170 billion in 2005), it has grown exponentially since 1995, and is the type of e-commerce that most consumers are likely to encounter. Within the B2C category, there are many different types of business models. Chapter 2 has a detailed discussion of seven different B2C business mod1 Business-to-Consumer (B2C) e-commerce online businesses selling to individual consumers Business-to-Government (B2G) e-commerce can be considered yet another type of e-commerce.For the purposes of this text, we subsume B2G e-commerce within B2B e-commerce, viewing the gover nment as simply a form of business when it acts as a procurer of goods and/or services. 18 CHAPTER 1 The Revolution Is Just Beginning els portals, online retailers, content providers, transaction brokers, market creators, service providers, and lodge providers. Business-to-Business (B2B) E-commerce Business-to-Business (B2B) e-commerce online businesses selling to other businesses Business-to-Business (B2B) e-commerce, in which businesses focus on selling to other businesses, is the largest form of e-commerce, with over $1. trillion in transactions in the United States in 2005. There was an estimated $13 trillion in business-to-business exchanges of all kinds, online and offline, in 2002, suggesting that B2B e-commerce has significant growth potential (eMarketer, Inc. , 2003). The ultimate size of B2B e-commerce could be huge. There are two primary business models used within the B2B arena Net marketplaces, which include e-distributors, e-procurement companies, exchanges and indust ry consortia, and private industrial networks, which include single firm networks and industry-wide networks.Consumer-to-Consumer (C2C) E-commerce Consumer-toConsumer (C2C) e-commerce consumers selling to other consumers Consumer-to-Consumer (C2C) e-commerce provides a way for consumers to sell to each other, with the help of an online market maker such as the auction site eBay. Given that in 2005, eBay generated more than $44 billion in gross merchandise volume around the world, it is probably safe to estimate that the size of the global C2C market in 2006 will be over $50 billion (eBay, 2006).In C2C e-commerce, the consumer prepares the product for market, places the product for auction or sale, and relies on the market maker to provide catalog, search engine, and transaction-clearing capabilities so that products can be easily displayed, discovered, and paid for. Peer-to-Peer (P2P) E-commerce Peer-to-peer technology enables Internet users to share files and computer resources dir ectly without having to go through a central Web server. In peer-to-peers purest form, no intermediary is required, although in fact, most P2P networks make use of intermediary super servers to speed operations.Since 1999, entrepreneurs and venture capitalists have attempted to adapt various aspects of peer-to-peer technology into Peer-to-Peer (P2P) e-commerce. To date there have been very few successful commercial applications of P2P e-commerce with the notable exception of il ratified downloading of copyrighted music. Napster. com, which was established to aid Internet users in decision and sharing online music files, was the most well-known example of peer-to-peer e-commerce until it was put out of business in 2001 by a series of negative court decisions.However, other file-sharing networks, such as Kazaa and Grokster, quickly emerged to take Napsters place. These networks have also been subjected to legal challenge. For instance, in 2002, the Recording Industry of America, a tra de organization of the largest recording companies, filed a federal lawsuit against Kazaa and Grokster for violating copyright law by enabling and encouraging members to exchange copyrighted music tracks without compensation to the copyright holders. The Supreme tribunal issued a decision in the case against the file-sharing networks in June 2005.Read the case study at the end of the chapter for a further look at how file-sharing networks work and the legal issues surrounding them. Peer-to-Peer (P2P) e-commerce use of peer-to-peer technology, which enables Internet users to share files and computer resources directly without having to go through a central Web server, in e-commerce E-commerce The Revolution Is Just Beginning 19 Mobile Commerce (M-commerce) Mobile commerce, or m-commerce, refers to the use of wireless digital devices to enable transactions on the Web.Described more fully in Chapter 3, m-commerce involves the use of wireless networks to connect cell phones, handheld d evices such Blackberries, and personal computers to the Web. Once connected, mobile consumers can conduct transactions, including stock trades, in-store price comparisons, banking, travel reservations, and more. Thus far, m-commerce is used most widely in Japan and Europe (especially in Scandinavia), where cell phones are more prevalent than in the United States however, as discussed in the next section, m-commerce is expected to grow rapidly in the United States over the next five years. obile commerce (m-commerce) use of wireless digital devices to enable transactions on the Web GROWTH OF THE INTERNET AND THE WEB The technology juggernauts behind e-commerce are the Internet and the World Wide Web. Without both of these technologies, e-commerce as we know it would be impossible. We describe the Internet and the Web in some detail in Chapter 3. The Internet is a worldwide network of computer networks built on common standards.Created in the late 1960s to connect a small number of ma inframe computers and their users, the Internet has since grown into the worlds largest network, connecting over 500 million computers worldwide. The Internet link up businesses, educational institutions, government agencies, and individuals together, and provides users with services such as e-mail, document transfer, newsgroups, shopping, research, instant messaging, music, videos, and news. Figure 1. 3 illustrates one way to measure the growth of the Internet, by looking at the number of Internet hosts with domain names. An Internet host is defined by the Internet Software Consortium, which conducts this survey, as any IP wrap up that returns a domain name in the in-addr. arpa domain, which is a special part of the DNS namespace that resolves IP addresses into domain names. ) In January 2005, there were over 317 million Internet hosts in over 245 countries, up from a mere 70 million in 2000. The number of Internet hosts has been growing at a rate of around 35% a year since 2000 (Internet Systems Consortium, Inc. , 2005). The Internet has shown extraordinary growth patterns when compared to other electronic technologies of the past.It took radio 38 years to achieve a 30% share of U. S. households. It took television 17 years to achieve a 30% share. Since the invention of a graphical user interface for the World Wide Web in 1993, it took only 10 years for the Internet/Web to achieve a 53% share of U. S. households. The World Wide Web (the Web) is the most popular service that runs on the Internet infrastructure. The Web is the killer application that made the Internet commercially interesting and extraordinarily popular. The Web was developed in the early 1990s and indeed is of much more recent vintage than the Internet.We describe the Web in some detail in Chapter 3. The Web provides easy access to over 8 billion Web pages created in a language called HTML (HyperText Markup Language). These HTML pages contain informationincluding text, graphics, animations , and other Internet Worldwide network of computer networks built on common standards World Wide Web (Web) the most popular service that runs on the Internet provides easy access to Web pages 20 CHAPTER 1 The Revolution Is Just Beginning FIGURE 1. 3 THE GROWTH OF THE INTERNET, MEASURED BY NUMBER OF INTERNET HOSTS WITH DOMAIN NAMESGrowth in the size of the Internet 1993-2005 as measured by the number of Internet hosts with domain names. SOURCE Internet Systems Consortium, Inc. (www. isoc. org), 2005. objectsmade available for public use. You can find an exceptionally wide range of information on Web pages, ranging from the entire catalog of Sears Roebuck, to the entire collection of public records from the Securities and Exchange Commission, to the card catalog of your local library, to millions of music tracks (some of them legal), and videos. The Internet prior to the Web was primarily used for text communications, file transfers, and remote computing.The Web introduced far more po werful and commercially interesting, colorful multimedia capabilities of direct relevance to commerce. In essence, the Web added color, voice, and video to the Internet, creating a communications infrastructure and information storage system that rivals television, radio, magazines, and even libraries. There is no precise measurement of the number of Web pages in existence, in part because todays search engines index only a portion of the known universe of Web pages, and also because the size of the Web universe is unknown.Google, the Webs most popular and perhaps most comprehensive Web search engine, currently E-commerce The Revolution Is Just Beginning 21 FIGURE 1. 4 THE GROWTH OF WEB CONTENT AS MEASURED BY PAGES INDEXED BY GOOGLE The number of Web pages indexed by Google has grown from about 1 billion in 1998 to over 8 billion in 2005. SOURCE Based on data from Google Inc. , 2005. indexes over 8 billion pages. There are also an estimated 600 billion Web pages in the so-called de ep Web that are not indexed by ordinary search engines such as Google.Nevertheless, it would be accurate to say that Web content has grown exponentially since 1993. Figure 1. 4 describes the growth of Web content measured by the number of pages indexed by Google. Read Insight on Technology Spider Webs, Bow Ties, Scale-Free Networks, and the Deep Web on pages 2223 for the latest view of researchers on the structure of the Web. ORIGINS AND GROWTH OF E-COMMERCE It is difficult to pinpoint just when e-commerce began. There were several precursors to e-commerce.In the late 1970s, a pharmaceutical firm named Baxter Healthcare initiated a indigenous form of B2B e-commerce by using a telephone-based modem that permitted hospitals to reorder supplies from Baxter. This system was later expanded during the 1980s into a PC-based remote order entry system and was widely copied throughout the United States long before the Internet became a commercial environment. The 1980s saw the development of Electronic Data Interchange (EDI) 22 CHAPTER 1 The Revolution Is Just Beginning INSIGHT ON TECHNOLOGYSPIDER WEBS, BOW TIES, SCALE-FREE NETWORKS, AND THE DEEP WEB The World Wide Web conjures up images of a giant bird of passage web where everything is connected to everything else in a random pattern, and you can go from one edge of the web to another by just following the right cogitate. Theoretically, thats what makes the Web different from a typical index systemyou can follow hyperlinks from one page to another. In the small world guess of the Web, every Web page is thought to be separated from any other Web page by an average of about 19 clicks.In 1968, sociologist Stanley Milgram invented small-world hypothesis for social networks by noting that every human was separated from any other human by only six degrees of separation. On the Web, the small world hypothesis was supported by early research on a small sampling of Web sites. But recent research conducted jointly by scie ntists at IBM, Compaq, and AltaVista found something entirely different. These scientists used AltaVistas Web crawler Scooter to identify 200 million Web pages and follow 1. 5 billion links on these pages.The researchers discovered that the Web was not like a spider web at all, but rather like a arc tie (see figure below). The bow-tie Web had a strongly connected component (SCC) composed of about 56 million Web pages. On the right side of the bow tie was a set of 44 million OUT pages that you could get to from the center, but could not return to the center from. OUT pages tended to be corporate intranet and other (continued) E-commerce The Revolution Is Just Beginning 23 Web site pages that are designed to trap you at the site when you land.On the left side of the bow tie was a set of 44 million IN pages from which you could get to the center, but that you could not travel to from the center. These were recently created newbie pages that had not yet been coupled to by many center pages. In addition, 43 million pages were classified as tendrils, pages that did not link to the center and could not be conjugate to from the center. However, the tendril pages were sometimes linked to IN and/or OUT pages. Occasionally, tendrils linked to one another without passing through the center (these are called tubes).Finally, there were 16 million pages totally undo from everything. Further evidence for the non-random and structured nature of the Web is provided in research performed by Albert-Lazlo Barabasi at the University of Notre Dame. Barabasis team found that far from being a random, exponentially exploding network of 8 billion Web pages, activity on the Web was actually highly concentrated in very connected super nodes that provided the connectivity to less wellconnected nodes.Barabasi dubbed this type of network a scale-free network and found parallels in the growth of cancers, disease transmission, and computer viruses. As its turns out, scale-free networks are highly vulnerable to destruction. annihilate their super nodes and transmission of messages breaks down rapidly. On the upside, if you are a marketer trying to spread the message about your products, place your products on one of the super nodes and watch the news spread. Or build super nodes like Kazaa did (see the case study at the end of the chapter) and attract a huge audience.Thus, the picture of the Web that emerges from this research is quite different from earlier reports. The notion that most pairs of Web pages are separated by a handful of links, almost always under 20, and that the number of connections would grow exponentially with the size of the Web, is not supported. In fact, there is a 75% chance that there is no path from one haphazard chosen page to another. With this knowledge, it now becomes clear why the most advanced Web search engines only index about 6 million Web sites, when the overall population of Internet hosts is over 300 million.Most Web sites canno t be found by search engines because their pages are not well-connected or linked to the central core of the Web. Another important finding is the identification of a deep Web composed of over 600 billion Web pages that are not indexed at all. The pages are not easily accessible to Web crawlers that most search engine companies use. Instead, these pages are either proprietary (not available to crawlers and non-subscribers, such as the pages of the Wall Street Journal) or are not easily available from home pages. In the last few years, new search engines (such as the checkup search engine Mamma. om) and older ones such as Yahoo have been revised to enable them to search the deep Web. Because e-commerce revenues in part depend on customers being able to find a Web site using search engines, Web site managers need to take steps to ensure their Web pages are part of the connected central core, or super nodes of the Web. One way to do this is to make sure the site has as many links as p ossible to and from other relevant sites, especially to other sites within the SCC. SOURCES Deep Web Research, by Marcus P. Zillman, Llrx. com, July 2005 Momma. om Conquers Deep Web, Mammamediasolutions. com, June 20, 2005 Yahoo Mines the Deep Web, by Tim Gray, Internetnews. com, June 17, 2005 united The New Science of Networks by Albert-Lazlo Barabasi. Cambridge, MA Perseus Publishing (2002) The Bowtie Theory Explains Link Popularity, by John Heard, Searchengineposition. com, June 1, 2000 Graph Structure in the Web, by A. Broder, R. Kumar, F. Maghoul, P. Raghaven, S. Rajagopalan, R. Stata, A. Tomkins, and J. Wiener, Proceedings of the 9th internationalist World Wide Web Conference, Amsterdam, The Netherlands, pages 309320.Elsevier Science, May 2000. 24 CHAPTER 1 The Revolution Is Just Beginning FIGURE 1. 5 THE GROWTH OF B2C E-COMMERCE In the early years, B2C e-commerce was duplicate or tripling each year. This explosive early growth rate has since slowed. Currently, B2C e-commer ce is growing at about 25% per year, with seasonal spikes showing stronger year-to-year gains. Note Revenue shown includes retail sales, travel and financial services revenues. SOURCES Based on data from eMarketer, Inc. , 2005a