Learning Objectives Define e-commerce and describe how it differs from e-business

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Learning Objectives

  • Define e-commerce and describe how it differs from e-business

  • Identify the unique features of e-commerce technology and discuss their business significance

  • Describe the major types of e-commerce

  • Understand the visions and forces behind the E-commerce I era

  • Understand the successes and failures of E-commerce I

  • Identify several factors that will define the E-commerce II era

  • Identify the major themes underlying the study of e-commerce

  • Identify the major academic disciplines contributing to e-commerce research

Amazon.com: Tuned-Up and Profitable

  • Page 3

Amazon.com:Tuned-Up and Profitable

  • Story of Amazon in many ways mirrors story of e-commerce itself

  • Amazon offers consumers four compelling reasons to shop: selection, convenience, price and service

  • Founded in 1995, went public in 1997

  • From 1997-2000, revenues increased from $148 million to $2.7 billion but so did losses, to $1.4 billion

  • In 2001-2002, new focus on cost-cutting and achieving profitability leads to first quarterly profits ever in 2002

E-commerce Developments and Themes-2003

  • Contrary to expectations, e-commerce is rebounding and the e-commerce revolution is still just beginning

  • More and more people and businesses are using the Internet to conduct commerce

  • The e-commerce channel is deepening as more and more products and services come online

  • Broadband and wireless Internet access are growing

  • E-commerce business models are being refined to achieve higher levels of profitability

  • At societal level, there is continued conflict over copyrights, content regulation, taxation, privacy, and Internet fraud and abuse.

New Developments in E-commerce, 2003

  • Table 1.1,

  • Page 8

E-commerce Defined

  • E-commerce involves digitally enabled commercial transactions between and among organizations and individuals

  • Digitally enabled transactions include all transactions mediated by digital technology

  • Commercial transactions involve the exchange of value across organizational or individual boundaries in return for products or services

E-commerce vs. E-business

  • Debate among consultants and academics about meanings and limitations of terms e-commerce and e-business

  • We 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

  • E-business does not include commercial transactions involving an exchange of value across organizational boundaries

The Difference between E-commerce and E-business

  • Figure 1.1, Page 11

Why Study E-commerce

  • E-commerce technology is different and more powerful than any of the other technologies that we have seen in the past century.

  • E-commerce has challenged much traditional business thinking

  • E-commerce has a number of unique features that help explain why we have so much interest in e-commerce

Seven Unique Features of E-commerce Technology and Their Significance

  • Is ubiquitous (available everywhere, all the time)

  • Offers global reach (across cultural/national boundaries)

  • Operates according to universal standards (lowers market entry for merchants and search costs for consumers)

  • Provides information richness (more powerful selling environment)

  • Is interactive (can simulate face-to-face experience, but on global scale)

  • Increases information density (amount and quality of information available to all market participants)

  • Permits personalization/customization

Seven Unique Features of E-commerce Technology

  • Table 1.2,

  • Page 12

The Changing Trade-off between Richness and Reach

  • Figure 1.2, Page 15

Types of E-commerce

  • Classified by nature of market relationship

  • Business-to-Consumer (B2C)

  • Business-to-Business (B2B)

  • Consumer-to-Consumer (C2C)

  • Classified by type of technology used

  • Peer-to-Peer (P2P)

  • Mobile commerce (M-commerce)

Major Types of E-commerce

  • Table 1.3, Page 17

Business-to-Consumer (B2C) E-commerce

  • Involves online businesses attempting to reach individual consumers

  • In 2002, total B2C revenues were about $72-$78 billion

  • Many types of business models within this category including online retailers, content providers, portals, transaction brokers, service providers, market creators and community providers

Business-to-Business (B2B) E-commerce

  • Involves businesses focusing on selling to other businesses

  • Largest form of e-commerce ($800 billion in 2002)

  • Two primary business models within B2B:

    • Net marketplaces (includes e-distributors, e-procurement companies, exchanges and industry consortia)
    • Private industrial networks (includes single firm networks and industry-wide networks)

Consumer-to-Consumer (C2C) E-commerce

  • Provides a way for consumers to sell to each other, with the help of an online market maker

  • eBay most well-known example

  • Estimated that size of C2C commerce will reach $15 billion by 2004

Peer-to-Peer (P2P) E-commerce

  • Uses peer-to-peer technology, which enables Internet users to share files and computer resources without having to go through a central Web server

  • Napster most well-known example until put out of business for copyright infringement

  • Today, Kazaa is the leading P2P software network, although also under attack for copyright infringement


  • Use of wireless digital devices such as cell phones and handheld devices to enable transactions on the Web

  • Most widely used in Japan and Europe (especially Finland)

  • Expected to grow rapidly in U.S. over the next five years.

Growth of the Internet

  • The Internet is a worldwide network of computer networks built on common standards

  • Internet was first created in 1960s

  • Today is world’s largest network, connecting over 500 million computers worldwide

  • Services include the Web, e-mail, file transfers, etc.

  • Can measure growth of Internet by looking at number of Internet hosts with domain names:

    • In January 2003, there were 170 million Internet hosts with domain names, up from 70 million in 2000
    • Growing at about 50% a year

The Growth of the Internet, Measured by Number of Internet Hosts with Domain Names

  • Figure 1.3, Page 20

Growth of the Web

  • Web is the most popular service on the Internet

  • Developed in early 1990s

  • Provides access to Web pages -- documents created with HTML

  • Can include text, graphics, animations, music, videos

  • Web content in form of Web pages has grown exponentially, from over 2 billion pages in 2000 to over 6 billion pages in 2003

The Growth of Web Content

  • Figure 1.4, Page 21

Insight on Technology: Spider Webs, Bow Ties, and Scale-Free Networks

  • Small world theory of Web (every Web page is thought to be separated from any other Web page by a small number of clicks) has been debunked by recent research

  • New research indicates Web has “bow-tie” form with a strongly connected component, In pages,Out pages, tendrils and tubes.

  • Barabasi calls Web a “scale-free network” with “very connected super nodes”

Insight on Technology: Spider Webs, Bow Ties, and Scale-Free Networks

  • Page 22

Origins and Growth of E-commerce

  • Precursors to e-commerce include

    • Baxter Healthcare (in 1970s, used telephone-based modems to reorder supplies; in 1980s, became a PC-based remote order entry system)
    • Electronic Data Interchange (EDI) standards developed in 1980s; permitted firms to exchange commercial documents and conduct digital commercial transactions across private networks
    • French Minitel (1980s videotext system; still in use today)
  • None of these precursor system had functionality of Internet

Origins and Growth of E-commerce

  • For our purposes, we will date the beginning of e-commerce to 1995

    • First banner advertisements - October 1994
    • First sales of banner ad space - early 1995
  • Since then, has been fastest growing form of commerce in U.S.

The Growth of B2C E-commerce

  • Figure 1.5, Page 24

The Growth of B2B E-commerce

  • Figure 1.6, Page 25

Technology and E-commerce in Perspective

  • First, the Internet and Web are just two of a long list of technologies, such as automobiles and radio, that have followed a similar historical path:

    • Creation of business models designed to leverage the technology and explosive early growth, followed by retrenchment and then a long-term successful exploitation of the technology by larger established firms
  • Second, although e-commerce has grown explosively, eventually its growth will cap as it confronts its own fundamental limitations.

Potential Limitations on the Growth of B2C E-commerce

  • Expensive technology – Although currently a limitation, may become less so as prices of entry-level PCs fall

  • Complex software interface – Integration with television may reduce this limitation

  • Sophisticated skill set – This limitation may recede as PC operating system evolves, becomes more simple

  • Persistent cultural attraction of physical markets and traditional shopping experiences – unlikely to change

  • Persistent global inequality limiting access to telephones and computers – unlikely to change

Limitations on the Growth of B2C E-commerce

  • Table 1.4, Page 26

Growth Projections for Wireless Web Devices and Broadband Home Connections in the United States

  • Figure 1.7, Page 27

E-commerce I and E-commerce II

  • E-commerce I: A period of explosive growth and extraordinary innovation; key concepts developed and explored

    • Begins in 1995, ends in March 2000 when stock market valuations for dot.com companies begin to collapse
    • Thousands of dot.com companies formed, backed by over $125 billion in financial capital
  • E-commerce II: Characterized by a reassessment of e-commerce companies and their value

    • Begins in January 2001; ongoing

The Visions and Forces Behind E-commerce 1: 1995-2000

  • For computer scientists:

    • A vindication of the vision of a universal communications and computing environment
    • Belief that Internet should not be controlled by government, and remain free for all
  • For economists:

    • Vision of a perfect Bertrand market and friction-free commerce, characterized by low transaction costs, low search costs, price transparency, low menu costs, dynamic pricing, disintermediation, and elimination of unfair competitive advantages

The Visions and Forces Behind E-commerce I: 1995-2000 (cont’d)

  • For entrepreneurs, their financial backers and marketing professionals, e-commerce represented an extraordinary opportunity to return far above normal returns on investment based on:

    • Worldwide access to consumers
    • New marketing communications technologies that were universal, inexpensive and powerful
    • Ability to segment market
    • First mover advantages – by building in switching costs
    • Network effects

Quarterly Amounts Raised by Venture-Backed Firms

  • Figure 1.8, Page 29

Insight on Business: A Short History of Dot.Com IPOs

  • Between 1998-2000, over $120 billion invested by venture capitalists in over 12,450 dot.com start-up ventures

  • Over 1,260 of these firms went public in initial public offerings (IPOs)

  • During E-commerce I heyday (1998-2000), shares often tripled or quadrupled in value on 1st day of trading

  • By 2003, many of these firms either are trading at much lower values or have shut down

  • Second wave of dot.com investment is focusing on acquisition of Web companies

E-commerce II: 2001-2007

  • Crash in stock market values for e-commerce companies throughout 2000 marks end of E-commerce I period

  • Reasons for crash:

    • Run-up in technology stocks due to enormous information technology capital expenditure of firms rebuilding their internal business systems to withstand Y2K
    • Telecommunications industry had built excess capacity in high-speed fiber optic networks
    • 1999 Christmas season provided less sales growth that anticipated and demonstrated e-commerce was not easy (eToys.com)
    • Valuations of dot.com and technology companies had risen so high supporters were questioning whether earnings could justify the prices of the shares.

E-commerce Today: Successes and Failures

  • E-commerce I a stunning technological success

  • E-commerce I a mixed success from a business perspective

  • Many visions developed during E-commerce I not fulfilled

    • Economists’ visions of “friction-free” commerce and Bertrand model of extreme market efficiency not entirely realized
    • Entrepreneurs and venture capitalists’ visions have not materialized exactly as predicted either

E-commerce I and E-commerce II Compared

  • Table 1.5, Page 35

Predictions for the Future

  • Technology of e-commerce will continue to propagate through all commercial activity

  • E-commerce prices will rise to cover the real cost of doing business on Web and pay investors reasonable rate of return

  • E-commerce margins and profits will rise to levels more typical of all retailers

  • In B2C and B2B, traditional Fortune 500 companies will play growing and dominant role

  • Number of successful pure online companies will decline and most successful e-commerce firms will adopt mixed “clicks and bricks” strategies

  • Growth of regulatory activity worldwide

NRF/Forrester Online Retail Index, December 2002

  • Table 1.6, Page 37

Fastest Growing Non-Travel E-commerce Categories 2002

  • Table 1.7, Page 38

Top 25 Shopping Web Sites for Week Ending November 10, 2002

  • Table 1.8, Page 39

Understanding E-commerce: Organizing Themes

  • Technology: Development and mastery of digital computing and communications technology

  • Business: New technologies present businesses and entrepreneurs with new ways of organizing production and transacting business

  • Society: Intellectual property, individual privacy and public policy

The Internet and the Evolution of Corporate Computing

  • Figure 1.9, Page 41

Insight on Society: Keeping Your Clickstream Private is Getting Harder

  • One-to-one marketing/personalization is one of the virtues or vices of e-commerce, depending on one’s perspective

  • Clickstream—clicking behavior at a site; used to create a user profile by advertising networks such as DoubleClick, ValueClick, 24/7 Real Media

  • Web sites also use Web logs, cookies, Web bugs and spyware/adware

  • Many consumers feel these practices constitute invasion of privacy

  • Ways to protect privacy– merchant and advertising network privacy policies, new technologies, laws

Academic Disciplines Concerned with E-commerce

  • Technical Approaches

    • Computer scientists and information system researchers
    • Management scientists
  • Behavioral Approaches

    • Information system researchers
    • Economists
    • Marketing
    • Management
    • Finance and accounting
    • Sociologists
    • Legal scholars

Disciplines Concerned with E-commerce

  • Figure 1.10, Page 45

Case Study: Kazaa Is Rockin’ and Rappin’ But for How Long?

  • Kazaa’s Media Desktop – largest and most successful free music file-swapping site; 65 million users worldwide; 3 million downloads per week; 1 billion tracks available

  • Relies on a software program known as Fast Track; claims there is no central index, control, or administration

  • Makes money by acting as an advertising network; has also developed parallel network called Altnet that uses a pay-for-download business model

  • Currently being sued by RIAA and MPIA for copyright infringement (Metro Goldwyn Mayer Studios v. Grokster et al.)

    • April 2003, court ruled defendants not liable; case is being appealed

Kazaa’s Home Page

  • Page 47

Music Swapping Software

  • Page 48

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