Chapter 10 E-Commerce: Digital Markets, Digital Goods
LEARNING OBJECTIVES
NEXON GAMES: E-COMMERCE GOES SOCIAL
If you like to play online games, you may already be familiar with MapleStory. It an online
role-playing game in which players assume the identities of warriors, magicians, and thieves
to collectively fight monsters. You can play the game for free, but if you want your avatar to
have a new outfit, wacky hairstyle, or funny pet, you’ll need to pay for these extras. And if
you want your MapleStory characters to marry each other in an elaborate Las Vegas
ceremony attended by other in-game buddies, it will cost $20 to $29.
MapleStory is a recent creation of Nexon Holdings Inc., the world leader in massively
multiplayer online role playing games. Nexon is headquartered in South Korea, with branch
offices in China, Japan, and the United States. Nexon pioneered in the “item”
(microtransactions) business model, where users can access the full game for free but later
opt to pay for game enhancements (items). Nexon charges players anywhere from 30 cents to
$30 each for virtual “items” to enhance their game experiences. MapleStory has 85 million
users globally, with 5.9 million registered in the United States. In 2007, players worldwide
purchased more than 1.3 million articles of clothing and over 1 million hair makeovers for
their MapleStory characters.
One source of Nexon’s popularity is the ability to socialize with other users. According to
Min Kim, vice president of marketing at Nexon’s U.S. division, “we sell social experiences,
not packaged product.” During much of the last decade, most games were played alone. As
the Internet and PCs developed more capabilities for rich-media experiences, solitary gaming
has given way to social gaming. Whether it’s integrated instant messaging, voice-over IP, or
text messaging, there are now multiple mechanisms for players to communicate with their
friends. Video games now attract a whole new type of consumer—people who want to have a
social experience.
Other popular Nexon games include Sugar Rush, Mabinogi, and Kart Rider. Kart Rider is an
anime-style online racing game that allows player to customize their vehicles and chat with
friends. Sugar Rush players are able to fight each other while collecting virtual coins.
Inspired by Celtic mythology, Mabinogi allows players to participate in mundane tasks such
as farming, writing music, and marrying as well as fighting. The game continuously evolves
through the release of patches (termed “Generations” and “Chapters”) that introduce new
areas to explore and advance the story line. All Nexon games feature Forums where players
are invited to socialize with friends, share hints, or just “hang out.”
Nexon looks like it has a winning formula for success online. In the United States alone,
2007 revenue tripled to $29.3 million from $8.5 million the previous year. Prepaid cards used
to purchase Nexon game items are now the second best-selling entertainment gift card (after
Apple’s iTunes Store) at Target Stores.
Sources: Nick Wingfield, “Korea’s Nexon Bets on Sales of Virtual Gear for Free Online Games,” The
Wall Street Journal, May 23, 2008; Kara Swisher, “Playing with Others,” The Wall Street Journal, June 9,
2008; and www.nexon.com, accessed May 25, 2008.
Nexon’s online games exemplify the new face of e-commerce. Selling physical goods on the
Internet is still important, but much of the excitement and interest now centers around services
and social experiences—social networking, photo sharing, sharing music, sharing ideas, and
multiplayer online games where users communicate and interact with other users. The ability
to link with other users and with other Web sites has spawned a huge wave of new businesses
built around linking and sharing.
The chapter-opening diagram calls attention to important points raised by this case and this
chapter. Nexon’s business is a response to these questions: How do we make money on the
Web today? How can we take advantage of more widespread broadband access to the Internet
and to new Web 2.0 technologies? Nexon pioneered in the microtransactions business model
and became a leading provider of massively multiplayer online games. The company provides
games replete with action and interactivity where players can socialize with friends or other
players. By playing up social features of online games, and providing the ability to make online
micropayments for small purchases, Nexon’s games have huge numbers of users and a
continuing stream of revenue.
10.1
ELECTRONIC COMMERCE AND THE INTERNET
Have you ever purchased music over the Web? Have you ever used the Web to search for
information about your sneakers before you bought them in a retail store? If so, you’ve
participated in e-commerce. So have hundreds of millions of people around the globe. And
although most purchases still take place through traditional channels, e-commerce continues
to grow rapidly and to transform the way many companies do business.
E-COMMERCE TODAY
E-commerce refers to the use of the Internet and the Web to transact business. More
formally, e-commerce is about digitally enabled commercial transactions between and
among organizations and individuals. For the most part, this means transactions that occur
over the Internet and the Web. Commercial transactions involve the exchange of value
(e.g., money) across organizational or individual boundaries in return for products and
services.
E-commerce began in 1995 when one of the first Internet portals, Netscape.com, accepted
the first ads from major corporations and popularized the idea that the Web could be used
as a new medium for advertising and sales. No one envisioned at the time what would turn
out to be an exponential growth curve for e-commerce retail sales, which tripled and
doubled in the early years. Only since 2006 has consumer e-commerce “slowed” to a 16percent annual growth rate in 2008 (Figure 10-1).
FIGURE 10-1 THE GROWTH OF E-COMMERCE
Retail e-commerce revenues have grown exponentially since 1995 and have only
recently “slowed” to a very rapid 16-percent annual increase in 2008, which is
projected to remain at this growth rate through 2010.
Mirroring the history of many technological innovations, such as the telephone, radio, and
television, the very rapid growth in e-commerce in the early years created a market bubble
in e-commerce stocks. Like all bubbles, the “dot-com” bubble burst in March 2001. A large
number of e-commerce companies failed during this process. Yet for many others, such as
Amazon, e-Bay, Expedia, and Google, the results have been more positive: soaring
revenues, fine-tuned business models that produce profits, and rising stock prices. By 2006,
e-commerce revenues returned to solid growth again, and have continued to be the fastest
growing form of retail trade in the United States, Europe, and Asia.
•
Online consumer sales increased by more than 15 percent in 2008 to an estimated
$255 billion (including travel services), with 117 million people purchasing online and
138 million shopping and gathering information but not necessarily purchasing
(eMarketer, 2008).
•
The number of individuals online in the United States expanded to 173 million in
2008, up from 147 million in 2004. In the world, over 1.4 billion people are now
connected to the Internet. Growth in the overall Internet population has spurred growth in
e-commerce.
•
On the average day, 112 million people go online, 97 million send e-mail, 71
million use a search engine, 67 million read a blog, 11 million write on their blogs, 12
million share music on peer-to-peer networks, 28 million work on their social network
profile, 13 million visit Wikipedia, and 3 million use the Internet to rate a person,
product, or service (Pew Internet, 2008).
•
B2B e-commerce—use of the Internet for business-to-business commerce and
collaboration among business partners expanded 17 percent to more than $3.6 trillion.
The e-commerce revolution is still unfolding. Individuals and businesses will increasingly
use the Internet to conduct commerce as more products and services come online and
households switch to broadband telecommunications. More industries will be transformed
by e-commerce, including travel reservations, music and entertainment, news, software,
education, and finance. Table 10-1 highlights these new e-commerce developments.
WHY E-COMMERCE IS DIFFERENT
Why has e-commerce grown so rapidly? The answer lies in the unique nature of the
Internet and the Web. Simply put, the Internet and e-commerce technologies are much
more rich and powerful than previous technology revolutions like radio, television, and the
telephone. Table 10-2 describes the unique features of the Internet and Web as a
commercial medium. Let’s explore each of these unique features in more detail.
Ubiquity
In traditional commerce, a marketplace is a physical place, such as a retail store, that you
visit to transact business. E-commerce is ubiquitous, meaning that is it available just
about everywhere, at all times. It 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
marketspace—a marketplace extended beyond traditional boundaries and removed from
a temporal and geographic location.
From a consumer point of view, ubiquity reduces transaction costs—the costs of
participating in a market. To transact business, it is no longer necessary that you spend
time or money traveling to a market, and much less mental effort is required to make a
purchase.
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 world’s online population (more than 1 billion, and growing
rapidly).
TABLE 10-1 THE GROWTH OF E-COMMERCE
BUSINESS TRANSFORMATION
• E-commerce remains the fastest growing form of commerce when
compared to physical retail stores, services, and entertainment.
• 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 scenario: advertising, telephones, movies, television,
jewelry, real estate, hotels, bill payments, and software.
• The breadth of e-commerce offerings grows, especially in the services
economy of social networking, travel, information clearinghouses,
entertainment, retail apparel, appliances, and home furnishings.
• The online demographics of shoppers broaden to match that of ordinary
shoppers.
• Pure e-commerce business models are refined further to achieve higher
levels of profitability, whereas traditional retail brands, such as Sears, JC
Penney, L.L. Bean, and Wal-Mart, use e-commerce to retain their dominant
retail positions.
• Small businesses and entrepreneurs continue to flood the e-commerce
marketplace, often riding on the infrastructures created by industry giants,
such as Amazon and eBay.
TECHNOLOGY FOUNDATIONS
• Wireless Internet connections (Wi-Fi, Wi-Max, and 3G smart mobile
phones) grow rapidly.
• Powerful handheld mobile devices support music, Web surfing, and
entertainment as well as voice communication. Podcasting takes off as a
medium for distribution of video, radio, and user-generated content.
• The Internet broadband foundation becomes stronger in households and
businesses as transmission prices fall. More than 75 million households had
broadband cable or DSL access to the Internet in 2008—about 62% percent of
all households in the United States (eMarketer, 2008).
• RSS grows to become a major new form of user-controlled information
distribution that rivals e-mail in some applications.
• New Internet-based models of computing, such as .NET and Web
services, expand B2B opportunities.
NEW BUSINESS MODELS EMERGE
• More than half the Internet user population join an online social network,
contribute to social bookmarking sites, create blogs, and share photos.
Together these sites create a massive online audience as large as television
that is attractive to marketers.
• The traditional advertising business model is severely disrupted as Google
and other technology players such as Microsoft and Yahoo! seek to dominate
online advertising, and expand into offline ad brokerage for television and
newspapers.
• Newspapers and other traditional media adopt online, interactive models
but are losing advertising revenues to the online players despite gaining online
readers.
In contrast, most traditional commerce is local or regional—it 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 but 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 standards. They are shared by all nations around the world and enable any
computer to link with any other computer regardless of the technology platform each is
using. 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.
TABLE 10-2 EIGHT UNIQUE FEATURES OF ECOMMERCE TECHNOLOGY
E-COMMERCE TECHNOLOGY DIMENSION
BUSINESS SIGNIFICANCE
Ubiquity. Internet/Web technology is available everywhere: at work, at home,
and elsewhere via mobile devices, anytime.
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.
Global Reach. The technology reaches across national boundaries, around the
earth.
Commerce is enabled across cultural and national boundaries seamlessly and
without modification. The marketspace includes, potentially, billions of
consumers and millions of businesses worldwide.
Universal Standards. There is one set of technology standards, namely Internet
standards.
With one set of technical standards across the globe, disparate computer
systems can easily communicate with each other.
Richness. Video, audio, and text messages are possible.
Video, audio, and text marketing messages are integrated into a single
marketing message and consumer experience.
Interactivity. The technology works through interaction with the user.
Consumers are engaged in a dialog that dynamically adjusts the experience to
the individual, and makes the consumer a co-participant in the process of
delivering goods to the market.
Information Density. The technology reduces information costs and raises
quality.
Information processing, storage, and communication costs drop dramatically,
whereas currency, accuracy, and timeliness improve greatly. Information
becomes plentiful, cheap, and more accurate.
Personalization/Customization. The technology allows personalized messages
to be delivered to individuals as well as groups.
Personalization of marketing messages and customization of products and
services are based on individual characteristics.
Social Technology. User content generation and social networking.
New Internet social and business models enable user content creation and
distribution, and support social networks.
The universal technical standards of the Internet and e-commerce greatly lower market
entry costs—the cost merchants must pay simply to bring their goods to market. At the
same time, for consumers, universal standards reduce search costs—the effort required
to find suitable products.
Richness
Information richness refers to the complexity and content of a message. 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 powerful selling or commercial
environments. 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. The Web
makes it possible to deliver rich messages with text, audio, and video simultaneously to
large numbers of people.
Interactivity
Unlike any of the commercial technologies of the twentieth century, with the possible
exception of the telephone, e-commerce technologies are interactive, meaning they allow
for two-way communication between merchant and consumer. Television, for instance,
cannot ask viewers any questions or enter into conversations with 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
massive, global scale.
Information Density
The Internet and the Web vastly increase information density—the 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 while greatly increasing the currency, accuracy, and timeliness of
information.
Information density in e-commerce markets make prices and costs 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.
There are advantages for merchants as well. Online merchants can discover much more
about consumers than in the past. This allows merchants to segment the market into groups
who are willing to pay different prices and permits the merchants to engage in price
discrimination—selling the same goods, or nearly the same goods, to different targeted
groups at different prices. For instance, an online merchant can discover a consumer’s avid
interest in expensive, exotic vacations and then pitch high-end 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 a more price-sensitive consumer. Information density also helps merchants
differentiate their products in terms of cost, brand, and quality.
Personalization/Customization
E-commerce technologies permit personalization: Merchants can target their marketing
messages to specific individuals by adjusting the message to a person’s name, interests,
and past purchases. The technology also permits customization—changing the delivered
product or service based on a user’s 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 deal of information about the consumer’s past purchases and behavior can be stored
and used by online merchants.
The result is a level of personalization and customization unthinkable with traditional
commerce technologies. For instance, you may be able to shape what you see on
television by selecting a channel, but you cannot change the content of the channel you
have chosen. In contrast, the Wall Street Journal Online allows you to select the type of
news stories you want to see first and gives you the opportunity to be alerted when
certain events happen.
You can see these features of e-commerce at work in the Interactive Session on
Organizations. Turner Sports New Media operates a series of Web sites for NASCAR,
the NBA, and other sports organizations. It uses interactivity and richness, and is able to
combine the reach of cable TV with deep relationships with consumers.
Social Technology: User Content Generation and Social
Networking
In contrast to previous technologies, the Internet and e-commerce technologies have
evolved to be much more social by allowing users to create and share with their personal
friends (and a larger worldwide community) content in the form of text, videos, music, or
photos. Using these forms of communication, users are able to create new social
networks and strengthen existing ones.
All previous mass media in modern history, including the printing press, use a broadcast
model (one-to-many) where content is created in a central location by experts
(professional writers, editors, directors, and producers) and audiences are concentrated in
huge numbers to consume a standardized product. The new Internet and e-commerce
empower users to create and distribute content on a large scale, and permit users to
program their own content consumption. The Internet provides a many-to-many model of
mass communications which is unique.
KEY CONCEPTS IN E-COMMERCE: DIGITAL MARKETS AND
DIGITAL GOODS IN A GLOBAL MARKETPLACE
The location, timing, and revenue models of business are based in some part on the cost
and distribution of information. The Internet has created a digital marketplace where
millions of people all over the world are able to exchange massive amounts of information
directly, instantly, and for free. As a result, the Internet has changed the way companies
conduct business and increased their global reach.
The Internet shrinks information asymmetry. An information asymmetry exists when one
party in a transaction has more information that is important for the transaction than the
other party. That information helps determine their relative bargaining power. In digital
markets, consumers and suppliers can “see” the prices being charged for goods, and in that
sense digital markets are said to be more “transparent” than traditional markets.
For example, until auto retailing sites appeared on the Web, there was a pronounced
information asymmetry between auto dealers and customers. Only the auto dealers knew
the manufacturers’ prices, and it was difficult for consumers to shop around for the best
price. Auto dealers’ profit margins depended on this asymmetry of information. Today’s
consumers have access to a legion of Web sites providing competitive pricing information,
and three-fourths of U.S. auto buyers use the Internet to shop around for the best deal.
Thus, the Web has reduced the information asymmetry surrounding an auto purchase. The
Internet has also helped businesses seeking to purchase from other businesses reduce
information asymmetries and locate better prices and terms.
Digital markets are very flexible and efficient because they operate with reduced search
and transaction costs, lower menu costs (merchants’ costs of changing prices), price
discrimination, and the ability to change prices dynamically based on market conditions. In
dynamic pricing, the price of a product varies depending on the demand characteristics of
the customer or the supply situation of the seller.
INTERACTIVE SESSION: ORGANIZATIONS TURNER
SPORTS NEW MEDIA MARRIES TV AND THE INTERNET
Turner Sports New Media is the online division of Turner Broadcasting System, a
collection of TV networks assembled by billionaire Ted Turner. TBS was founded in the
1970s by Turner and has since grown into a prominent media company with diverse
holdings, including CNN, TBS, TNT, and Cartoon Network. Turner Sports New Media
was founded by Turner’s sports division chief, David Levy, in response to the growing
popularity of broadband video. Predicting that broadband video would damage Turner’s
TV business, Levy focused on making deals to manage the Web rights of various sports
leagues and to unite TV and the Internet in creative ways.
Turner Sports New Media has established itself as an innovator through its ability to
combine TV and the Web more successfully than rivals. Turner’s success allows them to
both sell more ads and persuade sports leagues such as the PGA Tour and NASCAR to
pay Turner millions per year to run their Web operations. Turner’s formula is to provide
rich, interactive features that use TV and the Web simultaneously to enhance the viewer’s
experience.
In 2003, Turner lacked the number of Web clients it has today, with only NASCAR.com
under their management. By 2006, they had added PGA.com and PGATour.com, and in
early 2008 they reached an agreement with the NBA to jointly manage NBA.com, which
has 5.5 million unique monthly visitors. Their latest target is Major League Soccer’s Web
operations, which, oddly enough, are managed by Major League Baseball. Turner earns
fees for managing the sites and splits ad revenues with each league. With each site that
Turner Sports New Media manages, their goal is to get fans switching between TV and
unique features on their desktops or laptops. For example, PGATour.com visitors can
watch play on certain holes, watch a certain player, aerial views of the course, and get
tips from pros on the site while events are in progress.
Many sports leagues don’t like to relinquish control of their Web sites to outside
organizations, preferring to handle their Web operations themselves to avoid paying fees
to organizations like Turner Sports New Media. The NFL recently reacquired rights to its
Web site back from CBS. But Turner’s value proposition to sports leagues is a
compelling one. The league’s official site will benefit from Turner’s reach and the Web’s
relationship with consumers. Turner’s experience with running Web sites is extensive, as
is their track record for success in increasing site traffic and developing innovative
interactive applications. Marketers can place ads in multiple formats (TV and the
Internet).
Turner’s oldest client is NASCAR, and the recent contract extension signed between the
two suggests that NASCAR is more than happy with Turner’s results. NASCAR.com has
been one of the top three sports league sites on the Internet in the past few years. Since
Turner assumed control of the league’s Web rights, the site has seen double-digit growth
in page views and an increase in average monthly unique visitors of 25 percent over the
last 7 years. Over the past calendar year the site had 1.4 billion page views. Turner will
continue to operate NASCAR.com through 2014, collaborating in content creation, ecommerce, and race ticket sales. Turner will continue to have oversight over news
content, broadband coverage, wireless platforms, video downloads, and ad sales, and will
seek to provide fans with better information and NASCAR merchandise.
Turner has implemented a wide array of cutting-edge applications and offerings to
NASCAR.COM, including TrackPass, its most interactive feature. TrackPass is a
premium service that consists of several interactive applications, including TrackPass
Scanner, TrackPass PitCommand, and TrackPass RaceView. RaceView renders each car
digitally and offers a multitude of camera angles and viewing options for each and every
car and driver. Users can pause, rewind, and replay live races and listen to any driver’s
in-car audio, in addition to a variety of other features that give the viewer unparalleled
customization over how they watch and enjoy each race.
Other features that Turner has implemented on NASCAR.com include a 24-hr news
center, live streaming for some races, a social networking ‘community’ section, an
extensive video library, live and interactive broadband shows, and a merchandise
superstore.
Turner’s contract extension with the NBA extends the longest-running partnership
between a league and programming network in professional sports to a whopping 32
years. The contract also grants Turner Sports New Media access to the NBA.com
network, which includes WNBA.com and NBADleague.com in addition to the flagship
site. Under the contract, TNT will continue televising NBA games, broaden their Internet
involvement, and jointly manage NBA’s digital businesses along with the league. These
businesses include NBA TV (a 24-hr digital TV network), operating the NBA.com
network of sites, NBA League Pass, advertising, and availability of TNT’s on-air TV
talent for NBA.com’s interactive features. Turner is likely to develop features like
TrackPass RaceView for NBA games to provide a similar level of richness and
customizability to the viewer experience.
One feature that Turner hopes to further develop is TNT NBA Overtime—a broadband
feature on NBA.com that streams TNT-televised games, highlights, exclusive interviews,
expert analysis, and more, which users can get live, delayed, and on demand. Turner’s
contract with the NBA is slated to run through the 2015-16 NBA season. If Turner’s track
record continues, NBA.com will continue to be an example of rich, interactive media
done right.
Sources:“Turner, NASCAR Announce Extension of Online Rights,” NASCAR.com, January 22,
2008; “Turner Broadcasting and NBA Broaden Partnership with Digital Rights,” NBA.com, January 17,
2008; Tom Lowry, “Turner’s Secret WebWeapon,” BusinessWeek, December 31, 2007/January 7, 2008;
“NASCAR.COM: TrackPass,” NASCAR.com, accessed July 2008.
CASE STUDY QUESTIONS
1.
case.
Describe the unique features of e-commerce technology illustrated in this
2.
How does the Web enhance the TV businesses for the companies
discussed in this case? How does it add value?
3.
Why is NASCAR TrackPass a good example of Turner Sports New
Media’s value to sports league sites?
4.
Do you think Turner Sports New Media will continue to grow steadily?
Why or why not?
MIS IN ACTION
Visit PGA.com, PGATour.com, or NASCAR.com, explore the Web site, and then answer
the following questions:
1.
What unique features of e-commerce technology can you find on the site? What
purposes do they serve?
2.
How does the Web site promote TV viewing? How does it create value for the
company?
These markets may either reduce or increase switching costs, depending on the nature of
the product or service being sold, and they may cause some extra delay in gratification.
Unlike a physical market, you can’t immediately consume a product such as clothing
purchased over the Web (although immediate consumption is possible with digital music
downloads and other digital products.)
Digital markets provide many opportunities to sell directly to the consumer, bypassing
intermediaries, such as distributors or retail outlets. Eliminating intermediaries in the
distribution channel can significantly lower purchase transaction costs. To pay for all the
steps in a traditional distribution channel, a product may have to be priced as high as 135
percent of its original cost to manufacture.
Figure 10-2 illustrates how much savings result from eliminating each of these layers in the
distribution process. By selling directly to consumers or reducing the number of
intermediaries, companies are able to raise profits while charging lower prices. The
removal of organizations or business process layers responsible for intermediary steps in a
value chain is called disintermediation.
Disintermediation is affecting the market for services. Airlines and hotels operating their
own reservation sites online earn more per ticket because they have eliminated travel
agents as intermediaries. Table 10-3 summarizes the differences between digital markets
and traditional markets.
Digital Goods
The Internet digital marketplace has greatly expanded sales of digital goods. Digital
goods are goods that can be delivered over a digital network. Music tracks, video,
software, newspapers, magazines, and books can all be expressed, stored, delivered, and
sold as purely digital products. Currently, most of these products are sold as physical
goods, for example, CDs, DVDs, and hard copy books. But the Internet offers the
possibility of delivering all these products on demand as digital products.
In general, for digital goods, the marginal cost of producing another unit is about zero (it
costs nothing to make a copy of a music file). However, the cost of producing the original
first unit is relatively high—in fact it is nearly the total cost of the product because there
are few other costs of inventory and distribution. Costs of delivery over the Internet are
very low, marketing costs remain the same, and pricing can be highly variable. (On the
Internet, the merchant can change prices as often as desired because of low menu costs.)
The impact of the Internet on the market for these kinds of digital goods is nothing short
of revolutionary, and we see the results around us every day. Businesses dependent on the
physical products for sales—such as bookstores, book publishers, music labels, and film
studios—face the possibility of declining sales and even destruction of their businesses.
Newspapers and magazines are losing readers to the Internet, and losing advertisers.
Record label companies are losing sales to Internet piracy and record stores are going out
of business. Video rental firms, such as Blockbuster, based on a physical DVD market
and physical stores have lost sales to NetFlix using an Internet model. Hollywood studios
as well face the prospect that Internet pirates will distribute their product as a digital
stream, bypassing Hollywood’s monopoly on DVD rentals and sales, which now
accounts for more than half of industry film revenues (see the Chapter 3 ending case).
Table 10-4 describes digital goods and how they differ from traditional physical goods.
FIGURE 10-2 THE BENEFITS OF DISINTERMEDIATION
TO THE CONSUMER
The typical distribution channel has several intermediary layers, each of which adds
to the final cost of a product, such as a sweater. Removing layers lowers the final cost
to the consumer.
TABLE 10-3 DIGITAL MARKETS COMPARED TO
TRADITIONAL MARKETS
DIGITAL MARKETS
TRADITIONAL MARKETS
Information asymmetry
Asymmetry reduced
Asymmetry high
Search costs
Low
High
Transaction costs
Low (sometimes virtually nothing)
High (time, travel)
Delayed gratification
High (or lower in the case of a digital good)
Lower: purchase now
Menu costs
Low
High
Dynamic pricing
Low cost, instant
High cost, delayed
Price discrimination
Low cost, instant
High cost, delayed
Market segmentation
Low cost, moderate precision
High cost, less precision
Switching costs
Higher/lower (depending on product characteristics)
High
Network effects
Strong
Weaker
Disintermediation
More possible/likely
Less possible/unlikely
INTERNET BUSINESS MODELS
The bottom line result of these changes in the economics of information is nearly a
revolution in commerce, with many new business models appearing and many old business
models no longer tenable. Table 10-5 describes some of the most important Internet
business models that have emerged. All, in one way or another, use the Internet to add extra
value to existing products and services or to provide the foundation for new products and
services.
TABLE 10-4 HOW THE INTERNET CHANGES THE
MARKETS FOR DIGITAL GOODS
DIGITAL GOODS
TRADITIONAL GOODS
Marginal cost/unit
Zero
Greater than zero, high
Cost of production
High (most of the cost)
Variable
Copying cost
Approximately 0
Greater than zero, high
Distributed delivery cost
Low
High
Inventory cost
Low
High
Marketing cost
Variable
Variable
Pricing
More variable (bundling, random pricing games)
Fixed, based on unit costs
TABLE 10-5
INTERNET BUSINESS MODELS
CATEGORY
DESCRIPTION
EXAMPLES
Virtual storefront
Sells physical products directly to consumers or to individual businesses.
Amazon.com RedEnvelope.com
Information broker
Provides product, pricing, and availability information to individuals and
businesses. Generates revenue from advertising or from directing buyers to
sellers.
Edmunds.com Kbb.com, Insweb.com, Realtor.com
Transaction broker
Saves users money and time by processing online sales transactions and
generating a fee each time a transaction occurs. Also provides information on
rates and terms.
Etrade.com Expedia.com
Online marketplace
Provides a digital environment where buyers and sellers can meet, search for
products, display products, and establish prices for those products. Can provide
online auctions or reverse auctions in which buyers submit bids to multiple sellers
to purchase at a buyer-specified price as well as negotiated or fixed pricing. Can
serve consumers or B2B e-commerce, generating revenue from transaction fees.
eBay.com Priceline.com ChemConnect.com
Content provider
Creates revenue by providing digital content, such as digital news, music, photos,
or video, over the Web. The customer may pay to access the content, or revenue
may be generated by selling advertising space.
WSJ.com GettyImages.com iTunes.com Games.com
Social network
Provides an online meeting place where people with similar interests can
communicate and find useful information.
Creates revenue through advertising.
Linkedin.com MySpace.com
iVillage.com
Portal
Provides initial point of entry to the Web along with specialized content and other
services. Revenue derives from advertising.
Yahoo.com MSN.com StarMedia.com
Service provider
Provides Web 2.0 applications such as photo sharing, video sharing, and usergenerated content (in blogs and social networking sites) as services. Provide other
services such as online data storage and backup. Uses either a subscription or
advertising revenue model.
Google Maps Photobucket.com YouTube.com Xdrive.com
Communication and Social Networking
Some of these new business models take advantage of the Internet’s rich communication
capabilities. EBay is an online auction forum that uses e-mail and other interactive
features of the Web, which we described in the Chapter 3 opening case. The system
accepts bids entered on the Internet, evaluates the bids, and notifies the highest bidder.
EBay collects a small commission on each listing and sale. EBay has become so popular
that its site serves as a huge trading platform for other companies, hosting hundreds of
thousands of “virtual storefronts.”
Business-to-business auctions have also emerged. GoIndustry, for instance, features
Web-based auction services for business-to-business sales of industrial equipment and
machinery.
The Internet has created online communities, where people with similar interests are able
to communicate with each other from many different locations. A major source of
revenue for these communities involves providing ways for corporate clients to target
customers, including the placement of banner ads and pop-up ads on their Web sites. A
banner ad is a graphic display on a Web page used for advertising. The banner is linked
to the advertiser’s Web site so that a person clicking the banner is transported to a Web
page with more information about the advertiser. Pop-up ads work in the opposite
manner. They automatically open up when a user accesses a specific Web site, and the
user must click the ad to make it disappear.
Social networking sites are a type of online community that has become extremely
popular. Social networking is the practice of expanding the number of one’s business or
social contacts by making connections through individuals. Social networking sites link
people through their mutual business or personal connections, enabling them to mine
their friends (and their friends’ friends) for sales leads, job-hunting tips, or new friends.
MySpace, Facebook, and Friendster appeal to people who are primarily interested in
extending their friendships, while LinkedIn.com focuses on job networking.
Members of social networking sites spend hours surfing pages, checking out other
members, and exchanging messages, revealing a great deal of information about
themselves. Businesses harvest this information to create carefully targeted promotions
that far surpass the typical text and display ads found on the Web. They also use the sites
to interact with potential customers. For example, Procter & Gamble set up a MySpace
profile page for Crest toothpaste soliciting “friends” for a fictional character called “Miss
Irresistable.”
The most popular of these sites attract so many visitors and are so “sticky” that they have
become very powerful marketing tools. The chapter-ending case study discusses
Facebook as a business model.
Social networking is so appealing that it has inspired a new type of e-commerce
experience called social shopping. Social shopping sites such as Kaboodle, ThisNext,
and Stylehive.com provide online meeting places for people to swap shopping ideas.
These sites provide tools for users to create their own Web pages with information and
images about items they like to help other shoppers.
Digital Content, Entertainment, and Services
In 2008, perhaps no industry has experienced more Internet-driven change than the
entertainment industry, roughly defined as television, movies, music, radio, and text
content. The ability to deliver digital goods and digital content over the Web has created
new alternatives to traditional print and broadcast media. There are Web sites for digital
versions of print publications, such as the New York Times or the Wall Street Journal, and
for new online journals such as Salon.com.
Some of the most popular Web sites deliver entertainment in digital form. Online games
attract huge numbers of players. Nexon’s games, described in the chapter-opening case,
have millions of users.
You can listen to some of your favorite radio channels, such as Classic Rock or the BBC,
on the Web as well as many independent channels. Because the radio signal is relayed
over the Internet, it is possible to access stations from anywhere in the world. Services
such as Yahoo!’s Launchcast even puts together individualized radio channels for
listeners.
Broadband connections now make it possible for Web sites to display full-length films
and television shows. Netflix, Apple, Amazon, Movielink, and CinemaNow have
downloading services for full-length movies. MLB.com, the Web site for Major League
Baseball, delivers live streaming video of MLB baseball games to paid subscribers. Some
online television and video services, such as IVillage Live, provide instant messaging
capabilities allowing viewers to discuss the show as its being broadcast.
Many of you use the Web to preview and download music. Although some of this
Internet music is free of charge, Apple’s iTunes and other sites are generating revenue by
charging for each song or album downloaded from their Web sites. The phenomenal
popularity of Apple’s iTunes music service and Apple’s iPod portable music player have
inspired a new form of digital content delivery called podcasting. Podcasting is a method
of publishing audio broadcasts via the Internet, allowing subscribing users to download
audio files onto their personal computers or portable music players. Video clips designed
to be downloaded and viewed on a portable device are called vcasts.
Podcasting enables independent producers to self-publish their own audio content and
gives broadcast media a new distribution method. Podcasts also have internal uses for
businesses who want to distribute information in audio form to their employees. Internet
security firm SonicWALL uses podcats to demonstrate its expertise to customers and to
provide new product information to its resellers.
The Web’s information resources are so vast and rich that portals have emerged as an
Internet business models to help individuals and organizations locate information more
efficiently. In Chapter 2, we defined a portal as a Web interface for presenting integrated,
personalized information from a variety of sources. As an e-commerce business model, a
portal is a “supersite” that provides a comprehensive entry point for a huge array of
resources and services on the Internet.
Yahoo! is an example. It provides capabilities for locating information on the Internet
along with news, sports, weather, telephone directories, maps, games, shopping, e-mail,
chat, discussion boards, and links to other sites. Also, specialized portals help users with
specific interests. For example, StarMedia is a portal customized for Hispanic Internet
users.
Yahoo! and other portals and Web content sites often combine content and applications
from many different sources and service providers. Other Internet business models use
syndication as well providing additional value. For example, E*TRADE, the discount
Web trading site, purchases most of its content from outsider sources such as Reuters
(news) and BigCharts.com (charts). Online syndicators, who aggregate content or
applications from multiple sources, package them for distribution, and resell them to
third-party Web sites, have emerged as another variant of the online content provider
business model. The Web makes it much easier for companies to aggregate, repackage,
and distribute information and information-based services.
Photobucket is an online photo-sharing service that works with other Web 2.0
applications and services. Other online service providers offer services such as remote
storage of data (Xdrive.com). Online service providers generate revenue from
subscription fees or from advertising.
Most of the business models described in Table 10-5 are called pure-play business
models because they are based purely on the Internet. These firms did not have an
existing bricks-and-mortar business when they designed their Internet business. However,
many existing retail firms, such as L.L. Bean, Office Depot, R.E.I., and the Wall Street
Journal, have developed Web sites as extensions of their traditional bricks-and-mortar
businesses. Such businesses represent a hybrid clicks-and-mortar business model.
The Interactive Session on Technology describes another clicks-and-mortar business.
J&R Electronics sells music, office equipment, cameras, computers, movies, and games
through multiple channels: a massive retail store in New York City, a print catalog, and a
Web site. As you read this case, try to determine the role of the Web in this company’s
business model and business strategy.
10.2
ELECTRONIC COMMERCE
Although most commercial transactions still take place through traditional retail channels,
rising numbers of consumers and businesses are using the Internet for electronic commerce.
Today, e-commerce revenue represents about 5 percent of all retail sales in the United States,
and there is tremendous upside potential for growth.
TYPES OF ELECTRONIC COMMERCE
There are many ways to classify electronic commerce transactions. One is by looking at the
nature of the participants in the electronic commerce transaction. The three major
electronic commerce categories are business-to-consumer (B2C) e-commerce, business-tobusiness (B2B) e-commerce, and consumer-to-consumer (C2C) e-commerce.
•
Business-to-consumer (B2C) electronic commerce involves retailing products
and services to individual shoppers. BarnesandNoble.com, which sells books, software,
and music to individual consumers, is an example of B2C e-commerce.
•
Business-to-business (B2B) electronic commerce involves sales of goods and
services among businesses. ChemConnect’s Web site for buying and selling natural gas
liquids, refined and intermediate fuels, chemicals, and plastics is an example of B2B ecommerce.
•
Consumer-to-consumer (C2C) electronic commerce involves consumers selling
directly to consumers. For example, eBay, the giant Web auction site, enables people to
sell their goods to other consumers by auctioning the merchandise off to the highest
bidder.
Another way of classifying electronic commerce transactions is in terms of the participants’
physical connection to the Web. Until recently, almost all e-commerce transactions took
place over wired networks. Now mobile phones and other wireless handheld digital
appliances are Internet-enabled to send text messages and e-mail, access Web sites, and
make purchases. Companies are offering new types of Web-based products and services
that can be accessed by these wireless devices. The use of handheld wireless devices for
purchasing goods and services from any location has been termed mobile commerce or mcommerce. Both business-to-business and business-to-consumer e-commerce transactions
can take place using m-commerce technology, which we discuss in detail in Section 10.3.
INTERACTIVE SESSION: TECHNOLOGY CAN J&R
ELECTRONICS GROW WITH E-COMMERCE?
J&R Electronics is a mom-and-pop shop for the modern age. Joe and Rachelle Friedman
started the business as an audio equipment store in 1971. Today, J&R Electronics
encompasses a lucrative catalog business and 10 specialty electronics stores covering
300,000 square feet of retail space on Park Row in New York City. Among the stores are
the famed J&R Music World and J&R Computer World.
The J&R empire sells nearly every type of electronic device imaginable. However, the
Friedmans have resisted the advice of suppliers, such as record companies, who have told
them the only way to compete with big box stores was to become a chain. Rachelle
Friedman explained that “by staying on the block...we maintain control, which the chain
stores lose.”
How does J&R continue to survive with only one location in an industry dominated by
Wal-Marts, Best Buy, and Circuit City? One reason is that the company found ways to
make its Web site as popular a destination online as its bricks-and-mortar store.
J&R went online in 1998 using InterWorld’s Commerce Exchange e-commerce software.
InterWorld did not survive the dot-com bust in 2000, and J&R had to support its online
presence on its own. The company’s information systems staff managed to piece together
a customized e-commerce application that could handle the 400,000 products that J&R
sold. However, the solution did not support some of the features that online retail
competitors offered, such as the ability to collect and display customer reviews and
provide information on inventory statistics, and shipping time.
By that time, 30 percent of J&R’s $400 million in revenue came from JR.com, and the
company needed to inject new life into its Web site. For the new site, J&R chose an ecommerce platform from Blue Martini and a CRM package made by Loyalty Lab. In
addition, management wanted to populate the site with videos and customer reviews.
Those features were valuable tools that customers could use to educate themselves about
products and comparison-shop before they committed to buying.
In May 2006, J&R unveiled an online loyalty program to encourage shoppers to visit
JR.com directly rather than connect from a link on another site, such as a price
comparison search engine.
The strategy intends to raise the number of unique visitors to the site and, as Jason
Friedman put it, relieve J&R from “fighting over pennies with our competitors.” For
participating in the program, customers receive gift cards equaling 2 percent of their
purchases. If successful, the loyalty program will keep past customers from giving their
business to other stores, as well as entice new customers to join the J&R community.
Catalog shoppers are also eligible for loyalty rewards.
Mark H. Goldstein, CEO of Loyalty Lab, noted that J&R already had a loyal customer
base as a result of its top-notch customer service and focus on building relationships. All
that the company lacked was a program that recognized customer loyalty. Loyalty Lab’s
CRM package helped fill that void by hosting the modules that enabled J&R customers to
register for accounts, manage their accounts, and redeem the incentives they have earned.
The Loyalty Lab program also reduces the Google tax.” This is the 20 to 30 percent
charge that J&R pays to search sites when visitors are directed to J&R from another site,
a fee that J&R avoids when shoppers visit JR.com directly.
J&R selected Blue Martini as its new e-commerce platform because Blue Martini
functions well with J&R’s ERP software from a technical perspective. The two systems
are able to exchange data easily. Blue Martini provides a better opportunity to share the
strengths of J&R’s bricks-and-mortar channels online.
J&R has plenty of advantages, or differentiators, to showcase. Its prices are very
competitive, yet it maintains a vast inventory that rarely leaves customers disappointed.
J&R also has a reputation for being at the leading edge of new technology. The company
has a penchant for being the first retailer to sell new products or the latest versions of
already popular products. J&R often caters to those trends before other stores are
prepared to do so. Aside from good prices, perhaps the element of J&R that appeals to
customers most is its sales staff. Customers who enter J&R stores know that the workers
they encounter will be well informed and adept at explaining the features and
specifications of even the newest and most high-tech products.
With Blue Martini, J&R will try to emulate the expertise of its sales staff online. The
platform provides a Guided Selling application, which collects input from the shopper
and produces a narrowed-down view of the product catalog that is tailored for the
requirements and preferences of a particular customer. Customers are able to view
products by brand, price, popularity, size, and availability of special offers. By providing
interactive recommendations, J&R can put more information about products in the hands
of the customers, which makes them more comfortable in their purchases.
Comprehensive product descriptions, product reviews from customers and other sources,
and comparison grids will also make it easier for shoppers to understand and select
products. Going a step further, Blue Martini enables J&R to deepen its Web content with
videos, including hundreds of clips that feature staff members giving tutorials on specific
products. The videos bring a personalization to the online shopping experience that
normally would be available only in a bricks-and-mortar store. J&R even films the videos
in its actual stores.
The new JR.com launched in March 2007 with a host of new customer conveniences. If a
customer selects a product that is out of stock, the site is prepared with a list of similar
products. The site also has real-time integration with store inventory, so onsite purchases
are reflected in the availability of products online. J&R has also made the checkout
process more efficient so shoppers arrive at final price more quickly. The shipping
section has been restructured to improve the accuracy of delivery dates and shipping fees.
Jason Friedman recognizes that despite the increased functionality provided by Blue
Martini, his company is still limited by having physical stores located solely in New York
City. He notes that where chain stores can offer customers the option of ordering
merchandise online and picking it up that day in person at the nearest store, J&R can only
make that option available to customers in the New York City area. However, he feels
that emphasizing e-commerce carries great potential for the business and represents the
company’s future.
In August 2008, J&R contracted with the Toy advertising agency to coordinate its TV,
print, radio, events, digital, and in-store promotions. Although J&R spends millions of
dollars each year on advertising through various channels, this is the first time it has
worked with an advertising agency. Toy will further shape J&R’s brand image of quality,
customer service, and leading-edge technology offerings among new audiences in a
rapidly changing retail environment.
Sources:“J&R Music Turns to Toy,” Adweek, August 19, 2008; www.jr.com, accessed August 28,
2008; Laton McCartney, “Mid-Market Case: J&R Electronics Pumps Up the Volume,” Baseline
Magazine, March 13, 2007; “J&R Electronics Taps Loyalty Lab’s On-Demand Suite for First Shopper
Loyalty Program,” Rtmilestones.com, accessed May 1, 2007; and “J&R Electronics Migrating to Blue
Martini E-Commerce Platform,” Internetretailer.com, November 8, 2006.
CASE STUDY QUESTIONS
1.
Analyze J&R Electronics using the competitive forces and value chain
models. What is its business model and business strategy? How does it provide
value?
2.
What is the role of the Internet in J&R’s business strategy? Is it providing
a solution to J&R’s problems? Why or why not?
3.
Can J&R keep up with the competition since it is more or less a local
brand competing with nationwide chains? How would you measure its success in
keeping up with the competition?
MIS IN ACTION
Visit J&R’s online store at JR.com, then answer the following questions:
1.
What features described in this case are you able to find on the site?
2.
How effective is the implementation of these features? Do they seem to be
achieving the goals that J&R set for them?
3.
Compare JR.com to the Web sites of Circuit City or Best Buy. Evaluate them in
terms of product selection and availability, tools for providing product information and
customer service, and ease of use. Which site would you use to purchase a computer or
MP3 player? Why?
ACHIEVING CUSTOMER INTIMACY: INTERACTIVE
MARKETING, PERSONALIZATION, AND SELF-SERVICE
The unique dimensions of e-commerce technologies that we have just described offer many
new possibilities for marketing and selling. The Internet provides companies with
additional channels of communication and interaction for closer yet more cost-effective
relationships with customers in sales, marketing, and customer support.
Interactive Marketing and Personalization
The Internet and e-commerce have helped some merchants achieve the holy grail of
marketing: making products for millions of consumers that are personal, an impossible
task in traditional markets. Web sites, such as that for Lands’ End (shirts and pants), Nike
(athletic shoes), and VistaPrint (business cards, note cards, and labels), feature online
tools that allow consumers to purchase products tailored to their individual specifications.
Sites such as encourage customers to participate in designing products they want.
Web sites have become a bountiful source of detailed information about customer
behavior, preferences, needs, and buying patterns that companies can use to tailor
promotions, products, services, and pricing. Some customer information may be obtained
by asking visitors to “register” online and provide information about themselves, but
many companies also collect customer information using software tools that track the
activities of Web site visitors.
Clickstream tracking tools collect data on customer activities at Web sites and store
them in a log. The tools record the site that users visited prior to coming to a particular
Web site and where these users go when they leave that site. They also record the specific
pages visited on the particular site, the time spent on each page of the site, the types of
pages visited, and what the visitors purchased (see Figure 10-3). Firms analyze this
information about customer interests and behavior to develop precise profiles of existing
and potential customers.
FIGURE 10-3 WEB SITE VISITOR TRACKING
E-commerce Web sites have tools to track a shopper’s every step through an online
store. Close examination of customer behavior at a Web site selling women’s clothing
shows what the store might learn at each step and what actions it could take to
increase sales.
Such information enables firms to create unique personalized Web pages that display
content or ads for products or services of special interest to each user, improving the
customer’s experience and creating additional value (see Figure 10-4). By using
personalization technology to modify the Web pages presented to each customer,
marketers achieve the benefits of using individual salespeople at dramatically lower
costs.
One technique for Web personalization is collaborative filtering, which compares
information gathered about a specific user’s behavior at a Web site to data about other
customers with similar interests to predict what the user would like to see next. The
software then makes recommendations to users based on their assumed interests. For
example, Amazon.com and BarnesandNoble.com use collaborative filtering software to
prepare personalized book recommendations: “Customers who bought this book also
bought. . .” These recommendations are made just at the point of purchase, an ideal time
to prompt a consumer into purchasing a related product.
Blogs and Wikis
Blogs, which we introduced in Chapter 7, have emerged as another promising Web-based
tool for marketing. A blog, the popular term for a Weblog, is a personal Web page that
typically contains a series of chronological entries (newest to oldest) by its author, and
links to related Web pages.
FIGURE 10-4 WEB SITE PERSONALIZATION
Firms can create unique personalized Web pages that display content or ads for
products or services of special interest to individual users, improving the customer
experience and creating additional value.
The blog may include a blogroll (a collection of links to other blogs) and trackbacks (a
list of entries in other blogs that refer to a post on the first blog). Most blogs allow
readers to post comments on the blog entries as well. Blogs are either hosted by a thirdparty site such as Blogger.com, LiveJournal.com, Typepad.com, and Xanga.com, or
prospective bloggers can download software such as Movable Type to create a blog that
is housed by the user’s ISP. Blogger and Twitter have added features to allow users to
post short notes and photos to their blogs from cell phones.
Blog pages are usually variations on templates provided by the blogging service or
software. Therefore, millions of people without HTML skills of any kind can post their
own Web pages and share content with others. The totality of blog-related Web sites is
often referred to as the blogosphere.
The content of blogs range from individual musings to corporate communications. Blogs
have a significant impact on political affairs, and have gained increasing notice for their
role in breaking and shaping the news. Blogs have become hugely popular. There are at
least 70 million blogs on the Web and nearly 100,000 new ones added daily.
Companies that maintain public blogs use them as a new channel for reaching customers.
These corporate blogs provide a personal and conversational way for businesses to
present information to the public and prospective customers about new products and
services. Readers are often invited to post comments. For example, Stonyfield Farm Inc.,
the world’s third-largest organic food company, maintains blogs on childrearing and
organic dairy farms to create a more personal relationship with consumers than the
traditional selling relationship.
Marketers are analyzing blogs as well as chat groups and message boards to see what is
being said online about new products, old brands, and ad campaigns. Blog-watching
services that monitor popular blogs claim that “blog watching” can be cheaper and faster
for analyzing consumer interests and sentiment than traditional focus groups and surveys.
For example, Polaroid learned from blogs that consumers online frequently discuss photo
longevity and archiving, prompting it to pay more attention to long-lasting photos in its
product development. Companies are also posting ads on some of the most popular blogs
published by individuals or by other organizations.
Stonyfield Farms’ Baby Babble blog provides a channel for the company to talk to
customers with young children directly and hear back from them.
Customer Self-Service
Many companies use their Web sites and e-mail to answer customer questions or to
provide customers with product information, reducing the need for human customersupport expert. For instance, American, Northwest, and other major airlines have created
Web sites where customers can review flight departure and arrival times, seating charts,
and airport logistics; check frequent-flyer miles; and purchase tickets online. Chapter 1
describes how customers of UPS use its Web site to track shipments, calculate shipping
costs, determine time in transit, and arrange for a package pickup. FedEx and other
package delivery firms provide similar Web-based services. Automated self-service or
other Web-based responses to customer questions cost only a fraction of what a live
customer service representative on the telephone would cost.
New software products are even integrating the Web with customer call centers, where
customer service problems have been traditionally handled over the telephone. A call
center is an organizational department responsible for handling customer service issues
by telephone and other channels. For example, visitors to the Lands’ End Web site can
request a phone call from customer service by entering his or her telephone number. A
call-center system directs a customer service representative to place a voice telephone
call to the user’s phone.
BUSINESS-TO-BUSINESS E-COMMERCE: NEW
EFFICIENCIES AND RELATIONSHIPS
About 80 percent of B2B e-commerce is still based on proprietary systems for electronic
data interchange (EDI). Electronic data interchange (EDI) enables the computer-tocomputer exchange between two organizations of standard transactions such as invoices,
bills of lading, shipment schedules, or purchase orders. Transactions are automatically
transmitted from one information system to another through a network, eliminating the
printing and handling of paper at one end and the inputting of data at the other. Each major
industry in the United States and much of the rest of the world has EDI standards that
define the structure and information fields of electronic documents for that industry.
EDI originally automated the exchange of documents such as purchase orders, invoices,
and shipping notices. Although some companies still use EDI for document automation,
firms engaged in just-in-time inventory replenishment and continuous production use EDI
as a system for continuous replenishment. Suppliers have online access to selected parts of
the purchasing firm’s production and delivery schedules and automatically ship materials
and goods to meet prespecified targets without intervention by firm purchasing agents (see
Figure 10-5).
Although many organizations still use private networks for EDI, they are increasingly
Web-enabled because Internet technology provides a much more flexible and low-cost
platform for linking to other firms. Businesses are able to extend digital technology to a
wider range of activities and broaden their circle of trading partners.
Take procurement, for example. Procurement involves not only purchasing goods and
materials but also sourcing, negotiating with suppliers, paying for goods, and making
delivery arrangements. Businesses can now use the Internet to locate the most low-cost
supplier, search online catalogs of supplier products, negotiate with suppliers, place orders,
make payments, and arrange transportation. They are not limited to partners linked by
traditional EDI networks.
FIGURE 10-5 ELECTRONIC DATA INTERCHANGE (EDI)
Companies use EDI to automate transactions for B2B e-commerce and continuous
inventory replenishment. Suppliers can automatically send data about shipments to
purchasing firms. The purchasing firms can use EDI to provide production and
inventory requirements and payment data to suppliers.
The Internet and Web technology enable businesses to create new electronic storefronts for
selling to other businesses with multimedia graphic displays and interactive features similar
to those for B2C commerce. Alternatively, businesses can use Internet technology to create
extranets or electronic marketplaces for linking to other businesses for purchase and sale
transactions.
FIGURE 10-6 A PRIVATE INDUSTRIAL NETWORK
A private industrial network, also known as a private exchange, links a firm to its
suppliers, distributors, and other key business partners for efficient supply-chain
management and other collaborative commerce activities.
Private industrial networks typically consist of a large firm using an extranet to link to its
suppliers and other key business partners (see Figure 10-6). The network is owned by the
buyer, and it permits the firm and designated suppliers, distributors, and other business
partners to share product design and development, marketing, production scheduling,
inventory management, and unstructured communication, including graphics and e-mail.
Another term for a private industrial network is a private exchange.
An example is VW Group Supply, which links the Volkswagen Group and its suppliers.
VW Group Supply handles 90 percent of all global purchasing for Volkswagen, including
all automotive and parts components.
Net marketplaces, which are sometimes called e-hubs, provide a single, digital
marketplace based on Internet technology for many different buyers and sellers (see Figure
10-7). They are industry owned or operate as independent intermediaries between buyers
and sellers. Net marketplaces generate revenue from purchase and sale transactions and
other services provided to clients. Participants in Net marketplaces can establish prices
through online negotiations, auctions, or requests for quotations, or they can use fixed
prices.
There are many different types of Net marketplaces and ways of classifying them. Some
Net marketplaces sell direct goods and some sell indirect goods. Direct goods are goods
used in a production process, such as sheet steel for auto body production. Indirect goods
are all other goods not directly involved in the production process, such as office supplies
or products for maintenance and repair. Some Net marketplaces support contractual
purchasing based on long-term relationships with designated suppliers, and others support
short-term spot purchasing, where goods are purchased based on immediate needs, often
from many different suppliers.
Some Net marketplaces serve vertical markets for specific industries, such as automobiles,
telecommunications, or machine tools, whereas others serve horizontal markets for goods
and services that can be found in many different industries, such as office equipment or
transportation.
FIGURE 10-7 A NET MARKETPLACE
Net marketplaces are online marketplaces where multiple buyers can purchase from
multiple sellers.
Exostar is an example of an industry-owned net marketplace, focusing on long-term
contract purchasing relationships and on providing common networks and computing
platforms for reducing supply chain inefficiencies. This aerospace and defense industrysponsored Net marketplace was founded jointly by BAE Systems, Boeing, Lockheed
Martin, Raytheon, and Rolls-Royce plc to connect these companies to their suppliers and
facilitate collaboration. More than 16,000 trading partners in the commercial, military, and
government sectors use Exostar’s sourcing, e-procurement, and collaboration tools for both
direct and indirect goods.
Exchanges are independently owned third-party Net marketplaces that connect thousands
of suppliers and buyers for spot purchasing. Many exchanges provide vertical markets for a
single industry, such as food, electronics, or industrial equipment, and they primarily deal
with direct inputs. For example, FoodTrader.com automates spot purchases among buyers
and sellers from more than 180 countries in the food and agriculture industry.
Exchanges proliferated during the early years of e-commerce, but many have failed.
Suppliers were reluctant to participate because the exchanges encouraged competitive
bidding that drove prices down and did not offer any long-term relationships with buyers or
services to make lowering prices worthwhile. Many essential direct purchases are not
conducted on a spot basis because they require contracts and consideration of issues such
as delivery timing, customization, and quality of products.
10.3
M-COMMERCE
Wireless mobile devices are starting to be used for purchasing goods and services as well as
for transmitting messages. In the United States, m-commerce is still in its infancy but is
starting to grow as 3G cell phones become more common. In Asia and Europe, mobile
commerce is much more widely adopted. Although m-commerce represents a small fraction
of total e-commerce transactions, revenue has been steadily growing (see Figure 10-8). In
2008, there were an estimated 3 billion cell phone subscribers worldwide, with over 500
million in China alone. In the United States, there are about 255 million cell phone
subscribers.
FIGURE 10-8
2012
GLOBAL M-COMMERCE REVENUE, 2000–
M-commerce sales represent a small fraction of total e-commerce sales, but that
percentage is steadily growing.
Sources: eMarketer, 2008; Gartner, 2008; author estimates.
M-COMMERCE SERVICES AND APPLICATIONS
M-commerce applications have taken off for services that are time-critical, that appeal to
people on the move, or that accomplish a task more efficiently than other methods. They
are especially popular in Europe, Japan, South Korea, and other countries where fees for
conventional Internet usage are very expensive. Here are some examples.
Location-Based Services
Services such as Verizon’s VZ Navigator enable users to locate nearby restaurants,
ATMs, and gasoline stations, find local entertainment, and send and receive location
information with other Verizon users, providing maps showing how to reach the
locations. MeetMoi provides a dating service that helps users identify people who are
nearby and looking for dates. Smarter Agent enables users of cell phones with global
positioning systems (GPS) to find nearby vacant apartments.
Banking and Financial Services
Banks are rolling out services that let customers manage their bank accounts from their
cell phones or other mobile devices. Citibank and Bank of America customers can use
their cell phones to check account balances, transfer funds, and pay bills.
Wireless Advertising
Cell phone service providers have information valuable to advertisers about where
subscribers live, their location the moment they view ads, their age, and the games,
music, and other services they use on their phones. Advertisers must find a way to deal
with privacy issues and consumer reactions to ads on their phones. But when done right,
mobile campaigns yield high response rates and increased consumer engagement.
Yahoo! displays ads on its mobile home page for companies such as Pepsi, Procter &
Gamble, Hilton, Nissan, and Intel. The News Corporation has a mobile campaign to
encourage people to vote for winners of its American Idol television show. Google is
displaying ads linked to cell phone searches by users of the mobile version of its search
engine, while Microsoft offers banner and text advertising on its MSN Mobile portal in
the United States. Ads are starting to be embedded in downloadable applications such as
games and videos. Less than $1 billion was spent on mobile advertising in 2007, but
spending on mobile ads could surge to $10 billion to $20 billion over the next five years
(Bellman and Engineer, 2008).
Games and Entertainment
Cell phones are quickly turning into portable entertainment platforms. Mobile phone
services offer downloadable digital games, music, and ringtones (digitized snippets of
music that play on mobile phones when a user receives or places a call). More and more
handset models combine the features of a cell phone and a portable music player.
Users of broadband services from the major wireless vendors can download on-demand
video clips, news clips, and weather reports. MobiTV, offered by Sprint and Cingular
Wireless, features live TV programs, including MSNBC and Fox Sports. Film companies
are starting to produce short films explicitly designed to play on mobile phones. News
Corp., which owns the Fox Network, coined the trademark “mobisodes” for short cell
phone videos.
User-generated content is also appearing in mobile form. A selection of YouTube videos
are available to Verizon Wireless customers who subscribe to its VCast media service.
MySpace arranged with Vodafone Group PLC and AT&T to allow European and
American users to post comments, photos, and eventually videos to the MySpace Web
site from their mobile phones.
ACCESSING INFORMATION FROM THE WIRELESS WEB
Although cell phones, PDAs, and other handheld mobile devices are able to access the Web
at anytime and from any place, the amount of information that they can actually handle at
one time is very limited. Until 3G broadband service comes into widespread use, these
devices will not be able to transmit or receive large amounts data. The information must fit
onto small display screens.
Major search providers Google, Yahoo!, and Microsoft have introduced search services for
mobile phones that provide useful information with minimal typing. Their wireless portals
(also known as mobile portals) feature content and services optimized for mobile devices to
steer users to the information they are most likely to need. Google’s mobile service
remembers recent place names in searches, so that when users initiate a search for
“movies,” it returns a list of movies playing locally and makes it easy to find show times
and purchase tickets. Microsoft’s Tellme service allows uers to speak into their phones to
search movie listings, stock quotes, news, and other information and then see the results on
their phone screens.
10.4
ELECTRONIC COMMERCE PAYMENT SYSTEMS
Several electronic payment systems have been developed to pay for goods electronically on
the Internet. Electronic payment systems for the Internet include systems for digital credit
card payments, digital wallets, accumulated balance digital payment systems, online stored
value payment systems, digital checking, and electronic billing presentment and payment
systems.
TYPES OF ELECTRONIC PAYMENT SYSTEMS
Nearly all online payments in the United States (90 percent) use credit cards, or rely on the
credit card system. Businesses can also contract with services that extend the functionality
of existing credit card payment systems. Digital wallets make paying for purchases over
the Web more efficient by eliminating the need for shoppers to enter their address and
credit card information repeatedly each time they buy something. The digital wallet
securely stores credit card and owner identification information and enters the shopper’s
name, credit card number, and shipping information automatically when invoked to
complete a purchase. Google Checkout is an example.
Micropayment systems have been developed for purchases of less than $10, such as
downloads of individual articles or music clips, which would be too small for conventional
credit card payments. Accumulated balance digital payment systems enable users to
make micropayments and purchases on the Web, accumulating a debit balance that they
must pay periodically on their credit card or telephone bills. Examples are Valista’s
PaymentsPlus used by AOL, Vodafone, and NTT DoCoMo, and Clickshare, which is
widely used by the online newspaper and publishing industry.
Online stored value payment systems enable consumers to make instant online payments
to merchants and other individuals based on value stored in an online digital account. Some
online stored value payment systems such as Valista are merchant platforms. Others are
focused on peer-to-peer payments, such as PayPal. PayPal is owned by eBay and makes it
possible for people to send money to vendors or individuals who are not set up to accept
credit card payments.
Digital checking systems such as PayByCheck extend the functionality of existing
checking accounts so they can be used for online shopping payments. Digital checks are
processed much faster than traditional paper-based checking.
Electronic billing presentment and payment systems are used for paying routine
monthly bills. They enable users to view their bills electronically and pay them through
electronic fund transfers from bank or credit card accounts. These services notify
purchasers about bills that are due, present the bills, and process the payments. Some of
these services, such as CheckFree, consolidate subscribers’ bills from various sources so
that they can all be paid at one time. Table 10-6 summarizes the features of some of these
e-commerce payment systems.
DIGITAL PAYMENT SYSTEMS FOR M-COMMERCE
Use of mobile handsets as payment devices is already well established in Europe, Japan,
and South Korea. Three kinds of mobile payment systems are used in Japan, and these
provide a glimpse of the future of mobile payment in the United States Japanese cell
phones support stored value systems charged by credit cards or bank accounts, mobile debit
cards (tied to personal bank accounts), and mobile Credit card payment Protect information
transmitted Visa systems among users, merchant sites, and MasterCard processing banks
American Express credit cards. Japanese cell phones act like mobile wallets, containing a
variety of payment mechanisms. Consumers can pay merchants by simply waving the cell
phone at a merchant payment device that can accept payments. Japan’s largest phone
company NTT DoCoMo introduced wireless RFID cell phones and a related payment
system (FeliCa) in 2004. Currently 10 million wallet phones are in use in Japan.
TABLE 10-6 EXAMPLES OF ELECTRONIC PAYMENT
SYSTEMS FOR E-COMMERCE
PAYMENT COMMERCIAL DESCRIPTION
SYSTEM
EXAMPLE
Credit card payment systems
Protect information transmitted among users, merchant sites, and processing
banks
Visa MasterCard American Express
Digital wallet
Software that stores credit card and other information to facilitate form
completion and payment for goods on the Web
Google Checkout
Accumulated balance digital payment systems
Accumulates micropayment purchases as a debit balance that must be paid
periodically on credit card or telephone bills
Valista PaymentsPlus Clickshare
Stored value payment systems
Enable consumers to make instant payments to merchants or individuals based on
value stored in a digital account
PayPal, Valista
Digital checking
Provides electronic checks with a secure digital signature
PayByCheck
Electronic billing presentment and payment systems
Support electronic payments for online and physical store purchases of goods or
services after the purchase have taken place
Yahoo! Bill Pay, CheckFree
In the United States, the cell phone has not yet evolved into a fully capable mobile
commerce and payment system. The cell phone in the United States is not connected to a
wide network of financial institutions, but instead resides behind the walled garden of the
telephone providers. In Europe and Asia, cell phone users can pay for a very wide variety
of real goods and services, and there, phones are integrated into a large array of financial
institutions.
10.5
HAND-ON MIS PROJECTS
The projects in this section give you hands-on experience developing e-commerce strategies
for businesses, using spreadsheet software to research the profitability of an e-commerce
company, and using Web tools to research and evaluate e-commerce hosting services.
Management Decision Problems
1.
Columbiana is a small, independent island in the Caribbean. It wants to develop
its tourist industry and attract more visitors. The island has many historical buildings,
forts, and other sites, along with rain forests and striking mountains. A few first-class
hotels and several dozen less-expensive accommodations can be found along its beautiful
white sand beaches. The major airlines have regular flights to Columbiana, as do several
small airlines. Columbiana’s government wants to increase tourism and develop new
markets for the country’s tropical agricultural products. How can a Web presence help?
What Internet business model would be appropriate? What functions should the Web site
perform?
2.
Explore the Web sites of the following companies: Blue Nile, J. Crew, Circuit
City, Black&Decker, Peet’s Coffee & Tea, and Priceline. Determine which of these Web
sites would benefit most from adding a company-sponsored blog to the Web site. List the
business benefits of the blog. Specify the intended audience for the blog. Decide who in
the company should author the blog, and select some topics for the blog.
Improving Decision Making: Using Spreadsheet Software
to Analyze a Dot-Com Business
Software skills: Spreadsheet downloading, formatting, and formulas
Business skills: Financial statement analysis
Publicly traded companies, including those specializing in e-commerce, are required to file
financial data with the U.S. Securities and Exchange Commission. By analyzing this
information, you can determine the profitability of an e-commerce company and the
viability of its business model.
Pick one e-commerce company on the Internet, for example, Ashford.com, Buy.com,
Yahoo.com, or Priceline.com. Study the Web pages that describe the company and explain
its purpose and structure. Use the Web to find articles that comment on the company. Then
visit the Securities and Exchange Commission’s Web site at www.sec.gov and select
Filings & Forms to access the company’s 10-K (annual report) form showing income
statements and balance sheets. Select only the sections of the 10-K form containing the
desired portions of financial statements that you need to examine, and download them into
your spreadsheet. (The Laudon Web site for Chapter 10 provides more detailed instructions
on how to download this 10-K data into a spreadsheet.) Create simplified spreadsheets of
the company’s balance sheets and income statements for the past three years.
•
Is the company a dot-com success, borderline business, or failure? What
information dictates the basis of your decision? Why? When answering these questions,
pay special attention to the company’s three-year trends in revenues, costs of sales, gross
margins, operating expenses, and net margins.
•
Prepare an overhead presentation (with a minimum of five slides), including
appropriate spreadsheets or charts, and present your work to your professor and
classmates.
Achieving Operational Excellence: Evaluating E-Commerce
Hosting Services
Software skills: Web browser software
Business skills: Evaluating e-commerce hosting services
This project will help develop your Internet skills in commercial services for hosting an ecommerce site for a small startup company.
You would like to set up a Web site to sell towels, linens, pottery, and tableware from
Portugal and are examining services for hosting small business Internet storefronts. Your
Web site should be able to take secure credit card payments and to calculate shipping costs
and taxes. Initially, you would like to display photos and descriptions of 40 different
products. Visit Yahoo! Small Business, GoDaddy, and Volusion and compare the range of
e-commerce hosting services they offer to small business, their capabilities, and costs. Also
examine the tools they provide for creating an e-commerce site. Compare these services
and decide which you would use if you were actually establishing a Web store. Write a
brief report indicating your choice and explaining the strengths and weaknesses of each.
LEARNING TRACK MODULES
The following Learning Tracks provide content relevant to topics covered in this chapter:
1.
E-Commerce Challenges: The Story of Online Groceries
2.
Build an E-Commerce Business Plan
3.
Hot New Careers in E-Commerce
Review Summary
1.
What are the unique features of e-commerce, digital markets, and digital
goods?
E-commerce involves digitally enabled commercial transactions between and among
organizations and individuals. Unique features of e-commerce technology include ubiquity,
global reach, universal technology standards, richness, interactivity, information density,
capabilities for personalization and customization, and social technology.
Digital markets are said to be more “transparent” than traditional markets, with reduced
information asymmetry, search costs, transaction costs, and menu costs, along with the
ability to change prices dynamically based on market conditions. Digital goods, such as
music, video, software, and books, can be delivered over a digital network. Once a digital
product has been produced, the cost of delivering that product digitally is extremely low.
2.
How has Internet technology changed business models?
The Internet can help companies add extra value to existing products and services or create
new products and services. Many different business models for electronic commerce on the
Internet have emerged, including virtual storefronts, information brokers, transaction
brokers, online marketplaces, content providers, social networks, service providers, and
portals. Business models that take advantage of the Internet’s capabilities for
communication, community building, and digital goods distribution have become
especially prominent.
3.
What are the various types of e-commerce and how has e-commerce changed
consumer retailing and business-to-business transactions?
The three major types of electronic commerce are business-to-consumer (B2C), businessto-business (B2B), and consumer-to-consumer (C2C). Mobile commerce, or m-commerce,
is the purchase of goods and services using handheld wireless devices.
The Internet creates new channels for marketing, sales, and customer support and to
eliminate intermediaries in buy-and-sell transactions. Interactive capabilities on the Web
can be used to build closer relationships with customers in marketing and customer
support. Web personalization technologies deliver Web pages with content geared to the
specific interests of each user. Web sites and e-mail reduce transaction costs for placing
orders and customer service.
B2B e-commerce generates efficiencies by enabling companies to locate suppliers, solicit
bids, place orders, and track shipments in transit electronically. Net marketplaces provide a
single, digital marketplace for many buyers and sellers. Private industrial networks link a
firm with its suppliers and other strategic business partners to develop highly efficient and
responsive supply chains.
4.
What is the role of m-commerce in business and what are the most important
m-commerce applications?
M-commerce is especially well-suited for location-based applications, such as finding local
hotels and restaurants, monitoring local traffic and weather, and providing personalized
location-based marketing. Mobile phones and handhelds are being used for mobile bill
payment; banking; securities trading; transportation schedule updates; and downloads of
digital content, such as music, games, and video clips. M-commerce requires wireless
portals and special digital payment systems that can handle micropayments.
5.
What are the principal payment systems for electronic commerce?
The principal e-commerce payment systems are digital credit card payment systems, digital
wallets, accumulated balance digital payment systems, stored value payment systems,
digital checking, and electronic billing presentment and payment systems.