E Commerce 2014 e-commerce e-commerce e-commerce e-commerce
CHAPTER 1 THE REVOLUTION IS JUST BEGINNING Opening Case: Pinterest: A Picture Is Worth a Thousand Words Insight on Technology: Will Apps Make the Web Irrelevant? Insight on Business: Start-Up Boot Camp Insight on Society: Facebook and the Age of Privacy Case Study: The Pirate Bay: Searching for a Safe Haven CHAPTER 2 E-COMMERCE BUSINESS MODELS AND CONCEPTS Opening Case: Twitter’s Business Model Insight on Society: Foursquare: Check Your Privacy at the Door Insight on Business: Crowdfunding Takes Off Insight on Technology: Battle of the Titans: Music in the Cloud Case Study: Pandora and the Freemium Business Model CHAPTER 3 E-COMMERCE INFRASTRUCTURE: THE INTERNET, WEB, AND MOBILE PLATFORM Opening Case: Google Glass: Augment My Reality Insight on Society: Government Surveillance and Regulation of the Internet Insight on Technology: Is HTML5 Ready for Prime Time? Insight on Business: The Apps Ecosystem Case Study: Akamai Technologies: Attempting to Keep Supply Ahead of Demand
In no event shall Microsoft and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, aris-ing out of or in connection with the use or performance of information available from the services. We use the most recent data available, and focus on companies that you arelikely to encounter on a daily basis in your everyday life, such as Facebook, Google,Twitter, Amazon, YouTube, Pinterest, eBay, and many more that you will recognize, as well as some exciting startups that may be new to you.
WELCOME TO THE NEW E-COMMERCE
Since it began in 1995, electronic commerce has grown in the United States from a standing start to a $419 billion retail, travel, and media business and a $4.7 trillionbusiness-to-business juggernaut, bringing about enormous change in business firms, markets, and consumer behavior. While newer firms such as Facebook, Tumblr, YouTube, Twitter, Pinterest, Flickr, and Square have grown explosively in the last two years and grab our attention, thetraditional forms of retail e-commerce and services also remain vital and have proven to be more resilient than traditional retail channels in facing the economic recession.
BUSINESS. TECHNOLOGY. SOCIETY
We believe that in order for business and technology students to really understand e-commerce, they must understand the relationships among e-commerce businessconcerns, Internet technology, and the social and legal context of e-commerce. As founders of a dot.com company and participants in the e-commercerevolution, we have learned that the “e” in e-commerce does not stand for “easy.” The Web and e-commerce have caused a major revolution in marketing and viii P r e f a c e and advertising.
FEATURES AND COVERAGE
Chapter8 is devoted to a thorough exploration of four ethical dimensions of e-commerce: information privacy, intellectual property, governance, and protecting public welfare A major theme throughout this chapter, and the remainder of the book, is the impact of social, mobile, and local commerce on how consumers use the Internet. Chapter 2 introduces and defines the concepts of business model and revenue model,describes the major e-commerce business and revenue models for both B2C and B2B firms, and introduces the basic business concepts required throughout the text forunderstanding e-commerce firms including industry structure, value chains, and firm strategy.
PEDAGOGY AND CHAPTER OUTLINE
While there is a strong dataand conceptual foundation to the book, we seek to engage student interest with lively writing about e-commerce businesses and the transformation of business models attraditional firms. For instance, students areasked to evaluate publicly available information about a company’s financials at the SEC Web site, assess payment system options for companies across inter-national boundaries, or search for the top 10 cookies on their own computer and the sites they are from.
The following indi-viduals provided extremely useful evaluations of this and previous editions of the text: xviii P r e f a c e CrosseSherri Harms, University of Nebraska at MarcosSeung Jae Shin, Mississippi State SingaporeAmber Settle, DePaul CTIVivek Shah, Texas State University-San CollegePatricia Sendall, Merrimack CollegeDr. A special thanks also to Susan Hartman, Executive Editor for the first and second editions and to Frank Ruggirello, Publisher at Addison-Wesley when we began thisproject, and now Vice President and Editorial Director at Benjamin-Cummings.
3 E-COMMERCE INFRASTRUCTURE: THE INTERNET, WEB, AND MOBILE PLATFORM 106Learning Objectives 106 Google Glass: Augment My Reality 107 3.1 The Internet: Technology Background 110 The Evolution of the Internet: 1961—the Present 112The Internet: Key Technology Concepts 113 Packet Switching 113Transmission Control Protocol/Internet Protocol (TCP/IP) 118 IP Addresses 118Domain Names, DNS, and URLs 120Client/Server Computing 121 The New Client: the Mobile Platform 123The Internet “Cloud Computing” Model: Software and Hardware as a Service 124Other Internet Protocols and Utility Programs 125 Internet Protocols: HTTP, E-mail Protocols, FTP, Telnet, and SSL/TLS 125Utility Programs: Ping and Tracert 126 3.2 The Internet Today 127 The Internet Backbone 129Internet Exchange Points 130Campus Area Networks 130Internet Service Providers 132Intranets 134Who Governs the Internet? 134 3.3 The Future Internet Infrastructure 136 Limitations of the Current Internet 136 Insight on Society: Government Regulation and Surveillance of the Internet 137® The Internet2 Project 140The First Mile and the Last Mile 142 Fiber Optics and the Bandwidth Explosion in the First Mile 142The Last Mile: Mobile Internet Access 143 The Future Internet 147Latency Solutions 147 3.4 The Web 148 Hypertext 149Markup Languages 150 HyperText Markup Language (HTML) 150 eXtensible Markup Language (XML) 152 Insight on Technology: Is HTML5 Ready for Prime Time? 153 Web Servers and Clients 155Web Browsers 157 3.5 The Internet and the Web: Features and Services 158 E-mail 158Instant Messaging 158Search Engines 159Online Forums and Chat 161Streaming Media 162Cookies 162Web 2.0 Features and Services 163 Online Social Networks 163Blogs 163Really Simple Syndication (RSS) 164Podcasting 164Wikis 164Music and Video Services 165Internet Telephony 166Video Conferencing, Video Chatting, and Telepresence 166Online Software and Web Services: Web Apps, Widgets, and Gadgets 167Intelligent Personal Assistants 167 3.6 Mobile Apps: The Next Big Thing Is Here 168 Insight on Business: Apps for Everything: The App Ecosystem 169 Platforms for Mobile Application Development 171App Marketplaces 171 3.7 Case Study: Akamai Technologies: Attempting to Keep Supply Ahead of Demand 172 3.8 Review 176 Key Concepts 176Questions 180Projects 181 xxviii C o n t e n t s
4 BUILDING AN E-COMMERCE PRESENCE: WEB SITES, MOBILE SITES, AND APPS 182
(The Visioning Process) 186Where’s the Money: Business and Revenue Model 186Who and Where is the Target Audience 187What Is the Ballpark? 607Online Recruitment Industry Trends 609 9.8 Case Study: OpenTable: Your Reservation Is Waiting 612 xxxviii C o n t e n t s 9.9 Review 616 Key Concepts 616Questions 622Projects 623Learning Objectives 624 YouTube and the Emerging Internet Broadcasting System (IBS) 625 10.1 Online Content 629 Content Audience and Market: Where Are the Eyeballs and the Money?
12 B2B E-COMMERCE: SUPPLY CHAIN MANAGEMENT AND COLLABORATIVE COMMERCE 744Learning Objectives 744 Volkswagen Builds Its B2B Platform 745 Defining and Measuring the Growth of B2B Commerce 750The Evolution of B2B Commerce 750The Growth of B2B E-commerce 2012–2017 753 Industry Forecasts 753Potential Benefits and Challenges of B2B E-commerce 754The Procurement Process and the Supply Chain 755 Insight on Society : Where’s My iPad? Supply Chain Risk and Vulnerability 756 Types of Procurement 758The Role of Existing Legacy Computer Systems and Enterprise Systems 760Trends in Supply Chain Management and Collaborative Commerce 760 Just-in-Time and Lean Production 761Supply Chain Simplification 761Supply Chain Black Swans: Adaptive Supply Chains 761Accountable Supply Chains: Labor Standards 763Sustainable Supply Chains: Lean, Mean, and Green 764 Insight on Technology: RFID Autoidentification: Giving a Voice to Your Inventory 770 Social Networks and B2B: The Extended Social Enterprise 773Main Types of Internet-based B2B Commerce 774 12.2 Net Marketplaces 775 The Variety and Characteristics of Net Marketplaces 775Types of Net Marketplaces 776 E-distributors 777E-procurement 778Exchanges 780Industry Consortia 782 The Long-term Dynamics of Net Marketplaces 784 12.3 Private Industrial Networks 786 What Are Private Industrial Networks? 786Characteristics of Private Industrial Networks 787Private Industrial Networks and Collaborative Commerce 788 Insight on Business: Walmart Develops a Private Industrial Network 789 Implementation Barriers 792 12.4 Case Study: Elemica: Cooperation, Collaboration, and Community 793 12.5 Review 798 Key Concepts 798Questions 803Projects 803 This page intentionally left blank P A R T
1 CHAPTERThe Revolution Is Just Beginning
CHAPTER 2 E-commerce Business Models and Concepts Introduction
■ Recognize and describe Web 2.0 applications.■ Describe the major types of e-commerce.■ Understand the evolution of e-commerce from its early years to today.■ Identify the factors that will define the future of e-commerce.■ Describe the major themes underlying the study of e-commerce.■ Identify the major academic disciplines contributing to e-commerce. The mobile platform based on smartphones and tablet computers has also finally arrived 7 TABLE 1.1 MAJOR TRENDS IN E-COMMERCE 2013–2014 B U S I N E S S T E C H N O L O G Y TABLE 1.1 MAJOR TRENDS IN E-COMMERCE 2013–2014 (CONT.) S O C I E T Y More and more people and businesses are using the Internet to conduct com- merce; smaller, local firms are learning how to take advantage of the Internet asWeb services and Web site tools become very inexpensive.
THE FIRST 30 SECONDS
It is important to realize that the rapid growth and change that has occurred in the first 19 years of e-commerce represents just the beginning—what could be called the first 30seconds of the e-commerce revolution. For society as a whole, the next few decades offer the possibility of extraordinary gains insocial wealth as the digital revolution works its way through larger and larger segments of the world’s economy, offering the possibility of high rates of productivity and incomegrowth in an inflation-free environment.
WHAT IS E-COMMERCE?
e-commerceOur focus in this book is e-commerce—the use of the Internet, the World Wide Web the use of the Internet, the(Web), and mobile apps to transact business. More formally, is a worldwide network of computer networks, and the Web is one of the Internet’sdigitally enabled commer- most popular services, providing access to billions of Web pages.
THE DIFFERENCE BETWEEN E-COMMERCE AND E-BUSINESS
For purposes of this text, we will use the term e-business e-business to refer primarily to the digital enabling of transactions and processes within the digital enabling ofa firm, involving information systems under the control of the firm. For example, a company’s online inventory information systems undercontrol mechanisms are a component of e-business, but such internal processes do not the control of the firmdirectly generate revenue for the firm from outside businesses or consumers, as e-com- merce, by definition, does.
WHY STUDY E-COMMERCE?
The reason for the interest specifically in e-commerce is that e-commerce tech- nology (discussed in detail in Chapters 3 and 4) is different and more powerful thanany of the other technologies we have seen in the past century. It was so expensive to change national or regional prices in traditional market information amongretailing (what are called menu costs) that “one national price” was the norm, and parties in a transactiondynamic pricing to the marketplace let alone to individuals in the marketplace—chang- ing prices in real time—was unheard of.
EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
With e-commerce technologies, it is possible for the first time in history to easily find many of the suppliers, prices, and delivery terms of a specificproduct anywhere in the world, and to view them in a coherent, comparative environ- ment. Merchants also have enhanced abilities to differentiate theirproducts in terms of cost, brand, and quality.personalization the targeting of marketing Personalization/Customization messages to specificE-commerce technologies permit personalization: merchants can target their market- individuals by adjusting theing messages to specific individuals by adjusting the message to a person’s name, message to a person’sinterests, and past purchases.
WEB 2.0: PLAY MY VERSION
Many of the unique features of e-commerce technology and the Internet come togetherWeb 2.0 in a set of applications and social media technologies referred to as Web 2.0. By 2007 something else was happening.preferences, bookmarks, The Internet and the Web had evolved to the point where users could create, edit, and and online personas;distribute content to others; share with one another their preferences, bookmarks, participate in virtual lives;and online personas; par ticipate in virtual lives; and build online communities.
TYPES OF E-COMMERCE
Table 1.3 lists the major types of e-commerce discussed in this book.1 For the most part, we distinguish different types of e-commerce by the nature of the market relationship—who is selling to whom. Eventhough B2C is comparatively small (about $419 billion in 2013 in the United States), e-commerce, viewing the government as simply a form of business when it acts as a procurer of goods and/or services.
1 For the purposes of this text, we subsume business-to-government (B2G) e-commerce within B2B
Social e-commerce is still in its infancy, but is estimated to generate about $5 billion in the United States in 2013, and about $8 billion in the rest of the world (eMarketer, Mobile E-commerce (M-commerce) mobile e-commerce Mobile e-commerce, or m-commerce , refers to the use of mobile devices to enable(m-commerce) online transactions. Local mer- on engaging the consumerchants use a variety of online marketing techniques to drive consumers to their stores.based on his or her current Local e-commerce is the third prong of the social, mobile, local e-commerce wave, and geographic locationis expected to grow in the United States from $3.6 billion in 2011 to an estimated $4.4 billion in 2013 (eMarketer, Inc., 2012b).
GROWTH OF THE INTERNET, WEB, AND MOBILE PLATFORM
There is no precise measurement of the number of Web pages in existence, in part because today’s search engines index only a portion of the known universe of Web pages, and also because the size of the Web universe is unknown. In 2013, there are over variety of highly mobile363 million mobile devices in the United States that can be connected to the Internet devices such as smart-(more than 1 device for each person in the United States), and that number is expected phones, tablets, and otherto grow to almost 400 million by 2017 (eMarketer, Inc., 2013b).
ORIGINS AND GROWTH OF E-COMMERCE
For our purposes, we will say e-commerce begins in 1995, following the appear-ance of the first banner advertisements placed by AT&T, Volvo, Sprint, and others onHotwired.com in late October 1994, and the first sales of banner ad space by Netscape and Infoseek in early 1995. Since then, e-commerce has been the fastest growing form E - c o m m e r c e : T h e R e v o l u t i o n I s J u s t B e g i n n i n g 25 FIGURE 1.6 MOBILE INTERNET ACCESS IN THE UNITED STATES Continued growth in the number of people using mobile phones and tablets to connect to the Internet will provide a significant stimulus to mobile e-commerce.
INSIGHT ON TECHNOLOGYWILL APPS MAKE THE WEB IRRELEVANT?
As the pioneer of apps and the marketleader in apps, smartphones, and tablet comput- ers, Apple stands to gain from a shift towardsapps, and although they will also face increas- ing opposition from other companies, includingGoogle, the established success of the App Store will make it next to impossible to dethrone them. For computer scientists and information technologists, the early success ofe-commerce was a powerful vindication of a set of information technologies that had developed over a period of 40 years—extending from the development of the earlyInternet, to the PC, to local area networks.
30 C H A P T E R 1 T h e R e v o l u t i o n I s J u s t B e g i n n i n g searching for customers would also fall, reducing the need for wasteful advertising
Given the instant nature of Internet communications, the availability of powerful sales information systems, and the low cost involved in changing prices on a Website (low menu costs), producers could dynamically price their products to reflect actual demand, ending the idea of one national price, or one suggested manufac-turer’s list price. The ideology of the period emphasized the ungoverned “Wild West” character of the Web and the feelingthat governments and courts could not possibly limit or regulate the Internet; there was a general belief that traditional corporations were too slow and bureaucratic, toostuck in the old ways of doing business, to “get it”—to be competitive in e-commerce.
2 The network effect is quantified by Metcalfe’s Law, which argues that the value of a network grows
E-COMMERCE 2007—PRESENT: REINVENTION Beginning in 2007 with the introduction of the iPhone, to the present day, e-commerce has been transformed yet again by the rapid growth of online social networks, wide-spread adoption of consumer mobile devices such as smartphones and tablet comput- ers, and the expansion of e-commerce to include local goods and services. Firms’online policies expand in the attempt to build a digital presence that surrounds the online consumer with coordinated marketing messages based on their social networkmemberships, use of search engines and Web browsers, and even their personal e-mail messages, social networks, the mobile platform, and local commerce.
ASSESSING E-COMMERCE: SUCCESSES, SURPRISES, AND FAILURES
Looking back at the early years of e-commerce, it is apparent that e-commerce has been, for the most part, a stunning technological success as the Internet and the Webramped up from a few thousand to billions of e-commerce transactions per year, and this year will generate an estimated $419 billion in total B2C revenues and around$4.7 trillion in B2B revenues, with around 155 million online buyers in the UnitedStates. With enhancements and strengthening, described in later chapters, it is clear that e-commerce’s digital infrastructure is solid enough to sustain significant growth ine-commerce during the next decade.
START-UP BOOT CAMP
A number of them have something in common—they have been nurtured,and in some cases, whipped into shape, with the help of an “incubator.” As entrepreneurs continue to launch a growing number of e-commerce companies, incu-bators have come to occupy a vital role in SiliconValley, helping new businesses move from little more than a great idea to an established, vibrantbusiness. Most manufacturers, for instance, have not adopted the Dellmodel of online sales (direct sales by the manufacturer to the consumer), and Dell itself has moved towards a mixed model heavily reliant on in-store sales where customers can“kick the tires” by trying the keyboard and viewing the screen.
PREDICTIONS FOR THE FUTURE: MORE SURPRISES
Throughout history, whenever technologies have risen to this level of social importance, power, andvisibility, they become the target of efforts to regulate and control the technology to ensure that positive social benefits result from their use and to guarantee the public’shealth and welfare. In summary, the future of e-commerce will be a fascinating mixture of traditional retail, service, and media firms extending their brands to online markets; early-periode-commerce firms such as Amazon and eBay strengthening their financial results and dominant positions; and a bevy of entirely new entrepreneurial firms with thepotential to rocket into prominence by developing huge new audiences in months.
The Internet, while representinga sharp break from prior corporate computing and communications technologies, is nevertheless just the latest development in the evolution of corporate computing andpart of the continuing chain of computer-based innovations in business. Figure 1.11 illustrates the major stages in the development of corporate computing and indicateshow the Internet and the Web fit into this development trajectory.
BUSINESS: BASIC CONCEPTS
SOCIETY: TAMING THE JUGGERNAUT
Since the Internet and the Web are exceptionally adept at tracking the identity and behavior of individuals online, e-commerce raises difficulties for preservingprivacy—the ability of individuals to place limits on the type and amount of informa- tion collected about them, and to control the uses of their personal information. Because the cost of distributing digital copies of copyrighted intellectual prop- erty—tangible works of the mind such as music, books, and videos—is nearly zero onthe Internet, e-commerce poses special challenges to the various methods societies have used in the past to protect intellectual property rights.
FACEBOOK AND THE AGE OF PRIVACY
Socialnetwork sites such as Facebook use a model based on building a database of hundreds of millions ofusers who post personal information, preferences, and behaviors, and who are encouraged, or deceived,into relinquishing control over their information, which is then sold to advertisers and outside thirdparties. Shortly thereafter, Facebook announced that it was launching a mobile advertising product thatpushes ads to the mobile news feeds of users based on the apps they use through the Face-book Connect feature, without explicit permis- sion from the user to do so.
ACADEMIC DISCIPLINES CONCERNED WITH E-COMMERCE
Economists share an interest with marketing scholarswho have focused on e-commerce consumer response to marketing and advertising campaigns, and the ability of firms to brand, segment markets, target audiences, andposition products to achieve above-normal returns on investment. Sociologists—and to a lesser extent, psycholo-gists—have focused on general population studies of Internet usage, the role of social inequality in skewing Internet benefits, and the use of the Web as a social network andgroup communications tool.
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However, the First Swedish Court in Stockholm declared TPB’s four founders guilty of violating Swedish copyright law, and sentenced each to one year in prisonand payment of $3.5 million in restitution to the plaintiffs, all Swedish divisions of the major record firms (Warner Music, Sony, and EMI Group among them). Thecourt also said that the four defendants had been aware of the fact that copyrighted material was shared with the help of their site and that the defendants were engagedin a commercial enterprise, the basis of which was encouraging visitors to violate the copyrights of owners.
3. How has the music industry reacted to the problems created by pirates like TPB?
Twitter has become like a global town squareand was among the first to report on terrorist attacks in Mumbai, the Iranian rebellion in June 2009, the political violence in Bangkok and Kenya in May 2010, and the uprisingsin Egypt, Tunisia, and other areas in the Mideast and Africa in 2011. In contrast, successful e-commerce firms have business models that are ableto leverage the unique qualities of the Internet, the Web, and the mobile platform, provide customers real value, develop highly effective and efficient operations, avoidlegal and social entanglements that can harm the firm, and produce profitable business results.
INSIGHT ON SOCIETYFOURSQUARE: CHECK YOUR PRIVACY AT THE DOOR
Market strategy is the plan you put together that the plan you put togetherdetails exactly how you intend to enter a new market and attract new customers.that details exactly how For instance, Twitter, YouTube, and Pinterest have a social network marketing you intend to enter a newstrategy that encourages users to post their content on the sites for free, build per- market and attract newsonal profile pages, contact their friends, and build a community. Many e-commerce firms and many traditional firms that attempt an e-commerce strategy have failed because they lacked the organizational structures and supportivecultural values required to support new forms of commerce (Kanter, 2001).organizational Companies that hope to grow and thrive need to have a plan for organizational development development that describes how the company will organize the work that needs to plan describes how thebe accomplished.
Incubators (sometimes also referred to as accelerators) such as Y-Combinator(profiled in Chapter 1’s Insight on Business case) typically provide a small amount of funding, but more importantly, also provide an array of services to start-up companiesthat they select to participate in their programs, such as business, technical, and marketing assistance, as well as introductions to other sources of capital. However, the passage ofthe Jumpstart Our Business Startups (JOBS) Act in 2012 and issuance of enabling regu- lations by the Securities and Exchange Commission in July 2013 will now enablecompanies to begin to use the Internet to solicit wealthy (“accredited”) investors to invest in small and early-stage start-ups in exchange for stock.
CATEGORIZING E-COMMERCE BUSINESS MODELS: SOME DIFFICULTIES
In the case of e-tailers in the B2C sector, the business modelfocuses on sales to the individual consumer, while in the case of the e-distributor, the business model focuses on sales to another business. Likewise, although they are sometimes referred to as such, social e-commerce and local e-commerce are not busi-ness models in and of themselves, but rather subsectors of B2C and B2B e-commerce in which different business models can operate.
Although community providers are not a new phenomenon, the Internet has made such sites for like-minded individuals to meet and converse much easier, without thecommunity provider limitations of geography and time to hinder participation. For instance, a parent might visit RightStart.com for tipson diapering a baby and be presented with a link to Huggies.com; if the parent clicks the link and then makes a purchase from Huggies.com, RightStart gets a commission.
For instance, Shopping.com collects information on the prices of thousands of goods online, analyzes the information, and presents userswith tables showing the range of prices and links to the sites where the products can be purchased. PORTAL portal Portals such as Yahoo, MSN, and AOL offer users powerful search tools as well as an offers users powerfulintegrated package of content and services, such as news, e-mail, instant messaging, search tools as well as ancalendars, shopping, music downloads, video streaming, and more, all in one place.integrated package of Initially, portals sought to be viewed as “gateways” to the Internet.
INSIGHT ON TECHNOLOGYBATTLE OF THE TITANS: MUSIC IN THE CLOUD
You get free storage for 20,000songs, for $9.99 a month, you can enjoy unlimited listening to millions of songs and create a per-sonalized radio station similar to that offered byPandora based on any song or artist. Although the total number of vortalusers may be much lower than the number of portal users, if the market segment is attractive enough, advertisers are willing to pay a premium in order to reach a tar-geted audience.
Given rising consumer interest in financial planning and the stock market, the market opportunity for online transaction brokers appears to be large. Consequently, the challenge for online brokersis to overcome consumer fears by emphasizing the security and privacy measures in place, and, like physical banks and brokerage firms, providing a broad range offinancial services and not just stock trading.
80 C H A P T E R 2 E - c o m m e r c e B u s i n e s s M o d e l s a n d C o n c e p t s to trade frequently are the keys to generating more revenue for these companiesTravel sites generate commissions from travel books and job sites generate listing fees from employers up front, rather than charging a fee when a position is filled.
Prime examples are Priceline, which allows consumers to set the price they are willing to pay for various travel accommoda-tions and other products (sometimes referred to as a reverse auction), and eBay, the online auction site utilized by both businesses and consumers. Each sale on eBay nets the company a commission based on the percentage of the item’s sales price, in addition to a listing fee.
The basic value proposition of service providers is that they offer consumers valu- able, convenient, time-saving, and low-cost alternatives to traditional service providersor—in the case of search engines and most Web 2.0 applications—they provide services that are truly unique. The market opportunity for service providers is as large as the variety of services that can be provided and potentially is much larger than themarket opportunity for physical goods.
1 FreshDirect and other e-commerce businesses can also be classified as online retailers insofar as
Many firms have supplemented their EDI systems, however, with more powerful Internet technologiesthat can enable many-to-one and many-to-many market relationships where there are many suppliers selling to a single or small group of very large purchasers, or, inthe case of independent exchanges, where there are many sellers and many buyers simultaneously in the marketplace. In the case of software, the marginal cost of a digital copy of a software program is nearly zero, and finding additional buyersfor an expensive software program is exceptionally profitable.
Vertical marketplaces supply a smaller number of companies with prod- ucts and services of specific interest to their industry, while horizontal marketplacessupply companies in different industries with a particular type of product and service, such as marketing-related, financial, or computing services. For example, Exostar isan online trading exchange for the aerospace and defense industry, founded by BAESystems, Boeing, Lockheed Martin, Raytheon, and Rolls-Royce in 2000.
PRIVATE INDUSTRIAL NETWORKS
For instance, Walmartoperates one of the largest private industrial networks in the world for its suppliers, who on a daily basis use Walmart’s network to monitor the sales of their goods, thestatus of shipments, and the actual inventory level of their goods. 2.5 HOW E-COMMERCE CHANGES BUSINESS: STRATEGY, Now that you have a clear grasp of the variety of business models used by e-commerce firms, you also need to understand how e-commerce has changed the business envi-ronment in the last decade, including industry structures, business strategies, and industry and firm operations (business processes and value chains).
Individual firms existing competitors , the threat of substitute products, barriers to entry into the industry, the bargaining power of suppliers, and the bargaining power of buyers (Porter, 1985). After Travelocity, Expedia,CheapTickets, and other travel services demonstrated the power of e-commerce mar- keting for airline tickets, the actual owners of the airline seats—the major airlines—banded together to form their own Internet outlet for tickets, Orbitz, for direct sales to consumers (although ultimately selling the company to a private investor group).
INDUSTRY VALUE CHAINS
A value chain is the set of activities performed the set of activitiesin an industry or in a firm that transforms raw inputs into final products and services.performed in an industry or Each of these activities adds economic value to the final product; hence, the term value in a firm that transforms chain as an interconnected set of value-adding activities. E-commerce potentially affects the capabilities of each player as well as the overall operational efficiency of 91 H o w E - c o m m e r c e C h a n g e s B u s i n e s s : S t r a t e g y , S t r u c t u r e , a n d P r o c e s s suppliers.
FIRM VALUE CHAINS
A firm value chain is the setthe set of activities a firm of activities a firm engages in to create final products from raw inputs. For instance, Amazon FIGURE 2.6 E-COMMERCE AND FIRM VALUE CHAINS Every firm can be characterized by a set of value-adding primary and secondary activities performed by a variety of actors in the firm.
FIRM VALUE WEBS
A value webnetworked business is a networked business ecosystem that uses e-commerce technology to coordinateecosystem that coordinates the value chains of business partners within an industry, or at the first level, to coor-the value chains of several dinate the value chains of a group of firms. As you will see throughout the book, successful e-commerce strategiesinvolve using the Internet and mobile platform to leverage and strengthen existing business (rather than destroy your business), and to provide products and servicesyour competitors cannot copy (in the short term anyway).
A busi- ness may start with a core generic product or service, but then create expectationsamong users about the “experience” of consuming the product or using the service—”Nothing refreshes like a Coke!” or “Nothing equals the experience of driving a BMW.”Businesses may also augment products and services by adding features to make them different from those of competitors. The purpose of market-ing is to create these differentiation features and to make the consumer aware of the unique qualities of products and services, creating in the process a “brand” that standsfor these features.
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The model is based on giving away some services for free to 99% of the customers, and relying onthe other 1% of the customers to pay for premium versions of the same service. AsChris Anderson, author of Free: The Future of a Radical Price, has pointed out, since the marginal cost of digital products is typically close to zero, providing free productdoes not cost much, and potentially enables you to reach many more people, and if the market is very large, even getting just 1% of that market to purchase could be verylucrative.