Ethical Issues and E-Commerce

Assignment 1: Discussion—Ethical Issues and E-Commerce

In November 2011, the US Immigration and Customs Enforcement agency seized 150 Web sites accused of selling counterfeit merchandise. Attorney General Eric Holder warned that counterfeit merchandise not only affects American innovation but can also be hazardous to a person’s health and that the profits can be used to fund organized crime. The federal government has recently stepped up efforts to enforce laws associated with e-commerce such as copyright laws. The rise of e-commerce presents some interesting legal and ethical issues such as the fact that it is illegal to sell counterfeit merchandise, but such laws are often only lightly enforced.

Using the module readings,  University online library resources, and the Internet, conduct research regarding ethical issues and e-commerce.

Respond to the following:

• Describe a minimum of two ethical and two legal issues of e-commerce as it relates to buyers and sellers. For example, explain if online auction sites should be liable for illegal or counterfeit merchandise sold on behalf of third party sellers.

Give reasons and examples to support your response.

Write your initial response in approximately 300-400 words. Apply APA standards to citation of sources.

 

Assignment 1 Grading Criteria

Described a minimum of two ethical issues of e-commerce as they relate to buyers and sellers.

Described a minimum of two legal issues of e-commerce as they relate to buyers and sellers.

Supported the response with reasons and examples.

 

Assignment 2: Online Payment Systems

With the increasing use of digital payments and the decreasing use of cash payments, enhanced digital security and tracking of financial transactions have become significant aspects of many businesses. The executive director of operations of Centervale Apparel has asked you to research this issue and prepare a presentation for the executive committee to educate them on these issues. You remember hearing that the National Automated Clearing House Association (NACHA) is a leader in this field and would be a good place to start your research.

Review the following:

• NACHA – The Electronic Payments Association. (2011). News headlines. Retrieved from www.nacha.org

Using the  University online library resources as well as NACHA’s Web site article complete the following:

• Describe NACHA and its role.
• Examine and explain the Automated Clearing House (ACH), its role, and how it relates to NACHA.
• List and explain the key participants in an ACH e-payment.
• Describe the key initiatives currently underway at ACH.
• Identify and analyze at least four digital payment concerns Centervale Apparel might want to consider in light of what you’ve learned from NACHA.
• Use the Notes function in Microsoft PowerPoint to prepare detailed speaker’s notes for your formal presentation to the executive committee.

Develop a 4–6-slide presentation in PowerPoint format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M5_A2.ppt.

 

 

 

 

 

 

 

Assignment 2 Grading Criteria

Described NACHA and its role.

Examined and illustrated ACH, its role, and how it relates to NACHA.

Listed and explained the key participants in an ACH e-payment.

Described the key initiatives currently underway at ACH.

Identified and analyzed at least four digital payment concerns Centervale Apparel might want to consider in light of what you’ve learned from NACHA.

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 16-percent 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 https://achieverpapers.com, 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 https://achieverpapers.com 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 E-COMMERCE 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, e-commerce, 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

Low

ry, “Turner’s Secret WebWeapon,” BusinessWeek, December 31, 2007/January 7, 2008; “NASCAR.COM: TrackPass,” NASCAR.com, accessed July 2008.

CASE STUDY QUESTIONS

1.
Describe the unique features of e-commerce technology illustrated in this case.

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

EXAMPLE

S

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 user-generated 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.

https://achieverpapers.com 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-to-business (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 e-commerce.

• 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 m-commerce. 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 e-commerce 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 https://achieverpapers.com 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 third-party 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 customer-support 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-to-computer 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 industry-sponsored 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 GLOBAL M-COMMERCE REVENUE, 2000–2012

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. https://achieverpapers.com 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 https://achieverpapers.com, 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. https://achieverpapers.com’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

SYSTEM

S

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 wallet

s 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.

https://achieverpapers.com 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

https://achieverpapers.com 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 e-commerce 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), business-to-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.