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ISBN-13: 978-0-13-460156-4 ISBN-10: 0-13-460156-4
www.pearsonhighered.com
E-commerce 2017 business. technology. society. THIRTEENTH EDITION
Kenneth C. Laudon
Carol Guercio Traver Laudon
Traver
THIRTEENTH EDITION
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Complete Listing of Chapter Opening Cases, Insight Cases, E-commerce in Action Cases, and Case Studies
CHAPTER 1 THE REVOLUTION IS JUST BEGINNING Opening Case: Uber: The New Face of E-commerce?
Insight on Technology: Will Apps Make the Web Irrelevant?
Insight on Business: Startup Boot Camp
Insight on Society: Facebook and the Age of Privacy
Case Study: Pinterest: A Picture Is Worth a Thousand Words
CHAPTER 2 E-COMMERCE BUSINESS MODELS AND CONCEPTS Opening Case: Tweet Tweet: Twitter’s Business Model
Insight on Society: Foursquare: Check Your Privacy at the Door
Insight on Business: Crowdfunding Takes Off
Insight on Technology: Will the Connected Car Become the Next Hot Entertainment Vehicle?
Case Study: Freemium Takes Pandora Public
CHAPTER 3 E-COMMERCE INFRASTRUCTURE: THE INTERNET, WEB, AND MOBILE PLATFORM
Opening Case: The Apple Watch: Bringing the Internet of Things to Your Wrist
Insight on Society: Government Regulation and Surveillance of the Internet
Insight on Technology: The Rise of HTML5
Insight on Business: AI, Intelligent Assistants, and Chatbots
Case Study: Akamai Technologies: Attempting to Keep Supply Ahead of Demand
CHAPTER 4 BUILDING AN E-COMMERCE PRESENCE: WEBSITES, MOBILE SITES, AND APPS Opening Case: The Wall Street Journal: Redesigning for Today’s Platforms
Insight on Business: Weebly Makes Creating Websites Easy
Insight on Society: Designing for Accessibility
Insight on Technology: Carnival Cruise Ships Go Mobile
Case Study: Dick’s Sporting Goods: Taking Control of Its E-commerce Operations
CHAPTER 5 E-COMMERCE SECURITY AND PAYMENT SYSTEMS Opening Case: Cyberwar: MAD 2.0
Insight on Society: The Ashley Madison Data Breach
Insight on Technology: Think Your Smartphone Is Secure?
Insight on Business: Bitcoin
Case Study: The Mobile Payment Marketplace: Goat Rodeo
CHAPTER 6 E-COMMERCE MARKETING AND ADVERTISING CONCEPTS Opening Case: Video Ads: Shoot, Click, Buy
Insight on Business: Are the Very Rich Different From You and Me?
Insight on Technology: The Long Tail: Big Hits and Big Misses
Insight on Society: Every Move You Take, Every Click You Make, We’ll Be Tracking You
Case Study: Programmatic Advertising: Real-Time Marketing
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CHAPTER 7 SOCIAL, MOBILE, AND LOCAL MARKETING Opening Case: Facebook: Putting Social Marketing to Work
Insight on Technology: Optimizing Social Marketing with Simply Measured
Insight on Society: Marketing to Children of the Web in the Age of Social Networks
Insight on Business: Mobile Marketing: Ford Goes 3-D
Case Study: ExchangeHunterJumper.com: Building a Brand with Social Marketing
CHAPTER 8 ETHICAL, SOCIAL, AND POLITICAL ISSUES IN E-COMMERCE Opening Case: The Right To Be Forgotten: Europe Leads on Internet Privacy
Insight on Technology: Apple: Defender of Privacy?
Insight on Business: Internet Sales Tax Battle
Insight on Society: The Internet Drug Bazaar
Case Study: The Pirate Bay: Searching for a Safe Haven
CHAPTER 9 ONLINE RETAILING AND SERVICES Opening Case: Blue Nile Sparkles for Your Cleopatra
E-commerce in Action: Amazon
Insight on Technology: Big Data and Predictive Marketing
Insight on Society: Phony Reviews
Insight on Business: Food on Demand: Instacart and GrubHub
Case Study: OpenTable: Your Reservation Is Waiting
CHAPTER 10 ONLINE CONTENT AND MEDIA Opening Case: Cord Cutters and Cord Shavers: The Emerging Internet Broadcasting System (IBS)
Insight on Society: Are Millennials Really All That Different?
Insight on Business: Vox: Native Digital News
Insight on Technology: Hollywood and the Internet: Let’s Cut a Deal
Case Study: Netflix: How Does This Movie End?
CHAPTER 11 SOCIAL NETWORKS, AUCTIONS, AND PORTALS Opening Case: Social Network Fever Spreads to the Professions
Insight on Society: The Dark Side of Social Networks
Insight on Technology: Trapped Inside the Facebook Bubble?
Insight on Business: Verizon Doubles Down on Portals
Case Study: eBay Evolves
CHAPTER 12 B2B E-COMMERCE: SUPPLY CHAIN MANAGEMENT AND COLLABORATIVE COMMERCE
Opening Case: Amazon Takes on B2B with Amazon Business
Insight on Society: Where’s My IPad? Supply Chain Risk and Vulnerability
Insight on Technology: Your Shoes Are in the Cloud
Insight on Business: Walmart Develops a Private Industrial Network
Case Study: Elemica: Cooperation, Collaboration, and Community
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Introductory MIS
Experiencing MIS, 7/e Kroenke & Boyle ©2017
Using MIS, 10/e Kroenke & Boyle ©2018
Management Information Systems, 15/e Laudon & Laudon ©2018
Essentials of MIS, 12/e Laudon & Laudon ©2017
IT Strategy, 3/e McKeen & Smith ©2015
Processes, Systems, and Information: An Introduction to MIS, 2/e McKinney & Kroenke ©2015
Information Systems Today, 8/e Valacich & Schneider ©2018
Introduction to Information Systems, 3/e Wallace ©2018
Database
Hands-on Database, 2/e Conger ©2014
Modern Database Management, 12/e Hoffer, Ramesh & Topi ©2016
Database Concepts, 8/e Kroenke, Auer, Vandenburg, Yoder ©2018
Database Processing, 14/e Kroenke & Auer ©2016
Systems Analysis and Design
Modern Systems Analysis and Design, 8/e Hoffer, George & Valacich ©2017
Systems Analysis and Design, 9/e Kendall & Kendall ©2014
Essentials of Systems Analysis and Design, 6/e Valacich, George & Hoffer ©2015
Decision Support Systems
Business Intelligence, Analytics, and Data Science, 4/e Sharda, Delen & Turban ©2018
Business Intelligence and Analytics: Systems for Decision Support, 10/e Sharda, Delen & Turban ©2014
Data Communications & Networking
Applied Networking Labs, 2/e Boyle ©2014
Digital Business Networks Dooley ©2014
Business Data Networks and Security, 10/e Panko & Panko ©2015
Electronic Commerce
E-Commerce: Business, Technology, Society, 13/e Laudon & Traver ©2018
Enterprise Resource Planning
Enterprise Systems for Management, 2/e Motiwalla & Thompson ©2012
Project Management
Project Management: Process, Technology and Practice Vaidyanathan ©2013
OTHER MIS TITLES OF INTEREST
CVR_LAUD1564_13_SE_FEP.indd 4 21/11/16 3:20 PM
Kenneth C. Laudon Carol Guercio Traver New York University Azimuth Interactive, Inc.
E - c o m m e r c e
business. technology. society.
T H I R T E E N T H E D I T I O N
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Microsoft and/or its respective suppliers make no representations about the suitability of the information contained in the docu- ments and related graphics published as part of the services for any purpose. All such documents and related graphics are provided “as is” without warranty of any kind. Microsoft and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all warranties and conditions of merchantability, whether express, implied or statutory, fitness for a particular purpose, title and non-infringement. In no event shall Microsoft and/or its respective suppliers be liable for any spe- cial, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from the services. The documents and related graphics contained herein could include technical inaccuracies or typographical er- rors. Changes are periodically added to the information herein. Microsoft and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time. Partial screen shots may be viewed in full within the software version specified.
Microsoft® Windows® and Microsoft Office® are registered trademarks of Microsoft Corporation in the U.S.A. and other countries. This book is not sponsored or endorsed by or affiliated with Microsoft Corporation.
Copyright © 2018, 2017, 2016 by Kenneth C. Laudon and Carol Guercio Traver.
Published by Pearson Education, Inc. All rights reserved. Manufactured in the United States of America. This publication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval sys- tem, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regarding permissions, request forms and the appropriate contacts within the Pearson Education Global Rights & Permissions De- partment, please visit www.pearsoned.com/permissions.
Acknowledgments of third-party content appear on the appropriate page within the text and/or page C-1, which constitute an ex- tension of this copyright page.
Unless otherwise indicated herein, any third-party trademarks that may appear in this work are the property of their respective owners and any references to third-party trademarks, logos or other trade dress are for demonstrative or descriptive purposes only. Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc. or its affiliates, authors, licensees or dis- tributors.
Library of Congress Cataloging-in-Publication Data Names: Laudon, Kenneth C., 1944- author. | Traver, Carol Guercio, author. Title: E-commerce 2017: business, technology, society / Kenneth C. Laudon, New York University, Carol Guercio Traver, Azimuth Interactive, Inc. Description: Thirteenth EDITION. | Boston: Pearson, [2017] | Revised edition of the authors’ E-commerce 2016. | Includes index. Identifiers: LCCN 2016035789| ISBN 9780134601564 | ISBN 0134601564 Subjects: LCSH: Electronic commerce. | Internet marketing. | Information technology. Classification: LCC HF5548.32 .L38 2017 | DDC 658.8/72--dc23 LC record available at https://lccn.loc.gov/2016035789
ISBN-13: 978-0-13-460156-4 ISBN-10: 0-13-460156-4
VP Editorial Director: Andrew Gilfillan Senior Portfolio Manager: Samantha Lewis Content Development Team Lead: Laura Burgess Program Monitor: Ann Pulido/SPi Global Editorial Assistant: Michael Campbell Product Marketing Manager: Kaylee Carlson Project Manager: Revathi Viswanathan/Cenveo Publisher
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E-commerce. Business. Technology. Society. 13E provides you with an in-depth introduc- tion to the field of e-commerce. We focus on key concepts, and the latest empirical and financial data, that will help you understand and take advantage of the evolving world of opportunity offered by e-commerce, which is dramatically altering the way business is conducted and driving major shifts in the global economy.
Just as important, we have tried to create a book that is thought-provoking and current. We use the most recent data available, and focus on companies that you are likely to encounter on a daily basis in your everyday life, such as Facebook, Google, Twitter, Amazon, YouTube, Pinterest, eBay, Uber, WhatsApp, Snapchat, and many more that you will recognize, as well as some exciting startups that may be new to you. We also have up-to-date coverage of the key topics in e-commerce today, from privacy and piracy, to government surveillance, cyberwar, social, local, and mobile marketing, Internet sales taxes, intellectual property, and more. You will find here the most up-to-date and comprehensive overview of e-commerce today.
The e-commerce concepts you learn in this book will make you valuable to potential employers. The e-commerce job market is expanding rapidly. Many employ- ers expect new employees to understand the basics of e-commerce, social and mobile marketing, and how to develop an e-commerce presence. Every industry today is touched in at least some way by e-commerce. The information and knowledge you find in this book will be valuable throughout your career, and after reading this book, we expect that you will be able to participate in, and even lead, management discus- sions of e-commerce for your firm.
WHAT’S NEW IN THE 13TH EDITION
Currency
The 13th edition features all new or updated opening, closing, and “Insight on” cases. The text, as well as all of the data, figures, and tables in the book, have been updated through October 2016 with the latest marketing and business intelligence available from eMarketer, Pew Research Center, Forrester Research, comScore, Gartner Research, and other industry and government sources.
In addition, we have added new, expanded, and/or updated material throughout the text on a number of e-commerce topics that have appeared in the headlines dur- ing 2016, including the following: • The latest developments with respect to on-demand service companies such as
Uber, Airbnb, Instacart, and many others (Chapters 1, 2, and 9)
• Twitter’s difficulties in finding a workable business model, new federal equity crowdfunding regulations, developing new business models based on the Internet of Things (Chapter 2)
P R E F A C E
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• Developments in wearable computing, including Apple Watch 2; Border Gateway Protocol; HTTP/2; depletion of IPv4 Internet addresses; Tier 1, Tier 2, and Tier 3 ISPs and peering arrangements; Facebook’s satellite Internet access plans; the transition of control over IANA from the U.S. Department of Commerce to ICANN; 5G wireless; Google’s Project Loon and Facebook’s Internet access drone Aquila; IoT developments; the rise of mobile messaging applications and mobile search; virtual and augmented reality; artificial intelligence, intelligent personal assis- tants, and chatbots (Chapter 3)
• Open source Web and app development tools; mobile-first and responsive design; large companies, such as Dick’s Sporting Goods, reclaim their e-commerce infra- structure (Chapter 4)
• New research on tensions between ease of use and security; new security threats (such as the growth of ransomware; hacktivist attacks such as Wikileaks; the Yahoo data breach; the DDoS attack on Dyn); bug bounty programs; HSTS; Cyber- security Information Sharing Act; end-to-end encryption and national security issues; mobile wallets; Bitcoin and blockchain technology; P2P (Venmo; Face- book Messenger) and mobile payment systems (Chapter 5)
• Google search engine algorithm updates; FTC regulation of native advertising; ad fraud issues; new proposed rules on mobile ad viewability; the continuing rise in usage of ad blocking software; mobile supercookie issues; industry and FTC guide- lines on cross-device tracking; big data and marketing (Chapter 6)
• Mobile marketing spending overtakes spending on desktop advertising; new social marketing and social e-commerce tools from Facebook, Twitter, Pinterest, Insta- gram, LinkedIn, and Snapchat; proximity marketing; BLE; Google Eddystone; Apple iBeacons (Chapter 7)
• New, revised section on privacy issues, including facial recognition issues; the impact of the Supreme Court’s Spokeo decision; new E.U. General Data Protection Regulation (Privacy Shield); new FCC privacy regulations on ISPs; Apple/U.S. gov- ernment iPhone privacy fight; Google Library Project final court decision; new DMCA litigation; Apple/Samsung patent battles new section on trade secrets and federal Trade Secrets act; Internet sales tax developments; net neutrality develop- ments; online fantasy sports gambling issues (Chapter 8)
• The rise of social e-commerce; investments in fintech companies and online lending services; consolidation in the online recruitment industry; on-demand service companies (Chapter 9)
• Cord cutters, cord shavers, and cord nevers; industry structure convergence (AT&T/Time Warner; Verizon/Yahoo mergers); native digital news sites; FCC open set top box plan; streaming of pirated content; streaming music services; streaming TV devices; the impact of Pokemon GO (Chapter 10)
• Acquisition of LinkedIn by Microsoft; new section on the the use of algorithms by social networks, such as Facebook’s algorithm for generating personalized content; Facebook Workplace; Verizon acquires AOL and Yahoo (Chapter 11)
• Amazon Business; the rise of B2B sell-side marketplaces; supply chain visibility; cloud-based B2B; mobile B2B; B2B marketing (Chapter 12)
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Themes
E-commerce has significantly evolved over the last decade. The iPhone was intro- duced in 2007. The iPad tablet was first introduced in 2010 and has already gone through several generations! Cloud services for storing and streaming content, and hosting thousands of apps, were not widely available until 2011. Smartphone and tab- let devices have changed e-commerce into a social, local, and mobile experience. The 13th edition spotlights the following themes and content:
Headlines • Social, Mobile, Local: We include an entire chapter describing social, mobile, and
local marketing. Content about social networks, the mobile platform, and local e-commerce appears throughout the book.
» The mobile platform composed of smartphones and tablet computers takes off and becomes a major factor in search, marketing, payment, retailing and ser- vices, and online content, as well as on-demand service companies. Mobile device use poses new security and privacy issues as well.
» Social networks such as Facebook, Twitter, Pinterest, Instagram, LinkedIn, and Snapchat continue their rapid growth, laying the groundwork for a social net- work marketing platform.
» Location-based services lead to explosive growth in local advertising and mar- keting.
• Online privacy continues to deteriorate, driven by a culture of self-revelation and powerful technologies for collecting personal information online without the knowledge or consent of users. A growing number of consumers adopt ad blockers.
• Internet security risks increase; cyberwarfare becomes a new way of conducting warfare among nation-states and a national security issue. A growing perception of online risk supports a growing lack of trust in e-commerce firms and transac- tions.
Business • E-commerce revenues surge, despite slow economic growth.
• Internet advertising growth continues to outpace traditional advertising, including television.
• Social marketing grows faster than traditional online marketing like search and display advertising.
• E-books sales plateau but continue as a major channel for books. Consumers increasingly use smartphones and tablets as reader devices.
• Newspapers struggle to define a digital first news service.
• Streaming of popular TV shows and movies (Netflix, Amazon, YouTube, and Hulu. com) becomes a reality, as Internet distributors and Hollywood and TV producers strike deals for Web distribution that also protects intellectual property.
• “Free” and “freemium” business models compete to support digital content. Sub- scription services show unexpected strength.
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• New mobile payment platforms continue to emerge to challenge PayPal, including Apple Pay, Android Pay, Samsung Pay, and Venmo.
• B2B e-commerce exceeds pre-recession levels as firms become more comfortable with digital supply chains.
Technology • Smartphones, tablets, and e-book readers, along with associated cloud-based soft-
ware applications, and coupled with 4G cellular network expansion, fuel rapid growth of the mobile platform.
• Investment in cloud computing increases, providing the computing infrastructure for a massive increase in online digital information content, and e-commerce.
• Cloud-based streaming services for music and video challenge sales of downloads and physical product.
• Software apps fuel growth in app sales, marketing, and advertising; transforming software production and distribution.
• The cost of developing sophisticated websites continues to drop due to declining software and hardware prices and open source software tools.
• Internet and cellular network capacity is challenged by the rapid expansion in digital traffic generated by mobile devices; the use of bandwidth caps tier-pricing expands.
Society • The mobile, “always on” culture in business and family life continues to grow.
• Congress considers legislation to regulate the use of personal information for behavioral tracking and targeting consumers online.
• European countries develop much stronger privacy policies, including Right to be Forgotten laws, add a new General Data Protection Regulation (Privacy Shield), and continue to expand the rights of citizens vis-à-vis Internet data giants.
• States heat up the pursuit of taxes on Internet sales by e-commerce firms.
• Intellectual property issues remain a source of conflict with significant movement toward resolution in some areas, such as Google’s deals with Hollywood and the publishing industry, and Apple’s and Amazon’s deals with e-book and magazine publishers.
• Net neutrality regulations forbid Internet providers from discriminating against types of content, or providing differential service to large players.
• P2P piracy traffic declines as paid streaming music and video gains ground, although digital piracy of online content remains a significant threat to Hollywood and the music industry.
• Governments around the world increase surveillance of Internet users and web sites in response to national security threats; Google continues to tussle with China and other countries over censorship and security issues. Europe ends safe harbor protections for U.S. Internet firms.
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• Venture capital investing in e-commerce explodes for social, mobile, and local soft- ware applications. Crowdfunding becomes a new source of funding for e-com- merce start-ups.
WELCOME TO E-COMMERCE 2017
Since it began in 1995, electronic commerce has grown in the United States from a standing start to a $600 billion retail, travel, and media business and a $6.7 trillion business-to-business juggernaut, bringing about enormous change in business firms, markets, and consumer behavior. Economies and business firms around the globe are being similarly affected. During this relatively short time, e-commerce has itself been transformed from its origin as a mechanism for online retail sales into something much broader. Today, e-commerce has become the platform for media and new, unique services and capabilities that aren’t found in the physical world. There is no physical world counterpart to Facebook, Twittter, Google search, or a host of other recent online innovations from Pinterest and iTunes to Tumblr. The Internet is about to replace television as the largest entertainment platform. Welcome to the new e-commerce!
E-commerce is projected to continue growing at double-digit rates over the next five years, remaining the fastest growing form of commerce. Just as automobiles, airplanes, and electronics defined the twentieth century, so will e-commerce of all kinds define business and society in the twenty-first century. The rapid movement toward an e-commerce economy and society is being led by both established business firms such as Walmart, Ford, IBM, Macy’s, and General Electric, and online firms such as Google, Amazon, Apple, Facebook, Yahoo, Twitter, and YouTube. Students of business and information technology need a thorough grounding in e-commerce in order to be effective and successful managers in the next decade.
While firms such as Facebook, YouTube, Twitter, Pinterest, and Uber have grown explosively in the last two years and grab our attention, the traditional forms of retail e-commerce and services also remain vital and have proven to be more resilient than traditional retail channels in facing the economic recession. The experience of these firms from 1995 to the present is also a focus of this book. The defining characteristic of these firms is that they are profitable, sustainable, efficient, and innovative, with powerful brand names. Many of these now-experienced retail and service firms, such as eBay, Amazon, E*Trade, Priceline, and Expedia, are survivors of the first era of e-commerce. These surviving firms have evolved their business models, integrated their online and offline operations, and changed their revenue models to become profitable. Understanding how these online businesses succeeded will help students to manage their own firms in the current omni-channel business environment.
It would be foolish to ignore the lessons learned in the early period of e-commerce. Like so many technology revolutions in the past—automobiles, electricity, tele- phones, television, and biotechnology—there was an explosion of entrepreneurial efforts, followed by consolidation. By 2005, the survivors of the early period were moving to establish profitable businesses while maintaining rapid growth in reve- nues. In 2016, e-commerce is in the midst of a new period of explosive entrepreneur-
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ial activity focusing on on-demand services, social networks, and the mobile platform created by smartphones and tablet computers. These technologies and social behav- iors are bringing about extraordinary changes to our personal lives, markets, indus- tries, individual businesses, and society as a whole. E-commerce is generating thousands of new jobs in all fields from marketing to management, entrepreneurial studies, and information systems. Today, e-commerce has moved into the main- stream life of established businesses that have the market brands and financial mus- cle required for the long-term deployment of e-commerce technologies and methods. If you are working in an established business, chances are the firm’s e-commerce capabilities are important factors for its success. If you want to start a new business, chances are very good that the knowledge you learn in this book will be very helpful.
BUSINESS. TECHNOLOGY. SOCIETY.
We believe that in order for business and technology students to really understand e-commerce, they must understand the relationships among e-commerce business concerns, Internet technology, and the social and legal context of e-commerce. These three themes permeate all aspects of e-commerce, and therefore, in each chapter, we present material that explores the business, technological, and social aspects of that chapter’s main topic.
Given the continued growth and diffusion of e-commerce, all students—regard- less of their major discipline—must also understand the basic economic and busi- ness forces driving e-commerce. E-commerce has created new digital markets where prices are more transparent, markets are global, and trading is highly effi- cient, though not perfect. E-commerce has a direct impact on a firm’s relationship with suppliers, customers, competitors, and partners, as well as how firms market products, advertise, and use brands. Whether you are interested in marketing and sales, design, production, finance, information systems, or logistics, you will need to know how e-commerce technologies can be used to reduce supply chain costs, increase production efficiency, and tighten the relationship with customers. This text is written to help you understand the fundamental business issues in e-com- merce.
We spend a considerable amount of effort analyzing the business models and strategies of both online companies and established businesses now employing “bricks-and-clicks” business models. We explore why e-commerce firms fail and the strategic, financial, marketing, and organizational challenges they face. We also dis- cuss how e-commerce firms learned from the mistakes of early firms, and how estab- lished firms are using e-commerce to succeed. Above all, we attempt to bring a strong sense of business realism and sensitivity to the often exaggerated descriptions of e-commerce.
The Web and mobile platform have caused a major revolution in marketing and advertising in the United States. We spend two chapters discussing online marketing and advertising. Chapter 6 discusses “traditional” online marketing formats like search engine marketing, display advertising, and e-mail, as well as various Internet marketing technologies underlying those efforts, and metrics for measuring market-
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P r e f a c e ix
ing success. Chapter 7 provides an in-depth examination of social, mobile, and local marketing, which relies on mobile devices and social networks.
E-commerce is driven by Internet technology. Internet technology, and infor- mation technology in general, is perhaps the star of the show. Without the Internet, e-commerce would be virtually nonexistent. Accordingly, we provide three chapters specifically on the Internet and e-commerce technology, and in every chapter we provide continuing coverage by illustrating how the topic of the chapter is being shaped by new information technologies. For instance, Internet technology drives developments in security and payment systems, marketing strategies and advertis- ing, financial applications, media distribution, business-to-business trade, and retail e-commerce. We discuss the rapid growth of the mobile platform, the emergence of cloud computing, new open source software tools and applications, and new types of Internet-based information systems that support digital business-to-business markets.
E-commerce is not only about business and technology, however. The third part of the equation for understanding e-commerce is society. E-commerce and Internet technologies have important social consequences that business leaders can ignore only at their peril. E-commerce has challenged our concepts of privacy, intellectual property, and even our ideas about national sovereignty and governance. Google, Facebook, Amazon, and assorted advertising networks maintain profiles on millions of shoppers and consumers worldwide. The proliferation of illegally copied music, videos, and books on the Internet, and the growth of social network sites often based on displaying copyrighted materials without permission, are challenging the intel- lectual property rights of record labels, Hollywood studios, artists, and writers. And many countries—including the United States—are demanding to control the content of websites displayed within their borders for political and social reasons. Tax author- ities in the United States and Europe are demanding that e-commerce sites pay sales taxes just like ordinary brick and mortar stores on Main Street. As a result of these challenges to existing institutions, e-commerce and the Internet are the subject of increasing investigation, litigation, and legislation. Business leaders need to under- stand these societal developments, and they cannot afford to assume any longer that the Internet is borderless, beyond social control and regulation, or a place where market efficiency is the only consideration. In addition to an entire chapter devoted to the social and legal implications of e-commerce, each chapter contains material highlighting the social implications of e-commerce.
FEATURES AND COVERAGE
Strong Conceptual Foundation The book emphasizes the three major driving forces behind e-commerce: business development and strategy, technological innovations, and social controversies and impacts. Each of these driving forces is represented in every chapter, and together they provide a strong and coherent conceptual frame- work for understanding e-commerce. We analyze e-commerce, digital markets, and e-business firms just as we would ordinary businesses and markets using concepts from economics, marketing, finance, sociology, philosophy, and information sys-
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tems. We strive to maintain a critical perspective on e-commerce and avoid industry hyperbole.
Some of the important concepts from economics and marketing that we use to explore e-commerce are transaction cost, network externalities, information asym- metry, social networks, perfect digital markets, segmentation, price dispersion, tar- geting, and positioning. Important concepts from the study of information systems and technologies play an important role in the book, including Internet standards and protocols, client/server computing, cloud computing, mobile platform and wireless technologies, and public key encryption, among many others. From the literature on ethics and society, we use important concepts such as intellectual property, privacy, information rights and rights management, governance, public health, and welfare.
From the literature on business, we use concepts such as business process design, return on investment, strategic advantage, industry competitive environment, oli- gopoly, and monopoly. We also provide a basic understanding of finance and account- ing issues, and extend this through an “E-commerce in Action” case that critically examines the financial statements of Amazon. One of the witticisms that emerged from the early years of e-commerce and that still seems apt is the notion that e-com- merce changes everything except the rules of business. Businesses still need to make a profit in order to survive in the long term.
Currency Important new developments happen almost every day in e-commerce and the Internet. We try to capture as many of these important new developments as possible in each annual edition. You will not find a more current book for a course offered for the 2017 academic year. Many other texts are already six months to a year out of date before they even reach the printer. This text, in contrast, reflects extensive research through October 2016, just weeks before the book hits the press.
Real-World Business Firm Focus and Cases From Akamai Technologies to Google, Microsoft, Apple, and Amazon, to Facebook, Twitter, and Tumblr, to Netflix, Pandora, and Elemica, this book contains hundreds of real-company examples and over 60 more extensive cases that place coverage in the context of actual e-commerce busi- nesses. You’ll find these examples in each chapter, as well as in special features such as chapter-opening, chapter-closing, and “Insight on” cases. The book takes a realistic look at the world of e-commerce, describing what’s working and what isn’t, rather than presenting a rose-colored or purely “academic” viewpoint.
In-depth Coverage of Marketing and Advertising The text includes two chapters on marketing and advertising, both traditional online marketing and social, mobile, and local marketing. Marketing concepts, including market segmentation, personaliza- tion, clickstream analysis, bundling of digital goods, long-tail marketing, and dynamic pricing, are used throughout the text.
In-depth Coverage of B2B E-commerce We devote an entire chapter to an examina- tion of B2B e-commerce. In writing this chapter, we developed a unique and easily understood classification schema to help students understand this complex arena of e-commerce. This chapter covers e-distributors, e-procurement companies, exchanges,
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and industry consortia, as well as the development of private industrial networks and collaborative commerce.
Current and Future Technology Coverage Internet and related information tech- nologies continue to change rapidly. The most important changes for e-commerce include dramatic price reductions in e-commerce infrastructure (making it much less expensive to develop a sophisticated e-commerce presence), the explosive growth in the mobile platform such as iPhones, iPads, and tablet computers, and expansion in the development of social technologies, which are the foundation of online social networks. What was once a shortage of telecommunications capacity has now turned into a surplus, PC prices have continued to fall, smartphone and tablet sales have soared, Internet high-speed broadband connections are now typical and are continu- ing to show double-digit growth, and wireless technologies such as Wi-Fi and cellular broadband are transforming how, when, and where people access the Internet. While we thoroughly discuss the current Internet environment, we devote considerable attention to describing emerging technologies and applications such as the Internet of Things, advanced network infrastructure, fiber optics, wireless and 4G technolo- gies, Wi-Fi, IP multicasting, and future guaranteed service levels.
Up-to-Date Coverage of the Research Literature This text is well grounded in the e-commerce research literature. We have sought to include, where appropriate, refer- ences and analysis of the latest e-commerce research findings, as well as many classic articles, in all of our chapters. We have drawn especially on the disciplines of eco- nomics, marketing, and information systems and technologies, as well as law jour- nals and broader social science research journals including sociology and psychology.
We do not use references to Wikipedia in this text, for a variety of reasons. Most colleges do not consider Wikipedia a legitimate or acceptable source for academic research and instruct their students not to cite it. Material found on Wikipedia may be out of date, lack coverage, lack critical perspective, and cannot necessarily be trusted. Our references are to respected academic journals; industry sources such as eMarketer, comScore, Hitwise, Nielsen, and Gartner; newspapers such as the New York Times and Wall Street Journal; and industry publications such as Computerworld and InformationWeek, among others. Figures and tables sourced to “authors’ estimates” reflect analysis of data from the U.S. Department of Commerce, estimates from vari- ous research firms, historical trends, revenues of major online retailers, consumer online buying trends, and economic conditions.
Special Attention to the Social and Legal Aspects of E-commerce We have paid special attention throughout the book to the social and legal context of e-commerce. Chapter 8 is devoted to a thorough exploration of four ethical dimensions of e-com- merce: information privacy, intellectual property, governance, and protecting public welfare on the Internet. We have included an analysis of the latest Federal Trade Commission and other regulatory and nonprofit research reports, and their likely impact on the e-commerce environment.
A major theme throughout this chapter, and the remainder of the book, is the impact of social, mobile, and local commerce on how consumers use the Internet.
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Writing That’s Fun to Read Unlike some textbooks, we’ve been told by many stu- dents that this book is actually fun to read and easy to understand. This is not a book written by committee—you won’t find a dozen different people listed as authors, co- authors, and contributors on the title page. We have a consistent voice and perspec- tive that carries through the entire text and we believe the book is the better for it.
OVERVIEW OF THE BOOK
The book is organized into four parts. Part 1, “Introduction to E-commerce,” provides an introduction to the major
themes of the book. Chapter 1 defines e-commerce, distinguishes between e-commerce and e-business, and defines the different types of e-commerce. Chapter 2 introduces and defines the concepts of business model and revenue model, describes the major e-commerce business and revenue models for both B2C and B2B firms, and introduces the basic business concepts required throughout the text for understanding e-commerce firms including industry structure, value chains, and firm strategy.
Part 2, “Technology Infrastructure for E-commerce,” focuses on the technology infrastructure that forms the foundation for all e-commerce. Chapter 3 traces the historical development of the Internet and thoroughly describes how today’s Internet works. A major focus of this chapter is mobile technology, new software applications, and the near-term future Internet that is now under development and will shape the future of e-commerce. Chapter 4 builds on the Internet chapter by focusing on the steps managers need to follow in order to build an e-commerce presence. This e-com- merce infrastructure chapter covers the process that should be followed in building an e-commerce presence; the major decisions regarding outsourcing site develop- ment and/or hosting; how to choose software, hardware, and other tools that can improve website performance; and issues involved in developing a mobile website and mobile applications. Chapter 5 focuses on e-commerce security and payments, building on the e-commerce infrastructure discussion of the previous chapter by describing the ways security can be provided over the Internet. This chapter defines digital information security, describes the major threats to security, and then dis- cusses both the technology and policy solutions available to business managers seek- ing to secure their firm’s sites. This chapter concludes with a section on e-commerce payment systems. We identify the various types of online payment systems (credit cards, stored value payment systems such as PayPal, digital wallets such as Google Wallet, and others), and the development of mobile and social payment systems such as Apple Pay, Venmo, and Facebook Messenger.
Part 3, “Business Concepts and Social Issues,” focuses directly on the business concepts and social-legal issues that surround the development of e-commerce. Chap- ter 6 focuses on e-commerce consumer behavior, the Internet audience, and intro- duces the student to the basics of online marketing and branding, including traditional online marketing technologies and marketing strategies. Topics include the website as a marketing platform, search engine marketing and advertising, display ad market- ing, e-mail campaigns, affiliate and lead generation marketing programs, multichan-
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nel marketing, and various customer retention strategies such as personalization (including interest-based advertising, also known as behavioral targeting) and cus- tomer service tools. The chapter also covers other marketing strategies such as pric- ing and long-tail marketing. Internet marketing technologies (web transaction logs, tracking files, data mining, and Big Data) and marketing automation and CRM sys- tems are also explored. The chapter concludes with a section on understanding the costs and benefits of various types of online marketing, including a new section on marketing analytics software. Chapter 7 is devoted to an in-depth analysis of social, mobile, and local marketing. Topics include Facebook, Twitter, and Pinterest market- ing platforms, the evolution of mobile marketing, and the growing use of geo-aware technologies to support proximity marketing. Chapter 8 provides a thorough intro- duction to the social and legal environment of e-commerce. Here, you will find a description of the ethical and legal dimensions of e-commerce, including a thorough discussion of the latest developments in personal information privacy, intellectual property, Internet governance, jurisdiction, and public health and welfare issues such as pornography, gambling, and health information.
Part 4, “E-commerce in Action,” focuses on real-world e-commerce experiences in retail and services, online media, auctions, portals, and social networks, and busi- ness-to-business e-commerce. These chapters take a sector approach rather than the conceptual approach used in the earlier chapters. E-commerce is different in each of these sectors. Chapter 9 takes a close look at the experience of firms in the retail mar- ketplace for both goods and services, as well as on-demand service companies such as Uber and Airbnb. Chapter 9 also includes an "E-commerce in Action" case that provides a detailed analysis of the business strategies and financial operating results of Amazon, which can be used as a model to analyze other e-commerce firms. Chap- ter 10 explores the world of online content and digital media and examines the enor- mous changes in online publishing and entertainment industries that have occurred over the last two years, including streaming movies, e-books, and online newspapers and magazines. Chapter 11 explores the online world of social networks, auctions, and portals. Chapter 12 concentrates on the world of B2B e-commerce, describing both Net marketplaces and the less-heralded, but very large arena of private indus- trial networks and the movement toward collaborative commerce.
PEDAGOGY AND CHAPTER OUTLINE
The book’s pedagogy emphasizes student cognitive awareness and the ability to ana- lyze, synthesize, and evaluate e-commerce businesses. While there is a strong data and conceptual foundation to the book, we seek to engage student interest with lively writing about e-commerce businesses and the transformation of business models at traditional firms.
Each chapter contains a number of elements designed to make learning easy as well as interesting.
Learning Objectives A list of learning objectives that highlights the key concepts in the chapter guides student study.
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Chapter-Opening Cases Each chapter opens with a story about a leading e-com- merce company that relates the key objectives of the chapter to a real-life e-com- merce business venture.
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“Insight on” Cases Each chapter contains three real-world cases illustrating the themes of technol- ogy, business, and society. These cases take an in-depth look at rel- evant topics to help describe and analyze the full breadth of the field of e-commerce. The cases probe such issues as the ability of govern- ments to regulate Internet content, how to design websites for accessibility, the challenges faced by luxury marketers in online marketing, and smartphone security.
Margin Glossary Throughout the text, key terms and their definitions appear in the text margin where they are first intro- duced.
Real-Company Examples Drawn from actual e-commerce ventures, well over 100 pertinent examples are used throughout the text to illustrate concepts.
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Chapter-Closing Case Studies Each chap- ter concludes with a robust case study based on a real-world organization. These cases help students synthesize chapter concepts and apply this knowledge to concrete prob- lems and scenarios such as evaluating Pan- dora’s freemium business model, ExchangeHunterJumper’s efforts to build a brand, and the evolution of eBay.
Chapter-Ending Pedagogy Each chap- ter contains extensive end-of-chapter materials designed to reinforce the learning objectives of the chapter.
Key Concepts Keyed to the learn- ing objectives, Key Concepts pres- ent the key points of the chapter to aid student study.
Review Questions Thought-pro- voking questions prompt stu- dents to demonstrate their
comprehension and apply chapter con- cepts to management problem solving.
Projects At the end of each chapter are a number of projects that encourage students to apply chapter concepts and to use higher level evaluation skills. Many make use of the Internet and require students to present their findings in an oral or electronic pre- sentation or written report. For instance, students are asked to evaluate publicly avail- able information about a company’s financials at the SEC website, assess payment
system options for companies across international boundaries, or search for the top 10 cookies on their own computer and the sites they are from.
Web Resources Web resources that can extend stu- dents’ knowledge of each chapter with projects, exercises, and additional content are available at www.azimuth-interactive.com/ecommerce13e. The website contains the following content provided by the authors: • Additional projects, exercises, and tutorials
• Information on how to build a business plan and revenue models
• Essays on careers in e-commerce
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INSTRUCTOR RESOURCES
At the Instructor Resource Center, www.pearsonhighered.com/irc, instructors can easily register to gain access to a variety of instructor resources available with this text in downloadable format. If assistance is needed, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit http://247.pearsoned.com for answers to frequently asked questions and toll-free user support phone numbers.
The following supplements are available with this text:
• Instructor’s Resource Manual
• Test Bank
• TestGen® Computerized Test Bank
• PowerPoint Presentation
• Image Library
• Video Cases The authors have created a collection of video case studies that inte- grate short videos, supporting case study material, and case study questions. Video cases can be used in class to promote discussion or as written assignments. There are 29 video cases for the 13th edition, of which 14 are entirely new, and the remainder with updated supporting case study material.
Chapter 1 1.1 The Importance of the Internet for E-commerce 1.2 The Growth of the On-Demand Economy
Chapter 2 2.1 Twitter for Business 2.2 Angel Investing 2.3 Deals Galore at Groupon
Chapter 3 3.1 How Freshdesk Uses Amazon Web Services 3.2 Compare.com Turns to Microsoft Azure and the Cloud 3.3 Facebook’s Data Centers 3.4 Amazon Echo
Chapter 4 4.1 WL Gore Expands Using Demandware 4.2 National Kidney Registry Turns to Rackspace for Managed Hosting
Chapter 5 5.1 The Rise of Cyberwarfare 5.2 Tech Titans Clash over Future of Mobile Payments
Chapter 6 6.1 To Ad Block or Not to Ad Block 6.2 Pandora’s Recommendation System
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Chapter 7 7.1 Pinterest Users Engage with Sephora 7.2 The Full Value of Mobile Marketing
Chapter 8 8.1 The Right to Be Forgotten 8.2 Facebook Privacy 8.3 What Net Neutrality Means for You
Chapter 9 9.1 Walmart Takes On Amazon 9.2 Etsy: A Marketplace and a Community
Chapter 10 10.1 YouTube: Secrets of Successful Content Creators 10.2 Vox Media 10.3 ESPN: Sports Broadcasting Evolves
Chapter 11 11.1 Instagram 11.2 Small Businesses Find a Home on eBay
Chapter 12 12.1 Flextronics Uses Elementum’s Cloud-based Mobile Supply Chain Apps 12.2 Mechan Groep Streamlines with Sana Commerce
• Learning Tracks These additional essays, created by the authors, provide instruc- tors and students with more in-depth content on selected topics in e-commerce.
Chapter 1 1.1 Global E-commerce Europe 1.2 Global E-commerce Latin America 1.3 Global E-commerce China
Chapter 6 6.1 Basic Marketing Concepts 6.2 Consumer Behavior: Cultural, Social, and Psychological Background Fac- tors 6.3 Social Media Marketing—Blogging
Chapter 7 Social Media Marketing: Facebook Social Media Marketing: Twitter
ACKNOWLEDGMENTS
Pearson Education has sought the advice of many excellent reviewers, all of whom have strongly influenced the organization and substance of this book. The following individuals provided extremely useful evaluations of this and previous editions of the text:
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Deniz Aksen, Koç University (Istanbul) Carrie Andersen, Madison Area
Technical College Subhajyoti Bandyopadhyay, University of
Florida Christine Barnes, Lakeland Community
College Reneta Barneva, SUNY Fredonia Rathin Basu, Ferrum College Dr. Shirley A. Becker, Northern Arizona
University Prasad Bingi, Indiana-Purdue University,
Fort Wayne Joanna Broder, Pima Community
College Lisa Bryan, Southeastern Community
College James Buchan, College of the Ozarks Ashley Bush, Florida State University Cliff Butler, North Seattle Community
College Carl Case, St. Bonaventure University Teuta Cata, Northern Kentucky
University Adnan Chawdhry, California University
of Pennsylvania Mark Choman, Luzerne City Community
College Andrew Ciganek, Jacksonville State
University Daniel Connolly, University of Denver Tom Critzer, Miami University Dr. Robin R. Davis, Claflin University Dursan Delen, Oklahoma State
University Abhijit Deshmukh, University of
Massachusetts Brian L. Dos Santos, University of
Louisville Robert Drevs, University of Notre Dame Akram El-Tannir, Hariri Canadian
University, Lebanon Kimberly Furumo, University of Hawaii
at Hilo
John H. Gerdes, University of California, Riverside
Gurram Gopal, Illinois Institute of Technology
Philip Gordon, University of California at Berkeley
Allan Greenberg, Brooklyn College Bin Gu, University of Texas at Austin Norman Hahn, Thomas Nelson
Community College Peter Haried, University of Wisconsin-La
Crosse Sherri Harms, University of Nebraska at
Kearney Sharon Heckel, St. Charles Community
College David Hite, Virginia Intermont College Gus Jabbour, George Mason University Thaddeus Janicki, University of Mount
Olive Kevin Jetton, Texas State University, San
Marcos Jim Keogh, Saint Peter’s University Ellen Kraft, Georgian Court University Gilliean Lee, Lander University Zoonky Lee, University of Nebraska,
Lincoln Andre Lemaylleux, Boston University,
Brussels Haim Levkowitz, University of
Massachusetts, Lowell Yair Levy, Nova Southeastern University Richard Lucic, Duke University Brenda Maynard, University of Pikeville Vincent McCord, Foothill College John Mendonca, Purdue University John Miko, Saint Francis University Dr. Abdulrahman Mirza, DePaul
University Natalie Nazarenko, SUNY - Fredonia Barbara Ozog, Benedictine University Kent Palmer, MacMurray College Karen Palumbo, University of St. Francis
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We would like to thank eMarketer, Inc. and David Iankelevich for their permission to include data and figures from their research reports in our text. eMarketer is one of the leading independent sources for statistics, trend data, and original analysis cover- ing many topics related to the Internet, e-business, and emerging technologies. eMar- keter aggregates e-business data from multiple sources worldwide.
In addition, we would like to thank all those who have worked so hard to make sure this book is the very best it can be, including Samantha McAfee Lewis, Senior Portfolio Manager at Pearson and Revathi Viswanathan, Project Manager at Cenveo
James Pauer, Lorain County Community College
Wayne Pauli, Dakota State University Sam Perez, Mesa Community College Jamie Pinchot, Thiel College Selwyn Piramuthu, University of Florida Kai Pommerenke, University of
California at Santa Cruz Barry Quinn, University of Ulster,
Northern Ireland Mahesh (Michael) Raisinghani, TWU
School of Management, Executive MBA Program
Michelle Ramim, Nova Southeastern University
Jay Rhee, San Jose State University Jorge Romero, Towson University John Sagi, Anne Arundel Community
College Carl Saxby, University of Southern
Indiana Patricia Sendall, Merrimack College Dr. Carlos Serrao, ISCTE/DCTI, Portugal Neerja Sethi, Nanyang Business School,
Singapore Amber Settle, DePaul CTI Vivek Shah, Texas State University-San
Marcos Wei Shi, Santa Clara University Seung Jae Shin, Mississippi State
University Sumit Sircar, University of Texas at
Arlington Toni Somers, Wayne State University
Mike Ilitch School of Business
Hongjun Song, University of Memphis Pamela Specht, University of Nebraska at
Omaha Esther Swilley, Kansas State University Tony Townsend, Iowa State University Bill Troy, University of New Hampshire Susan VandeVen, Southern Polytechnic
State University Hiep Van Dong, Madison Area Technical
College Michael Van Hilst, Nova Southeastern
University Mary Vitrano, Palm Beach Community
College Andrea Wachter, Point Park University Nitin Walia, Ashland University Catherine Wallace, Massey University,
New Zealand Biao Wang, Boston University Haibo Wang, Texas A&M International
University Harry Washington, Lincoln University Irene Wheeler, CVCC Rolf Wigand, University of Arkansas at
Little Rock Erin Wilkinson, Johnson & Wales
University Alice Wilson, Cedar Crest College Dezhi Wu, Southern Utah University Gene Yelle, SUNY Institute of Technology Kaimei Zheng, Isenberg School of
Management, UMass, Amherst David Zolzer, Northwestern State
University
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Publisher Services. Very special thanks to Megan Miller and Will Anderson at Azi- muth Interactive, Inc., for all their hard work on the production of, and supplements for, this book.
Finally, last but not least, we would like to thank our family and friends, without whose support this book would not have been possible.
Kenneth C. Laudon Carol Guercio Traver
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B r i e f C o n t e n t s
PART 1 Introduction to E-commerce
1 THE REVOLUTION IS JUST BEGINNING 2
2 E-COMMERCE BUSINESS MODELS AND CONCEPTS 52
PART 2 Technology Infrastructure for E-commerce
3 E-COMMERCE INFRASTRUCTURE: THE INTERNET, WEB, AND MOBILE PLATFORM 106
4 BUILDING AN E-COMMERCE PRESENCE: WEBSITES, MOBILE SITES, AND APPS 186
5 E-COMMERCE SECURITY AND PAYMENT SYSTEMS 250
PART 3 Business Concepts and Social Issues
6 E-COMMERCE MARKETING AND ADVERTISING CONCEPTS 334
7 SOCIAL, MOBILE, AND LOCAL MARKETING 422
8 ETHICAL, SOCIAL, AND POLITICAL ISSUES IN E-COMMERCE 494
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PART 4 E-commerce in Action
9 ONLINE RETAIL AND SERVICES 582
10 ONLINE CONTENT AND MEDIA 648
11 SOCIAL NETWORKS, AUCTIONS, AND PORTALS 716
12 B2B E-COMMERCE: SUPPLY CHAIN MANAGEMENT AND COLLABORATIVE COMMERCE 760
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C o n t e n t s
Learning Objectives 2
Uber: The New Face of E-commerce? 3
1.1 The First Thirty Seconds: Why You Should Study E-commerce 7
1.2 Introduction to E-commerce 8 What Is E-commerce? 8
The Difference Between E-commerce and E-business 9
Technological Building Blocks Underlying E-commerce: The Internet, Web, and Mobile Platform 9
Insight on Technology: Will Apps Make the Web Irrelevant? 13 Major Trends in E-commerce 15
1.3 Unique Features of E-commerce Technology 17 Ubiquity 18
Global Reach 18
Universal Standards 19
Richness 19
Interactivity 20
Information Density 20
Personalization and Customization 21
Social Technology: User-Generated Content and Social Networks 21
1.4 Types of E-commerce 21 Business-to-Consumer (B2C) E-commerce 22
Business-to-Business (B2B) E-commerce 23
Consumer-to-Consumer (C2C) E-commerce 24
Mobile E-commerce (M-commerce) 25
PART 1 Introduction to E-commerce
1 THE REVOLUTION IS JUST BEGINNING 2
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Social E-commerce 25
Local E-commerce 26
1.5 E-commerce: A Brief History 27 E-commerce 1995–2000: Invention 28
E-commerce 2001–2006: Consolidation 31
E-commerce 2007–Present: Reinvention 32
Assessing E-commerce: Successes, Surprises, and Failures 33
Insight on Business: Startup Boot Camp 34
1.6 Understanding E-commerce: Organizing Themes 38 Technology: Infrastructure 38
Business: Basic Concepts 40
Society: Taming the Juggernaut 40
Insight on Society: Facebook and the Age of Privacy 41
1.7 Academic Disciplines Concerned with E-commerce 43 Technical Approaches 43
Behavioral Approaches 43
1.8 Case Study: Pinterest: A Picture Is Worth a Thousand Words 44
1.9 Review 48 Key Concepts 48
Questions 50
Projects 50
References 51
Learning Objectives 52
Tweet Tweet: Twitter’s Business Model 53
2.1 E-commerce Business Models 56 Introduction 56
Eight Key Elements of a Business Model 56
Value Proposition 57
Revenue Model 58
Insight on Society: Foursquare: Check Your Privacy at the Door 60 Market Opportunity 62
Competitive Environment 62
Competitive Advantage 63
2 E-COMMERCE BUSINESS MODELS AND CONCEPTS 52
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Market Strategy 65
Organizational Development 65
Management Team 66
Raising Capital 66
Categorizing E-commerce Business Models: Some Difficulties 68
Insight on Business: Crowdfunding Takes Off 69
2.2 Major Business-to-Consumer (B2C) Business Models 71 E-tailer 71
Community Provider 74
Content Provider 75
Portal 76
Insight on Technology: Will the Connected Car Become the Next Hot Entertainment Vehicle? 77
Transaction Broker 79
Market Creator 79
Service Provider 80
2.3 Major Business-to-Business (B2B) Business Models 81 E-distributor 82
E-procurement 82
Exchanges 83
Industry Consortia 84
Private Industrial Networks 84
2.4 How E-commerce Changes Business: Strategy, Structure, and Process 84
Industry Structure 86
Industry Value Chains 88
Firm Value Chains 89
Firm Value Webs 90
Business Strategy 91
E-commerce Technology and Business Model Disruption 94
2.5 Case Study: Freemium Takes Pandora Public 97
2.6 Review 101 Key Concepts 101
Questions 103
Projects 103
References 104
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Learning Objectives 106
The Apple Watch: Bringing the Internet of Things to Your Wrist 107
3.1 The Internet: Technology Background 110 The Evolution of the Internet: 1961—The Present 112
The Internet: Key Technology Concepts 116
Packet Switching 116
Transmission Control Protocol/Internet Protocol (TCP/IP) 118
IP Addresses 118
Domain Names, DNS, and URLs 120
Client/Server Computing 121
The New Client: The Mobile Platform 123
The Internet “Cloud Computing” Model: Hardware and Software as a Service 123
Other Internet Protocols and Utility Programs 128
3.2 The Internet Today 130 The Internet Backbone 132
Internet Exchange Points 134
TIER 3 Internet Service Providers 134
Campus/Corporate Area Networks 137
Intranets 138
Who Governs the Internet? 138
3.3 The Future Internet Infrastructure 140 Limitations of the Current Internet 140
Insight on Society: Government Regulation and Surveillance of the Internet 141 The Internet2® Project 144
The First Mile and the Last Mile 145
Fiber Optics and the Bandwidth Explosion in the First Mile 146
The Last Mile: Mobile Internet Access 146
Telephone-based versus Computer Network-based Wireless Internet Access 147
Internet Access Drones 150
The Future Internet 151
Latency Solutions 151
PART 2 Technology Infrastructure for E-commerce
3 E-COMMERCE INFRASTRUCTURE: THE INTERNET, WEB, AND MOBILE PLATFORM 106
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Guaranteed Service Levels and Lower Error Rates 152
Declining Costs 152
The Internet of Things 152
3.4 The Web 154 Hypertext 155
Markup Languages 156
HyperText Markup Language (HTML) 156
Insight on Technology: The Rise of HTML5 159 eXtensible Markup Language (XML) 161
Web Servers and Clients 162
Web Browsers 164
3.5 The Internet and the Web: Features and Services 164 Communication Tools 164
E-mail 165
Messaging Applications 165
Online Message Boards 166
Internet Telephony 166
Video Conferencing, Video Chatting, and Telepresence 167
Search Engines 167
Downloadable and Streaming Media 170
Web 2.0 Applications and Services 171
Online Social Networks 171
Blogs 171
Wikis 172
Virtual Reality and Augmented Reality 172
Intelligent Personal Assistants 173
3.6 Mobile Apps: The Next Big Thing Is Here 174
Insight on Business: AI, Intelligent Assistants, and Chatbots 175 Platforms for Mobile Application Development 177
App Marketplaces 177
3.7 Case Study: Akamai Technologies: Attempting to Keep Supply Ahead of Demand 178
3.8 Review 181 Key Concepts 181
Questions 183
Projects 183
References 184
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Learning Objectives 186
The Wall Street Journal: Redesigning for Today’s Platforms 187
4.1 Imagine Your E-commerce Presence 190 What’s the Idea? (The Visioning Process) 190
Where’s the Money: Business and Revenue Model 190
Who and Where Is the Target Audience? 191
What Is the Ballpark? Characterize the Marketplace 192
Where’s the Content Coming From? 192
Know Yourself: Conduct a SWOT Analysis 193
Develop an E-commerce Presence Map 194
Develop a Timeline: Milestones 195
How Much Will This Cost? 196
4.2 Building an E-commerce Presence: A Systematic Approach 197 Planning: The Systems Development Life Cycle 198
Systems Analysis/Planning: Identify Business Objectives, System Functionality, and Information Requirements 198
System Design: Hardware and Software Platforms 199
Building the System: In-house Versus Outsourcing 200
Build Your Own versus Outsourcing 202
Host Your Own versus Outsourcing 204
Insight on Business: Weebly Makes Creating Websites Easy 205 Testing the System 208
Implementation and Maintenance 208
Factors in Optimizing Website Performance 209
4.3 Choosing Software 210 Simple Versus Multi-Tiered Website Architecture 210
Web Server Software 212
Site Management Tools 212
Dynamic Page Generation Tools 213
Application Servers 216
E-commerce Merchant Server Software Functionality 217
Online Catalog 217
Shopping Cart 217
Credit Card Processing 217
Merchant Server Software Packages (E-commerce Software Platforms) 217
Choosing an E-commerce Software Platform 218
4.4 Choosing Hardware 220 Right-sizing Your Hardware Platform: The Demand Side 220
4 BUILDING AN E-COMMERCE PRESENCE: WEBSITES, MOBILE SITES, AND APPS 186
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Right-sizing Your Hardware Platform: The Supply Side 222
4.5 Other E-commerce Site Tools 225 Website Design: Basic Business Considerations 225
Tools for Search Engine Optimization 226
Tools for Interactivity and Active Content 227
Common Gateway Interface (CGI) 227
Active Server Pages (ASP) and ASP.NET 228
Java, Java Server Pages (JSP), and JavaScript 228
ActiveX and VBScript 229
ColdFusion 230
PHP, Ruby on Rails (RoR), and Django 230
Other Design Elements 231
Personalization Tools 231
The Information Policy Set 232
4.6 Developing a Mobile Website and Building Mobile Applications 232
Insight on Society: Designing for Accessibility 233 Planning and Building a Mobile Presence 235
Mobile Presence: Design Considerations 237
Cross-platform Mobile App Development Tools 238
Mobile Presence: Performance and Cost Considerations 239
Insight on Technology: Carnival Cruise Ships Go Mobile 240
4.7 Case Study: Dick’s Sporting Goods: Taking Control of Its E-commerce Operations 242
4.8 Review 245 Key Concepts 245
Questions 247
Projects 248
References 248
Learning Objectives 250
Cyberwar: MAD 2.0 251
5.1 The E-commerce Security Environment 254 The Scope of the Problem 255
The Underground Economy Marketplace: The Value of Stolen Information 256
What Is Good E-commerce Security? 258
Dimensions of E-commerce Security 259
5 E-COMMERCE SECURITY AND PAYMENT SYSTEMS 250
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The Tension Between Security and Other Values 260
Ease of Use 260
Public Safety and the Criminal Uses of the Internet 261
5.2 Security Threats in the E-commerce Environment 262 Malicious Code 263
Potentially Unwanted Programs (PUPs) 268
Phishing 268
Hacking, Cybervandalism, and Hacktivism 270
Insight on Society: The Ashley Madison Data Breach 271 Data Breaches 273
Credit Card Fraud/Theft 274
Identity Fraud 275
Spoofing, Pharming, and Spam (Junk) websites 275
Sniffing and Man-in-the-Middle Attacks 276
Denial of Service (DOS) and Distributed Denial of Service (DDOS) Attacks 277
Insider Attacks 278
Poorly Designed Software 279
Social Network Security Issues 280
Mobile Platform Security Issues 280
Insight on Technology: Think Your Smartphone Is Secure? 282 Cloud Security Issues 284
Internet of Things Security Issues 284
5.3 Technology Solutions 286 Protecting Internet Communications 286
Encryption 287
Symmetric Key Cryptography 287
Public Key Cryptography 288
Public Key Cryptography Using Digital Signatures and Hash Digests 290
Digital Envelopes 292
Digital Certificates and Public Key Infrastructure (PKI) 293
Limitations of PKI 294
Securing Channels of Communication 295
Secure Sockets Layer (SSL) and Transport Layer Security (TLS) 295
Virtual Private Networks (VPNs) 297
Wireless (Wi-Fi) Networks 297
Protecting Networks 298
Firewalls 298
Proxy Servers 299
Intrusion Detection and Prevention Systems 300
Protecting Servers and Clients 300
Operating System Security Enhancements 300
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Anti-Virus Software 300
5.4 Management Policies, Business Procedures, and Public Laws 301 A Security Plan: Management Policies 301
The Role of Laws and Public Policy 303
Private and Private-Public Cooperation Efforts 304
Government Policies and Controls on Encryption 306
5.5 E-commerce Payment Systems 307 Online Credit Card Transactions 309
Credit Card E-commerce Enablers 310
PCI-DSS Compliance 310
Limitations of Online Credit Card Payment Systems 311
Alternative Online Payment Systems 311
Mobile Payment Systems: Your Smartphone Wallet 313
Social/Mobile Peer-to-Peer Payment Systems 313
Regulation of Mobile Wallets and Rechargeable Cards 314
Digital Cash and Virtual Currencies 315
5.6 Electronic Billing Presentment and Payment 315
Insight on Business: Bitcoin 316 Market Size and Growth 318
EBPP Business Models 318
5.7 Case Study: The Mobile Payment Marketplace: Goat Rodeo 320
5.8 Review 326 Key Concepts 326
Questions 329
Projects 330
References 330
Learning Objectives 334
Video Ads: Shoot, Click, Buy 335
6.1 Consumers Online: The Internet Audience and Consumer Behavior 338
Internet Traffic Patterns: The Online Consumer Profile 338
Intensity and Scope of Usage 339
PART 3 Business Concepts and Social Issues
6 E-COMMERCE MARKETING AND ADVERTISING CONCEPTS 334
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Demographics and Access 340
Type of Internet Connection: Broadband and Mobile Impacts 341
Community Effects: Social Contagion in Social Networks 341
Consumer Behavior Models 342
Profiles of Online Consumers 342
The Online Purchasing Decision 343
Shoppers: Browsers and Buyers 346
What Consumers Shop for and Buy Online 347
Intentional Acts: How Shoppers Find Vendors Online 347
Why Some People Don’t Shop Online 348
Trust, Utility, and Opportunism in Online Markets 348
6.2 Digital Commerce Marketing and Advertising Strategies and Tools 349
Strategic Issues and Questions 349
The Website as a Marketing Platform: Establishing the Customer Relationship 351
Traditional Online Marketing and Advertising Tools 352
Search Engine Marketing and Advertising 354
Display Ad Marketing 358
E-mail Marketing 366
Affiliate Marketing 368
Viral Marketing 369
Lead Generation Marketing 369
Social, Mobile, and Local Marketing and Advertising 370
Social Marketing and Advertising 370
Mobile Marketing and Advertising 371
Local Marketing: The Social-Mobile-Local Nexus 372
Multi-channel Marketing: Integrating Online and Offline Marketing 372
Other Online Marketing Strategies 373
Insight on Business: Are the Very Rich Different from You and Me? 374 Customer Retention Strategies 376
Pricing Strategies 381
Long Tail Marketing 386
6.3 Internet Marketing Technologies 386
Insight on Technology: The Long Tail: Big Hits and Big Misses 387 The Revolution in Internet Marketing Technologies 389
Web Transaction Logs 390
Supplementing the Logs: Cookies and Other Tracking Files 391
Databases, Data Warehouses, Data Mining, and Big Data 393
Databases 393
Data Warehouses and Data Mining 393
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Insight on Society: Every Move You Take, Every Click You Make, We’ll Be Tracking You 394
Hadoop and the Challenge of Big Data 397
Marketing Automation and Customer Relationship Management (CRM) Systems 398
6.4 Understanding the Costs and Benefits of Online Marketing Communications 400
Online Marketing Metrics: Lexicon 400
How Well Does Online Advertising Work? 404
The Costs of Online Advertising 406
Marketing Analytics: Software for Measuring Online Marketing Results 408
6.5 Case Study: Programmatic Advertising: Real-Time Marketing 411
6.6 Review 415 Key Concepts 415
Questions 417
Projects 418
References 419
Learning Objectives 422
Facebook: Putting Social Marketing to Work 423
7.1 Introduction to Social, Mobile, and Local Marketing 426 From Eyeballs to Conversations 426
From the Desktop to the Smartphone and Tablet 426
The Social, Mobile, Local Nexus 428
7.2 Social Marketing 429 Social Marketing Players 430
The Social Marketing Process 431
Facebook Marketing 432
Basic Facebook Features 432
Facebook Marketing Tools 434
Starting a Facebook Marketing Campaign 438
Measuring Facebook Marketing Results 439
Insight on Technology: Optimizing Social Marketing with Simply Measured 441 Twitter Marketing 443
Basic Twitter Features 443
Twitter Marketing Tools 443
Starting a Twitter Marketing Campaign 446
7 SOCIAL, MOBILE, AND LOCAL MARKETING 422
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Measuring Twitter Marketing Results 448
Pinterest Marketing 448
Basic Pinterest Features 449
Pinterest Marketing Tools 449
Starting a Pinterest Marketing Campaign 452
Measuring Pinterest Marketing Results 454
Marketing on Other Social Networks 454
The Downside of Social Marketing 457
7.3 Mobile Marketing 457 Overview: M-commerce Today 457
Insight on Society: Marketing to Children of the Web in the Age of Social Networks 458
How People Actually Use Mobile Devices 460
In-App Experiences and In-App Ads 462
How the Multi-Screen Environment Changes the Marketing Funnel 463
Basic Mobile Marketing Features 464
The Technology: Basic Mobile Device Features 465
Mobile Marketing Tools: Ad Formats 466
Starting a Mobile Marketing Campaign 468
Insight on Business: Mobile Marketing: Ford Goes 3-D 469 Measuring Mobile Marketing Results 472
7.4 Local and Location-Based Mobile Marketing 473 The Growth of Local Marketing 473
The Growth of Location-Based (Local) Mobile Marketing 474
Location-Based Marketing Platforms 475
Location-Based Mobile Marketing: The Technologies 476
Why Is Local Mobile Attractive to Marketers? 478
Location-Based Marketing Tools 478
A New Lexicon: Location-Based Digital Marketing Features 478
Proximity Marketing with Beacons 479
Starting a Location-Based Marketing Campaign 481
Measuring Location-Based Marketing Results 481
7.5 Case Study: ExchangeHunterJumper.com: Building a Brand with Social Marketing 483
7.6 Review 489 Key Concepts 489
Questions 491
Projects 492
References 492
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Learning Objectives 494
The Right to Be Forgotten: Europe Leads on Internet Privacy 495
8.1 Understanding Ethical, Social, and Political Issues in E-commerce 498 A Model for Organizing the Issues 499
Basic Ethical Concepts: Responsibility, Accountability, and Liability 501
Analyzing Ethical Dilemmas 503
Candidate Ethical Principles 504
8.2 Privacy and Information Rights 505 What Is Privacy? 505
Privacy in the Public Sector: Privacy Rights of Citizens 506
Privacy in the Private Sector: Privacy Rights of Consumers 507
Information Collected by Websites 510
Key Issues in Online Privacy of Consumers 511
Marketing: Profiling, Behavioral Targeting, and Retargeting 513
The Harm of False Data: That’s Not Me! 515
Social Networks: Privacy and Self Revelation 516
Mobile Devices: Location-Based Privacy Issues 517
Consumer Privacy Regulation: The FTC 518
Consumer Privacy Regulation: The Federal Communications Commission (FCC) 521
Privacy Policies 522
The European Data Protection Directive 524
Industry Self-Regulation 525
Technological Solutions 526
Privacy Protection as a Business 527
Privacy Advocacy Groups 528
Limitations on the Right to Privacy: Law Enforcement and Surveillance 528
8.3 Intellectual Property Rights 530
Insight on Technology: Apple: Defender of Privacy? 531 Types of Intellectual Property Protection 534
Copyright: the Problem of Perfect Copies and Encryption 535
Look and Feel 536
Fair Use Doctrine 536
The Digital Millennium Copyright Act of 1998 538
Patents: Business Methods and Processes 542
E-commerce Patents 545
Trademarks: Online Infringement and Dilution 546
Trademarks and the Internet 549
8 ETHICAL, SOCIAL, AND POLITICAL ISSUES IN E-COMMERCE 494
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Cybersquatting and Brandjacking 550
Cyberpiracy 551
Metatagging 552
Keywording 553
Linking 553
Framing 554
Trade Secrets 554
Challenge: Balancing the Protection of Property with Other Values 555
8.4 Governance 555 Can the Internet Be Controlled? 556
Taxation 557
Net Neutrality 558
Insight on Business: Internet Sales Tax Battle 559
8.5 Public Safety and Welfare 562 Protecting Children 562
Cigarettes, Gambling, and Drugs: Is the Web Really Borderless? 564
Insight on Society: The Internet Drug Bazaar 565
8.6 Case Study: The Pirate Bay: Searching for a Safe Haven 569
8.7 Review 573 Key Concepts 573
Questions 575
Projects 576
References 577
Learning Objectives 582
Blue Nile Sparkles For Your Cleopatra 583
9.1 The Online Retail Sector 586 The Retail Industry 587
Online Retailing 588
E-commerce Retail: The Vision 589
The Online Retail Sector Today 590
PART 4 E-commerce in Action
9 ONLINE RETAIL AND SERVICES 582
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9.2 Analyzing the Viability of Online Firms 596 Strategic Analysis 596
Financial Analysis 597
9.3 E-commerce in Action: E-tailing Business Models 599 Virtual Merchants 600
E-commerce in Action: Amazon 600
The Vision 601
Business Model 601
Financial Analysis 602
Strategic Analysis—Business Strategy 604
Strategic Analysis—Competition 606
Strategic Analysis—Technology 606
Strategic Analysis—Social and Legal Challenges 607
Future Prospects 607
Omni-Channel Merchants: Bricks-and-Clicks 607
Catalog Merchants 609
Manufacturer-Direct 610
Common Themes in Online Retailing 612
9.4 The Service Sector: Offline and Online 614
Insight on Technology: Big Data and Predictive Marketing 615
9.5 Online Financial Services 617 Online Financial Consumer Behavior 617
Online Banking and Brokerage 618
Multi-Channel vs. Pure Online Financial Services Firms 619
Financial Portals and Account Aggregators 620
Online Mortgage and Lending Services 620
Online Insurance Services 621
Online Real Estate Services 623
9.6 Online Travel Services 624 Why Are Online Travel Services So Popular? 624
The Online Travel Market 625
Online Travel Industry Dynamics 626
9.7 Online Career Services 627
Insight on Society: Phony Reviews 628 It’s Just Information: The Ideal Web Business? 630
Online Recruitment Industry Trends 632
9.8 On-Demand Service Companies 633
Insight on Business: Food on Demand: Instacart and GrubHub 635
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9.9 Case Study: OpenTable: Your Reservation Is Waiting 638
9.10 Review 642 Key Concepts 642
Questions 644
Projects 645
References 646
Learning Objectives 648
Cord Cutters and Cord Shavers: The Emerging Internet Broadcasting System (IBS) 649
10.1 Online Content 651 Content Audience and Market: Where Are the Eyeballs and the Money? 651
Media Utilization: A Converging Digital Stream 653
Insight on Society: Are Millennials Really All That Different? 654 Internet and Traditional Media: Cannibalization versus
Complementarity 657
Media Revenues 657
Three Revenue Models for Digital Content Delivery: Subscription, A La Carte, and Advertising-Supported (Free and Freemium) 657
Online Content Consumption 658
Free or Fee: Attitudes About Paying for Content and the Tolerance for Advertising 659
Digital Rights Management (DRM) and Walled Gardens 660
Media Industry Structure 661
Media Convergence: Technology, Content, and Industry Structure 661
Technological Convergence 662
Content Convergence 662
Industry Structure Convergence 663
10.2 The Online Publishing Industry 664 Online Newspapers 665
From Print-centric to Digital First: The Evolution of Newspaper Online Business Models, 1995–2016 667
Online Newspaper Industry: Strengths and Challenges 669
Magazines Rebound on the Tablet Platform 676
Insight on Business: Vox: Native Digital News 677 E-Books and Online Book Publishing 679
Amazon and Apple: The New Digital Media Ecosystems 681
E-Book Business Models 682
The Challenges of the Digital E-Book Platform 684
10 ONLINE CONTENT AND MEDIA 648
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Interactive Books: Converging Technologies 685
10.3 The Online Entertainment Industry 686 Online Entertainment Market Size and Growth 688
Television 688
Feature-Length Movies 692
Insight on Technology: Hollywood and the Internet: Let’s Cut a Deal 697 Music 699
Games 703
10.4 Case Study: Netflix: How Does This Movie End? 707
10.5 Review 712 Key Concepts 712
Questions 713
Projects 714
References 714
Learning Objectives 716
Social Network Fever Spreads to the Professions 717
11.1 Social Networks and Online Communities 719 What Is an Online Social Network? 720
The Growth of Social Networks and Online Communities 721
Turning Social Networks into Businesses 724
Types of Social Networks and Their Business Models 726
Insight on Society: The Dark Side of Social Networks 727 Social Network Technologies and Features 730
Insight on Technology: Trapped Inside the Facebook Bubble? 733
11.2 Online Auctions 736 Benefits and Costs of Auctions 736
Benefits of Auctions 736
Risks and Costs of Auctions 738
Auctions as an E-commerce Business Model 738
Types and Examples of Auctions 739
When to Use Auctions (and for What) in Business 740
Auction Prices: Are They the Lowest? 742
Consumer Trust in Auctions 743
When Auction Markets Fail: Fraud and Abuse in Auctions 743
11.3 E-commerce Portals 744 The Growth and Evolution of Portals 745
11 SOCIAL NETWORKS, AUCTIONS, AND PORTALS 716
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Types of Portals: General-Purpose and Vertical Market 746
Insight on Business: Verizon Doubles Down on Portals 747 Portal Business Models 750
11.4 Case Study: eBay Evolves
11.5 Review 755 Key Concepts 755
Questions 757
Projects 757
References 758
Learning Objectives 760
Amazon Takes on B2B with Amazon Business 761
12.1 An Overview of B2B E-commerce 765 Some Basic Definitions 767
The Evolution of B2B E-commerce 767
The Growth of B2B E-commerce 769
Potential Benefits and Challenges of B2B E-commerce 771
12.2 The Procurement Process and Supply Chains 772 Steps in the Procurement Process 772
Insight on Society: Where’s My iPad? Supply Chain Risk and Vulnerability 773 Types of Procurement 775
Multi-Tier Supply Chains 776
Visibility and Other Concepts in Supply Chain Management 777
The Role of Existing Legacy Computer Systems and Enterprise Systems in Supply Chains 777
12.3 Trends in Supply Chain Management and Collaborative Commerce 778
Just-in-Time and Lean Production 778
Supply Chain Simplification 779
Supply Chain Black Swans: Adaptive Supply Chains 779
Accountable Supply Chains: Labor Standards 780
Sustainable Supply Chains: Lean, Mean, and Green 782
Electronic Data Interchange (EDI) 783
Mobile B2B 785
B2B in the Cloud 786
Supply Chain Management Systems 787
12 B2B E-COMMERCE: SUPPLY CHAIN MANAGEMENT AND COLLABORATIVE COMMERCE 760
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Insight on Technology: Your Shoes Are in the Cloud 788 Collaborative Commerce 791
Collaboration 2.0: Cloud, Web, Social, and Mobile 792
Social Networks and B2B: The Extended Social Enterprise 793
B2B Marketing 793
12.4 Net Marketplaces: The Selling Side of B2B 794 Characteristics of Net Marketplaces 795
Types of Net Marketplaces 795
E-distributors 796
E-procurement 798
Exchanges 799
Industry Consortia 802
12.5 Private Industrial Networks 804 Objectives of Private Industrial Networks 805
Private Industrial Networks and Collaborative Commerce 806
Insight on Business: Walmart Develops a Private Industrial Network 807 Implementation Barriers 810
12.6 Case Study: Elemica: Cooperation, Collaboration, and Community 811
12.7 Review 816 Key Concepts 816
Questions 819
Projects 820
References 820
Index I-1
Credits C-1
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CHAPTER 1 The Revolution Is Just Beginning
CHAPTER 2 E-commerce Business Models and Concepts
Introduction to E-commerce
P A R T 1
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1C H A P T E R
The Revolution Is Just Beginning
L E A R N I N G O B J E C T I V E S
After reading this chapter, you will be able to:
■ Understand why it is important to study e-commerce. ■ Define e-commerce, understand how e-commerce differs from e-business, identify the
primary technological building blocks underlying e-commerce, and recognize major current themes in e-commerce.
■ Identify and describe the unique features of e-commerce technology and discuss their business significance.
■ Describe the major types of e-commerce. ■ Understand the evolution of e-commerce from its early years to today. ■ Describe the major themes underlying the study of e-commerce. ■ Identify the major academic disciplines contributing to e-commerce.
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3
© Lenscap/Alamy
If you were trying to pick iconic examples of e-commerce in the two decades since it began in 1995, it is likely that companies such as Amazon, eBay, Google, Apple, and Facebook would be high on the list. Today, there’s a new company that is becoming the face of e-commerce as it enters its third decade: Uber. Uber and other firms with similar business models, such as Lyft (a ride service similar to Uber’s), Airbnb (rooms for rent), Heal (doctor home visits), Handy (part-time household helpers), Instacart (grocery shopping), Washio (laundry service), and BloomThat (flower delivery), are the pio- neers of a new on-demand service e-commerce business model that is sweeping up billions of investment dollars and disrupting major industries, from transportation to hotels, real estate, house cleaning, maintenance, and grocery shopping. On-demand service firms have collected over $26 billion in venture capital funding over the last five years, making this the hottest business model in e-commerce.
Uber offers a variety of different services. The two most common are UberX, which uses compact sedans and is the least expensive, and UberBlack, which provides higher- priced town car service. UberPool is a ride-sharing service that allows users to share a ride with another person who happens to be going to the same place. In several cities, Uber is developing UberEats, a food delivery service; UberRush, a same-day delivery service; and UberCargo, a trucking service.
Uber, headquartered in San Francisco, was founded in 2009 by Travis Kalanick and Garrett Camp, and has grown explosively since then to over 480 cities in 69 countries. Drivers are signing up at an exponential rate: as of the beginning of 2016, there were over 450,000 drivers in the United States and over 1 million worldwide. According to an Uber-sponsored survey, over 44% of Uber drivers have college degrees (compared to 15% of taxi drivers), 71% say they have boosted their income and financial security by driving for Uber, and 73% say they prefer a job where they choose their hours rather than a 9-to-5 job. It is estimated that Uber’s revenue will reach around $2 billion in 2016, but it is still not expected to generate an overall profit, with losses in developing markets
U b e r : T h e N e w F a c e o f E - c o m m e r c e ?
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4 C H A P T E R 1 T h e R e v o l u t i o n I s J u s t B e g i n n i n g
such as China and India swallowing up profits being generated in North America, Europe, and elsewhere. Uber’s strategy is to expand as fast as possible while foregoing short-term profits in the hope of long-term returns. As of July 2016, Uber has raised over $12.5 billion in venture capital. Uber is currently valued at around $68 billion, more than all of its competitors combined. In August 2016, Uber agreed to sell Uber China, where it had been engaged in a costly turf war for Chinese riders, to Didi Chuxing Technology, its primary Chinese rival. Uber will receive a 18% interest in Didi Chuxing and Didi will invest $1 billion in Uber. In doing so, Uber converted a reported $2 billion loss on its Chinese operations into a new merged entity valued at around $7 billion, and freed up capital to invest more heavily in other emerging markets such as Indonesia and India where it does not have such significant competition.
Uber offers a compelling value proposition for both customers and drivers. Customers can sign up for free, request and pay for a ride (at a cost Uber claims is 40% less than a traditional taxi) using a smartphone and credit card, and get picked up within a few minutes. No need to stand on a street corner frantically waving, competing with others, or waiting and waiting for an available cab to drive by, without knowing when that might happen. Instead, customers using the Uber app know just how long it will take for the ride to arrive and how much it will cost. With UberPool ride-sharing, the cost of a ride drops by 50%, making it cost-competitive with owning a car in an urban area, according to Uber. Uber’s value proposition for drivers is that it allows them to set their own hours, work when they like, and put their own cars to use generating revenue.
Uber is the current poster child for “digital disruption.” It is easy to see why Uber has ignited a firestorm of opposition from existing taxi services both in the United States and around the world. Who can compete in a market where a new upstart firm offers a 50% price reduction? If you’ve paid $1 million for a license to drive a taxi in New York City, what is it worth now that Uber has arrived? Even governments find Uber to be a disruptive threat. Governments do not want to give up regulatory control over passenger safety, driver training, nor the healthy revenue stream generated by charging taxi firms for a taxi license and sales taxes.
Uber’s business model differs from traditional retail e-commerce. Uber doesn’t sell goods. Instead it has created a smartphone-based platform that enables people who want a service—like a taxi—to find a provider with the resources, such as a personal automobile and a driver with available time, to fill the demand. It’s important to understand that although Uber and similar firms are often called “sharing economy” companies, this is a misnomer. Uber drivers are selling their services as drivers and the temporary use of their car. Uber itself is not in the sharing business either: it charges a hefty fee for every transaction on its platform. Uber is not an example of true “peer-to-peer” e-commerce because Uber transactions involve an online intermediary: a third party that takes a cut of all transactions and arranges for the marketplace to exist in the first place.
Uber has disrupted the traditional taxi business model because it offers a superior, fast, convenient taxi-hailing service when compared to traditional taxi companies. With a traditional taxi service, there is no guarantee you will find a cab. Uber reduces that uncertainty: the customer enters a request for pickup using his or her smartphone and
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U b e r : T h e N e w F a c e o f E - c o m m e r c e ? 5
nearly instantly (under the best of circumstances), Uber finds a provider and notifies the customer of the estimated time of arrival and price. Riders can accept the price or find an alternative.
Uber’s business model is much more efficient than a traditional taxi firm. Uber does not own taxis and has no maintenance and financing costs. Uber calls its drivers “independent contractors,” not employees. Doing so enables Uber to avoid costs for workers’ compensation, minimum wage requirements, driver training, health insurance, and commercial licensing.
Quality control would seem to be a nightmare with over 1 million contract drivers. But Uber relies on user reviews to identify problematic drivers and driver reviews to identify problematic passengers. Drivers are evaluated by riders on a 5-point scale. Drivers that fall below 4.5 are warned and may be dropped if they don’t improve. Customers are also rated with a 5-point system. Drivers can refuse to pick up troublesome customers, and the Uber server can delay service to potential customers with low ratings or ban them entirely. Uber does not publicly report how many poorly rated drivers or passengers there are in its system. Academic articles have found that in similar on-demand companies, such as Airbnb, there is a built-in bias for both sellers and buyers to give good reviews regardless of the actual experience. If you routinely give low reviews to sellers (drivers), they will think you are too demanding and not service you in the future. If a driver gives low reviews to passengers, they might not rate you highly in return.
Rather than having a dispatcher in every city, Uber has an Internet-based app service running on cloud servers located throughout the world. It does not provide radios to its drivers, who instead must use their own smartphones and cell service, which the drivers pay for. It does not provide insurance or maintenance for its drivers’ cars. Uber has shifted the costs of running a taxi service entirely to the drivers. Uber charges prices that vary dynamically with demand: the higher the demand, the greater the price of a ride. Therefore, it is impossible using public information to know if Uber’s prices are lower than traditional taxis. Clearly, in high-demand situations they are higher, sometimes ten times higher, than a regulated taxi. There is no regulatory taxi commission setting uniform per mile fares. Consumers do face some traditional uncertainties regarding availability: during a rain storm, a convention, or a sports event, when demand peaks, not enough drivers may be available at any price.
If Uber is the poster child for the new on-demand service economy, it’s also an iconic example of the social costs and conflicts associated with this new kind of e-commerce. Uber has been accused by attorney generals in several states of misclassifying its drivers as contractors as opposed to employees, thereby denying the drivers the benefits of employee status, such as minimum wages, social security, workers’ compensation, and health insur- ance. In June 2015, the California Labor Commission ruled that an Uber driver was, in fact, an employee under the direct, detailed supervision and control of Uber management, notwithstanding Uber’s claims that it merely provides a “platform.” However, the ruling applied only to that individual driver, and Uber is appealing the decision. In April 2016, Uber settled two federal class action lawsuits brought in California and Massachusetts on behalf of an estimated 385,000 drivers, who sued the company for mistreatment and
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6 C H A P T E R 1 T h e R e v o l u t i o n I s J u s t B e g i n n i n g
lack of due process, including barring them from the app without explanation, lack of transparency in how driver ratings are calculated, and deactivating drivers who regularly declined to accept requests. Uber agreed to pay up to $84 million to the drivers, give them more information about why they are barred from using the app, assist drivers in forming “driver associations” in these two states, and review its policy of no tipping. Uber also agreed to pay an additional $16 million if it goes public next year with a valuation exceeding $93.75 billion. The company retained the right to shut out drivers temporarily if their acceptance rates are low and can deactivate drivers completely if they have high cancellation rates. Most importantly, the settlement allowed Uber to continue classifying its drivers as independent contractors in California and Massachusetts, enabling Uber to continue not paying for workers’ compensation insurance, health insurance, or overtime work. However, in August 2016, a federal district court judge in California rejected the terms of the settlement on the grounds that it was unfair and unreasonable, and as a result, Uber and the parties to the lawsuit have resumed negotiations. The terms on which the lawsuit are finally resolved may have a significant effect on the on-demand services business model.
Uber has also been accused of violating public transportation laws and regulations throughout the United States and the world; abusing the personal information it has collected on users of the service; seeking to use personal information to intimidate jour- nalists; failing to protect public safety by refusing to do adequate criminal, medical, and financial background checks on its drivers; taking clandestine actions against its chief competitor Lyft in order to disrupt its business; and being tone-deaf to the complaints of its own drivers against the firm’s efforts to reduce driver fees. Uber has been banned in several European cities.
Critics also fear the long-term impact of on-demand service firms, because of their potential for creating a society of part-time, low-paid, temp work, displacing traditionally full-time, secure jobs—the so-called “uberization” of work. As one critic put it, Uber is not the Uber for rides so much as it is the Uber for low-paid jobs. Uber responds to this fear by claiming that it is lowering the cost of transportation, making better use of spare human and financial resources, expanding the demand for ride services, and expanding opportunities for car drivers, whose pay is about the same as other taxi drivers.
Despite the controversy surrounding it, Uber continues to have no trouble attracting additional investors and according to CEO Kalanick, plans to remain a private company for the foreseeable future. Although Uber currently has a host of rivals, both big and small, most analysts expect that ultimately, only one or two major players will remain. Uber is doing everything it can to assure that it will be the one to prevail.
SOURCES: “Uber Driver Settle- ment Rejected, Both Parties Resume Negotiations,” by Robert Lawson, Norcalrecord.com, October 12, 2016; “Even Uber Couldn’t Bridge the China Divide,” by Farhad Manjoo, New York Times, August 1, 2016; “Uber Sells China Operations to Didi Chuxing,” by Alyssa Abkowitz and Rick Carew, Wall Street Journal, August 1, 2016; “Why Uber Keeps Raising Billions,” by Andrew Ross Sorkin, New York Times, June 20, 2016; “Uber Points to Profits in All Developed Markets,” by Leslie Hook, FT.com, June 16, 2016; “An Uber Shakedown,” Wall Street Journal, April 24, 2016; “Uber Settlement Takes Customers For a Ride,” by Rob Berger, Forbes, April 22, 2016; “Uber Settles Cases With Concessions, but Drivers Stay Freelancers,” by Mike Isaac and Noam Scheiber, New York Times, April 21, 2016; “Leaked: Uber’s Financials Show Huge Growth, Even Bigger Losses,” by Brian Solomon, Forbes, January 12, 2016; “Twisting Words to Make ‘Sharing’ Apps Seem Selfless,” by Natasha Singer, New York Times, August 9, 2015; “Uber Dealt Setback on Labor Rules,” by Lauren Weber, Wall Street Journal, June 18, 2015; “The $50 Billion Question: Can Uber Deliver?,” by Douglas Macmillan, Wall Street Journal, June 15, 2015; “How Everyone Misjudges the Sharing Economy,” by Christopher Mims, Wall Street Journal, May 25, 2015; “The On-Demand Economy Is Reshaping Companies and Careers,” The Economist, January 4, 2015; “The On-Demand Economy: Workers on Tap,” The Economist, January 3, 2015.
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T h e F i r s t T h i r t y S e c o n d s : W h y Y o u S h o u l d S t u d y E - c o m m e r c e 7
In 1994, e-commerce as we now know it did not exist. In 2016, just 22 years later, around 177 million American consumers are expected to spend about $600 billion, and businesses around $6.7 trillion, purchasing goods, services, and digital content via a desktop computer or mobile device. A similar story has occurred throughout the world. And in this short period of time, e-commerce has been reinvented not just once, but twice.
The early years of e-commerce, during the late 1990s, were a period of business vision, inspiration, and experimentation. It soon became apparent, however, that establishing a successful business model based on those visions would not be easy. There followed a period of retrenchment and reevaluation, which led to the stock market crash of 2000–2001, with the value of e-commerce, telecommunications, and other technology stocks plummeting. After the bubble burst, many people were quick to write off e-commerce. But they were wrong. The surviving firms refined and honed their business models, and the technology became more powerful and less expensive, ultimately leading to business firms that actually produced profits. Between 2002–2008, retail e-commerce grew at more than 25% per year.
Today, we are in the middle of yet another transition. Social networks such as Facebook, Twitter, YouTube, Pinterest, Instagram, and Tumblr, which enable users to distribute their own content (such as videos, music, photos, personal information, commentary, blogs, and more), have rocketed to prominence. Never before in the history of media have such large audiences been aggregated and made so accessible. At the same time, mobile devices, such as smartphones and tablet computers, and mobile apps have supplanted the traditional desktop/laptop platform and web browser as the most common method for consumers to access the Internet. Facilitated by technologies such as cloud computing, cellular networks, and Wi-Fi, mobile devices have become advertising, shopping, reading, and media viewing machines, and in the process, are transforming consumer behavior yet again. Mobile, social, and local have become driving forces in e-commerce. The mobile platform infrastructure has also given birth to yet another e-commerce innovation: on-demand services that are local and personal. From hailing a taxi, to shopping, to washing your clothes, these new businesses are creating a marketspace where owners of resources such as cars, spare bedrooms, and spare time can find a market of eager consumers looking to buy a service in a few minutes using their smartphones. Uber, profiled in the opening case, is a leading example of these new on-demand service firms that are disrupting traditional business models.
1.1 THE FIRST THIRTY SECONDS: WHY YOU SHOULD STUDY E-COMMERCE
The rapid growth and change that has occurred in the first two decades of e-com- merce represents just the beginning—what could be called the first 30 seconds of the e-commerce revolution. Technology continues to evolve at exponential rates. This
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underlying ferment presents entrepreneurs with new opportunities to create new business models and businesses in traditional industries and in the process, disrupt, and in some instances, destroy existing business models and firms.
Improvements in underlying information technologies and continuing entrepre- neurial innovation in business and marketing promise as much change in the next decade as was seen in the previous two decades. The twenty-first century will be the age of a digitally enabled social and commercial life, the outlines of which we can still only barely perceive at this time. Analysts estimate that by 2020, consumers will be spending around $933 billion and businesses around $9.1 trillion in digital transactions. It appears likely that e-commerce will eventually impact nearly all commerce, and that most commerce will be e-commerce by the year 2050, if not sooner.
Business fortunes are made—and lost—in periods of extraordinary change such as this. The next five years hold exciting opportunities—as well as risks—for new and traditional businesses to exploit digital technology for market advantage. For society as a whole, the next few decades offer the possibility of extraordinary gains in social wealth as the digital revolution works its way through larger and larger segments of the world’s economy.
It is important to study e-commerce in order to be able to perceive and understand the opportunities and risks that lie ahead. By the time you finish this book, you will be able to identify the technological, business, and social forces that have shaped, and continue to shape, the growth of e-commerce, and be ready to participate in, and ultimately guide, discussions of e-commerce in the firms where you work. More specifi- cally, you will be able to analyze an existing or new idea for an e-commerce business, identify the most effective business model to use, and understand the technological underpinnings of an e-commerce presence, including the security and ethical issues raised, as well as how to optimally market and advertise the business, using both traditional e-marketing tools and social, mobile, and local marketing.
1.2 INTRODUCTION TO E-COMMERCE
In this section, we’ll first define e-commerce and then discuss the difference between e-commerce and e-business. We will also introduce you to the major technological building blocks underlying e-commerce: the Internet, Web, and mobile platform. The section concludes with a look at some major current trends in e-commerce.
WHAT IS E-COMMERCE?
E-commerce involves the use of the Internet, the World Wide Web (Web), and mobile apps and browsers running on mobile devices to transact business. Although the terms Internet and Web are often used interchangeably, they are actually two very different things. The Internet is a worldwide network of computer networks, and the Web is one of the Internet’s most popular services, providing access to billions of web pages. An app (short-hand for application) is a software application. The term is typically used when referring to mobile applications, although it is also sometimes used to refer to desktop computer applications as well. A mobile browser is a version of web browser
e-commerce the use of the Internet, the Web, and mobile apps and browsers running on mobile devices to transact business. More formally, digitally enabled commer- cial transactions between and among organizations and individuals
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software accessed via a mobile device. (We describe the Internet, Web, and mobile platform more fully later in this chapter and in Chapters 3 and 4.) More formally, e-commerce can be defined as digitally enabled commercial transactions between and among organizations and individuals. Each of these components of our working defini- tion of e-commerce is important. Digitally enabled transactions include all transactions mediated by digital technology. For the most part, this means transactions that occur over the Internet, the Web, and/or via mobile devices. Commercial transactions involve the exchange of value (e.g., money) across organizational or individual boundaries in return for products and services. Exchange of value is important for understanding the limits of e-commerce. Without an exchange of value, no commerce occurs.
The professional literature sometimes refers to e-commerce as digital commerce. For our purposes, we consider e-commerce and digital commerce to be synonymous.
THE DIFFERENCE BETWEEN E-COMMERCE AND E-BUSINESS
There is a debate about the meaning and limitations of both e-commerce and e-busi- ness. Some argue that e-commerce encompasses the entire world of electronically based organizational activities that support a firm’s market exchanges—including a firm’s entire information system infrastructure (Rayport and Jaworski, 2003). Others argue, on the other hand, that e-business encompasses the entire world of internal and external electronically based activities, including e-commerce (Kalakota and Robinson, 2003).
We think it is important to make a working distinction between e-commerce and e-business because we believe they refer to different phenomena. E-commerce is not “anything digital” that a firm does. For purposes of this text, we will use the term e-business to refer primarily to the digital enabling of transactions and processes within a firm, involving information systems under the control of the firm. For the most part, in our view, e-business does not include commercial transactions involving an exchange of value across organizational boundaries. For example, a company’s online inventory control mechanisms are a component of e-business, but such internal processes do not directly generate revenue for the firm from outside businesses or consumers, as e-commerce, by definition, does. It is true, however, that a firm’s e-business infrastructure provides support for online e-commerce exchanges; the same infrastructure and skill sets are involved in both e-business and e-commerce. E-com- merce and e-business systems blur together at the business firm boundary, at the point where internal business systems link up with suppliers or customers (see Figure 1.1). E-business applications turn into e-commerce precisely when an exchange of value occurs (see Mesenbourg, U.S. Department of Commerce, 2001, for a similar view). We will examine this intersection further in Chapter 12.
TECHNOLOGICAL BUILDING BLOCKS UNDERLYING E-COMMERCE: THE INTERNET, WEB, AND MOBILE PLATFORM
The technology juggernauts behind e-commerce are the Internet, the Web, and increas- ingly, the mobile platform. We describe the Internet, Web, and mobile platform in some detail in Chapter 3. The Internet is a worldwide network of computer networks built on common standards. Created in the late 1960s to connect a small number of
e-business the digital enabling of transactions and processes within a firm, involving information systems under the control of the firm
Internet worldwide network of computer networks built on common standards
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mainframe computers and their users, the Internet has since grown into the world’s largest network. It is impossible to say with certainty exactly how many computers and other mobile devices such as smartphones and tablets are connected to the Inter- net worldwide at any one time, but some experts estimate the number to be more than 5 billion (Camhi, 2015). The Internet links businesses, educational institutions, government agencies, and individuals together, and provides users with services such as e-mail, document transfer, shopping, research, instant messaging, music, videos, and news.
One way to measure the growth of the Internet is by looking at the number of Internet hosts with domain names. (An Internet host is defined by the Internet Systems Consortium as any IP address that returns a domain name in the in-addr.arpa domain, which is a special part of the DNS namespace that resolves IP addresses into domain names.) In January 2016, there were more than 1 billion Internet hosts in over 245 countries, up from just 70 million in 2000 (Internet Systems Consortium, 2016).
The Internet has shown extraordinary growth patterns when compared to other electronic technologies of the past. It took radio 38 years to achieve a 30% share of U.S. households. It took television 17 years to achieve a 30% share. It took only 10 years for the Internet/Web to achieve a 53% share of U.S. households once a graphical user interface was invented for the Web in 1993. Today, in the United States, around 267 million people of all ages (about 82% of the U.S. population) use the Internet at least once a month (eMarketer, Inc. 2016a).
The World Wide Web (the Web) is an information system that runs on the Internet infrastructure. The Web was the original “killer app” that made the Internet commercially interesting and extraordinarily popular. The Web was developed in the early 1990s and hence is of much more recent vintage than the Internet. We describe
World Wide Web (the Web) an information system running on Internet infra- structure that provides access to billions of web pages
FIGURE 1.1 THE DIFFERENCE BETWEEN E-COMMERCE AND E-BUSINESS
E-commerce primarily involves transactions that cross firm boundaries. E-business primarily involves the application of digital technologies to business processes within the firm.
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the Web in some detail in Chapter 3. The Web provides access to billions of web pages indexed by Google and other search engines. These pages are created in a language called HTML (HyperText Markup Language). HTML pages can contain text, graphics, animations, and other objects. The Internet prior to the Web was primarily used for text communications, file transfers, and remote computing. The Web introduced far more powerful and commercially interesting capabilities of direct relevance to com- merce. In essence, the Web added color, voice, and video to the Internet, creating a communications infrastructure and information storage system that rivals television, radio, magazines, and libraries.
There is no precise measurement of the number of web pages in existence, in part because today’s search engines index only a portion of the known universe of web pages. Google has identified over 30,000 trillion unique uniform resource locators (URLs), commonly known as web addresses, up from 1 trillion in 2008, although many of these pages do not necessarily contain unique content (Schwartz, 2015). In addition to this “surface” or “visible” Web, there is also the so-called deep Web that is reportedly 500 to 1,000 times greater than the surface Web. The deep Web contains databases and other content that is not routinely indexed by search engines such as Google (see Figure 1.2). Although the total size of the Web is not known, what is indisputable is that web content has grown exponentially since 1993.
The mobile platform is the newest development in Internet infrastructure. The mobile platform provides the ability to access the Internet from a variety of mobile
mobile platform provides the ability to access the Internet from a variety of mobile devices such as smartphones, tablets, and other ultra- lightweight laptop computers
FIGURE 1.2 THE DEEP WEB
Search engines index only a small portion of online content.
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devices such as smartphones, tablets, and other ultra-lightweight laptop computers via wireless networks or cell phone service. Mobile devices are playing an increasingly prominent role in Internet access. In 2016, there are over 360 million mobile devices in the United States that can be connected to the Internet (more than 1 device for each person in the United States), and almost 93% of Americans who access the Internet use a mobile device to do so at least some of the time (eMarketer, Inc., 2016b, 2016c). Figure 1.3 illustrates the variety of devices used by Americans to access the Internet in 2016.
The mobile platform is not just a hardware phenomenon. The introduction of the Apple iPhone in 2007, followed by the Apple iPad in 2010, has also ushered in a sea-change in the way people interact with the Internet from a software perspective. In the early years of e-commerce, the Web and web browsers were the only game in town. Today, in contrast, more Americans access the Internet via a mobile app than by using a desktop computer and web browser. Insight on Technology: Will Apps Make the Web Irrelevant? examines the challenge that apps and the mobile platform pose to the Web’s dominance of the Internet ecosphere in more depth.
FIGURE 1.3 INTERNET ACCESS IN THE UNITED STATES, 2016
Over 80% of all Internet users in the United States (217 million people) go online using both a desktop/ laptop and mobile device. Almost 12% (31 million) only go online by using a mobile device. Just over 7% (19 million) use only a desktop or laptop computer to access the Internet. SOURCE: Based on data from eMarketer, Inc., 2016c.
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(continued)
INSIGHT ON TECHNOLOGY
WILL APPS MAKE THE WEB IRRELEVANT?
Nowadays, it’s hard to recall a time before the Web. How did we get along without the ability to pull up a web
browser and search for any item, learn about any topic, or play just about any
type of game? Though the Web has come a remarkably long way from its humble beginnings, many experts claim that the Web’s best days are behind it, and that there’s a new player on the field: apps. Opinions vary widely over the future role of the Web in a world where apps have become an ever larger portion of the Internet marketspace. In 10 years, will web browsers be forgotten relics, as we rely entirely on apps to do both our work and our play on the Internet? Will the Web and apps coexist peacefully as vital cogs in the Internet eco- system? Or will the app craze eventually die down as tech users gravitate back toward the Web as the primary way to perform Internet-related tasks?
Apps have grown into a disruptive force ever since Apple launched its App Store in 2008. The list of industries apps have disrupted is wide- ranging: communications, media and entertain- ment, logistics, education, healthcare, and most recently, with Uber, the taxi industry. Despite not even existing prior to 2008, in 2016, sales of apps are expected to account for over $59 billion in revenues worldwide, and the app economy is continuing to show robust growth, with estimates of over $100 billion in revenue by 2020. More of those revenues are likely to come from in-app purchases than from paid app downloads. Not only that, but the growth is not coming from more users trying the same small number of apps. Although usage of apps tends to be highly concentrated, with nearly 75% of smartphone app minutes spent on an individual’s top 3 apps, con- sumers are trying new apps all the time and visit about 27 apps per month, leaving plenty of room
for new app developers to innovate and create best-selling apps. In fact, according to mobile advertising company Flurry, 280 million people worldwide qualify as mobile addicts, which they define as someone who launches a smartphone app more than 60 times a day. According to Flurry, the number of such addicts increased by about 350% from 2013 to 2015.
In January 2014, for the first time ever, Americans used mobile apps more than desktop computers to access the Internet. The time U.S. adults are spending using mobile apps has exploded, growing by over 110% over the past three years, and now accounting for 58% of total digital media time spent; time spent on the desktop now accounts for just 33%, and mobile browsers just 9%. U.S. adults are spending over 96 hours a month (about 3¼ hours a day) within apps on their smartphones and tablet computers. Consum- ers have gravitated to apps for several reasons. First, smartphones and tablet computers enable users to use apps anywhere, instead of being teth- ered to a desktop or having to lug a heavy laptop around. Of course, smartphones and tablets enable users to use the Web too, but apps are often more convenient and boast more streamlined, elegant interfaces than mobile web browsers.
Not only are apps more appealing in certain ways to consumers, they are much more appealing to content creators and media companies. Apps are much easier to control and monetize than websites, not to mention they can’t be crawled by Google or other services. On the Web, the average price of ads per thousand impressions is falling, and many content providers are still mostly strug- gling to turn the Internet into a profitable content delivery platform. Much of software and media companies’ focus has shifted to developing mobile apps for this reason.
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These trends are why some pundits boldly proclaim that the Web is dead, and that
the shift from the Web to apps has only just started. These analysts believe that the Internet will be used to transport data, but individual app interfaces will replace the web browser as the most common way to access and display content. Even the creator of the Web, Tim Berners-Lee, feels that the Web as we know it is being threat- ened. That’s not a good sign.
But there is no predictive consensus about the role of the Web in our lives in the next decade and beyond. Many analysts believe the demise of the Web has been greatly exaggerated, and that the Web boasts many advantages over today’s apps that users will be unwilling to relinquish. Although apps may be more convenient than the Web in many respects, the depth of the web browsing experience trumps that of apps. The Web is a vibrant, diverse array of sites, and browsers have an openness and flexibility that apps lack. The connections between websites enhance their usefulness and value to users, and apps that instead seek to lock users in cannot offer the same experience.
Other analysts who are more optimistic about the Web’s chances to remain relevant in an increasingly app-driven online marketplace feel this way because of the emergence of HTML5. HTML5 is a markup language that enables more dynamic web content and allows for browser- accessible web apps that are as appealing as device-specific apps. In fact, there is another
group of analysts who believe that apps and the Web are going to come together, with HTML5 bringing the best of the app experience to the Web, and with apps developing new web-like capabilities. Already, work is underway to create more “smart” apps that handle a wider array of tasks than today’s apps can handle, such as apps with Siri integration.
A shift towards apps and away from the Web could have a ripple effect on e-commerce firms. As the pioneer of apps and the market leader in apps, smartphones, and tablet computers, Apple stands to gain from a shift towards apps, and although it also faces increasing competition from other com- panies, including Google, the established success of the App Store will make it next to impossible to dethrone Apple. For instance, while Google’s Google Play store had double the number of down- loads compared to Apple’s App Store in 2015, the App Store still made 75% more revenue than Google Play. Google’s search business is likely to suffer from all of the “walled garden” apps that it cannot access, but it also has a major stake in the world of smartphones, tablets, and apps itself with its Android operating system, which is used by over 80% of smartphones worldwide. Facebook has already seen its members make the transi- tion from using its website to using its mobile app and has made, and continues to make, significant investments in standalone apps, such as Instagram and WhatsApp. Web-based companies that fail to find an answer to the growth of mobile apps may eventually fall by the wayside.
SOURCES: “The 2016 U.S. Mobile App Report,” comScore, September 2016; “US Mobile StatPack,” by Cathy Boyle, eMarketer, March 2016; “Gart- ner Says Worldwide Smartphone Sales Grew 9.7 Percent in Fourth Quarter of 2015,” Gartner.com, February 18, 2016; “App Forecast: Over $100 Billion in Revenue by 2020,” by Danielle Levitas, Blog.Appannie.com, February 10, 2016; “App Annie 2015: Google Play Saw 100% More Downloads Than the iOS App Store, but Apple Generated 75% More Revenue,” by Emil Protalinski, Venturebeat.com, January 20, 2016; “Publisher Straddle the Apple-Google, App- Web Divide,” by Katie Benner and Conor Dougherty, New York Times, October 18, 2015; “Mobile Addicts Multiply Across the Globe,” by Simon Khalaf, Flurrymobile.tumblr.com, July 15, 2015; “How Apps Won the Mobile Web,” by Thomas Claburn, Informationweek.com, April 3, 2014; “Mobile Apps Overtake PC Internet Usage in U.S.,” by James O’Toole, Money.cnn.com, February 28, 2014; “Is The Web Dead In the Face of Native Apps? Not Likely, But Some Think So,” by Gabe Knuth, Brianmadden.com, March 28, 2012; “The Web Is Dead. Long Live the Internet,” by Chris Anderson and Michael Wolff, Wired.com, August 17, 2010; “The Web Is Dead? A Debate,” by Chris Anderson, Wired.com, August 17, 2010.
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MAJOR TRENDS IN E-COMMERCE
Table 1.1 describes the major trends in e-commerce in 2016–2017 from a business, technological, and societal perspective, the three major organizing themes that we use in this book to understand e-commerce (see Section 1.6).
From a business perspective, one of the most important trends to note is that all forms of e-commerce continue to show very strong growth. Retail e-commerce has been growing at double-digit rates for the last few years, and by 2017, is expected to reach $460 billion, while mobile e-commerce is anticipated to increase by almost 30% to around $232 billion. Social networks such as Facebook, Pinterest, and Ins- tagram are enabling social e-commerce by providing advertising, search, and Buy buttons that enable consumers to actually purchase products. Local e-commerce is being fueled by the explosion of interest in on-demand services such as Uber and Airbnb. B2B e-commerce, which dwarfs all other forms, also is continuing to strengthen and grow.
From a technology perspective, the mobile platform based on smartphones and tablet computers has finally arrived with a bang, driving astronomical growth in mobile advertising and making true mobile e-commerce a reality. The use of mobile messaging services such as WhatsApp and Snapchat has created an alternative communications platform that are beginning to be leveraged for commerce as well. Cloud computing is inextricably linked to the development of the mobile platform by enabling the storage of consumer content and software on cloud (Internet-based) servers, and making it available to mobile devices as well as desktops. Other major technological trends include the increasing ability of companies to track and analyze the flood of online data (typically referred to as big data) being produced. The Internet of Things, comprised of billions of Internet-connected devices, continues to grow exponentially, and will only add to this flood of data in the years to come.
At the societal level, other trends are apparent. The Internet and mobile plat- form provide an environment that allows millions of people to create and share content, establish new social bonds, and strengthen existing ones through social network, photo- and video-posting, and blogging sites and apps, while at the same time creating significant privacy issues. Privacy seems to have lost some of its meaning in an age when millions create public online personal profiles, while at the same time concerns over commercial and governmental privacy invasion continue to increase. The major digital copyright owners have increased their pursuit of online piracy with mixed success, while reaching agreements with the big technol- ogy players such as Apple, Amazon, and Google to protect intellectual property rights. Governments have successfully moved toward taxation of e-commerce sales. Sovereign nations have expanded their surveillance of, and control over, online communications and content as a part of their anti-terrorist activities and their traditional interest in law enforcement. Online security, or lack thereof, remains a significant issue, as new stories about security breaches, malware, hacking, and other attacks emerge seemingly daily.
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TABLE 1.1 MAJOR TRENDS IN E-COMMERCE 2016–2017
B U S I N E S S
• Retail e-commerce in the United States continues double-digit growth (over 15%), with global growth rates even higher in Europe and emerging markets such as China, India, and Brazil.
• Mobile e-commerce (both retail and travel sales) explodes and is estimated to reach over $180 billion in the United States in 2016.
• The mobile app ecosystem continues to grow, with over 210 million Americans using mobile apps. • Social e-commerce, based on social networks and supported by advertising, emerges and continues to grow,
generating $3.9 billion in revenue for the top 500 social media retailers in the United States in 2015. • Local e-commerce, the third dimension of the mobile, social, local e-commerce wave, also is growing in the
United States, fueled by an explosion of interest in on-demand services such as Uber, to over $40 billion in 2016.
• B2B e-commerce in the United States continues to strengthen and grow to $6.7 trillion. • On-demand service firms like Uber and Airbnb attract billions in capital, garner multi-billion dollar valuations,
and show explosive growth. • Mobile advertising continues growing at astronomical rates, accounting for almost two-thirds of all digital ad
spending. • Small businesses and entrepreneurs continue to flood into the e-commerce marketplace, often riding on the
infrastructures created by industry giants such as Apple, Facebook, Amazon, Google, and eBay.
T E C H N O L O G Y
• A mobile computing and communications platform based on smartphones, tablet computers, wearable devices, and mobile apps becomes a reality, creating an alternative platform for online transactions, marketing, advertising, and media viewing. The use of mobile messaging services such as WhatsApp and Snapchat continues to expand, and these services are now used by over 60% of smartphone users.
• Cloud computing completes the transformation of the mobile platform by storing consumer content and software on “cloud” (Internet-based) servers and making it available to any consumer-connected device from the desktop to a smartphone.
• The Internet of Things, comprised of billions of Internet-connected devices, continues to grow exponentially. • As firms track the trillions of online interactions that occur each day, a flood of data, typically referred to as
big data, is being produced. • In order to make sense out of big data, firms turn to sophisticated software called business analytics (or web
analytics) that can identify purchase patterns as well as consumer interests and intentions in milliseconds.
S O C I E T Y
• User-generated content, published online as social network posts, tweets, blogs, and pins, as well as video and photo-sharing, continues to grow and provides a method of self-publishing that engages millions.
• The amount of data the average American consumes continues to increase, more than doubling from an average of about 34 gigabytes in 2008 to an estimated 74 gigabytes today.
• Social networks encourage self-revelation, while threatening privacy. • Participation by adults in social networks increases; Facebook becomes ever more popular in all
demographic categories. • Conflicts over copyright management and control continue, but there is substantial agreement among
online distributors and copyright owners that they need one another. • Taxation of online sales becomes more widespread. • Surveillance of online communications by both repressive regimes and Western democracies grows. • Concerns over commercial and governmental privacy invasion increase. • Online security continues to decline as major sites are hacked and lose control over customer information. • Spam remains a significant problem despite legislation and promised technology fixes. • On-demand service e-commerce produces a flood of temporary, poorly paid jobs without benefits.
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1.3 UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
Figure 1.4 illustrates eight unique features of e-commerce technology that both chal- lenge traditional business thinking and help explain why we have so much interest in e-commerce. These unique dimensions of e-commerce technologies suggest many new possibilities for marketing and selling—a powerful set of interactive, personalized, and rich messages are available for delivery to segmented, targeted audiences.
Prior to the development of e-commerce, the marketing and sale of goods was a mass-marketing and salesforce–driven process. Marketers viewed consumers as passive targets of advertising campaigns and branding “blitzes” intended to influence their long-term product perceptions and immediate purchasing behavior. Companies sold their products via well-insulated channels. Consumers were trapped by geographi- cal and social boundaries, unable to search widely for the best price and quality. Information about prices, costs, and fees could be hidden from the consumer, creating profitable information asymmetries for the selling firm. Information asymmetry refers to any disparity in relevant market information among parties in a transaction. It was so expensive to change national or regional prices in traditional retailing (what are called menu costs) that one national price was the norm, and dynamic pricing to
information asymmetry any disparity in relevant market information among parties in a transaction
FIGURE 1.4 EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
E-commerce technologies provide a number of unique features that have impacted the conduct of business.
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the marketplace (changing prices in real time) was unheard of. In this environment, manufacturers prospered by relying on huge production runs of products that could not be customized or personalized.
E-commerce technologies make it possible for merchants to know much more about consumers and to be able to use this information more effectively than was ever true in the past. Online merchants can use this information to develop new informa- tion asymmetries, enhance their ability to brand products, charge premium prices for high-quality service, and segment the market into an endless number of subgroups, each receiving a different price. To complicate matters further, these same technolo- gies also make it possible for merchants to know more about other merchants than was ever true in the past. This presents the possibility that merchants might collude on prices rather than compete and drive overall average prices up. This strategy works especially well when there are just a few suppliers (Varian, 2000a). We examine these different visions of e-commerce further in Section 1.4 and throughout the book.
Each of the dimensions of e-commerce technology illustrated in Figure 1.4 deserves a brief exploration, as well as a comparison to both traditional commerce and other forms of technology-enabled commerce.
UBIQUITY
In traditional commerce, a marketplace is a physical place you visit in order to transact. For example, television and radio typically motivate the consumer to go someplace to make a purchase. E-commerce, in contrast, is characterized by its u biquity: it is available just about everywhere, at all times. It liberates the market from being restricted to a physical space and makes it possible to shop from your desktop, at home, at work, or even from your car, using mobile e-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, it is no longer necessary that you spend time and money traveling to a market. At a broader level, the ubiquity of e-commerce lowers the cognitive energy required to transact in a marketspace. Cognitive energy refers to the mental effort required to complete a task. Humans generally seek to reduce cognitive energy outlays. When given a choice, humans will choose the path requiring the least effort—the most convenient path (Shapiro and Varian, 1999; Tversky and Kahneman, 1981).
GLOBAL REACH
E-commerce technology permits commercial transactions to cross cultural, regional, 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 mer- chants is roughly equal to the size of the world’s online population (an estimated 3.3 billion in 2016) (eMarketer, Inc., 2016d). More realistically, the Internet makes it much easier for startup e-commerce merchants within a single country to achieve a national audience than was ever possible in the past. The total number of users or
marketplace physical space you visit in order to transact
ubiquity available just about every- where, at all times
marketspace marketplace extended beyond traditional bound- aries and removed from a temporal and geographic location
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customers an e-commerce business can obtain is a measure of its reach (Evans and Wurster, 1997).
In contrast, most traditional commerce is local or regional—it involves local merchants or national merchants with local outlets. Television, radio stations, and newspapers, for instance, are primarily local and regional institutions with limited but powerful national networks that can attract a national audience. In contrast to e-commerce technology, these older commerce technologies do not easily cross national boundaries to a global audience.
UNIVERSAL STANDARDS
One strikingly unusual feature of e-commerce technologies is that the technical stan- dards of the Internet, and therefore the technical standards for conducting e-commerce, are universal standards—they are shared by all nations around the world. In contrast, most traditional commerce technologies differ from one nation to the next. For instance, television and radio standards differ around the world, as does cell phone technology.
The universal technical standards of e-commerce greatly lower market entry costs— the cost merchants must pay just to bring their goods to market. At the same time, for consumers, universal standards reduce search costs—the effort required to find suitable products. And by creating a single, one-world marketspace, where prices and product descriptions can be inexpensively displayed for all to see, price discovery becomes simpler, faster, and more accurate (Banerjee et al., 2005; Bakos, 1997; Kambil, 1997). Users, both businesses and individuals, also experience network externalities—benefits that arise because everyone uses the same technology. With e-commerce technologies, it is possible for the first time in history to easily find many of the suppliers, prices, and delivery terms of a specific product anywhere in the world, and to view them in a coherent, comparative environment. Although this is not necessarily realistic today for all or even most products, it is a potential that will be exploited in the future.
RICHNESS
Information richness refers to the complexity and content of a message (Evans and Wurster, 1999). Traditional markets, national sales forces, and retail stores have great richness: they are able to provide personal, face-to-face service using aural and visual cues when making a sale. The richness of traditional markets makes them a powerful selling or commercial environment. Prior to the development of the Web, there was a trade-off between richness and reach: the larger the audience reached, the less rich the message.
E-commerce technologies have the potential for offering considerably more infor- mation richness than traditional media such as printing presses, radio, and television because they are interactive and can adjust the message to individual users. Chatting with an online sales person, for instance, comes very close to the customer experience in a small retail shop. The richness enabled by e-commerce technologies allows retail and service merchants to market and sell “complex” goods and services that heretofore required a face-to-face presentation by a sales force to a much larger audience.
reach the total number of users or customers an e-commerce business can obtain
universal standards standards that are shared by all nations around the world
richness the complexity and content of a message
U n i q u e F e a t u r e s o f E - c o m m e r c e T e c h n o l o g y 19
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INTERACTIVITY
Unlike any of the commercial technologies of the twentieth century, with the possible exception of the telephone, e-commerce technologies allow for interactivity, meaning they enable two-way communication between merchant and consumer and among consumers. Traditional television or radio, for instance, cannot ask viewers questions or enter into conversations with them, or request that customer information be entered into a form.
Interactivity allows an online merchant to engage a consumer in ways similar to a face-to-face experience. Comment features, community forums, and social networks with social sharing functionality such as Like and Share buttons all enable consumers to actively interact with merchants and other users. Somewhat less obvious forms of interactivity include responsive design elements, such as websites that change format depending on what kind of device they are being viewed on, product images that change as a mouse hovers over them, the ability to zoom in or rotate images, forms that notify the user of a problem as they are being filled out, and search boxes that autofill as the user types.
INFORMATION DENSITY
E-commerce technologies vastly increase information density—the total amount and quality of information available to all market participants, consumers and mer- chants alike. E-commerce technologies reduce information collection, storage, process- ing, and communication costs. At the same time, these technologies greatly increase the currency, accuracy, and timeliness of information—making information more useful and important than ever. As a result, information becomes more plentiful, less expensive, and of higher quality.
A number of business consequences result from the growth in information density. One of the shifts that e-commerce is bringing about is a reduction in infor- mation asymmetry among market participants (consumers and merchants). Prices and costs become more transparent. Price transparency refers to the ease with which consumers can find out the variety of prices in a market; cost transparency refers to the ability of consumers to discover the actual costs merchants pay for products. Pre- venting consumers from learning about prices and costs becomes more difficult with e-commerce and, as a result, the entire marketplace potentially becomes more price competitive (Sinha, 2000). But there are advantages for merchants as well. Online mer- chants can discover much more about consumers; this allows merchants to segment the market into groups willing to pay different prices and permits them to engage in price 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 expensive exotic vacation plans to that consumer at a premium price, knowing this person is willing to pay extra for such a vacation. At the same time, the online merchant can pitch the same vacation plan at a lower price to more price-sensitive consumers. Merchants also have enhanced abilities to differentiate their products in terms of cost, brand, and quality.
interactivity technology that allows for two-way communication between merchant and consumer
information density the total amount and quality of information available to all market participants
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T y p e s o f E - c o m m e r c e 21
PERSONALIZATION AND CUSTOMIZATION
E-commerce technologies permit personalization: merchants can target their market- ing messages to specific individuals by adjusting the message to a person’s name, interests, and past purchases. Today this is achieved in a few milliseconds and followed by an advertisement based on the consumer’s profile. The technology also permits customization—changing the delivered product or service based on a user’s prefer- ences 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 contents of the channel you have chosen. In contrast, the online version of the Wall Street Journal allows you to select the type of news stories you want to see first, and gives you the opportunity to be alerted when certain events happen. Personalization and customization allow firms to precisely identify market segments and adjust their messages accordingly.
SOCIAL TECHNOLOGY: USER-GENERATED CONTENT AND SOCIAL NETWORKS
In a way quite different from all previous technologies, e-commerce technologies have evolved to be much more social by allowing users to create and share content with a worldwide community. 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, used a broadcast model (one-to-many): content is created in a central location by experts (professional writers, editors, directors, actors, and producers) and audiences are concentrated in huge aggregates to consume a standardized product. The telephone would appear to be an exception but it is not a mass communication technology. Instead the telephone is a one-to-one technology. E-commerce technologies have the potential to invert this standard media model by giving users the power to create and distribute content on a large scale, and permit users to program their own content consumption. E-commerce technologies provide a unique, many-to-many model of mass communication.
Table 1.2 provides a summary of each of the unique features of e-commerce technol- ogy and their business significance.
1.4 TYPES OF E-COMMERCE
There are a number of different types of e-commerce and many different ways to characterize them. For the most part, we distinguish different types of e-commerce
personalization the targeting of marketing messages to specific individuals by adjusting the message to a person’s name, interests, and past purchases
customization changing the delivered product or service based on a user’s preferences or prior behavior
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by the nature of the market relationship—who is selling to whom. Mobile, social, and local e-commerce can be looked at as subsets of these types of e-commerce.
BUSINESS-TO-CONSUMER (B2C) E-COMMERCE
The most commonly discussed type of e-commerce is business-to-consumer (B2C) e-commerce, in which online businesses attempt to reach individual consumers. B2C e-commerce includes purchases of retail goods, travel and other types of services, and online content. Even though B2C is comparatively small (an estimated $600 billion in 2016 in the United States), it has grown exponentially since 1995, and is the type of e-commerce that most consumers are likely to encounter (see Figure 1.5).
Within the B2C category, there are many different types of business models. Chapter 2 has a detailed discussion of seven different B2C business models: online
business-to-consumer (B2C) e-commerce online businesses selling to individual consumers
E - C O M M E R C E T E C H N O L O G Y D I M E N S I O N
B U S I N E S S S I G N I F I C A N C E
Ubiquity—E-commerce 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. “Marketspace” includes potentially billions of consumers and millions of businesses worldwide.
Universal standards—There is one set of technology standards.
There is a common, inexpensive, global technology foundation for businesses to use.
Richness—Video, audio, and text messages are possible.
Video, audio, and text marketing messages are integrated into a single marketing message and consuming 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, while currency, accuracy, and timeliness improve greatly. Information becomes plentiful, cheap, and 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-generated content and social networks.
New online social and business models enable user content creation and distribution, and support social networks.
TABLE 1.2 BUSINESS SIGNIFICANCE OF THE EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
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retailers, service providers, transaction brokers, content providers, community provid- ers/social networks, market creators, and portals. Then, in Part 4, we look at each of these business models in action. In Chapter 9, we examine online retailers, service providers, including on-demand services, and transaction brokers. In Chapter 10, we focus on content providers. In Chapter 11, we look at community providers (social networks), market creators (auctions), and portals.
The data suggests that, over the next five years, B2C e-commerce in the United States will grow by over 10% annually. There is tremendous upside potential. Today, for instance, retail e-commerce (which currently comprises the lion’s share of B2C e-commerce revenues) is still a very small part (around 8%) of the overall $4.8 tril- lion retail market in the United States. There is obviously much room to grow (see Figure 1.6). However, it’s not likely that B2C e-commerce revenues will continue to expand forever at current rates. As online sales become a larger percentage of all sales, online sales growth will likely eventually decline. However, this point still appears to be a long way off. Online content sales, everything from music, to video, medical information, games, and entertainment, have an even longer period to grow before they hit any ceiling effects.
BUSINESS-TO-BUSINESS (B2B) E-COMMERCE
Business-to-business (B2B) e-commerce, in which businesses focus on selling to other businesses, is the largest form of e-commerce, with around $6.7 trillion in
business-to-business (B2B) e-commerce online businesses selling to other businesses
In the early years, B2C e-commerce was doubling or tripling each year. Although B2C e-commerce growth in the United States slowed in 2008–2009 due to the economic recession, it resumed growing at about 13% in 2010 and since then, has continued to grow at double-digit rates. SOURCES: Based on data from eMarketer, Inc., 2016e, 2016f; authors’ estimates.
FIGURE 1.5 THE GROWTH OF B2C E-COMMERCE IN THE UNITED STATES
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transactions in the United States in 2016 (see Figure 1.7). There is an estimated $14.5 trillion in business-to-business exchanges of all kinds, online and offline, suggesting that B2B e-commerce has significant growth potential. The ultimate size of B2B e-commerce is potentially huge.
There are two primary business models used within the B2B arena: Net mar- ketplaces, which include e-distributors, e-procurement companies, exchanges and industry consortia, and private industrial networks. We review various B2B business models in Chapter 2 and examine them in further depth in Chapter 12.
CONSUMER-TO-CONSUMER (C2C) E-COMMERCE
Consumer-to-consumer (C2C) e-commerce provides a way for consumers to sell to each other, with the help of an online market maker (also called a platform pro- vider) such as eBay or Etsy, the classifieds site Craigslist, or on-demand service com- panies such as Airbnb and Uber. In C2C e-commerce, the consumer prepares the product for market, places the product for auction or sale, and relies on the market maker to provide catalog, search engine, and transaction-clearing capabilities so that products can be easily displayed, discovered, and paid for.
Given that in 2015, eBay by itself generated around $82 billion in gross merchan- dise volume, it is probably safe to estimate that the size of the C2C market in 2016 is more than $100 billion (eBay, 2016).
consumer-to- consumer (C2C) e-commerce consumers selling to other consumers
The retail e-commerce market is still just a small part of the overall U.S. retail market, but with much room to grow in the future.
FIGURE 1.6 ROOM TO GROW
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MOBILE E-COMMERCE (M-COMMERCE)
Mobile e-commerce (m-commerce), refers to the use of mobile devices to enable online transactions. M-commerce involves the use of cellular and wireless networks to connect smartphones and tablet computers to the Internet. Once connected, mobile consumers can purchase products and services, make travel reservations, use an expanding variety of financial services, access online content, and much more.
M-commerce purchases are expected to reach over $180 billion in 2016 and to grow rapidly in the United States over the next five years (see Figure 1.8). Factors that are driving the growth of m-commerce include the increasing amount of time consumers are spending using mobile devices, larger smartphone screen sizes, greater use of responsive design enabling e-commerce sites to be better optimized for mobile use and mobile checkout and payment, and enhanced mobile search functionality. (eMarketer, Inc., 2016g, 2016h).
SOCIAL E-COMMERCE
Social e-commerce is e-commerce that is enabled by social networks and online social relationships. The growth of social e-commerce is being driven by a number of factors, including the increasing popularity of social sign-on (signing onto websites using your Facebook or other social network ID), network notification (the sharing of approval or disapproval of products, services, and content), online collaborative
mobile e-commerce (m-commerce) use of mobile devices to enable online transactions
social e-commerce e-commerce enabled by social networks and online social relationships
T y p e s o f E - c o m m e r c e 25
FIGURE 1.7 THE GROWTH OF B2B E-COMMERCE IN THE UNITED STATES
B2B e-commerce in the United States is about 10 times the size of B2C e-commerce. In 2020, B2B e-commerce is projected to be over $9 trillion. (Note: Does not include EDI transactions.) SOURCES: Based on data from U.S. Census Bureau, 2016; authors’ estimates.
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shopping tools, social search (recommendations from online trusted friends), and the increasing prevalence of integrated social commerce tools such as Buy buttons, Shop- ping tabs, and virtual shops on Facebook, Instagram, Pinterest, YouTube, and other social network sites.
Social e-commerce is still in its relative infancy, but in 2015, the top 500 retailers in Internet Retailer’s Social Media 500 earned about $3.9 billion from social e-commerce. Website traffic from social networks to the top 500 retailers also increased by almost 20% in 2015 (Internet Retailer, 2016).
Social e-commerce is often intertwined with m-commerce, particularly as more and more social network users access those networks via mobile devices. A variation of social e-commerce known as conversational commerce leverages the mobile connection even further. Conversational commerce involves the use of mobile messaging apps such as Facebook Messenger, WhatsApp, Snapchat, Slack, and others as a vehicle for companies to engage with consumers.
LOCAL E-COMMERCE
Local e-commerce, as its name suggests, is a form of e-commerce that is focused on engaging the consumer based on his or her current geographic location. Local mer- chants use a variety of online marketing techniques to drive consumers to their stores.
local e-commerce e-commerce that is focused on engaging the consumer based on his or her current geographic location
FIGURE 1.8 THE GROWTH OF M-COMMERCE IN THE UNITED STATES
In the last five years, m-commerce has increased astronomically, from just $32.8 billion in 2012 to over an expected $180 billion in 2016, and it is anticipated that it will continue to grow at double-digit rates over the next five years as consumers become more and more accustomed to using mobile devices to purchase products and services. SOURCES: Based on data from eMarketer, Inc., 2016g, 2016h, 2015a, 2015b, 2014.
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Local e-commerce is the third prong of the mobile, social, local e-commerce wave and, fueled by an explosion of interest in local on-demand services such as Uber, is expected to grow in the United States to over $40 billion in 2016.
Figure 1.9 illustrates the relative size of all of the various types of e-commerce while Table 1.3 provides examples for each type.
1.5 E-COMMERCE: A BRIEF HISTORY
It is difficult to pinpoint just when e-commerce began. There were several precursors to e-commerce. In the late 1970s, a pharmaceutical firm named Baxter Healthcare initiated a primitive form of B2B e-commerce by using a telephone-based modem that permitted hospitals to reorder supplies from Baxter. This system was later expanded during the 1980s into a PC-based remote order entry system and was widely copied throughout the United States long before the Internet became a commercial environ- ment. The 1980s saw the development of Electronic Data Interchange (EDI) standards that permitted firms to exchange commercial documents and conduct digital com- mercial transactions across private networks.
B2B e-commerce dwarfs all other forms of e-commerce; mobile, social, and local e-commerce, although growing rapidly, are still relatively small in comparison to “traditional” e-commerce.
FIGURE 1.9 THE RELATIVE SIZE OF DIFFERENT TYPES OF E-COMMERCE
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In the B2C arena, the first truly large-scale digitally enabled transaction system was the Minitel, a French videotext system that combined a telephone with an 8-inch screen. The Minitel was first introduced in 1981, and by the mid-1980s, more than 3 million had been deployed, with more than 13,000 different services available, including ticket agencies, travel services, retail products, and online banking. The Minitel service continued in existence until December 31, 2006, when it was finally discontinued by its owner, France Telecom.
However, none of these precursor systems had the functionality of the Internet. Generally, when we think of e-commerce today, it is inextricably linked to the Inter- net. For our purposes, we will say e-commerce begins in 1995, following the appear- ance of the first banner advertisements placed by AT&T, Volvo, Sprint, and others on Hotwired in late October 1994, and the first sales of banner ad space by Netscape and Infoseek in early 1995.
Although e-commerce is not very old, it already has a tumultuous history, which can be usefully divided into three periods: 1995–2000, the period of invention; 2001– 2006, the period of consolidation; and 2007–present, a period of reinvention with social, mobile, and local expansion. The following examines each of these periods briefly, while Figure 1.10 places them in context along a timeline.
E-COMMERCE 1995–2000: INVENTION
The early years of e-commerce were a period of explosive growth and extraordinary innovation. During this Invention period, e-commerce meant selling retail goods, usually quite simple goods, on the Internet. There simply was not enough bandwidth for more complex products. Marketing was limited to unsophisticated static display ads and not very powerful search engines. The web policy of most large firms, if they had one at all, was to have a basic static website depicting their brands. The rapid
TABLE 1.3 MAJOR TYPES OF E-COMMERCE
T Y P E O F E - C O M M E R C E E X A M P L E
B2C—business-to-consumer Amazon is a general merchandiser that sells consumer products to retail consumers.
B2B—business-to-business Go2Paper is an independent third-party marketplace that serves the paper industry.
C2C—consumer-to-consumer Auction sites such as eBay, and listing sites such as Craigslist, enable consumers to auction or sell goods directly to other consumers. Airbnb and Uber provide similar platforms for services such as room rental and transportation.
M-commerce—mobile e-commerce
Mobile devices such as tablet computers and smartphones can be used to conduct commercial transactions.
Social e-commerce Facebook is both the leading social network and social e-commerce site.
Local e-commerce Groupon offers subscribers daily deals from local businesses in the form of Groupons, discount coupons that take effect once enough subscribers have agreed to purchase.
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growth in e-commerce was fueled by over $125 billion in venture capital. This period of e-commerce came to a close in 2000 when stock market valuations plunged, with thousands of companies disappearing (the “dot-com crash”).
The early years of e-commerce were also one of the most euphoric of times in American commercial history. It was also a time when key e-commerce concepts were developed. For computer scientists and information technologists, the early success of e-commerce was a powerful vindication of a set of information technolo- gies that had developed over a period of 40 years—extending from the development of the early Internet, to the PC, to local area networks. The vision was of a universal communications and computing environment that everyone on Earth could access with cheap, inexpensive computers—a worldwide universe of knowledge stored on HTML pages created by hundreds of millions of individuals and thousands of librar- ies, governments, and scientific institutes. Technologists celebrated the fact that the Internet was not controlled by anyone or any nation, but was free to all. They believed the Internet—and the e-commerce that rose on this infrastructure—should remain a self-governed, self-regulated environment.
For economists, the early years of e-commerce raised the realistic prospect of a nearly perfect competitive market: where price, cost, and quality information are equally distributed, a nearly infinite set of suppliers compete against one another, and customers have access to all relevant market information worldwide. The Internet would spawn digital markets where information would be nearly perfect—something that is rarely true in other real-world markets. Merchants in turn would have equal
FIGURE 1.10 PERIODS IN THE DEVELOPMENT OF E-COMMERCE
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direct access to hundreds of millions of customers. In this near-perfect information marketspace, transaction costs would plummet because search costs—the cost of searching for prices, product descriptions, payment settlement, and order fulfillment— would all fall drastically (Bakos, 1997). For merchants, the cost of searching for custom- ers would also fall, reducing the need for wasteful advertising. At the same time, advertisements could be personalized to the needs of every customer. Prices and even costs would be increasingly transparent to the consumer, who could now know exactly and instantly the worldwide best price, quality, and availability of most products. Information asymmetry would be greatly reduced. Given the instant nature of Internet communications, the availability of powerful sales information systems, and the low cost involved in changing prices on a website (low menu costs), producers could dynamically price their products to reflect actual demand, ending the idea of one national price, or one suggested manufacturer’s list price. In turn, market middle- men—the distributors and wholesalers who are intermediaries between producers and consumers, each demanding a payment and raising costs while adding little value— would disappear (disintermediation). Manufacturers and content originators would develop direct market relationships with their customers. The resulting intense com- petition, the decline of intermediaries, and the lower transaction costs would eliminate product brands, and along with these, the possibility of monopoly profits based on brands, geography, or special access to factors of production. Prices for products and services would fall to the point where prices covered costs of production plus a fair, “market rate” of return on capital, plus additional small payments for entrepreneurial effort (that would not last long). Unfair competitive advantages (which occur when one competitor has an advantage others cannot purchase) would be reduced, as would extraordinary returns on invested capital. This vision was called friction-free com- merce (Smith et al., 2000).
For real-world entrepreneurs, their financial backers, and marketing professionals, e-commerce represented an extraordinary opportunity to earn far above normal returns on investment. This is just the opposite of what economists hoped for. The e-commerce marketspace represented access to millions of consumers worldwide who used the Internet and a set of marketing communications technologies (e-mail and web pages) that was universal, inexpensive, and powerful. These new technologies would permit marketers to practice what they always had done—segmenting the market into groups with different needs and price sensitivity, targeting the segments with branding and promotional messages, and positioning the product and pricing for each group—but with even more precision. In this new marketspace, extraordinary profits would go to first movers—those firms who were first to market in a particular area and who moved quickly to gather market share. In a “winner take all” market, first movers could establish a large customer base quickly, build brand name recogni- tion early, create an entirely new distribution channel, and then inhibit competitors (new entrants) by building in switching costs for their customers through proprietary interface designs and features available only at one site. The idea for entrepreneurs was to create near monopolies online based on size, convenience, selection, and brand. Online businesses using the new technology could create informative, community-like features unavailable to traditional merchants. These “communities of consumption”
disintermediation displacement of market middlemen who tradition- ally are intermediaries between producers and consumers by a new direct relationship between producers and consumers
friction-free commerce a vision of commerce in which information is equally distributed, trans- action costs are low, prices can be dynamically adjusted to reflect actual demand, intermediaries decline, and unfair compet- itive advantages are eliminated
first mover a firm that is first to market in a particular area and that moves quickly to gather market share
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also would add value and be difficult for traditional merchants to imitate. The thinking was that once customers became accustomed to using a company’s unique web inter- face and feature set, they could not easily be switched to competitors. In the best case, the entrepreneurial firm would invent proprietary technologies and techniques that almost everyone adopted, creating a network effect. A network effect occurs where all participants receive value from the fact that everyone else uses the same tool or product (for example, a common operating system, telephone system, or software application such as a proprietary instant messaging standard or an operating system such as Windows), all of which increase in value as more people adopt them.1
To initiate this process, entrepreneurs argued that prices would have to be very low to attract customers and fend off potential competitors. E-commerce was, after all, a totally new way of shopping that would have to offer some immediate cost benefits to consumers. However, because doing business on the Web was supposedly so much more efficient when compared to traditional “bricks-and-mortar” businesses (even when compared to the direct mail catalog business) and because the costs of customer acquisition and retention would supposedly be so much lower, profits would inevitably materialize out of these efficiencies. Given these dynamics, market share, the number of visitors to a site (“eyeballs”), and gross revenue became far more important in the earlier stages of an online firm than earnings or profits. Entrepreneurs and their financial backers in the early years of e-commerce expected that extraordinary profit- ability would come, but only after several years of losses.
Thus, the early years of e-commerce were driven largely by visions of prof- iting from new technology, with the emphasis on quickly achieving very high market visibility. The source of financing was venture capital funds. The ideology of the period emphasized the ungoverned “Wild West” character of the Web and the feeling that governments and courts could not possibly limit or regulate the Internet; there was a general belief that traditional corporations were too slow and bureaucratic, too stuck in the old ways of doing business, to “get it”—to be competi- tive in e-commerce. Young entrepreneurs were therefore the driving force behind e-commerce, backed by huge amounts of money invested by venture capitalists. The emphasis was on disrupting (destroying) traditional distribution channels and disintermediating existing channels, using new pure online companies who aimed to achieve impregnable first-mover advantages. Overall, this period of e-commerce was characterized by experimentation, capitalization, and hypercompetition (Varian, 2000b).
E-COMMERCE 2001–2006: CONSOLIDATION
In the second period of e-commerce, from 2000 to 2006, a sobering period of reassess- ment of e-commerce occurred, with many critics doubting its long-term prospects. Emphasis shifted to a more “business-driven” approach rather than being technology driven; large traditional firms learned how to use the Web to strengthen their market positions; brand extension and strengthening became more important than creating
1 The network effect is quantified by Metcalfe’s Law, which argues that the value of a network grows by the square of the number of participants.
network effect occurs where users receive value from the fact that everyone else uses the same tool or product
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new brands; financing shrunk as capital markets shunned startup firms; and traditional bank financing based on profitability returned.
During this period of consolidation, e-commerce changed to include not just retail products but also more complex services such as travel and financial services. This period was enabled by widespread adoption of broadband networks in American homes and businesses, coupled with the growing power and lower prices of personal computers that were the primary means of accessing the Internet, usually from work or home. Marketing on the Internet increasingly meant using search engine advertis- ing targeted to user queries, rich media and video ads, and behavioral targeting of marketing messages based on ad networks and auction markets. The web policy of both large and small firms expanded to include a broader “web presence” that included not just websites, but also e-mail, display, and search engine campaigns; multiple websites for each product; and the building of some limited community feedback facilities. E-commerce in this period was growing again by more than 10% a year.
E-COMMERCE 2007–PRESENT: REINVENTION
Beginning in 2007 with the introduction of the iPhone, to the present day, e-commerce has been transformed yet again by the rapid growth of Web 2.0 (a set of applications and technologies that enable user-generated content, such as online social networks, blogs, video and photo sharing sites, and wikis), widespread adoption of mobile devices such as smartphones and tablet computers, the expansion of e-commerce to include local goods and services, and the emergence of an on-demand service economy enabled by millions of apps on mobile devices and cloud computing. This period can be seen as both a sociological, as well as a technological and business, phenomenon.
The defining characteristics of this period are often characterized as the “social, mobile, local” online world. Entertainment content has developed as a major source of e-commerce revenues and mobile devices have become entertainment centers, as well as on-the-go shopping devices for retail goods and services. Marketing has been transformed by the increasing use of social networks, word-of-mouth, viral marketing, and much more powerful data repositories and analytic tools for truly personal mar- keting. Firms have greatly expanded their online presence by moving beyond static web pages to social networks such as Facebook, Twitter, Pinterest, and Instagram in an attempt to surround the online consumer with coordinated marketing messages. These social networks share many common characteristics. First, they rely on user- generated content. “Regular” people (not just experts or professionals) are creating, sharing, and broadcasting content to huge audiences. They are inherently highly interactive, creating new opportunities for people to socially connect to others. They attract extremely large audiences (about 1.7 billion monthly active users worldwide as of June 2016 in the case of Facebook). These audiences present marketers with extraordinary opportunities for targeted marketing and advertising.
More recently, the reinvention of e-commerce has resulted in a new set of on- demand, personal service businesses such as Uber, Airbnb, Instacart, and Handy. These businesses have been able to tap into a large reservoir of unused assets (cars, spare rooms, and personal spare time) and to create lucrative markets based on the mobile platform infrastructure. The Insight on Business case, Startup Boot Camp, takes
Web 2.0 set of applications and technologies that enable user-generated content
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a look at Y Combinator, which has mentored a number of these new social, mobile, and local e-commerce ventures.
Table 1.4 summarizes e-commerce in each of these three periods.
ASSESSING E-COMMERCE: SUCCESSES, SURPRISES, AND FAILURES
Looking back at the evolution of e-commerce, it is apparent that e-commerce has been a stunning technological success as the Internet and the Web ramped up from a few thousand to billions of e-commerce transactions per year, and this year will gener- ate an estimated $600 billion in total B2C revenues and around $6.7 trillion in B2B revenues, with around 177 million online buyers in the United States. With enhance- ments and strengthening, described in later chapters, it is clear that e-commerce’s digital infrastructure is solid enough to sustain significant growth in e-commerce during the next decade. The Internet scales well. The “e” in e-commerce has been an overwhelming success.
From a business perspective, though, the early years of e-commerce were a mixed success, and offered many surprises. Only a very small percentage of dot-coms formed
TABLE 1.4 EVOLUTION OF E-COMMERCE
1 9 9 5 – 2 0 0 0
I N V E N T I O N
2 0 0 1 – 2 0 0 6
C O N S O L I D A T I O N
2 0 0 7 – P R E S E N T
R E I N V E N T I O N
Technology driven Business driven Mobile technology enables social, local, and mobile e-commerce
Revenue growth emphasis
Earnings and profits emphasis
Audience and social network connections emphasis
Venture capital financing
Traditional financing Return of venture capital financing; buy-outs of startups by large firms
Ungoverned Stronger regulation and governance
Extensive government surveillance
Entrepreneurial Large traditional firms Entrepreneurial social, mobile, and local firms
Disintermediation Strengthening intermediaries
Proliferation of small online intermediaries renting business processes of larger firms
Perfect markets Imperfect markets, brands, and network effects
Continuation of online market imperfections; commodity competition in select markets
Pure online strategies Mixed “bricks-and-clicks” strategies
Return of pure online strategies in new markets; extension of bricks-and-clicks in traditional retail markets
First-mover advantages
Strategic-follower strength; complementary assets
First-mover advantages return in new markets as traditional web players catch up
Low-complexity retail products
High-complexity retail products and services
Retail, services, and content
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INSIGHT ON BUSINESS
STARTUP BOOT CAMP
By now we’ve all heard the story of some lines of code written by Mark Zuckerberg in a Harvard dorm room
blossoming into a multi-billion dollar business. These days, it’s harder than ever
to keep track of all the tech start-ups being valued at millions and even billions of dollars,
often even without a cent of revenue to show for themselves. A number of them have something in common—they have been nurtured, and in some cases, whipped into shape, with the help of an “incubator.”
As entrepreneurs continue to launch a growing number of e-commerce companies, incubators have come to occupy a vital role in Silicon Valley, helping new businesses move from little more than a great idea to an established, vibrant business. Founded in 2005 by programmer and venture capitalist Paul Graham, Y Combinator (YC) is Silicon Valley’s best known incubator. Twice a year the company pro- vides a three-month boot camp, complete with seed funding and mentorship from an extensive network of highly regarded tech entrepreneurs. Every boot camp ends with a demonstration day, known as Demo Day or D Day, where all of the entrepre- neurs, known as “founders,” pitch their fledgling businesses to a group of wealthy venture capitalists hoping to unearth the next Facebook or Google. In 2014, Graham stepped down from a leadership role at the company, replaced by Sam Altman, former CEO of Loopt, a location-based mobile services provider and a successful YC graduate company. Altman is aiming to expand YC’s focus beyond the Internet to energy, biotechnology, medical devices, and other “hard technology” startups that solve concrete problems.
When companies are admitted to YC after a rigorous selection progress (typically less than 2% of applicants are accepted), they are given $120,000 in cash in exchange for a 7% stake in
the company. Founders have regular meetings with YC partners, and have free access to technology, technical advice, emotional support, and lessons in salesmanship. As of September 2016, Y Combinator has helped launch almost 1,400 start-up compa- nies, which together have a market capitalization of more than $70 billion. Its graduates have raised more than $10 billion, and ten of them have attained once rare, but now increasingly common, “unicorn” status, with a valuation in excess of $1 billion. More than 50 are worth over $100 million.
YC has been so successful that it is sometimes referred to as a “unicorn breeder.” Graduates that have achieved unicorn status include Airbnb, an on-demand room rental service (with a valuation of $30 billion); Dropbox, a cloud-based file storage service ($10 billion); Stripe, a digital payment infrastructure company ($5 billion); MZ (Machine Zone), a massively multi-player online gaming company ($3 billion); Zenefits, a cloud-based employee benefits manager ($2 billion); Instacart, an on-demand grocery delivery service ($2 billion); Twitch, a streaming video game network (acquired by Amazon for $1 billion); Docker, an open source software company ($1 billion), and Cruise, which develops self-driving car technology (acquired by GM for $ 1 billion). Other well-known graduates include Reddit, a social news site; Weebly, a website building platform; Coinbase, a Bitcoin wallet; Scribd, a digital library subscription service; and Codecad- emy, an online education service that teaches people how to program.
YC’s Winter 2016 class featured 127 startups that launched during its March 2016 Demo Days. While YC is increasingly focused on startups that are aiming to solve pervasive problems in the world rather than the next big gaming or to-do list app, it still accepts a number of startups seeking to make their mark in the e-commerce arena. For instance, Restocks is a mobile app that helps consumers
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track and buy hard-to-find, limited release prod- ucts. Subscribers to Restocks’ service receive push notification when brands such as Nike release or restock those products. Restocks had its genesis in founder Luke Miles’ frustration with his inability to find and purchase some “hot” Supreme-brand t-shirts. Miles wrote some code that sent him an e-mail when the products showed up as restocked on the brand’s website and then realized that it could be a useful tool for other products as well. Although Restocks faces competition from individual brands that may offer apps with a similar functionality, such as Nike’s SNKRs app, Restocks differentiates itself by aggregating dozens of brands.
Among other startups from the Winter 2016 class tabbed by analysts as particularly promising were Cover (an app that enables users to obtain insurance just by taking a photo), Castle.io (behav- ior-based online security), Yardbook (a cloud soft- ware system for the landscaping industry), Mux (a Netflix-like streaming service for business looking to deliver online video to customers), and Chatfuel (an automated chat tool for WhatsApp and other platforms).
YC also accepts startups that are focused on markets outside the United States. The Winter 2016 class included Paystack, an online payments pro- vider for African businesses; Kisan Network, which provides an online marketplace in India for farmers to sell directly to institutional buyers; Rappi, an on-demand service company focused on grocery delivery in Colombia; Shypmate, which offers a platform to facilitate person-to-person shipping to Africa; Lynks, an e-commerce logistics infrastruc- ture company for countries that are less developed;
and GoLorry, a mobile app that provides trucking logistics in India.
Not every company that makes it through YC’s boot camp is successful. Companies that fail to attract sufficient investor interest at Demo Day can try again with a different company or go their own way and “grow organically.” Some skeptics believe that incubators like YC might not be the best idea for every startup. For startups with solid, but not eye-popping products, services, or growth metrics, YC’s D Day might actually hurt their chances of getting funding. Having to compete against an extremely qualified field of startup companies diminishes the appeal for less flashy businesses. Once you’ve failed at acquiring funding at YC, other prospective investors might become concerned. There is also the concern founders may fixate on raising more money in seed funding rounds than necessary. According to Altman, founders should initially focus on making their company work on as little capital as possible, and YC’s best com- panies have been able to make great strides even with just relatively small amounts of seed funding.
As part of its own continuing evolution, YC announced in 2015 that it would begin to make later-stage investments in its graduates as well. Together with Stanford University’s endowment fund and Willett Advisors, YC has created a new $700 million Continuity Fund. YC has said that it hopes to participate in later funding rounds for all of its graduates that are being valued in funding at $300 million or less to help further guide them as they mature. In 2016, background screening software maker Checkr was one of the first to benefit, raising $40 million in funding led by the Continuity Fund.
SOURCES: “Press,” Y.combinator.com/press, accessed November 11, 2016; “Get Hype Brands at Retail with Restocks,” by Matthew Panzarino, Techcrunch.com, April 19, 2016; “Inside Silicon Valley’s Big Pitch Day,” by Anna Wiener, The Atlantic, March 29, 2016; “4 Cloud Startups to Watch from Y Combinator,” by Tess Townsend, Inc.com, March 24, 2016; “The Top 8 Startups from Y Combinator Winter ’16 Demo Day 2,” by Josh Constine, Techcrunch. com, March 24, 2016; “The Top 7 Startups From Y Combinator Winter ’16 Demo Day 1,” by Josh Constine, Techcrunch.com, March 23, 2016; “Checkr Raises $40 Million Series B Led by Y Combinator Continuity Fund,” Ivp.com, March 23, 2016; “Stanford, Michael Bloomberg Now Back Every Y Combinator Startup,” by Douglas Macmillan, Wall Street Journal, October 15, 2015; “Y Combinator Will Fund Later-Stage Companies,” by Mike Isaac, New York Times, October 15, 2015; “Meet Y Combinator’s Bold Whiz Kid Boss,” by Jason Ankeny, Entrepreneur.com, April 25, 2015; “The Y Combinator Chronicles: Y Combinator President Sam Altman Is Dreaming Big,” by Max Chafkin, Fastcompany.com, April 16, 2015; “Y Combinator Known for Picking Winners,” by Heather Somer- ville, San Jose Mercury News, May 8, 2014; “Y Combinator’s New Deal for Startups: More Money, Same 7% Equity,” by Kia Kokalitcheva, Venturebeat.com, April 22, 2014; “The New Deal,” by Sam Altman, Blog.ycombinator.com, April 22, 2014; “Silicon Valley’s Start-up Machine,” by Nathaniel Rich, New York Times, May 2, 2013; “What’s the Secret Behind Y Combinator’s Success?,” by Drew Hansen, Forbes.com, February 18, 2013.
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since 1995 have survived as independent companies in 2016, and even fewer of these survivors are profitable. Yet online retail sales of goods and services are still growing very rapidly. Contrary to economists’ hopes, however, online sales are increasingly concentrated. For instance, according to Internet Retailer, the top 500 retailers account for 84% of all online retail sales (Internet Retailer, 2016). So thousands of firms have failed, and those few that have survived dominate the market. The idea of thousands of suppliers competing on price has been replaced by a market dominated by giant firms. Consumers use the Web as a powerful source of information about products they often actually purchase through other channels, such as at a traditional bricks-and-mortar store. For instance, a 2014 study found that almost 90% of those surveyed “webroomed” (researched a product online before purchasing at a physical store) (Interactions Consumer Experience Marketing, Inc., 2014). This is especially true of expensive consumer durables such as automobiles, appliances, and electronics. This offline “Internet-influenced” commerce is very difficult to estimate, but definitely significant. For instance, Forrester Research estimated the amount to be somewhere around $1.3 trillion in 2015 (Forrester Research, 2016). All together then, retail e-commerce (actual online purchases) and purchases influenced by online shopping but actually bought in a store (Internet-influenced commerce) are expected to amount to almost $1.7 trillion in 2016. The “commerce” in e-commerce is basically very sound, at least in the sense of attracting a growing number of customers and generating revenues and profits for large e-commerce players.
Although e-commerce has grown at an extremely rapid pace in customers and revenues, it is clear that many of the visions, predictions, and assertions about e-com- merce developed in the early years have not been fulfilled. For instance, economists’ visions of “friction-free” commerce have not been entirely realized. Prices are some- times lower online, but the low prices are sometimes a function of entrepreneurs selling products below their costs. In some cases, online prices are higher than those of local merchants, as consumers are willing to pay a small premium for the con- venience of buying online (Cavallo, 2016). Consumers are less price sensitive than expected; surprisingly, the websites with the highest revenue often have the highest prices. There remains considerable persistent and even increasing price dispersion: online competition has lowered prices, but price dispersion remains pervasive in many markets despite lower search costs (Levin, 2011; Ghose and Yao, 2010). In a study of 50,000 goods in the United Kingdom and the United States, researchers found Internet prices were sticky even in the face of large changes in demand, online merchants did not alter prices significantly more than offline merchants, and price dispersion across online sellers was somewhat greater than traditional brick and mortar stores (Gorodnichenko, et al., 2014). The concept of one world, one market, one price has not occurred in reality as entrepreneurs discover new ways to differentiate their products and services. Merchants have adjusted to the competitive Internet environment by engaging in “hit-and-run pricing” or changing prices every day or hour (using “flash pricing” or “flash sales”) so competitors never know what they are charging (neither do customers); by making their prices hard to discover and sowing confusion among con- sumers by “baiting and switching” customers from low-margin products to high-margin products with supposedly “higher quality.” Finally, brands remain very important in
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e-commerce—consumers trust some firms more than others to deliver a high-quality product on time and they are willing to pay for it (Rosso and Jansen, 2010).
The “perfect competition” model of extreme market efficiency has not come to pass. Merchants and marketers are continually introducing information asymmetries. Search costs have fallen overall, but the overall transaction cost of actually completing a purchase in e-commerce remains high because users have a bewildering number of new questions to consider: Will the merchant actually deliver? What is the time frame of delivery? Does the merchant really stock this item? How do I fill out this form? Many potential e-commerce purchases are terminated in the shopping cart stage because of these consumer uncertainties. Some people still find it easier to call a trusted catalog merchant on the telephone than to order on a website. Finally, inter- mediaries have not disappeared as predicted. Most manufacturers, for instance, have not adopted the manufacturer-direct sales model of online sales, and some that had, such as Sony, have returned to an intermediary model. Dell, one of the pioneers of online manufacturer-direct sales, has moved toward a mixed model heavily reliant on in-store sales where customers can “kick the tires;” Apple’s physical stores are among the most successful stores in the world. People still like to shop in a physical store.
If anything, e-commerce has created many opportunities for middlemen to aggre- gate content, products, and services and thereby introduce themselves as the “new” intermediaries. Third-party travel sites such as Travelocity, Orbitz, and Expedia are an example of this kind of intermediary. E-commerce has not driven existing retail chains and catalog merchants out of business, although it has created opportunities for entrepreneurial online-only firms to succeed.
The visions of many entrepreneurs and venture capitalists for e-commerce have not materialized exactly as predicted either. First-mover advantage appears to have succeeded only for a very small group of companies, albeit some of them extremely well-known, such as Google, Facebook, Amazon, and others. Getting big fast sometimes works, but often not. Historically, first movers have been long-term losers, with the early-to-market innovators usually being displaced by established “fast-follower” firms with the right complement of financial, marketing, legal, and production assets needed to develop mature markets, and this has proved true for e-commerce as well. Many e-commerce first movers, such as eToys, FogDog (sporting goods), Webvan (grocer- ies), and Eve.com (beauty products), failed. Customer acquisition and retention costs during the early years of e-commerce were extraordinarily high, with some firms, such as E*Trade and other financial service firms, paying up to $400 to acquire a new customer. The overall costs of doing business online—including the costs of technol- ogy, site design and maintenance, and warehouses for fulfillment—are often no lower than the costs faced by the most efficient bricks-and-mortar stores. A large warehouse costs tens of millions of dollars regardless of a firm’s online presence. The knowledge of how to run the warehouse is priceless, and not easily moved. The startup costs can be staggering. Attempting to achieve or enhance profitability by raising prices has often led to large customer defections. From the e-commerce merchant’s perspective, the “e” in e-commerce does not stand for “easy.”
On the other hand, there have been some extraordinary and unanticipated surprises in the evolution of e-commerce. Few predicted the impact of the mobile
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platform. Few anticipated the rapid growth of social networks or their growing success as advertising platforms based on a more detailed understanding of personal behavior than even Google has achieved. And few, if any, anticipated the emergence of on- demand e-commerce, which enables people to use their mobile devices to order up everything from taxis, to groceries, to laundry service.
1.6 UNDERSTANDING E-COMMERCE: ORGANIZING THEMES
Understanding e-commerce in its totality is a difficult task for students and instructors because there are so many facets to the phenomenon. No single academic discipline is prepared to encompass all of e-commerce. After teaching the e-commerce course for a number of years and writing this book, we have come to realize just how difficult it is to “understand” e-commerce. We have found it useful to think about e-commerce as involving three broad interrelated themes: technology, business, and society. We do not mean to imply any ordering of importance here because this book and our thinking freely range over these themes as appropriate to the problem we are trying to understand and describe. Nevertheless, as in previous technologically driven com- mercial revolutions, there is a historic progression. Technologies develop first, and then those developments are exploited commercially. Once commercial exploitation of the technology becomes widespread, a host of social, cultural, and political issues arise, and society is forced to respond to them.
TECHNOLOGY: INFRASTRUCTURE
The development and mastery of digital computing and communications technology is at the heart of the newly emerging global digital economy we call e-commerce. To understand the likely future of e-commerce, you need a basic understanding of the information technologies upon which it is built. E-commerce is above all else a technologically driven phenomenon that relies on a host of information technologies as well as fundamental concepts from computer science developed over a 50-year period. At the core of e-commerce are the Internet and the Web, which we describe in detail in Chapter 3. Underlying these technologies are a host of complementary technologies: cloud computing, desktop computers, smartphones, tablet computers, local area networks, relational and non-relational databases, client/server computing, data mining, and fiber-optic switches, to name just a few. These technologies lie at the heart of sophisticated business computing applications such as enterprise-wide information systems, supply chain management systems, manufacturing resource planning systems, and customer relationship management systems. E-commerce relies on all these basic technologies—not just the Internet. The Internet, while representing a sharp break from prior corporate computing and communications technologies, is nevertheless just the latest development in the evolution of corporate computing and part of the continuing chain of computer-based innovations in business. Figure 1.11 illustrates the major stages in the development of corporate computing and indicates how the Internet and the Web fit into this development trajectory.
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To truly understand e-commerce, you will need to know something about packet- switched communications, protocols such as TCP/IP, client/server and cloud comput- ing, mobile digital platforms, web servers, HTML5, CSS, and software programming tools such as Flash and JavaScript on the client side, and Java, PHP, Ruby on Rails, and ColdFusion on the server side. All of these topics are described fully in Part 2 of the book (Chapters 3–5).
FIGURE 1.11 THE INTERNET AND THE EVOLUTION OF CORPORATE COMPUTING
The Internet and Web, and the emergence of a mobile platform held together by the Internet cloud, are the latest in a chain of evolving technologies and related business applications, each of which builds on its predecessors.
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BUSINESS: BASIC CONCEPTS
While technology provides the infrastructure, it is the business applications—the potential for extraordinary returns on investment—that create the interest and excite- ment in e-commerce. New technologies present businesses and entrepreneurs with new ways of organizing production and transacting business. New technologies change the strategies and plans of existing firms: old strategies are made obsolete and new ones need to be invented. New technologies are the birthing grounds where thousands of new companies spring up with new products and services. New technologies are the graveyard of many traditional businesses. To truly understand e-commerce, you will need to be familiar with some key business concepts, such as the nature of digital markets, digital goods, business models, firm and industry value chains, value webs, industry structure, digital disruption, and consumer behavior in digital markets, as well as basic concepts of financial analysis. We’ll examine these concepts further in Chapters 2, 6, 7, and 9 through 12.
SOCIETY: TAMING THE JUGGERNAUT
With around 267 million Americans now using the Internet, many for e-commerce purposes, and more than 3.3 billion users worldwide, the impact of the Internet and e-commerce on society is significant and global. Increasingly, e-commerce is subject to the laws of nations and global entities. You will need to understand the pressures that global e-commerce places on contemporary society in order to conduct a success- ful e-commerce business or understand the e-commerce phenomenon. The primary societal issues we discuss in this book are individual privacy, intellectual property, and public welfare policy.
Because the Internet and the Web are exceptionally adept at tracking the iden- tity and behavior of individuals online, e-commerce raises difficulties for preserving privacy—the ability of individuals to place limits on the type and amount of informa- tion collected about them, and to control the uses of their personal information. Read the Insight on Society case, Facebook and the Age of Privacy, to get a view of some of the ways e-commerce sites use personal information.
Because the cost of distributing digital copies of copyrighted intellectual prop- erty—tangible works of the mind such as music, books, and videos—is nearly zero on the Internet, e-commerce poses special challenges to the various methods societies have used in the past to protect intellectual property rights.
The global nature of e-commerce also poses public policy issues of equity, equal access, content regulation, and taxation. For instance, in the United States, public telephone utilities are required under public utility and public accommodation laws to make basic service available at affordable rates so everyone can have telephone service. Should these laws be extended to the Internet and the Web? If goods are purchased by a New York State resident from a website in California, shipped from a center in Illinois, and delivered to New York, what state has the right to collect a sales tax? Should some heavy Internet users who consume extraordinary amounts of bandwidth by streaming endless movies be charged extra for service, or should the Internet be neutral with respect to usage? What rights do nation-states and their
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INSIGHT ON SOCIETY
FACEBOOK AND THE AGE OF PRIVACY
In a January 2010 interview, Mark Zuckerberg, the founder of Face- book, proclaimed that the age of
privacy had to come to an end. Accord- ing to Zuckerberg, people were no longer
worried about sharing their personal infor- mation with friends, friends of friends, or even the entire Web. Supporters of Zuckerberg’s viewpoint believe the twenty-first century is a new era of openness and transparency. If true, this is good news for Facebook because its business model is based on selling access to a database of personal information.
However, not everyone is a true believer. Privacy—limitations on what personal informa- tion government and private institutions can collect and use—is a founding principle of democ- racies. A decade’s worth of privacy surveys in the United States show that well over 80% of the American public fear the Internet is a threat to their privacy.
With about 1.7 billion monthly users world- wide, and around 175 million in North America, Facebook’s privacy policies are going to shape privacy standards on the Internet for years to come. The economic stakes in the privacy debate are quite high, involving billions in advertising and transaction dollars. Facebook’s business model is based on building a database of billions of users who are encouraged, or even perhaps deceived, into relinquishing control over personal informa- tion, which is then sold to advertisers and other third parties. The less privacy Facebook’s users want or have, the more Facebook profits. Elimi- nating personal information privacy is built into Facebook’s DNA.
Facebook’s current privacy policies are quite a flip-flop from its original policy in 2004, which promised users near complete control over who could see their personal profile. However,
every year since 2004, Facebook has attempted to extend its control over user information and content, often without notice. For instance, in 2007, Facebook introduced the Beacon program, which was designed to broadcast users’ activities on participating websites to their friends. After a public outcry, Facebook terminated the Beacon program, and paid $9.5 million to settle a host of class action lawsuits. In 2009, undeterred by the Beacon fiasco, Facebook unilaterally decided that it would publish users’ basic personal infor- mation on the public Internet, and announced that whatever content users had contributed belonged to Facebook, and that its ownership of that information never terminated. However, as with the Beacon program, Facebook’s efforts to take permanent control of user information resulted in users joining online resistance groups and it was ultimately forced to withdraw this policy as well.
In 2011, Facebook began publicizing users’ “likes” of various advertisers in Sponsored Stories (i.e., advertisements) that included the users’ names and profile pictures without their explicit consent, without paying them, and without giving them a way to opt out. This resulted in yet another class action lawsuit, which Facebook settled for $20 million in June 2012. (Facebook dropped Sponsored Stories in April 2014.) In 2011, Face- book enrolled all Facebook subscribers into its facial recognition program without notice. This too raised the privacy alarm, forcing Facebook to make it easier for users to opt out.
In May 2012, Facebook went public, creating even more pressure to increase revenues and profits to justify its stock market value. Shortly thereaf- ter, Facebook announced that it was launching a mobile advertising product that pushes ads to the mobile news feeds of users based on the apps they use through the Facebook Connect feature, without explicit permission from the user to do so. It also
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announced Facebook Exchange, a program that allows advertisers to serve ads to Face-
book users based on their browsing activity while not on Facebook. Privacy advocates raised the alarm yet again and more lawsuits were filed by users. In 2013, Facebook agreed to partner with several data marketing companies that deliver tar- geted ads based on offline data. The firms provide customer data to Facebook, which then allows Facebook advertisers to target their ads to those users based on that data.
In December 2013, another class action lawsuit was filed against Facebook by users alleg- ing that it violated their privacy by scanning users’ private Facebook messages and mining them for data such as references to URLs that Facebook could then sell to advertisers. In May 2014, an enhancement to Facebook’s mobile app that allows the app to recognize the music, television show, or movie playing in the background when a user makes a status update raised a new privacy alarm.
Facebook’s newest privacy issue involves its facial recognition software used to tag users in photos. The “tag suggestions” feature is auto- matically enabled when you sign up, without user consent. A federal court in 2016 is allowing a lawsuit to go forward contesting Facebook’s right to tag users in photos without their consent. This feature appears to be in violation of several state laws which seek to secure the privacy of biometric data.
After all these lawsuits and online public protests, one might think that Facebook’s privacy
policy would improve. But an academic analysis of Facebook’s privacy policies from 2008 to 2015 found that on most measures of privacy protec- tion, Facebook’s policies have worsened. Since 2008, Facebook has made it more difficult for users to find out what information is being shared with whom, how it builds profiles, or how to change privacy settings. Its privacy policies have become less readable, even inscrutable, according to the researchers.
Facebook is certainly aware of consumer suspicion of its privacy policies, and it changes its policies almost yearly in response to criticism. But the response is often not helpful for users, and typically extends the company’s claims to do whatever it wants with personal information. Its latest privacy policy, implemented in 2015, claims to switch its default privacy settings for new users from Public to Friends, provide a Privacy Checkup tool for users, give users the ability to see the data it keeps on their likes and interests, and enable users to change, delete, or add to that data. Facebook argues this new policy gives users more control of the ads they are shown. Analysts point out, however, that using these new features requires users to navigate a maze of check boxes and menus that are difficult to understand even for expert Facebook users. Users have come to realize that everything they post or say on Facebook will be given over to advertisers. There is no privacy on Facebook. People who are concerned about their privacy, analysts have concluded, should delete their Facebook accounts.
SOURCES: “Facebook’s Newest Privacy Problem: ‘Faceprint’ Data” by Katie Collins, Cnet.com, May 16, 2016; “In Re Facebook Biometric Information Privacy Litigation,” U.S. District Court, Northern District of California, Case No. 15-cv-03747-JD, May 6, 2016; “Facebook to Face Privacy Lawsuit Over Photo Tagging,” by Jessica Guynn, USA Today, May 6, 2016; “Facebook Rescinds Internship to Harvard Student Who Exposed a Privacy Flaw in Messenger,” by Robert Gabelhoff, Washington Post, August 14, 2015; “Did You Really Agree to That? The Evolution of Facebook’s Privacy Policy,” by Jennifer Shore and Jill Steinman, Technology Science, August 11, 2015; “Facebook’s Privacy Incident Response: A Study of Geolocation Sharing on Facebook Messenger,” by Aran Khanna, Technology Science, August 11, 2015; “Sharing Data, but Not Happily,” by Natasha Singer, New York Times, June 4, 2015; “How Your Facebook Likes Could Cost You a Job,” by Anna North, New York Times, January 20, 2015; “Facebook Stops Irresponsibly Defaulting Privacy of New Users’ Posts to ‘Public,’ Changes to ‘Friends,’” by Josh Constine, Techcrunch.com, May 22, 2014; “Facebook Users Revolt Over Privacy Feature—Enables Microphone in Apps,” by Jan Willem Aldershoff, Myce.com, June 9, 2014; “Didn’t Read Those Terms of Service? Here’s What You Agreed to Give Up,” by Natasha Singer, New York Times, April 28, 2014; “Facebook Eliminates Sponsored Stories—Will It Matter to Advertisers?,” by Amy Durbin, Mediapost.com, February 25, 2014; “Facebook Sued for Allegedly Intercepting Private Messages,” by Jennifer Van Grove, Cnet.com, January 2, 2014; “Facebook to Partner with Data Brokers,” by Bob Sullivan, Redtape.nbcnews.com, February 26, 2013; “Facebook Exchange Ads Raise Privacy Concerns,” by Mikal E. Belicove, Cnbc.com, June 21, 2012; “Facebook Suit Over Subscriber Tracking Seeks $15 Billion,” by Kit Chellel and Jeremy Hodges, Bloomberg.com, May 19, 2012; “How Facebook Pulled a Privacy Bait and Switch,” by Dan Tynan, PC World, May 2010.
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citizens have with respect to the Internet, the Web, and e-commerce? We address issues such as these in Chapter 8, and also throughout the text.
1.7 ACADEMIC DISCIPLINES CONCERNED WITH E-COMMERCE
The phenomenon of e-commerce is so broad that a multidisciplinary perspective is required. There are two primary approaches to e-commerce: technical and behavioral.
TECHNICAL APPROACHES
Computer scientists are interested in e-commerce as an exemplary application of Internet technology. They are concerned with the development of computer hard- ware, software, and telecommunications systems, as well as standards, encryption, and database design and operation. Operations management scientists are primarily interested in building mathematical models of business processes and optimizing these processes. They are interested in e-commerce as an opportunity to study how business firms can exploit the Internet to achieve more efficient business operations. The information systems discipline spans the technical and behavioral approaches. Technical groups within the information systems specialty focus on data mining, search engine design, and artificial intelligence.
BEHAVIORAL APPROACHES
From a behavioral perspective, information systems researchers are primarily inter- ested in e-commerce because of its implications for firm and industry value chains, industry structure, and corporate strategy. Economists have focused on online con- sumer behavior, pricing of digital goods, and on the unique features of digital electronic markets. The marketing profession is interested in marketing, brand development and extension, online consumer behavior, and the ability of e-commerce technologies to segment and target consumer groups, and differentiate products. Economists share an interest with marketing scholars who have focused on e-commerce consumer response to marketing and advertising campaigns, and the ability of firms to brand, segment markets, target audiences, and position products to achieve above-normal returns on investment.
Management scholars have focused on entrepreneurial behavior and the chal- lenges faced by young firms who are required to develop organizational structures in short time spans. Finance and accounting scholars have focused on e-commerce firm valuation and accounting practices. Sociologists—and to a lesser extent, psycholo- gists—have focused on general population studies of Internet usage, the role of social inequality in skewing Internet benefits, and the use of the Web as a social network and group communications tool. Legal scholars are interested in issues such as preserving intellectual property, privacy, and content regulation.
No one perspective dominates research about e-commerce. The challenge is to learn enough about a variety of academic disciplines so that you can grasp the signifi- cance of e-commerce in its entirety.
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1.8 C A S E S T U D Y
P i n t e r e s t : A Picture Is Worth a Thousand Words
Like all successful e-commerce companies, Pinterest taps into a simple truth. In Pinterest’s case, the simple truth is that people love to collect things, and show off their collections to others. Founded in 2009 by Ben Silbermann, Evan Sharp, and Paul Sciarra and launched in March 2010, Pinterest allows you to create virtual scrapbooks of images, video, and other content that you “pin” (save) to a virtual bulletin board or pin board. Categories range from Animals to Videos, with Food & Drink, DIY & Crafts, Home Décor, and Women’s Fashion among the most popular. Find something that you particularly like? In addition to “liking” and perhaps commenting on it, you can re-pin it to your own board or follow a link back to the original source. Find someone whose taste you admire or who shares your passions? You can follow one or more of that pinner’s boards to keep track of everything she or he pins. As of October 2016, there were over 50 billion pins on Pinterest on more than 1 billion different boards.
Pinterest originally positioned itself as a social network. However, it has changed its tune and now describes itself as a visual search tool for discovering and saving creative
© Blaize Pascall / Alamy
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ideas (and potential purchases), with less emphasis on sharing with friends. Search has become the core part of its mission. It views Google, rather than Facebook, Twitter, or Instagram, as its primary competition.
In October 2016, Pinterest has over 150 million monthly active members worldwide. About 75% of those members are women, but men are its fastest growing demographic. Pinterest is one of the “stickiest” sites on the Web, with women spending over 1.5 hours (96 minutes) per session, and men about 1.25 hours (75 minutes). According to a survey by the Pew Research Center, the percentage of online adults in the United States who use Pinterest has more than doubled since 2012.
Over the past five years, investors such as well-known Silicon Valley venture capital firms Andreessen Horowitz and Bessemer Venture Partners, hedge fund Valiant Capital Partners, and Japanese e-commerce company Rakuten have poured over $1.3 billion in venture capital into Pinterest, with its latest round of funding in May 2015 valuing the company at $11 billion, more than double its 2014 valuation. Like Facebook, Twitter, and many other startup companies, Pinterest focused initially on refining its product and building its user base, but not surprisingly, its investors began to push it to begin generat- ing revenue. Pinterest’s first step was to offer business accounts that provided additional resources for brands. In 2013, it introduced Rich Pins, which allowed companies to embed information, such as current pricing and availability, as well as a direct link to a product page. In 2014, Pinterest took the official leap into the advertising arena, launching a beta version of ads it called Promoted Pins that appear in search results and category feeds. Around the same time, Pinterest also introduced a search engine, called Guided Search, which suggests related terms to refine a search. Guided Search is based on user metadata, such as board titles, captions, and comments related to pins, to create different categories and subcategories. In January 2015, Pinterest further enhanced Guided Search by allowing users to personalize search results based on gender.
In the last two years, Pinterest has gotten serious about monetization. In January 2015, it rolled out Promoted Pins to all its U.S.-based partners and in April 2016, began offering them to advertisers in the United Kingdom, with additional English-speaking countries expected to be added later in the year. In May 2015, it added Cinematic Pins, a made-for-mobile format. Cinematic Pins display a short animation when the user scrolls down through the ad, and only play a full-length version when the user clicks on the ad, providing more user control over the experience. Pinterest also introduced new ad-targeting and pricing options. Advertisers can target users by interests, life stage, or “persona” such as Millennial, prospective parent, or foodie. In June 2016, it added three additional ad- targeting options: custom list targeting (similar to Facebook’s Custom Audiences); visitor targeting, which allows advertisers to retarget a customer who has visited the advertiser’s website; and lookalike targeting, which enables advertisers to target consumers who share traits or behaviors with the advertiser’s existing customers. Ads can be purchased on a pay-per-view, pay-per-click, cost-per-engagement (CPE), or cost-per-action (CPA) model. Using the CPE model, advertisers only pay when a user engages with a pin, such as through re-pinning, and with the CPA model, only when the user clicks through to a website and makes a purchase or downloads an app. As of 2016, there are more than 1 million businesses on Pinterest, and over 10,000 different advertisers. During 2016,
SOURCES: “As Pinterest Hits 150MM Actives, It’s Time to Re-Think Your Social Approach,” by Allie Wassum, Huffingtonpost.com, October 17, 2016; “Pinterest Starts Expanding Its Visual Search Tools to Video,” by Matthew Lynley, Techcrunch.com, August 4, 2016; “Social’s Next Evolution? Pinterest Begins to Monetize Users’ Search,” eMarketer, Inc., July 15, 2016; “Amid IPO Speculation, Pinterest Hangs a Target on Alphabet’s Back,” by John-Erik Koslosky, Fool. com, July 11, 2016; “Pinterest Adds Features as It Looks to Monetize 55 Million Active Users,” by Emily Rolen, Thestreet.com, July 6, 2016; “Pinterest Updates Strategy, Looks to Scale Search and Audience Based Buying,” by
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Pinterest plans to broaden its focus from retail and packaged goods to financial services, travel, automotive, and fast food restaurants.
Search advertising is the next frontier for Pinterest. Pinterest search differs from other types of search because it is visual and typically happens at the early stages of a person’s decision process. Users currently conduct over 2 billion keyword and 130 million visual searches per month on Pinterest. In July 2016, Pinterest began offering its search inventory to advertisers for the first time and is reportedly working on the infrastructure for keyword-based buying. Pinterest believes search advertising revenue can become a significant part of its business, and that it can challenge Google in the mobile search arena. It is making significant investments in search technology, such as deep-learning assisted visual search, which will build on its existing visual search tool that allows users to search within images on Pinterest. In August 2016, it began updating its visual search tools to work on videos and also began rolling out a fully integrated native video player similar to that offered by Facebook, along with video ads.
Many analysts also believe that Pinterest will become a significant factor in the social e-commerce arena. In June 2015, Pinterest launched Buyable Pins, which allow users to directly purchase products by clicking a blue Buy It button within the pin, for its iPhone and iPad apps. Buyable Pins for Android devices were rolled out in November 2015, and in June 2016 finally reached the desktop. According to Pinterest, 10 million unique items are available for sale, from merchants both large (such as Macy’s, Nordstrom, Neiman Marcus, Bloomingdale’s, and Wayfair) and small. Pinterest says its data shows that Buyable Pins are generating a significant percentage of brand-new customers for merchants. Pinterest is significantly ahead of other social networks such as Facebook, Instagram, and Twitter in terms of the percentage of users who use it to find or shop for products: 55% for Pinterest versus just 12% for Facebook and Instagram and 9% for Twitter. To further enhance its lead, in 2016, it announced a number of other e-commerce-related initiatives, including Shopping with Pinterest, a shopping cart that links to a user’s account, is visible on all devices, can hold multiple items, and allows for checkout on any device.
The fact that Pinterest launched Buyable Pins on its iOS mobile platform rather than the desktop is just one indication of how important the mobile platform is to Pinterest. Pinterest provides apps for iPhone, iPad, Android, and Windows Phone, as well as a mobile version of its website using HTML5. Pinterest Mobile runs inside the smartphone’s browser rather than as a stand-alone program. Mobile has been a huge success for Pinterest, with 80% of its traffic coming from mobile devices in 2016. Pinterest releases new versions of its mobile apps on a regular basis, and in April 2016 launched a nearly completely written iOS app that allows the home page to load much more quickly, scales to the different number of iOS screens more efficiently, and is readable in all 31 languages in which Pinterest is available. According to Pinterest co-founder Evan Sharp, the smart- phone is the platform Pinterest focuses on when it develops new features and products.
International expansion continues to be a major area of focus. Pinterest introduced its first localized site, for the United Kingdom in May 2013, and it is now available in 31 different languages. Pinterest is aiming to make its platform feel more regional, focusing specifically on the United Kingdom, France, Germany, Japan, and Brazil. In 2016, for the first time, more than 50% of its monthly active users are located outside of the United
George Siefo, Adage.com, July 5, 2016; “Pinterest Doubles Down in the Shopping Cart Wars,” by Thom Forbes, Mediapost.com, June 29, 2016; “Pinterest Hopes to Woo Shoppers with Visual Search,” by Rachel Metz, MIT Technology Review, June 28, 2016; “Pinterest Makes a Major E-commerce Push,” by Zak Stambor, Internetretailer. com, June 28, 2016; “Pinterest Ramps Up Its Ad Targeting Options,” by Zak Stambor, Internetretailer.com, June 14, 2016; “Pinterest Renames ‘Pin It’ Button as ‘Save’ in Push for Global Growth,” by Kathleen Chaykowski, Forbes.com, June 2, 2016; “Pinterest Broadens Ad Sales Focus Once Again,” by Jack Marshall, Wall Street Journal, May 2, 2016; “Pinterest’s Plans for World Domination,” by Lara O’Reilly, Businessinsider.com, April 28, 2016; “Pinterest Is a Sleeping Giant – Don’t Underestimate It,” by Madjumita Murgia, Telegraph. co.uk, April 28, 2016; “Pinterest Announces Complete Overhaul of iOS App with Performance & Visual Improvements,” by Chance Miller, 9to5mac.com, April 19, 2016; “Pinterest Launches Promoted Pins Internationally, Starting with the U.K.,” by Paul Sawers, Venturebeat. com, April 7, 2016; “Final Update on Boffoli Case Against Pinterest,” Ipforthelittleguy.com, March 26, 2016; “Pinterest Sharpens Its Visual Search Skills,” by Yoree Koh, Wall Street Journal, November 8, 2015; “Mobile Messaging and Social Media 2015,” by Maeve Duggan, Pewinternet.org, August 19, 2015; “In Lawsuit Against Pinterest, Artist Continues a Crusade for Copyright on the Internet,” by Kate Lucas, Gross- manllp.com, July 23, 2015; “With Buyable Pins, Pinterest Lets You Buy Stuff Right in the App,” by JP Mangalindan, Mashable.com, June 2, 2015; “Why $11 Billion Pinterest Thinks It Has the ‘Best Kind of Business Model’,” by Jillian D’Onfrio, Businessinsider.com, May 19, 2015; “Pinterest Doubles Down on Making Money, Rolls Out Video Ads,” by JP Mangalindan, Mashable.com, May 19, 2015; “Pinterest Puts Its Own Spin on Video Ads with These Cinematic Pins,” by Garret Sloane, Adweek.com, May 19, 2015; “How Pinterest Plans to Spend Its New
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States. Looking to the future, Pinterest believes that international expansion will provide it with the greatest growth opportunities.
Despite all the good news for Pinterest, there are some issues lurking just behind the scenes that may cloud its future, such as the issue of copyright infringement. The basis of Pinterest’s business model involves users potentially violating others’ copyrights by posting images without permission and/or attribution. Although Pinterest’s Terms of Service puts the onus on its users to avoid doing so, the site knowingly facilitates such actions by, for example, providing a Pin It tool embedded in the user’s browser toolbar. Much content on the site reportedly violates its Terms of Service. Pinterest has provided an opt-out code to enable other sites to bar its content from being shared on Pinterest, but some question why they should have to take action when Pinterest is creating the problem. Another thing Pinterest has done to try to ameliorate the problem is to automatically add citations (attribution) to content coming from certain specified sources, such as Flickr, YouTube, Vimeo, Etsy, Kickstarter, and SlideShare, among others. In 2013, it entered into an agreement with Getty Images in which it agreed to provide attribution for Getty content and pay Getty a fee. Pinterest says it complies with the Digital Millennium Copyright Act, which requires sites to remove images that violate copyright, but this too requires the copyright holder to be proactive and take action to demand the images be removed. Christopher Boffoli, a well-known photographer, filed a federal lawsuit against Pinterest in late 2014 alleging that Pinterest users used his photographs without his permission and that Pinterest failed to take adequate measures to remove them. In September 2015, Boffoli agreed to dismiss the case, presumably as part of a confidential settlement with Pinterest, leaving the legal issues raised unresolved.
Pinterest is also not immune to the spam and scams that plague many e-commerce initiatives. Security analysts believe Pinterest will have to adapt its systems to deal with scammers and warn users to be wary of requests to pin content before viewing it and to be suspicious of “free” offers, surveys, and links with questionable titles. Pinterest has acknowledged the problem and has promised to improve its technology. In 2015, for in- stance, Pinterest migrated its website to the HTTPS protocol, which provides more security than the more common HTTP protocol typically used to access web pages. Pinterest also employs a system known as Stingray that enables it to quickly react to spam and other types of malicious behavior, and has created a program that pays a bounty to white hat hackers who discover security issues.
At the moment, however, the future looks very bright for Pinterest as it reportedly gears up for an initial public offering in the near future. Although it may encounter some growing pains in the process of implementing its new business model, it has the potential to generate significant revenue based on advertising and social e-commerce.
Case Study Questions
1. Why does Pinterest view Google as its primary competitor?
2. Why does Pinterest focus on the smartphone platform when it develops new features and products?
3. Why is copyright infringement a potential issue for Pinterest?
Millions and Why It Only Hires Nice Employees, According to Its Cofounder,” by Jillian D’Onfrio, Businessinsider.com, May 11, 2015; “Pinterest Beefs Up Security with Full HTTPS Support and Bug Bounty Program,” by Jordan Novet, Venturebeat.com, March 13, 2015; “Fighting Spam at Pinterest,” Engineering.pinterest.com, February 20, 2015; “Pinterest Goes After the Male Demographic with Debut of New Search Filters,” by Sarah Perez, Techcrunch.com, January 23, 2015; “Pinterest Becomes More Search Engine-Like with the Launch of Guided Search on the Web,” by Sarah Perez, Techcrunch.com, June 11, 2014;“Pinterest Tests Do-It- Yourself Promoted Pins for Small and Medium-Sized Businesses,” by Ryan Lawler, Techcrunch.com, June 5, 2014; “Can Pinterest Be Found in Translation,” by Sarah Frier, Businessweek.com, May 22, 2014; “Pinterest’s Next Big Move: A Clever New Take on Search,” by Kyle VanHemert, Wired.com, April 24, 2014; “Paying for Pin-Ups,” by Sarah Laskow, Columbia Jour- nalism Review, November 7, 2013; “Pinning Down Pinterest: Addressing Copyright and Other IP Issues,” by Jennifer L. Barry, Lexology.com, October 22, 2013; “Pinterest (Officially) Jumps the Pond,” by Zak Stambor, Internetre- tailer.com, May 10, 2013; “Pinterest Gives Copyright Credit to Etsy, Kickstarter, SoundCloud,” by Sarah Kessler, Mashable.com, July 19, 2012; “A Site That Aims to Unleash the Scrapbook Maker in All of Us,” by Jenna Wortham, New York Times, March 11, 2012; “Pinterest Releases Optional Code to Prevent Unwanted Image Sharing,” by Andrew Webster, Theverge.com, February 20, 2012; “A Scrapbook on the Web Catches Fire,” by David Pogue, New York Times, February 15, 2012.
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1.9 REVIEW
K E Y C O N C E P T S
Understand why it is important to study e-commerce.
• The next five years hold out exciting opportunities—as well as risks—for new and traditional businesses to exploit digital technology for market advantage. It is important to study e-commerce in order to be able to perceive and understand these opportunities and risks that lie ahead.
Define e-commerce, understand how e-commerce differs from e-business, identify the primary technological building blocks underlying e-commerce, and recognize major current themes in e-commerce.
• E-commerce involves digitally enabled commercial transactions between and among organizations and individuals.
• E-business refers primarily to the digital enabling of transactions and processes within a firm, involving information systems under the control of the firm. For the most part, unlike e-commerce, e-business does not involve commercial transactions across organizational boundaries where value is exchanged.
• The technology juggernauts behind e-commerce are the Internet, the Web, and increasingly, the mobile platform.
• From a business perspective, one of the most important trends to note is that all forms of e-commerce continue to show very strong growth. From a technology perspective, the mobile platform has finally arrived with a bang, driving astronomical growth in mobile advertising and making true mobile e-com- merce a reality. At a societal level, major issues include privacy and government surveillance, protection of intellectual property, online security, and governance of the Internet.
Identify and describe the unique features of e-commerce technology and discuss their business significance.
There are eight features of e-commerce technology that are unique to this medium: • Ubiquity—available just about everywhere, at all times, making it possible to shop from your desktop, at
home, at work, or even from your car. • Global reach—permits commercial transactions to cross cultural and national boundaries far more conve-
niently and cost-effectively than is true in traditional commerce. • Universal standards—shared by all nations around the world, in contrast to most traditional commerce
technologies, which differ from one nation to the next. • Richness—enables an online merchant to deliver marketing messages in a way not possible with tradi-
tional commerce tech nologies. • Interactivity—allows for two-way communication between merchant and consumer and enables the mer-
chant to engage a consumer in ways similar to a face-to-face experience, but on a much more massive, global scale.
• Information density—is the total amount and quality of information available to all market participants. The Internet reduces information collection, storage, processing, and communication costs while increas- ing the currency, accuracy, and timeliness of information.
• Personalization and customization—the increase in information density allows merchants to target their marketing messages to specific individuals and results in a level of personalization and customization unthinkable with previously existing commerce technologies.
• Social technology—provides a many-to-many model of mass communications. Millions of users are able to generate content consumed by millions of other users. The result is the formation of social networks on a wide scale and the aggregation of large audiences on social network platforms.
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Describe the major types of e-commerce.
There are six major types of e-commerce: • B2C e-commerce involves businesses selling to consumers and is the type of e-commerce that most con-
sumers are likely to encounter. • B2B e-commerce involves businesses selling to other businesses and is the largest form of e-commerce. • C2C e-commerce is a means for consumers to sell to each other. In C2C e-commerce, the consumer pre-
pares the product for market, places the product for auction or sale, and relies on the market maker to provide catalog, search engine, and transaction clearing capabilities so that products can be easily dis- played, discovered, and paid for.
• Social e-commerce is e-commerce that is enabled by social networks and online social relationships. • M-commerce involves the use of wireless digital devices to enable online transactions. • Local e-commerce is a form of e-commerce that is focused on engaging the consumer based on his or her
current geographic location.
Understand the evolution of e-commerce from its early years to today.
E-commerce has gone through three stages: innovation, consolidation, and reinvention. • The early years of e-commerce were a technological success, with the digital infrastructure created dur-
ing the period solid enough to sustain significant growth in e-commerce during the next decade, and a mixed business success, with significant revenue growth and customer usage, but low profit margins.
• E-commerce entered a period of consolidation beginning in 2001 and extending into 2006. • E-commerce entered a period of reinvention in 2007 with the emergence of the mobile digital platform,
social networks, and Web 2.0 applications that attracted huge audiences in a very short time span.
Describe the major themes underlying the study of e-commerce.
E-commerce involves three broad interrelated themes: • Technology—To understand e-commerce, you need a basic understanding of the information technologies
upon which it is built, including the Internet, the Web, and mobile platform, and a host of complemen- tary technologies—cloud computing, desktop computers, smartphones, tablet computers, local area net- works, client/server computing, packet-switched communications, protocols such as TCP/IP, web servers, HTML, and relational and non-relational databases, among others.
• Business—While technology provides the infrastructure, it is the business applications—the potential for extraordinary returns on investment—that create the interest and excitement in e-commerce. Therefore, you also need to understand some key business concepts such as electronic markets, information goods, business models, firm and industry value chains, industry structure, and consumer behavior in digital markets.
• Society—Understanding the pressures that global e-commerce places on contemporary society is critical to being successful in the e-commerce marketplace. The primary societal issues are intellectual property, individual privacy, and public policy.
Identify the major academic disciplines contributing to e-commerce.
There are two primary approaches to e-commerce: technical and behavioral. Each of these approaches is represented by several academic disciplines. • On the technical side, this includes computer science, operations management, and information systems. • On the behavioral side, it includes information systems as well as sociology, economics, finance and
accounting, management, and marketing.
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Q U E S T I O N S
1. What is e-commerce? How does it differ from e-business? Where does it intersect with e-business? 2. What is information asymmetry? 3. What are some of the unique features of e-commerce technology? 4. What is a marketspace? 5. What are three benefits of universal standards? 6. Compare online and traditional transactions in terms of richness. 7. Name three of the business consequences that can result from growth in information density. 8. What is Web 2.0? Give examples of Web 2.0 sites and explain why you included them in your list. 9. Give examples of B2C, B2B, C2C, and social, mobile, and local e-commerce besides those listed in the
chapter materials. 10. How are e-commerce technologies similar to or different from other technologies that have changed
commerce in the past? 11. Describe the three different stages in the evolution of e-commerce. 12. Define disintermediation and explain the benefits to Internet users of such a phenomenon. How does
disintermediation impact friction-free commerce? 13. What are some of the major advantages and disadvantages of being a first mover? 14. What is a network effect, and why is it valuable? 15. Discuss the ways in which the early years of e-commerce can be considered both a success and a failure. 16. What are five of the major differences between the early years of e-commerce and today’s e-commerce? 17. Why is a multidisciplinary approach necessary if one hopes to understand e-commerce? 18. What are some of the privacy issues that Facebook has created? 19. What are those who take a behavioral approach to studying e-commerce interested in?
P R O J E C T S
1. Choose an e-commerce company and assess it in terms of the eight unique features of e-commerce technology described in Table 1.2. Which of the features does the company implement well, and which features poorly, in your opinion? Prepare a short memo to the president of the company you have chosen detailing your findings and any suggestions for improvement you may have.
2. Search the Web for an example of each of the major types of e-commerce described in Section 1.4 and listed in Table 1.3. Create a presentation or written report describing each company (take a screenshot of each, if possible), and explain why it fits into the category of e-commerce to which you have assigned it.
3. Given the development and history of e-commerce in the years from 1995–2016, what do you predict we will see during the next five years of e-commerce? Describe some of the technological, business, and societal shifts that may occur as the Internet continues to grow and expand. Prepare a brief presentation or written report to explain your vision of what e-commerce will look like in 2020.
4. Prepare a brief report or presentation on how companies are using Instagram or another company of your choosing as a social e-commerce platform.
5. Follow up on events at Uber since October 2016 (when the opening case was prepared). Prepare a short report on your findings.
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R E F E R E N C E S
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Camhi, Jonathan. “BI Intelligence Projects 34 Bil- lion Devices Will Be Connected by 2020.” Business insider.com (November 6, 2015).
Cavallo, Alberto F. “Are Online and Offline Prices Simi- lar? Evidence from Large Multi-Channel Retailers.” NBER Working Paper No. 22142. (March 2016).
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eMarketer, Inc. “US Internet Users and Penetration, 2015–2020.” (August 3, 2016a).
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eMarketer, Inc. “US Internet Users, by Device, 2015–2020.” (August 2, 2016c).
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Evans, Philip, and Thomas S. Wurster. “Getting Real About Virtual Commerce.” Harvard Business Review (November–December 1999).
Evans, Philip, and Thomas S. Wurster. “Strategy and the New Economics of Information.” Harvard Business Review (September–October 1997).
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Ghose, Anindya, and Yuliang Yao. “Using Transaction Prices to Re-Examine Price Dispersion in Electronic Markets.” Information Systems Research, Vol. 22 No. 2. (June 2011).
Gorodnichenko, Yuriy, et al. “Price Setting in Online Markets: Does IT Click?” NBER Working Paper No. 20819 (December 2014).
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Internet Retailer. “Top 500 Guide 2016 Edition.” (2016). Internet Systems Consortium, Inc. “ISC Internet Domain
Survey.” (January 2016). Kalakota, Ravi, and Marcia Robinson. e-Business 2.0: Road-
map for Success, 2nd edition. Reading, MA: Addison Wesley (2003).
Kambil, Ajit. “Doing Business in the Wired World.” IEEE Computer (May 1997).
Levin, Jonathon. “The Economics of Internet Markets.” NBER Working Paper No 16852 (February 2011).
Mesenbourg, Thomas L. “Measuring Electronic Business: Definitions, Underlying Concepts, and Measurement Plans.” U. S. Department of Commerce Bureau of the Census (August 2001).
Rayport, Jeffrey F., and Bernard J. Jaworski. Introduction to E-commerce, 2nd edition. New York: McGraw-Hill (2003).
Rosso, Mark, and Bernard Jansen. “Smart Marketing or Bait & Switch: Competitors’ Brands as Keywords in Online Advertising.” Proceedings of the 4th Work- shop on Information Credibility. ACM (2010).
Schwartz, Barry. “Google: We Know About 30 Thousand Trillion URLS on the Web, But...” Seroundtable.com (June 3, 2015).
Shapiro, Carl, and Hal R. Varian. Information Rules. A Strategic Guide to the Network Economy. Cambridge, MA: Harvard Business School Press (1999).
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2C H A P T E R
E-commerce Business Models and Concepts
L E A R N I N G O B J E C T I V E S
After reading this chapter, you will be able to:
■ Identify the key components of e-commerce business models. ■ Describe the major B2C business models. ■ Describe the major B2B business models. ■ Understand key business concepts and strategies applicable to e-commerce.
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© Kennedy Photography/Alamy
Twitter, the social network based on 140-character text messages, continues in the long tradition of Internet developments that emerged seemingly out of nowhere to take the world by storm. Twitter’s basic idea was to marry short text messaging on cell phones with the Web and its ability to create social groups.
Twitter has since expanded beyond simple text messages to article previews, photographs, videos, and even animated images, and today has over 310 million active users worldwide (as of June 2016). The 5,000 tweets a day that it began with in 2006 has turned into a deluge of around 6,000 tweets per second and 500 million per day worldwide. Special events, such as the Super Bowl, tend to generate an explosion of tweets, with a total of 28.4 million tweets during the course of the game in 2015. Some celebrities, such as the pop star Katy Perry, have millions of followers (in Perry’s case, over 90 million as of 2016).
Like many social network firms, Twitter began operating without any revenue stream. However, it quickly developed some important assets, such as user attention and audience size (unique visitors). Another important asset is its database of tweets, which contain the real-time comments, observations, and opinions of its audience, and a search engine that can mine those tweets for patterns. In addition, Twitter has become a powerful alternative media platform for the distribution of news, videos, and pictures. Twitter has sought to monetize its platform via three primary advertising options, Promoted Tweets, Promoted Trends, and Promoted Accounts, although it continues to develop more and more variations on these products.
Promoted Tweets are Twitter’s version of Google’s search ads. In response to a search on Twitter for tablet computers, for example, a Best Buy Promoted Tweet about tablets might be displayed. Promoted Tweets typically cost between 20 cents and $10. Twitter also offers geo-targeted and keyword targeting functionality, which enables advertisers to send Promoted Tweets to specific users in specific locations or based on their Twitter activity. Twitter’s research indicates that users are much more likely to engage with such Promoted Tweets than traditional online ads.
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SOURCES: “Twitter to Cut Jobs as It Aims For a Turnaround,” by Mike Isaac, New York Times, October 27, 2016; “Twitter, Grappling with Anemic Growth, Tries to Bolster Its Advertising Business,” by Mike Isaac, New York Times, July 26, 2016; “What Happened to Twitter’s Music Strategy?” by Cherie Hu, Forbes.com, May 31, 2016; “Nearly a Year Later, Jack Dorsey’s Twitter Shows Few Signs of a Successful Turnaround,” by Alice Truong, Quartz.com, May 30, 2016; “Will The Death of Twitter’s Buy Button Be the End of Social Commerce?” by Natalie Gagliordi, Zdnet.com, May 28, 2016; “Report, Twitter Has Stopped Caring About ‘Buy’ Buttons, Just Like the Rest of Us,” by Nate Swanner, Thenextweb.com, May 26, 2016; “Twitter Downgraded to Sell: Hope Is Not a Strategy, Research Firm Says,” by Mathew Ingram, Fortune, May 24, 2016; “Twitter Narrows Loss, Adds Users, and Misses Revenue Forecast,” by Mike Isaac, New York Times, April 26, 2016; “Twitter Gains Rights to Stream Thursday NFL Games,” by Ken Belson and Mike Isaac, New York Times, April 5, 2016; “Twitter Will Offer Selected Tweets to Keep Users Coming Back,” by Mike Isaac, New York Times, February 10, 2016; “Here’s Another Area Where Twitter Appears to Have Stalled: Tweets Per Day,” by Alexei
Promoted Trends is the second major Twitter advertising product. “Trends” is a section of the Twitter home page that identifies what people are talking about. A company can place a Promoted Trends banner at the top of the Trends section, and when users click on the banner, they are taken to the follower page for that company or product. A Promoted Trend must be purchased for an entire market for a day (for example, the United States) for a flat fee. In the United States, the fee is now $200,000, up from $80,000 when Promoted Trends were first introduced in 2010.
Twitter’s third primary advertising product is Promoted Accounts, which are sug- gestions to follow various advertiser accounts based on the list of accounts that the user already follows. Like Promoted Tweets, Promoted Accounts can be geo-targeted at both the country level and the local level. Promoted Accounts are priced on a cost-per-follower basis, with advertisers only paying for new followers gained. Prices range from $.50 to $2.50. Twitter also offers Enhanced Profile Pages for brands. For a reported $15,000 to $25,000, companies get their own banner to display images, and the ability to pin a tweet to the top of the company’s Twitter stream.
In 2013, Twitter began a natural progression into the video ad market. Video clips that include video ads can now be embedded within tweets. Known as the Twitter Amplify program, the program now includes media partners such as CBS, ESPN, Condé Nast, MLB.com, Warner Music, and others. Twitter also launched a television ad targeting product in 2013 that allows marketers to show Promoted Tweets to people who have been tweeting about a television show. In 2014, building on the Amplify program, Twitter announced a beta test of Promoted Video, which allows advertisers to distribute videos on the Twitter platform, and in 2015, it began allowing advertisers to use Promoted Video to link directly to app installations, as well as an ad purchasing feature for videos called “optimized action bidding.” This allows marketers to customize ad purchases to improve their return on investment.
But it is mobile that has proven to be the primary driver of Twitter’s business and the source of most of its revenue. Twitter began testing Promoted Tweets and Promoted Accounts on mobile devices in March 2012, and by June 2012, reported that it was generating the majority of its revenues from ads on mobile devices rather than on its website. Twitter has acquired companies like MoPub and TapCommerce to bolster its mobile capabilities, and in 2015 made its largest acquisition yet, spending $533 million to acquire digital ad platform TellApart. Twitter hopes that TellApart’s technology will help improve its mobile ad targeting. Currently, Twitter derives over 80% of its advertising revenue from mobile.
Twitter also continues to refine its data mining capability, recognizing that its stockpile of customer sentiment about products, services, and marketing efforts is among its most valuable assets. In 2013, Twitter purchased Big Data startup Lucky Sort and since then has acquired a number of companies such as Topsy Labs and Gnip that will help it improve its ability to provide information about its users’ behavior.
Twitter went public in November 2013 with a valuation of about $14 billion, raising $1.8 billion on top of the $1.2 billion it had previously raised from private investors and venture capital firms. The public offering was viewed as a rousing success, with the stock
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Oreskovic, Businessinsider.com, June 15, 2015; “Twitter Is Now Letting Apps Advertise With Video,” by Garett Sloane, Adweek.com, July 8, 2015; “Twitter To Pay About $533 Million For TellApart, Largest Acquisition To Date,” by Zach Rodgers, Adexchanger.com, April 30, 2015; “Where Did Dick Costolo Go Wrong?” by Erin Griffith, Fortune, June 12, 2015; “Twitter’s Evolving Plans to Make Money From its Data,” by Vindu Goel, New York Times, April 11, 2015; “Twitter Launches New Ad Product, Promoted Video, into Beta,” by Sarah Perez, Techcrunch.com, August 12, 2014; “Twitter Changes Pricing Model for Advertisers,” by Mark Bergan, Adage.com, August 7, 2014; “Twitter ‘Buy Now’ Button Appears for First Time,” by Kurt Wagner, Mashable.com, June 30, 2014; “Twitter Buys TapCommerce, a Mobile Advertising Start-up,” by Mike Isaac, New York Times, June 30, 2014; “Twitter’s Growth Shifts to Developing Countries,” by Vindu Goel, New York Times, May 27, 2014; “Twitter Pushes Further Into Mobile Ads with MoPub Integra- tion,” by Yoree Koh, Wall Street Journal, April 17, 2014; “Twitter Acquires Gnip, Bringing a Valuable Data Service In-House,” by Ashwin Seshagiri, New York Times, April 15, 2014; “Only 11% of New Twitter Users in 2012 Are Still Tweeting,” by Yoree Koh, Wall Street Journal, March 21, 2014; “Twitter’s Big Battle is Indiffer- ence,” by Yoree Koh, Wall Street Journal, February 10, 2014; “A Sneak Peek at Twitter’s E-commerce Plans,” by Yoree Koh, Wall Street Journal, January 31, 2014; “#Wow! Twitter Soars 73% in IPO,” by Julianne Pepitone, Money.cnn.com, November 7, 2013; “Twitter Amplify Partner- ships: Great Content, Great Brands, Great Engagement,” by Glenn Brown, Blog.twitter.com, May 23, 2013; “Twitter’s Latest Buy: Big Data Startup Lucky Sort,” by Daniel Terdiman, News.cnet.com, May 13, 2013; “Twitter’s New Video Plan: Ads, Brought to You by Ads,” by Peter Kafka, Allthingsd.com, April 16, 2013.
price jumping almost 75% on its opening day, despite the fact that at the time, Twitter had not generated a profit. However, its share price has declined significantly from its high of over $74 in December 2013 down to around $18 per share as of October 2016, well below its IPO price. Analysts have reiterated serious concerns about Twitter’s lack of profitability and anemic growth rate. Only about 20% of U.S. Internet users use Twitter, compared to the over 60% that use Facebook. The vast majority of its users (almost 80%) are located outside the United States, although the United States is the source of over 50% of its ad revenues.
Another issue is user engagement. Research indicates that the vast majority of tweets are generated by a small percentage of users: one study found that the top 15% of users account for 85% of all tweets. This is problematic because Twitter only makes money when a user engages with an ad. User retention is another problem. One study found that Twitter had only a 40% retention rate: 60% of users failed to return the following month. Only about 11% of the accounts created in 2012 are still tweeting. Acknowledging a need for a change in direction, CEO Dick Costolo stepped down in 2015, replaced by co-founder Jack Dorsey.
Twitter recognizes that one of its problems is that it is perceived to be more confusing to use than Facebook. Twitter’s first move with Dorsey at the helm was to launch Moments, a feature that packages tweets into thematic groups that are easier to follow. The company also announced upcoming changes to relax the 140-character limit for certain types of content and to provide a curated selection of tweets for users who have been away that might be especially interesting based on their previous activity. Analysts argue that these moves are merely cosmetic.
Dorsey has also vowed to narrow the company’s focus on their core service. Twitter is moving away from products and features that don’t do enough to enhance the basic user experience. For example, Twitter had hoped that it would become a hub of social e-commerce, and rolled out a Buy Now button in 2014 that allowed users to add products to their Amazon shopping cart. However, in 2016, development on the service has halted due to the users’ lukewarm response to the feature. Other services that have failed to take off, such as Twitter’s #Music app, have been shelved until further notice. For the time being, Twitter is focusing on improving its video capability, including improving support for its popular Periscope video service. In 2016, Twitter purchased the rights to stream Thursday night NFL games. The ability to stream live events on Twitter is a substantive change in strategy that could help keep users on the site longer.
Despite Dorsey’s reshuffling, including restructuring Twitter’s board and firing 8% of the workforce, Twitter has yet to reverse its flagging earnings and stagnant growth. In October 2016, Salesforce was rumored to interested in acquiring Twitter, but decided not to pursue a takeover. Shortly thereafter, Twitter reported yet another loss for the third quarter of the year, and announced that it was cutting an additional 9% of its workforce and shutting down its Vine video app. It is clear Twitter has not yet found a business model that works.
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The story of Twitter illustrates the difficulties of turning a good business idea with a huge audience into a successful business model that pro-duces revenues and even profits. Thousands of firms have discovered that they can spend other people’s invested
capital much faster than they can get customers to pay for their products or services. In most instances of failure, the business model of the firm is faulty from the begin- ning. In contrast, successful e-commerce firms have business models that are able to leverage the unique qualities of the Internet, the Web, and the mobile platform, provide customers real value, develop highly effective and efficient operations, avoid legal and social entanglements that can harm the firm, and produce profitable business results. In addition, successful business models must scale. The business must be able to achieve efficiencies as it grows in volume. But what is a business model, and how can you tell if a firm’s business model is going to produce a profit?
In this chapter, we focus on business models and basic business concepts that you must be familiar with in order to understand e-commerce.
2.1 E-COMMERCE BUSINESS MODELS
INTRODUCTION
A business model is a set of planned activities (sometimes referred to as business processes) designed to result in a profit in a marketplace. A business model is not always the same as a business strategy, although in some cases they are very close insofar as the business model explicitly takes into account the competitive environ- ment (Magretta, 2002). The business model is at the center of the business plan. A business plan is a document that describes a firm’s business model. A business plan always takes into account the competitive environment. An e-commerce business model aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform.
EIGHT KEY ELEMENTS OF A BUSINESS MODEL
If you hope to develop a successful business model in any arena, not just e-com- merce, you must make sure that the model effectively addresses the eight elements listed in Figure 2.1. These elements are value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team. Many writers focus on a firm’s value proposition and revenue model. While these may be the most important and most easily identifiable aspects of a company’s business model, the other elements are equally important when evaluating business models and plans, or when attempt- ing to understand why a particular company has succeeded or failed (Kim and Mauborgne, 2000). In the following sections, we describe each of the key business model elements more fully.
business model a set of planned activities designed to result in a profit in a marketplace
business plan a document that describes a firm’s business model
e-commerce business model a business model that aims to use and leverage the unique qualities of the Internet, the Web, and the mobile platform
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Value Proposition
A company’s value proposition is at the very heart of its business model. A value proposition defines how a company’s product or service fulfills the needs of custom- ers (Kambil, Ginsberg, and Bloch, 1998). To develop and/or analyze a firm’s value proposition, you need to understand why customers will choose to do business with the firm instead of another company and what the firm provides that other firms do not and cannot. From the consumer point of view, successful e-commerce value propo- sitions include personalization and customization of product offerings, reduction of product search costs, reduction of price discovery costs, and facilitation of transactions by managing product delivery.
value proposition defines how a company’s product or service fulfills the needs of customers
A business model has eight key elements. Each element must be addressed if you hope to be successful.
FIGURE 2.1 THE EIGHT KEY ELEMENTS OF A BUSINESS MODEL
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For instance, before Amazon existed, most customers personally traveled to book retailers to place an order. In some cases, the desired book might not be available, and the customer would have to wait several days or weeks, and then return to the bookstore to pick it up. Amazon makes it possible for book lovers to shop for virtually any book in print from the comfort of their home or office, 24 hours a day, and to know immediately whether a book is in stock. Amazon’s Kindle takes this one step further by making e-books instantly available with no shipping wait. Amazon’s primary value propositions are unparalleled selection and convenience.
Revenue Model
A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on invested capital. We use the terms revenue model and financial model interchangeably. The function of business organizations is both to generate profits and to produce returns on invested capital that exceed alternative investments. Profits alone are not sufficient to make a company “successful” (Porter, 1985). In order to be considered successful, a firm must produce returns greater than alternative investments. Firms that fail this test go out of existence.
Although there are many different e-commerce revenue models that have been developed, most companies rely on one, or some combination, of the following major revenue models: advertising, subscription, transaction fee, sales, and affiliate.
In the advertising revenue model, a company that offers content, services, and/or products also provides a forum for advertisements and receives fees from advertisers. Companies that are able to attract the greatest viewership or that have a highly specialized, differentiated viewership and are able to retain user attention (“stickiness”) are able to charge higher advertising rates. Yahoo, for instance, derives a significant amount of revenue from display and video advertising.
In the subscription revenue model, a company that offers content or services charges a subscription fee for access to some or all of its offerings. For instance, the digital version of Consumer Reports provides online and mobile access to premium content, such as detailed ratings, reviews, and recommendations, only to subscribers, who have a choice of paying a $6.95 monthly subscription fee or a $30.00 annual fee. Experience with the subscription revenue model indicates that to successfully overcome the disinclination of users to pay for content, the content offered must be perceived as a high-value-added, premium offering that is not readily available elsewhere nor easily replicated. Companies successfully offering content or services online on a subscription basis include eHarmony (dating services), Ancestry (genealogy research), Microsoft’s Xbox Live (video games), Pandora, Spotify, and Apple Music (music), Scribd and Ama- zon’s Kindle Unlimited program (e-books), and Netflix and Hulu (television and movies). See Table 2.1 for examples of various subscription services.
Recently, a number of companies have been combining a subscription revenue model with a freemium strategy. In a freemium strategy, the companies give away a certain level of product or services for free, but then charge a subscription fee for premium levels of the product or service. See the case study, Freemium Takes Pandora Public, at the end of the chapter, for a further look at the freemium strategy.
revenue model describes how the firm will earn revenue, produce profits, and produce a superior return on invested capital
advertising revenue model a company provides a forum for advertisements and receives fees from advertisers
subscription revenue model a company offers its users content or services and charges a subscription fee for access to some or all of its offerings
freemium strategy companies give away a certain level of product or services for free, but then charge a subscription fee for premium levels of the product or service
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In the transaction fee revenue model, a company receives a fee for enabling or executing a transaction. For example, eBay provides an auction marketplace and receives a small transaction fee from a seller if the seller is successful in selling the item. E*Trade, a financial services provider, receives transaction fees each time it executes a stock transaction on behalf of a customer.
In the sales revenue model, companies derive revenue by selling goods, content, or services to customers. Companies such as Amazon, L.L.Bean, and Gap all have sales revenue models. A number of companies are also using a subscription-based sales revenue model. Birchbox, which offers home delivery of beauty products for a $10 monthly or $100 annual subscription price, is one example. Dollar Shave Club, which sells razor blades by subscription and was recently acquired by Unilever for $1 billion, is another.
In the affiliate revenue model, companies that steer business to an “affiliate” receive a referral fee or percentage of the revenue from any resulting sales. For example, MyPoints makes money by connecting companies with potential customers by offering special deals to its members. When they take advantage of an offer and make a purchase, members earn “points” they can redeem for freebies, and MyPoints receives a fee. Community feedback companies typically receive some of their revenue from steering potential customers to websites where they make a purchase.
Table 2.2 summarizes these major revenue models. The Insight on Society case, Foursquare: Check Your Privacy at the Door, examines some of the issues associated with Foursquare's business and revenue model.
transaction fee revenue model a company receives a fee for enabling or executing a transaction
sales revenue model a company derives revenue by selling goods, information, or services
affiliate revenue model a company steers business to an affiliate and receives a referral fee or percentage of the revenue from any resulting sales
TABLE 2.1 EXAMPLES OF SUBSCRIPTION SERVICES
N A M E D E S C R I P T I O N
eHarmony (dating) • Free: Create profile and view profiles of matches
• Basic (see photos, send and receive messages): $180 for 6 months; $240 for 1 year
• Total Connect (Basic plus additional services): $203 for 6 months; $287 for 1 year
• Premier (Basic/Total Connect plus additional services): $503/year
Ancestry (genealogical research) • All U.S. records: $19.99/month or $99 for 6 months
• All U.S. and international records: $34.99/monthly or $149 for 6 months
Scribd (e-books) • Unlimited access to “Scribd Select” books and audio- books, plus 3 books and 1 audiobook of the user’s choice each month for $8.99/month (over 1 million e-books, audio books, and comic books from which to choose)
Spotify (music) • Many different permutations, depending on device (mobile, tablet, or desktop) and plan chosen (Free, Unlimited, or Premium)
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INSIGHT ON SOCIETY
FOURSQUARE: CHECK YOUR PRIVACY AT THE DOOR
Foursquare is one of a host of com- panies that combine a social network business model with location-based
technology. Foursquare offers mobile social applications that know where you
are located and can provide you with informa- tion about popular spots nearby, as well as reviews from other Foursquare users. Its apps also allow you to check in to a restaurant or other location, and automatically let friends on Facebook and other social networks learn where you are. Founded in 2008 by Dennis Crowley and Naveen Selvadu- rai, Foursquare has more than 55 million monthly active users worldwide, split fairly evenly between the United States and the rest of the world, who have checked in over 8 billion times. There’s poten- tially a great deal of money to be made by com- bining a social network with smartphone-based technology that can identify your location precisely. Location-based data has extraordinary commercial value because advertisers can then send you adver- tisements, coupons, and flash bargains, based on where you are located.
In 2014, Foursquare shook up its business model when it split its app into two separate apps with different focuses. Its redesigned Four- square app became a recommender system akin to a travel guide, using passive location track- ing to offer suggestions to users for where to eat or visit. A separate app, Swarm, absorbed Four- square’s check-in feature. The redesigned app asks the user to identify things he or she likes, known as “tastes,” from over 10,000 possibilities (ranging from barbecue to museums to board games), and then provides recommendations. Rather than earn badges, users are encouraged to add tips to work toward becoming an expert. Many loyal Four- square users were driven away by the change. In 2015, the company added many of the old fea- tures, such as status levels, mayorships (awards
offered to users with the most check-ins at a particular location), and leaderboards, back to Swarm. Foursquare’s decision was influenced pri- marily by its continued struggles to find profitabil- ity, though it’s not for lack of trying. Foursquare has continued to develop in-app advertising prod- ucts that serve advertising based on users’ loca- tions and has formed partnerships with companies like American Express to offer discounts to card- holders after using Foursquare to check-in. Unfor- tunately for Foursquare, Facebook and seemingly every other social network now offer the ability to check-in and share that information with friends. However, in 2015, Foursquare shifted in a different direction with the launch of its Pinpoint product, an advertising tool that allows marketers unprec- edented ability to target users based on its accu- mulated historical location data and to filter out inaccurate data. Most importantly, Pinpoint can even reach mobile users without the Foursquare app, a major advantage considering the company’s relatively low number of in-network users com- pared to other top social networks.
In 2016, Foursquare is likely to focus more on Pinpoint and other technologies that it can offer other companies than on its flagship check-in app. From 2014 to 2016, Foursquare’s revenue doubled on a year-to-year basis, including a 170% increase in its advertising solutions business in 2015. This growth has been driven primarily by data licensing agreements with other tech and social networking giants. For example, in 2014, Foursquare struck just such an agreement with Microsoft, which may use the data to customize Bing on a user-by-user basis with specific search results and advertise- ments based on their location data. Foursquare has also struck similar deals with Twitter, Google, Yahoo, and Pinterest to provide location-based functions and to share location data, increasing the richness and accuracy of its own data in the process. All of
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these partnerships greatly enrich the value of Pin- point and allow Foursquare to track users that are not even a part of its platform. All of a sudden, Foursquare’s “lowly” 55 million users and unim- pressive user growth don’t matter quite as much. In 2016, Foursquare received $45 million in new financing, albeit at a much lower valuation than its last round of financing in 2013. Crowley also stepped down as CEO as the company restructured its executive team to focus on continued develop- ment of both advertising products as well as tech- niques to monetize its location data. The company believes that its renewed focus on its advertising products will help it overcome the stigma of its stalled user growth.
As the popularity of location-based services like Foursquare has grown, so too have concerns about privacy. Privacy advocates point out that many apps have no privacy policy, that most of the popular apps transmit location data to their developers, after which the information is not well controlled, and that these services are creating a situation where government, marketers, creditors, and telecommunications firms will end up knowing nearly everything about citizens, including their whereabouts. Many users may not truly understand how much of their location history is available to their friends. A 2016 study indicated that algo- rithms that analyze Twitter posts in tandem with Foursquare or Instagram posts can identify users’ identities with relative ease. One advantage Four- square does have, though, is that many of its users
are actually interested in having their loca- tion tracked and their data collected—users are less likely to revolt when they find that Four- square is collecting and sharing their data.
The Foursquare app automatically provides Foursquare with the phone’s GPS coordinates any time the phone is turned on, even when the app is closed, unless the user specifically opts out of such tracking. In contrast, Facebook’s Nearby Friends feature requires users to opt in. Persistent location tracking of this sort further enhances the value of Foursquare’s location data. Foursquare claims that the services it provides are a fair trade for the data it collects; privacy experts are con- cerned that users cannot delete archived loca- tion data from Foursquare’s servers. Striking a balance between respecting user privacy and con- tinuing to drive profitability will continue to be a challenge for Foursquare moving forward. Signal- ing a desire to meet its users’ demands for privacy, in 2016, Swarm began allowing users to check in without sharing their locations publicly; but at approximately the same time, Foursquare released its Attribution product, which mines daily loca- tion information of over 1.3 million Foursquare users who have consented to location tracking in order to determine whether or not the advertising they’ve seen has actually influenced their purchas- ing decisions. In July 2016, Foursquare released a digital dashboard for advertising using Attribution that lets marketers drill down into the data even further, with even more detailed audience metrics.
SOURCES: “Foursquare Is Debuting a Dashboard for Its Intriguing Foot Traffic Measurement System,” by Christoper Heine, Adweek.com, July 25, 2016; “Swarm Now Lets Users Check-In Without Sharing Their Location,” by Jordan Crook, Techcrunch.com, April 21, 2016; “Location Data From Just Two of Your Apps Is Enough to Reveal Your Identity,” by Brian Mastroianni, Cbsnews.com, April 14, 2016; “Foursquare ‘Attribution’ Takes On Nielsen By Selling Foot Traffic From 1.2 Million Daily Mobile Audience,” by Kerry Flynn, Ibtimes.com, February 22, 2016; “Foursquare’s Potentially Game-Changing New Tool Can Measure Foot Traffic Generated by Digital Ads,” by Christopher Heine, Adweek.com, February 22, 2016; “Inside Foursquare’s Plan to Become Profitable,” by Andrew Nusca, Fortune, January 25, 2016; “Foursquare’s Plan to Use Your Data to Make Money—Even If You Aren’t a User,” by Klint Finley, Wired.com, January 19, 2016; “Foursquare Raises $45 Million, Cutting Its Valuation Nearly in Half,” by Mike Isaac, New York Times, January 14, 2016; “Swarm Gets Back into the Game with Leaderboards,” by Jordan Crook, Techcrunch.com, August 20, 2015; “Foursquare by the Numbers: 60M Registered Users, 50M MAUs, and 75M Tips to Date,” by Harrison Weber and Jordan Novet, Venturebeat.com, August 18, 2015; “Foursquare Returns to Its Roots in Bid to Win Back Users,” by Jason Cipriani, Fortune, May 13, 2015; “Foursquare Unveils Pinpoint for Location-Based Ad Targeting,” by Melanie White, Clickz.com, April 14, 2015; “Four- square Unveils Pinpoint to Show You Ads Based on Where You’ve Been,” by Harrison Weber, Venturebeat.com, April 14, 2015; “Why Twitter and Foursquare Just Struck a Deal,” by Erin Griffith, Fortune, March 23, 2015; “Radical New Foursquare App Thinks You Want Even Less Privacy,” by Jason Cipriani, Wired. com, August 6, 2014; “Foursquare Now Tracks Users Even When the App is Closed,” by Douglas Macmillan, Wall Street Journal, August 6, 2014; “Foursquare Updates Swarm to Soothe Check-in Blues,” by Caitlin McGarry, Techhive.com, July 8, 2014; “How Foursquare Uses Location Data to Target Ads on PCs, Phones,” by Cotton Delo, Adage.com, February 27, 2014; “With Foursquare Deal, Microsoft Aims for Supremacy in Hyper-Local Search,” by Ryan Tate, Wired. com, February 5, 2014.
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Market Opportunity
The term market opportunity refers to the company’s intended marketspace (i.e., an area of actual or potential commercial value) and the overall potential financial opportunities available to the firm in that marketspace. The market opportunity is usually divided into smaller market niches. The realistic market opportunity is defined by the revenue potential in each of the market niches where you hope to compete.
For instance, let’s assume you are analyzing a software training company that creates online software-learning systems for sale to businesses. The overall size of the software training market for all market segments is approximately $70 billion. The overall market can be broken down, however, into two major market segments: instructor-led training products, which comprise about 70% of the market ($49 billion in revenue), and computer-based training, which accounts for 30% ($21 billion). There are further market niches within each of those major market segments, such as the Fortune 500 computer-based training market and the small business computer-based training market. Because the firm is a start-up firm, it cannot compete effectively in the large business, computer-based training market (about $15 billion). Large brand- name training firms dominate this niche. The start-up firm’s real market opportunity is to sell to the thousands of small business firms that spend about $6 billion on computer-based software training. This is the size of the firm’s realistic market oppor- tunity (see Figure 2.2).
Competitive Environment
A firm’s competitive environment refers to the other companies selling similar products and operating in the same marketspace. It also refers to the presence of substitute products and potential new entrants to the market, as well as the power of customers and suppliers over your business. We discuss the firm’s environment
market opportunity refers to the company’s intended marketspace and the overall potential financial opportunities available to the firm in that marketspace
marketspace the area of actual or potential commercial value in which a company intends to operate
competitive environment refers to the other companies operating in the same marketspace selling similar products
TABLE 2.2 FIVE PRIMARY REVENUE MODELS
R E V E N U E M O D E L E X A M P L E S R E V E N U E S O U R C E
Advertising Yahoo Fees from advertisers in exchange for advertisements
Subscription eHarmony Consumer Reports Online Netflix
Fees from subscribers in exchange for access to content or services
Transaction Fee eBay E*Trade
Fees (commissions) for enabling or executing a transaction
Sales Amazon L.L.Bean Birchbox iTunes
Sales of goods, information, or services
Affiliate MyPoints Fees for business referrals
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later in the chapter. The competitive environment for a company is influenced by several factors: how many competitors are active, how large their operations are, what the market share of each competitor is, how profitable these firms are, and how they price their products.
Firms typically have both direct and indirect competitors. Direct competitors are companies that sell very similar products and services into the same market segment. For example, Priceline and Travelocity, both of whom sell discount airline tickets online, are direct competitors because both companies sell identical prod- ucts—cheap tickets. Indirect competitors are companies that may be in different industries but still compete indirectly because their products can substitute for one another. For instance, automobile manufacturers and airline companies operate in different industries, but they still compete indirectly because they offer consumers alternative means of transportation. CNN, a news outlet, is an indirect competitor of ESPN, not because they sell identical products, but because they both compete for consumers’ time online.
The existence of a large number of competitors in any one segment may be a sign that the market is saturated and that it may be difficult to become profitable. On the other hand, a lack of competitors could signal either an untapped market niche ripe for the picking, or a market that has already been tried without success because there is no money to be made. Analysis of the competitive environment can help you decide which it is.
Competitive Advantage
Firms achieve a competitive advantage when they can produce a superior product and/or bring the product to market at a lower price than most, or all, of their
competitive advantage achieved by a firm when it can produce a superior product and/or bring the product to market at a lower price than most, or all, of its competitors
FIGURE 2.2 MARKETSPACE AND MARKET OPPORTUNITY IN THE SOFTWARE TRAINING MARKET
Marketspaces are composed of many market segments. Your realistic market opportunity will typically focus on one or a few market segments.
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competitors (Porter, 1985). Firms also compete on scope. Some firms can develop global markets, while other firms can develop only a national or regional market. Firms that can provide superior products at the lowest cost on a global basis are truly advantaged.
Firms achieve competitive advantages because they have somehow been able to obtain differential access to the factors of production that are denied to their competi- tors—at least in the short term (Barney, 1991). Perhaps the firm has been able to obtain very favorable terms from suppliers, shippers, or sources of labor. Or perhaps the firm has more experienced, knowledgeable, and loyal employees than any competitors. Maybe the firm has a patent on a product that others cannot imitate, or access to investment capital through a network of former business colleagues or a brand name and popular image that other firms cannot duplicate. An asymmetry exists whenever one participant in a market has more resources—financial backing, knowledge, infor- mation, and/or power—than other participants. Asymmetries lead to some firms having an edge over others, permitting them to come to market with better products, faster than competitors, and sometimes at lower cost.
For instance, when Apple announced iTunes, a service offering legal, download- able individual song tracks for 99 cents a track that would be playable on any digital device with iTunes software, the company had better-than-average odds of success simply because of Apple’s prior success with innovative hardware designs, and the large stable of music firms that Apple had meticulously lined up to support its online music catalog. Few competitors could match the combination of cheap, legal songs and powerful hardware to play them on.
One rather unique competitive advantage derives from being a first mover. A first-mover advantage is a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service. If first movers develop a loyal following or a unique interface that is difficult to imitate, they can sustain their first-mover advantage for long periods (Arthur, 1996). Amazon provides a good example. However, in the history of technology-driven business innovation, most first movers often lack the complementary resources needed to sustain their advantages, and often follower firms reap the largest rewards (Rigdon, 2000; Teece, 1986). Indeed, many of the success stories we discuss in this book are those of com- panies that were slow followers—businesses that gained knowledge from the failure of pioneering firms and entered into the market late.
Some competitive advantages are called “unfair.” An unfair competitive advan- tage occurs when one firm develops an advantage based on a factor that other firms cannot purchase (Barney, 1991). For instance, a brand name cannot be purchased and is in that sense an “unfair” advantage. Brands are built upon loyalty, trust, reliability, and quality. Once obtained, they are difficult to copy or imitate, and they permit firms to charge premium prices for their products.
In perfect markets, there are no competitive advantages or asymmetries because all firms have access to all the factors of production (including information and knowl- edge) equally. However, real markets are imperfect, and asymmetries leading to competitive advantages do exist, at least in the short term. Most competitive
asymmetry exists whenever one participant in a market has more resources than other participants
first-mover advantage a competitive market advantage for a firm that results from being the first into a marketplace with a serviceable product or service
complementary resources resources and assets not directly involved in the production of the product but required for success, such as marketing, management, financial assets, and reputation
unfair competitive advantage occurs when one firm develops an advantage based on a factor that other firms cannot purchase
perfect market a market in which there are no competitive advantages or asymmetries because all firms have equal access to all the factors of production
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advantages are short term, although some can be sustained for very long periods. But not forever. In fact, many respected brands fail every year.
Companies are said to leverage their competitive assets when they use their competitive advantages to achieve more advantage in surrounding markets. For instance, Amazon’s move into the online grocery business leverages the company’s huge customer database and years of e-commerce experience.
Market Strategy
No matter how tremendous a firm’s qualities, its marketing strategy and execution are often just as important. The best business concept, or idea, will fail if it is not properly marketed to potential customers.
Everything you do to promote your company’s products and services to potential customers is known as marketing. Market strategy is the plan you put together that details exactly how you intend to enter a new market and attract new customers.
For instance, Twitter, YouTube, and Pinterest have a social network marketing strategy that encourages users to post their content for free, build personal profile pages, contact their friends, and build a community. In these cases, the customer becomes part of the marketing staff!
Organizational Development
Although many entrepreneurial ventures are started by one visionary individual, it is rare that one person alone can grow an idea into a multi-million dollar company. In most cases, fast-growth companies—especially e-commerce businesses—need employees and a set of business procedures. In short, all firms—new ones in particu- lar—need an organization to efficiently implement their business plans and strategies. Many e-commerce firms and many traditional firms that attempt an e-commerce strategy have failed because they lacked the organizational structures and supportive cultural values required to support new forms of commerce (Kanter, 2001).
Companies that hope to grow and thrive need to have a plan for organizational development that describes how the company will organize the work that needs to be accomplished. Typically, work is divided into functional departments, such as production, shipping, marketing, customer support, and finance. Jobs within these functional areas are defined, and then recruitment begins for specific job titles and responsibilities. Typically, in the beginning, generalists who can perform multiple tasks are hired. As the company grows, recruiting becomes more specialized. For instance, at the outset, a business may have one marketing manager. But after two or three years of steady growth, that one marketing position may be broken down into seven separate jobs done by seven individuals.
For instance, eBay founder Pierre Omidyar started an online auction site, accord- ing to some sources, to help his girlfriend trade Pez dispensers with other collectors, but within a few months the volume of business had far exceeded what he alone could handle. So he began hiring people with more business experience to help out. Soon the company had many employees, departments, and managers who were responsible for overseeing the various aspects of the organization.
leverage when a company uses its competitive advantages to achieve more advantage in surrounding markets
market strategy the plan you put together that details exactly how you intend to enter a new market and attract new customers
organizational development plan that describes how the company will organize the work that needs to be accomplished
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Management Team
Arguably, the single most important element of a business model is the management team responsible for making the model work. A strong management team gives a model instant credibility to outside investors, immediate market-specific knowledge, and experience in implementing business plans. A strong management team may not be able to salvage a weak business model, but the team should be able to change the model and redefine the business as it becomes necessary.
Eventually, most companies get to the point of having several senior executives or managers. How skilled managers are, however, can be a source of competitive advantage or disadvantage. The challenge is to find people who have both the experi- ence and the ability to apply that experience to new situations.
To be able to identify good managers for a business start-up, first consider the kinds of experiences that would be helpful to a manager joining your company. What kind of technical background is desirable? What kind of supervisory experience is necessary? How many years in a particular function should be required? What job functions should be fulfilled first: marketing, production, finance, or operations? Espe- cially in situations where financing will be needed to get a company off the ground, do prospective senior managers have experience and contacts for raising financing from outside investors?
Table 2.3 summarizes the eight key elements of a business model and the key questions that must be answered in order to successfully develop each element.
RAISING CAPITAL
Raising capital is one of the most important functions for a founder of a start-up busi- ness and its management team. Not having enough capital to operate effectively is a primary reason why so many start-up businesses fail. Many entrepreneurs initially “bootstrap” to get a business off the ground, using personal funds derived from savings,
management team employees of the company responsible for making the business model work
TABLE 2.3 KEY ELEMENTS OF A BUSINESS MODEL
C O M P O N E N T S K E Y Q U E S T I O N S
Value proposition Why should the customer buy from you?
Revenue model How will you earn money?
Market opportunity What marketspace do you intend to serve, and what is its size?
Competitive environment Who else occupies your intended marketspace?
Competitive advantage What special advantages does your firm bring to the marketspace?
Market strategy How do you plan to promote your products or services to attract your target audience?
Organizational development
What types of organizational structures within the firm are necessary to carry out the business plan?
Management team What kinds of experiences and background are important for the company’s leaders to have?
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credit card advances, home equity loans, or from family and friends. Funds of this type are often referred to as seed capital. Once such funds are exhausted, if the company is not generating enough revenue to cover operating costs, additional capital will be needed. Traditional sources of capital include incubators, commercial banks, angel investors, venture capital firms, and strategic partners. One of the most impor- tant aspects of raising capital is the ability to boil down the elements of the company’s business plan into an elevator pitch, a short two-to-three minute (about the length of an elevator ride, giving rise to its name) presentation aimed at convincing investors to invest. Table 2.4 lists the key elements of an elevator pitch.
Incubators (sometimes also referred to as accelerators) such as Y Combinator (profiled in Chapter 1’s Insight on Business case) typically provide a small amount of funding, but more importantly, also provide an array of services to start-up companies that they select to participate in their programs, such as business, technical, and marketing assistance, as well as introductions to other sources of capital. Well-known incubator programs include TechStars, DreamIt, and Capital Factory.
Obtaining a loan from a commercial bank is often difficult for a start-up company without much revenue, but it may be worthwhile to investigate programs offered by the U.S. Small Business Administration, and its state or local equivalents. The advantage of obtaining capital in the form of a loan (debt) is that, although it must be repaid, it does not require an entrepreneur to give up any ownership of the company.
Angel investors are typically wealthy individuals (or a group of individuals) who invest their own money in an exchange for an equity share in the stock in the business. In general, angel investors make smaller investments (typically $1 million or less) than venture capital firms, are interested in helping a company grow and succeed, and invest on relatively favorable terms compared to later stage investors. The first round of exter- nal investment in a company is sometimes referred to as Series A financing.
seed capital typically, an entrepreneur’s personal funds derived from savings, credit card advances, home equity loans, or from family and friends
elevator pitch short two-to-three minute presentation aimed at convincing investors to invest
incubators typically provide a small amount of funding and also an array of services to start-up companies
angel investors typically wealthy individuals or a group of individuals who invest their own money in exchange for an equity share in the stock of a business; often are the first outside investors in a start-up
TABLE 2.4 KEY ELEMENTS OF AN ELEVATOR PITCH
E L E M E N T D E S C R I P T I O N
Introduction Your name and position; your company’s name, and a tagline in which you compare what your company does to a well-known company. Example: “My name is X, I am the founder of Y, and we are the Uber/Amazon of Z.”
Background The origin of your idea and the problem you are trying to solve.
Industry size/market opportunity
Brief facts about the (hopefully very large) size of the market.
Revenue model/numbers/ growth metrics
Insight into your company’s revenue model and results thus far, how fast it is growing, and early adopters, if there are any.
Funding The amount of funds you are seeking and what it will help you achieve.
Exit strategy How your investors will achieve a return on their investment.
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Venture capital investors typically become more interested in a start-up company once it has begun attracting a large audience and generating some revenue, even if it is not profitable. Venture capital investors invest funds they manage for other investors such as investment banks, pension funds, insurance companies, or other businesses, and usually want to obtain a larger stake in the business and exercise more control over the operation of the business. Venture capital investors also typically want a well-defined “exit strategy,” such as a plan for an initial public offering or acquisition of the company by a more established business within a relatively short period of time (typically 3 to 7 years), that will enable them to obtain an adequate return on their investment. Venture capital investment often ultimately means that the founder(s) and initial investors will no longer control the company at some point in the future.
Crowdfunding involves using the Internet to enable individuals to collectively contribute money to support a project. The concepts behind crowdfunding have been popularized by Kickstarter and Indiegogo, but they were not able to be used for equity investments in for-profit companies in the United States due to securities regulations. However, the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012 and issuance of regulations by the Securities and Exchange Commission in July 2013 has enabled companies to use the Internet to solicit wealthy (“accred- ited”) investors to invest in small and early-stage start-ups in exchange for stock. Regulation A+, which enables equity crowdfunding investments by non-accredited investors (people with a net worth of less than $1 million and who earned less than $200,000 a year in the previous two years), took effect in June 2015. Regulations implementing even broader-based equity crowdfunding authorized by the JOBS Act, which allow investments by people with annual income or net worth of less than $100,000, also recently took effect, in May 2016. See the Insight on Business case, Crowdfunding Takes Off, for a further look at the issues surrounding crowdfunding.
CATEGORIZING E-COMMERCE BUSINESS MODELS: SOME DIFFICULTIES
There are many e-commerce business models, and more are being invented every day. The number of such models is limited only by the human imagination, and our list of different business models is certainly not exhaustive. However, despite the abundance of potential models, it is possible to identify the major generic types (and subtle variations) of business models that have been developed for the e-commerce arena and describe their key features. It is important to realize, however, that there is no one correct way to categorize these business models.
Our approach is to categorize business models according to the different major e-commerce sectors—B2C and B2B—in which they are utilized. You will note, however, that fundamentally similar business models may appear in more than one sector. For example, the business models of online retailers (often called e-tailers) and e-distribu- tors are quite similar. However, they are distinguished by the market focus of the sector in which they are used. In the case of e-tailers in the B2C sector, the business model focuses on sales to the individual consumer, while in the case of the e-distributor, the business model focuses on sales to another business. Many companies use a variety of
venture capital investors typically invest funds they manage for other investors; usually later-stage investors
crowdfunding involves using the Internet to enable individuals to collectively contribute money to support a project
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(continued)
INSIGHT ON BUSINESS
CROWDFUNDING TAKES OFF
Think you have the next big idea but lack the resources to make it happen? Crowdfunding sites might
be your best shot. Sites such as Kick- starter, Indiegogo, RocketHub, and Tilt
have led the growth of crowdfunding from $530 million in 2009 to over $34 billion in 2015. A World Bank study predicts that capital raised via crowdfunding will exceed $93 billion by 2025. The Internet is the ideal medium for crowdfunding because it allows individuals and organizations in need of funds and potential backers to find one another around the globe.
How do sites like Kickstarter and Indiegogo work? The idea is simple—an inventor, artist, or activist looking to raise money for a project uses the site to create a page for that project. People can pledge to support the project, but at Kick- starter, money actually only changes hands once the project fully reaches its funding goal (other sites, such as Indiegogo and RocketHub, allow project creators to keep the money they raise even if they do not achieve their goal). The sites take a small commission, usually about 5%, on com- pleted projects. Backers often receive some type of reward, often corresponding to the size of their contribution to the project.
Crowdfunding is quickly becoming a main- stay in the development of movies, video games, art installations, and other types of projects. For instance, among the most funded Kickstarter proj- ects to date are Pebble, a customizable e-paper watch that connects to a smartphone (over $33 million raised across several campaigns) and Coolest Cooler, a cooler with a waterproof Blue- tooth speaker, USB charger and other high tech features ($13.3 million). Several of the biggest
Kickstarter projects have been movie projects that struggled to gain traction at Hollywood studios, like the Veronica Mars movie project ($5.7 million) and a project to reboot the popular educa- tional TV show Reading Rainbow, which garnered over $5 million in financing in 2015. In 2014, a man from Ohio solicited $10 in donations to make a batch of potato salad as a joke, but after his campaign went viral, he raised over $55,000, much of which he used to support local charities. The applications for crowdfunding are limited only by the imagination.
Successful crowdfunding projects typically share some common elements. One of the most important is a clear and concise presentation of the idea, especially through the use of video. The crowdfunding campaign is in many ways similar to presenting a business plan, and should touch on the same eight elements of a business model, such as the project’s value proposition, its target market, and so on. A whole ecosystem of video producers, editors, and other services has sprung up to support crowdfunding projects.
Not every crowdfunding project gets off the ground—Kickstarter reports that only about 35% of its approximately 308,000 projects thus far have reached their funding goals. Sometimes projects that do get off the ground simply flame out, disappointing their backers. For instance, the Coolest Cooler has been marred by price increases, delays in production, and failure to deliver the product to its original backers, despite shipping it to those who pay full retail price on Amazon. Another high profile Kickstarter, fledgling drone manufacturer Zano, went bankrupt before ever completing its product, despite raising $3.4 million. Kickstarter now requires fundraisers to
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disclose the risks associated with their project, and for inventions, now requires
photos of prototype products instead of simply drawings, simulations, or renderings. But backers still have no real recourse with respect to proj- ects that never get off the ground or unresponsive founders.
A new use of crowdfunding is to provide seed capital for startup companies in return for equity (shares) in the company, known as equity crowd- funding. Under the JOBS Act passed by Congress in 2012, a company will be able to crowdfund up to $1 million over a 12-month period, and in 2016, the rules requiring potential investors to be accredited (having a net worth of at least $1 million dollars) were relaxed to allow smaller investors to purchase equity stakes of $2,000 or more. Twenty-five states have their own crowd- funding rules that allow local businesses to raise money in this way, and the 2016 regulations will also fix a loophole preventing these businesses from advertising to investors from outside their respective states. However, equity crowdfunding will require extensive compliance from businesses, with steep penalties for any irregularities, and potential investors will be subject to all the same risks that professional investors experience, but may put themselves in more precarious financial positions as a result. They’ll also be forced to hold their investments for at least one year.
Kickstarter currently has no plans to allow creators to offer equity in Kickstarter projects,
believing that equity crowdfunding is funda- mentally different from the projects on its site, which focus less on profits and more on ideas and social issues. In the meantime, many companies, such as Indiegogo, Crowdfunder, AngelList, and StartEngine are laying the groundwork for an expected explosion of activity. Indiegogo in par- ticular has been open about its support for the JOBS act and is currently working on implement- ing it as an option on its site in the near future. When it does, it’s likely to immediately become the dominant player in the industry thanks to its 15 million monthly visitors. Niche companies are also springing up, with varying degrees of success. For instance, SeedInvest is a company that caters to investors who may have concerns about crowd- funding privacy by offering better privacy con- trols. CircleUp is focused on consumer products. As crowdfunding becomes more widely recognized by the general public, more specialty sites such as these are likely to spring up. However, studies from MIT and the College of William and Mary suggest that equity crowdfunding isn’t as likely to lead to positive outcomes for smaller investors. Many of the highest quality startups won’t need to use equity crowdfunding and will instead pursue more traditional venture capitalists, and smaller inves- tors may be more likely to fall prey to misleading claims from businesses seeking funding. It’s likely that more regulations will need to be developed to protect smaller equity crowdfunding investors in coming months and years.
SOURCES: “Indiegogo Could Soon Dominate Equity Crowdfunding,” by Jeremy Quittner, Fortune, July 5, 2016; “Latest Pebble Campaign Snags the Top Slot on Kickstarter,” by Haje Jan Kamps,Techcrunch.com, June 30, 2016; “New Crowdfunding Rules Could Do More Harm Than Good for Some Startups,” by Samantha Drake, Forbes, June 27, 2016; “Equity Crowdfunding is Here—And It Could Be Terrible for Indie Filmmakers,” by Chris O’Falt, Indiewire.com, May 17, 2016; “New Crowdfunding Rules Let the Small Fry Swim with Sharks,” by Stacy Cowley, New York Times, May 14, 2016; “Can Equity Crowdfunding Democratize Access to Capital and Investment Opportunities?,” by Christian Catalini, Catherine Fazio, and Fiona Murray, MIT Innovation Initiative, May 2016; “As Equity Crowdfunding Debuts in U.S., Will More Regulations Follow?,” by Jeff Engel, Xconomy.com, March 25, 2016; “Trouble on Kickstarter as Two Massive Projects Hit the Rocks,” by Alex Hern, The Guardian, November 19, 2015; “S.E.C. Gives Small Investors Access to Equity Crowdfunding,” by Stacy Cowley, New York Times, October 30, 2015; “Equity Crowdfunding: A Market for Lemons?,” by Darian M. Ibrahim, College of William & Mary Law School, 2015; “Indiegogo Is Getting Ready for Equity Crowdfunding,” by Harry McCracken, Fast Company, October 2015; “Tired of Waiting for U.S. to Act, States Pass Crowdfunding Laws and Rules,” by Stacy Cowley, New York Times, June 3, 2015;“Keeping Up With Kickstarter,” by Stephen Heyman, New York Times, January 15, 2015; “Why Investors Are Pouring Millions into Crowdfunding,” by Katherine Noyes, Fortune, April 17, 2014; “Invest in Next Facebook…For a Few Bucks,” by Patrick M. Sheridan, CNNMoney.com, April 14, 2014; “How You’ll Fund – And Wildly Profit From – The Next Oculus Rift,” by Ryan Tate, Wired. com, April 4, 2014; “If You Back a Kickstarter Project That Sells for $2 Billion, Do You Deserve to Get Rich?,” by Adrianne Jeffries, Theverge.com, March 28, 2014; “Crowdfunding Tips for Turning Inspiration into Reality,” by Kate Murphy, New York Times, January 22, 2014; “World Bank: Crowdfunding Investment Market to Hit $93 Billion by 2025,” by Richard Swart, PBS.org, December 10, 2013; “SEC Finally Moves on Equity Crowdfunding, Phase 1,” by Chance Barnett, Forbes.com, July 19, 2013.
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different business models as they attempt to extend into as many areas of e-commerce as possible. We look at B2C business models in Section 2.2 and B2B business models in Section 2.3.
A business’s technology platform is sometimes confused with its business model. For instance, “mobile e-commerce” refers to the use of mobile devices and cellular and wide area networks to support a variety of business models. Commentators sometimes confuse matters by referring to mobile e-commerce as a distinct business model, which it is not. All of the basic business models we discuss below can be implemented on both the traditional Internet/Web and mobile platforms. Likewise, although they are sometimes referred to as such, social e-commerce and local e-commerce are not busi- ness models in and of themselves, but rather subsectors of B2C and B2B e-commerce in which different business models can operate.
You will also note that some companies use multiple business models. For instance, Amazon has multiple business models: it is an e-retailer, content provider, market creator, e-commerce infrastructure provider, and more. eBay is a market creator in the B2C and C2C e-commerce sectors, using both the traditional Inter- net/Web and mobile platforms, as well as an e-commerce infrastructure provider. Firms often seek out multiple business models as a way to leverage their brands, infrastructure investments, and assets developed with one business model into new business models.
Finally, no discussion of e-commerce business models would be complete without mention of a group of companies whose business model is focused on providing the infrastructure necessary for e-commerce companies to exist, grow, and prosper. These are the e-commerce enablers. They provide the hardware, operating system soft- ware, networks and communications technology, applications software, web design, consulting services, and other tools required for e-commerce (see Table 2.5 on page 72). While these firms may not be conducting e-commerce per se (although in many instances, e-commerce in its traditional sense is in fact one of their sales channels), as a group they have perhaps profited the most from the development of e-commerce. We discuss many of these players in the following chapters.
2.2 MAJOR BUSINESS-TO-CONSUMER (B2C) BUSINESS MODELS
Business-to-consumer (B2C) e-commerce, in which online businesses seek to reach individual consumers, is the most well-known and familiar type of e-commerce. Table 2.6 illustrates the major business models utilized in the B2C arena.
E-TAILER
Online retail stores, often called e-tailers, come in all sizes, from giant Amazon to tiny local stores. E-tailers are similar to the typical bricks-and-mortar storefront, except that customers only have to connect to the Internet or use their smartphone to place an order. Some e-tailers, which are referred to as “bricks-and-clicks,” are subsidiaries or
e-tailer online retail store
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I N F R A S T R U C T U R E P L A Y E R S
Hardware: Web Servers HP • Dell • Lenovo Software: Web Server Software Microsoft • IBM • Red Hat Linux (Apache) • Oracle
Cloud Providers Amazon Web Services • Google • IBM • Rackspace Hosting Services Rackspace • WebIntellects • 1&1 • HostGator • Hostway
Domain Name Registration GoDaddy • Network Solutions • Dotster Content Delivery Networks Akamai • Limelight
Site Design Weebly • Wix • Squarespace E-commerce Platform Providers Magento • IBM • Oracle • Salesforce
Mobile Commerce Hardware Platform Apple • Samsung • LG Mobile Commerce Software Platform Apple • Google • Adobe • Usablenet • Unbound Commerce Streaming, Rich Media, Online Video Adobe • Apple • Webcollage
Security and Encryption VeriSign • Check Point • GeoTrust • Entrust • Thawte • Intel Security Payment Systems PayPal • Authorize.net • Chase Paymentech • Cybersource
Web Performance Management Compuware • SmartBear • Keynote Comparison Engine Feeds/Marketplace
Management ChannelAdvisor • CommerceHub • CPC Strategy
Customer Relationship Management Oracle • SAP • Salesforce • Microsoft Dynamics Order Management JDA Software • Jagged Peak • Monsoon Commerce
Fulfillment JDA Software • Jagged Peak • CommerceHub Social Marketing Buffer • HootSuite • SocialFlow
Search Engine Marketing iProspect • ChannelAdvisor • Merkle E-mail Marketing Constant Contact • Experian CheetahMail • Bronto Software • MailChimp
Affiliate Marketing CJ Affiliate • Rakuten LinkShare Customer Reviews and Forums Bazaarvoice • PowerReviews • BizRate
Live Chat/Click-to-Call LivePerson • BoldChat • Oracle Web Analytics Google Analytics • Adobe Analytics • IBM Digital Analytics • Webtrends
TABLE 2.5 E-COMMERCE ENABLERS
divisions of existing physical stores and carry the same products. REI, JCPenney, Barnes & Noble, Walmart, and Staples are examples of companies with complementary online stores. Others, however, operate only in the virtual world, without any ties to physical locations. Amazon, Blue Nile, and Bluefly are examples of this type of e-tailer. Several other variations of e-tailers—such as online versions of direct mail catalogs, online malls, and manufacturer-direct online sales—also exist.
Given that the overall retail market in the United States in 2016 is estimated to be around $4.8 trillion, the market opportunity for e-tailers is very large. Every Internet and smartphone user is a potential customer. Customers who feel time-starved are even better prospects, because they want shopping solutions that will eliminate the
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TABLE 2.6 B2C BUSINESS MODELS
B U S I N E S S M O D E L V A R I A T I O N S E X A M P L E S D E S C R I P T I O N
R E V E N U E M O D E L S
E-tailer Virtual Merchant Amazon Blue Nile Bluefly
Online version of retail store, where customers can shop at any hour of the day or night without leaving their home or office
Sales of goods
Bricks-and-Clicks Walmart Sears
Online distribution channel for a company that also has physical stores
Sales of goods
Catalog Merchant
L.L.Bean LillianVernon
Online version of direct mail catalog Sales of goods
Manufacturer- Direct
Dell Mattel
Manufacturer uses online channel to sell direct to customer
Sales of goods
Community Provider
Facebook LinkedIn Twitter Pinterest
Sites where individuals with particular interests, hobbies, common experiences, or social networks can come together and “meet” online
Advertising, subscription, affiliate referral fees
Content Provider Wall Street Journal CNN ESPN Netflix Apple Music
Offers customers newspapers, magazines, books, film, television, music, games, and other forms of online content
Advertising, subscription fees, sales of digital goods
Portal Horizontal/ General
Yahoo AOL MSN Facebook
Offers an integrated package of content, search, and social network services: news, e-mail, chat, music downloads, video streaming, calendars, etc. Seeks to be a user’s home base
Advertising, subscription fees, transaction fees
Vertical/ Specialized (Vortal)
Sailnet Offers services and products to specialized marketplace
Advertising, subscription fees, transaction fees
Search Google Bing Ask
Focuses primarily on offering search services
Advertising, affiliate referral
Transaction Broker
E*Trade Expedia Monster Travelocity Orbitz
Processors of online sales transactions, such as stockbrokers and travel agents, that increase customers’ productivity by helping them get things done faster and more cheaply
Transaction fees
Market Creator eBay Etsy Amazon Priceline
Businesses that use Internet technology to create markets that bring buyers and sellers together
Transaction fees
Service Provider VisaNow Wave RocketLawyer
Companies that make money by selling users a service, rather than a product
Sales of services
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need to drive to the mall or store (Bellman, Lohse, and Johnson, 1999). The e-tail revenue model is product-based, with customers paying for the purchase of a particular item.
This sector, however, is extremely competitive. Because barriers to entry (the total cost of entering a new marketplace) into the e-tail market are low, tens of thou- sands of small e-tail shops have sprung up. Becoming profitable and surviving is very difficult, however, for e-tailers with no prior brand name or experience. The e-tailer’s challenge is differentiating its business from existing competitors.
Companies that try to reach every online consumer are likely to deplete their resources quickly. Those that develop a niche strategy, clearly identifying their target market and its needs, are best prepared to make a profit. Keeping expenses low, selection broad, and inventory controlled is key to success in e-tailing, with inventory being the most difficult to gauge. Online retail is covered in more depth in Chapter 9.
COMMUNITY PROVIDER
Although community providers are not a new phenomenon, the Internet has made such sites for like-minded individuals to meet and converse much easier, without the limitations of geography and time to hinder participation. Community providers create an online environment where people with similar interests can transact (buy and sell goods); share interests, photos, videos; communicate with like-minded people; receive interest-related information; and even play out fantasies by adopting online personalities called avatars. Facebook, LinkedIn, Twitter, and Pinterest, and hundreds of other smaller, niche social networks all offer users community-building tools and services.
The basic value proposition of community providers is to create a fast, convenient, one-stop site where users can focus on their most important concerns and interests, share the experience with friends, and learn more about their own interests. Com- munity providers typically rely on a hybrid revenue model that includes subscription fees, sales revenues, transaction fees, affiliate fees, and advertising fees from other firms that are attracted by a tightly focused audience.
Community providers make money from advertising and through affiliate rela- tionships with retailers. Some of the oldest online communities are The Well, which provides a forum for technology and Internet-related discussions, and The Motley Fool, which provides financial advice, news, and opinions. The Well offers various member- ship plans ranging from $10 to $15 a month. Motley Fool supports itself through ads and selling products that start out “free” but turn into annual subscriptions.
Consumers’ interest in communities is mushrooming. Community is, arguably, the fastest growing online activity. While many community providers have had a difficult time becoming profitable, many have succeeded over time, with advertising as their main source of revenue. Both the very large social networks such as Facebook, Twitter, and LinkedIn, as well as niche social networks with smaller dedicated audiences, are ideal marketing and advertising territories. Traditional online communities such as The Motley Fool and WebMD (which provides medical information to members) find that the breadth and depth of knowledge offered is an important factor. Community members frequently request knowledge, guidance, and advice. Lack of experienced
barriers to entry the total cost of entering a new marketplace
community provider creates an online environment where people with similar interests can transact (buy and sell goods); share interests, photos, and videos; communicate with like- minded people; and receive interest-related information
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personnel can severely hamper the growth of a community, which needs facilitators and managers to keep discussions on course and relevant. For the newer community social networks, the most important ingredients of success appear to be ease and flexibility of use, and a strong customer value proposition. For instance, Facebook leapfrogged over its rival MySpace by encouraging the development of third-party revenue-producing applications.
Online communities benefit significantly from offline word-of-mouth, viral mar- keting. Online communities tend to reflect offline relationships. When your friends say they have a profile on Facebook, and ask you to “friend” them, you are encouraged to build your own online profile.
CONTENT PROVIDER
Content providers distribute information content, such as digital video, music, photos, text, and artwork. It is estimated that U.S. consumers will spend more than $23 billion for online content such as movies, music, videos, television shows, e-books, and newspapers during 2016.
Content providers can make money via a variety of different revenue models, including advertising, subscription fees, and sales of digital goods. For instance, in the case of Apple Music, a monthly subscription fee provides users with access to millions of music tracks. Other content providers, such as the Wall Street Journal online newspaper, Harvard Business Review, and many others, charge customers for content downloads in addition to, or in place of, a subscription fee.
Of course, not all online content providers charge for their information: just look at the websites or mobile apps for ESPN, CIO, CNN, and the online versions of many newspapers and magazines. Users can access news and information without paying a cent, although sometimes they may be required to register as a member. These popular online content providers make money in other ways, such as through advertising and partner promotions. Increasingly, however, “free content” may be limited to headlines and text, whereas premium content—in-depth articles or videos—is sold for a fee.
Generally, the key to becoming a successful content provider is owning the content. Traditional owners of copyrighted content—publishers of books and news- papers, broadcasters of radio and television content, music publishers, and movie studios—have powerful advantages over newcomers who simply offer distribution channels and must pay for content, often at very high prices.
Some content providers, however, do not own content, but syndicate (aggregate) and then distribute content produced by others. Syndication is a major variation of the standard content provider model. Aggregators, who collect information from a wide variety of sources and then add value to that information through post-aggregation services, are another variation. For instance, Shopzilla collects information on the prices of thousands of goods online, analyzes the information, and presents users with tables showing the range of prices and links to the sites where the products can be purchased. Shopzilla adds value to content it aggregates, and resells this value to advertisers.
Any e-commerce start-up that intends to make money by providing content is likely to face difficulties unless it has a unique information source that others cannot
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access. For the most part, this business category is dominated by traditional content providers. The Insight on Technology case, Will the Connected Car Become the Next Hot Entertainment Vehicle?, discusses how changes in Internet technology are driving the development of new business models in the online content market.
Online content is discussed in further depth in Chapter 10.
PORTAL
Portals such as Yahoo, MSN, and AOL offer users powerful search tools as well as an integrated package of content and services, such as news, e-mail, instant messaging, calendars, shopping, music downloads, video streaming, and more, all in one place. Initially, portals sought to be viewed as “gateways” to the Internet. Today, however, the portal business model is to be a destination. They are marketed as places where consumers will hopefully stay a long time to read news, find entertainment, and meet other people (think of destination resorts). Portals do not sell anything directly—or so it seems—and in that sense they can present themselves as unbiased. The market opportunity is very large: in 2016, around 265 million people in the United States accessed the Internet via a variety of devices at work or home. Portals generate revenue primarily by charging advertisers for ad placement, collecting referral fees for steering customers to other sites, and charging for premium services.
Although there are numerous portals/search engines, the top five (Google, Micro- soft’s Bing,, Yahoo, Ask, and AOL) gather more than 95% of the search engine traffic because of their superior brand recognition. Many of the top portal/search engines were among the first to appear on the Web and therefore had first-mover advantages. Being first confers advantage because customers come to trust a reliable provider and experience switching costs if they change to late arrivals in the market. By garnering a large chunk of the marketplace, first movers—just like a single telephone network— can offer customers access to commonly shared ideas, standards, and experiences (something called network externalities that we describe in later chapters).
The traditional portals have company: Facebook and other social networks are now the initial start or home page (portal) for millions of Internet users in the United States.
Yahoo, AOL, and others like them are considered to be horizontal portals because they define their marketspace to include all users of the Internet. Vertical portals (sometimes called vortals) attempt to provide similar services as horizontal portals, but are focused around a particular subject matter or market segment. For instance, Sailnet specializes in the consumer sailboat market that contains about 8 million Americans who own or rent sailboats. Although the total number of vortal users may be much lower than the number of portal users, if the market segment is attractive enough, advertisers are willing to pay a premium in order to reach a targeted audience. Also, visitors to specialized niche vortals spend more money than the average Yahoo visitor. Google and Ask can also be considered portals of a sort, but focus primarily on offering search and advertising services. They generate revenues primarily from search engine advertising sales and also from affiliate referral fees.
portal offers users powerful search tools as well as an integrated package of content and services all in one place
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(continued)
INSIGHT ON TECHNOLOGY
WILL THE CONNECTED CAR BECOME THE NEXT HOT ENTERTAINMENT VEHICLE?
You’re in the driver’s seat of your car, commuting to work. But instead of
keeping your eyes on the road, you’re watching a Netflix movie, logging on to
Facebook, and checking your e-mail. And no, you are not an accident waiting to happen.
This scenario is one that is likely to become commonplace in the not too distant future. In 2016, we are on the cusp of yet another revolu- tion in the way we live our lives, this time driven by technology known as the Internet of Things (IoT). IoT refers to the use of sensors connected to the Internet and cloud computers, coupled with powerful data analytics programs, to track things and make sense out of their behavior (you’ll learn more about IoT in Chapter 3). The technology behind IoT already exists, and now businesses are working on using it to develop products and ser- vices that consumers and businesses are willing to pay for.
From a business perspective, IoT is not just a collection of technologies, but an enabler for services that can be sold to other businesses and consumers. For businesses, IoT may mean more effective and efficient maintenance, remote moni- toring of equipment, tracking assets in the supply chain, and identifying patterns of behavior of machines and operators. These services translate into cost reduction, and greater profits for firms that truly understand IoT. For consumers, IoT means self-driving smart cars, intelligent media systems, smart homes, personal health monitoring, and retail and e-commerce automation.
Gartner estimates that 6.4 billion connected things are in use worldwide in 2016, 5.5 million new things are added every day, and over 20 billion will be connected by 2020. McKinsey estimates
that IoT will produce from $4 to $11 trillion in value by 2025, with 70% of this value occurring in B2B commerce, and the rest in B2C commerce. For suppliers of IoT hardware, software, and tele- communications, it’s a bonanza of potential sales revenue. Along the way, IoT is going to transform business processes and enable a host of new busi- ness models in a variety of different industries.
One arena that IoT is expected to have a sig- nificant impact on is the content industry, espe- cially when coupled with its increasing use in the automobile industry to create connected, and ulti- mately, self-driving cars that will free drivers from having to focus on the road. Today, your car is still probably one of the least connected devices in your digital life, but that is rapidly changing, in part due to consumer demand. A recent survey found that almost two-thirds of U.S. car owners with broad- band Internet access in their homes wanted similar access in their cars. A connected car is equipped with hundreds of sensors and has direct access to the Internet, as well as links to hundreds of other connected objects. Tiny sensors will be able to report on your route and destination, the state of your tires, air conditioning, what music you are listening to, and in the future, perhaps even your state of mind, using sentiment sensors that can pick up anger, tears, crying, and laughing.
The number of connected cars on the road is rapidly increasing. According to one industry analysis, more than 40 million cars in the United States were already connected to the Internet by the beginning of 2016. Telecommunications com- panies are, not surprisingly, very interested in con- nected cars as platforms for their services and are facilitating their development. AT&T, for example, introduced an expanded connected car platform in
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2016, which allows unlimited plan smart- phone customers to add their car to the
service for $40 a month, or $10 a month for 1 gigabyte of data. In 2016, AT&T also signed an agreement with Ford to connect 10 million Ford cars using Ford’s new SYNC Connect system. AT&T is also working with a number of other auto companies to install wireless access devices in cars. Aside from selling its wireless network to consumers, AT&T is planning to sell data col- lected from cars and drivers that will allow ads to be targeted, based on car model, locations, and even the kind of music listened to.
For content distributors, IoT offers a whole new venue. Connected cars provide a poten- tially huge market for media companies. People (drivers and passengers) spend about 500 hours in a vehicle per year, including 42 hours in traffic. This captive audience is an ideal target for both marketers and media companies. Today, although we primarily think of cars as transportation, they are also entertainment and media centers. For instance, cars are already the main source of radio revenues in the United States, with more than half of all radio consumption taking place in a car. But using online radio services in today’s cars is most often a painful process that often fails to work properly. Both carmakers and content pro- viders have been hard at work fixing this problem.. Pandora Media, seeking to build on its existing dominance in the online radio market, has entered into agreements with 24 auto brands to embed its music service into over 160 car models. Spotify,
Apple’s CarPlay, and Google’s Android Auto also have new services for connected cars. Cars will eventually become like a mobile living room, with video services that deliver ads along with movies and TV shows (currently, for the rear seats only, but moving to the front seats in a self-driving car). As cars become more and more automated and drivers are able to shift from driving to watch- ing video content, consulting firm EY estimates that video industry revenue may increase by more than $20 billion. Connected cars are also likely to feature enhanced dashboard interfaces that will enable easy access to email, music streaming, and social networks.
In addition to changing the type of content available in automobiles, IoT is also expected to have the ability to deliver much more personal- ized content. IoT sensors will make it possible for sensors to recognize individual consumers and offer suggested content on the basis of their past behavior and preferences. Advertisers are already imagining ways to use the shape of a car to create immersive, 360-degree ad experi- ences. To that end, Ford patented a driverless car windshield entertainment system that could be the basis for this type of advertising as well as consuming traditional video content. Other forms of personalization could include the ability to find the nearest available parking place, locating nearby favorite restaurants or other attractions, and the ability to take your “driving profile” with you from car to car, including preferences and tendencies.
SOURCES: “5 Reasons the Music Industry Should Care About Driverless Cars,” by Cherie Hu, Hypebot.com, October 26, 2016; “Detroit’s Music Chops and Auto Shops Could Drive Connected-Car Entertainment,” by Scott Keeney, Techcrunch.com, August 30, 2016; “The Internet of Things Is Here, and It Isn’t a Thing,” by Christopher Mims, Wall Street Journal, August 21, 2016; “DASH Podcast Episode 7: Audio Entertainment in Self-Driving Cars (Andreas Mai),” by Seth Resler, Jacobsmedia.com, August 17, 2016; “Will IoT Totally Reshape How, When, and Where We Get Content,” By Chris Gianutsos, Readwrite.com, July 8, 2016; “Verizon Acquisition of Telogis Expands Company’s Connected Car Footprint,” by Doug Newcomb, Forbes.com, June 30, 2016; “Media and Entertainment Meet the Internet of Things,” by Chase Martin, Mediapost.com, June 22, 2016; “The Connected Car Report: Forecasts, Competing Technolo- gies, and Leading Manufacturers,” by John Greenough, BusinessInsider.com, June 10, 2016; “The Internet of Things,” by Victoria Petrock, eMarketer, Inc., May 2016; “AT&T Just Took a Big Step to Maintain Its Lead in Wireless Service for Connected Cars,” by Andrew Meola, Businessinsider.com, May 23, 2016; “How Ford Is Building the Connected Car,” by Steven Norton, Wall Street Journal, February 21, 2016; “The Internet of Media and Entertainment Things,” by Victo- ria Petrock, eMarketer, Inc., February 2016; “The Internet of Automotive Things,” by Victoria Petrock, eMarketer, Inc., February 2016; “The Top Five Trends for the Connected Car in 2016,” by Mahbubul Alam, Techcrunch.com, January 2, 2016 “AT&T and the Connected Car Making Cars Smarter and Safer,” Business. att.com, 2016; “State of the Market: Internet of Things 2016,” by Verizon, 2016; “Gartner Says 6.4 Billion Connected “Things” Will Be in Use in 2016, Up 30 Percent from 2015,” Gartner.com, November 10, 2015; “The Internet of Things: Mapping the Value Beyond the Hype,” McKinsey & Company, June 2015.
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TRANSACTION BROKER
Companies that process transactions for consumers normally handled in person, by phone, or by mail are transaction brokers. The largest industries using this model are financial services, travel services, and job placement services. The online transac- tion broker’s primary value propositions are savings of money and time. In addition, most transaction brokers provide timely information and opinions. Companies such as Monster offer job searchers a national marketplace for their talents and employers a national resource for that talent. Both employers and job seekers are attracted by the convenience and currency of information. Online stock brokers charge commis- sions that are considerably less than traditional brokers, with many offering substantial deals, such as cash and a certain number of free trades, to lure new customers.
Given rising consumer interest in financial planning and the stock market, the market opportunity for online transaction brokers appears to be large. However, while millions of customers have shifted to online brokers, some are still wary about switch- ing from their traditional broker who provides personal advice and a brand name. Fears of privacy invasion and the loss of control over personal financial information also contribute to market resistance. Consequently, the challenge for online brokers is to overcome consumer fears by emphasizing the security and privacy measures in place, and, like physical banks and brokerage firms, providing a broad range of financial services and not just stock trading. This industry is covered in greater depth in Chapter 9.
Transaction brokers make money each time a transaction occurs. Each stock trade, for example, nets the company a fee, based on either a flat rate or a sliding scale related to the size of the transaction. Attracting new customers and encouraging them to trade frequently are the keys to generating more revenue for these companies. Travel sites generate commissions from travel bookings and job sites generate listing fees from employers up front, rather than charging a fee when a position is filled.
MARKET CREATOR
Market creators build a digital environment in which buyers and sellers can meet, display and search for products and services, and establish prices. Prior to the Internet and the Web, market creators relied on physical places to establish a market. Beginning with the medieval marketplace and extending to today’s New York Stock Exchange, a market has meant a physical space for transacting business. There were few private digital network marketplaces prior to the Web. The Web changed this by making it possible to separate markets from physical space. Prime examples are Priceline, which allows consumers to set the price they are willing to pay for various travel accommoda- tions and other products (sometimes referred to as a reverse auction), and eBay, the online auction site utilized by both businesses and consumers. Market creators make money by either charging a percentage of every transaction made, or charging mer- chants for access to the market.
For example, eBay’s auction business model is to create a digital environment for buyers and sellers to meet, agree on a price, and transact. This is different from transaction brokers who actually carry out the transaction for their customers, acting as agents in larger markets. At eBay, the buyers and sellers are their own agents. Each
transaction broker processes transactions for consumers that are normally handled in person, by phone, or by mail
market creator builds a digital environment where buyers and sellers can meet, display products, search for products, and establish a price for products
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sale on eBay nets the company a commission based on the percentage of the item’s sales price, in addition to a listing fee. eBay is one of the few e-commerce companies that has been profitable virtually from the beginning. Why? One answer is that eBay has no inventory or production costs. It is simply a middleman.
The market opportunity for market creators is potentially vast, but only if the firm has the financial resources and marketing plan to attract sufficient sellers and buyers to the marketplace. As of June 30, 2016, eBay had more than 164 million active buyers, and this makes for an efficient market (eBay Inc., 2016). There are many sellers and buyers for each type of product, sometimes for the same product, for example, laptop computer models. Many other digital auctions have sprung up in smaller, more special- ized vertical market segments such as jewelry and automobiles.
Uber, Airbnb, and Lyft are another example of the market creator business model (although they could also be categorized as service providers). On-demand service companies (also sometimes called sharing economy companies) are market creators that have developed online platforms that allow people to sell services, such as trans- portation or spare rooms, in a marketplace that operates in the cloud and relies on the Web or smartphone apps to conduct transactions. It is important to note that, although referred to as sharing economy or mesh economy companies, these companies do not in fact share resources. Users of these services are either selling something or buying something, and the companies produce revenue by extracting fees for each transac- tion. However, they do unlock the economic value in spare resources (personal cars and rooms) that might otherwise have been lost. In the process they have created huge online markets. For instance, Uber (founded in 2009) currently operates in over 480 cities in 69 countries around the world. Airbnb, founded in 2008, operates in more than 190 countries and 34,000 cities, lists over 2 million rooms available for rent, and has had over 60 million people use its services to book a room. Airbnb has raised around $2.4 billion in funding thus far and is valued at $30 billion; Uber has raised over $12.5 billion and is valued at around $68 billion.
SERVICE PROVIDER
While e-tailers sell products online, service providers offer services online. There’s been an explosion in online services that is often unrecognized. Photo sharing, video sharing, and user-generated content (in blogs and social networks) are all services provided to customers. Google has led the way in developing online applications such as Google Maps, Google Docs, and Gmail. Other personal services such as online medical bill management, financial and pension planning, and travel recommendation are showing strong growth.
Service providers use a variety of revenue models. Some charge a fee, or monthly subscriptions, while others generate revenue from other sources, such as through advertising and by collecting personal information that is useful in direct marketing. Many service providers employ a freemium revenue model, in which some basic services are free, but others require the payment of additional charges. Much like retailers who trade products for cash, service providers trade knowledge, expertise, and capabilities for revenue.
service provider offers services online
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Obviously, some services cannot be provided online. For example, dentistry, plumbing, and car repair cannot be completed via the Internet. However, online arrangements can be made for these services. Online service providers may offer computer services, such as data storage (Dropbox and Carbonite), provide legal ser- vices (RocketLawyer), or accounting or bookkeeping services (Wave, Bench). Grocery shopping sites such as FreshDirect and Peapod are also providing services.1 To compli- cate matters a bit, most financial transaction brokers (described previously) provide services such as college tuition and pension planning. Travel brokers also provide vacation-planning services, not just transactions with airlines and hotels. Indeed, mixing services with your products is a powerful business strategy pursued by many hard-goods companies (for example, warranties are services).
The basic value proposition of service providers is that they offer consumers valuable, convenient, time-saving, and low-cost alternatives to traditional service providers or provide services that are truly unique. Where else can you search billions of web pages, or share photos with as many people instantly? Research has found, for instance, that a major factor in predicting online buying behavior is time starvation. Time-starved people tend to be busy professionals who work long hours and simply do not have the time to pick up packages, buy groceries, send photos, or visit with financial planners (Bellman, Lohse, and Johnson, 1999). The market opportunity for service providers is as large as the variety of services that can be provided and potentially is much larger than the market opportunity for physical goods. We live in a service-based economy and society; witness the growth of fast-food restaurants, package delivery services, and wireless cellular phone services. Consumers’ increas- ing demand for convenience products and services bodes well for current and future online service providers.
Marketing of service providers must allay consumer fears about hiring a vendor online, as well as build confidence and familiarity among current and potential cus- tomers. Building confidence and trust is critical for service providers just as it is for retail product merchants.
2.3 MAJOR BUSINESS-TO-BUSINESS (B2B) BUSINESS MODELS
In Chapter 1, we noted that business-to-business (B2B) e-commerce, in which busi- nesses sell to other businesses, is more than 10 times the size of B2C e-commerce, even though most of the public attention has focused on B2C. For instance, it is estimated that revenues for all types of B2B e-commerce in the United States will total around $6.7 trillion in 2016, compared to about $600 billion for all types of B2C e-com- merce. Clearly, most of the dollar revenues in e-commerce involve B2B e-commerce.
1 FreshDirect and other e-commerce businesses can also be classified as online retailers insofar as they warehouse commonly purchased items and make a profit based on the spread between their buy and sell prices.
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Much of this activity is unseen and unknown to the average consumer. Table 2.7 lists the major business models utilized in the B2B arena.
E-DISTRIBUTOR
Companies that supply products and services directly to individual businesses are e-distributors. W.W. Grainger, for example, is the largest distributor of maintenance, repair, and operations (MRO) supplies. In the past, Grainger relied on catalog sales and physical distribution centers in metropolitan areas. Its catalog of equipment went online in 1995. In 2015, Grainger’s e-commerce platform, which includes websites and mobile apps, produced $3.3 billion in sales (41% of its total revenue) for the company.
E-distributors are owned by one company seeking to serve many customers. However, as with exchanges (described on the next page), critical mass is a factor. With e-distributors, the more products and services a company makes available, the more attractive it is to potential customers. One-stop shopping is always preferable to having to visit numerous sites to locate a particular part or product.
E-PROCUREMENT
Just as e-distributors provide products to other companies, e-procurement firms create and sell access to digital markets. Firms such as Ariba, for instance, have created software that helps large firms organize their procurement process by creating mini- digital markets for a single firm. Ariba creates custom-integrated online catalogs
e-distributor a company that supplies products and services directly to individual businesses
e-procurement firm creates and sells access to digital markets
TABLE 2.7 B2B BUSINESS MODELS
B U S I N E S S M O D E L E X A M P L E S D E S C R I P T I O N R E V E N U E M O D E L
( 1 ) N E T M A R K E T P L A C E
E-distributor Grainger Amazon Business
Single-firm online version of retail and wholesale store; supply maintenance, repair, operation goods; indirect inputs
Sales of goods
E-procurement Ariba Supplier Network
PerfectCommerce
Single firm creating digital markets where sellers and buyers transact for indirect inputs
Fees for market-making services, supply chain management, and fulfillment services
Exchange Go2Paper Independently owned vertical digital marketplace for direct inputs
Fees and commissions on transactions
Industry Consortium
TheSeam SupplyOn
Industry-owned vertical digital market open to select suppliers
Fees and commissions on transactions
( 2 ) P R I V A T E I N D U S T R I A L N E T W O R K
Walmart Procter & Gamble
Company-owned network that coordinates supply chains with a limited set of partners
Cost absorbed by network owner and recovered through production and distribution efficiencies
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(where supplier firms can list their offerings) for purchasing firms. On the sell side, Ariba helps vendors sell to large purchasers by providing software to handle catalog creation, shipping, insurance, and finance. Both the buy and sell side software is referred to generically as “value chain management” software.
B2B service providers make money through transaction fees, fees based on the number of workstations using the service, or annual licensing fees. They offer purchas- ing firms a sophisticated set of sourcing and supply chain management tools that permit firms to reduce supply chain costs. In the software world, firms such as Ariba are sometimes also called Software as a Service (SaaS) or Platform as a Service (PaaS) providers; they are able to offer firms much lower costs of software by achieving scale economies. Scale economies are efficiencies that result from increasing the size of a business, for instance, when large, fixed-cost production systems (such as factories or software systems) can be operated at full capacity with no idle time. In the case of software, the marginal cost of a digital copy of a software program is nearly zero, and finding additional buyers for an expensive software program is exceptionally profitable. This is much more efficient than having every firm build its own supply chain man- agement system, and it permits firms such as Ariba to specialize and offer their soft- ware to firms at a cost far less than the cost of developing it.
EXCHANGES
Exchanges have garnered most of the B2B attention and early funding because of their potential market size even though today they are a small part of the overall B2B picture. An exchange is an independent digital marketplace where hundreds of sup- pliers meet a smaller number of very large commercial purchasers (Kaplan and Sawhney, 2000). Exchanges are owned by independent, usually entrepreneurial start- up firms whose business is making a market, and they generate revenue by charging a commission or fee based on the size of the transactions conducted among trading parties. They usually serve a single vertical industry such as steel, polymers, or alu- minum, and focus on the exchange of direct inputs to production and short-term contracts or spot purchasing. For buyers, B2B exchanges make it possible to gather information, check out suppliers, collect prices, and keep up to date on the latest happenings all in one place. Sellers, on the other hand, benefit from expanded access to buyers. The greater the number of sellers and buyers, the lower the sales cost and the higher the chances of making a sale. The ease, speed, and volume of transactions are summarily referred to as market liquidity.
In theory, exchanges make it significantly less expensive and time-consuming to identify potential suppliers, customers, and partners, and to do business with each other. As a result, they can lower transaction costs—the cost of making a sale or pur- chase. Exchanges can also lower product costs and inventory-carrying costs—the cost of keeping a product on hand in a warehouse. In reality, as will be discussed in Chapter 12, B2B exchanges have had a difficult time convincing thousands of suppliers to move into singular digital markets where they face powerful price competition, and an equally dif- ficult time convincing businesses to change their purchasing behavior away from trusted long-term trading partners. As a result, the number of exchanges has fallen significantly.
B2B service provider sells business services to other firms
scale economies efficiencies that arise from increasing the size of a business
exchange an independent digital marketplace where suppliers and commercial purchasers can conduct transactions
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INDUSTRY CONSORTIA
Industry consortia are industry-owned vertical marketplaces that serve specific indus- tries, such as the automobile, aerospace, chemical, floral, or logging industries. In contrast, horizontal marketplaces sell specific products and services to a wide range of companies. Vertical marketplaces supply a smaller number of companies with prod- ucts and services of specific interest to their industry, while horizontal marketplaces supply companies in different industries with a particular type of product and service, such as marketing-related, financial, or computing services. For example, SupplyOn, founded in 2000 and owned by industrial giants Bosch (one of the world’s largest suppliers of automotive components), Continental (a leading automotive manufactur- ing company), and Schaeffler (a global manufacturer of various types of bearings), among others, provides a shared supply chain collaboration platform for companies in various manufacturing industries. In 2016, in addition to its shareholders, its custom- ers include Airbus, BMW, BorgWarner, Siemens, Thales, and many other major global manufacturing companies.
Industry consortia have tended to be more successful than independent exchanges in part because they are sponsored by powerful, deep-pocketed industry players, and also because they strengthen traditional purchasing behavior rather than seek to transform it.
PRIVATE INDUSTRIAL NETWORKS
A private industrial network (sometimes referred to as a private trading exchange or PTX) is a digital network designed to coordinate the flow of communications among firms engaged in business together. The network is owned by a single large purchasing firm. Participation is by invitation only to trusted long-term suppliers of direct inputs. These networks typically evolve out of a firm’s own enterprise resource planning (ERP) system, and are an effort to include key suppliers in the firm’s own business decision making. For instance, Walmart operates one of the largest private industrial networks in the world for its suppliers, who on a daily basis use Walmart’s network to monitor the sales of their goods, the status of ship- ments, and the actual inventory level of their goods.
We discuss the nuances of B2B e-commerce in more detail in Chapter 12.
2.4 HOW E-COMMERCE CHANGES BUSINESS: STRATEGY, STRUCTURE, AND PROCESS
Now that you have a clear grasp of the variety of business models used by e-commerce firms, you also need to understand how e-commerce has changed the business envi- ronment in the last decade, including industry structures, business strategies, and industry and firm operations (business processes and value chains). We return to these concepts throughout the book as we explore the e-commerce phenomenon. In general, the Internet is an open standards system available to all players, and this fact inher- ently makes it easy for new competitors to enter the marketplace and offer substitute
industry consortia industry-owned vertical marketplaces that serve specific industries
private industrial network digital network designed to coordinate the flow of communications among firms engaged in business together
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products or channels of delivery. The Internet tends to intensify competition. Because information becomes available to everyone, the Internet inherently shifts power to buyers who can quickly discover the lowest-cost provider. On the other hand, the Internet presents many new opportunities for creating value, for branding products and charging premium prices, and for enlarging an already powerful offline physical business such as Walmart or Sears.
Recall Table 1.2 in Chapter 1 that describes the truly unique features of e-com- merce technology. Table 2.8 suggests some of the implications of each unique feature for the overall business environment—industry structure, business strategies, and operations.
TABLE 2.8 EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY
F E A T U R E S E L E C T E D I M P A C T S O N B U S I N E S S E N V I R O N M E N T
Ubiquity Alters industry structure by creating new marketing channels and expanding size of overall market. Creates new efficiencies in industry operations and lowers costs of firms’ sales operations. Enables new differentiation strategies.
Global reach Changes industry structure by lowering barriers to entry, but greatly expands market at the same time. Lowers cost of industry and firm operations through production and sales efficiencies. Enables competition on a global scale.
Universal standards Changes industry structure by lowering barriers to entry and intensifying competition within an industry. Lowers costs of industry and firm operations by lowering computing and communications costs. Enables broad scope strategies.
Richness Alters industry structure by reducing strength of powerful distribution channels. Changes industry and firm operations costs by reducing reliance on sales forces. Enhances post-sales support strategies.
Interactivity Alters industry structure by reducing threat of substitutes through enhanced customization. Reduces industry and firm costs by reducing reliance on sales forces. Enables differentiation strategies.
Personalization/ Customization
Alters industry structure by reducing threats of substitutes, raising barriers to entry. Reduces value chain costs in industry and firms by lessening reliance on sales forces. Enables personalized marketing strategies.
Information density Changes industry structure by weakening powerful sales channels, shifting bargaining power to consumers. Reduces industry and firm operations costs by lowering costs of obtaining, processing, and distributing information about suppliers and consumers.
Social technologies Changes industry structure by shifting programming and editorial decisions to consumers. Creates substitute entertainment products. Energizes a large group of new suppliers.
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FIGURE 2.3 HOW E-COMMERCE INFLUENCES INDUSTRY STRUCTURE
E-commerce has many impacts on industry structure and competitive conditions. From the perspective of a single firm, these changes can have negative or positive implications depending on the situation. In some cases, an entire industry can be disrupted, while at the same time, a new industry is born. Individual firms can either prosper or be devastated.
INDUSTRY STRUCTURE
E-commerce changes industry structure, in some industries more than others. Indus- try structure refers to the nature of the players in an industry and their relative bargaining power. An industry’s structure is characterized by five forces: rivalry among existing competitors, the threat of substitute products, barriers to entry into the industry, the bargaining power of suppliers, and the bargaining power of buyers (Porter, 1985). When you describe an industry’s structure, you are describing the general business environment in an industry and the overall profitability of doing business in that environment. E-commerce has the potential to change the relative strength of these competitive forces (see Figure 2.3).
industry structure refers to the nature of the players in an industry and their relative bargaining power
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When you consider a business model and its potential long-term profitability, you should always perform an industry structural analysis. An industry structural analy- sis is an effort to understand and describe the nature of competition in an industry, the nature of substitute products, the barriers to entry, and the relative strength of consumers and suppliers.
E-commerce can affect the structure and dynamics of industries in very different ways. Consider the recorded music industry, an industry that has experienced signifi- cant change because of e-commerce. Historically, the major record companies owned the exclusive rights to the recorded music of various artists. With the entrance into the marketplace of substitute providers such as Napster and Kazaa, millions of consum- ers began to use the Internet to bypass traditional music labels and their distributors entirely. In the travel industry, entirely new middlemen such as Travelocity entered the market to compete with traditional travel agents. After Travelocity, Expedia, CheapTickets, and other travel services demonstrated the power of e-commerce mar- keting for airline tickets, the actual owners of the airline seats—the major airlines— banded together to form their own Internet outlet for tickets, Orbitz, for direct sales to consumers (although ultimately selling the company to a private investor group). Clearly, e-commerce creates new industry dynamics that can best be described as the give and take of the marketplace, the changing fortunes of competitors.
Yet, in other industries, e-commerce has strengthened existing players. In the chemi- cal and automobile industries, e-commerce is being used effectively by manufacturers to strengthen their traditional distributors. In these industries, e-commerce technology has not fundamentally altered the competitive forces—bargaining power of suppliers, barriers to entry, bargaining power of buyers, threat of substitutes, or rivalry among competi- tors—within the industry. Hence, each industry is different and you need to examine each one carefully to understand the impacts of e-commerce on competition and strategy.
New forms of distribution created by new market entrants can completely change the competitive forces in an industry. For instance, consumers gladly substituted free access to Wikipedia for a $699 set of World Book encyclopedias, or a $40 DVD, radi- cally changing the competitive forces in the encyclopedia industry. As we describe in Chapter 10, the content industries of newspapers, books, movies, games, and television have been transformed by the emergence of new distribution platforms.
Inter-firm rivalry (competition) is one area of the business environment where e-commerce technologies have had an impact on most industries. In general, e-commerce has increased price competition in nearly all markets. It has been relatively easy for existing firms to adopt e-commerce technology and attempt to use it to achieve competitive advantage vis-à-vis rivals. For instance, e-commerce inherently changes the scope of competition from local and regional to national and global. Because consumers have access to global price information, e-commerce produces pressures on firms to compete by lowering prices (and lowering profits). On the other hand, e-commerce has made it possible for some firms to differentiate their products or services from others. Amazon patented one-click purchasing, for instance, while eBay created a unique, easy- to-use interface and a differentiating brand name. Therefore, although e-commerce has increased emphasis on price competition, it has also enabled businesses to create new strategies for differentiation and branding so that they can retain higher prices.
industry structural analysis an effort to understand and describe the nature of competition in an industry, the nature of substitute products, the barriers to entry, and the relative strength of consumers and suppliers
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It is impossible to determine if e-commerce technologies have had an overall posi- tive or negative impact on firm profitability in general. Each industry is unique, so it is necessary to perform a separate analysis for each one. Clearly, e-commerce has shaken the foundations of some industries, in particular, content industries (such as the music, newspaper, book, and software industries) as well as other information-intense indus- tries such as financial services. In these industries, the power of consumers has grown relative to providers, prices have fallen, and overall profitability has been challenged. In other industries, especially manufacturing, e-commerce has not greatly changed relationships with buyers, but has changed relationships with suppliers. Increasingly, manufacturing firms in entire industries have banded together to aggregate purchases, create industry exchanges or marketplaces, and outsource industrial processes in order to obtain better prices from suppliers. Throughout this book, we document these changes in industry structure and market dynamics introduced by e-commerce.
INDUSTRY VALUE CHAINS
While an industry structural analysis helps you understand the impact of e-commerce technology on the overall business environment in an industry, a more detailed indus- try value chain analysis can help identify more precisely just how e-commerce may change business operations at the industry level. One of the basic tools for understand- ing the impact of information technology on industry and firm operations is the value chain. The concept is quite simple. A value chain is the set of activities performed in an industry or in a firm that transforms raw inputs into final products and services. Each of these activities adds economic value to the final product; hence, the term value chain as an interconnected set of value-adding activities. Figure 2.4 illustrates the six generic players in an industry value chain: suppliers, manufacturers, transporters, distributors, retailers, and customers.
value chain the set of activities performed in an industry or in a firm that transforms raw inputs into final products and services
FIGURE 2.4 E-COMMERCE AND INDUSTRY VALUE CHAINS
Every industry can be characterized by a set of value-adding activities performed by a variety of actors. E-commerce potentially affects the capabilities of each player as well as the overall operational efficiency of the industry.
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By reducing the cost of information, e-commerce offers each of the key players in an industry value chain new opportunities to maximize their positions by lower- ing costs and/or raising prices. For instance, manufacturers can reduce the costs they pay for goods by developing Internet-based B2B exchanges with their suppli- ers. Manufacturers can develop direct relationships with their customers, bypass- ing the costs of distributors and retailers. Distributors can develop highly efficient inventory management systems to reduce their costs, and retailers can develop highly efficient customer relationship management systems to strengthen their service to customers. Customers in turn can search for the best quality, fastest delivery, and lowest prices, thereby lowering their transaction costs and reducing prices they pay for final goods. Finally, the operational efficiency of the entire industry can increase, lowering prices and adding value for consumers, and helping the industry to compete with alternative industries.
FIRM VALUE CHAINS
The concept of value chain can be used to analyze a single firm’s operational efficiency as well. The question here is: How does e-commerce technology potentially affect the value chains of firms within an industry? A firm value chain is the set of activities a firm engages in to create final products from raw inputs. Each step in the process of production adds value to the final product. In addition, firms develop support activities that coordinate the production process and contribute to overall operational efficiency. Figure 2.5 illustrates the key steps and support activities in a firm’s value chain.
E-commerce offers firms many opportunities to increase their operational effi- ciency and differentiate their products. For instance, firms can use the Internet’s communications efficiency to outsource some primary and secondary activities to specialized, more efficient providers without such outsourcing being visible to the
firm value chain the set of activities a firm engages in to create final products from raw inputs
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FIGURE 2.5 E-COMMERCE AND FIRM VALUE CHAINS
Every firm can be characterized by a set of value-adding primary and secondary activities performed by a variety of actors in the firm. A simple firm value chain performs five primary value-adding steps: inbound logistics, operations, outbound logistics, sales and marketing, and after sales service.
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consumer. In addition, firms can use e-commerce to more precisely coordinate the steps in the value chains and reduce their costs. Finally, firms can use e-commerce to provide users with more differentiated and high-value products. For instance, Amazon provides consumers with a much larger inventory of books to choose from, at a lower cost, than traditional book stores. It also provides many services—such as instantly available professional and consumer reviews, and information on buying patterns of other consumers—that traditional bookstores cannot.
FIRM VALUE WEBS
While firms produce value through their value chains, they also rely on the value chains of their partners—their suppliers, distributors, and delivery firms. E-commerce creates new opportunities for firms to cooperate and create a value web. A value web is a networked business ecosystem that uses e-commerce technology to coordinate the value chains of business partners within an industry, or at the first level, to coor- dinate the value chains of a group of firms. Figure 2.6 illustrates a value web.
A value web coordinates a firm’s suppliers with its own production needs using an Internet-based supply chain management system. We discuss these B2B systems
value web networked business ecosystem that coordinates the value chains of several firms
FIGURE 2.6 INTERNET-ENABLED VALUE WEB
Internet technology enables firms to create an enhanced value web in cooperation with their strategic alliance and partner firms, customers, and direct and indirect suppliers.
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in Chapter 12. Firms also use the Internet to develop close relationships with their logistics partners. For instance, Amazon relies on UPS tracking systems to provide its customers with online package tracking, and it relies on the U.S. Postal Service systems to insert packages directly into the mail stream. Amazon has partnership relations with hundreds of firms to generate customers and to manage relationships with customers. In fact, when you examine Amazon closely, you realize that the value it delivers to customers is in large part the result of coordination with other firms and not simply the result of activities internal to Amazon. The value of Amazon is, in large part, the value delivered by its value web partners. This is difficult for other firms to imitate in the short run.
BUSINESS STRATEGY
A business strategy is a set of plans for achieving superior long-term returns on the capital invested in a business firm. A business strategy is therefore a plan for making profits in a competitive environment over the long term. Profit is simply the difference between the price a firm is able to charge for its products and the cost of producing and distributing goods. Profit represents economic value. Economic value is created anytime customers are willing to pay more for a product than it costs to produce. Why would anyone pay more for a product than it costs to produce? There are multiple answers. The product may be unique (there are no other sup- pliers), it may be the least costly product of its type available, consumers may be able to purchase the product anywhere in the world, or it may satisfy some unique needs that other products do not. Each of these sources of economic value defines a firm’s strategy for positioning its products in the marketplace. There are four generic strategies for achieving a profitable business: differentiation, cost, scope, and focus. We describe each of these below. The specific strategies that a firm follows will depend on the product, the industry, and the marketplace where competition is encountered.
Although the Internet is a unique marketplace, the same principles of strategy and business apply. As you will see throughout the book, successful e-commerce strategies involve using the Internet and mobile platform to leverage and strengthen existing business (rather than destroy your business), and to provide products and services your competitors cannot copy (in the short term anyway). That means developing unique products, proprietary content, distinguishing processes (such as Amazon’s one-click shopping), and personalized or customized services and products (Porter, 2001). There are five generic business strategies: product/service differentiation, cost competition, scope, focus, and customer/supplier intimacy. Let’s examine these ideas more closely.
Differentiation refers to all the ways producers can make their products or ser- vices unique and distinguish them from those of competitors. The opposite of differ- entiation is commoditization—a situation where there are no differences among products or services, and the only basis of choosing is price. As economists tell us, when price alone becomes the basis of competition and there are many suppliers and
business strategy a set of plans for achieving superior long-term returns on the capital invested in a business firm
profit the difference between the price a firm is able to charge for its products and the cost of producing and distributing goods
differentiation refers to all the ways producers can make their products or services unique and different to distinguish them from those of competitors
commoditization a situation where there are no differences among products or services, and the only basis of choosing is price
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many customers, eventually the price of the good/service falls to the cost to produce it (marginal revenues from the nth unit equal marginal costs). And then profits are zero! This is an unacceptable situation for any business person. The solution is to differentiate your product or service and to create a monopoly-like situation where you are the only supplier.
There are many ways businesses differentiate their products or services. A busi- ness may start with a core generic product or service, but then create expectations among users about the “experience” of consuming the product or using the service— “Nothing equals the experience of driving a BMW.” Businesses may also augment prod- ucts and services by adding features to make them different from those of competitors. And businesses can differentiate their products and services further by enhancing their abilities to solve related consumer problems. For instance, tax programs such as TurboTax can import data from spreadsheet programs, as well as be used to file tax returns online. These capabilities are enhancements to the product that solve a cus- tomer’s problems. The purpose of marketing is to create these differentiation features and to make the consumer aware of the unique qualities of products and services, creating in the process a “brand” that stands for these features. We discuss marketing and branding in Chapters 6 and 7.
In their totality, the differentiation features of a product or service constitute the customer value proposition we described in earlier sections of this chapter. E-commerce offers some unique ways to differentiate products and services, such as the ability to personalize the shopping experience and to customize the product or service to the particular demands of each consumer. E-commerce businesses can also differentiate products and services by making it possible to purchase the product from home, work, or on the road (ubiquity); by making it possible to purchase anywhere in the world (global reach); by creating unique interactive content, videos, stories about users, and reviews by users (richness and interactivity); and by storing and processing information for consumers of the product or service, such as warranty information on all products purchased through a site or income tax information online (information density).
Adopting a strategy of cost competition means a business has discovered some unique set of business processes or resources that other firms cannot obtain in the marketplace. Business processes are the atomic units of the value chain. For instance, the set of value-creating activities called Inbound Logistics in Figure 2.5 is in reality composed of many different collections of activities performed by people on the loading docks and in the warehouses. These different collections of activities are called business processes—the set of steps or procedures required to perform the various elements of the value chain.
When a firm discovers a new, more efficient set of business processes, it can obtain a cost advantage over competitors. Then it can attract customers by charging a lower price, while still making a handsome profit. Eventually, its competitors go out of business as the market decisively tilts toward the lowest-cost provider. Or, when a business discovers a unique resource, or lower-cost supplier, it can also compete effectively on cost. For instance, switching production to low-wage-cost areas of the world is one way to lower costs.
strategy of cost competition offering products and services at a lower cost than competitors
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Competing on cost can be a short-lived affair and very tricky. Competitors can also discover the same or different efficiencies in production. And competitors can also move production to low-cost areas of the world. Also, competitors may decide to lose money for a period as they compete on cost.
E-commerce offers some ways to compete on cost, at least in the short term. Firms can leverage ubiquity by lowering the costs of order entry (the customer fills out all the forms, so there is no order entry department); leverage global reach and universal standards by having a single order entry system worldwide; and leverage richness, interactivity, and personalization by creating customer profiles online and treating each individual consumer differently—without the use of an expensive sales force that performed these functions in the past. Finally, firms can leverage informa- tion intensity by providing consumers with detailed information on products, without maintaining either expensive catalogs or a sales force.
While e-commerce offers powerful capabilities for intensifying cost competition, which makes cost competition appear to be a viable strategy, the danger is that com- petitors have access to the same technology. The factor markets—where producers buy supplies—are open to all. Assuming they have the skills and organizational will to use the technology, competitors can buy many of the same cost-reducing techniques in the marketplace. Even a skilled labor force can be purchased, ultimately. However, self-knowledge, proprietary tacit knowledge (knowledge that is not published or codi- fied), and a loyal, skilled workforce are in the short term difficult to purchase in factor markets. Therefore, cost competition remains a viable strategy.
Two other generic business strategies are scope and focus. A scope strategy is a strategy to compete in all markets around the globe, rather than merely in local, regional, or national markets. The Internet’s global reach, universal standards, and ubiquity can certainly be leveraged to assist businesses in becoming global competi- tors. Yahoo, for instance, along with all of the other top 20 e-commerce companies, has readily attained a global presence. A focus/market niche strategy is a strategy to compete within a narrow market segment or product segment. This is a specializa- tion strategy with the goal of becoming the premier provider in a narrow market. For instance, L.L.Bean uses e-commerce to continue its historic focus on outdoor sports apparel; and W.W. Grainger focuses on the narrow MRO market segment. E-commerce offers some obvious capabilities that enable a focus strategy. Firms can leverage rich- ness and interactivity to create highly focused messages to different market segments; information intensity makes it possible to focus e-mail and other marketing campaigns on small market segments; personalization—and related customization—means the same product can be customized and personalized to fulfill the very focused needs of specific market segments and consumers.
Another generic strategy is customer intimacy, which focuses on developing strong ties with customers. Strong linkages with customers increase switching costs (the costs of switching from one product or service to a competing product or service) and thereby enhance a firm’s competitive advantage. For example, Amazon’s one-click shopping that retains customer details and recommendation services based on previ- ous purchases makes it more likely that customers will return to make subsequent purchases.
scope strategy competing in all markets around the globe, rather than just local, regional, or national markets
focus/market niche strategy competing within a narrow market or product segment
customer intimacy focuses on developing strong ties with customers in order to increase switching costs
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Table 2.9 summarizes the five basic business strategies. Industry structure, industry and firm value chains, value webs, and business strat-
egy are central business concepts used throughout this book to analyze the viability of and prospects for e-commerce companies. In particular, the signature case studies found at the end of each chapter are followed by questions that may ask you to iden- tify the competitive forces in the case, or analyze how the case illustrates changes in industry structure, industry and firm value chains, and business strategy.
E-COMMERCE TECHNOLOGY AND BUSINESS MODEL DISRUPTION
While e-commerce has changed most industries in terms of their structure, processes, and strategies, in some cases e-commerce has radically changed entire industries, driving incumbent firms out of business, greatly altering the economics of an industry, and spawning entirely new firms and value chains (Schumpeter, 1942). When new technologies are at the core of a change in the way business is done, they are referred to as disruptive technologies. When the technology involved is digital, the term digital disruption is used. Usually it is not the technology per se that is disruptive—in fact, it can be rather ordinary and commonplace. Instead, the disruption occurs when an innovative firm applies the technology to pursue a different business model and strategy than existing firms, perhaps discovering a whole new market that existing firms did not even know existed (Bower and Christensen, 1995; Christensen and Leslie, 2000). For instance, personal computers using off-the-shelf inexpensive processors and technologies disrupted the market for mainframe and mini-computers. All the eight elements of a business model identified previously can be affected by disruptive technologies, from the business value proposition to the revenue model, market oppor- tunity, competitive environment, competitive advantage, market strategy, organiza- tional development, and management. In short, it’s a whole new world that often confuses and surprises successful companies who tend to ignore, dismiss, and/or mock
disruptive technologies technologies that underpin a business model disruption
digital disruption a business model disruption that is driven by changes in information technology
TABLE 2.9 BUSINESS STRATEGIES
S T R A T E G Y D E S C R I P T I O N E X A M P L E
Differentiation Making products and services unique and different in order to distinguish them from those of competitors
Warby Parker (vintage- inspired prescription eyeglasses)
Cost competition Offering products and services at a lower cost than competitors
Walmart
Scope Competing in all markets around the globe, rather than merely in local, regional, or national markets
Apple iDevices
Focus/market niche Competing within a narrow market or product segment
Bonobos (men’s clothing)
Customer intimacy Developing strong ties with customers Amazon; Netflix
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the early disruptive products. For instance, the entrepreneurs who introduced personal computers identified an entire new market of customers that had been ignored by the large computer firms, along with new price points, competitive factors, and market strategy, using new organizational, management teams, and employees with different skills. Many existing firms could not compete, and dissolved. Similar dynamics can be found in communications (disrupted by e-mail), data storage, music, photography, publishing, and transportation (Lepore, 2014). In 2016, firms like Uber and Airbnb are beginning to have a significant impact on the taxi and lodging industries.
Not all technologies are disruptive (Christensen, et al., 2015; King and Baatartog- tokh, 2015). In fact, most successful companies use technology to sustain their current business models, industry structure, processes, and strategies. This use of technology is referred to as sustaining technology because it helps companies to cope with competitive pressures and improve their products, and serve their customers with less expensive, more powerful, or unique products. But the same technology can be used by innovative entrepreneurs (disruptors) to destroy existing business models. Here’s how it works.
Successful companies use whatever technology is available to incrementally improve their products, focusing on the customer by improving quality, price, and service. The incumbent and dominant firms seek to maintain the status quo in an industry, and their firms. In the first disruptive stage, disruptors, often funded by new sources of finance, introduce new products that are less expensive, less capable, and of poorer quality. The first personal computers used relatively unsophisticated technology compared to mainframe computers of the 1970s. These early products nevertheless find a niche in a market that incumbents do not serve or are unaware of. In the second stage, disruptors improve their products at a rapid pace, taking advantage of newer technologies at a faster pace than incumbents, expanding their niche market, and eventually attracting a larger customer base from the incumbents’ market. When word processors, and eventually Microsoft Office, were married to the more powerful PC of the 1980s, they attracted a new market of business managers and professionals that was not served by incumbents. The concept was entirely new at the time. The successful incumbents never thought business professionals, let alone people working at home, would like to have a computer at their desk to create documents, build spreadsheets, and make presentation slides. The people and companies that developed personal computers were outsiders to the mainframe computer industry. They were disruptors. They had the vision.
In the third stage, the new products and business model become good enough, and even superior to products offered by incumbents. In the fourth stage, incumbent companies lose market share, and either go out of business or are consolidated into other more successful firms that serve a much more limited customer base. Some incumbents survive by finding new customers for their existing product, adopting some of the newer products and business models in separate divisions of their firms, or moving into other often nearby markets. For instance, mainframe computers are still made by IBM, but they are one of the few survivors. They survived by sustaining innovation in their traditional market of large-scale computing for Fortune 500 firms, moving into computing services, data centers, enterprise software, and most recently cloud computing, business analytics, data mining, and machine learning. As for the PC
sustaining technologies technologies that enable the incremental improvement of products and services
disruptors the entrepreneurs and their business firms that lead a business model disruption
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industry, it is currently being disrupted by smartphones and tablet computers, created by outsiders who played a small role in the personal computer world, and who have identified huge consumer markets that incumbent PC manufacturers did not realize even existed. They have the vision, for now, but they face new digital disruptors sure to follow.
Why don’t the existing companies realize the changes that are coming, and take steps to compete directly with the disruptors? Successful incumbents usually have enormous capital reserves, in-depth technology and intellectual skills, and access to prestigious management consulting firms. Why didn’t Kodak see the transition to digital photography? Why didn’t Canon see the smartphone camera as a powerful competitor to digital cameras? Why don’t firms disrupt their own business models? The answers are complex. Incumbent technologists and professionals may be trained in an unfit fitness, having the wrong skills for the current environment. Shareholders expect returns on investment, not destruction of a firm’s historic and cherished profit- able products. The existing customer base comes to expect continuous improvement in existing products—not a business disruption, but business as usual. These power- ful practices, all of which make good business sense, prevent incumbent firms from meeting the challenges of business model disruption. It is unclear at this time if the two most innovative firms in the current e-commerce environment, Apple and Google, will prove any different from previous incumbents.
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F r e e m i u m Takes Pandora Public
Pandora is the Internet’s most successful radio service. As of June 2016, it had over 250 million registered users (225 million of whom access the service via a mobile device) and about 80 million active listeners. Accord-ing to a recent survey, Pandora is the clear leader among Internet radio services, with more than 25% of reporting they had listened to it in the previous week, with Spotify a distant second at 10%. Pandora currently accounts for a 10% share of total U.S. radio listening (both traditional and Internet). In 2015, it streamed over 21 billion hours of music!
At Pandora, users select a genre of music based on a favorite musician, and a computer algorithm puts together a personal radio station that plays not only the music of the selected artist but also closely related music by different artists. Listeners have created over 10 billion different stations. A team of approximately 25 profes- sional musicians listens to new songs each day and classifies the music according to more than 450 musical criteria. These criteria are used in a computer algorithm to classify new songs into various genres. Within each of these genres are hundreds of subgenres. Altogether, Pandora has a database of over 1 million analyzed songs from over 200,000 artists.
© NetPhotos / Alamy
2.5 C A S E S T U D Y
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Pandora’s founders, Will Glaser and Tim Westergren, launched Pandora in 2005. Their biggest challenge was making a business out of a totally new kind of online radio station when competing online stations were making music available for free, many without advertising, and online subscription services were streaming music for a monthly fee and finding some advertising support as well. Online music illegally downloaded from P2P networks for free was also a significant factor, as was iTunes, which by 2005 was a roaring success, charging 99 cents a song. The idea of a “personal” radio station playing your kind of music was very new.
Pandora’s business strategy is referred to as “freemium.” A freemium strategy is based on giving away some products or services for free while relying on a certain percentage of customers to pay for premium versions of the same product or service. Because the marginal cost of digital products is typically close to zero, providing free product does not cost much, and potentially enables you to reach many more people. If the market is very large, even getting just 1% of that market to purchase could be very lucrative. Other notable freemium success stories include LinkedIn, a social network for career-oriented and job networking that offers some basic services for free, such as creating a profile and making connections, but which charges for premium services, and Dropbox, a cloud storage and file sharing service that provides 2 gigabytes of cloud storage for free, but charges for additional storage. Freemium has been the standard business model for most apps, with over 65% of the top 100 apps in Apple’s App Store and the most successful mobile gaming apps today using a freemium strategy.
Pandora’s first strategy was to give away 10 hours of free access, and then ask subscribers to pay $36 a month for a year after they used up their free 10 hours. The result: 100,000 people listened to their 10 hours for free and then refused to pay for the annual service. People loved Pandora but appeared unwilling to pay for it.
Facing financial collapse, in November 2005 Pandora introduced an ad-supported option. Subscribers could listen to a maximum of 40 hours of music in a calendar month for free. After the 40 hours were used up, subscribers had three choices: (a) pay 99 cents for the rest of the month, (b) sign up for a premium service offering unlimited usage, or (c) do nothing. If they chose (c), the music would stop, but users could sign up again the next month. The ad-supported business model was a risky move because Pandora had no ad server or accounting system, but it attracted so many users that in a few weeks it had a sufficient number of advertisers (including Apple) to pay for its infrastructure. In 2006, Pandora added a “Buy” button to each song being played and struck deals with Amazon, iTunes, and other online retail sites. Pandora now gets an affiliate fee for directing listeners to Amazon where users can buy the music. In 2008, Pandora added an iPhone app to allow users to sign up from their smartphones and listen all day if they wanted. By 2009, this “free” ad-supported model had attracted 20 million users.
After attracting a sufficiently large user base, Pandora turned its attention back to its premium service. In late 2009, the company launched Pandora One, a high-end version of its service that offered no advertising, higher-quality streaming music, a desktop app, and fewer usage limits. The service cost $36 a year. This time around it met with much more success, so much so that Pandora went public in June 2011. By 2016, Pandora had a projected $1.42 billion in revenue with about 80% coming from advertising and the remainder from subscriptions and other sources.
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However, Pandora has not yet shown a profit, and its stock price has steadily dropped since its high in 2014. The company is experiencing slowing growth rates and even declines in its number of active users, and competitors like Spotify have made gains at Pandora’s expense. Fully paid services like Apple-backed Apple Music, as well as much-hyped new entrants like Tidal, founded by Jay Z and a slew of other high profile artists, represent threats to Pandora as well. But the picture isn’t totally bleak: Pandora has continued to show growth in advertising revenue and in listener hours, as its active users are listening more and more. Pandora also made a flurry of acquisitions in 2015, including on-demand music service Rdio. Absorbing Rdio signified Pandora’s ambitions to directly compete with Spotify in on-demand music streaming, as opposed to focusing primarily on its radio model. Additionally, music licensing costs were expected to increase sharply in 2016, jeopardizing Pandora’s ability to license its music, but a 2015 ruling by the U.S. Copyright Royalty Board raised rates to stream a song one time by a smaller amount than expected. After the ruling, Pandora made deals with the two largest music licensing companies in the United States and continues to make deals with music labels in 2016 as it prepares for the launch of its on-demand service.
While freemium clearly has worked to grow companies like Pandora, LinkedIn, and Dropbox, there is ongoing debate about the effectiveness of the freemium strategy. The crux of the issue is that while freemium can be an efficient way to gather a large group of potential customers, companies have found that it’s a challenge to convert eyeballs into those willing to pay. Absent subscriber revenue, firms are forced to rely on advertising revenues.
Apple has led a recent push against freemium competitors. Pandora and Spotify have thrived at the expense of iTunes Music Store, whose revenues have declined steeply for several years, and Apple’s first attempt at a streaming service, iTunes Radio, was a bust. Undeterred and sensing a shift in the industry, in 2014 Apple acquired Beats, a streaming music service and maker of popular headphones, for $3 billion. In 2015, Apple launched its own paid subscription streaming service app modeled after Beats called Apple Music, and by offering free three-month trials, quickly made significant inroads against Pandora and Spotify. In 2016, Apple Music has more than 15 million paying users and continues to grow quickly.
Music industry leadership is also unsure about the future of freemium music streaming. The heads of Universal Music Group and Sony Music both expressed skepti- cism of the long-term prospects of the freemium model in 2015, and in 2014, Taylor Swift removed her entire catalog of music from Spotify in protest of the freemium model, claiming that it devalued her music. Lesser known artists are equally upset with the revenue sharing models used by Pandora and other online music streaming services, with Pandora keeping about 54% of its revenue and only 4% going to music creators. Music labels are optimistic about Apple’s ability to make paid streaming work, given Apple’s deep pockets and brand cachet. But industry analysts believe that Pandora and Spotify are headed toward profitability as their subscriber numbers continue to expand.
Whether freemium services continue to breathe life back into the music business remains to be seen, but other companies like MailChimp show how freemium can turn
SOURCES: “Pandora’s Share of U.S. Radio Listening Time from 1st Quarter 2013 to 4th Quarter 2015,” Statista.com, accessed August 22, 2016; “Form 10-Q for the Quarterly Period Ended June 30, 2016,” Pandora Media, Inc., July 26, 2016; “US Usage, Sales and Ad Spending Trends for Digital Music, Digital Radio, and Podcasting,” by eMarketer, Inc., May 20, 2016; “Pandora Reports Q4 and Full Year 2015 Financial Results,” Businesswire.com, February 11, 2016; “The Battle of Subscription Business Models: A Look at Their Strengths and Weaknesses,” by Glenn Peoples, Billboard.com, January 29, 2016;
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a company’s fortunes around. The company lets anyone send e-mail to customers, manage subscriber lists, and track the performance of an e-mail marketing campaign. Despite the powerful tools it gives marketers, and its open applications programming interface, after 10 years in business, the company had only 85,000 paid subscribers.
In 2009, MailChimp began giving away its basic tools and charging subscription fees for special features, expecting that users would be more willing to pay for analyt- ics and other services as their e-mail lists grew. In just over a year, MailChimp went from 85,000 to 450,000 users. E-mail volume went from 200 million a month to around 700 million. Most importantly, the number of paying customers increased more than 150%, while profit increased more than 650%!
For MailChimp, freemium has been worth the price. It currently supports more than 8 million subscribers worldwide, sending over 200 billion e-mails per year. However, Baremetrics, a developer of analytics compatible with the Stripe payment processing platform, came to a different conclusion. Though it had historically charged even for the lowest tier of its product offerings, Baremetrics introduced a free option in 2015. For the full versions of each of the features in the free plan, customers would have to upgrade. If judged solely by conversion rate, the free plan could have been deemed a success, as over 11% of free plan subscribers eventually became paying cus- tomers compared to the 3% to 5% that is typical in the industry. However, Baremetrics wasn’t able to keep up with the sudden increase in data processing requirements, and the staff it had available for customer support requests were struggling to meet the higher demand.
Eventually, the total number of Baremetrics customers began to drop below what it had been before the introduction of the free plan as frustrated customers canceled their subscriptions. Baremetrics discovered that its resources were too tight to use the freemium model. Unlike MailChimp or Pandora, whose marginal costs were small enough that they could launch their service for millions of users, Baremetrics is a smaller company with different goals and scope. Baremetrics has since switched to a 14-day free trial strategy, after which customers are forced to pick a paid subscription plan.
So when does it make sense to include freemium in a business plan? It makes sense when the product is easy to use and has a very large potential audience, prefer- ably in the millions. Using a freemium strategy can be a very successful marketing tool, because free features can help attract a user base, and are more attractive to most consumers than 30-day free trials that require a cancellation process. A solid customer value proposition is critical. It’s helpful if a large user network increases the perceived value of the product (i.e., a dating service such as Match). Freemium may work when a company has good long-term customer retention rates and the product produces more value over time. An extremely important part of the equation is that the variable costs of providing the product or service to additional customers for free must be low.
Companies also face challenges in terms of determining what products and/or services to offer for free versus what to charge for (this may change over time), the cost of supporting free customers, and how to price premium services. Further, it is difficult to predict attrition rates, which are highly variable at companies using freemium. So, while freemium can be a great way to get early users and to provide a company with
“203 Billion Emails in a Year: The Untold Growth Story of Mailchimp,” Appvirality.com, December 24, 2015; “2016 Is Shaping Up to Be a Critical Year for Pandora, If Not All Music Streaming,” by Amy X. Wang, Quartz.com, December 23, 2015; “A Big Music Copyright Ruling Has Managed to Make Both Pandora and Record Labels Happy – Mostly,” by Amy X. Wang, Quartz.com, December 16, 2015; “Pandora to Acquire Pieces of Rdio,” by lenn Peoples, Billboard.com, November 16, 2015; “How Freemium Nearly Caused Our Business to Implode,” by Josh Pigford, Baremetrics.com, November 10, 2015; “Freemium Model Works for Pandora But is Devastating to Songwriters,” by David Israelite, Hypebot.com, September 2015; “Should You Consider a Freemium Model For Your Business?” by Chuck Cohn, Forbes, July 2, 2015; Amy X. Wang, “No, Apples Music Streaming App Looks Nothing Like Beats,” by Liz Stinson, Wired.com, June 11, 2015; “Pandora’s Three Biggest Issues Are Both a Blessing and a Curse,” by Leon Lazaroff, Thestreet.com, May 20, 2015; “Spotify: Freemium Clampdown Rumours Are ‘Completely False,’” by Tim Ingham, Musicbusiness- worldwide.com, May 17, 2015; “Apple, Spotify, and the Battle Over Freemium,” by Jingping Zhang, Harvard Business Review, May 13, 2015; “Why Apple Wants to End the Era of Free Music Streaming,” by James Cook, Businessinsider. com, May 5, 2015; “Apple Pushing Music Labels to Kill Free Spotify Streaming Ahead of Beats Relaunch,” by Micah Singleton, Theverge.com, May 4, 2015; “Apple and Beats Developing Streaming Music Service to Rival Spotify,” by Ben Sisario and Brian X. Chen, New York Times, March 25, 2015; “Sony Music Boss Doug Morris: ‘In General, Free is Death,’” by Stuart Dredge, Musically.com, March 12, 2015; “Making ‘Freemium’ Work,” by Vineet Kumar, Harvard Business Review, May 2014; “How MailChimp Learned to Treat Data Like Orange Juice and Rethink the Email in the Process,” by Derrick Harris, Gigaom.com, May 5, 2013; “When Freemium Fails,” by Sarah E.
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C a s e S t u d y 101
a built-in pool for upgrades, it’s tough to determine how many users will be willing to pay and willing to stay.
A freemium strategy makes sense for companies such as Pandora, where there is a very low marginal cost, approaching zero, to support free users. It also makes sense for a company where the value to its potential customers depends on a large network, like LinkedIn. Freemium also works when a business can be supported by the percentage of customers who are willing to pay, like Pandora, especially when there are other revenues like advertising fees that can make up for shortfalls in subscriber revenues. The freemium music streaming services don’t have to worry about their business model being sound strategy, but they do have to worry about industry goliaths like Apple and the record labels taking a stand against them.
Case Study Questions
1. Compare Pandora’s original business model with its current business model. What’s the difference between “free” and “freemium” revenue models?
2. What is the customer value proposition that Pandora offers?
3. Why did MailChimp ultimately succeed with a freemium model but Baremetrics did not?
4. What’s the most important consideration when considering a freemium revenue model?
R e v i e w 101
Needleman and Angus Loten, Wall Street Journal, August 22, 2012; “Pandora IPO Prices at $16; Valuation $2.6 Billion,” by Eric Savitz, Blogs.forbes.com, June 14, 2011; “Going Freemium: One Year Later,” by Ben Chestnut, Blog.mailchimp.com, September 27, 2010; “Case Studies in Freemium: Pandora, Dropbox, Evernote, Automattic and MailChimp,” by Liz Gannes, Gigaom.com, March 26, 2010; Free: The Future of a Radical Price, by Chris Anderson, Hyperion, 2009.
2.6 REVIEW
K E Y C O N C E P T S
Identify the key components of e-commerce business models.
A successful business model effectively addresses eight key elements: • Value proposition—how a company’s product or service fulfills the needs of customers. Typical e-com-
merce value propositions include personalization, customization, convenience, and reduction of product search and price delivery costs.
• Revenue model—how the company plans to make money from its operations. Major e-commerce revenue models include the advertising model, subscription model, transaction fee model, sales model, and affili- ate model.
• Market opportunity—the revenue potential within a company’s intended marketspace. • Competitive environment—the direct and indirect competitors doing business in the same marketspace,
including how many there are and how profitable they are. • Competitive advantage—the factors that differentiate the business from its competition, enabling it to pro-
vide a superior product at a lower cost.
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• Market strategy—the plan a company develops that outlines how it will enter a market and attract custom- ers.
• Organizational development—the process of defining all the functions within a business and the skills nec- essary to perform each job, as well as the process of recruiting and hiring strong employees.
• Management team—the group of individuals retained to guide the company’s growth and expansion.
Describe the major B2C business models.
There are a number of different business models being used in the B2C e-commerce arena. The major mod- els include the following: • Portal—offers powerful search tools plus an integrated package of content and services; typically utilizes a
combined subscription/advertising revenue/transaction fee model; may be general or specialized (vor- tal).
• E-tailer—online version of traditional retailer; includes virtual merchants (online retail store only), bricks- and-clicks e-tailers (online distribution channel for a company that also has physical stores), catalog mer- chants (online version of direct mail catalog), and manufacturers selling directly to the consumer.
• Content provider—information and entertainment companies that provide digital content; typically utilizes an advertising, subscription, or affiliate referral fee revenue model.
• Transaction broker—processes online sales transactions; typically utilizes a transaction fee revenue model. • Market creator—uses Internet technology to create markets that bring buyers and sellers together; typi-
cally utilizes a transaction fee revenue model. • Service provider—offers services online. • Community provider—provides an online community of like-minded individuals for networking and infor-
mation sharing; revenue is generated by advertising, referral fees, and subscriptions.
Describe the major B2B business models.
The major business models used to date in the B2B arena include: • E-distributor—supplies products directly to individual businesses. • E-procurement—single firms create digital markets for thousands of sellers and buyers. • Exchange—independently owned digital marketplace for direct inputs, usually for a vertical industry
group. • Industry consortium—industry-owned vertical digital market. • Private industrial network—industry-owned private industrial network that coordinates supply chains with
a limited set of partners.
Understand key business concepts and strategies applicable to e-commerce.
E-commerce has had a major impact on the business environment in the last decade, and have affected: • Industry structure—the nature of players in an industry and their relative bargaining power by changing
the basis of competition among rivals, the barriers to entry, the threat of new substitute products, the strength of suppliers, and the bargaining power of buyers.
• Industry value chains—the set of activities performed in an industry by suppliers, manufacturers, trans- porters, distributors, and retailers that transforms raw inputs into final products and services by reducing the cost of information and other transaction costs.
• Firm value chains—the set of activities performed within an individual firm to create final products from raw inputs by increasing operational efficiency.
• Business strategy—a set of plans for achieving superior long-term returns on the capital invested in a firm by offering unique ways to differentiate products, obtain cost advantages, compete globally, or compete in a narrow market or product segment.
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Q U E S T I O N S
1. What is a business model? How does it differ from a business plan? 2. What are the eight key components of an effective business model? 3. What are Amazon’s primary customer value propositions? 4. Describe the five primary revenue models used by e-commerce firms. 5. Why is targeting a market niche generally smarter for a community provider than targeting a large
market segment? 6. Would you say that Amazon and eBay are direct or indirect competitors? (You may have to visit the
websites or apps to answer.) 7. What are some of the specific ways that a company can obtain a competitive advantage? 8. Besides advertising and product sampling, what are some other market strategies a company might
pursue? 9. How do venture capitalists differ from angel investors? 10. Why is it difficult to categorize e-commerce business models? 11. Besides the examples given in the chapter, what are some other examples of vertical and horizontal
portals in existence today? 12. What are the major differences between virtual storefronts, such as Bluefly, and bricks-and-clicks opera-
tions, such as Walmart? What are the advantages and disadvantages of each? 13. Besides news and articles, what other forms of information or content do content providers offer? 14. What is a reverse auction? What company is an example of this type of business? 15. What are the key success factors for exchanges? How are they different from portals? 16. How have the unique features of e-commerce technology changed industry structure in the travel
business? 17. Who are the major players in an industry value chain and how are they impacted by e-commerce
technology? 18. What are five generic business strategies for achieving a profitable business? 19. What is the difference between a market opportunity and a marketspace? 20. What is crowdfunding and how does it help e-commerce companies raise capital?
P R O J E C T S
1. Select an e-commerce company. Visit its website or mobile app and describe its business model based on the information you find there. Identify its customer value proposition, its revenue model, the marketspace it operates in, who its main competitors are, any comparative advantages you believe the company possesses, and what its market strategy appears to be. Also try to locate information about the company’s management team and organizational structure. (Check for a page labeled “the Company,” “About Us,” or something similar.)
2. Examine the experience of shopping online versus shopping in a traditional environment. Imagine that you have decided to purchase a digital camera (or any other item of your choosing). First, shop for the camera in a traditional manner. Describe how you would do so (for example, how you would gather the necessary information you would need to choose a particular item, what stores you would visit, how long it would take, prices, etc.). Next, shop for the item on the Web or via a mobile app. Compare and contrast your experiences. What were the advantages and disadvantages of each? Which did you prefer and why?
3. During the early days of e-commerce, first-mover advantage was touted as one way to success. On the other hand, some suggest that being a market follower can yield rewards as well. Which approach has
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proven to be more successful—first mover or follower? Choose two e-commerce companies that prove your point, and prepare a brief presentation to explain your analysis and position.
4. Select an e-commerce company that has participated in an incubator program such as Y Combinator, TechStars, DreamIt, Capital Factory, or another of your choosing, and write a short report on its business model and the amount and sources of capital it has raised thus far. Include your views on the company’s future prospects for success. Then create an elevator pitch for the company.
5. Select a B2C e-commerce retail industry segment such as pet products, sporting goods, or toys, and analyze its value chain and industry value chain. Prepare a short presentation that identifies the major industry participants in that business and illustrates the move from raw materials to finished product.
R E F E R E N C E S
Arthur, W. Brian. “Increasing Returns and the New World of Business.” Harvard Business Review (July–August 1996).
Barney, J. B. “Firm Resources and Sustained Competi- tive Advantage.” Journal of Management Vol. 17, No. 1 (1991).
Bellman, Steven, Gerald L. Lohse, and Eric J. Johnson. “Predictors of Online Buying Behavior.” Communica- tions of the ACM (December 1999).
Bower, Joseph L., and Clayton Christensen. “Disruptive Technologies: Catching the Wave.” Harvard Business Review (January–February, 1995).
Christensen, Clayton M., Michael E. Raynor, and Rory McDonald. “What Is Disruptive Innovation?” Har- vard Business Review (December 2015).
eBay, Inc. “eBay Inc. Reports Second Quarter 2016 Re- sults.” (July 20, 2016).
Johnson, Mark, and Clayton Christensen. “Reinventing Your Business Model.” Harvard Business Review (De- cember 2008).
Kambil, Ajit, Ari Ginsberg, and Michael Bloch. “Reinvent- ing Value Propositions.” Working Paper, NYU Center for Research on Information Systems (1998).
Kanter, Elizabeth Ross. “The Ten Deadly Mistakes of Wan- na-Dots.” Harvard Business Review (January 2001).
Kaplan, Steven, and Mohanbir Sawhney. “E-Hubs: The New B2B Marketplaces.” Harvard Business Review (May–June 2000).
Kim, W. Chan, and Renee Mauborgne. “Knowing a Win- ning Business Idea When You See One.” Harvard Business Review (September-October 2000).
King, Andrew A. and Baljir Baatartogtokh. “How Useful Is the Theory of Disruptive Innovation?” Sloan MIT Management Review (September 15, 2015).
Lepore, Jill. “The Disruption Machine: What the Gospel of Innovation Gets Wrong.” New Yorker (June 23, 2014).
Magretta, Joan. “Why Business Models Matter.” Harvard Business Review (May 2002).
Porter, Michael E. “Strategy and the Internet.” Harvard Business Review (March 2001).
Porter, Michael E. Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press (1985).
Rigdon, Joan I. “The Second-Mover Advantage.” Red Her- ring (September 1, 2000).
Schumpeter, Joseph A. Capitalism, Socialism and Democ- racy. London: Routledge, 1942.
Teece, David J. “Profiting from Technological Innovation: Implications for Integration, Collaboration, Licens- ing and Public Policy.” Research Policy 15 (1986).
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Technology Infrastructure for E-commerce
P A R T 2 CHAPTER 3 E-commerce Infrastructure: The Internet, Web, and Mobile Platform
CHAPTER 4 Building an E-commerce Presence: Websites, Mobile Sites, and Apps
CHAPTER 5 E-commerce Security and Payment Systems
Technology Infrastructure for E-commerce
P A R T 2
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3C H A P T E R
E-commerce Infrastructure: The Internet, Web, and Mobile Platform
L E A R N I N G O B J E C T I V E S
After reading this chapter, you will be able to:
■ Discuss the origins of, and the key technology concepts behind, the Internet. ■ Explain the current structure of the Internet. ■ Understand the limitations of today’s Internet and the potential capabilities of the
Internet of the future. ■ Understand how the Web works. ■ Describe how Internet and web features and services support e-commerce. ■ Understand the impact of mobile applications.
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107
Apple has a rich history of dis-rupting the technology land-scape, dating back to the Mac computer and its revolutionary graphical user interface in the mid-1980s. More recently, we all know about the impact the iPod, iPhone, and iPad have had on our daily lives and on society in general. In 2015, Apple unveiled its most recent attempt at disruptive, ground- breaking technology in the post-Steve Jobs era: the Apple Watch. While so far the Watch has yet to garner the same results as the other iconic Apple products, it has sold relatively well and still offers strong potential to join that group in the future.
The Apple Watch is one of the latest examples of wearable computing, a fast- developing field with potential applications in healthcare, medicine, fitness, the military, gaming, and many other areas, especially those requiring the use of both hands. Defined broadly as any electronic technology incorporated into clothing and wearable accessories, examples of wearable technology include wristbands and watches, smart clothing and foot- wear, and smart glasses. Until recently, wearable technology has been too bulky or unwieldy to be useful, but the proliferation of smaller, more compact, more powerful devices and the resulting improvements in computing power have made wearable computing possible.
Analysts view wearable computing as an industry primed for explosive growth in the near future. According to market research firm IDC, over 100 million wearable computing devices will be shipped by the end of 2016; that number is projected to grow to over 210 million by 2020. The global market for wearable computing products is expected to grow to over $170 billion by 2021. However, the market for wearable computing is so new and evolving so quickly that even these projections could quickly become obsolete.
Sensing these trends earlier than most, Apple spent several years building and fine- tuning the Apple Watch before releasing it. Ironically, one of the guiding principles behind the development of the Watch is as a counter to the omnipresence of the smartphone, which Apple itself has driven. One of Apple’s goals for the Watch is to act as a filter to much of the information overload of a smartphone, only notifying users when truly critical information requires attention. As a result, the Apple Watch prioritizes speed above depth
© Iain Masterton /Alamy
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of engagement. In its development, features that required longer than 10 seconds to use were scrapped in favor of shorter, more concise interactions.
Apple also placed its typical emphasis on elegance and simplicity of design when developing the Watch, both in its outward appearance and its underlying technology. The Watch is equipped with a scrolling wheel called the Digital Crown, which is faster than the touch screen for navigation. It also functions as a button that returns users to the home screen when pressed. Directly underneath the Digital Crown is the Apple Pay button, which allows Watch wearers to quickly pay for transactions. The prominence of the Apple Pay button on the Watch suggests that Apple wants the Watch to become a popular way to make mobile payments.
The Watch screen is a flexible retina display that uses a feature called Force Touch, which allows the Watch to detect the strength of each touch of the screen, performing different functions based on the force of the touch. On the back of the watch are four sensors, consisting of sapphire lenses and photodiode sensors that can monitor the user’s vital signs and movements. Movement is used to control many functions of the Watch; for example, when receiving an incoming text message by lifting your arm to view the notification, lowering your arm again will hide the notification, saving it for later. The Watch comes in three price ranges, Sport, Watch, and Edition. Most Watch wearers will opt for the Sport, the basic $299 model, while the fashion-conscious (and deep-pocketed) may opt for the Edition, a gold-plated version of the Watch that costs between $10,000 to $17,000.There are a wide variety of options for watch faces, straps and strap sizes, and other add-ons.
Perhaps the most unique feature of the Apple Watch with regard to the user experi- ence is the Taptic Engine, a form of haptic technology that applies gentle pressure to the skin to deliver information and alerts to the user. Wearers are alerted to different types of incoming information depending on the number, cadence, and force of the taps. Different taps designate incoming phone calls, upcoming meetings, text messages, and news alerts. When using GPS, different taps can designate different steps on the route. The Apple Watch might someday tap you to let you know that you’re leaving the house without a winter coat on a cold day, or that your blood sugar is low and you need to eat.
For the time being, many critics of the device rightly point out that nearly all of what the Watch can do, the iPhone can also do, and often do better. On the other hand, because of its compatibility with apps and the Taptic Engine, the capabilities of the Watch in 2020 may be unrecognizable compared to its capabilities in 2016. For instance, sensors in the Watch may be used to differentiate the Watch from the iPhone and iPad, although the new versions of the iPhone are also being equipped with haptic technology.
Major retailers and other app developers have lined up in droves to create Apple Watch apps, despite the fact that the mobile shopping experience can be quite limited on the Watch, and that advertising is limited to ten seconds or less along with all of its other features. The device launched with 3,500 apps already available, including many from major retailers such as eBay, Amazon, and Target. Some online retailers are experiment- ing with the ability to bookmark an item on the Watch for future viewing on a phone or desktop. Bricks-and-mortar retailers like JCPenney and Kohl’s have also developed
SOURCES: “Deep Dive: The Apple Watch Series 2 Delivers on Last Year’s Promise,” by Michael deAgonia, Computerworld.com, October 21, 2016; “Booming Wearable Computing Market Could Disrupt Multiple Industries,” Bccresearch.com, June 8, 2016; “A Year With the Apple Watch: What Works, What Doesn’t, and What Lies Ahead?” by Andrew Cunningham, Arstechnica.com, April 22, 2016; “2016 Apple Watch Will Be Internal ‘S’ Upgrade, Major
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Design Changes to Wait Until 2017, Insider Says,” by Neil Hughes, Appleinsider.com, April 11, 2016; “Apple Watch Isn’t a Smash Hit, But It Could Be a Sleeper,” by Jefferson Graham, USA Today, March 18, 2016; “Smartwatch Growth Predicted, Thanks Largely to Apple Watch,” by Matt Hamblen, Computerworld.com, September 18, 2015; “The Apple Watch Is Already Crushing the Competition, According to a New Study,” by Lisa Eadicicco, Busines- sinsider.com, August 27, 2015; “In Apple Watch Debut, Signs of a Familiar Path to Success,” by Farhad Manjoo, New York Times, July 22, 2015; “How Ecommerce Marketers Are Adapting to the Apple Watch,” by Eric Samson, Entrepreneur.com, June 03, 2015; “Are Wearables the Next In-Store Shopping Buddies?” eMarketer, Inc., May 29, 2015; “Are We Really Going to Shop From the Apple Watch? What Retail Apps are Trying to Achieve,” by Rachel Arthur, Forbes, May 7, 2015; “IPhone Killer: The Secret History of the Apple Watch,” David Pierce, Wired.com, April 2015; “Apple Watch Is Already Attracting E-Commerce Players,” by Rebecca Borison, Thestreet.com, April 24, 2015; “Wearables: The Next Mobile Payment Device?” eMar- keter, Inc., March 3, 2015; “Taptic, Haptics, and the Body Fantastic: The Real Apple Watch Revolution,” by Brian S. Hall, Macworld.com, October 3, 2014; “Inside the Apple Watch: The Tech Behind Apple’s New Wearable,” by Adario Strange, Mashable.com, September 9, 2014.
apps, and many of these retailers hope to add features that improve the in-store shopping experience for Watch wearers. Users might be able to use a retailer’s Watch app to avoid long lines in stores, find items more efficiently with interactive store maps, and pay for their purchases with Apple Pay.
Although the functionality of the Watch may currently be slightly underwhelming, users appear to be extremely satisfied so far, with 97% of Watch wearers reporting satisfaction with their device. That was better than the first iterations of the iPad and the iPhone. The Apple Watch is also selling as well as the Fitbit, a popular fitness tool. Fitbit is also worn around the wrist, but it’s considered a “basic” wearable because it cannot run third-party apps. The Apple Watch may grow to have most or all of Fitbit’s functionality along with a host of other capabilities. On the other hand, Fitbits sell for as low as $100 for older models, and work with all types of smartphones, including Androids. The Apple Watch will have to contend with Fitbit and other niche devices from Samsung, Garmin and Xiaomi that may sacrifice some functionality for a much lower cost. Although Apple has not released recent sales figures for the Watch and instead groups them in a category with a host of other products, estimates show that Apple will lead the wearable computing market with just under half of market share in 2016. Nevertheless, most analysts project that thus far, sales have come in under expectations, and the device hasn’t really captured the public’s attention the way the iPad and iPhone did.
In the early going, Apple focused on making small tweaks, many of which are cosmetic, rather than making wholesale change to the Watch. However, in September 2016, Apple released the Apple Watch 2, with changes that are both internal and external, including a thinner profile, a larger battery, performance enhancements, the addition of extremely efficient micro-LED panels to replace its previous organic LED (OLED) screen, and GPS capability without the use of a nearby iPhone. As the device continues to mature, the Watch is likely to have the functionality that its users demand. Will it be a fitness and health tool? The new frontier in mobile payments? An indispensable in-store shopping buddy? A must-have complement to the iPhone? Or something completely unforeseen? Apple would prefer it be all of these, and become the next great Apple product; but the Watch has a ways to go, both in sales and functionality, until it reaches that level of success.
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This chapter examines the Internet, Web, and mobile platform of today and tomorrow, how they evolved, how they work, and how their present and future infrastructure enable new business opportunities. The opening case illustrates the importance of understanding how the Internet
and related technologies work, and being aware of what’s new. The Internet and its underlying technology are not static phenomena, but instead continue to change over time. Computers have merged with cell phone services; broadband access in the home and broadband wireless access to the Internet via smartphones, tablet computers, and laptops are expanding rapidly; self-publishing via social networks and blogging now engages millions of Internet users; and software technologies such as cloud computing and smartphone apps are revolutionizing the way businesses are using the Internet. Looking forward a few years, the business strategies of the future will require a firm understanding of these technologies and new ones, such as different types of wearable technology like the Apple Watch profiled in the opening case, the Internet of Things, the “smart/connected” movement (smart homes, smart TVs, and connected cars), aug- mented and virtual reality, and artificial intelligence to deliver products and services to consumers. Table 3.1 summarizes some of the most important developments in e-commerce infrastructure for 2016–2017.
3.1 THE INTERNET: TECHNOLOGY BACKGROUND
What is the Internet? Where did it come from, and how did it support the growth of the Web? What are the Internet’s most important operating principles? How much do you really need to know about the technology of the Internet?
Let’s take the last question first. The answer is: it depends on your career interests. If you are on a marketing career path, or general managerial business path, then you need to know the basics about Internet technology, which you’ll learn in this and the following chapter. If you are on a technical career path and hope to become a web designer, or pursue a technical career in web infrastructure for businesses, you’ll need to start with these basics and then build from there. You’ll also need to know about the business side of e-commerce, which you will learn about throughout this book.
As noted in Chapter 1, the Internet is an interconnected network of thousands of networks and millions of computers (sometimes called host computers or just hosts), linking businesses, educational institutions, government agencies, and individuals. The Internet provides approximately 3.3 billion people around the world (including about 267 million people in the United States) with services such as e-mail, apps, newsgroups, shopping, research, instant messaging, music, videos, and news (eMarketer, Inc., 2016a, 2016b). No single organization controls the Internet or how it functions, nor is it owned by anybody, yet it has provided the infrastructure for a transformation in commerce, scientific research, and culture. The word Internet is derived from the word internetwork, or the connecting together of two or more
Internet an interconnected network of thousands of networks and millions of computers linking businesses, educational institutions, government agencies, and individuals
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TABLE 3.1 TRENDS IN E-COMMERCE INFRASTRUCTURE 2016–2017
B U S I N E S S
• Mobile devices become the primary access point to social network services and a rapidly expanding social marketing and advertising platform, and create a foundation for location-based web services and business models.
• Explosion of Internet content services and mobile access devices strains the business models of Internet backbone providers (the large telecommunication carriers).
• The growth in cloud computing and bandwidth capacity enables new business models for distributing music, movies, and television.
• Search becomes more social and local, enabling social and local commerce business models.
• Big data produced by the Internet creates new business opportunities for firms with the analytic capability to understand it.
T E C H N O L O G Y
• Mobile devices such as smartphones and tablet computers have become the dominant mode of access to the Internet. The new client is mobile.
• The explosion of mobile apps threatens the dominance of the Web as the main source of online software applications and leads some to claim the Web is dead.
• Cloud computing reshapes computing and storage, and becomes an important force in the delivery of software applications and online content.
• The Internet runs out of IPv4 addresses; the transition to IPv6 continues.
• The decreased cost of storage and advances in database software lead to explosion in online data collection known as big data, and creates new business opportunities for firms with the analytic capability to understand it.
• The Internet of Things, with millions of sensor-equipped devices connecting to the Internet, starts to become a reality, and is powering the development of smart connected “things” such as televisions, houses, cars, and wearable technology.
• Augmented reality applications such as Pokemon GO, and virtual reality hardware such as Facebook’s Oculus Rift, Google’s Cardboard, and Samsung’s Gear VR, begin to gain traction.
• Interest in and funding of artificial intelligence technologies explode, with potential applications ranging from supply chain logistics, to self-driving cars, to consumer-oriented personal assistants.
• HTML5 grows in popularity among publishers and developers and makes possible web applications that are just as visually rich and lively as native mobile apps.
S O C I E T Y
• Governance of the Internet becomes more involved with conflicts between nations; the United States gives up control over IANA, which administers the Internet’s IP addressing system.
• Government control over, and surveillance of, the Internet is expanded in most advanced nations, and in many nations the Internet is nearly completely controlled by government agencies.
• The growing infrastructure for tracking online and mobile consumer behavior conflicts with individual claims to privacy and control over personal information.
computer networks. The Web is one of the Internet’s most popular services, providing access to billions, perhaps trillions, of web pages, which are documents created in a programming language called HTML that can contain text, graphics, audio, video, and other objects, as well as “hyperlinks” that permit users to jump easily from one page to another. Web pages are navigated using web browser software.
Web one of the Internet’s most popular services, providing access to billions, and perhaps trillions, of web pages
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THE EVOLUTION OF THE INTERNET: 1961—THE PRESENT
Although journalists talk glibly about “ Internet” time—suggesting a fast-paced, nearly instant, worldwide global change mechanism—in fact, today’s Internet had its start about 55 years ago and has slowly evolved since then.
The history of the Internet can be segmented into three phases (see Figure 3.1). During the Innovation Phase, from 1961 to 1974, the fundamental building blocks of the Internet—packet-switching hardware, a communications protocol called TCP/ IP, and client/server computing (all described more fully later in this section)—were conceptualized and then implemented in actual hardware and software. The Internet’s original purpose was to link large mainframe computers on different college campuses. This kind of one-to-one communication between campuses was previously possible only via the telephone system or private networks owned by the large computer manufacturers.
During the Institutionalization Phase, from 1975 to 1995, large institutions such as the U.S. Department of Defense (DoD) and the National Science Foundation (NSF) provided funding and legitimization for the fledging Internet. Once the concepts behind the Internet had been proven in several government-supported demonstra- tion projects, the DoD contributed $1 million to further develop them into a robust military communications system. This effort created what was then called ARPANET (Advanced Research Projects Agency Network). In 1986, the NSF assumed responsi- bility for the development of a civilian Internet (then called NSFNET) and began a 10-year-long $200 million expansion program.
During the Commercialization Phase, from 1995 to the present, the U.S. government encouraged private corporations to take over and expand the Internet backbone as well as local service beyond military installations and college campuses to the rest of the population around the world. See Table 3.2 for a closer look at the development of the Internet from 1961 on.
FIGURE 3.1 STAGES IN THE DEVELOPMENT OF THE INTERNET
The Internet has developed in three stages over approximately a 55-year period from 1961 to the present. In the Innovation stage, basic ideas and technologies were developed; in the Institutionalization stage, these ideas were brought to life; in the Commercialization stage, once the ideas and technologies had been proven, private companies brought the Internet to millions of people worldwide.
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TABLE 3.2 DEVELOPMENT OF THE INTERNET TIMELINE
Y E A R E V E N T S I G N I F I C A N C E
I N N O V A T I O N P H A S E 1 9 6 1 – 1 9 7 4
1961 Leonard Kleinrock (MIT) publishes a paper on “packet switching” networks.
The concept of packet switching is born.
1962 J.C.R. Licklider (MIT) writes memo calling for an “Intergalactic Computer Network.”
The vision of a global computer network is born.
1969 BBN Technologies awarded ARPA contract to build ARPANET.
The concept of a packet-switched network moves closer toward physical reality.
1969 The first packet-switched message is sent on ARPANET from UCLA to Stanford.
The communications hardware underlying the Internet is implemented for the first time. The initial ARPANET consisted of four routers (then called Interface Message Processors (IMPs)) at UCLA, Stanford, UCSB, and the University of Utah.
1972 E-mail is invented by Ray Tomlinson of BBN. Larry Roberts writes the first e-mail utility program permitting listing, forwarding, and responding to e-mails.
The first “killer app” of the Internet is born.
1973 Bob Metcalfe (Xerox PARC Labs) invents Ethernet and local area networks.
Client/server computing is invented. Ethernet permitted the development of local area networks and client/server computing in which thousands of fully functional desktop computers could be connected into a short-distance (<1,000 meters) network to share files, run applications, and send messages.
1974 “Open architecture” networking and TCP/IP concepts are presented in a paper by Vint Cerf (Stanford) and Bob Kahn (BBN).
TCP/IP invented. The conceptual foundation for a single common communications protocol that could potentially connect any of thousands of disparate local area networks and computers, and a common addressing scheme for all computers connected to the network, are born. Prior to this, computers could communicate only if they shared a common proprietary network architecture. With TCP/IP, computers and networks could work together regardless of their local operating systems or network protocols.
I N S T I T U T I O N A L I Z A T I O N P H A S E 1 9 7 5 – 1 9 9 5
1977 Lawrence Landweber envisions CSNET (Computer Science Network).
CSNET is a pioneering network for U.S. universities and industrial computer research groups that could not directly connect to ARPANET, and was a major milestone on the path to the development of the global Internet.
1980 TCP/IP is officially adopted as the DoD standard communications protocol.
The single largest computing organization in the world adopts TCP/IP and packet-switched network technology.
1980 Personal computers are invented. Altair, Apple, and IBM personal desktop computers are invented. These computers become the foundation for today’s Internet, affording millions of people access to the Internet and the Web.
1984 Apple Computer releases the HyperCard program as part of its graphical user interface operating system called Macintosh.
The concept of “hyperlinked” documents and records that permit the user to jump from one page or record to another is commercially introduced.
(continued)
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1 “Backbone” refers to the U.S. domestic trunk lines that carry the heavy traffic across the nation, from one metropolitan area to another. Universities are given responsibility for developing their own campus networks that must be connected to the national backbone.
TABLE 3.2 DEVELOPMENT OF THE INTERNET TIMELINE (CONTINUED)
Y E A R E V E N T S I G N I F I C A N C E
1984 Domain Name System (DNS) introduced. DNS provides a user-friendly system for translating IP addresses into words that people can easily understand.
1989 Tim Berners-Lee of CERN in Switzerland proposes a worldwide network of hyperlinked documents based on a common markup language called HTML—HyperText Markup Language.
The concept of an Internet-supported service called the World Wide Web based on HTML pages is born. The Web would be constructed from”pages” created in a common markup language, with “hyperlinks” that permitted easy access among the pages.
1990 NSF plans and assumes responsibility for a civilian Internet backbone and creates NSFNET.1 ARPANET is decommissioned.
The concept of a “civilian” Internet open to all is realized through nonmilitary funding by NSF.
1993 The first graphical web browser called Mosaic is invented by Marc Andreessen and others at the National Center for Supercomputing Applications at the University of Illinois.
Mosaic makes it very easy for ordinary users to connect to HTML documents anywhere on the Web. The browser-enabled Web takes off.
1994 Andreessen and Jim Clark form Netscape Corporation.
The first commercial web browser—Netscape—becomes available.
1994 The first banner advertisements appear on Hotwired.com in October 1994.
The beginning of e-commerce.
C O M M E R C I A L I Z A T I O N P H A S E 1 9 9 5 – P R E S E N T
1995 NSF privatizes the backbone, and commercial carriers take over backbone operation.
The fully commercial civilian Internet is born. Major long-haul networks such as AT&T, Sprint, GTE, UUNet, and MCI take over operation of the backbone. Network Solutions (a private firm) is given a monopoly to assign Internet addresses.
1995 Jeff Bezos founds Amazon; Pierre Omidyar forms AuctionWeb (eBay).
E-commerce begins in earnest with pure online retail stores and auctions.
1998 The U.S. federal government encourages the founding of the Internet Corporation for Assigned Names and Numbers (ICANN).
Governance over domain names and addresses passes to a private nonprofit international organization.
1999 The first full-service Internet-only bank, First Internet Bank of Indiana, opens for business.
Business on the Web extends into traditional services.
2003 The Internet2 Abilene high-speed network is upgraded to 10 Gbps.
A major milestone toward the development of ultra-high-speed transcontinental networks several times faster than the existing backbone is achieved.
2005 NSF proposes the Global Environment for Network Innovations (GENI) initiative to develop new core functionality for the Internet.
Recognition that future Internet security and functionality needs may require the thorough rethinking of existing Internet technology.
2006 The U.S. Senate Committee on Commerce, Science, and Transportation holds hearings on “Network Neutrality.”
The debate grows over differential pricing based on utilization that pits backbone utility owners against online content and service providers and device makers.
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TABLE 3.2 DEVELOPMENT OF THE INTERNET TIMELINE (CONTINUED)
Y E A R E V E N T S I G N I F I C A N C E
2007 The Apple iPhone is introduced. The introduction of the iPhone represents the beginning of the development of a viable mobile platform that will ultimately transform the way people interact with the Internet.
2008 The Internet Society (ISOC) identifies Trust and Identity as a primary design element for every layer of the Internet, and launches an initiative to address these issues.
The leading Internet policy group recognizes the current Internet is threatened by breaches of security and trust that are built into the existing network.
2008 Internet “cloud computing” becomes a billion- dollar industry.
Internet capacity is sufficient to support on-demand computing resources (processing and storage), as well as software applications, for large corporations and individuals.
2009 Internet-enabled smartphones become a major new web access platform.
Smartphones extend the reach and range of the Internet to more closely realize the promise of the Internet anywhere, anytime, anyplace.
2009 Broadband stimulus package and Broadband Data Improvement Act enacted.
President Obama signs stimulus package containing $7.2 billion for the expansion of broadband access in the United States.
2011 ICANN expands domain name system. ICANN agrees to permit the expansion of generic top-level domain names from about 300 to potentially thousands using any word in any language.
2012 World IPv6 Launch day. Major Internet service providers (ISPs), home networking equipment manufacturers, and online companies begin to permanently enable IPv6 for their products and services as of June 6, 2012.
2013 The Internet of Things (IoT) starts to become a reality.
Internet technology spreads beyond the computer and mobile device to anything that can be equipped with sensors, leading to predictions that up to 100–200 billion uniquely identifiable objects will be connected to the Internet by 2020.
2014 Apple introduces Apple Pay and Apple Watch. Apple Pay is likely to become the first widely adopted mobile payment system; Apple Watch may usher in a new era of wearable Internet-connected technology and is a further harbinger of the Internet of Things.
2015 Federal Communications Commission adopts regulations mandating net neutrality.
ISPs are required to treat all data on the Internet equally and are not allowed to discriminate or charge differentially based on user, content, site, platform, application, type of equipment, or mode of communication.
2016 FCC proposes “Open Set Top Box” rules; net neutrality regulations upheld by U.S. Court of Appeals.
FCC continues to promote concept of an open Internet, despite continued resistance from telecommunications industry.
SOURCES: Based on Leiner et al., 2000; Zakon, 2005; Gross, 2005; Geni.net, 2007; ISOC.org, 2010; Arstechnica.com, 2010; ICANN, 2011a; Internet Society, 2012; IEEE Computer Society, 2013; Craig, 2016.
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THE INTERNET: KEY TECHNOLOGY CONCEPTS
In 1995, the Federal Networking Council (FNC) passed a resolution formally defin- ing the term Internet as a network that uses the IP addressing scheme, supports the Transmission Control Protocol (TCP), and makes services available to users much like a telephone system makes voice and data services available to the public (see Figure 3.2).
Behind this formal definition are three extremely important concepts that are the basis for understanding the Internet: packet switching, the TCP/IP communications protocol, and client/server computing. Although the Internet has evolved and changed dramatically in the last 35 years, these three concepts are at the core of the way the Internet functions today and are the foundation for the Internet of the future.
Packet Switching
Packet switching is a method of slicing digital messages into discrete units called packets, sending the packets along different communication paths as they become available, and then reassembling the packets once they arrive at their destination (see Figure 3.3). Prior to the development of packet switching, early computer networks used leased, dedicated telephone circuits to communicate with terminals and other computers. In circuit-switched networks such as the telephone system, a complete point-to-point circuit is put together, and then communication can proceed. However, these “dedicated” circuit-switching techniques were expensive and wasted available communications capacity—the circuit would be maintained regardless of whether any data was being sent. For nearly 70% of the time, a dedicated voice circuit is not being fully used because of pauses between words and delays in assembling the circuit
packet switching a method of slicing digital messages into packets, sending the packets along different communication paths as they become available, and then reassembling the packets once they arrive at their destination
packets the discrete units into which digital messages are sliced for transmission over the Internet
FIGURE 3.2 RESOLUTION OF THE FEDERAL NETWORKING COUNCIL
SOURCE: Federal Networking Council, 1995
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segments, both of which increase the length of time required to find and connect circuits. A better technology was needed.
The first book on packet switching was written by Leonard Kleinrock in 1964 (Kleinrock, 1964), and the technique was further developed by others in the defense research labs of both the United States and England. With packet switching, the communications capacity of a network can be increased by a factor of 100 or more. (The communications capacity of a digital network is measured in terms of bits per second.2) Imagine if the gas mileage of your car went from 15 miles per gallon to 1,500 miles per gallon—all without changing too much of the car!
In packet-switched networks, messages are first broken down into packets. Appended to each packet are digital codes that indicate a source address (the origina- tion point) and a destination address, as well as sequencing information and error- control information for the packet. Rather than being sent directly to the destination address, in a packet network, the packets travel from computer to computer until they reach their destination. These computers are called routers. A router is a special- purpose computer that interconnects the different computer networks that make up the Internet and routes packets along to their ultimate destination as they travel. To ensure that packets take the best available path toward their destination, routers use a computer program called a routing algorithm.
Packet switching does not require a dedicated circuit, but can make use of any spare capacity that is available on any of several hundred circuits. Packet switching
2 A bit is a binary digit, 0 or 1. A string of eight bits constitutes a byte. A home telephone dial-up modem connects to the Internet usually at 56 Kbps (56,000 bits per second). Mbps refers to millions of bits per second, whereas Gbps refers to billions of bits per second.
router special-purpose computer that interconnects the computer networks that make up the Internet and routes packets to their ultimate destination as they travel the Internet
routing algorithm computer program that ensures that packets take the best available path toward their destination
FIGURE 3.3 PACKET SWITCHING
In packet switching, digital messages are divided into fixed-length packets of bits (generally about 1,500 bytes). Header information indicates both the origin and the ultimate destination address of the packet, the size of the message, and the number of packets the receiving node should expect. Because the receipt of each packet is acknowledged by the receiving computer, for a considerable amount of time, the network is not passing information, only acknowledgments, producing a delay called latency.
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makes nearly full use of almost all available communication lines and capacity. More- over, if some lines are disabled or too busy, the packets can be sent on any available line that eventually leads to the destination point.
Transmission Control Protocol/Internet Protocol (TCP/IP)
While packet switching was an enormous advance in communications capacity, there was no universally agreed-upon method for breaking up digital messages into packets, routing them to the proper address, and then reassembling them into a coherent message. This was like having a system for producing stamps but no postal system (a series of post offices and a set of addresses). The answer was to develop a protocol (a set of rules and standards for data transfer) to govern the formatting, ordering, com- pressing, and error-checking of messages, as well as specify the speed of transmission and means by which devices on the network will indicate they have stopped sending and/or receiving messages.
Transmission Control Protocol/Internet Protocol (TCP/IP) has become the core communications protocol for the Internet (Cerf and Kahn, 1974). TCP establishes the connections among sending and receiving computers, and makes sure that packets sent by one computer are received in the same sequence by the other, without any packets missing. IP provides the Internet’s addressing scheme and is responsible for the actual delivery of the packets.
TCP/IP is divided into four separate layers, with each layer handling a different aspect of the communication problem (see Figure 3.4). The Network Interface Layer is responsible for placing packets on and receiving them from the network medium, which could be a LAN (Ethernet) or Token Ring network, or other network technology. TCP/IP is independent from any local network technology and can adapt to changes at the local level. The Internet Layer is responsible for addressing, packaging, and routing messages on the Internet. The Transport Layer is responsible for providing communication with other protocols (applications) within the TCP/IP protocol suite by acknowledging and sequencing the packets to and from the applications. The Applica- tion Layer includes a variety of protocols used to provide user services or exchange data. One of the most important is the Border Gateway Protocol (BGP), which enables the exchange of routing information among different autonomous systems on the Internet. BGP uses TCP as its transport protocol. Other important protocols included in the Application layer include HyperText Transfer Protocol (HTTP), File Transfer Protocol (FTP), and Simple Mail Transfer Protocol (SMTP), all of which we will discuss later in this chapter.
IP Addresses
The IP addressing scheme answers the question “How can billions of computers attached to the Internet communicate with one another?” The answer is that every computer connected to the Internet must be assigned an address—otherwise it cannot send or receive TCP packets. For instance, when you sign onto the Internet using a dial-up, DSL, or cable modem, your computer is assigned a temporary address by your
protocol set of rules and standards for data transfer
Transmission Control Protocol/Internet Protocol (TCP/IP) core communications protocol for the Internet
TCP establishes connections among sending and receiving computers and handles assembly and reassembly of packets
IP provides the Internet’s addressing scheme and is responsible for delivery of packets
Network Interface Layer responsible for placing packets on and receiving them from the network medium
Internet Layer responsible for addressing, packaging, and routing messages on the Internet
Transport Layer responsible for providing communication with other protocols within TCP/IP suite
Application Layer includes protocols used to provide user services or exchange data
Border Gateway Protocol enables exchange of routing information among systems on the Internet
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Internet Service Provider. Most corporate and university computers attached to a local area network have a permanent IP address.
There are two versions of IP currently in use: IPv4 and IPv6. An IPv4 Internet address is a 32-bit number that appears as a series of four separate numbers marked off by periods, such as 64.49.254.91. Each of the four numbers can range from 0–255. This “dotted quad” addressing scheme supports up to about 4 billion addresses (2 to the 32nd power). In a typical Class C network, the first three sets of numbers identify the network (in the preceding example, 64.49.254 is the local area network identifica- tion) and the last number (91) identifies a specific computer.
Because many large corporate and government domains have been given millions of IP addresses each (to accommodate their current and future work forces), and with all the new networks and new Internet-enabled devices requiring unique IP addresses being attached to the Internet, the number of IPv4 addresses available to be assigned has shrunk significantly. Registries for North America, Europe, Asia, and Latin
IPv4 Internet address Internet address expressed as a 32-bit number that appears as a series of four separate numbers marked off by periods, such as 64.49.254.91
FIGURE 3.4 THE TCP/IP ARCHITECTURE AND PROTOCOL SUITE
TCP/IP is an industry-standard suite of protocols for large internetworks. The purpose of TCP/IP is to provide high-speed communication network links.
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America have all essentially run out. IPv6 was created to address this problem. An IPv6 Internet address is 128 bits, so it can support up to 2128 (3.4×1038) addresses, many more than IPv4. According to Akamai, in the United States, about 20% of Inter- net traffic now occurs over IPv6. Belgium leads the way globally, with over 40% of Internet traffic converted to IPv6 (Akamai, 2016a).
Figure 3.5 illustrates how TCP/IP and packet switching work together to send data over the Internet.
Domain Names, DNS, and URLs
Most people cannot remember 32-bit numbers. An IP address can be represented by a natural language convention called a domain name. The Domain Name System (DNS) allows expressions such as Cnet.com to stand for a numeric IP address (cnet. com’s numeric IP is 216.239.113.101).3 A Uniform Resource Locator (URL), which is the address used by a web browser to identify the location of content on the Web, also uses a domain name as part of the URL. A typical URL contains the protocol to be used when accessing the address, followed by its location. For instance, the URL http://www.azimuth-interactive.com/flash_test refers to the IP address 208.148.84.1 with the domain name “azimuth-interactive.com” and the protocol being used to access the address, HTTP. A resource called “flash_test” is located on the server directory path /flash_test. A URL can have from two to four parts; for example, name1.name2.name3.org. We discuss domain names and URLs further in Section 3.4.
3 You can check the IP address of any domain name on the Internet. If using a Windows operating system, open the command prompt. Type ping <Domain Name>. You will receive the IP address in return.
IPv6 Internet address Internet address expressed as a 128-bit number
domain name IP address expressed in natural language
Domain Name System (DNS) system for expressing numeric IP addresses in natural language
Uniform Resource Locator (URL) the address used by a web browser to identify the location of content on the Web
FIGURE 3.5 ROUTING INTERNET MESSAGES: TCP/IP AND PACKET SWITCHING
The Internet uses packet-switched networks and the TCP/IP communications protocol to send, route, and assemble messages. Messages are broken into packets, and packets from the same message can travel along different routes.
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Figure 3.6 illustrates the Domain Name System and Table 3.3 summarizes the impor- tant components of the Internet addressing scheme.
Client/Server Computing
While packet switching exploded the available communications capacity and TCP/ IP provided the communications rules and regulations, it took a revolution in
FIGURE 3.6 THE HIERARCHICAL DOMAIN NAME SYSTEM
The Domain Name System is a hierarchical namespace with a root server at the top. Top-level domains appear next and identify the organization type (such as .com, .gov, .org, etc.) or geographic location (such as .uk [Great Britain] or .ca [Canada]). Second-level servers for each top-level domain assign and register second-level domain names for organizations and individuals such as IBM.com, Microsoft.com, and Stanford.edu. Finally, third-level domains identify a particular computer or group of computers within an organization, e.g., www.finance.nyu.edu.
TABLE 3.3 PIECES OF THE INTERNET PUZZLE: NAMES AND ADDRESSES
IP addresses Every device connected to the Internet must have a unique address number called an Internet Protocol (IP) address.
Domain names The Domain Name System allows expressions such as Pearsoned.com (Pearson Education’s website) to stand for numeric IP locations.
DNS servers DNS servers are databases that keep track of IP addresses and domain names on the Internet.
Root servers Root servers are central directories that list all domain names currently in use for specific domains; for example, the .com root server. DNS servers consult root servers to look up unfamiliar domain names when routing traffic.
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computing to bring about today’s Internet and the Web. That revolution is called client/server computing and without it, the Web—in all its richness—would not exist. Client/server computing is a model of computing in which client computers are connected in a network with one or more servers, which are computers that are dedicated to performing common functions that the client computers on the network need, such as file storage, software applications, printing, and Internet access. The client computers are themselves sufficiently powerful to accomplish complex tasks. Servers are networked computers dedicated to common functions that the client computers on the network need, such as file storage, software applications, utility programs that provide web connections, and printers (see Figure 3.7). The Internet is a giant example of client/server computing in which millions of web servers located around the world can be easily accessed by millions of client computers, also located throughout the world.
To appreciate what client/server computing makes possible, you must understand what preceded it. In the mainframe computing environment of the 1960s and 1970s, computing power was very expensive and limited. For instance, the largest com- mercial mainframes of the late 1960s had 128k of RAM and 10-megabyte disk drives, and occupied hundreds of square feet. There was insufficient computing capacity to support graphics or color in text documents, let alone sound files, video, or hyper- linked documents. In this period, computing was entirely centralized: all work was done by a single mainframe computer, and users were connected to the mainframe using terminals.
With the development of personal computers and local area networks during the late 1970s and early 1980s, client/server computing became possible. Client/server computing has many advantages over centralized mainframe computing. For instance, it is easy to expand capacity by adding servers and clients. Also, client/server networks are less vulnerable than centralized computing architectures. If one server goes down,
client/server computing a model of computing in which client computers are connected in a network together with one or more servers
client a powerful desktop computer that is part of a network
server networked computer dedicated to common functions that the client computers on the network need
FIGURE 3.7 THE CLIENT/SERVER COMPUTING MODEL
In the client/server model of computing, client computers are connected in a network together with one or more servers.
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backup or mirror servers can pick up the slack; if a client computer is inoperable, the rest of the network continues operating. Moreover, processing load is balanced over many powerful smaller computers rather than being concentrated in a single huge computer that performs processing for everyone. Both software and hardware in client/server environments can be built more simply and economically.
In 2016, there are an estimated 1.8 billion “traditional” personal computers in use around the world (Cox, 2016). Personal computing capabilities have also moved to smartphones and tablet computers (all much “thinner” clients with a bit less comput- ing horsepower, and limited memory, but which rely on Internet servers to accomplish their tasks). In the process, more computer processing will be performed by central servers.
THE NEW CLIENT: THE MOBILE PLATFORM
There’s a new client in town. The primary means of accessing the Internet both in the United States and worldwide is now through highly portable smartphones and tablet computers, and not traditional desktop or laptop PCs. This means that the primary platform for e-commerce products and services is also changing to a mobile platform.
The change in hardware has reached a tipping point. The form factor of PCs has changed from desktops to laptops and tablet computers such as the iPad (and more than 100 other competitors). Tablets are lighter, do not require a complex operating system, and rely on the Internet cloud to provide processing and storage. In the United States, about 155 million people access the Internet using a tablet computer (eMarketer, Inc., 2016c).
Smartphones are a disruptive technology that radically alters the personal comput- ing and e-commerce landscape. Smartphones have created a major shift in computer processors and software that has disrupted the dual monopolies long established by Intel and Microsoft, whose chips, operating systems, and software applications began dominating the PC market in 1982. Few smartphones use Intel chips, which power 90% of the world’s PCs; only a small percentage of smartphones use Microsoft’s operat- ing system (Windows Mobile). Instead, smartphone manufacturers either purchase operating systems such as Symbian, the world leader, or build their own, such as Apple’s iPhone iOS, typically based on Linux and Java platforms. Smartphones do not use power-hungry hard drives but instead use flash memory chips with storage up to 128 gigabytes that also require much less power. In 2016, over 210 million Americans use mobile phones to access the Internet (eMarketer, Inc., 2016d).
The mobile platform has profound implications for e-commerce because it influ- ences how, where, and when consumers shop and buy.
THE INTERNET “CLOUD COMPUTING” MODEL: HARDWARE AND SOFTWARE AS A SERVICE
Cloud computing is a model of computing in which computer processing, storage, software, and other services are provided as a shared pool of virtualized resources over the Internet. These “clouds” of computing resources can be accessed on an as-needed
cloud computing model of computing in which computer processing, storage, software, and other services are provided as a shared pool of virtualized resources over the Internet
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basis from any connected device and location. Figure 3.8 illustrates the cloud comput- ing concept.
The U.S. National Institute of Standards and Technology (NIST) defines cloud computing as having the following essential characteristics:
• On-demand self-service: Consumers can obtain computing capabilities such as server time or network storage as needed automatically on their own.
• Ubiquitous network access: Cloud resources can be accessed using standard network and Internet devices, including mobile platforms.
• Location-independent resource pooling: Computing resources are pooled to serve multiple users, with different virtual resources dynamically assigned accord- ing to user demand. The user generally does not know where the computing resources are located.
• Rapid elasticity: Computing resources can be rapidly provisioned, increased, or decreased to meet changing user demand.
• Measured service: Charges for cloud resources are based on the amount of resources actually used.
Cloud computing consists of three basic types of services:
• Infrastructure as a service (IaaS): Customers use processing, storage, network- ing, and other computing resources from third-party providers called cloud service providers (CSPs) to run their information systems. For example, Amazon used the spare capacity of its information technology infrastructure to develop Amazon Web Services (AWS), which offers a cloud environment for a myriad of different IT infrastructure services. See Table 3.4 for a description of the range of services that AWS offers, such as its Simple Storage Service (S3) for storing customers’ data and
FIGURE 3.8 THE CLOUD COMPUTING MODEL
In the cloud computing model, hardware and software services are provided on the Internet by vendors operating very large server farms and data centers.
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TABLE 3.4 AMAZON WEB SERVICES
N A M E D E S C R I P T I O N
C O M P U T I N G S E R V I C E S
Elastic Compute Cloud (EC2) Scalable cloud computing services
Elastic Load Balancing (ELB) Distributes incoming application traffic among multiple EC2 instances
S T O R A G E S E R V I C E S
Simple Storage Service (S3) Data storage infrastructure
Glacier Low-cost archival and backup storage
D A T A B A S E S E R V I C E S
DynamoDB NoSQL database service
Redshift Petabyte-scale data warehouse service
Relational Database Service (RDS) Relational database service for MySQL, Oracle, SQL Server, and PostgreSQL databases
ElastiCache In-memory cache in the cloud
SimpleDB Non-relational data store
N E T W O R K I N G A N D C O N T E N T D E L I V E R Y S E R V I C E S
Route 53 DNS service in the cloud, enabling business to direct Internet traffic to web applications
Virtual Private Cloud (VPC) Creates a VPN between the Amazon cloud and a company’s existing IT infrastructure
CloudFront Content delivery services
Direct Connect Provides alternative to using the Internet to access AWS cloud services
A N A L Y T I C S
Elastic MapReduce (EMR) Web service that enables users to perform data-intensive tasks
Kinesis Big Data service for real-time data streaming ingestion and processing
A P P L I C A T I O N S E R V I C E S
AppStream Provides streaming services for applications and games from the cloud
CloudSearch Search service that can be integrated by developers into applications
M E S S A G I N G S E R V I C E S
Simple Email Service (SES) Cloud e-mail sending service
Simple Notification Service (SNS) Push messaging service
Simple Queue Service (SQS) Queue for storing messages as they travel between computers
(continued)
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TABLE 3.4 AMAZON WEB SERVICES (CONT.)
D E P L O Y M E N T A N D M A N A G E M E N T S E R V I C E S
Identity and Access Management (IAM)
Enables securely controlled access to AWS services
CloudWatch Monitoring service
Elastic Beanstalk Service for deploying and scaling web applications and services developed with Java, .Net, PHP, Python, Ruby, and Node.js
CloudFormation Service that allows developers an easy way to create a collection of related AWS resources
M O B I L E
Cognito Allows developers to securely manage and synchronize app data for users across mobile devices
Mobile Analytics Can collect and process billions of events from millions of users a day
P A Y M E N T S E R V I C E S
Flexible Payment Service (FPS) Payment services for developers
DevPay Online billing and account management service for developers who create an Amazon cloud application
M I S C E L L A N E O U S
Amazon Mechanical Turk Marketplace for work that requires human intelligence
Alexa Web Information Service Provides web traffic data and information for developers
its Elastic Compute Cloud (EC2) service for running applications. Users pay only for the amount of computing and storage capacity they actually use.
• Software as a service (SaaS): Customers use software hosted by the vendor on the vendor’s cloud infrastructure and delivered as a service over a network. Leading SaaS examples are Google Apps, which provides common business applications online, and Salesforce.com, which provides customer relationship management and related software services over the Internet. Both charge users an annual subscrip- tion fee, although Google Apps also has a pared-down free version. Users access these applications from a web browser, and the data and software are maintained on the providers’ remote servers.
• Platform as a service (PaaS): Customers use infrastructure and programming tools supported by the CSP to develop their own applications. For example, IBM offers Bluemix for software development and testing on its cloud infrastructure. Another example is Salesforce.com’s Force.com, which allows developers to build applications that are hosted on its servers as a service.
A cloud can be private, public, or hybrid. A public cloud is owned and main- tained by CSPs, such as Amazon Web Services, IBM, HP, and Dell, and made available
public cloud third-party service providers that own and manage large, scalable data centers that offer computing, data storage, and high speed Internet to multiple customers who pay for only the resources they use
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to multiple customers, who pay only for the resources they use. A public cloud offers relatively secure enterprise-class reliability at significant cost savings. Because orga- nizations using public clouds do not own the infrastructure, they do not have to make large investments in their own hardware and software. Instead, they purchase their computing services from remote providers and pay only for the amount of computing power they actually use (utility computing) or are billed on a monthly or annual subscription basis. The term on-demand computing is also used to describe such ser- vices. As such, public clouds are ideal environments for small and medium-sized businesses who cannot afford to fully develop their own infrastructure; for applications requiring high performance, scalability, and availability; for new application develop- ment and testing; and for companies that have occasional large computing projects. Gartner estimates that spending on public cloud services worldwide will grow over 15% in 2016, to $204 billion (Gartner, Inc., 2016a). Companies such as Google, Apple, Dropbox, and others also offer public clouds as a consumer service for online storage of data, music, and photos. Google Drive, Dropbox, and Apple iCloud are leading examples of this type of consumer cloud service.
A private cloud provides similar options as a public cloud but is operated solely for the benefit of a single tenant. It might be managed by the organization or a third party and hosted either internally or externally. Like public clouds, private clouds can allocate storage, computing power, or other resources seamlessly to provide computing resources on an as-needed basis. Companies that have stringent regulatory compliance or specialized licensing requirements that necessitate high security, such as financial services or healthcare companies, or that want flexible information technology resources and a cloud service model while retaining control over their own IT infra- structure, are gravitating toward these private clouds.
Large firms are most likely to adopt a hybrid cloud computing model, in which they use their own infrastructure for their most essential core activities and adopt public cloud computing for less-critical systems or for additional processing capacity during peak business periods. Table 3.5 compares the three cloud computing models.
private cloud provides similar options as public cloud but only to a single tenant
hybrid cloud offers customers both a public cloud and a private cloud
TABLE 3.5 CLOUD COMPUTING MODELS COMPARED
T Y P E O F C L O U D D E S C R I P T I O N M A N A G E D B Y U S E S
Public cloud Third-party service offering computing, storage, and software services to multiple customers
Third-party service providers (CSPs)
Companies without major privacy concerns Companies seeking pay-as-you-go IT services Companies lacking IT resources and expertise
Private cloud Cloud infrastructure operated solely for a single organization and hosted either internally or externally
In-house IT or private third-party host
Companies with stringent privacy and security requirements Companies that must have control over data sovereignty
Hybrid cloud Combination of private and public cloud services that remain separate entities
In-house IT, private host, third-party providers
Companies requiring some in-house control of IT that are also willing to assign part of their IT infrastructures to a public cloud partition on their IT infrastructures
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Cloud computing will gradually shift firms from having a fixed infrastructure capacity toward a more flexible infrastructure, some of it owned by the firm, and some of it rented from giant data centers owned by CSPs.
Cloud computing has some drawbacks. Unless users make provisions for storing their data locally, the responsibility for data storage and control is in the hands of the provider. Some companies worry about the security risks related to entrusting their critical data and systems to an outside vendor that also works with other companies. Companies expect their systems to be available 24/7 and do not want to suffer any loss of business capability if cloud infrastructures malfunction. Nevertheless, the trend is for companies to shift more of their computer processing and storage to some form of cloud infrastructure.
Cloud computing has many significant implications for e-commerce. For e-com- merce firms, cloud computing radically reduces the cost of building and operating websites because the necessary hardware infrastructure and software can be licensed as a service from CSPs at a fraction of the cost of purchasing these services as products. This means firms can adopt “pay-as-you-go” and “pay-as-you-grow” strategies when building out their websites. For instance, according to Amazon, hundreds of thousands of customers use Amazon Web Services. For individuals, cloud computing means you no longer need a powerful laptop or desktop computer to engage in e-commerce or other activities. Instead, you can use much less-expensive tablet computers or smart- phones that cost a few hundred dollars. For corporations, cloud computing means that a significant part of hardware and software costs (infrastructure costs) can be reduced because firms can obtain these services online for a fraction of the cost of owning, and they do not have to hire an IT staff to support the infrastructure.
OTHER INTERNET PROTOCOLS AND UTILITY PROGRAMS
There are many other Internet protocols and utility programs that provide services to users in the form of Internet applications that run on Internet clients and servers. These Internet services are based on universally accepted protocols—or standards— that are available to everyone who uses the Internet. They are not owned by any organization, but they are services that have been developed over many years and made available to all Internet users.
HyperText Transfer Protocol (HTTP) is the Internet protocol used to transfer web pages (described in the following section). HTTP was developed by the World Wide Web Consortium (W3C) and the Internet Engineering Task Force (IETF). HTTP runs in the Application Layer of the TCP/IP model shown in Figure 3.4 on page 119. An HTTP session begins when a client’s browser requests a resource, such as a web page, from a remote Internet server. When the server responds by sending the page requested, the HTTP session for that object ends. Because web pages may have many objects on them—graphics, sound or video files, frames, and so forth—each object must be requested by a separate HTTP message. For more information about HTTP, you can consult RFC 2616, which details the standards for HTTP/1.1, the version of HTTP most commonly used today (Internet Society, 1999). (An RFC is a document
HyperText Transfer Protocol (HTTP) the Internet protocol used for transferring web pages
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published by the Internet Society [ISOC] or one of the other organizations involved in Internet governance that sets forth the standards for various Internet-related technolo- gies. You will learn more about the organizations involved in setting standards for the Internet later in the chapter.) An updated version of HTTP, known as HTTP/2, was published as RFC 7540 in May 2015 (IETF, 2015). HTTP/2 addresses a number of HTTP 1.1 shortcomings and is designed to enhance performance by eliminating the need to open multiple TCP connections between a client and server (known as multiplexing), allowing servers to push resources to a client without the client having to request them (known as server push), and reducing the HTTP header size (header compression). HTTP/2 will also have security benefits, with improved performance for encrypted data running over HTTP/2. HTTP/2 is supported by almost all the leading web brows- ers, but as of August 2016, it has only been adopted by around 10% of the top 10 million websites, in part due to the challenges involved for organizations in transitioning their applications from HTTP to HTTP/2 (Akamai, 2016; W3techs.com, 2016).
E-mail is one of the oldest, most important, and frequently used Internet services. Like HTTP, the various Internet protocols used to handle e-mail all run in the Applica- tion Layer of TCP/IP. Simple Mail Transfer Protocol (SMTP) is the Internet protocol used to send e-mail to a server. SMTP is a relatively simple, text-based protocol that was developed in the early 1980s. SMTP handles only the sending of e-mail. To retrieve e-mail from a server, the client computer uses either Post Office Protocol 3 (POP3) or Internet Message Access Protocol (IMAP). You can set POP3 to retrieve e-mail messages from the server and then delete the messages on the server, or retain them on the server. IMAP is a more current e-mail protocol. IMAP allows users to search, organize, and filter their mail prior to downloading it from the server.
File Transfer Protocol (FTP) is one of the original Internet services. FTP runs in TCP/IP’s Application Layer and permits users to transfer files from a server to their client computer, and vice versa. The files can be documents, programs, or large data- base files. FTP is the fastest and most convenient way to transfer files larger than 1 megabyte, which some e-mail servers will not accept. More information about FTP is available in RFC 959 (Internet Society, 1985).
Telnet is a network protocol that also runs in TCP/IP’s Application Layer and is used to allow remote login on another computer. The term Telnet also refers to the Telnet program, which provides the client part of the protocol and enables the client to emulate a mainframe computer terminal. (The industry-standard terminals defined in the days of mainframe computing are VT-52, VT-100, and IBM 3250.) You can then attach yourself to a computer on the Internet that supports Telnet and run programs or download files from that computer. Telnet was the first “remote work” program that permitted users to work on a computer from a remote location.
Secure Sockets Layer (SSL)/Transport Layer Security (TLS) are protocols that operate between the Transport and Application Layers of TCP/IP and secure communications between the client and the server. SSL/TLS helps secure e-commerce communications and payments through a variety of techniques, such as message encryption and digital signatures, that we will discuss further in Chapter 5.
Simple Mail Transfer Protocol (SMTP) the Internet protocol used to send mail to a server
Post Office Protocol 3 (POP3) a protocol used by the client to retrieve mail from an Internet server
Internet Message Access Protocol (IMAP) a more current e-mail protocol that allows users to search, organize, and filter their mail prior to downloading it from the server
File Transfer Protocol (FTP) one of the original Internet services. Part of the TCP/IP protocol that permits users to transfer files from the server to their client computer, and vice versa
Telnet a terminal emulation program that runs in TCP/IP
Secure Sockets Layer (SSL) /Transport Layer Security (TLS) protocols that secure communications between the client and the server
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Packet InterNet Groper (Ping) is a utility program that allows you to check the connection between a client computer and a TCP/IP network (see Figure 3.9). Ping will also tell you the time it takes for the server to respond, giving you some idea about the speed of the server and the Internet at that moment. You can run Ping from the command prompt on a personal computer with a Windows operating system by typing: ping <domain name>. Ping can also be used to slow down or even crash a domain server by sending it millions of ping requests.
Tracert is one of several route-tracing utilities that allow you to follow the path of a message you send from your client to a remote computer on the Internet. Figure 3.10 shows the result of a message sent to a remote host using a visual route- tracing program called VisualRoute (available from Visualware).
3.2 THE INTERNET TODAY
In 2016, there are an estimated 3.3 billion Internet users worldwide, up from 100 million users at year-end 1997. While this is a huge number, it still represents less than half (about 45%) of the world’s population (eMarketer, Inc., 2016a). Although Internet user growth has slowed in the United States and Western Europe to about 1%–2% annually, worldwide, the growth rate is about 7%, with the highest growth areas being the Middle East/Africa and Asia-Pacific (both still growing at over 8%). By 2020, it is expected that there will be over 3.9 billion Internet users worldwide. One would think the Internet would be overloaded with such incredible growth; however, this has not been true for several reasons. First, client/server computing is highly extensible. By simply adding servers and clients, the population of Internet users can grow indefi- nitely. Second, the Internet architecture is built in layers so that each layer can change without disturbing developments in other layers. For instance, the technology used to move messages through the Internet can go through radical changes to make service faster without being disruptive to your desktop applications running on the Internet.
Ping a program that allows you to check the connection between your client and the server
Tracert one of several route-tracing utilities that allow you to follow the path of a message you send from your client to a remote computer on the Internet
FIGURE 3.9 THE RESULT OF A PING
A ping is used to verify an address and test the speed of the round trip from a client computer to a host and back. SOURCE: Command Prompt, Microsoft Windows, Microsoft Corporation.
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FIGURE 3.10 TRACING THE ROUTE A MESSAGE TAKES ON THE INTERNET
VisualRoute and other tracing programs provide some insight into how the Internet uses packet switching. This particular message traveled to a Google server in Mountain View, California. SOURCE: © Visualware, Inc., 2014.
Figure 3.11 illustrates the “hourglass” and layered architecture of the Internet. The Internet can be viewed conceptually as having four layers: Network Technology Substrates, Transport Services and Representation Standards, Middleware Services, and Applications.4 The Network Technology Substrate layer is composed of telecom- munications networks and protocols. The Transport Services and Representation Standards layer houses the TCP/IP protocol. The Applications layer contains client applications such as the Web, e-mail, and audio or video playback. The Middleware Services layer is the glue that ties the applications to the communications networks and includes such services as security, authentication, addresses, and storage reposi- tories. Users work with applications (such as e-mail) and rarely become aware of middleware that operates in the background. Because all layers use TCP/IP and other common standards linking all four layers, it is possible for there to be significant
4 Recall that the TCP/IP communications protocol also has layers, not to be confused with the Internet architecture layers.
Network Technology Substrate layer layer of Internet technology that is composed of telecommunications networks and protocols
Transport Services and Representation Standards layer layer of Internet architecture that houses the TCP/IP protocol
Applications layer layer of Internet architecture that contains client applications
Middleware Services layer the “glue” that ties the applications to the communications networks and includes such services as security, authentication, addresses, and storage repositories
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changes in the Network Technology Substrate layer without forcing changes in the Applications layer.
THE INTERNET BACKBONE
Figure 3.12 illustrates some of the main physical elements of today’s physical Inter- net. Originally, the Internet had a single backbone, but today’s Internet is woven together from numerous privately owned networks comprised of high-bandwidth fiber-optic cable that are physically connected with each other and that transfer infor- mation from one private network to another. These long-haul fiber-optic networks are owned by firms sometimes referred to as Tier 1 Internet Service Providers (Tier 1 ISPs) (also sometimes called transit ISPs) (see Table 3.6). Tier 1 ISPs have “peering”
Tier 1 Internet Service Providers (Tier 1 ISPs) own and control the major long-haul fiber-optic cable networks comprising the Internet’s backbone
FIGURE 3.11 THE HOURGLASS MODEL OF THE INTERNET
The Internet can be characterized as an hourglass modular structure with a lower layer containing the bit-carrying infrastructure (including cables and switches) and an upper layer containing user applications such as e-mail and the Web. In the narrow waist are transportation protocols such as TCP/IP.
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arrangements with other Tier 1 ISPs to allow Internet traffic to flow through each other’s cables and equipment without charge. Tier 1 ISPs deal only with other Tier 1 or Tier 2 ISPs (described in the next section) and not with end consumers.
For the sake of simplicity, we will refer to these networks of backbones as a single “backbone.” The backbone has been likened to a giant pipeline that transports data around the world in milliseconds. In the United States, the backbone is composed entirely of fiber-optic cable with bandwidths ranging from 155 Mbps to 2.5 Gbps. Bandwidth measures how much data can be transferred over a communications medium within a fixed period of time and is usually expressed in bits per second (Bps), kilobits (thousands of bits) per second (Kbps), megabits (millions of bits) per second (Mbps), or gigabits (billions of bits) per second (Gbps).
FIGURE 3.12 INTERNET NETWORK ARCHITECTURE
Today’s Internet has a multi-tiered open network architecture featuring multiple backbones, regional hubs, campus/corporate area networks, and local client computers.
backbone high-bandwidth fiber-optic cable that transports data across the Internet
bandwidth measures how much data can be transferred over a communications medium within a fixed period of time; is usually expressed in bits per second (bps), kilobits per second (Kbps), megabits per second (Mbps), or gigabits per second (Gbps)
AT&T Sprint
CenturyLink Verizon
Cogent Communications Zayo Group
Level 3 Communications
TABLE 3.6 MAJOR U.S. TIER 1 (TRANSIT) INTERNET SERVICE PROVIDERS
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Connections to other continents are made via a combination of undersea fiber- optic cable and satellite links. Increasingly, rather than leasing bandwidth from Tier 1 ISPs, Internet giants such as Google, Microsoft, and Facebook are laying down their own fiber-optic networks. For instance, Google has one cable stretching from the Cali- fornia to Japan and another connecting the United States to Brazil, while Facebook and Microsoft have allied to lay a cable across the Atlantic, connecting Virginia to Spain. The backbone in foreign countries typically is operated by a mixture of private and public owners. The backbone has built-in redundancy so that if one part breaks down, data can be rerouted to another part of the backbone. Redundancy refers to multiple duplicate devices and paths in a network. A recent study of the Internet’s physical structure in the United States has created one of the first maps of the Inter- net’s long-haul fiber network as it currently exists. The map reveals that, not surpris- ingly, there are dense networks of fiber in the Northeast and coastal areas of the United States, while there is a pronounced absence of infrastructure in the Upper Plains and Four Corners regions. The U.S. Department of Homeland Security has made the map, as well as the data that underlies it, available to government, private, and public researchers, believing that doing so could make the Internet more resilient by improving knowledge (Simonite, 2015; Durairajan et al., 2015).
INTERNET EXCHANGE POINTS
In the United States, there are a number of regional hubs where Tier 1 ISPs physically connect with one another and/or with regional (Tier 2) ISPs. Tier 2 ISPs exchange Internet traffic both through peering arrangements as well as by purchasing Internet transit, and they connect Tier 1 ISPs with Tier 3 ISPs, which provide Internet access to consumers and business. Tier 3 ISPs are described further in the next section. These hubs were originally called Network Access Points (NAPs) or Metropolitan Area Exchanges (MAEs), but now are more commonly referred to as Internet Exchange Points (IXPs) (see Figure 3.13).
TIER 3 INTERNET SERVICE PROVIDERS
The firms that provide the lowest level of service in the multi-tiered Internet archi- tecture by leasing Internet access to home owners, small businesses, and some large institutions are sometimes called Tier 3 Internet Service Providers (ISPs). Tier 3 ISPs are retail providers. They deal with “the last mile of service” to the curb—homes and business offices. Tier 3 ISPs typically connect to IXPs with high-speed telephone or cable lines (45 Mbps and higher).
Three companies, Comcast, Verizon, and Time Warner Cable, together control almost half of the “last mile” wired infrastructure in the United States. Other major Tier 3 ISPs include AT&T, Charter (which is poised to move up the ladder with a proposed purchase, currently awaiting federal approval, of Time Warner Cable and Bright House Networks), Altice (Optimum Online), Cox, Sprint, and CenturyLink. There are also thousands of much smaller, local access ISPs. If you have home or small business Internet access, a Tier 3 ISP likely provides the service to you. (It’s important to note that many Tier 3 ISPs are also Tier I ISPs; the two roles are not mutually exclusive.)
redundancy multiple duplicate devices and paths in a network
Internet Exchange Point (IXP) hub where the backbone intersects with local and regional networks and where backbone owners connect with one another
Tier 3 Internet Service Provider (Tier 3 ISP) firm that provides the lowest level of service in the multi-tiered Internet architecture by leasing Internet access to home owners, small businesses, and some large institutions
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FIGURE 3.13 SOME MAJOR U.S. INTERNET EXCHANGE POINTS (IXPs)
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Satellite firms also offer Internet access, especially in remote areas where broadband service is not available.
Table 3.7 summarizes the variety of services, speeds, and costs of Internet access available to consumers and businesses. There are two types of service: narrowband and broadband. Narrow band service is the traditional telephone modem connection now operating at 56.6 Kbps (although the actual throughput hovers around 30 Kbps due to line noise that causes extensive resending of packets). This used to be the most common form of connection worldwide but it has been largely replaced by broadband connections in the United States, Europe, and Asia. Broadband service is based on DSL (including high speed fiber-optic service), cable, telephone (T1 and T3 lines), and satellite technologies. Broadband, in the context of Internet service, refers to any communication technology that permits clients to play streaming audio and video files at acceptable speeds. In January 2015, the U.S. Federal Communications Com- mission updated its broadband benchmark speeds to 25 Mbps for downloads and 3 Mbps for uploads. According to Akamai, the global average connection speed in 2016 was 6.3 Mbps, and the global average peak connection speed was 34.7 Mbps. The United States ranks 16th with an 15.3 Mbps average connection speed (South Korea leads, at 29.9 Mbps) and 22nd with a 67.8 Mbps average peak connection speed (Sin- gapore leads, at 146.9 Mbps) (Akamai, 2016c). The FCC found that 17% of all Ameri- cans lack access to 25 Mbps/3 Mbps service, and that rural America is particularly underserved, with more than half lacking such access (Federal Communication Com- mission, 2015). In the United States, broadband users surpassed dial-up users in 2004, and in 2016, there are an estimated 92 million broadband households (over 75% of all households) (eMarketer, Inc., 2016e).
The actual throughput of data will depend on a variety of factors including noise in the line and the number of subscribers requesting service. Service-level speeds quoted are typically only for downloads of Internet content; upload speeds tend to be slower, although a number of broadband ISPs have plans that offer the same upload as download speed. T1 and T3 lines are publicly regulated utility lines that offer a
narrowband the traditional telephone modem connection, now operating at 56.6 Kbps
broadband refers to any communication technology that permits clients to play streaming audio and video files at acceptable speeds
S E R V I C E C O S T / M O N T H D O W N L O A D S P E E D
Telephone modem $10–$25 30–56 Kbps
DSL $20–$30 1–15 Mbps
FiOS $50–$300 25 Mbps–500 Mbps
Cable Internet $35–$199 1 Mbps–500 Mbps
Satellite $39–$129 5–15 Mbps
T1 $200–$300 1.54 Mbps
T3 $2,500–$10,000 45 Mbps
TABLE 3.7 INTERNET ACCESS SERVICE LEVELS AND BANDWIDTH CHOICES
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guaranteed level of service, but the actual throughput of the other forms of Internet service is not guaranteed.
Digital Subscriber Line (DSL) service is a telephone technology that provides high-speed access to the Internet through ordinary telephone lines found in a home or business. Service levels typically range from about .5 to 15 Mbps. DSL service requires that customers live within two miles (about 4,000 meters) of a neighborhood telephone switching center. In order to compete with cable companies, telephone companies now also offer an advanced form of DSL called FiOS (fiber-optic service) that provides up to 500 Mbps to homes and businesses.
Cable Internet refers to a cable television technology that piggybacks digital access to the Internet using the same analog or digital video cable providing television signals to a home. Cable Internet is a major broadband alternative to DSL service, generally providing faster speeds and a “triple play” subscription: telephone, television, and Internet for a single monthly payment. However, the available bandwidth of cable Internet is shared with others in the neighborhood using the same cable. When many people are attempting to access the Internet over the cable at the same time, speeds may slow and performance will suffer. Cable Internet services typically range from 1 Mbps up to 500 Mbps. Comcast, Time Warner Cable, Charter, Cox, and Altice (Optimum Online) are some of the major cable Internet providers.
T1 and T3 are international telephone standards for digital communication. T1 lines offer guaranteed delivery at 1.54 Mbps, while T3 lines offer 45 Mbps. T1 lines cost about $200–$300 per month, and T3 lines around $2500–$6000 per month. These are leased, dedicated, guaranteed lines suitable for corporations, government agencies, and businesses such as ISPs requiring high-speed guaranteed service levels.
Satellite Internet is offered by satellite companies that provide high-speed broad- band Internet access primarily to homes and offices located in rural areas where DSL or cable Internet access is not available. Access speeds and monthly costs are compa- rable to DSL and cable, but typically require a higher initial payment for installation of a small (18-inch) satellite dish. Upload speeds tend to be slower, typically 1–5 Mbps. Satellite providers typically have policies that limit the total megabytes of data that a single account can download within a set period, usually monthly. The major satellite providers are Dish, HughesNet, and Exede. In August 2016, Facebook announced plans to launch a satellite aimed at bringing Internet connectivity to parts of sub-Saharan Africa, but those plans were put on hold when the SpaceX rocket that was to launch the satellite exploded while being tested during pre-launch activities.
Nearly all business firms and government agencies have broadband connections to the Internet. Demand for broadband service has grown so rapidly because it greatly speeds up the process of downloading web pages and large video and audio files (see Table 3.8). As the quality of Internet service offerings continues to expand, the demand for broadband access will continue to swell.
CAMPUS/CORPORATE AREA NETWORKS
Campus/corporate area networks (CANs) are generally local area networks operat- ing within a single organization—such as New York University or Microsoft Corpora- tion. In fact, most large organizations have hundreds of such local area networks.
Digital Subscriber Line (DSL) delivers high-speed access through ordinary telephone lines found in homes or businesses
FiOS (fiber-optic service) a form of DSL that provides speeds of up to 500 Mbps
cable Internet piggybacks digital access to the Internet on top of the analog video cable providing television signals to a home
T1 an international telephone standard for digital communication that offers guaranteed delivery at 1.54 Mbps
T3 an international telephone standard for digital communication that offers guaranteed delivery at 45 Mbps
satellite Internet high-speed broadband Internet access provided via satellite
campus/corporate area network (CAN) generally, a local area network operating within a single organization that leases access to the Web directly from regional and national carriers
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These organizations are sufficiently large that they lease access to the Web directly from regional and national carriers. These local area networks generally are running Ethernet (a local area network protocol) and have network operating systems such as Windows Server or Linux that permit desktop clients to connect to the Internet through a local Internet server attached to their campus networks. Connection speeds in campus area networks are in the range of 10–100 Mbps to the desktop.
INTRANETS
The very same Internet technologies that make it possible to operate a worldwide public network can also be used by private and government organizations as internal networks. An intranet is a TCP/IP network located within a single organization for purposes of communications and information processing. Internet technologies are generally far less expensive than proprietary networks, and there is a global source of new applications that can run on intranets. In fact, all the applications available on the public Internet can be used in private intranets. The largest provider of local area network software is Microsoft, followed by open source Linux, both of which use TCP/ IP networking protocols.
WHO GOVERNS THE INTERNET?
Aficionados and journalists often claim that the Internet is governed by no one, and indeed cannot be governed, and that it is inherently above and beyond the law. What these people forget is that the Internet runs over private and public telecommunica- tions facilities that are themselves governed by laws, and subject to the same pressures as all telecommunications carriers. In fact, the Internet is tied into a complex web of governing bodies, national governments, and international professional societies. There is no one single governing organization that controls activity on the Internet.
intranet a TCP/IP network located within a single organization for purposes of communications and information processing
TABLE 3.8 TIME TO DOWNLOAD A 10-MEGABYTE FILE BY TYPE OF INTERNET SERVICE
T Y P E O F I N T E R N E T S E R V I C E T I M E T O D O W N L O A D
N A R R O W B A N D S E R V I C E S
Telephone modem 25 minutes
B R O A D B A N D S E R V I C E S
DSL @ 1 Mbps 1.33 minutes
Cable Internet @ 10 Mbps 8 seconds
T1 52 seconds
T3 2 seconds
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Instead, there are a number of organizations that influence the system and monitor its operations. Among the governing bodies of the Internet are:
• The Internet Corporation for Assigned Names and Numbers (ICANN), which coordi- nates the Internet’s systems of unique identifiers: IP addresses, protocol parameter registries, and the top-level domain systems. ICANN was created in 1998 as a non- profit organization and manages the Internet Assigned Numbers Authority (IANA), which is in charge of assigning IP addresses.
• The Internet Engineering Task Force (IETF), which is an open international commu- nity of network operators, vendors, and researchers concerned with the evolution of the Internet architecture and operation of the Internet. The IETF has a number of working groups, organized into several different areas, that develop and promote Internet standards, which influence the way people use and manage the Internet.
• The Internet Research Task Force (IRTF), which focuses on the evolution of the Inter- net. The IRTF has a number of long-term research groups working on various topics such as Internet protocols, applications, applications, and technology.
• The Internet Engineering Steering Group (IESG), which is responsible for technical management of IETF activities and the Internet standards process.
• The Internet Architecture Board (IAB), which helps define the overall architecture of the Internet and oversees the IETF and IRTF.
• The Internet Society (ISOC), which is a consortium of corporations, government agencies, and nonprofit organizations that monitors Internet policies and practices.
• The Internet Governance Forum (IGF), which is a multi-stakeholder open forum for debate on issues related to Internet governance.
• The World Wide Web Consortium (W3C), which is a largely academic group that sets HTML and other programming standards for the Web.
• The Internet Network Operators Groups (NOGs), which are informal groups that are made up of ISPs, IXPs, and others that discuss and attempt to influence matters related to Internet operations and regulation.
While none of these organizations has actual control over the Internet and how it functions, they can and do influence government agencies, major network owners, ISPs, corporations, and software developers with the goal of keeping the Internet operating as efficiently as possible. ICANN comes closest to being a manager of the Internet and reflects the powerful role that the U.S. Department of Commerce has played historically in Internet governance. The United States has been responsible for the IANA function since the beginning of the Internet. After the creation of ICANN, however, the expectation was the function would eventually be transferred out of the U.S. government’s control. In 2006, however, the U.S. Department of Commerce announced that the U.S. government would retain oversight over the root servers, contrary to initial expectations. There were several reasons for this move, including the use of the Internet for basic communications services by terrorist groups and the uncertainty that might be caused should an international body take over. In 2008, the Department of Commerce reaffirmed this stance, stating that it did not have
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any plans to transition management of the authoritative root zone file to ICANN (U.S. Department of Commerce, 2008). At the same time, growing Internet powers China and Russia were lobbying for more functions of the Internet to be brought under the control of the United Nations, raising fears that governance of the Internet could become even more politicized (Pfanner, 2012). In 2014, the United States, under continued pressure from other countries, finally announced its willingness to transi- tion control of IANA, provided that certain stipulations are met, including that the organization managing the IANA functions not be specifically controlled by any other government or inter-governmental organization (such as the United Nations). The transition took place on October 1, 2016.
In addition to these professional bodies, the Internet must also conform to the laws of the sovereign nation-states in which it operates, as well as the technical infrastruc- tures that exist within each nation-state. Although in the early years of the Internet there was very little legislative or executive interference, this situation is changing as the Internet plays a growing role in the distribution of information and knowledge, including content that some find objectionable.
Read Insight on Society: Government Regulation and Surveillance of the Internet for a further look at the issue of censorship of Internet content and substance.
3.3 THE FUTURE INTERNET INFRASTRUCTURE
The Internet is changing as new technologies appear and new applications are developed. The next era of the Internet is being built today by private corporations, universities, and government agencies. To appreciate the potential benefits of the Internet of the future, you must first understand the limitations of the Internet’s current infrastructure.
LIMITATIONS OF THE CURRENT INTERNET
Much of the Internet’s current infrastructure is several decades old (equivalent to a century in Internet time). It suffers from a number of limitations, including:
• Bandwidth limitations. There is insufficient capacity throughout the backbone, the metropolitan switching centers, and most importantly, the “last mile” to the house and small businesses. The result is slow peak-hour service (congestion) and a limited ability to handle high volumes of video and voice traffic.
• Quality of service limitations. Today’s information packets take a circuitous route to get to their final destinations. This creates the phenomenon of latency—delays in messages caused by the uneven flow of information packets through the network. In the case of e-mail, latency is not noticeable. However, with streaming video and synchronous communication, such as a telephone call, latency is noticeable to the user and perceived as “jerkiness” in movies or delays in voice communication. Today’s Internet uses “best-effort” quality of service (QoS), which makes no guar- antees about when or whether data will be delivered, and provides each packet with the same level of service, no matter who the user is or what type of data is
latency delays in messages caused by the uneven flow of information packets through the network
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(continued)
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INSIGHT ON SOCIETY
GOVERNMENT REGULATION AND SURVEILLANCE OF THE INTERNET
Hardly a week goes by without reports that a massive protest has
occurred in the streets of a big city somewhere in the world. Invariably, the
Internet, social media, and mobile phones are either blamed or praised for enabling these popular expressions of discontent with politi- cal regimes, corrupt officials, unemployment, or wealth inequality. Such events encourage us to think of the Internet and the Web as an extraor- dinary technology unleashing torrents of human creativity, innovation, expression, popular rebel- lion, and sometimes, even democracy.
How ironic then that the same Internet has also spawned an explosion in government control and surveillance of individuals on the Internet. Totalitarian dictators of the mid-twentieth century would have given their eyeteeth for a technology such as this, that can track what mil- lions of people do, say, think, and search for in billions of e-mails, searches, blogs, and Facebook posts every day.
In the early years of the Internet and the Web, many people assumed that because the Internet is so widely dispersed, it must be difficult to control or monitor. But the reality is quite different. We now know that just about all governments assert some kind of control and surveillance over Inter- net content and messages, and in many nations this control over the Internet and the people who use it is very extensive.
While the Internet is a decentralized network, Internet traffic in all countries runs through large fiber-optic trunk lines that are controlled by national authorities or private firms. In China, there are three such lines, and China requires the companies that own these lines to configure their routers for both internal and external service
requests. When a request originates in China for a web page in Chicago, Chinese routers examine the request to see if the site is on a blacklist, and then examine words in the requested web page to see if it contains blacklisted terms. The system is often referred to as “The Great Firewall of China” (but formally by China as the “Golden Shield”) and was implemented with the assistance of Cisco Systems (the U.S. firm that is the largest manufacturer of routers in the world), Juniper Networks, and California-based Blue Coat (now owned by Symantec), which provides deep packet inspection software. A number of other U.S. Internet firms have also been involved in China’s censorship and surveillance efforts.
Over the past several years, China has strengthened and extended its regulation of the Internet in the name of social stability. Recently passed legislation allows web users to be jailed for up to three years if they post defamatory rumors that are read by more than 5,000 people. China has also issued rules to restrict the dissemination of political news and opinions on instant messag- ing applications such as WeChat, a text messag- ing app similar to Twitter and WhatsApp. Users are required to post political opinions and news only to state-authorized media outlets and are required to use their own names when establishing accounts. In 2016, China issued new rules barring foreign companies or their affiliates from publish- ing online content without government approval. It also began to subject online programs to the same censorship regulations as regular TV shows. In July 2016, it said it would punish websites that publish unverified social media content as news, and ordered several of the most popular Chinese portals, such as Sinu, Sohu, and NetEase, to cease original news reporting.
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While China is often criticized for its extensive Internet controls, other countries
are not far behind. Iran’s Internet surveillance of its citizens is considered by security experts to be one of the world’s most sophisticated mecha- nisms for controlling and censoring the Internet, allowing it to examine the content of individual online communications on a massive scale. The Iranian system goes beyond merely preventing access to specific sites such as Google, Twitter, and Facebook and reportedly also utilizes deep packet inspection. Deep packet inspection allows governments to read messages, alter their contents for disinformation purposes, and identify senders and recipients. It is accomplished by installing computers in the line between users and ISPs, opening up every digitized packet, inspecting for keywords and images, reconstructing the message, and sending it on. This is done for all Internet traffic including Skype, Facebook, e-mail, tweets, and messages sent to proxy servers. In 2016, Iran announced that it had completed the first stage of establishing an isolated, domestic version of the Internet, purportedly one that will be faster and less costly, but which subjects its users to even more heightened surveillance.
In Russia, a 2014 law allows the govern- ment to close websites without a court decision if the General Prosecutor’s office declares the material on a site to be “extremist.” Russia also regulates the blogosphere, requiring bloggers with more than 3,000 daily readers to register their real names and contact information with Russia’s communications regulator. In 2015, Russia passed laws requiring domestic Internet companies to store their data on Russian soil, allowing the government to control it and limit access, and in July 2016, passed additional laws that provide for mandatory data retention by ISPs and telecom- munications providers for between 6 months and three years, require those companies to provide access to all such data without a warrant, and also require a government backdoor that will enable it to access all encrypted communications.
Turkey is another country that has increas- ingly attempted to control and censor Internet content. These efforts have increased after the terrorist attack on Istanbul’s Ataturk Airport and the failed coup against President Recep Tayyip Erdogan.
But it is not just totalitarian nations that have sought to regulate and surveil the Inter- net. Both Europe and the United States have, at various times, also taken steps to control access to certain websites, censor web content, and engage in extensive surveillance of communications. For instance, Great Britain has a list of blocked sites, as do Germany, France, and Australia. The United States and European countries generally ban the sale, distribution, and/or possession of online child pornography. France, Germany, and Austria all bar the online sale of Nazi memorabilia. Even in South Korea, one of the world’s most wired countries, there are restrictions on content that is deemed subversive and harmful to the public order.
In response to terrorism threats and other crimes, European governments and the U.S. government also perform deep packet inspection on e-mail and text communications of terrorist suspects. This surveillance is not limited to cross- border international data flows and includes large-scale domestic surveillance and analysis of routine e-mail, tweets, and other messages. In 2013, National Security Agency (NSA) contrac- tor Edward Snowden made headlines by leaking classified NSA documents shedding light on the NSA’s PRISM program, which allowed the agency access to the servers of major Internet companies such as Facebook, Google, Apple, Microsoft, and many others. Additionally, the documents revealed the existence of the NSA’s XKeyscore program, which allows analysts to search databases of e-mails, chats, and browsing histories of individual citizens without any autho- rization. Warrants, court clearance, or other forms of legal documentation are not required for ana- lysts to use the technology. Snowden’s documents
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also showed spy agencies were tapping data from smartphone apps like Candy Crush, and most others, and that the NSA was tapping the flow of personal user information between Google and Yahoo. The NSA claimed that the program was only used to monitor foreign intelligence targets and that the information it collects has assisted in apprehending terrorists. The FBI also has an Internet surveillance unit, the National Domestic Communications Assistance Center. The NDCAC’s mission is to assist in the development of new sur- veillance technologies that will allow authorities to increase the interception of Internet, wireless, and VoIP communications.
In 2016, many European powers moved ahead with plans to fortify their online surveil- lance with new start-of-the-art networks. In England, potential new laws would force Internet service companies to maintain “Internet connec- tion records” that would be subject to review by law enforcement at any time. In response to multiple terror attacks on French soils in 2015, the French government passed very similar rules that force ISPs to maintain browsing data, as well as additional provisions for surveillance of phone calls, e-mails, and all mobile phone com- munications. And De-Cix, the world’s largest IXP, pushed back against the German govern- ment regarding requests to allow surveillance
of all communications passing through its Frankfurt hub. De-Cix sued the German intelligence service for what it views as illegal overreach, but the German government hopes to pass new laws that would legitimize the practice, just as England, France, and other nations have done.
However, in the United States, efforts are underway to curb domestic and international counter-terrorist agencies like the NSA from conducting dragnet surveillance of the entire American population, strengthen court oversight of surveillance, limit surveillance to specific indi- viduals, and ease disclosure rules for Internet firms who receive requests from government agen- cies. In 2015, Congress passed the USA Freedom Act, which limits the bulk collection of Americans’ phone records. However, equally concerted efforts are underway to expand these types of spying powers. For instance, the Obama administration has expanded the NSA’s ability to perform war- rantless wiretaps on suspected malicious hackers, allowing them to monitor international Internet traffic from these suspects as well as domestic traffic. Concerns about the use of the Internet and other methods of encrypted communications by the Islamic State to recruit new members and engage in terrorism have further heightened the tension.
SOURCES: “World’s Biggest Internet Hub Sues German Government Over Surveillance,” by David Meyer, Fortune, September 16, 2016; “Iran Launches New ‘National Internet’ That Censors Content, Encourages Regime Surveillance,” Thetower.org, August 30, 2016; “China Clamps Down on Online News Reporting,” by Michael Forsythe, New York Times, July 25, 2016; “Russia Asks for the Impossible with Its New Surveillance Laws,” by Eva Galperin and Danny O’Brien, Eff.org, July 19, 2016; “China Cracks Down on News Reports Spread via Social Media,” by Edward Wong and Vanessa Pia, July 5, 2016; “Britain to Pay Billions for Monster Internet Surveillance Network,” by Duncan Campbell, Computerweekly.com, March 21, 2016; “China Cracks Down on Online Televi- sion,” by Amy Qin, New York Times, March 3, 2016; “New Chinese Rules on Foreign Firms’ Online Content,” by David Barboza and Paul Mozer, New York Times, February 19, 2016; “ISIS Influence on Web Prompts Second Thoughts on First Amendment,” by Erik Eckholm, New York Times, December 7, 2015; “France Has a Powerful and Controversial New Surveillance Law,” by Arik Hesseldahl, Recode.net, November 14, 2015 “Freedom on the Net 2015,” Freedom- house.org, October 28, 2015; “Russian Data Law Fuels Web Surveillance Fears,” by Shaun Walker, The Guardian, September 1, 2015; “China Passes New National Security Law Extending Control Over Internet,” The Guardian, July 1, 2015; “Hunting for Hackers, N.S.A. Secretly Expands Internet Spying at U.S. Border,” by Charlie Savage et al., New York Times, June 4, 2015; “The State of Surveillance in Iran,” by Arta Shams, Ifex.org, May 22, 2015; “House Moves to Curb Government Surveillance of Phone, Internet Records,” by Cristina Maza, Csmonitor.com, May 1, 2015; “Turkey’s Parliament Issues Contested Security, Surveillance Laws,” Bloombergnews.com, March 27, 2015; “Russia Forces Its Popular Bloggers to Register—Or Else,” by Ilya Khrennikov, Bloomberg.com, August 19, 2014; “NSA Top Lawyer Says Tech Giants Knew About Data Collection,” Cnet.com, March 19, 2014; “Documents Say NSA Pretends to Be Face- book in Surveillance,” by Reed Albergotti, Wall Street Journal, March 12, 2014; “Amid Flow of Leaks, Turkey Moves to Crimp Internet,” by Tim Arango and Ceylan Yeginsu, New York Times, February 6, 2014; “Spy Agencies Tap Data Streaming From Phone Apps,” by James Glanz, Jeff Larson, and Andrew Lehren, New York Times, January 27, 2014; “NSA Surveillance Covers 75 Percent of U.S. Internet Traffic: WSJ,” by Reuters, News.Yahoo.com, August 20, 2013; “New Snowden Leak: NSA Program Taps All You Do Online,” by Amanda Wills, Mashable.com, August 1, 2013; “Snowden: NSA Collects ‘Everything,’ Including Content of Emails,” by Eyder Peralta, NPR.org, June 17, 2013; “FBI Quietly Forms Secret Net-Surveillance Unit,” by Declan McCullagh, News.cnet.com, May 22, 2012.
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contained in the packet. A higher level of service quality is required if the Internet is to keep expanding into new services, such as video on demand and telephony.
• Network architecture limitations. Today, a thousand requests for a single music track from a central server will result in a thousand efforts by the server to download the music to each requesting client. This slows down network performance, as the same music track is sent out a thousand times to clients that might be located in the same metropolitan area. This is very different from television, where the program is broadcast once to millions of homes.
• Wired Internet. The Internet is still largely based on cables—fiber-optic and coaxial copper cables. Copper cables use a centuries-old technology, and fiber-optic cable is expensive to place underground. The wired nature of the Internet restricts mobility of users although it is changing rapidly as Wi-Fi hotspots proliferate, and cellular phone technology advances. However, cellular systems are often overloaded due to the growth in the number of smartphones.
Now imagine an Internet at least 1,000 times as powerful as today’s Internet, one that is not subjected to the limitations of bandwidth, protocols, architecture, physical connections, and language detailed previously. Welcome to the world of the future Internet, and the next generation of e-commerce services and products!
THE INTERNET2® PROJECT
Internet2® is an advanced networking consortium of more than 450 member institu- tions including universities, corporations, government research agencies, and not-for- profit networking organizations, all working in partnership to facilitate the development, deployment, and use of revolutionary Internet technologies. The broader Internet2 community includes more than 90,000 institutions across the United States and international networking partners in more than 100 countries. Internet2’s work is a continuation of the kind of cooperation among government, private, and educa- tional organizations that created the original Internet.
The advanced networks created and in use by Internet2 members provide an environment in which new technologies can be tested and enhanced. For instance, Internet2 provides a next-generation, nationwide 100 gigabit-per-second network that not only makes available a reliable production services platform for current high- performance needs but also creates a powerful experimental platform for the develop- ment of new network capabilities. See Table 3.9 to get some sense of just how fast a 100-Gbps network is in terms of data transmission times. The fourth generation of this network, built through a federal stimulus grant from the National Telecommunications and Information Administration’s Broadband Technology Opportunities Program, has now been deployed. The hybrid optical and packet network provides 8.8 terabits of capacity with the ability to seamlessly scale as requirements grow, includes over 15,000 miles of owned fiber optic cable, and reaches into underserved areas of the country, supporting connectivity for approximately 200,000 U.S. community anchor institutions (schools, local libraries, and museums), and enabling them to provide citizens across the country with telemedicine, distance learning, and other advanced applications not possible with consumer-grade Internet services. The infrastructure supports a wide range of IP and optical services already available today and also will stimulate a new
Internet2®
advanced networking consortium of more than 450 member institutions working in partnership to facilitate the development, deployment, and use of revolutionary Internet technologies
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TABLE 3.10 PROJECTS BEING ENABLED BY INTERNET2’S 100-GBPS NETWORK
P R O J E C T D E S C R I P T I O N
XSEDE (Extreme Science and Engineering Discovery Environment)
XSEDE is a collection of integrated, advanced digital resources and services that enables scientists to interactively share computing resources, data, and expertise. XSEDE supports over 8,000 members of the scientific community, and 16 supercomputers. In 2013, XSEDE upgraded from a 10-Gbps network to Internet2’s 100-Gbps network. In 2016, the NSF awarded XSEDE $110 million in funding to enable it to continue to provide advanced cyberinfrastructure resources and services to the nation’s scientists and engineers.
CloudLab Cloud computing test beds based at the University of Utah, Clemson, and the University of Wisconsin-Madison, connected by Internet2’s 100-Gbps network. Focusing on the development of novel cloud architectures and new cloud computing applications. Enables researchers to build their own clouds and experiment with applications such as real-time disaster response and medical record security.
University of Florida Support for Compact Muon Solenoid (CMS) experiments at CERN’s Hadron collider (contributed to discovery of the Higgs boson particle, which earned 2013 Nobel Prize).
generation of innovative services. The goal is to create an intelligent global ecosystem that will enable researchers, scientists, and others to “turn on” high-capacity network connections whenever and wherever they are needed. Table 3.10 describes some of the projects that Internet2’s 100-Gbps network is enabling. Other initiatives involve science and engineering (advanced network applications in support of distributed lab environments, remote access to rare scientific instruments, and distributed large-scale computation and data access), health sciences and health networks (telemedicine, medical and biological research, and health education and awareness), and arts and humanities (collaborative live performances, master classes, remote auditions, and interactive performing arts education and media events).
THE FIRST MILE AND THE LAST MILE
The Internet2 project is just the tip of the iceberg when it comes to future enhance- ments to the Internet. In 2007, the NSF began work on the Global Environment for Network Innovations (GENI) initiative. GENI is a unique virtual laboratory for explor- ing future internets at scale. GENI aims to promote innovations in network science, security technologies, services, and applications. GENI is a partnership of leading
TABLE 3.9 HOW FAST IS A 100-GBPS NETWORK?
D A T A T I M E T O T R A N S M I T
8.5 million electronic records 1 minute
300,000 X-rays 1 minute
1.8 million e-books simultaneously downloaded 2 minute
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academic centers and private corporations such as Cisco, IBM, and HP, among many others. To date, awards have been made to 83 academic/industry teams for various projects to build, integrate, and operate early prototypes of the GENI virtual laboratory (Geni.net, 2014). Between 2015 and 2017, GENI will transition from being overseen by NSF’s GENI Project Office to a community governance model (Geni.net, 2016).
The most significant privately initiated (but often government-influenced) changes are coming in two areas: fiber-optic trunk line bandwidth and wireless Inter- net services. Fiber optics is concerned with the first mile or backbone Internet services that carry bulk traffic long distances. Wireless Internet is concerned with the last mile—from the larger Internet to the user’s smartphone, tablet computer, or laptop.
Fiber Optics and the Bandwidth Explosion in the First Mile
Fiber-optic cable consists of up to hundreds of strands of glass that use light to transmit data. It often replaces existing coaxial and twisted pair cabling because it can transmit much more data at faster speeds, with less interference and better data security. Fiber-optic cable is also thinner and lighter, taking up less space during installation. The hope is to use fiber optics to expand network bandwidth capacity in order to prepare for the expected increases in web traffic once next-generation Internet services are widely adopted.
Telecommunication firms have made substantial investments in global, national, and regional fiber optic cable systems in the last decade. For instance, Verizon has spent over $23 billion since 2004, building and expanding its FiOS fiber-optic Internet service that can provide speeds of up to 500 Mbps, and currently has about 6.6 million FiOS customers. In 2012, Google joined the fray with Google Fiber, a 1-Gbps fiber- optic network, that is currently available in 7 cities. This installed base of fiber-optic cable represents a vast digital highway that is currently being exploited by YouTube (Google), Facebook, and other high-bandwidth applications. But despite the interest in fiber, only about 12.3% of U.S. homes had fiber connections as of 2015, a much lower percentage than a number of other countries around the world (Buckley, 2015; Richter, 2016). Table 3.11 illustrates several optical bandwidth standards and compares them to traditional T lines.
The Last Mile: Mobile Internet Access
Fiber-optic networks carry the long-haul bulk traffic of the Internet and play an impor- tant role in bringing high-speed broadband to the household and small business. The goal of the Internet2 and GENI projects is to bring gigabit and ultimately terabit band- width to the household over the next 20 years. But along with fiber optics, arguably the most significant development for the Internet and Web has been the emergence of mobile Internet access.
Wireless Internet is concerned with the last mile of Internet access to the user’s home, office, car, smartphone, or tablet computer, anywhere they are located. Up until 2000, the last-mile access to the Internet—with the exception of a small satellite Internet connect population—was bound up in land lines of some sort: copper coaxial TV cables or telephone lines or, in some cases, fiber-optic lines to the office. Today,
fiber-optic cable consists of up to hundreds of strands of glass or plastic that use light to transmit data
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TABLE 3.11 HIGH-SPEED OPTICAL BANDWIDTH STANDARDS
S T A N D A R D S P E E D
T1 1.544 Mbps
T3 43.232 Mbps
OC-3 155 Mbps
OC-12 622 Mbps
OC-48 2.5 Gbps
OC-192 10 Gbps
OC-768 40 Gbps
Note: “OC” stands for Optical Carrier and is used to specify the speed of fiber-optic networks conforming to the SONET standard. SONET (Synchronous Optical Networks) includes a set of signal rate multiples for transmitting digital signals on optical fiber. The base rate (OC-1) is 51.84 Mbps.
in comparison, high-speed cell phone networks and Wi-Fi network hotspots provide a major alternative.
Today, sales of desktop computers have been eclipsed by sales of smartphones and tablet and ultramobile laptop computers with built-in wireless networking functional- ity. Clearly, a large part of the Internet is now mobile, access-anywhere broadband service for the delivery of video, music, and web search. According to eMarketer, there are over 210 million mobile Internet users in the United States in 2016 (about 65% of the population), and almost 2.5 billion worldwide (eMarketer, Inc., 2016f).
Telephone-based versus Computer Network-based Wireless Internet Access
There are two different basic types of wireless Internet connectivity: telephone-based and computer network-based systems.
Telephone-based wireless Internet access connects the user to a global telephone system (land, satellite, and microwave) that has a long history of dealing with mil- lions of users simultaneously and already has in place a large-scale transaction billing system and related infrastructure. Cellular telephones and the telephone industry are currently the largest providers of wireless access to the Internet today. Around 1.5 billion smartphones are expected to be sold worldwide in 2016 (Gartner, Inc., 2016b). Smartphones combine the functionality of a cell phone with that of a laptop computer with Wi-Fi capability. This makes it possible to combine in one device music, video, web access, and telephone service. Tablet computers can also access cellular networks. Table 3.12 summarizes the various telephone technologies currently being used and under development for wireless Internet access. 5G wireless is the next frontier. Although official standards are not expected to be fully rolled out for a few years, telecommunications companies will likely start to introduce technology branded as “5G” as soon as 2017.
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Wireless local area network (WLAN)-based Internet access derives from a completely different background from telephone-based wireless Internet access. Popularly known as Wi-Fi, WLANs are based on computer local area networks where the task is to connect client computers (generally stationary) to server computers within local areas of, say, a few hundred meters. Wi-Fi functions by sending radio signals that are broad- cast over the airwaves using certain radio frequency ranges (2.4 GHz to 5.875 GHz, depending on the type of standard involved). The major technologies here are the various versions of the Wi-Fi standard, WiMax, and Bluetooth (see Table 3.13).
In a Wi-Fi network, a wireless access point (also known as a “hot spot”) connects to the Internet directly via a broadband connection (cable, DSL telephone, or T1 line) and then transmits a radio signal to a transmitter/receiver installed in a tablet or laptop computer or smartphone. Figure 3.14 illustrates how a Wi-Fi network works.
Wi-Fi provided under the 802.11 a/b/g/n specifications offers high-bandwidth capacity from 11 Mbps up to a maximum of 7 Gbps—far greater than any 3G or 4G service currently in existence—but has a limited range of 300 meters, with the excep- tion of WiMax discussed below. Wi-Fi is also exceptionally inexpensive. The cost of creating a corporate Wi-Fi network in a single 14-story building with an access point for each floor is less than $100 an access point. It would cost well over $500,000 to
Wi-Fi Wireless standard for Ethernet networks with greater speed and range than Bluetooth
TABLE 3.12 WIRELESS INTERNET ACCESS TELEPHONE TECHNOLOGIES
T E C H N O L O G Y S P E E D D E S C R I P T I O N P L A Y E R S
3 G ( T H I R D G E N E R A T I O N )
CDMA2000 EV-DO HSPA (W-CDMA)
144 Kbps–2 Mbps High-speed, mobile, always on for e-mail, browsing, and instant messaging. Implementing technologies include versions of CDMA2000 EV-DO (used by CDMA providers) and HSPDA (used by GSM providers). Nearly as fast as Wi-Fi.
Verizon, Sprint, AT&T, T-Mobile, Vodafone
3 . 5 G ( 3 G + )
CDMA2000 EV-DO, Rev.B Up to 14.4 Mbps Enhanced version of CDMA 2000 EV-DO. Verizon, Sprint
HSPA+ Up to 11 Mbps Enhanced version of HSPA. AT&T, T-Mobile
4 G ( F O U R T H G E N E R A T I O N )
Long-Term Evolution (LTE) Up to 100 Mbps True broadband on cell phone; lower latency than previous generations.
AT&T, Verizon, Sprint, T-Mobile (in 2013)
5 G ( F I F T H G E N E R A T I O N )
Standards under development; expected by 2020
Up to 10 Gbps Goals include 1–10 Gbps connectivity; sub-1 millisecond latency enabling services such as autonomous driving, augmented reality, virtual reality, and immersive/tactile Internet.
Ericsson, SK Telecom, Huawei, Samsung, NTT DoCoMo, Verizon, national governments
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TABLE 3.13 WIRELESS NETWORK INTERNET ACCESS TECHNOLOGIES
T E C H N O L O G Y R A N G E / S P E E D D E S C R I P T I O N P L A Y E R S
Wi-Fi (IEEE 802.11 a/b/g/n)
300 feet/11–70 Mbps Evolving high-speed, fixed broadband wireless local area network for commercial and residential use
Linksys, Cisco, and other Wi-Fi router manufacturers; entrepreneurial network developers
802.11ac 500 Mbps–1 Gbps
802.11ad less than 10 meters/ up to 7 Gbps
WiMax (IEEE 802.16)
30 miles/50–70 Mbps High-speed, medium-range, broadband wireless metropolitan area network
Clearwire, Sprint, Fujitsu, Intel, Alcatel, Proxim
Bluetooth (wireless personal area network)
1–30 meters/1–3 Mbps
Modest-speed, low-power, short-range connection of digital devices
Sony Ericsson, Nokia, Apple, HP, and other device makers
FIGURE 3.14 WI-FI NETWORKS
In a Wi-Fi network, wireless access points connect to the Internet using a land-based broadband connection. Clients, which could be desktops, laptops, tablet computers, or smartphones, connect to the access point using radio signals.
wire the same building with Ethernet cable. IEEE 802.11ac is a version of the 802.11 specification adopted in December 2013 that provides for effective throughputs of 500 Mbps to over 1 Gbps. The newest standard, IEEE 802.11ad, provides for theoretical maximum throughput up to 7 Gbps. The first 802.11ad devices began shipping at the beginning of 2016. Next-generation Wi-Fi standards currently being worked on by
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the IEEE 802.11 Working Group include 802.11ay, which deals with 60 GHz wireless operations, and will provide for data rates of up to 20 Gbps, and 802.11ax, aimed at high-efficiency WLANs used for stadiums and other areas where many people want to access a Wi-Fi network at the same time. A next-generation 802.11ah standard aimed at the Internet of Things is also being developed (Weiss, 2015; Hsu, 2015).
While initially a grass roots, “hippies and hackers” public access technology, bil- lions of dollars have subsequently been poured into private ventures seeking to create for-profit Wi-Fi networks. One of the most prominent networks has been created by Boingo Wireless with more than 1 million hotspots around the globe. Optimum WiFi (available to Optimum Online customers for free) also offers over 1.5 million hotspots around the world. AT&T Wi-Fi Services (formerly Wayport) has another large network that provides Wi-Fi service at hotels, airports, McDonald’s, and IHOP restaurants, and Hertz airport rental offices, with thousands of hotspots throughout the United States. T-Mobile and Sprint also have nationwide Wi-Fi services at Starbucks coffee shops and thousands of other public locations. Apple, in turn, has made Wi-Fi automatically available to iPhone and iPad devices as an alternative to the more expensive and much slower 3G and 4G cellular systems. In 2015, for the first time, a majority (51%) of mobile Internet traffic originated from Wi-Fi rather than cellular systems, and it is expected that Wi-Fi will be carrying over half of all Internet traffic by 2019 (Cisco, 2016).
A second WLAN technology for connecting to the Internet, and for connecting Internet devices to one another, is called Bluetooth. Bluetooth is a personal connectiv- ity technology that enables links between mobile devices and connectivity to the Internet (Bluetooth.com, 2016). Bluetooth is the universal cable cutter, promising to get rid of the tangled mess of wires, cradles, and special attachments that plague the current world of personal computing. With Bluetooth, users can wear a wireless earbud, share files in a hallway or conference room, synchronize their smartphone with their laptop without a cable, send a document to a printer, and even pay a res- taurant bill from the table to a Bluetooth-equipped cash register. Bluetooth is also an unregulated media operating in the 2.4 GHz spectrum but with a very limited range of 30 feet or less. It uses a frequency hopping signal with up to 1,600 hops per second over 79 frequencies, giving it good protection from interference and interception. Bluetooth-equipped devices constantly scan their environments looking for connec- tions to compatible devices. Today, almost all mobile devices are Bluetooth-enabled. Bluetooth may also play a role in the future as a platform for the Internet of Things (see page 152).
INTERNET ACCESS DRONES
A new method of providing Internet access to areas that are not well served by wired or cellular networks is being explored by companies such as Google and Facebook. Both companies have recently purchased companies that make drones (unmanned aircraft/satellites) that may be used to provide Internet access to remote parts of the world.
In 2014, Google purchased Titan Aerospace, which makes solar-powered drones that can fly for several years at 65,000 feet. Google is reportedly experimenting with
Bluetooth technology standard for short-range wireless communication under 30 feet
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using drones to deliver 5G wireless Internet service. Google is also experimenting with high-altitude balloons with its Project Loon. Google envisions a network of balloons circling high above the earth in the stratosphere, establishing a ring of uninterrupted connectivity. In 2014, Google sent a prototype of a networked hot-air balloon around the world in 22 days, even taking photos for its Street View program, and in 2015, the government of Sri Lanka announced that Sri Lanka would be the first country to use Project Loon to provide universal Internet access across Sri Lanka. In August 2016, Google is reportedly taking steps to move Project Loon from a research project into a profitable business.
In a similar effort, Facebook has put together the Facebook Connectivity Lab, where engineers are focusing on solar-powered drones, satellites, and infrared lasers capable of providing Internet access. To propel that effort, Facebook purchased the British company Ascenta, whose founders helped create the world’s longest flying solar-powered drone. In 2016, Facebook completed a full-scale test flight of its first Internet access solar-powered drone, Aquila. Created from carbon fiber, the drone has the wingspan of a Boeing 737 but weighs less than a small car, and is designed to fly at 60,000 to 90,000 feet for up to three months at a time. It reportedly uses a laser communications system that can beam data from the sky.
THE FUTURE INTERNET
The increased bandwidth and expanded wireless network connectivity of the Internet of the future will result in benefits beyond faster access and richer communications. First-mile enhancements created by fiber-optic networks will enhance reliability and quality of Internet transmissions and create new business models and opportunities. Some of the major benefits of these technological advancements include latency solu- tions, guaranteed service levels, lower error rates, and declining costs. Widespread wireless access to the Internet will also essentially double or even triple the size of the online shopping marketspace because consumers will be able to shop and make purchases just about anywhere. This is equivalent to doubling the physical floor space of all shopping malls in America. We describe some of these benefits in more detail in the following sections.
Latency Solutions
One of the challenges of packet switching, where data is divided into chunks and then sent separately to meet again at the destination, is that the Internet does not differenti- ate between high-priority packets, such as video clips, and those of lower priority, such as self-contained e-mail messages. Because the packets cannot yet be simultaneously reassembled, the result can be distorted audio and video streams.
Differentiated quality of service (diffserv) is a technology that assigns levels of priority to packets based on the type of data being transmitted. Video conference packets, for example, which need to reach their destination almost instantaneously, receive much higher priority than e-mail messages. In the end, the quality of video and audio will skyrocket without undue stress on the network. Differential service is very controversial because it means some users may get more bandwidth than others, and potentially they may have to pay a higher price for more bandwidth.
differentiated quality of service (diffserv) a new technology that assigns levels of priority to packets based on the type of data being transmitted
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Guaranteed Service Levels and Lower Error Rates
In today’s Internet, there is no service-level guarantee and no way to purchase the right to move data through the Internet at a fixed pace. Today’s Internet promises only “best effort.” The Internet is democratic—it speeds or slows everyone’s traffic alike. In the future, it might be possible to purchase the right to move data through the network at a guaranteed speed in return for higher fees.
Declining Costs
As the Internet pipeline is upgraded, the availability of broadband service will expand beyond major metropolitan areas, significantly reducing the cost of access. More users mean lower cost, as products and technology catch on in the mass market. Higher volume usage enables providers to lower the cost of both access devices, or clients, and the service required to use such products. Both broadband and wireless service fees are expected to decline as geographic service areas increase, in part due to competition for that business.
The Internet of Things
No discussion of the future Internet would be complete without mentioning the Internet of Things (IoT), also sometimes referred to as the Industrial Internet. Internet technology is spreading beyond the desktop, laptop, and tablet computer, and beyond the smartphone, to consumer electronics, electrical appliances, cars, medical devices, utility systems, machines of all types, even clothing—just about anything that can be equipped with sensors that can collect data and connect to the Internet, enabling the data to be analyzed with data analytics software.
IoT builds on a foundation of existing technologies, such as radio frequency iden- tification (RFID) tags, and is being enabled by the availability of low-cost sensors, the drop in price of data storage, the development of “big data” analytics software that can work with trillions of pieces of data, as well as implementation of IPv6, which will allow Internet addresses to be assigned to all of these new devices. Although IoT devices don’t necessarily have to be wireless, most use wireless communications technology previously discussed, such as cellular networks, Wi-Fi, Bluetooth, or other wireless protocols such as ZigBee or Z-Wave, to connect either directly or via a mobile app to the Internet (often a cloud service).
IoT technology is powering the development of “smart” connected “things”— tele- visions, houses, and cars, as well as wearable technology—clothing and devices like the Apple Watch, profiled in the opening case. Smart televisions that integrate directly with the Internet and can run apps have become very popular, with more than half (52%) of all U.S. Internet homes having at least one TV connected to the Internet (NPD Group Inc, 2016). Smart houses have attracted even more interest, fueled by Google’s purchase of Nest Labs for $3.2 billion in 2014. Nest Labs makes smart thermostats, home security cameras, and smoke and carbon monoxide alarms. In 2015, Nest Labs announced that it was making Nest Weave, a protocol it had developed that enables appliances, thermostats, door locks, and other devices to communicate with each other and other Nest products, available to third-party developers and manufacturers. Apple
Internet of Things (IoT) Use of the Internet to connect a wide variety of devices, machines, and sensors
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announced a smart home platform that it calls HomeKit in 2014. HomeKit is a frame- work and network protocol for controlling devices in the home that is programmed directly into Apple’s iOS software for iPhones and iPads, and is integrated with Siri, Apple’s voice-activated artificial intelligence assistant. By 2016, a number of devices had been designed specifically for use with HomeKit, such as a smart thermostat, a smart deadbolt lock, a home sensor that provides temperature, humidity, and air quality readings, and an iDevices switch that enables you to turn electronic devices on and off using Siri. Many cable companies such as Time Warner Cable, Comcast, and AT&T already offer connected home systems that include appliances and lights. All in all, the global market for smart house products is expected to grow from about $47 billion in 2015 to over $120 billion by 2022 (Research and Markets, 2016).
In September 2014, as discussed in the chapter-opening case, Apple introduced the Apple Watch. The Apple Watch features a fitness/activity tracker similar to offerings from Fitbit, Nike+, FuelBand, and Jawbone Up, is able to access a wide variety of apps, and also works with Apple Pay, Apple’s mobile payment service. A number of other manufacturers, such as Samsung, LG, Motorola, and Swatch, have also introduced smartwatches. Wearable computing is expected to grow into a $170 billion business by 2021.
Connected cars that have built-in Internet access have also arrived (see the Insight on Technology case, Are Connected Cars the Next Hot Entertainment Vehicle? in Chapter 2). Here too, Google and Apple are major players. In 2014, Google announced the Open Automotive Alliance, a group of leading automakers and technology companies focused on bringing the Android platform to cars. Shortly thereafter, Apple announced CarPlay, a software platform that synchronizes iPhones to the car’s infotainment system. Android Auto and CarPlay-enabled vehicles began to be introduced in 2015, and have become more widely available in 2016. Connected cars are likely to be inte- grated with smart home initiatives in the future. Already, iControl, which provides the software underlying automated home systems from Comcast, TimeWarner, ADT, and others, has entered into a partnership with Zubie, a provider of connected car services. The next frontier on the connected car front is the the self-driving car, combining IoT and artificial intelligence technologies. Many Internet technology companies, ranging from giants such as Google, Baidu (China’s version of Google), Uber, and Intel to start-ups like Drive.ai and Mobileye, have jumped into the fray alongside automotive companies such as Tesla, BMW, Volvo, GM, Ford, and others, with the goal of offering self-driving, autonomous cars by 2019 or sooner.
Despite all of the IoT activity, however, interoperability remains a major concern. As with many technologies in the early stages of development, many organizations are fighting to create the standards that participants in the market will follow. The AllSeen Alliance, formed by Qualcomm in 2013 with 50 other companies, including Microsoft and Cisco, is one group that hopes to create an open source standard. Membership in the Alliance has soared since its initial founding and in 2016, it has over 200 members. Another group, the Open Connectivity Foundation (formerly the Open Interconnect Consortium), formed in 2014 by Intel, Broadcom, Dell, and others apparently not happy with the AllSeen effort, has also seen its membership soar to over 200 members. A different group, the Industrial Internet Consortium, has been formed by AT&T,
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Cisco, GE, IBM, and Intel to focus on engineering standards for industrial assets. The Wolfram Connected Devices Project is aimed at developing a database of IoT devices, and currently includes more than 3,000. And as with many other types of Internet- related technology, Google with its Android operating system and Apple with AirPlay wireless streaming protocol may be trying to create their own standards.
Other concerns include security and privacy. Security experts believe that IoT devices could potentially be a security disaster, with the potential for malware being spread through a connected network, and difficulty in issuing patches to devices, leaving them vulnerable (Internet Society, 2015). Data from stand-alone smart devices can reveal much personal detail about a consumer’s life, and if those devices are all ultimately interconnected, there will be little that is truly private.
Although challenges remain before the Internet of Things is fully realized, it is coming closer and closer to fruition. As of 2016, experts estimate that there are anywhere from 6.4 billion to 9 billion IoT devices (not including smartphones, tablets, or desktop computers), with some projecting as many as 100 billion connected IoT devices and global economic impact of more than $11 trillion by 2025 (Nordstrom, 2016; Internet Society, 2015).
3.4 THE WEB
Without the Web, there would be no e-commerce. The invention of the Web brought an extraordinary expansion of digital services to millions of amateur computer users, including color text and pages, formatted text, pictures, animations, video, and sound. In short, the Web makes nearly all the rich elements of human expression needed to establish a commercial marketplace available to nontechnical computer users worldwide.
While the Internet was born in the 1960s, the Web was not invented until 1989– 1991 by Dr. Tim Berners-Lee of the European Particle Physics Laboratory, better known as CERN (Berners-Lee et al., 1994). Several earlier authors—such as Vannevar Bush (in 1945) and Ted Nelson (in the 1960s)—had suggested the possibility of organiz- ing knowledge as a set of interconnected pages that users could freely browse (Bush, 1945; Ziff Davis Publishing, 1998). Berners-Lee and his associates at CERN built on these ideas and developed the initial versions of HTML, HTTP, a web server, and a browser, the four essential components of the Web.
First, Berners-Lee wrote a computer program that allowed formatted pages within his own computer to be linked using keywords (hyperlinks). Clicking on a keyword in a document would immediately move him to another document. Berners-Lee created the pages using a modified version of a powerful text markup language called Standard Generalized Markup Language (SGML).
Berners-Lee called this language HyperText Markup Language, or HTML. He then came up with the idea of storing his HTML pages on the Internet. Remote client computers could access these pages by using HTTP (introduced earlier in Section 3.1 and described more fully in the next section). But these early web pages still appeared
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as black and white text pages with hyperlinks expressed inside brackets. The early Web was based on text only; the original web browser only provided a line interface.
Information shared on the Web remained text-based until 1993, when Marc Andreessen and others at the National Center for Supercomputing Applications (NCSA) at the University of Illinois created a web browser with a graphical user interface (GUI) called Mosaic that made it possible to view documents on the Web graphically—using colored backgrounds, images, and even primitive animations. Mosaic was a software program that could run on any graphically based interface such as Macintosh, Windows, or Unix. The Mosaic browser software read the HTML text on a web page and displayed it as a graphical interface document within a GUI operating system such as Windows or Macintosh. Liberated from simple black and white text pages, HTML pages could now be viewed by anyone in the world who could operate a mouse and use a Macintosh or PC.
Aside from making the content of web pages colorful and available to the world’s population, the graphical web browser created the possibility of universal computing, the sharing of files, information, graphics, sound, video, and other objects across all computer platforms in the world, regardless of operating system. A browser could be made for each of the major operating systems, and the web pages created for one system, say, Windows, would also be displayed exactly the same, or nearly the same, on computers running the Macintosh or Unix operating systems. As long as each operating system had a Mosaic browser, the same web pages could be used on all the different types of computers and operating systems. This meant that no matter what kind of computer you used, anywhere in the world, you would see the same web pages. The browser and the Web have introduced us to a whole new world of comput- ing and information management that was unthinkable prior to 1993.
In 1994, Andreessen and Jim Clark founded Netscape, which created the first commercial browser, Netscape Navigator. Although Mosaic had been distributed free of charge, Netscape initially charged for its software. In August 1995, Microsoft Corporation released its own free version of a browser, called Internet Explorer. In the ensuing years, Netscape fell from a 100% market share to less than .5% in 2009. The fate of Netscape illustrates an important e-commerce business lesson. Innovators usually are not long-term winners, whereas smart followers often have the assets needed for long-term survival. Much of the Netscape browser code sur- vives today in the Firefox browser produced by Mozilla, a nonprofit heavily funded by Google.
HYPERTEXT
Web pages can be accessed through the Internet because the web browser software on your PC can request web pages stored on an Internet host server using the HTTP protocol. Hypertext is a way of formatting pages with embedded links that connect documents to one another and that also link pages to other objects such as sound, video, or animation files. When you click on a graphic and a video clip plays, you have clicked on a hyperlink. For example, when you type a web address in your browser such as http://www.sec.gov, your browser sends an HTTP request to the sec.gov server requesting the home page of sec.gov.
Mosaic Web browser with a graphical user interface (GUI) that made it possible to view documents on the Web graphically
universal computing the sharing of files, information, graphics, sound, video, and other objects across all computer platforms in the world, regardless of operating system
Netscape Navigator the first commercial web browser
Internet Explorer Microsoft’s web browser
hypertext a way of formatting pages with embedded links that connect documents to one another, and that also link pages to other objects such as sound, video, or animation files
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HTTP is the first set of letters at the start of every web address, followed by the domain name. The domain name specifies the organization’s server computer that is housing the document. Most companies have a domain name that is the same as or closely related to their official corporate name. The directory path and document name are two more pieces of information within the web address that help the browser track down the requested page. Together, the address is called a Uniform Resource Locator, or URL. When typed into a browser, a URL tells it exactly where to look for the information. For example, in the following URL:
http://www.megacorp.com/content/features/082602.html
http = the protocol used to display web pages
www.megacorp.com = domain name
content/features = the directory path that identifies where on the domain web server the page is stored
082602.html = the document name and its format (an HTML page)
The most common domain extensions (known as general top-level domains, or gTLDs) currently available and officially sanctioned by ICANN are shown in Table 3.14. Countries also have domain names, such as .uk, .au, and .fr (United Kingdom, Australia, and France, respectively). These are sometimes referred to as country- code top-level domains, or ccTLDs. In 2008, ICANN approved a significant expansion of gTLDs, with potential new domains representing cities (such as .berlin), regions (.africa), ethnicity (.eus), industry/activities (such as .health), and even brands (such as .deloitte). In 2009, ICANN began the process of implementing these guidelines. In 2011, ICANN removed nearly all restrictions on domain names, thereby greatly expanding the number of different domain names available. As of August 2016, over 1,150 gTLDs have been applied for, acquired, and launched. The new gTLDs are in multiple languages and scripts/characters (including Arabic, Chinese, Japanese, and Russian) and include geographic place names such as .nyc, .london, and .paris; busi- ness identifiers such as .restaurant, .realtor, .technology, and .lawyer; brand names such as .bmw and .suzuki; and a whole host of other descriptive names.
MARKUP LANGUAGES
Although the most common web page formatting language is HTML, the concept behind document formatting actually had its roots in the 1960s with the development of Generalized Markup Language (GML).
HyperText Markup Language (HTML)
HyperText Markup Language (HTML) is a GML that is relatively easy to use. HTML provides web page designers with a fixed set of markup “tags” that are used to format a web page (see Figure 3.15). When these tags are inserted into a web page, they are read by the browser and interpreted into a page display. You can see the source HTML
HyperText Markup Language (HTML) GML that is relatively easy to use in web page design. HTML provides web page designers with a fixed set of markup “tags” that are used to format a web page
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TABLE 3.14 EXAMPLES OF TOP-LEVEL DOMAINS
G E N E R A L T O P - L E V E L D O M A I N ( G T L D )
Y E A R ( S ) I N T R O D U C E D P U R P O S E
S P O N S O R / O P E R A T O R
.com 1980s Unrestricted (but intended for commercial registrants)
VeriSign
.edu 1980s U.S. educational institutions Educause
.gov 1980s U.S. government U.S. General Services Administration
.mil 1980s U.S. military U.S. Department of Defense Network Information Center
.net 1980s Unrestricted (but originally intended for network providers, etc.)
VeriSign
.org 1980s Unrestricted (but intended for organizations that do not fit elsewhere)
Public Interest Registry (was operated by VeriSign until December 31, 2002)
.int 1998 Organizations established by international treaties between governments
Internet Assigned Numbers Authority (IANA)
.aero 2001 Air-transport industry Societé Internationale de Telecommunications Aeronautiques SC (SITA)
.biz 2001 Businesses NeuLevel
.coop 2001 Cooperatives DotCooperation LLC
.info 2001 Unrestricted use Afilias LLC
.museum 2001 Museums Museum Domain Name Association (MuseDoma)
.name 2001 For registration by individuals Global Name Registry Ltd.
.pro 2002 Accountants, lawyers, physicians, and other professionals
RegistryPro Ltd
.jobs 2005 Job search Employ Media LLC
.travel 2005 Travel search Tralliance Corporation
.mobi 2005 Websites specifically designed for mobile phones
mTLD Top Level Domain, Ltd.
.cat 2005 Individuals, organizations, and companies that promote the Catalan language and culture
Fundació puntCAT
.asia 2006 Regional domain for companies, organizations, and individuals based in Asia
DotAsia Organization
.tel 2006 Telephone numbers and other contact information
ICM Registry
.xxx 2010 New top-level domain for pornographic content
None yet approved
SOURCE: Based on data from ICANN, 2011b.
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code for any web page by simply clicking on the “Page Source” command found in all browsers. In Figure 3.15, the HTML code in the first screen produces the display in the second screen.
HTML defines the structure and style of a document, including the headings, graphic positioning, tables, and text formatting. Since its introduction, the major brows- ers have continuously added features to HTML to enable programmers to further refine their page layouts. Unfortunately, some browser enhancements may work only in one company’s browser. Whenever you build an e-commerce site, you should take care that the pages can be viewed by the major browsers, even outdated versions of browsers. HTML web pages can be created with any text editor, such as Notepad or WordPad, using Microsoft Word (simply save the Word document as a web page), or any one of several web page development tools such as Microsoft Expression Web or Adobe Dreamweaver CC.5
The most recent version of HTML is HTML5. HTML5 introduces features like video playback and drag-and-drop that in the past were provided by plug-ins like Adobe Flash. HTML5 is also used in the development of mobile websites and mobile apps, and is an important tool in both responsive web design and adaptive web delivery, all of which are discussed more fully in Chapter 4. The Insight on Technology case, The Rise of HTML5, examines the increasing use of HTML5.
5 A detailed discussion of how to use HTML is beyond the scope of this text.
FIGURE 3.15 EXAMPLE HTML CODE (A) AND WEB PAGE (B)
(a) (b)
HTML is a text markup language used to create web pages. It has a fixed set of “tags” that are used to tell the browser software how to present the content on screen. The HTML shown in Figure 3.15 (a) creates the web page seen in Figure 3.15 (b). SOURCES: (A) Notepad, Microsoft Windows, Microsoft Corporation; (B) Internet Explorer, Microsoft Windows, Microsoft Corporation.
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(continued)
INSIGHT ON TECHNOLOGY
THE RISE OF HTML5
In 2010, Apple founder Steve Jobs lambasted Adobe Flash for its poor security, poor performance on mobile
devices, and for being an energy hog. Jobs instead trumpeted HTML5 as the
preferred method for displaying video online. Fast forward to 2016. Two years after its official ratification by the W3C, the Web’s standards- setting organization, HTML5 has become a de facto standard, proving once again Jobs’ uncanny ability to see and perhaps shape the future.
HTML5 has become a catch-all term that encompasses not only the video element but also the use of the newest versions of Cascading Style Sheets (CSS3) and Java Script, and another new tool, HTML5 Canvas, that is used with a set of JavaScript functions to render simple animations, which reduces page load time. HTML5 provides not only device independence, but can also access the built-in functionality of mobile devices, such as GPS and swiping, enabling the creation of web- based mobile apps that can replicate the native app experience. Web-based mobile apps (HTML5 apps) work just like web pages, with page content, including graphics, images, and video, loaded into the browser from a web server, rather than residing in the mobile device hardware like a native app. This concept has been embraced by mobile develop- ers who naturally dream of being able to reach all platforms with a single product.
For businesses, the cost savings of HTML5 are obvious. A single HTML5 app requires far less effort to build than multiple native apps for the iOS, Android, Windows Phone, and other platforms. HTML5 apps can more easily be linked to and shared on social networks, encouraging viral dis- tribution. Some HTML5 apps can even be designed so that they can be run on mobile devices when they are offline. Differences in how apps run across dif- ferent platforms and workarounds are eliminated.
In the past, HTML5 apps couldn’t approach the smooth and speedy user experience of a native app, but thanks to advancements in the underlying tech- nologies behind HTML5 and improvements in the expertise of HTML5 developers, that is no longer the case. Flash also requires installation, whereas HTML5 does not.
In 2014, the Interactive Advertising Bureau (IAB), together with a number of the largest online publishers and advertising firms, urged advertisers to implement HTML5 as the standard for mobile ads in order to guarantee that ads will run and look good on different platforms, and in 2015 released guidelines that fully embrace HTML5, citing interoperability and the improved effectiveness of HTML5 ads. The rise of HTML5 has mirrored the growth of the mobile platform as it supplants Flash, which was developed for the desktop, as the pre- ferred media delivery platform on the Web. During this time, Flash has continued to struggle with criti- cal security vulnerabilities. In response, the online advertising industry has responded by reducing or eliminating the use of Flash. For instance, in 2016, Facebook mandated HTML5 instead of Flash for all videos posted to its site, reporting improved loading times, fewer bugs, and better engagement, and Google signaled a shift towards HTML5 by blocking Flash advertisements from autoplaying in Chrome, in part due to their notorious security issues. In 2016, Chrome began to automatically block any non-visible Flash content, like tracking cookies, and by year’s end, HTML5 will be the “default” for Chrome, except where sites only sup- port Flash. Google also announced that its display ads would be 100 percent HTML5 by the beginning of 2017. Mozilla Firefox made a similar announce- ment shortly thereafter regarding non-visible Flash content and its own plans to make HTML5 its default by 2017, meaning that over 80% of the web browser market is now blocking Flash. Apple’s
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Safari browser, one of the first to impose restrictions on Flash, has taken steps to pre-
vent sites offering both Flash and HTML5 from displaying Flash content. Twitch, one of the largest sites still using Flash video streaming, announced it would begin a switch to HTML5 in 2016, just as YouTube did a year earlier. The moves from these advertising and tech juggernauts have solidified the downfall of Flash and the rise of HTML5 as the future of advertising. Even Adobe itself has begun to recommend that content creators use HTML5 instead of Flash and has renamed its Flash Profes- sional tool to ‘Adobe Animate CC,’ adding HTML5 support and the ability to convert Flash advertise- ments to HTML5.
Retailers have taken notice. One example of a company using HTML5 with success is Rakuten Shopping, an online retailer that offers a wide vari- ety of goods online, and is currently ranked as one of Internet Retailer’s top 30 mobile retailers. Using HTML5 has enabled Rakuten to shift away from using cookies to store customer attributes and has lightened the load on its servers.
Another example is the Financial Times, whose HTML5 app has proven to be an important driver for FT’s business. FT first switched from a native app to HTML5 in 2011, in part to make maintain- ing the app across multiple platforms and devices easier. In 2013, FT rolled out a redesign of the app, featuring even more videos and personaliza- tion features.
In fact, according to Indeed, which searches millions of jobs from thousands of different job
sites, “HTML5” continues to be one of the fast- est growing keywords found in online job postings. Many online advertisers that have relied heavily on Flash are also struggling to adapt to the emergence of HTML5 ads, which are larger in size and require testing on more platforms. Content creators and advertisers alike are also uneager to manage two different formats. In the past, they only had to deal with Flash, and many have been unwilling to make the transition just yet.
However, even given all its benefits, HTML5 is not without flaws. For instance, HTML5 has not consistently supported digital rights management (DRM). In the past, media companies developed their own copy protection standards based on geographical region and/or whether payment had been proffered. These were enforced through their own media players. Because HTML5 does not require plug-ins to play video (or audio), and further, because HTML5 is an official W3C standard charged with remaining vendor neutral, this presents a challenge to HTML5 developers. HTML5 also allows websites to track how much battery power their site visitors have remaining. This feature was implemented so that sites could warn users to recharge their battery, but the reporting is so detailed that sites can determine what sites you’ve come from last solely based on your battery information, presenting privacy con- cerns. However, the security issues with HTML5 pale in comparison to those associated with Flash, and it’s still early in the development cycle for HTML5.
SOURCES: “Google Nixes Flash, Embraces HTML5 in Chrome Browser,” by Paul Krill, Infoworld.com, August 11, 2016; “Publishers Must Embrace Transition From Flash to HTML5 Before It’s Too Late,” by Brian DeFrancesco, Publishersdaily.com, August 5, 2016; “Firefox Sets Kill-Flash Schedule,” by Gregg Keizer, Infoworld.com, July 22, 2016; “Twitch Begins Shift from Flash to HTML5 with Closed Beta,” by Devin Coldewey, Techcrunch.com, July 14, 2016; “Safari 10 To Turn Off Flash by Default,” by John Ribeiro, Infoworld.com, June 15, 2016; “As Flash Apocalypse Approaches, Here are HTML5 Rules of Thumb to Keep in Mind,” by Barry Levine, Marketingland.com, May 26, 2016; “Facebook’s Website Now Uses HTML5 Instead of Flash for All Videos,” by Chris Welch, Theverge.com, December 18, 2015; “Why We Chose to Move to HTML5 Video,” by Daniel Baulig, Code.facebook.com, December 18, 2015; “Adobe Tells Developers to Use HTML5 Instead of Flash,” by Fahmida Y. Rashid, Infoworld.com, December 2, 2015; “Adobe Bows to HTML5 and Renames Its Flash Profes- sional App,” by Steve Dent, Engadget.com, December 1, 2015; “Transforming the Web with HTML5,” by Christina Mulligan, Sdtimes.com, October 5, 2015; “With Digital Ads Shifting to HTML5, the Industry Now Has a New Set of Guidelines,” by Christopher Heine, Adweek.com, September 28, 2015; “HTML5 Looks Good in Light of Google, Facebook and IAB Moves,” by Carl Weinschenk, September 22, 2015; “How Your Smartphone’s Battery Life Can Be Used to Invade Your Privacy,” by Alex Hern, The Guardian, August 4, 2015; “RIP Flash: Why HTML5 Will Finally Take Over Video and the Web This Year,” by Erika Trautman, Thenextweb.com, April 19, 2014; “Financial Times: ‘There Is No Drawback to Working in HTML5’,” by Stuart Dredge, Theguardian.com, April 29, 2013; “Adobe's Flash Surrender Proves Steve Jobs and Apple Were Right All Along with HTML5,” by Nigam Arora, Forbes, November, 9, 2011.
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eXtensible Markup Language (XML)
eXtensible Markup Language (XML) takes web document formatting a giant leap forward. XML is a markup language specification developed by the W3C that is similar to HTML, but has a very different purpose. Whereas the purpose of HTML is to control the “look and feel” and display of data on the web page, XML is designed to describe data and information. For example, consider the sample XML document in Figure 3.16. The first line in the sample document is the XML declaration, which is always included; it defines the XML version of the document. In this case, the document conforms to the 1.0 specification of XML. The next line defines the first element of the document (the root element): <note>. The next four lines define four child ele- ments of the root (to, from, heading, and body). The last line defines the end of the root element. Notice that XML says nothing about how to display the data, or how the text should look on the screen. HTML is used for information display in combination with XML, which is used for data description.
Figure 3.17 shows how XML can be used to define a database of company names in a company directory. Tags such as <Company>, <Name>, and <Specialty> can be defined for a single firm, or an entire industry. On an elementary level, XML is extraordinarily easy to learn and is very similar to HTML except that you can make up your own tags. At a deeper level, XML has a rich syntax and an enormous set of software tools, which make XML ideal for storing and communicating many types of data on the Web.
XML is “extensible,” which means the tags used to describe and display data are defined by the user, whereas in HTML the tags are limited and predefined. XML can also transform information into new formats, such as by importing information from a database and displaying it as a table. With XML, information can be analyzed and displayed selectively, making it a more powerful alternative to HTML. This means that business firms, or entire industries, can describe all of their invoices, accounts payable, payroll records, and financial information using a web-compatible markup language. Once described, these business documents can be stored on intranet web servers and shared throughout the corporation.
Really Simple Syndication (RSS) is an XML format that allows users to have digital content, including text, articles, blogs, and podcast audio files, automatically
eXtensible Markup Language (XML) a markup language specification developed by the World Wide Web Consortium (W3C) that is designed to describe data and information
Really Simple Syndication (RSS) program that allows users to have digital content, including text, articles, blogs, and podcast audio files, automatically sent to their computers over the Internet
FIGURE 3.16 A SIMPLE XML DOCUMENT
The tags in this simple XML document, such as <note>, <to>, and <from>, are used to describe data and information, rather than the look and feel of the document.
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sent to their computers over the Internet. An RSS aggregator software application that you install on your computer gathers material from the websites and blogs that you tell it to scan and brings new information from those sites to you. Sometimes this is referred to as “syndicated” content because it is distributed by news organizations and other syndicators (or distributors). Users download an RSS aggregator and then “sub- scribe” to the RSS “feeds.” When you go to your RSS aggregator’s page, it will display the most recent updates for each channel to which you have subscribed. RSS has rocketed from a “techie” pastime to a broad-based movement. Although Google has closed down Google Reader, a popular RSS product, a number of other RSS reader options remain, including Feedly, Reeder, and NewsBlur.
WEB SERVERS AND CLIENTS
We have already described client/server computing and the revolution in computing architecture brought about by client/server computing. You already know that a server is a computer attached to a network that stores files, controls peripheral devices, interfaces with the outside world—including the Internet—and does some processing for other computers on the network.
But what is a web server? Web server software refers to the software that enables a computer to deliver web pages written in HTML to client computers on a network that request this service by sending an HTTP request. Apache, which works with Linux and Unix operating systems, is the most commonly used type of web server software. Microsoft’s Internet Information Services (IIS) also has significant market share (Net- craft, 2016).
web server software software that enables a computer to deliver web pages written in HTML to client computers on a network that request this service by sending an HTTP request
FIGURE 3.17 SAMPLE XML CODE FOR A COMPANY DIRECTORY
This XML document uses tags to define a database of company names.
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Aside from responding to requests for web pages, all web servers provide some additional basic capabilities such as the following:
• Security services—These consist mainly of authentication services that verify that the person trying to access the site is authorized to do so. For websites that process payment transactions, the web server also supports SSL and TLS, the protocols for transmitting and receiving information securely over the Internet. When private information such as names, phone numbers, addresses, and credit card data needs to be provided to a website, the web server uses SSL to ensure that the data passing back and forth from the browser to the server is not compromised.
• FTP—This protocol allows users to transfer files to and from the server. Some sites limit file uploads to the web server, while others restrict downloads, depending on the user’s identity.
• Search engine—Just as search engine sites enable users to search the entire Web for particular documents, search engine modules within the basic web server soft- ware package enable indexing of the site’s web pages and content and permit easy keyword searching of the site’s content. When conducting a search, a search engine makes use of an index, which is a list of all the documents on the server. The search term is compared to the index to identify likely matches.
• Data capture—Web servers are also helpful at monitoring site traffic, capturing information on who has visited a site, how long the user stayed there, the date and time of each visit, and which specific pages on the server were accessed. This information is compiled and saved in a log file, which can then be analyzed. By analyzing a log file, a site manager can find out the total number of visitors, the average length of each visit, and the most popular destinations, or web pages.
The term web server is also used to refer to the physical computer that runs web server software. Leading manufacturers of web server computers include Lenovo, Dell, and Hewlett-Packard. Although any desktop computer can run web server software, it is best to use a computer that has been optimized for this purpose. To be a web server, a computer must have the web server software installed and be connected to the Internet. Every public web server computer has an IP address. For example, if you type http://www.pearsonhighered.com/laudon in your browser, the browser software sends a request for HTTP service to the web server whose domain name is pearsonhighered.com. The server then locates the page named “laudon” on its hard drive, sends the page back to your browser, and displays it on your screen. Of course, firms also can use web servers for strictly internal local area networking in intranets.
Aside from the generic web server software packages, there are actually many types of specialized servers on the Web, from database servers that access specific information within a database, to ad servers that deliver targeted banner ads, to mail servers that provide e-mail messages, and video servers that provide video clips. At a small e-commerce site, all of these software packages might be running on a single computer, with a single processor. At a large corporate site, there may be hundreds or thousands of discrete server computers, many with multiple processors, running specialized web server functions. We discuss the architecture of e-commerce sites in greater detail in Chapter 4.
ad server server designed to deliver targeted banner ads
mail server server that provides e-mail messages
database server server designed to access specific information within a database
video server server that serves video clips
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A web client, on the other hand, is any computing device attached to the Internet that is capable of making HTTP requests and displaying HTML pages. The most common client is a Windows or Macintosh desktop computer, with various flavors of Unix/Linux computers a distant third. However, the fastest growing category of web clients is not computers at all, but mobile devices. In general, a web client can be any device—including a printer, refrigerator, stove, home lighting system, or automobile instrument panel—capable of sending and receiving information from a web server.
WEB BROWSERS
A web browser is a software program whose primary purpose is to display web pages. Browsers also have added features, such as e-mail and newsgroups (an online discus- sion group or forum). As of July 2016, the leading desktop web browser is Google’s Chrome, a small, yet technologically advanced open source browser, with about 51% of the market. Chrome is also the leading mobile/tablet browser, with about a 52% share of that market. The second most popular desktop browser is Microsoft’s Internet Explorer, with about a 30% share. However, Internet Explorer’s share of the mobile/ tablet market is miniscule, with less than a 2% share. Mozilla Firefox is in third place in the desktop browser marketplace, with only about 8% share. It has less than a 1% share of the mobile/tablet browser market. First released in 2004, Firefox is a free, open source web browser for the Windows, Linux, and Macintosh operating systems, based on Mozilla open source code (which originally provided the code for Netscape). It is small and fast and offers many features such as pop-up blocking and tabbed browsing. Apple’s Safari browser has only about a 4.5% share of the desktop browser market, but is the second most popular mobile/tablet browser, with a 28% share, due in large part to its use on iPhones and iPads (Marketshare.hitslink.com, 2016a, 2016b). In 2015, Microsoft introduced Edge, an entirely new browser bundled with its new operating system, Windows 10. Edge was designed to replace Internet Explorer. However, despite the popularity of Windows 10, Edge has thus far been largely ignored by Windows 10 adopters and has been installed on only about 5% of desktops.
3.5 THE INTERNET AND THE WEB: FEATURES AND SERVICES
The Internet and the Web have spawned a number of powerful software applications upon which the foundations of e-commerce are built. You can think of all these as web services, and it is interesting as you read along to compare these services to other traditional media such as television or print media. If you do, you will quickly realize the richness of the Internet environment.
COMMUNICATION TOOLS
The Internet and Web provide a number of communication tools that enable people around the globe to communicate with one another, both on a one-to-one basis as well
web client any computing device attached to the Internet that is capable of making HTTP requests and displaying HTML pages, most commonly a Windows PC or Macintosh
web browser software program whose primary purpose is to display web pages
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as a one-to-many basis. Communication tools include e-mail, messaging applications, online message boards (forums), Internet telephony applications, and video conferenc- ing, video chatting, and telepresence. We’ll look at each of these in a bit more depth in the following sections.
Since its earliest days, electronic mail, or e-mail, has been the most-used application of the Internet. Worldwide, there are over 2.6 billion e-mail users, sending over 2.15 billion e-mails a day. There are an estimated 1.7 billion mobile e-mail users worldwide, with over 65% of all e-mail users worldwide accessing e-mail on a mobile device (Radicati Group, 2016). Estimates vary on the amount of spam, ranging from 40% to 90%. E-mail marketing and spam are examined in more depth in Chapter 6.
E-mail uses a series of protocols to enable messages containing text, images, sound, and video clips to be transferred from one Internet user to another. Because of its flexibility and speed, it is now the most popular form of business communica- tion—more popular than the phone, fax, or snail mail (the U.S. Postal Service). In addition to text typed within the message, e-mail also allows attachments, which are files inserted within the e-mail message. The files can be documents, images, sounds, or video clips.
Messaging Applications
Instant messaging (IM) allows you to send messages in real time,unlike e-mail, which has a time lag of several seconds to minutes between when messages are sent and received. IM displays text entered almost instantaneously. Recipients can then respond immediately to the sender the same way, making the communication more like a live conversation than is possible through e-mail. To use IM, users create a buddy list they want to communicate with, and then enter short text messages that their buddies will receive instantly (if they are online at the time). And although text remains the primary communication mechanism in IM, more advanced systems also provide voice and video chat functionality. Instant messaging over the Internet com- petes with cell phone Short Message Service (SMS) and Multimedia Messaging Service (MMS) texting, which is far more expensive than IM. Major IM systems include Skype, Yahoo Messenger, Google Hangouts, and AIM (AOL Instant Messenger). IM systems were initially developed as proprietary systems, with competing firms offering versions that did not work with one another. Today, there still is no built-in interoperability among the major IM systems.
Mobile messaging apps, such as Facebook Messenger, WhatsApp (purchased by Facebook for $22 billion in 2014), Snapchat (which allows users to send pictures, videos, and texts that will disappear after a short period of time), Kik, Viber, and others have also become wildly popular, providing competition for both traditional desktop IM systems and SMS text messaging. In the United States in 2016, over 130 million people (about 40% of the population) use mobile messaging apps, and companies are increasingly turning their attention to using these apps to market their brands (eMarketer, Inc., 2016g).
electronic mail (e-mail) the most-used application of the Internet. Uses a series of protocols to enable messages containing text, images, sound, and video clips to be transferred from one Internet user to another
attachment a file inserted within an e-mail message
instant messaging (IM) displays text entered almost instantaneously. Recipients can then respond immediately to the sender the same way, making the communication more like a live conversation than is possible through e-mail
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Online Message Boards
An online message board (also referred to as a forum, bulletin board, discussion board, discussion group, or simply a board or forum) is a web application that enables Internet users to communicate with each other, although not in real time. A message board provides a container for various discussions (or “threads”) started (or “posted”) by members of the board, and depending on the permissions granted to board members by the board’s administrator, enables a person to start a thread and reply to other people’s threads. Most message board software allows more than one message board to be created. The board administrator typically can edit, delete, move, or oth- erwise modify any thread on the board. Unlike an electronic mailing list (such as a listserv), which automatically sends new messages to a subscriber, an online message board typically requires that the member visit the board to check for new posts. Some boards offer an “e-mail notification” feature that notifies users that a new post of inter- est to them has been made.
Internet Telephony
If the telephone system were to be built from scratch today, it would be an Internet- based, packet-switched network using TCP/IP because it would be less expensive and more efficient than the alternative existing system, which involves a mix of circuit- switched legs with a digital backbone. In fact, AT&T has begun testing all-digital IP phone networks in several U.S. cities. Likewise, if cable television systems were built from scratch today, they most likely would use Internet technologies for the same reasons.
IP telephony is a general term for the technologies that use Voice over Internet Protocol (VoIP) and the Internet’s packet-switched network to transmit voice, fax, and other forms of audio communication over the Internet. VoIP can be used over a traditional handset as well as over a mobile device. VoIP avoids the long distance charges imposed by traditional phone companies.
There were about 230 million residential VoIP subscribers worldwide in 2015, and in the United States, more than half of residential customers are now using VoIP, and this number is expanding rapidly as cable systems provide telephone service as part of their “triple play”: voice, Internet, and TV as a single package. This number is dwarfed, however, by the number of mobile VoIP subscribers, which has grown explosively over the last several years, fueled by the rampant growth of mobile messaging apps that now also provide free VoIP services, such as Facebook Messenger, WhatsApp (also owned by Facebook), Viber (owned by Japanese e-commerce giant Rakuten), WeChat, Line, KakaoTalk, and others (IHS, 2016; BuddeComm, 2016).
VoIP is a disruptive technology. In the past, voice and fax were the exclusive provenance of the regulated telephone networks. With the convergence of the Internet and telephony, however, this dominance is already starting to change, with local and long distance telephone providers and cable companies becoming ISPs, and ISPs getting into the phone market. Key players in the VoiP market include independent service providers such as VoIP pioneers Vonage and Skype (now owned by Microsoft), as well as traditional players such as telephone and cable companies that have moved aggressively into the market. Skype currently dominates the international market.
online message board a web application that allows Internet users to communicate with each other, although not in real time
IP telephony a general term for the technologies that use VoIP and the Internet’s packet- switched network to transmit voice and other forms of audio communication over the Internet
Voice over Internet Protocol (VoIP) protocol that allows for transmission of voice and other forms of audio communication over the Internet
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Skype carries over 3 billion minutes per day (translating into about 90 billion minutes per month) from 300 million users around the world (Anurag, 2016).
Video Conferencing, Video Chatting, and Telepresence
Internet video conferencing is accessible to anyone with a broadband Internet con- nection and a web camera (webcam). The most widely used web conferencing suite of tools is WebEx (now owned by Cisco). VoIP companies such as Skype and ooVoo also provide more limited web conferencing capabilities, commonly referred to as video chatting. Apple’s FaceTime is another video chatting technology available for iOS mobile devices with a forward-facing camera and Macintosh computers equipped with Apple’s version of a webcam, called a FaceTime camera.
Telepresence takes video conferencing up several notches. Rather than single persons “meeting” by using webcams, telepresence creates an environment in a room using multiple cameras and screens, which surround the users. The experience is uncanny and strange at first because as you look at the people in the screens, they are looking directly at you. Broadcast quality and higher screen resolutions help create the effect. Users have the sensation of “being in the presence of their colleagues” in a way that is not true for traditional webcam meetings. Providers of telepresence software and hardware include Cisco, LifeSize, BlueJeans Network, and Polycom ATX.
SEARCH ENGINES
Search engines identify web pages that appear to match keywords, also called queries, entered by a user and then provide a list of the best matches (search results). Almost 85% of U.S. Internet users regularly use search engines from either desktop or mobile devices, and they generate around 16 billion queries a month on desktop computers, about 10.2 billion of which are conducted using Google. Desktop search volume is declining, as more and more search activity moves to mobile devices. In fact, Google has reported that mobile search queries exceeded desktop queries in the United States and numerous other countries for the first time in 2015 (eMarketer, Inc., 2016h, 2016i; Sterling, 2016). There are hundreds of different search engines, but the vast majority of the search results are supplied by the top three providers: Google, Microsoft’s Bing, and Yahoo. Google currently has about 64% of the desktop search market based on number of searches, followed by Microsoft’s Bing, with about 22%, and Yahoo with about 12%.
Web search engines started out in the early 1990s shortly after Netscape released the first commercial web browser. Early search engines were relatively simple software programs that roamed the nascent Web, visiting pages and gathering information about the content of each web page. These early programs were called variously crawlers, spiders, and wanderers; the first full-text crawler that indexed the contents of an entire web page was called WebCrawler, released in 1994. AltaVista (1995), one of the first widely used search engines, was the first to allow “natural language” queries such as “history of web search engines” rather than “history + web + search engine.”
The first search engines employed simple keyword indexes of all the web pages visited. They would count the number of times a word appeared on the web page, and store this information in an index. These search engines could be easily fooled by web
search engine identifies web pages that appear to match keywords, also called queries, entered by the user and then provides a list of the best matches
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designers who simply repeated words on their home pages. The real innovations in search engine development occurred through a program funded by the Department of Defense called the Digital Library Initiative, designed to help the Pentagon find research papers in large databases. Stanford, Berkeley, and three other universities became hotbeds of web search innovations in the mid-1990s. At Stanford in 1994, two computer science students, David Filo and Jerry Yang, created a hand-selected list of their favorite web pages and called it “Yet Another Hierarchical Officious Oracle,” or Yahoo!. Yahoo initially was not a real search engine, but rather an edited selection of web sites organized by categories the editors found useful. Yahoo later developed “true” search engine capabilities.
In 1998, Larry Page and Sergey Brin, two Stanford computer science students, released their first version of the Google search engine. This search engine was dif- ferent: not only did it index each web page’s words, but Page had discovered that the AltaVista search engine not only collected keywords from sites but also calculated what other sites linked to each page. By looking at the URLs on each web page, they could calculate an index of popularity. AltaVista did nothing with this information. Page took this idea and made it a central factor in ranking a web page’s appropriateness to a search query. He patented the idea of a web page ranking system (PageRank System), which essentially measures the popularity of the web page. Brin contributed a unique web crawler program that indexed not just keywords on a web page, but combina- tions of words (such as authors and their article titles). These two ideas became the foundation for the Google search engine (Brandt, 2004). Figure 3.18(A) illustrates how Google indexes the Web. Figure 3.18(B) shows you what happens when you enter a search query.
Initially, few understood how to make money from search engines. That changed in 2000 when Goto.com (later Overture) allowed advertisers to bid for placement on their search engine results, and Google followed suit in 2003 with its AdWords program, which allowed advertisers to bid for placement of short text ads on Google search results. The spectacular increase in Internet advertising revenues (which have been growing at around 20%–25% annually over the last few years) has helped search engines transform themselves into major shopping tools and created an entire new industry called “search engine marketing.”
When users enter a search term at Google, Bing, Yahoo, or any of the other web- sites serviced by these search engines, they receive two types of listings: sponsored links, for which advertisers have paid to be listed (usually at the top of the search results page), and unsponsored “organic” search results. Advertisers can also purchase small text ads on the right side of the search results page. In addition, search engines have extended their services to include news, maps, satellite images, computer images, e-mail, group calendars, group meeting tools, and indexes of scholarly papers.
Although the major search engines are used for locating general information of interest to users, search engines have also become a crucial tool within e-commerce sites. Customers can more easily search for the product information they want with the help of an internal search program; the difference is that within websites, the search engine is limited to finding matches from that one site. For instance, more online shoppers use Amazon’s internal search engine to look for products than conducting a
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FIGURE 3.18 HOW GOOGLE WORKS
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product search using Google, a fact noted by Google’s executive chairman Eric Schmidt, who believes that Amazon search poses a significant threat to Google (Mangalindan, 2014). Pinterest hopes to challenge Google in the realm of visual search, as discussed in the closing case study in Chapter 1.
DOWNLOADABLE AND STREAMING MEDIA
When you download a file from the Web, the file is transferred from a web server and is stored on your computer for later use. With the low-bandwidth connections of the early Internet, audio and video files were difficult to download, but with the huge growth in broadband connections, these files are not only commonplace but today constitute the majority of web traffic. Streaming media is an alternative to down- loaded media and enables video, music, and other large-bandwidth files to be sent to a user in a variety of ways that enable the user to play the files as they are being delivered. In some situations, the files are broken into chunks and served by special- ized video servers to client software that puts the chunks together and plays the video. In other situations, a single large file is delivered from a standard web server to a user who can begin playing the video before the entire file is delivered. Streamed files must be viewed in real time; they cannot be stored on client hard drives without special software. Streamed files are “played” by a software program such as Windows Media Player, Apple QuickTime, Adobe Flash, and Real Player. There are a number of tools used to create streaming files, including HTML5 and Adobe Flash, as well as technologies specifically adapted for the mobile platform such as the Meerkat and Periscope apps. As the capacity of the Internet grows, streaming media will play an even larger role in e-commerce.
Spurred on by the worldwide sales of more than 2.5 billion iOS (iPhones, iPads, and iPod Touches) and Android devices, the Internet has become a virtual digital river of music, audio, and video files. The Apple iTunes store is probably the most well-known repository of digital music online, with a catalog of more than 43 million songs worldwide in its catalog as of September 2016. Google Play offers over 35 million, and there are hundreds of other sites offering music downloads as well. In addition, streaming music services and Internet radio, such as Apple Music, Spotify, Pandora, Amazon Prime Music, Tidal, and hundreds of others, add to the bandwidth devoted to the delivery of online music.
Podcasting (the name originates from a mashup of the word “iPod” and the word “broadcasting”) is also surging in popularity. A podcast is an audio presentation—such as a radio show, audio from a conference, or simply a personal presentation—stored online as digital media file. Listeners can download the file and play it on their mobile devices or computers. Podcasting has transitioned from an amateur independent producer media in the “pirate radio” tradition to a professional news and talk content distribution channel. For instance, This American Life’s Serial podcast has been down- loaded over 175 million times. NPR is the top U.S. producer of podcasts, with an aggregate monthly audience of almost 8 million, followed by WNYC Studios, a NYC- based public broadcasting organization, with a monthly audience of about 6 million (Podtrac, Inc., 2016).
download transfers a file from a web server and stores it on a computer for later use
streaming media enables video, music, and other large-bandwidth files to be sent to a user in a variety of ways that enable the user to play the files as they are being delivered
podcast an audio presentation— such as a radio show, audio from a movie, or simply a personal audio presentation—stored online as a digital media file
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Online video viewing has also exploded in popularity. In 2016, for instance, there are around 215 million Americans that watch streaming or downloaded video content on a desktop or mobile device at least once a month (eMarketer, Inc., 2016j). Cisco estimates that consumer Internet video traffic constituted a whopping 70% of all consumer Internet traffic in 2015, and this percentage is expected to grow to 82% by 2020 (Cisco, 2016b). The Internet has become a major distribution channel for movies, television shows, and sporting events (see Chapter 10). Another common type of Internet video is provided by YouTube, with more than 1 billion users worldwide, who each day watch hundreds of millions of hours of video content, ranging from a wide variety of user-generated content, to branded content from major corporations, music videos, original programming, and more. Sites such as YouTube, Metacafe, and Facebook have popularized user-generated video streaming. Many apps such as Instagram, Twitter, Snapchat, and others also include video capabilities.
Online advertisers increasingly use video to attract viewers. Companies that want to demonstrate use of their products have found video clips to be extremely effective. Streaming video segments used in web ads and news stories are perhaps the most frequently used streaming services. High-quality interactive video and audio makes sales presentations and demonstrations more effective and lifelike and enables com- panies to develop new forms of customer support.
WEB 2.0 APPLICATIONS AND SERVICES
Today’s broadband Internet infrastructure has greatly expanded the services avail- able to users. These capabilities have formed the basis for new business models. Web 2.0 applications and services are “social” in nature because they support com- munication among individuals within groups or social networks.
Online Social Networks
Online social networks are services that support communication within networks of friends, colleagues, and entire professions. Online social networks have developed very large worldwide audiences (over 2.3 billion people in 2016, almost one-third of the world’s population) and form the basis for new advertising platforms and for social e-commerce (see Chapters 6, 7, and 11). The largest social networks are Facebook (1.7 billion monthly active users worldwide), Instagram (500 million members worldwide), LinkedIn (more than 450 million members worldwide), Twitter (more than 310 million active users worldwide), and Pinterest (over 110 million active users). These networks rely on user-generated content (messages, photos, and videos) and emphasize sharing of content. All of these features require significant broadband Internet connectivity and equally large cloud computing facilities to store content.
Blogs
A blog (originally called 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. The blog may include a blogroll (a collection of links to other blogs) and
blog personal web page that is created by an individual or corporation to communicate with readers
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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. The act of creating a blog is often referred to as “blogging.” Blogs are either hosted by a third-party site such as WordPress, Tumblr, Blogger, LiveJournal, TypePad, and Xanga, or prospective bloggers can download software such as Movable Type to create a blog that is hosted by the user’s ISP. Blog pages are usually variations on templates provided by the blog- ging service or software and hence require no knowledge of HTML. Therefore, millions of people without HTML skills of any kind can post their own web pages, and share content with friends and relatives. The totality of blog-related websites is often referred to as the “blogosphere.”
Blogs have become hugely popular. Tumblr and Wordpress together hosted over 400 million blogs as of September 2016, so it is likely that the total number is signifi- cantly higher. According to eMarketer, there are an estimated 29 million active U.S. bloggers, and 81 million U.S. blog readers (eMarketer, Inc., 2916k, 2016l). No one knows how many of these blogs are kept up to date or are just yesterday’s news. And no one knows how many of these blogs have a readership greater than one (the blog author). In fact, there are so many blogs you need a search engine just to find them, or you can just go to a list of the most popular 100 blogs and dig in.
Wikis
A wiki is a web application that allows a user to easily add and edit content on a web page. (The term wiki derives from the “wiki wiki” (quick or fast) shuttle buses at Honolulu Airport.) Wiki software enables documents to be written collectively and collaboratively. Most wiki systems are open source, server-side systems that store content in a relational database. The software typically provides a template that defines layout and elements common to all pages, displays user-editable source code (usually plain text), and then renders the content into an HTML-based page for display in a web browser. Some wiki software allows only basic text formatting, whereas others allow the use of tables, images, or even interactive elements, such as polls and games. Because wikis by their very nature are very open in allowing anyone to make changes to a page, most wikis provide a means to verify the validity of changes via a “Recent Changes” page, which enables members of the wiki community to monitor and review the work of other users, correct mistakes, and hopefully deter “vandalism.”
The most well-known wiki is Wikipedia, an online encyclopedia that contains more than 40 million articles in 294 different languages on a variety of topics. The Wikimedia Foundation, which operates Wikipedia, also operates a variety of related projects, including Wikibooks, a collection of collaboratively written free textbooks and manuals; Wikinews, a free content news source; and Wiktionary, a collaborative project to produce a free multilingual dictionary in every language, with definitions, etymologies, pronunciations, quotations, and synonyms.
VIRTUAL REALITY AND AUGMENTED REALITY
In 2016, virtual reality and augmented reality technologies began to enter the con- sumer market and attract significant attention. Virtual reality (VR) involves fully immersing users within a virtual world, typically through the use of a head-mounted
wiki web application that allows a user to easily add and edit content on a web page
virtual reality (VR) involves fully immersing users within a virtual world, typically through the use of a head-mounted display (HMD) connected to headphones and other devices
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display (HMD) connected to headphones and other devices that enable navigation through the experience and allowing users to feel as if they are actually present within the virtual world. High-end VR devices designed to be used with PCs or gaming systems include Facebook’s Oculus Rift, HTC’s Vive, and Sony’s PlayStation VR. Sam- sung’s Gear VR and Google Cardboard are examples of lower-cost, mobile, entry-level devices. A number of publishers are experimented with VR content that can use these lower-cost devices. For example, the New York Times has a VR mobile app that viewers can use with Google Cardboard to view VR films and advertisements that feature 360-degree video. By 2020, some analysts estimate that there will be almost 155 million virtual reality users worldwide (with around 135 million using a smartphone-powered device and another 20 million a higher-end PC/game console-related device). Aug- mented reality (AR) involves overlaying virtual objects over the real world, via smartphones, tablets, or HMDs. Perhaps the highest profile use of AR thus far has been its use in Nintendo’s Pokemon GO game. Other uses include Snapchat’s Lenses feature, which uses facial recognition technology and 3-D models that allow users to augment their selfies by overlaying animations or other images on top of them, and “try-before- you-buy” apps created for beauty and fashion brands (eMarketer, Inc., 2016m).
INTELLIGENT PERSONAL ASSISTANTS
The idea of having a conversation with a computer, having it understand you and be able to carry out tasks according to your direction, has long been a part of science fiction, from the 1968 Hollywood movie 2001: A Space Odyssey, to an old Apple pro- motional video depicting a professor using his personal digital assistant to organize his life, gather data, and place orders at restaurants. That was all fantasy. But Apple’s Siri, billed as an intelligent personal assistant and knowledge navigator and released in 2011, has many of the capabilities of the computer assistants found in fiction. Siri has a natural language, conversational interface, situational awareness, and is capable of carrying out many tasks based on verbal commands by delegating requests to a variety of different web services. For instance, you can ask Siri to find a restaurant nearby that serves Italian food. Siri may show you an ad for a local restaurant in the process. Once you have identified a restaurant you would like to eat at, you can ask Siri to make a reservation using OpenTable. You can also ask Siri to place an appointment on your calendar, search for airline flights, and figure out what’s the fastest route between your current location and a destination using public transit. The answers are not always completely accurate, but critics have been impressed with its uncanny abilities. Siri is currently available on the Apple Watch, the iPhone 4S and later versions, iPads with Retina display, the iPad Mini, and iPod Touches (fifth generation and later versions).
In 2012, Google released its version of an intelligent assistant for Android-based smartphones, which it calls Google Now. Google Now is part of the Google Search mobile application. While Google Now has many of the capabilities of Apple’s Siri, it attempts to go further by predicting what users may need based on situational aware- ness, including physical location, time of day, previous location history, calendar, and expressed interests based on previous activity, as described in its patent application (United States Patent Office, 2012). For instance, if you often search for a particular musician or style of music, Google Now might provide recommendations for similar
augmented reality (AR) involves overlaying virtual objects over the real world, via smartphones, tablets or HMDs.
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music. If it knows that you go to a health club every other day, Google Now will remind you not to schedule events during these periods. If it knows that you typically read articles about health issues, the system might monitor Google News for similar articles and make recommendations. In 2016, Google unveiled Google Assistant, a similar virtual assistant for its Allo chat app and integrated into its Google Home products and its new Pixel phones. Other intelligent personal assistants include Samsung’s S Voice, LG’s Voice Mate, and Microsoft’s Cortana. The Insight on Business case, AI, Intelligent Assistants, and Chatbots, focuses on the increasing use of AI technologies in e-commerce.
3.6 MOBILE APPS: THE NEXT BIG THING IS HERE
When Steve Jobs introduced the iPhone in January 2007, no one, including himself, envisioned that the device would launch a software revolution or become a major e-commerce platform, let alone a game platform, advertising platform, and general media platform for television shows, movies, videos, and e-books. The iPhone’s original primary functions, beyond being a cell phone, were to be a camera, text messaging device, and web browser. What Apple initially lacked for the iPhone were software applications (“apps”) that would take full advantage of its computing capabilities. The solution was apps developed by outside developers. In July 2008, Apple introduced the App Store, which provides a platform for the distribution and sale of apps by Apple as well as by independent developers. Around the same time, Google was developing Android as an open source operating system for mobile devices. In October 2008, the first smartphone using Android was released, and Google launched the Android Market (now called Google Play) as the official app store for Android. In 2010, tablet computers such as Apple’s iPad and the Samsung Galaxy Tab, which provided additional platforms for mobile apps, were introduced.
As of June 2016, more than 130 billion apps have been downloaded from the App Store, and there are over 2 million approved apps available for download. There are over 2 million apps available for Android devices on Google Play as well. And while the number of cumulative downloads of Android apps is not publicly available, Google has announced that Android users downloaded over 65 billion apps between May 2015 and May 2016 alone.
The mobile app phenomenon has spawned a new digital ecosystem: tens of thou- sands of developers, a wildly popular hardware platform, and millions of consumers now using a mobile device to replace their clunky desktop-laptop Microsoft Windows computer and act as a digital media center as well. Mobile apps have even usurped TV as the most popular entertainment medium. A 2015 report from Flurry found that the average U.S. consumer now spends nearly 200 minutes per day within apps, well ahead of the 168 minutes spent watching TV. As recently as 2014, TV was still comfort- ably ahead of apps. More consumers are opting to consume media on their phones and tablet computers than ever before, which is more good news for app developers.
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INSIGHT ON BUSINESS
AI, INTELLIGENT ASSISTANTS, AND CHATBOTS
Despite the frequent appearances of robots and advanced artificial intel-
ligence (AI) in books and movies over the past several decades, real-world
equivalents have lagged hopelessly behind. However, today’s tech titans are doubling their
efforts to improve AI technologies in an effort to get a jump on the competition. We may still be a long way away from R2-D2, but AI in the form of personalization systems, chatbots, and intelligent assistants is finally entering the mainstream.
AI systems of the past have had frustrat- ingly limited capabilities. Asking them to perform tasks outside of their purpose or to interpret and respond to the variation and nuances of human language simply doesn’t work. Even tools like search engines, which have the ability to distin- guish between different types of language and queries, can’t incorporate context.
Although companies like Amazon have made use of more complex forms of AI to power their personalization and recommendation engines, this mostly occurs behind the scenes—customers aren’t interacting directly with these types of AI technologies. However, advances in natural lan- guage processing techniques have enabled Amazon to develop exciting new technologies like the Amazon Echo and its underlying AI technology, which Amazon calls Alexa. The Echo is marketed as a home assistant that can perform a variety of tasks using speech recognition, but is still in its infancy as a product. Currently, the Echo can update to-do lists, adjust home appliances, play games, and stream music, all controlled by voice.
Echo and Alexa are powered by these and other “skills,” which function much like apps do on the iPhone, and which third-party developers are lining up in droves to develop. For example,
1-800-Flowers was one of the first large retail- ers to develop a skill that allows users to place orders by voice alone on any device running Alexa, including the Echo and the Amazon Fire TV. Although customers interested in using this capability must have account info, payment info, and addresses already on file, this represents a major breakthrough. Other companies developing skills for Alexa include Domino’s, Capital One, Ford Motor, and many more. Amazon is hoping that in the future, people will be able to ask Alexa what they should buy and receive an intelligent, relevant response.
Although Echo and Alexa are perhaps the most visible sign of growth in artificial intelligence and natural language processing, the modern tech- nological landscape is defined by its multitude of platforms. Retailers are trying to encourage their customers to do business with them on each and every one of them. Many of these platforms are text-based, and the number of people using mes- saging apps is skyrocketing in the United States, from 113 million in 2015 to a projected 177 million by 2019. To that end, companies have been rolling out “chatbots”—AI that can interact with users via text and automate many parts of the pur- chasing process that are currently manual, such as talking on the phone or navigating online menus.
Facebook Messenger is one of the most popular messaging apps, trailing only WhatsApp in monthly active users. Facebook M is a virtual assistant within Messenger launched in 2015 that can perform a variety of tasks via text, including making restaurant reservations, booking travel plans, and helping find birthday gifts. Facebook has also opened the Messenger platform to third- party chatbots from other companies, including the previously mentioned 1-800-Flowers as well
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as others like Uber. Increasingly, popular workplace messaging tool Slack has done
the same with its platform, and companies like Taco Bell have developed tools like TacoBot that allow Slack users to order food through a brief text conversation.
Seemingly every prominent tech company and messaging platform has an AI that it hopes will dominate the emerging marketplace. Amazon has Alexa and Facebook has M; Apple has Siri, perhaps the best known intelligent assistant; Google has Google Now and Google Assistant; Microsoft has Cortana. Google also unveiled its Google Home appliance, which is modeled after the Echo but which reportedly has better con- versational functionality and ability to integrate with home speakers. In the same vein, Samsung announced the Samsung Otto device, which comes equipped with features Echo lacks like an HD camera and facial recognition capability. These companies are all positioning themselves to take part in the impending boom in virtual assistant technologies. Analysts anticipate that virtual assistants of all types will have 1.8 billion active global users by 2021, up from 390 million in 2016.
Other players have emerged as well. The developers of the AI that powers Apple’s Siri have developed a new platform called Viv that goes far beyond Siri’s functionality. Viv can answer much more complicated questions than Siri, such as “Will it be warmer than 70 degrees near the
Golden Gate Bridge after 5 PM the day after tomorrow?” Viv can also book flights by using your preferred airline, frequent flyer number, and seating preference, all without any human guid- ance, and might someday have the ability to auto- matically detect low fares.
A primary goal of all of these technologies is to facilitate sales. Intelligent personal assistants and chatbots might be able to understand what it is that we’re looking for as consumers even when we’re not sure how to phrase it or what we’re even looking for. If AI continues to improve and people learn to trust technologies like chatbots, the importance of websites and native apps is likely to greatly diminish, and web search may also take a hit. That’s part of the reason why Google has been so active in this area, perhaps sensing a threat to its core business model.
Interestingly, Microsoft has eight full-time writers who formulate Cortana’s responses to user queries. The team’s goal is for Cortana to exhibit the type of multi-dimensional intelligence that humans display—social intelligence, emotion, humor, and a point of view. Whichever intelligent assistant is most successful at this is likely to have a leg up on the others. Although these technologies still require plenty of human guidance (Facebook M reportedly has a staff of human customer service agents on hand to handle difficult queries), the time may finally have arrived where interacting directly with AI becomes a part of our everyday lives.
SOURCES: “What Alexa & AI Means for the Future of Commerce,” by Richard MacManus, Richardmacmanus.com, August 25, 2016; “Why Dominos’ Virtual Assistant Struggles to Understand Your Orders,” by Clint Boulton, Cio.com, August 24, 2016; “What Retailers Need to Know, and Expect, About Virtual Digital Technology,” by Judy Motti, Retailcustomerexperience.com, August 5, 2016; “3 Ways Artificial Intelligence Is Transforming E-commerce,” by Ben Rossi, Information-age.com, July 18, 2016; “These Three Virtual Assistants Point the Way to the Future,” by Mike Elgan, Computerworld.com, June 8, 2016; “The Search for the Killer Bot,” by Sharon Gaudin, Casey Newton, Theverge.com, June 1, 2016; “When a Robot Books Your Airline Ticket,” by Jane L. Levere, New York Times, May 30, 2016; “Google Makes Push Into Artificial Intelligence with New Offerings,” by Jack Nicas, Wall Street Journal, May 18, 2016; “Google Home vs. Amazon Echo: Why Home Could Win,” by Andrew Gebhart, Cnet.com, May 18, 2016; “New Siri Sibling Viv May Be Next Step in A.I. Evolution,” Computerworld.com, May 11, 2016; “Siri-Creator Shows Off First Public Demo of Viv, ‘The Intelligent Interface for Everything,’” by Lucas Matney, Techcrunch. com, May 9, 2016; “1-800-Flowers Chats Up Amazon’s Alexa,” by Allison Enright, Internetretailer.com, April 26, 2016; “The Chatbots are Coming - and They Want to Help You Buy Stuff,” by Sarah Halzack, Washington Post, April 13, 2016; “What Can Chatbots Do for Ecommerce?” by Mike O’Brien, Clickz.com, April 11, 2016; “2 Ways Artificial Intelligence Is Changing Customer Engagement,” by Randy Kohl, The-future-of-commerce.com, February 18, 2016; “How Real People Help Cortana, Siri, and Other Virtual Assistants Feel Alive,” by Mike Elgan, Pcworld.com, February 1, 2016; “The North Face Brings AI to Ecommerce,” by Rebecca Harris, Marketingmag.ca, January 12, 2016.
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The implications of the app ecosystem for e-commerce are significant. The smart- phone in your pocket or the tablet computer on your lap becomes not only a general- purpose computer, but also an always-present shopping tool for consumers, as well as an entirely new marketing and advertising platform for vendors. Early e-commerce applications using desktops and laptops were celebrated as allowing people to shop in their pajamas. Smartphones and tablets extend this range from pajamas to office desktops to trains, planes, and cars, all fully clothed. You can shop anywhere, shop everywhere, and shop all the time, in between talking, texting, watching video, and listening to music. Almost all of the top 100 brands have a presence in at least one of the major app stores, and more than 90% have an app in the Apple App Store. M-commerce in the form of purchases of retail and travel products and services via a mobile device is expected to generate over $180 billion in 2016, while downloads of mobile apps and in-app purchases are expected to generate over $10 billion (eMarketer, Inc., 2016n, 2016o, 2016p).
PLATFORMS FOR MOBILE APPLICATION DEVELOPMENT
Unlike mobile web sites, which can be accessed by any web-enabled mobile device, native apps, which are designed specifically to operate using the mobile device’s hard- ware and operating system, are platform-specific. Applications for the iPhone, iPad, and other iOS devices are written in the Objective-C programming language using the iOS SDK (software developer kit). Applications for Android operating system–based phones typically are written using Java, although portions of the code may be in the C or C++ programming language. Applications for Windows mobile devices are written in C or C++. In addition to creating native apps using a programming language such as Objective C or Java, there are also hundreds of low-cost or open source app development toolkits that make creating cross-platform mobile apps relatively easy and inexpensive without having to use a device-specific programming language. See Section 4.6 in Chapter 4 for more information.
APP MARKETPLACES
Once written, applications are distributed through various marketplaces. Android apps for Android-based phones are distributed through Google Play, which is controlled by Google. iPhone applications are distributed through Apple’s App Store. Microsoft operates the Windows Phone Marketplace for Windows mobile devices. Apps can also be purchased from third-party vendors such as Amazon’s Appstore. It is important to distinguish “native” mobile apps, which run directly on a mobile device and rely on the device’s internal operating system, from web apps, which install into your browser, although these can operate in a mobile environment as well.
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3.7 C A S E S T U D Y
A k a m a i T e c h n o l o g i e s : A t t e m p t i n g t o K e e p S u p p l y A h e a d o f D e m a n d
In 2016, the amount of Internet traffic generated by YouTube alone is greater than the amount of traffic on the entire Internet in 2000. Because of video streaming and the explosion in mobile devices demanding high-bandwidth applications, Internet traffic has increased over 500% since 2010 and is pre- dicted to nearly triple by 2019 (see Figure 3.19). Internet video is now a majority of Internet traffic and will reach 82% by 2020, according to Cisco. Experts call services like YouTube, Netflix, and high definition streaming video “net bombs” because they threaten the effective operation of the Internet. Mobile platform traffic grew by almost 75% in 2015 and may soon push cellular networks and the Internet to their capacities.
FIGURE 3.19 THE GROWTH OF INTERNET TRAFFIC
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Cisco estimates that annual global Internet traffic will be around 2.3 zettabytes in 2020: that’s 2,300 exabytes, or, in other words, 23 with 19 zeroes behind it!
In today’s broadband environment, the threshold of patience is very low. Increased video and audio customer expectations are bad news for anyone seeking to use the Web for delivery of high-quality multimedia content and high definition video. Akamai is one of the Web’s major helpers, and an overwhelming majority of the Web’s top companies use Akamai’s services to speed the delivery of content. Akamai serves more than 30 terabits of web traffic per second.
Slow-loading web pages and content sometimes result from poor design, but more often than not, the problem stems from the underlying infrastructure of the Internet. The Internet is a collection of networks that has to pass information from one network to another. Sometimes the handoff is not smooth. Every 1,500-byte packet of information sent over the Internet must be verified by the receiving server and an acknowledgment sent to the sender. This slows down not only the distribution of content such as music, but also slows down interactive requests, such as purchases, that require the client com- puter to interact with an online shopping cart. Moreover, each packet may go through many different servers on its way to its final destination, multiplying by several orders of magnitude the number of acknowledgments required to move a packet from New York to San Francisco. The Internet today spends much of its time and capacity verifying packets, contributing to a problem called “latency” or delay. For this reason, a single e-mail with a 1-megabyte attached PDF file can create more than 50 megabytes of Internet traffic and data storage on servers, client hard drives, and network backup drives.
Akamai Technologies was founded by Tom Leighton, an MIT professor of applied mathematics, and Daniel Lewin, an MIT grad student, with the idea of expediting Internet traffic to overcome these limitations. Lewin’s master’s thesis was the theoreti- cal starting point for the company. It described storing copies of web content such as pictures or video clips at many different locations around the Internet so that one could always retrieve a nearby copy, making web pages load faster.
Officially launched in August 1998, Akamai’s current products are based on the Akamai Intelligent Platform, a cloud platform made up of over 216,000 servers in 120 countries within over 1,500 networks around the world, and all within a single network hop of 85% of all Internet users. Akamai software on these servers allows the platform to identify and block security threats and provide comprehensive knowledge of network conditions, as well as instant device-level detection and optimization. Akamai’s site performance products allow customers to move their online content closer to end users so a user in New York City, for instance, will be served L.L.Bean pages from the New York Metro area Akamai servers, while users of the L.L.Bean site in San Francisco will be served pages from Akamai servers in San Francisco. Akamai has a wide range of large corporate and government clients: 1 out of every 3 global Fortune 500 companies, the top 30 media and entertainment companies, 96 of the top 100 online U.S. retailers, all branches of the U.S. military, all the major U.S. sports leagues, and so on. In 2015, Akamai delivers between 15% and 30% of all web traffic, and over 3 trillion daily Internet interactions. Other competitors in the content deliv- ery network (CDN) industry include Limelight Networks, Level 3 Communications, and Mirror Image Internet.
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Accomplishing this daunting task requires that Akamai monitor the entire Inter- net, locating potential sluggish areas and devising faster routes for information to travel. Frequently used portions of a client’s website, or large video or audio files that would be difficult to send to users quickly, are stored on Akamai’s servers. When a user requests a song or a video file, his or her request is redirected to an Akamai server nearby and the content is served from this local server. Akamai’s servers are placed in Tier 1 backbone supplier networks, large ISPs, universities, and other net- works. Akamai’s software determines which server is optimal for the user and then transmits the “Akamaized” content locally. Web sites that are “Akamaized” can be delivered anywhere from 4 to 10 times as fast as non-Akamaized content. Akamai has developed a number of other business services based on its Internet savvy, including targeted advertising based on user location and zip code, content security, business intelligence, disaster recovery, on-demand bandwidth and computing capacity during spikes in Internet traffic, storage, global traffic management, and streaming services. You can see several interesting visualizations of the Internet that log basic real-time online activity by visiting the Akamai website.
The shift toward cloud computing and the mobile platform as well as the growing popularity of streaming video have provided Akamai with new growth opportunities. As more businesses and business models are moving to the Web, Akamai has seen its client base continue to grow beyond the most powerful Internet retailers and online content providers. In 2014, Akamai made a push to encourage Hollywood studios to use the cloud for feature films, touting its ability to handle uploads and downloads of large video files, to quickly convert files from one format to another, and to apply DRM protections. Establishing partnerships with movie studios represented big business for Akamai, with an increasing amount of media consumption taking place on mobile devices through the cloud. Akamai has also made agreements to become the primary content delivery platform for cloud service providers like Microsoft Azure and Google Cloud Platform.
However, the growth of streaming video has also created new challenges for Akamai, including increased competition from Comcast and Amazon, which have built competing content delivery services. Amazon’s Cloudfront content delivery network is already bringing in $1.8 billion in revenues. Larger clients like Apple and Facebook are also increasingly shifting their content delivery operations away from Akamai’s platforms and onto in-house content delivery networks. Reducing carbon emissions and energy expenditure as demand grows has been another challenge for Akamai. In response, the company has undertaking sweeping efforts to reduce its greenhouse gas emissions to below 2015 levels by 2020 despite significantly higher demand.
Akamai is also acutely aware of the increase in cybercrime as more traffic migrates to the Internet. Growth in Internet traffic is good news for Akamai, but the company must also now deal with politically motivated cyberattacks, organized crime online, and state-sponsored cyberwarfare. Akamai has continued to improve its Kona Site Defender tool, which offers a variety of security measures for Akamai clients. The tool protects against Distributed Denial of Service (DDoS) attacks and includes a firewall for web applications. In 2016, Akamai rolled out new improvements to Kona’s web application firewall and analytics features. Akamai also upgraded Site Defender’s Web Application Firewall feature and developed modifications to the tool that make it easier
SOURCES: “Facts & Figures,” Akamai.com, accessed September 8, 2016; “Amazon, Comcast Content Delivery Network Push Could Hurt Akamai,” by Reinhardt Krause, Investors.com, May 11, 2016; “Akamai Will Power Internet with Sun and Wind,” by Nicola Peill-Moelter, Greenbiz.com, May 11, 2016; “Akamai Advances Kona Site Defender to Meet the Chal- lenges Posed by Constantly Evolving Web Application and DDoS Threat Landscape,” Akamai. com, February 29, 2016; “Akamai Shares Surge on Earnings Beat, Reorganization, Buybacks,” by Wallace Witkowski, Marketwatch. com, February 9, 2016; “Google and Akamai Partner on Speeding Up Cloud Network,” by Steven J. Vaughan-Nichols, Zdnet.com, November 20, 2015; “How Akamai Plans to Make a Comeback,” Bloomberg.com, October 28, 2015; “Microsoft and Akamai Bring CDN to Azure Customers,” by Sudheer Sirivara, Azure.microsoft.com,
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September 29, 2015; “Akamai Opens Dubai Office to Support Its Growing Middle East Business,” Akamai.com, June 14, 2015; “Akamai, Trustwave to Promote, Sell Each Other’s Security Services,” by Sean Michael Kerner, Eweek. com, June 1, 2015; “Akamai and China Unicom Establish Strategic Cloud Services Partnership,” Akamai.com, May 26, 2015; “Akamai Appeals to Hollywood Studios at NAB 2014,” by Troy Dreier, Streamingmedia.com, April 7, 2014; “Akamai Completes Acquisition of Prolexic,”Akamai. com, February 18, 2014; “You Think the Internet Is Big Now? Akamai Needs to Grow 100-Fold,” by Mathew Ingram, GigaOM.com, June 20, 2012; “Akamai Eyes Acceleration Boost for Mobile Content,” by Stephen Lawson, Computerworld, March 20, 2012; “To Cash In on Wave of Web Attacks, Akamai Launches Stand- alone Security Business,” by Andy Greenberg, Forbes.com, February 21, 2012.
for its users to use. With so many businesses now dependent on the uninterrupted flow of content over the Internet, Akamai is in a very strong position to sell security services to its customers. In 2015, Akamai partnered with top information security firm Trustwave to cross-sell each other’s services and products, expanding their offerings and reaching even further. Akamai made a similar agreement with China Unicom, a provider of cloud services in the fast-growing Chinese market. Akamai has also set itself up for future growth by moving into areas of the world with less developed broadband infrastructure, such as the Middle East. In 2015, Akamai opened an office in Dubai, hoping to bolster its presence in an area where the adoption rate for broadband is skyrocketing.
In 2016, experiencing rapidly increasing demand from its clients for security tools, Akamai announced it would restructure its business into two distinct units, one focusing on content delivery and media, and the other on website security. The improvements in Akamai’s security businesses have offset any slowdown in their content delivery business, as the company registered earnings well above analyst estimates in 2016 despite increased competition in content delivery. Akamai has plans to increase its suite of security tools going forward, with tools designed to protect employees from phishing and malware due to be released in 2017. While the future of its content delivery business is cloudier due to increased competition and the chal- lenges of Internet growth, the company is still very profitable.
Case Study Questions
1. Why does Akamai need to geographically disperse its servers to deliver its cus- tomers’ web content?
2. If you wanted to deliver software content over the Internet, would you sign up for Akamai’s service? Why or why not?
3. Do you think Internet users should be charged based on the amount of band- width they consume, or on a tiered plan where users would pay in rough propor- tion to their usage?
3.8 REVIEW
K E Y C O N C E P T S
Discuss the origins of, and the key technology concepts behind, the Internet.
• The Internet has evolved from a collection of mainframe computers located on a few U.S. college cam- puses to an interconnected network of thousands of networks and millions of computers worldwide.
• The history of the Internet can be divided into three phases: the Innovation Phase (1961–1974), the Insti- tutionalization Phase (1975–1995), and the Commercialization Phase (1995 to the present).
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• Packet switching, TCP/IP, and client/server technology are key technology concepts behind the Internet. • The mobile platform has become the primary means for accessing the Internet. • Cloud computing refers to a model of computing in which firms and individuals obtain computing power
and software applications over the Internet, rather than purchasing the hardware and software and installing it on their own computers.
• Internet protocols and utility programs such as BGP, HTTP, SMTP and POP, SSL and TLS, FTP, Telnet, Ping, and Tracert provide a number of Internet services.
Explain the current structure of the Internet.
• The main structural elements of the Internet are the backbone (composed primarily high-bandwidth fiber optic cable), IXPs (hubs that use high-speed switching computers to connect to the backbone), CANs (campus/corporate area networks), and ISPs (which deal with the “last mile” of service to homes and offices).
• Governing bodies, such as IAB, ICANN, IESG, IETF, ISOC, and W3C, have influence over the Internet and monitor its operations, although they do not control it.
Understand the limitations of today’s Internet and the potential capabilities of the Internet of the future.
• To envision what the Internet of tomorrow will look like, we must first look at the limitations of today’s Internet, which include bandwidth limitations, quality of service limitations, network architecture limita- tions, language limitations, and limitations arising from the wired nature of the Internet.
• Internet2 is a consortium working together to develop and test new technologies for potential use on the Internet. Other groups are working to expand Internet bandwidth via improvements to fiber optics. Wire- less and cellular technologies are providing users of mobile devices with increased access to the Internet and its various services. The increased bandwidth and expanded connections will result in a number of benefits, including latency solutions; guaranteed service levels; lower error rates; and declining costs. The Internet of Things will be a big part of the Internet of the future, with more and more sensor- equipped machines and devices connected to the Internet.
Understand how the Web works.
• The Web was developed during 1989–1991 by Dr. Tim Berners-Lee, who created a computer program that allowed formatted pages stored on the Internet to be linked using keywords (hyperlinks). In 1993, Marc Andreessen created the first graphical web browser, which made it possible to view documents on the Web graphically and created the possibility of universal computing.
• The key concepts you need to be familiar with in order to understand how the Web works are hypertext, HTTP, URLs, HTML, XML, web server software, web clients, and web browsers.
Describe how Internet and web features and services support e-commerce.
• Together, the Internet and the Web make e-commerce possible by allowing computer users to access product and service information and to complete purchases online.
• Some of the specific features that support e-commerce include communication tools such as e-mail, mes- saging applications, online message boards, Internet telephony, video conferencing, video chatting, and telepresence; search engines; and downloadable and streaming media.
• Web 2.0 applications and services include social networks, blogs, and wikis. • Virtual reality, augmented reality and artificial intelligence technologies have begun to enter the con-
sumer market and attract significant attention.
Understand the impact of mobile applications.
• The mobile app phenomenon has spawned a new digital ecosystem.
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• Smartphone and tablet users spent the majority of their time using mobile apps rather than the mobile Web. • There are a variety of different platforms for mobile application development including Objective-C (for
iOS devices), Java (Android smartphones), and C and C++ (Windows mobile devices). • Mobile apps for the iPhone are distributed through Apple's App Store, for Android devices through Google
Play, and for Windows mobile devices through Microsoft’s Windows Phone Marketplace. There are also third-party vendors such as Amazon's Appstore.
Q U E S T I O N S
1. What are the three basic building blocks of the Internet? 2. What is latency, and how does it interfere with Internet functioning? 3. Explain how packet switching works. 4. How is the TCP/IP protocol related to information transfer on the Internet? 5. What technological innovation made client/server computing possible? 6. What is cloud computing, and how has it impacted the Internet? 7. Why are smartphones a disruptive technology? 8. What role does a Tier 1 ISP play in Internet infrastructure? 9. What function do the IXPs serve? 10. What is the goal of the Internet2 project? 11. Compare and contrast intranets and the Internet as a whole. 12. What are some of the major limitations of today’s Internet? 13. What are some of the challenges of policing the Internet? Who has the final say when it comes to
content? 14. Compare and contrast the capabilities of Wi-Fi and cellular wireless networks. 15. What are the basic capabilities of a web server? 16. What are the major technological advancements that are anticipated to accompany the Internet of the
future? Discuss the importance of each. 17. Why was the development of the browser so significant for the growth of the Web? 18. What advances and features does HTML5 offer? 19. Name and describe five services currently available through the Web. 20. Why are mobile apps the next big thing?
P R O J E C T S
1. Review the opening case on Apple Watch. What developments have occurred since this case was written in September 2016?
2. Call or visit the websites of a cable provider, DSL provider, and satellite provider to obtain information on their Internet services. Prepare a brief report summarizing the features, benefits, and costs of each. Which is the fastest? What, if any, are the downsides of selecting any of the three for Internet service (such as additional equipment purchases)?
3. Select two countries (excluding the United States) and prepare a short report describing their basic Internet infrastructure. Are they public or commercial? How and where do they connect to backbones within the United States?
4. Investigate the Internet of Things. Select one example and describe what it is and how it works.
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4C H A P T E R
Building an E-commerce Presence: Websites, Mobile Sites, and Apps
L E A R N I N G O B J E C T I V E S
After reading this chapter, you will be able to:
■ Understand the questions you must ask and answer, and the steps you should take, in developing an e-commerce presence.
■ Explain the process that should be followed in building an e-commerce presence. ■ Identify and understand the major considerations involved in choosing web server and
e-commerce merchant server software. ■ Understand the issues involved in choosing the most appropriate hardware for an
e-commerce site. ■ Identify additional tools that can improve website performance. ■ Understand the important considerations involved in developing a mobile website and
building mobile applications.
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187
For 125 years, the Wall Street Journal (WSJ) has been a venerated newspaper with a focus on business and a well-educated, discerning readership. It consistently ranks as one of the top publications world- wide in terms of number of sub- scribers (currently approximately 2.8 million). Despite its pedigree as one of the most recognizable and respected newspapers in the world, WSJ has also made an effort to stay on the cutting edge in an industry that has seen significant disruption in the past decade. It was a pioneer in developing a pay wall for its digital content in 1997, which met with skepticism and even ridicule at first, but is now increasingly common among online newspapers. WSJ was also one of the first news organizations with its own app for the iPad, released in 2010.
From 2010 to 2015, however, WSJ began to lag behind other newspapers and web- sites as devices became smaller, more streamlined, and more specialized. Although it was a first mover into the mobile space, other papers like the Financial Times and USA Today made sweeping changes to their websites and mobile offerings during this time period that better suited mobile browsing. WSJ had not redesigned its website since 2008. To make matters worse, in 2015, Google updated its search algorithms to prioritize sites that are optimized for mobile devices, which caused WSJ’s search results to suffer. The company wasn’t alone in that regard, with nearly half of the websites belonging to Fortune 500 companies failing to achieve “mobile-friendliness,” according to Google, including a surprising 29% of retail sites, where mobile search is critical to maintaining revenue growth. However, with many publishing companies already struggling to adjust to the new online world, WSJ decided it had no more time to waste.
In 2015, WSJ undertook a complete redesign of its website and mobile apps across multiple platforms. It released new iPad and Android apps with a variety of new features to improve user experience, and followed those up with the release of apps for the Apple Watch and for the Windows 10 operating system. It also added its first mobile-only product, an app that features a curated digest of 10 stories that is refreshed during the
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day, patterned after the What’s News column that appears on the front page of the print version. WSJ also launched a London-specific app called WSJ City that provides frequent updates on the most significant business news in London. In 2016, WSJ announced plans to launch more apps with specific functions akin to What’s News and WSJ City. The paper also launched the WSJ.D niche site, which focuses on technology news, analysis, com- mentary, and product reviews. The overhaul was more than just cosmetic. Organizationally, it also integrated the team that works on new technology products and design elements into the news room, so that the editors themselves can have direct input into shaping the technological future of WSJ. This move has helped WSJ keep pace with other top newspapers, including the Washington Post, which has almost 50 engineers working in its newsroom. In 2016, WSJ also announced continued changes to the organizational structure of its newsroom to improve its digital efforts further.
One of the most critical objectives of the overhaul was to ensure that the user experi- ence was consistent across all of the different devices that readers use today and in the future. Being able to save an article on the iPad and open the app on your iPhone or log in to the website and see the same article with your progress saved was a top priority for WSJ. The number of options for navigating articles was reduced for simplicity and ease of use, with the number of exposed navigation options dropping by nearly half on many pages. In the past, options were different on different devices and appeared in different places on the screen, confusing readers attempting to move from one device to another. Using an iOS feature called Handoff, WSJ allows users to save stories across all of their devices and to carry over the “graying out” of article headlines that have been read across those devices as well. It also allows users to access its Watchlist stock portfolio service across all devices.
In addition to making the user experience more consistent across devices, WSJ hoped to improve it. The app versions of WSJ are more responsive and more visually appealing. Graphical elements are more prominent and even interactive. The app loads faster, which had been an area where it trailed its competitors in the past. WSJ wanted the reading experience to feel natural on any device, which required it to optimize its apps for the screen size of the latest generation of Apple and Android phones. As devices continue to evolve in size, so too will the WSJ app experience. On a desktop, users can mouse over and click precise areas, but on a mobile device, users can swipe and tilt the device. In general, WSJ seeks to minimize interactions requiring precise taps on mobile as well as to reduce the amount of the screen that is fixed from page to page. Making interactive maps suitable for mobile can be particularly difficult, but WSJ is fine-tuning its approach.
Most of the feedback on the design changes has been positive. Elements that many readers had requested were added, including a “Market Data Center” featured prominently on the new website home page with essential information on the status of the stock markets that day. The iOS app also includes a Journal widget that places top stories of the day alongside other daily notifications, such as appointments and weather alerts. Users can swipe directly from their widget menu to move straight to the story within the WSJ app. From a user perspective, the new site and apps provide a large number of content choices, while also offering a variety of advertising opportunities, which is beneficial from WSJ’s perspective.
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As traffic continues to shift to the mobile platform, providing these advertising op- portunities will become increasingly important to WSJ’s continued success. In 2008, 10% of WSJ’s traffic came via mobile devices. That figure sits at 55% in 2016 and continues to grow quickly. WSJ has about 900,000 digital-only subscribers, trailing the New York Times (1 million) and coming in ahead of the Financial Times (over 520,000), but most of its 1.5 million print edition subscribers also have all-access subscriptions. Although measuring subscription numbers has become more complicated as the number of digital devices and reading platforms has grown, the trend away from print and towards digital has long been clear throughout the industry. But despite the proliferation of the mobile platform, two-thirds of WSJ’s subscribers visit the website home page each month. Realizing this, WSJ included the website as a key component of its redesign. As it turns out, readers use whatever device is convenient at the time—desktop in the office and mobile devices when moving about.
Another effect of the wider array of options for WSJ subscribers is that different trends and reading patterns emerge on each platform. To capture this new data, WSJ is upgrading its analytics capabilities, with the goal of using them in the newsroom and in its larger business strategy. One example of this approach already delivering results is the breakdown of device usage by WSJ readers. Tablet usage of the WSJ app is growing at approximately 10% per year, but smartphone usage is growing by 30% to 40%, sug- gesting that the smartphone app experience should be WSJ’s major focus going forward. Additionally, WSJ has found that app users are more active and engaged than web browser users, spending more time in the app and reading more articles than other types of users. App users are also likelier to maintain their subscriptions than any other type of user. WSJ also dropped its LinkedIn share button in 2016 because its analytics indicated that it siphoned off more traffic than it returned.
Many of the features that WSJ engineers are working on are tailored specifically for the app experience. One goal is to provide live video coverage via mobile devices. Another is to improve push alerts to make them more relevant to users. By analyzing reader data to understand what types of stories are most appealing to individual users or different demographics of users, WSJ can provide custom push alerts that are likeliest to motivate readers to swipe and move to the app. Another feature in development is a “Read-it-later” button that allows users to tag stories on any platform and view them later within their app. WSJ will also continue to optimize its Apple Watch app, which allows users to tilt the watch while looking at a headline to make that story available on the iPhone app.
Going forward, WSJ hopes to begin work on other features that will help in the future as early as possible. This means the paper will be continuously redesigning itself on a rolling basis. By integrating its engineering and product teams into the newsroom, it is much better positioned to achieve this level of development. For example, WSJ is one of the first organizations experimenting with virtual reality technology to improve its reporting. To that end, it updated its apps with built-in 360-degree video and virtual reality capability. With its sweeping redesign across all platforms, WSJ has once again solidified its status as an industry leader, even in this brave new world of news media.
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