E-COMMERCE Overview

History…. Wired: What's your sense of when you first thought that this thing you were working on was going to take over the world? Paul Baran: Around December '66, I presented a paper at the American Marketing Association called "Marketing in the Year 2000." I didn't talk about packet switching, but I described push-and-pull communications and how we're going to do our shopping via a television set and a virtual department store. If you want to buy a drill, you click on Hardware and that shows Tools and you click on that and go deeper.

History…. In the end, if you have two drills you're interested in, then you hit your Consumers Union button, and their evaluation goes up on the screen. Pretty much what WebTV is. Some in the audience were furious. They said, "People don't go shopping to buy things. They go there because of the enjoyment. You don't understand women." I could see a few people going for it, but most of them were shaking their heads. So, what do marketers know?

What is E-commerce anyway? “…all the marketing and selling and various other business-related activities that take place over a network.” (Communications Week Interactive) “all the activities you’d conduct online to interest a customer in your products before the sale, as well as fulfillment and customer support after the sale.” (Internet Computing)

What is E-commerce anyway? “…the vast network of small businesses, government agencies, large corporations, and independent contractors [molded] into a single community with the ability to communicate with one another seamlessly across any computer platform.” (Electronic Commerce Resource Center, ECRC)

What is E-commerce anyway? “more than simply buying and selling goods electronically; involves using network communications technology to engage in a wide range of activities up and down the value-added chain both within and outside the organization.” -- Applegate et al.

Retail Sales (offline and online) $2 trillion$2.6 trillion Consumer e-commerce $45 billion$269 billion WW: $760 billion % online buyers 34.1% WW: 10% 51.4% (2004) Avg. consumer e-spending $46.3 /yr$61.3/yr Internet advertising revenue $7 billion WW: $8.3 billion $30.8 billion WW: $42.2 billion Whatever it is, the dollar value is growing:

Source: Student Monitor

Whatever it is, it’s growing: Online banking customers 9.9 million WW: 34.4 million 22.8 million (2004) WW: million Online brokerage customers8.9 million22.8 million (2004) # filing taxes online 35.4 million49.6 million Total b2b commerce $336 billion$6.3 trillion Percent of colleges offering online courses 46.6%87.1% (2004) Note: US Population =276 million

Whatever it is, it’s growing:

Internet as Mass Medium — North American Adoption Curves North American Users / Households (MM) * Launch of HBO in 1976 used to estimate the beginning of cable as an entertainment / advertising medium Radio TV CableCommercial Internet 50 Million Users / Households Years to Reach 50 MM Users Radio: 38 years TV: 13 yearsCable*: 10 years Commercial Internet: 5 years Internet Adoption Rates Versus Other Mediums

Whatever it is, it’s growing: Rate of Online Purchases (as a total % of total users) 4Q % 4Q % 4Q % Top 5 Items Purchased Online, 4Q 2000 (as a % of total online purchases in a 90 day period) Books: 19% CDs: 16 Clothing: 16 Toys/Games: 12 Computer Software: 10 Greenfield Online Inc. 2001

Three Eras Era 1: Early 90s Text Heavy, low bandwidth Limited transaction infrastructure Limited subscriber base (around 5 M) Early adopters -- upscale technophile males Usage -- , BBS, computing Little interest by mainstream companies

Three Eras Era 2: Emergence as a marketing tool/mid-late 90s Explosion of graphic content via WWW Security and bandwidth issues being addressed Subscriber base growing and broadening to younger and female users Still mostly communication -- transactions in some niches -- e.g. travel

Three Eras Era 2: Emergence as a marketing tool/mid-late 90s Growing interest by consumer cos. Early “winners” emerge (e.g. Amazon.com)

Era 2 “…1999 [was] ….the year that Corporate America [got]… with the program. No longer are corporate Web sites mainly a haven for product brochures and digitized versions of the annual report…entrenched companies are putting millions of dollars into Internet initiatives to make sure some ‘dot.com’ upstart won’t steal their customers away.” --WSJ July 12, 1999

Era 2 “The Internet-based marketplace is causing a huge re-engineering of business…It matches buyers and sellers, so that buyers can become infinitely informed without ever talking face to face.” Andy Grove (Chairman of Intel)

Three Eras Era 3: Early 2000s? Bandwidth available at consumer- friendly cost 47% of U.S. HH online in 2000, Forecast is 74% by 2005 Most consumer cos. use interactive media as a rel’p medium and sales channel

Era 3 “Today we are preoccupied with Internet companies….In five years…that label will be meaningless because all companies will be Internet companies.” Andy Grove (Chairman of Intel)

Era 3 Hypergrowth will occur in American e-commerce first, then in Britain and Germany, and then in Japan, France and Italy ( Forrester Research )

Globally (including B2B and B2C)*: US46%38% Japan1221 Asia510 Western Europe2033 Rest of World77 Total * International Data Corporation 100% $350B 100% $3.14T

Myths of E-Commerce

Myth #1: “It’s easy – low barriers to entry” Barriers to entry: all resources required to get into a business or start selling a new product Posting a website is easy -- add “effective, scalable and successful” and it’s much harder

Myth #1:“It’s easy – low barriers to entry” “A web site is like an iceberg…below it you have infrastructure integration issues with maybe 40 or 50 databases.” (Delta Airlines CIO Charles Feld)

Myth #2: “It’s cheap.” A full-scale online commerce effort is not cheap. However, it is often cost-effective and can help build customer relationships

Myth #3: “The 3 C’s: The way to success is Content, Community and Commerce.” Content: Articles and information Community: Virtual gathering place for consumers Commerce: Now that you’ve got the consumers there, now sell them something Largely, the 3C’s doesn’t work; fundamental reason is how most consumers use and view the online medium The most successful applications of content -- e- commerce sites buy content sites and advertise on them (e.g. Amazon.com owns Imdb.com; ACE hardware owns OurHouse.com, a home repair site)

Myth #4: “It’s lucrative.” Profitability has been difficult on the Internet “E-commerce is like the market in China for U. S. companies…Most probably aren’t making a profit there yet, but they’re in China because of huge market potential. The returns will be a few years coming.” (Sheldon Laube, Chief Tech. Officer, US Web Inc)

Myth #5: “The Web Levels the Playing Field” Most e-tailers are established companies -- “hybrid” strategies (brands still matter) Burn rate (cost of marketing per each customer who purchases) is much higher for “pure” plays

1. Amazon.com/ToysRUs 2. eToys.com (now defunct) 3. Dell.com 4. Barnesandnoble.com 5. CDNow.com 6. Walmart.com 7. HP.com 8. Buy.com 9. JCPenney.com 10. Bestbuy.com 11. Hallmark.com 12. Bluelight.com 13. Ubid.com 14. Sears.com 15. Target.com Holiday 2000, most visited e-commerce sites:

Myth #5: “The Web Levels the Playing Field” Trust matters in B2B, too; doing business with vendors requires believing the vendor can deliver what he says he can deliver

Myth #5: “The Web Levels the Playing Field” “There’s a low barrier to doing e-commerce, but a very high barrier to becoming one of the leading choices.” Importantly, the web can support niche players because of its ability to “aggregate demand.” (e..g Oddballshoe.com, Indiagalore.com, Scrunchies.com, Dogtoys.com)Oddballshoe.com Indiagalore.comScrunchies.com Dogtoys.com

Myth # 6: “ It means the end of mass marketing” Marketing to a “segment of one” has been goal of database marketing and data mining Technology is making it possible at low CPM (cost per thousand) – advertising messages, content, and websites can be personalized and customized But, how do we get customers to the web site? (Offline advertising? Portal sites? Search Engines? Isn’t this MASS marketing?)

Myth # 6: “ It means the end of mass marketing” “The Net is like TV with 10 million channels. You can’t just hope that someone surfs by” (Cliff Conneighton, CEO of Icomes Inc.)

Myth # 6: “ It means the end of mass marketing” Attention Economy: “A marketplace based on the idea that while information is essentially infinite, demand for it is limited by the waking hours in a human day.” --Encyclopedia of the New Economy The question is: How do we get eyeballs (important for both commerce and content sites)?

Myth # 7: “It leads to product commoditization.” Pricing has been important, but somewhat less important than anticipated Branding and service have been keys as well. Amazon.com and Dell have most online customers in their industry, and don’t always charge lowest prices.

Myth # 7: “It leads to product commoditization.” “[On the Internet], price has been defined as the primary if not the sole competitive variable. Instead of emphasizing the Internet’s ability to support convenience, service, specialization, customization and other forms of value that justify attractive prices, companies have turned competition into a race for the bottom. Once competition is defined this way, it is very difficult to turn back.” Micheal Porter – Harvard Business Review, March 2001

Myth # 8: “The Internet will result in disintermediation.” Disintermediation: Cutting out the middleman If products are sold direct, who needs intermediaries? Fullfillment requires intermediaries (e.g. Amazon.com has invested heavily in warehouses; FedEx and UPS has extended their business to “the last mile”) New types of intermediaries: e.g. Truste, Paypal, web designers, truck fleets hired by Staples…..

Myth #9: “e-Commerce is dead.” Internet businesses have crashed and burned at an alarming rate Many more are in trouble Many different problems have led to demise; too many firms failed to focus on profitability and /or didn’t use Internet technology to provide a “sustainable competitive advantage” Offline shopping has many real advantages Nevertheless, e-commerce is growing. Upper limit? 5%? 8%? 15%? More?

Myth #9: “e-Commerce is dead.” “We need to move away from the rhetoric about “Internet industries,” “e-business strategies,” and a “new economy” to see the Internet for what it is: an enabling technology – a powerful set of tools that can be used, wisely or unwisely, in almost any industry and as part of any strategy….

E-commerce is not dead, but: …. Some companies … have used the Internet technology to shift the basis of competition away from quality, features and service and toward price, making it harder for anyone in their industries to turn a profit…Until recently, the negative effects of these actions have been obscured by distorted signals from the marketplace. Now, however, the consequences are becoming evident.” -- Micheal Porter, Harvard Business Review, March 2001

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Estimated Savings from e-commerce

Exhibit 1-5: Where to Play On-Line and Off-Line Fulfillment Systems Customer Interface On-lineOff-line Yahoo! Amazon.com BN.com McDonalds Egghead

Exhibit 1-6: Media Convergence to a Digital Platform Telephone/DSL Cable Broadcast Radio & TV Satellite Wireless Print (Newspapers and Magazines) Television Radio Music Motion Pictures Digital Convergence Digital Convergence Network Infrastructure Network Infrastructure Media Infrastructure Media Infrastructure

A Framework for Electronic Commerce Framing the Market Opportunity Business Model Implementation Evaluation: Metrics and Valuation Media Infrastructure Network Infrastructure e-commerce Strategy Market Infrastructure Customer Interface Publics and Politics Market Communications and Branding