MIS ch10

Chapter 10
E-Commerce: Digital
Markets, Digital Goods
10.1
2007 by Prentice Hall
Management Information Systems

Chapter 10 E-Commerce: Digital Markets, Digital Goods
Electronic Commerce and the Internet
E-commerce:
E-commerce refers to use of the Internet and the Web to transact
business.
More formally, e-commerce is about digitally enabled commercial
transactions between and among organizations and individuals,
primarily over Internet
E-commerce began in 1995 with Netscape.coms acceptance of
advertisements
Then there was a rapid growth that led to dot-com bubble (burst in
2001)
However, the business was restored again and current growth
25% annually
10.2

E-commerce Trends:
Online consumer sales grew over 400 percent from 2007 to 2011.
The number of individuals of all ages online in India expanded to
100 million in 2010 and this figure is estimated to go up to 237
million in 2015.
Across the world, over 1.9 billion people are now connected to the
Internet.
B2B e-commerce use of the Internet for business-to-business
commerce and collaboration among business partners expanded
to more than $ 2.5 trillion.
10.3

Like the many technological innovations, such as the telephone, radio, and
television, the very rapid growth in e-commerce in the early years created a
market bubble in e-commerce stocks.
Like all bubbles, the dot-com bubble burst in March 2001.
A large number of e-commerce companies failed during this process.
Yet for many others, such as Amazon, e-Bay, Expedia, and Google, the
results have been more positive:
Soaring revenues
Fine-tuned business models that produce profits
Rising stock prices
A large number of e-commerce companies failed during this process.
By 2006, e-commerce revenues returned to solid growth again, and then

after a bump in 2008-2009 continued to be the fasters growing form of
retail trade in the United States, Europe and Asia.
10.4

Seven unique features of e-commerce (Why Ecommerce is Different)

1. Ubiquity
10.5
Internet technology available anytime and everywhere:

work, home, mobile devices
Business significance:
Marketplace is extended beyond traditional boundaries

and is removed from temporal and geographic location
Creates marketspace: Marketplace extended beyond

traditional temporal, geographical boundaries
Shopping can take place anywhere - customer

convenience is enhanced, shopping costs are reduced
i.e., transaction costs are reduced.

2. Global reach
10.6
Technology reaches across national

boundaries, around Earth
Commerce enabled across cultural and

national boundaries seamlessly, without
modification
Marketspace includes potentially billions of

consumers and millions of businesses
worldwide

3. Universal standards
10.7
There is one set of Internet technology standards
Business significance
Disparate computer systems can easily

communicate
Brings lower market entry costs (costs merchants

pay to bring goods to market)
Lowers search costs for consumers

4. Richness
Video, audio, text messages are possible
Business significance: Video, audio, text

integrated into single marketing message and
experience
5. Interactivity
10.8
Technology works through interaction with user
Business significance: Consumers engaged in

dialog that adjusts to individual; consumer is coparticipant in delivering goods to market

6. Information density
10.9
Technology reduces information costs and

raises quality
Information becomes plentiful, cheap, and

more accurate
Increases price transparency and cost

transparency
Enables price discrimination


7. Personalization/customization
Technology allows personalized messages to be

delivered to individuals as well as groups
Permits customizationchanging delivered

product or service based on users preferences
or prior behavior
Business significance
10.10
Personalization of marketing messages and

customization of products and services are
based on individual characteristics

Key concepts in e-commerce: Digital

markets and digital goods
Internet shrinks information asymmetry
Information asymmetry: when one party has more
information important for transaction
E.g. Information asymmetry between auto dealers and
customers
Digital markets more flexible and efficient

Reduced search and transaction costs
Lower menu costs (cost of changing prices)
Dynamic pricing
10.11

Key concepts in e-commerce: Digital

markets and digital goods (cont.)
Internet enables disintermediation
Disintermediation:
Removal of organizations or business process
layers responsible for intermediary steps in
value chain
Enables selling direct to consumer
10.12

The Benefits of Disintermediation to the Consumer
The typical distribution channel has several intermediary layers, each of which adds to the final cost of
a product, such as a sweater. Removing layers lowers the final cost to the consumer.
Figure 10-2
10.13

Digital goods
Goods that can be delivered over network
E.g. Music tracks, video, e-books, software
Cost for producing first unit is nearly total cost of product: Cost
for producing additional units very low
Impact of Internet on market for digital goods is revolutionary
Video rental services
Hollywood studios
Record label companies
Newspapers and magazines
10.14

DIGITAL MARKETS COMPARED TO TRADITIONAL MARKETS

CRITERIA
DIGITAL MARKETS TRADITIONAL MARKETS
Information Asymmetry
Search costs
Transaction costs
Delayed gratification
Menu costs
Dynamic pricing
Price discrimination
Market segmentation
Switching costs
Network effect
Disintermediation
Asymmetry reduced
Low
Low (sometimes virtually nothing)
High (or lower for digital goods)
Low
Low cost, instant
Low cost, instant
Low cost, moderate precision
Higher/lower (depending on product)
Strong
More possible/likely
10.15
Asymmetry high
High
High (time, travel)
Lower: purchase now
High
High cost, delayed
High cost, delayed
High cost, less precision
High
weaker
Less possible/unlikely

HOW THE INTERNET CHANGES THE MARKET FOR DIGITAL GOODS

CRITERIA
DIGITAL GOODS
TRADITIONAL GOODS
Marginal cost/unit
Cost of production
Copying cost
Distributed delivery cost
Inventory cost
Marketing cost
Pricing
Zero
High (most of the cost)
Low
Low
Low
Variable
More variable
Greater than zero, high

Variable
High
High
High
Variable
Fixed, based on unit costs
10.16

Internet business models

Virtual storefront
Information broker
Transaction broker
Online marketplace
Content provider
Online service provider
Virtual community
Portal
10.17

10.18
Virtual Storefront refers to a website that allows a person to research, order and pay for a good online.
Information broker refers to an individual who searches information for clients.
Transaction broker refers to an individual who works with both the buyer and the seller in the same
transaction.
Online marketplace (or online ecommerce marketplace) refers to a type of ecommerce site where
product and inventory information is provided by multiple third parties, whereas transactions are
processes by the marketplace operator.
Content provider refers to an organization or individual that creates information, educational or
entertainment content for the Internet, CD-ROMs or other software-based products.
Online service provider can for example be an internet service provider, email provider, news provider
(press), entertainment provider (music, movies), search, e-shopping site (online stores), e-finance or ebanking site, e-health site, e-government site, Wikipedia, Usenet.
Virtual community is a social network of individuals who interact through specific social media,
potentially crossing geographical and political boundaries in order to pursue mutual interests or goals.
Portal is a website that brings information together from diverse sources in a uniform way. Usually,
each information source gets its dedicated area on the page for displaying information (a portlet); often,
the user can configure which ones to display.

Communication and community

Some new business models take advantage of Internets rich
communication capabilities
E.g. eBay, iVillage
Banner ads and pop-up ads are source of revenue for online
communities
Social networking sites: Link people through their mutual
business or personal connections
Have become powerful marketing tools for businesses
Social shopping: Online meeting places where people swap
shopping ideas
10.19

YouTube is a free online

streaming video service
enabling users to upload, tag,
and share videos worldwide.
Members can join and create
video groups to connect to
people with similar interests.
10.20

Digital content, Entertainment, and

Services
Internet has created new alternatives to traditional print,
broadcast media
Online versions of newspapers, online games, radio,
TV, music downloads
Podcasting: a method of publishing audio and video
broadcasts via the Internet, allowing subscribers to
download audio or video files on their personal devices.
Streaming: a method of publishing audio and video files
that flows a continuous stream of content to a users
device without being stored locally on the device.
10.21

Digital content, Entertainment, and

Services
Portals
Supersites that provide comprehensive entry point for
huge array of resources and services on Internet, e.g.
Yahoo!
Syndicators
Aggregate content or applications from multiple
sources, package them for distribution, and resell them
to third-party Web sites
10.22

Pure-play business models

Based purely on Internet
Do not have bricks-and-mortar portion of business
E.g. Amazon.com, eBay.com, YouTube.com
Clicks-and-mortar models
Internet presence is extension of bricks-and-mortar
businesses
E.g. L.L.Bean, Office Depot, Wall Street Journal
10.23

Electronic Commerce
Three major e-commerce categories

Business-to-consumer (B2C)
E.g. Barnesandnoble.com
Business-to-business (B2B)
E.g. ChemConnect.com
Consumer-to-consumer (C2C)
E.g. eBay.com
M-commerce
Use of handheld wireless devices for purchasing goods
and services from any location
10.24

Electronic Commerce
Achieving customer intimacy

Interactive marketing and personalization
Enabled by gathering customer data from Web site
registrations or activities
Clickstream tracking tools
Web pages can be tailored to customer preferences or
interests
Collaborative filtering
Compares user information to data about other
customers to make recommendations based on
assumed interests
10.25

Electronic Commerce
Web Site Visitor Tracking
Figure 10-3
E-commerce Web
sites have tools to
track a shoppers
every step through an
online store. Close
examination of
customer behavior at a
Web site selling
womens clothing
shows what the store
might learn at each
step and what actions
it could take to
increase sales.
10.26

Electronic Commerce
Web Site Personalization
Firms can create unique

personalized Web pages that
display content or ads for
products or services of special
interest to individual users,
improving the customer
experience and creating
additional value.
Figure 10-4
10.27

Electronic Commerce

Corporate blogs:
Used as new channel for reaching customers,
maintaining existing customers
Provide personal and conversational way for
businesses to present information to the
public and prospective customers about new
products and services
10.28

Electronic Commerce

Customer self service:
Web sites and e-mail used to answer
customer questions or to provide customers
with product information, reducing need for
human customer-support experts
New software products can integrate Web
with customer call centers
E.g. by directing representative to phone
user regarding query
10.29

Visitors to the United

States Postal Service
Web site can calculate
postage, print shipping
labels, schedule package
pickups, and track
shipments. Web sites for
customer self-service are
convenient for customers
and help firms lower their
customer service and
support costs.
10.30

Electronic Commerce
Business-to-business (B2B) electronic

commerce: New efficiencies and relationships
EDI (Electronic Data Interchange)
Automated exchange of standard business documents
(e.g. invoices)
Each major industry has EDI standards
Internet used increasingly for EDI instead of private
networks
Internet broadens circle of trading partners
E.g. For procurement, firms can use Internet to locate most
low-cost suppliers
10.31

Electronic Commerce
Electronic Data Interchange (EDI)
Companies use EDI to automate transactions for B2B e-commerce and continuous inventory replenishment.
Suppliers can automatically send data about shipments to purchasing firms. The purchasing firms can use EDI to
provide production and inventory requirements and payment data to suppliers.
Figure 10-5
10.32

Electronic Commerce
Private industrial networks (private exchanges)

Large firm using extranet to link to its suppliers and other key
business partners
Privately owned by buyer
Permits firm and suppliers, distributors, partners to share:
Product design and development
Marketing
Production scheduling
Inventory management
Unstructured communication
Example: VWGroupSupply.com
10.33

Electronic Commerce
A Private Industrial Network
A private industrial network, also known as a private exchange, links a firm to its suppliers, distributors, and other
key business partners for efficient supply chain management and other collaborative commerce activities.
Figure 10-6
10.34

Electronic Commerce
Net marketplaces (e-hubs)

Internet-based marketplace for buyers and sellers
Industry-owned or independent intermediary
May establish prices through online negotiations,
auctions, requests for quotations or use fixed prices
Generate revenue from transactions and other services
May focus on direct goods or indirect goods
May serve vertical or horizontal markets
Example: Exostar
10.35

Electronic Commerce
A Net Marketplace
Figure 10-7
Net marketplaces
are online
marketplaces where
multiple buyers can
purchase from
multiple sellers.
10.36

Electronic Commerce
Exchanges
Independently owned third-party Net marketplaces
Connect thousands of suppliers and buyers for spot
purchases
Many provide vertical markets for single industry
Primarily deal with direct goods
Proliferated during early years of e-commerce, but many
have failed
Exchanges encourage competitive bidding, driving prices
down, and do not offer long-term relationships
Example: FoodTrader.com
10.37

Electronic Commerce
FoodTrader.com is a
Net marketplace
serving the food and
agricultural
industries. Over
100,000 growers,
packers, processors,
and retail chains in
170 countries use
the site as a onestop source to buy
and sell food
products directly.
10.38

M-Commerce
M-Commerce services and applications

Popular for services that are time-critical, that appeal to
people on the move, or that accomplish task more efficiently
than other methods
Especially popular in Europe, Japan, South Korea, and
countries where fees for conventional Internet usage are very
expensive
Content and location-based services
Example: checking train schedules, searching for local
businesses
10.39

M-Commerce
Banking and financial services

Example: Wireless alerts about changes in account information
Wireless advertising
Example: Wireless service providers including advertising for local
restaurants, movie theaters on cell phones and Wi-Fi devices
Games and entertainment

Example: downloading ringtones, movie clips
Wireless portals
Feature content optimized for mobile devices to steer users to
information most likely to need
10.40

M-Commerce
Global M-Commerce Revenue, 2000-2009
M-commerce sales represent a small fraction of total e-commerce sales, but that percentage is
steadily growing. (Totals for 20062009 are estimated.)
Figure 10-8
10.41

M-Commerce
M-Commerce challenges
Keyboards and screens tiny and awkward to use
Data transfer speeds (2G networks) slow compared to Internet
connections for PCs
Time-based connection fees
Limited memory and power supplies
M-commerce will benefit from:

3G networks and other broadband services
Standardized mobile payment systems
10.42

Electronic Commerce Payment Systems
Types of electronic payment systems

Digital credit card payment systems
Extend functionality of credit cards for online shopping
payments
Provide mechanisms for authentication and transferring money
from bank to seller
Digital wallets
Software stores credit card and other information to facilitate
form completion and payment for goods on Web.
Example: Google CheckOut
10.43

Micropayment systems: For purchases of less

than $10, such as downloads of individual articles
or music clips
Accumulated balance digital payment systems:
Accumulate debit balance that users pay periodically on
credit card or telephone bills
Stored value payment systems: Allow instant online
payments based on value stored in digital account (e.g.
checking, credit card accounts
May require use of digital wallet
Example: Smart cards and devices like EZ Pass
10.44

Digital cash: Currency represented in electronic form that

moves outside normal network of money. Not regulated and not
legal tender
Client software allows exchange of money with other e-cash user
over Internet or with retailer accepting e-cash
Peer-to-peer payment systems: Serve people who want to

send money to vendors or individuals who are not set up to
accept credit card payments
Digital checking payment systems: Electronic check with
secure digital signature
Electronic billing presentment and payment systems: Used
for paying routine monthly bills from bank or credit card accounts
10.45

Digital payment systems for m-commerce

Utilize any form of e-commerce payment systems
Many payments are small purchases (soft drinks, mobile games,
sports scores) requiring micropayment systems
In Europe/Asia, mobile payments often added and presented on
single bill such as mobile phone bill
Virgin Mobile phone can dial Virgin Cola vending machine in
London
eBays PayPal Mobile Text2Buy service allows payments sent to
mobile PayPal accounts via texting
In Bangladesh, we now have Mobile banking through which money
can be sent or received.
10.46

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Chapter 10

2007 by Prentice Hall

Management Information Systems

2007 by Prentice Hall

Management Information Systems

2007 by Prentice Hall

Management Information Systems

By 2006, e-commerce revenues returned to solid growth again, and then

2007 by Prentice Hall

Management Information Systems

Seven unique features of e-commerce (Why Ecommerce is Different)

Internet technology available anytime and everywhere:

Marketplace is extended beyond traditional boundaries

Creates marketspace: Marketplace extended beyond

Shopping can take place anywhere - customer

Management Information Systems

Technology reaches across national

Commerce enabled across cultural and

Marketspace includes potentially billions of

Management Information Systems

There is one set of Internet technology standards

Disparate computer systems can easily

Brings lower market entry costs (costs merchants

Lowers search costs for consumers

2007 by Prentice Hall

Management Information Systems

Video, audio, text messages are possible

Business significance: Video, audio, text

Technology works through interaction with user

Business significance: Consumers engaged in

Management Information Systems

Technology reduces information costs and

Information becomes plentiful, cheap, and

Increases price transparency and cost

Enables price discrimination

Management Information Systems

Technology allows personalized messages to be

Permits customizationchanging delivered

Personalization of marketing messages and

Management Information Systems

Key concepts in e-commerce: Digital

Digital markets more flexible and efficient

2007 by Prentice Hall

Management Information Systems

Key concepts in e-commerce: Digital

2007 by Prentice Hall

Management Information Systems

The Benefits of Disintermediation to the Consumer

2007 by Prentice Hall

Management Information Systems

2007 by Prentice Hall

Management Information Systems

DIGITAL MARKETS COMPARED TO TRADITIONAL MARKETS

DIGITAL MARKETS TRADITIONAL MARKETS

2007 by Prentice Hall

Management Information Systems

HOW THE INTERNET CHANGES THE MARKET FOR DIGITAL GOODS

Greater than zero, high

2007 by Prentice Hall

Management Information Systems

Internet business models

2007 by Prentice Hall

Management Information Systems