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Chapter 1 Introduction to E-commerce Objectives

Define e-commerce and describe how it differs from e-business. Identify and describe the unique features of e-commerce technology and discuss their business significance. Recognize and describe Web 2.0 applications. Describe the major types of e-commerce. Discuss the origins and growth of e-commerce. Explain the evolution of e-commerce from its early years to today. Identify the factors that will define the future of e-commerce. Describe the major themes underlying the study of e-commerce. Identify the major academic disciplines contributing to e-commerce.

Key Terms
e-commerce, p.47 e-business, p. 47 information asymmetry, p.49 marketplace, p.49 ubiquity, p.49 marketspace, p.49 reach, p.49 universal standards, p.51 richness, p.51 interactivity, p.52 information density, p.52 personalization, p.53 customization, p.53 Web 2.0, p.54 Business-to-Consumer (B2C) e-commerce, p.56 Business-to-Business (B2B) e-commerce, p.56 Consumer-to-Consumer (C2C) e-commerce, p.57 Peer-to-Peer (P2P) e-commerce, p.58 mobile commerce (m-commerce), p.58 Internet, p.58 World Wide Web (Web), p.59 disintermediation, p.68 friction-free commerce, p.68 first mover, p.69 network effect, p.69

Brief Chapter Outline

Opening Case: Facebook: The New Face of E-commerce? 1.1 E-commerce: The Revolution Is Just Beginning The First Thirty Seconds What Is E-commerce? The Difference between E-commerce and E-business Why Study E-commerce? Eight Unique Features of E-commerce Technology Web 2.0: Play My Version Types of E-commerce Growth of the Internet and the Web Origins and Growth of E-commerce Technology and E-commerce in Perspective Insight on Technology: Spider Webs, Bow Ties, Scale-Free Networks, and the Deep Web Potential Limitations on the Growth of B2C E-commerce 1.2 E-commerce: A Brief History E-commerce 1995-2000: Innovation Insight on Business: Noodlenomics Guides Internet Investment in 2010 E-commerce 2001-2006: Consolidation E-commerce 2006-Present: Reinvention Assessing E-commerce: Successes, Surprises, and Failures Predictions for the Future: More Surprises 1.3 Understanding E-commerce: Organizing Themes Technology: Infrastructure Business: Basic Concepts Society: Taming the Juggernaut Insight on Society: Who Really Cares About Online Privacy? Academic Disciplines Concerned with E-commerce 1.4 Case Study: The Pirate Bay: Stealing Media vs. Streaming Media 1.5 Review Key Concepts Questions Projects

Figure 1.1 The Difference between E-commerce and E-business, p.48 Figure 1.2 The Changing Trade-Off Between Richness and Reach, p.52 Figure 1.3 The Growth of the Internet, Measured by the Number of Internet Hosts with Domain Names, p.59 Figure 1.4 The Growth of B2C E-commerce, p.61 Figure 1.5 The Growth of B2B E-commerce, p.64 Figure 1.6 Mobile Internet Access in the United States, p.66 Figure 1.7 Amounts Raised by Internet-Related Venture-Backed Firms, p.68 Figure 1.8 Share of Retail Online Sales by Type of Company, p. 75 Figure 1.9 The Internet and the Evolution of Corporate Computing, p.80

Figure 1.10 Disciplines Concerned with E-commerce, p.85

Table 1.1 Major Trends in E-commerce, 2010-2011, p.44-45 Table 1.2 Eight Unique Features of E-commerce Technology, p.50 Table 1.3 Major Types of E-commerce, p.57 Table 1.4 Limitations on the Growth of B2C E-commerce, p.65 Table 1.5 Evolution of E-commerce, p.74 Table 1.6 Online Retail Sales by Category, 2009, p.77 Table 1.7 Top 25 Online Retailers Ranked by Online Sales, p.78

End of Chapter Questions

1. What is e-commerce? How does it differ from e-business? Where does it intersect with e-business? E-commerce, in the popular sense, can be defined as: The use of the Internet and the Web to conduct business transactions. A more technical definition would be: E-commerce involves digitally enabled commercial transactions between and among organizations and individuals. E-commerce differs from e-business in that no commercial transaction, an exchange of value across organizational or individual boundaries, takes place in e-business. E-business is the digital enablement of transactions and processes within a firm and therefore does not include any exchange in value. E-commerce and e-business intersect at the business firm boundary at the point where internal business systems link up with suppliers. For instance, e-business turns into e-commerce when an exchange of value occurs across firm boundaries. 2. What is information asymmetry? Information asymmetry refers to any disparity in relevant market information among the parties involved in a transaction. It generally applies to information about price, cost, and hidden fees. 3. What are some of the unique features of e-commerce technology? The unique features of e-commerce technology include: Ubiquity: It is available just about everywhere and at all times. Global reach: The potential market size is roughly equal to the size of the online population of the world. Universal standards: The technical standards of the Internet and therefore of conducting ecommerce, are shared by all of the nations in the world. Richness: Information that is complex and content-rich can be delivered without sacrificing reach. Interactivity: E-commerce technologies allow two-way communication between the merchant and the consumer. Information density: The total amount and quality of information available to all market participants is vastly increased and is cheaper to deliver. Personalization/Customization: E-commerce technologies enable merchants to target their marketing messages to a persons name, interests and past purchases. They allow a merchant to change the product or service to suit the purchasing behavior and preferences of a consumer. Social technology: User content generation and social networking technologies

4. What is a marketspace? A marketspace is a marketplace that is extended beyond traditional boundaries because it is removed from the restrictions of geography and time. The ubiquity of e-commerce technologies liberates the market from these limitations. 5. What are three benefits of universal standards? Reduced search costs for consumers Becomes simpler, faster, with more accurate price discovery Lower market entry costs for merchants 6. Compare online and traditional transactions in terms of richness. Traditional transactions can provide more richness in terms of face-to-face service including visual and aural cues. However, traditional transactions are limited in terms of how many people can be reached at a single time. Online transactions, which can be global in reach, can provide content that is both complex and rich, overcoming the traditional trade-off between reach and richness. 7. Name three of the business consequences that can result from growth in information density. Growth in information density can result in: Greater price transparency: Consumers can easily find out the variety of prices in a market. Greater cost transparency: Consumers can discover the actual costs merchants pay for products. Greater opportunities for marketers to practice price discrimination: Since marketers are able to gather much more information about their customers, they can segment the market into groups based on willingness to pay different prices for the same or nearly the same goods. 8. What is Web 2.0? Give examples of Web 2.0 sites and explain why you included them in your list. Web 2.0 is a set of applications and technologies that allows users to create, edit, and distribute content; share preferences, bookmarks, and online personas; participate in virtual lives; and build online communities. In other words, Web 2.0 is the set of new, advanced applications that have evolved along with the Webs ability to support larger audiences and more involved content. Students may list Facebook, Twitter, YouTube, MySpace, Photobucket, Google, Wikipedia, Second Life, Digg, and WordPress, among others, as example sites. 9. Give examples of B2C, B2B, C2C, and P2P Web sites besides those listed in the chapter materials. The answers to this question will vary. Possible examples include: B2C: E-tailers: Bluefly B2C: Service Providers: Expedia Travelocity

B2C: Portals: Yahoo MSN B2C: Content Providers: B2B: Ariba CommerceOne C2C: Craigslist Velvetbazaar Ubid Oldandsold iOffer P2P: Frostwire PirateBay 10. How are the Internet and the Web similar to or different from other technologies that have changed commerce in the past? The Internet and the Web are similar to other technologies that have changed commerce in the past in that each new technological innovation spawns explosive growth characterized by thousands of start-up companies. Many of these fail in the period of retrenchment and consolidation that follows. As with other technological revolutions, eventually it is the large, already established firms who have the resources to exploit the new technology. The growth of the Internet, when compared to other electronic technologies such as radio and television, has been much more rapid: the Internet and Web achieved a 53% share of U.S households in only 10 years. In comparison, it took 38 years for radio and 17 for television to achieve a 30% share. 11. Describe the three different stages in the evolution of e-commerce. The three stages in the evolution of e-commerce are innovation, consolidation, and reinvention. Innovation took place from 1995-2000 and was characterized by excitement and idealistic visions of markets in which quality information was equally available to both buyers and merchants. E-commerce did not fulfill these visions during its early years, however. After 2000, e-commerce entered its second stage of development: consolidation. In this stage, more traditional firms began to use the Web to enhance their existing businesses. Less emphasis was placed on creating new brands. In 2006, though, e-commerce entered its current stage, reinvention, as social networking and Web 2.0 applications reinvigorated e-commerce and encouraged the development of new business models. 12. What are the major limitations on the growth of e-commerce? Which is potentially the toughest to overcome? One major limitation to the growth of e-commerce is the price of personal computers. Another limitation is the need for many people to learn complicated operating systems, at least in comparison to

other technologies such as the television or the telephone. People must also learn a set of fairly sophisticated skills (when compared to radio or television) to make effective use of the Internet and ecommerce capabilities. Another limitation is the unlikelihood that the digital shopping experience will ever replace the social and cultural experience that many seek from the traditional shopping environment. Finally, persistent global income inequality will exclude most of the worlds population. New interfaces supported by new hardware technology, especially in the form of mobile computing platforms (smartphones), has drastically reduced limitations on future growth of e-commerce. As Internet access technologies become cheaper to purchase and easier to use, e-commerce should experience significant long-term growth. 13. What are three of the factors that will contribute to greater Internet penetration in U.S. households? Factors that will contribute to greater Internet penetration into U.S. households in the next decade include: The price of an entry-level PC such as a netbook and smartphones with Internet access has fallen to $300. Smartphones are free or heavily discounted with wireless phone plans. Enhanced capabilities, such as integration with television and access to film libraries on a payper-view basis, access to books and newspapers, will draw in more consumers. The personal computer operating systems are likely to evolve into a simpler platform with simpler choice panels. The use of wireless Web technology (Wi-Fi and 3G/4G networks) is increasing. 14. Define disintermediation and explain the benefits to Internet users of such a phenomenon. How does disintermediation impact friction-free commerce? Disintermediation means the removal of the market middlementhe distributors, wholesalers, and other intermediariesbetween producers and consumers. The predicted benefits to Internet users include the decline of prices for products and services as manufacturers and content originators develop a direct relationship with their customers, and the elimination of payments to these middlemen. Disintermediation of markets would create intense competition. This, along with lowered transaction costs, would eliminate product brands, eventually resulting in the elimination of unfair competitive advantages and extraordinary returns on capital: the vision of friction-free commerce. 15. What are some of the major advantages and disadvantages of being a first mover? The major advantages of being a first mover are the ability to build a brand name early on and establish a large customer base before followers enter the market, and the ability to build switching costs into the technology or services offered so that customers will find it discomfiting to change to a late entering competitor. The major disadvantage is that historically, many first movers have not succeeded and are instead replaced by the fast follower, larger firms with the financial, marketing, legal, and production assets necessary to develop mature markets. Generally, only a handful of first mover firms become successful long-term businesses as the start-up costs and time it takes to build a profitable business are often underestimated. 16. Discuss the ways in which the early years of e-commerce can be considered both a success and a failure. The early years of e-commerce can be considered a success because of the technological success that occurred as Web-enabled transactions grew from thousands to billions. The digital infrastructure

proved to be a solid foundation on which to build a viable marketing channel. From a business perspective, the early years of e-commerce were a mixed success with just a tiny percentage of companies surviving. However, the survivors have benefited from the continued growth in B2C revenues. The early years of e-commerce can also be considered a success in that the transfer of information has been a huge accomplishment as consumers learned to use the Web to procure information about products they wanted to purchase (Internet-influenced commerce). 17. What are five of the major differences between the early years of e-commerce and todays ecommerce? The major differences between the early years of e-commerce (the Innovation stage), the period between 2001-2006 (the Consolidation stage), and todays e-commerce (the Reinvention stage) are as follows: During the Innovation stage, e-commerce was primarily technology-driven. During the Consolidation stage, it was primarily business-driven. Todays e-commerce, while still business-driven, is also audience, customer, and community-driven. During the Innovation stage, firms placed an emphasis on revenue growth, quickly achieving high market visibility/market share. During the Consolidation stage, the emphasis was on building profitable firms. Today, audience and social network growth are being emphasized. Startups during the Innovation stage were financed by venture capitalists, while those in the Consolidation stage were primarily financed by traditional methods. Today, startups are once again being financed by venture capitalists, albeit with smaller investments. In addition, many large online firms are now entering the market, and acquiring early stage firms via buy-outs. During the Innovation phase, e-commerce was, for the most part, ungoverned. In the Consolidation stage, there was a rise in the amount of regulation and governmental controls by governments worldwide. Today, there is extensive government regulation and surveillance. The Innovation stage of e-commerce was characterized by the young entrepreneurial spirit. During the Consolidation stage, e-commerce was primarily dominated by the retail giants. Today, large purely Web-based firms are playing a major role. The Innovation phase was characterized by an emphasis on deconstructing traditional distribution channels and disintermediating existing channels. During the Consolidation stage, intermediaries strengthened. Today, there is a proliferation of small online intermediaries that are renting the business processes of larger firms. Perfect markets in which direct market relationships with consumers, the decline of intermediaries, and lower transaction costs resulted in intense competition and the elimination of brands, are being replaced by imperfect markets. Imperfect markets are characterized by a strengthening of brand name importance, increasing information asymmetries, price discrimination, and network effects. The early years of e-commerce saw an infusion of pure online businesses that thought they could achieve unassailable first mover advantages. During the Consolidation period, successful firms used a mixed bricks-and-clicks strategy, combining traditional sales channels such as physical stores and printed catalogs with online efforts. Today, there is a return of pure online strategies in new markets, as well as continuing extension of the bricks and clicks strategy in traditional retail markets. The early years of e-commerce were dominated by the first movers. In the Consolidation stage, e-commerce was dominated by the well-endowed and experienced Fortune 500 and other traditional firms. Today, first-mover advantages are returning in new markets as traditional

Web players catch up. Facebook is an excellent example of not-quite-a-first mover, but close enough to build a huge online audience. 18. What factors will help define the future of e-commerce over the next five years? The factors that will help define the future of e-commerce over the next five years include: The technology of e-commercethe Internet, the Web, and the number of wireless applianceswill continue to proliferate through all commercial activity; overall revenues will continue to rise rapidly; and the numbers of both visitors and products and services sold will continue to grow. Prices will rise to cover the real costs of doing business on the Web and to pay investors a reasonable rate of return on their capital. E-commerce margins and profits will rise to the level of traditional retailers. (The difference between revenues from sales and cost of goods sold will be equal to that of traditional firms.) The top e-commerce sites will increasingly obtain very well known brands from strong, older firms. The most successful e-commerce firms will use both traditional marketing channels such as physical stores, and printed catalogs, as well as e-commerce Web sites. Five years from now we may have a definitive answer to these questions as Wal-Mart and Amazon compete against one another for dominance in online retail. Clearly, Wal-Mart has won the offline traditional retailer marketplace. 19. Why is a multi-disciplinary approach necessary if one hopes to understand e-commerce? A multi-disciplinary approach is necessary in order to understand e-commerce because no single academic discipline covers all facets of the e-commerce phenomenon. E-commerce is primarily a technologically driven occurrence, including information technologies developed over the past fifty years, with the Internet and the Web at the core. However, beyond the infrastructure are the business purposes that drive the phenomenon: the changing business models and strategies that will transform old companies and spawn new ones. To understand e-commerce, one must understand some basic business concepts such as: industry structures, business models, firm and industry value chains, and consumer behavior. They must also comprehend the nature of electronic markets and information goods. Finally, the impact on society must be considered: global e-commerce can have consequences for individuals concerning their intellectual property and privacy rights. Public policy issues such as equal access, equity, content control, and taxation will need to be addressed.

1. Define social e-commerce and describe why it is a new form of advertising, search, and potentially commerce. A working definition of social e-commerce involves online commercial transactions that take place in an online social milieu involving friends, acquaintances, and others in the consumers social network. In many respects this is similar to a traditional village market where consumers search for, evaluate, and purchase products, in the presence of their social network members (families, friends, and neighbors). The social online experience can support search functions: rather than using Google to search for reviews on products, ask your friends instead about their experience with the product. By simply attracting huge audiences (eyeballs), social networks are an excellent venue for display advertising and text ad placement. Facebook and other networks are experimenting with conducting transactions within the social site itself, rather than have customers drift to Amazon and other retailers. 2. Search the Web for an example of each of the five major types of e-commerce described in Section 1.1. Create an electronic slide presentation or written report describing each Web site (take a screenshot of each, if possible) and explain why it fits into one of the five types of e-commerce. The purpose of this project is for students to begin looking at the Web sites they visit from a critical perspective and begin analyzing the information they can find at those sites. Presentations/reports submitted for this project will differ depending on the examples selected by students. Examples might include the following: B2C: Any one of a number of B2C companies such as e-tailers, service providers, portals, content providers, and community providers, might be selected. B2B: Any one of a number of B2B companies such as Elemica (consortia), (edistributor), and ChemConnect (exchange), could be selected. C2C: Leading examples of C2C e-commerce companies include eBay,, Craigslist and others that act as an intermediary between consumers seeking to make transactions. P2P: Companies engaged in P2P e-commerce include: The Pirate Bay,, and Frostwire. M-commerce: Companies with significant mobile commerce capabilities are Amazon, iTunes, eBay, Fandango, and For each example chosen, the student should describe the features of the company that indicate which particular category of e-commerce it falls into. For example, if is chosen as a representative of B2C e-commerce, the student might describe the features he or she sees available on the home page. They should note that focuses primarily on the sale of books, music, software, magazines, prints, posters, and related products to individual consumers. 3. Choose an e-commerce Web site 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 site 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.


As with the first project, the purpose of this exercise is for students to begin looking at the Web sites they visit from a critical perspective and to begin analyzing the information they can find at those sites. Presentations/reports submitted for this project will differ depending on the example selected by students. In assessing a Web site in terms of the eight unique features of e-commerce technology, a student might focus on the following: Ubiquity: What kinds of m-commerce applications, if any, does the site offer? (Such applications increase ubiquity by making e-commerce available from a wider range of devices.) Global reach: Does the Web site try to reach consumers outside of its host country? If so, how well is this implemented? Universal standards: There should not be much variance between Web sites with respect to this feature of e-commerce technology. Richness: Does the Web site use animated graphics, Flash animations, or streaming media to deliver marketing messages? If so, how effective does the student find these features? Do they aid the consuming experience, or hinder it? Interactivity: In what ways is the Web site interactive? Information density: Students should note what, if any, information (via registration or through other means) a Web site overtly collects from visitors or users. Personalization/Customization: In what ways does the Web site personalize its marketing messages? For instance, is the user greeted by name? Can products and services be customized? Social technology: Does the Web site offer ways for consumers to share opinions and preferences? Is there any capacity for content generation? 4. Given the development and history of e-commerce in the years from 1995-2010, 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 PowerPoint slide presentation or written report to explain your vision of what e-commerce looks like today. Although each students answer may differ depending on their personal perspective on e-commerce, here are some possible predictions: Technological shifts: the Internet will continue to grow, but at a slower pace. Internet usage, however, will become more focused, targeted, and intense. New client platforms will continue to emerge. New networking technologies will emerge to permit mobile commerce. Business shifts: Larger traditional firms will come to dominate e-commerce. There will be a greater emphasis on profitability for online ventures. Alternatively, as the costs of creating and running a Web site decline, more innovative small firms will enter the marketplace and challenge the leaders in e-commerce.


Societal shifts: There will be a greater emphasis on regulation and control over the Internet and ecommerce in areas such as taxation, content, and entertainment. Consumers will demand music, and other media, be delivered to any of several different platforms, from desktop to smartphones. 5. Follow up on events at Facebook and other social network sites since September 2010 (when the opening case was prepared). Has Facebook continued to challenge Google as an advertising and search platform? Has it launched any new e-commerce initiatives? Prepare a short report on your findings. Given the large number of press reports on Facebook and Google, students should be able to find a plethora of information about the two companies by using the Web to search for articles. Students may arrive at differing conclusions. As a search engine, Facebook is still clearly inferior to date, and does not purport to offer a systematic search of the Internet. Searching its user base for product information currently yields disappointing results. As a display advertising platform it has tremendous promise as it possesses the capability to instantly deliver advertising to specific groups that advertisers want to target. So far, it has not developed this capability but it is likely to in the future. From an advertisers point of view, it does not yet have the same well-developed ad tracking capabilities of Google.


Chapter 2 E-commerce Infrastructure: The Internet and the Web Objectives

Discuss the origins of the Internet. Identify the key technology concepts behind the Internet. Describe the role of Internet protocols and utility programs. Explain the current structure of the Internet. Explain the limitations of todays Internet. Describe the potential capabilities of Internet II. Explain how the World Wide Web works. Describe how Internet and Web features and services support e-commerce.

Key Terms
Internet, p. 102 World Wide Web (Web), p. 103 packet switching, p.107 packet, p. 107 router, p. 108 routing algorithm, p. 108 protocol, p.109 Transmission Control Protocol/Internet Protocol (TCP/IP), p. 109 TCP, p. 109 IP, p. 109 Network Interface Layer, p. 109 Internet Layer, p. 109 Transport Layer, p. 109 Application Layer, p. 109 IPv4 Internet address, p. 110 IPv6 Internet address, p. 110 domain name, p. 111 Domain Name System (DNS), p. 111 Uniform Resource Locator (URL), p. 111 client/server computing, p. 113 client, p. 112 server, p. 113 cloud computing, p. 115 HyperText Transfer Protocol (HTTP), p. 116 Simple Mail Transfer Protocol (SMTP), p. 117 Post Office Protocol 3 (POP3), p. 117 Internet Message Access Protocol (IMAP), p. 117 File Transfer Protocol (FTP), p. 117 Telnet, p. 117 Secure Sockets Layer (SSL), p. 117 Ping, p. 117 Tracert, p. 118 Pathping, p. 118 Network Technology Substrate layer, p. 119 Transport Services and Representation Standards layer, p. 119 Applications layer, p. 119


Middleware Services layer, p. 119 Network Service Provider (NSP), p. 119 backbone, p. 119 bandwidth, p. 119 redundancy, p. 120 Internet Exchange Point (IXP), p. 121 campus area networks (CAN), p. 123 Internet Service Provider (ISP), p. 123 narrowband, p. 123 broadband, p. 123 Digital Subscriber Line (DSL), p. 124 cable modem, p. 124 T1, p. 124 T3, p. 124 intranet, p. 125 extranet, p. 126 latency, p. 127 Internet2, p. 131 GigaPoP, p. 132 fiber-optic cable, p. 133 Bluetooth, p. 140 IP multicasting, p. 142 diffserv (differentiated quality of service), p. 143 Mosaic, p. 144 universal computing, p. 144 Netscape Navigator, p. 145 Internet Explorer, p. 145 Hypertext, p. 145 HyperText Markup Language (HTML), p. 147 eXtensible Markup Language (XML), p. 148 Web server software, p. 150 database server, p. 151 ad server, p. 151 mail server, p. 151 video server, p. 151 Web client, p. 151 electronic mail (e-mail), p. 152 attachment, p. 152 instant messaging (IM), p. 152 search engine, p. 153 intelligent agent, p. 155 online forum, p. 156 online chat, p. 157 streaming media, p. 157 cookie, p. 157 blog, p. 158 Really Simple Syndication (RSS), p. 159 podcast, p. 159 wiki, p. 160 IP telephony, p. 161


Voice over Internet Protocol (VoIP), p. 161 IPTV, p. 162

Brief Chapter Outline 2.1 The Internet: Technology Background The Evolution of the Internet 1961 The Present The Internet: Key Technology Concepts The New Client: The Emerging Mobile Platform The Internet Cloud Computing Model: Software and Hardware as a Service Other Internet Protocols and Utility Programs 2.2 The Internet Today The Internet Backbone Internet Exchange Points Campus Area Networks Internet Service Providers Intranets and Extranets Who Governs the Internet? 2.3 Internet II: The Future Infrastructure Limitations of the Current Internet Insight on Society: Government Regulation and Surveillance of the Internet The Internet2 Project The Larger Internet II Technology Environment: The First Mile and the Last Mile Benefits of Internet II Technologies 2.4 The World Wide Web Hypertext Markup Languages Web Servers and Clients Web Browsers 2.5 The Internet and the Web: Features E-mail Instant Messaging Search Engines Intelligent Agents (Bots) Online Forums and Chat Streaming Media Cookies Web 2.0 Features and Services Insight on Technology: Apps for Everything: The Apps Ecosystem 2.6 Case Study: Akamai Technologies: When Demand Exceeds Capacity 2.7 Review Key Concepts Questions Projects


Figure 2.1 Stages in the Development of the Internet, p. 103 Figure 2.2 Resolution of the Federal Networking Council, p. 104 Figure 2.3 Packet Switching, p.108 Figure 2.4 The TCP/IP Architecture and Protocol Suite, p. 110 Figure 2.5 Routing Internet Messages: TCP/IP and Packet Switching, p. 111 Figure 2.6 The Hierarchical Domain Name System, p. 112 Figure 2.7 The Client/Server Computing Model, p. 113 Figure 2.8 The Cloud Computing Model, p. 115 Figure 2.9 The Result of a Ping, p. 118 Figure 2.10 Tracing the Route a Message Takes on the Internet, p. 118 Figure 2.11 The Hourglass Model of the Internet, p. 120 Figure 2.12 Internet I Network Architecture, p. 121 Figure 2.13 Some Major U.S. Internet Exchange Points (IXPs), p. 122 Figure 2.14 Internet2 GigaPoP Exchanges, p. 132 Figure 2.15 Bandwidth Demand of Various Web Applications, p. 135 Figure 2.16 Wi-Fi Networks, p. 139 Figure 2.17 IP Multicasting, p. 142 Figure 2.18 Example HTML Code (A) and Web Page (B), p. 147 Figure 2.19 A Simple XML Document, p. 148 Figure 2.20 Sample XML Code for a Company Directory, p. 149 Figure 2.21 Top Five Search Engines, p. 153 Figure 2.22 How Google Works, p. 155

Table 2.1 Development of the Internet Timeline, p. 105-107 Table 2.2 Pieces of the Internet Puzzle: Names and Addresses, p. 112 Table 2.3 Major U.S. Internet Backbone Owners, p. 121 Table 2.4 ISP Service Levels and Bandwidth Choices, p. 124 Table 2.5 Time to Download a 10 Megabyte File by Type of Internet Service, p. 125 Table 2.6 High-Speed Optical Bandwidth Standards, p. 134 Table 2.7 Wireless Internet Access Telephone Technologies, p. 137 Table 2.8 Popular Smartphones, p. 138 Table 2.9 Wireless Internet Access Network Technologies, p. 138 Table 2.10 Potential Wireless Internet E-commerce Services, p. 141 Table 2.11 Top-Level Domains, p. 146 Table 2.12 Types of Web Bots, p. 156 Table 2.13 Key IP Telephony Players, p. 162

End-of-Chapter Questions
1. What are the three basic building blocks of the Internet? The three basic building blocks are packet switching, the Transmission Control Protocol/Internet Protocol (TCP/IP) communications protocol, and client/server computing. Packet switching is a method of splitting messages up into parcels, routing them along available communications paths, and reassembling them at the destination point. The TCP protocol is the set of rules that specifies how these messages should be formatted, ordered, compressed, and error-checked. The IP protocol provides the


addressing scheme for the Internet. Client/server computing refers to networks of powerful client computers that are connected to one or more server computers. The clients are powerful enough to display, process, and store very large files including graphics and sound files. The servers are dedicated to common functions that all of the clients need including file storage, and they also house many software applications and utility programs that the clients frequently use. 2. What is latency, and how does it interfere with Internet functioning? Latency is a delay in messages caused by the uneven flow of information packets through the network. It interferes with the functioning of the Internet today because with streaming video or synchronous communication transmissions, there may be noticeable gaps causing the video or voice to arrive looking or sounding jerky. 3. Explain how packet switching works. In packet-switched networks, messages are broken up into fragments (packets) and a digital code with the source address is attached. Sequencing and error-control instructions are also added. Instead of being sent directly to their destination, the packets travel between router computers that interconnect the thousands of networks that make up the Internet. The routers use programs called routing algorithms to ensure that each packet takes the best available communication path towards its destination. If some lines are disabled or busy, the packets can be sent along any available line. At the destination point, the packets are reassembled and delivered. This method enables nearly full use of all of the available communication lines and capacity. 4. How is the TCP/IP protocol related to information transfer on the Internet? The TCP/IP protocol determines how messages are formatted, compressed and error-checked and how they are addressed so that they reach the correct destination in the correct order and format. TCP establishes the connections between sending and receiving computers, and it handles the assembly of packets at the point of transmission and their reassembly at the receiving end. IP provides the Internets addressing scheme, and is responsible for the actual delivery of the packets. 5. What technological innovation made client/server computing possible? What impact has client/server computing had on the Internet? The technological innovation that made client/server computing possible is the personal computer. Without the invention of the PC and local area networks, we would not have the Internet and the Web. In client/server computing, capacity can be expanded constantly by adding servers and clients to the network. A client/server network is much less vulnerable than the centralized computing architecture that preceded it because if one server malfunctions, backup servers can take over. If a client is down, the rest of the system continues to operate without a hitch. The processing load can be balanced over many powerful, smaller machines rather than being concentrated in a single huge mainframe computer, both the software and the hardware can be more economically built. 6. Despite the number of PCs connected to the Internet, rich information sharing is still limited. Why? Rich information sharing is still limited because much of the Internets infrastructure is already over 30 years old. Bandwidth limitations throughout the backbone, and especially to most small businesses and


houses, cause congested service and only a limited ability to transmit video and voice files. Because packet-switching involves the use of a circuitous route, latency causes uneven transmission of these files. Todays Internet also gives each packet the same level of service no matter who the user or what type of file. A higher quality of service will have to be developed in which packets are given priority service based upon the type of content they contain in order for information sharing to continue to improve. Furthermore, there are some architectural limitations that slow Internet transmissions down: a file cannot be transmitted once to all who request it. Instead, the file must be downloaded separately to each person placing a request. Finally, there are some language development limitations as HTML, the language of Web pages, is not adequate for defining and communicating databases, business documents, and graphics. 7. Why isnt the Internet overloaded? Will it ever be at capacity? The Internet is not overloaded and will most likely not hit a capacity ceiling because client/server computing is highly extensible. Capacity can be continually expanded by adding client computers and server computers to the network. In this way, the population of Internet users can continue to grow indefinitely. It is also not overloaded because the Internet architecture is built in layers so that each layer can change without disturbing developments in other layers. On the other hand, network connections can reach a saturation point and slow down Internet traffic. 8. What types of companies form the Internet backbone today? The Internet backbone is formed by the Network Service Providers (NSPs) that own and control the major networks; NSPs are for-profit companies. Some of the major U.S. Internet backbone owners include: AT&T, Cable & Wireless, and Sprint, among others. The backbones in foreign countries are usually operated by a mixture of government-owned and for-profit companies. 9. What function do the IXPs serve? The IXPs use high-speed switching computers to connect the Internet backbone to regional and local networks. They function as the hubs, or interconnect points, where the backbone intersects with these regional and local networks; it is where the backbone owners connect with one another. 10. What is a campus area network, and who uses them? A campus area network is usually a local area network that operates within a single organization. These organizations are sufficiently large that they lease access to the Web directly from the regional and national carriers. There are an estimated one million campus area networks attached to the Internet worldwide that connect to the Web at speeds ranging from 10 100 Mbps. Campus area networks are generally used by large organizations like universities or large corporations, which in fact, often have hundreds of these local area networks. 11. Compare and contrast intranets, extranets, and the Internet as a whole. An intranet is a TCP/IP network located within a single organization whose function is to fulfill the communication and information processing needs of the organization. An extranet on the other hand, is formed when organizations allow outsiders to access their internal TCP/IP network. For example, a company may permit suppliers to gain access to their intranet in order to view information (like


production schedules or inventory allotments) so that the suppliers will know when the company will need to restock. It is the exact same technology that enables the operation of the Internet. It provides capabilities for private or governmental organizations to operate their own internal networks and to create extranets to allow for the exchange of information across organizational boundaries. All of the protocols that are used on the Internet are also used on private intranets and extranets. Also, all applications available on the Internet are compatible with intranets and extranets. 12. What are the four major limitations of todays Internet? The four major limitations of todays Internet are bandwidth, quality of service, network architecture, and language development. There is insufficient bandwidth capacity throughout the backbone, the metropolitan switching centers, and most importantly, to the houses and small businesses at the end of the information pipeline. Due to insufficient bandwidth and the circuitous nature of packet switching, video and voice traffic suffers from latency. This causes these types of messages to arrive with noticeable delays and a jerky quality. Because todays Internet uses best efforts quality of service, each packet is provided with the same level of service. This means that all packets traveling through the communication system are treated the same, no matter who is sending them or what type of message they are. Network architecture restrictions also limit the performance of the Internet. A thousand requests for the same file result in a server having to download the file one thousand times rather than being able to transmit it once to all one thousand computers at the same time. This significantly slows down network performance. Finally, HTML, the language for displaying Web pages, has proven to be insufficient for displaying rich documents such as database files, business documents and graphics. 13. What are some of the challenges of policing the Internet? Who has the final say when it comes to content? One challenge of policing the Internet is that there are multiple organizations that influence the system and monitor its operations. It is hard to make the Internet conform to the laws of the sovereign nation states in which it operates, and it is difficult to enforce the various and often contradictory laws of all of these nations. Many countries want to put far stricter restrictions on freedom of expression than the U.S. does. Different cultures have different social morals, and what is acceptable in some countries is decidedly not in others. The issue of who has the final say is also quite controversial and varies from country to country. For instance, in China, the Chinese government has the final say about what content is available to viewers who access the Internet from within China. Other countries also regulate the availability of certain types of content. Critics complain that attempting to create legal harmony will result in major content restrictions on the Internet with only content that is legally acceptable worldwide being made accessible. 14. Compare and contrast the capabilities of Wi-Fi and 3G/4G wireless networks. There are two basic types of wireless Internet connectivity: telephone-based systems and computer network-based systems. Wi-Fi is an example of a computer network-based wireless access system, and 3G/4G wireless networks are telephone-based wireless access systems. Telephone-based wireless Internet systems such as 3G/4G systems connect the user to a telephone system and use a packet-switched technology that is more efficient and faster than traditional circuitswitched networks. 3G/4G networks have speeds ranging from 384 Kbps for mobile users in a car, to up to 2 Mbps for stationary users. These networks are wide area networks of nearly unlimited range,


and are the basis for smartphones, hybrid cellular wireless devices that combine the functionality of a computer with that of a cell phone, and require a cellular phone company service connection. They enable consumers to have voice conversations, send and receive text messages or e-mail, and enable Web use. Computer network-based wireless Internet systems have a completely different history that is based on corporate local area networks. Here, the task is to connect stationary client computers to server computers within local areas of a few hundred meters. Wi-Fi was the first commercially viable standard for wireless local area networks. In a Wi-Fi network, a wireless access point connects to the Internet directly via a broadband connection (cable or DSL telephone or T1 line), and then transmits radio signals to other transmitters/receivers usually installed in laptop computers. Wi-Fi offers high bandwidth capacity (up to 11 Mbps), suitable for Web surfing and other corporate uses, but a much more limited range (300 feet). 15. What are some of the new wireless standards, and how are they relevant to Internet II? Wireless cell phone standards include Global System for Mobile Communication (GSM), Code Division Multiple Access (CDMA), and General Packet Radio Services (GPRS). These are cellular standards that control how wireless telephones connect to the Web. The development of these standards is highly relevant to the concept of Internet II because while Internet I was mostly a land-based technology; Internet II will increasingly rely on wireless technology to connect users handheld telephones and personal organizers to the Web. Wireless local area network (WLAN) standards include Wi-Fi, Wi-Max, Bluetooth, Ultra-Wideband, and ZigBee. Wi-Fi is a standard for WLANs that offers high bandwidth capacity (up to 11 Mbps; 54 Mbps for Wi-Fi 5), suitable for Web surfing and other corporate uses, but a limited range (300 feet). Wi-Max extends the range of Wi-Fi to 30 miles. Bluetooth, Ultra-Wideband and ZigBee are all wireless standards for short-range (under 30 feet) wireless communication. In Internet II, these WLAN standards will be used to develop such wireless LAN applications as handheld devices that can be used as a credit card, identification card, and key all in one. 16. What are some of the major technological advancements that are anticipated will accompany Internet II? Define and discuss the importance of each. First, a bandwidth explosion fueled by fiber optic technology, will allow the Internet to move from narrowband to broadband digital service. Second, wireless Web and 3G/4G technologies, will allow the Internet to move from cable-based stationary service to mobile service. Third, wireless LANS will allow laptop computers to be connected to other computers, as well as to other digital devices including: home appliances, vending machines, and remote sensors. Fourth, new Internet appliances will make it possible to connect nearly all the electronic devices in our lives to the Internet and to private intranets. These new Internet appliances will include thin client computing devices (PCs without hard drives), which rely totally on the Internet server to handle all information processing. Lightweight, portable, full-function tablet PCs (similar to the iPad) and handheld devices will be able to activate and deactivate virtually any device that can be connected to the Internet. This is expected to include home appliancesTVs, stereos, telephones, games, security systems, cars and netbooks which will be interconnected so that they can all be controlled from one source. 17. Why was the development of the browser so significant for the growth of the Web?


The development of the browser was an extremely significant breakthrough that enabled rapid growth of the Web. Once it progressed from a simple line interface device to a graphical user interface (GUI), it made it possible to view documents with colored backgrounds, images, and animations. Besides the natural interest stimulated by viewing such documents, the graphical Web browser also created the possibility of universal computing: the sharing of files including graphics, sound, video, and all sorts of different information by all computer users in the world, no matter what platform or operating system they were using. A browser could be made for each operating system, and Web pages created for one system could be displayed either exactly or nearly the same on a computer using a different operating system. 18. Name the different Web markup languages and explain the differences between them. The different Web markup languages include: Standard Generalized Markup Language (SGML): This language was developed to help very large organizations format and categorize large collections of documents. It is very complicated, hard to learn, and was not widely adopted. Hypertext Markup Language (HTML): This relatively easy to learn language consists of a set of tags that are used to instruct the Web browser how to display a Web page. It defines the structure and style for a document including the headings, positioning of the graphics on the page, construction of tables, and the formatting of text. eXtensible Markup Language (XML): This is a markup language that, instead of functioning to format the style and page layout for a Web page, sets out to describe the data on the page. Tags such as <name> and <address> are used to describe and display data according to the users definitions. It is extensible because new tags can be continually defined to transform data into new formats, in contrast to HTML that has only a set number of predefined tags. 19. Name and describe five services currently available through the Web. Services that are currently available through the Web are: E-mail: This is the most widely used application on the Internet and allows text messages and file attachments to be transferred from one Internet user to another. Instant messaging: This comes in the form of a software program that allows typed text to be displayed on a recipients computer almost instantaneously, making real-time conversations between two people possible on the Web. Search engines: Search engines are Web sites or services within a site that enable users to locate information by matching keywords that the user provides to a list of documents containing those words or the closest matches. Intelligent agents (bots): These are software programs that gather and/or filter information on a specific topic and provide a list of the results. For example, intelligent agents have been written to search through e-mail messages for certain keywords or simple concepts or phrases.


Online forums: Forums are Web applications that enable Internet users to communicate with each other via a message board, bulletin board, or discussion group. Online chat: This software enables several people or even a group of people to carry on a live conversation. Blogs: Blogs are personal Web pages that are created by an individual or corporation to communicate with readers. Really Simple Syndication (RSS): RSS is a program that allows users to have digital content, including text, articles, blogs and podcast audio file, automatically sent to their computers over the Internet. Podcasts: These are audio presentations stored as an audio file and posted to the Web, where it can be downloaded onto a computer or iPod. Wikis: These Web applications allow a user to easily add and edit content on a Web page. Internet telephony: IP telephony is a general term for technologies that use Voice over Internet Protocol (VoIP) and the Internet to send voice, fax, and other forms of audio communication over the Internet. IPTV: IPTV uses high-bandwidth Internet connections to deliver television programming to the home. Video conferencing: Internet video conferencing is now accessible to anyone with a broadband Internet connection and a Web camera. Web applications (apps), widgets and gadgets: Web services provide software applications that run off of Web servers instead of a computers hard drive. Widgets are small software applications that pull content and functionality from one place on the Web to another, such as a blog or social networking page. Gadgets are closely related to widgets and are small chunks of code that you can add to a Web page usually to provide a single limited function, such as a clock or calendar. 20. What are at least three new services that will be available through the next generation of the Internet? New services that will be available through the next generation of the Internet include: Digital video on demand: This is considered by many to be a killer app for the future Internet. Web distribution of software as a service will become increasingly prevalent. For example, Microsoft is planning for a future where Microsoft Office will be a Web application. M-commerce applications: The introduction of wireless devices such as the iPhone 3G/4G, Blackberry Storm and TMobile Android 3G/4G that have the combined capabilities for voice, data, images, audio, and video, will encourage the continued development of many sophisticated mobile commerce applications in the near future.


1. Visit the Web site and investigate the following types of purchases: an iPod, a copy of the book The Girl Who Kicked the Hornets Nest (by Stieg Larsson), and a dozen red roses. What did you find as you searched for these items? Describe the process, the search results, and any limitations you encountered. What are the major advantages and disadvantages of such intelligent agents? The purpose of this project is for students to examine a shopping bot, how it works, and its effectiveness of use. For example, when they enter iPod, they will be confronted with a list of products in a range of prices. When they enter The Girl Who Kicked the Hornets Nest, they will be able to compare prices for the book available from different Web sites. When they enter a dozen red roses in the Gifts and Flowers section, they will receive several pages of rose combinations, including some that are for two-dozen (i.e., 24 rose) assortments. If they refine the search to one they will get a more compact selection to choose from and a more exact search that weeds out the two-dozen options. However, rose assortments that include other colors besides just red (i.e. one dozen yellow and red roses) will still be included. The rose search typifies some of the limitations to search engine efficiency that students might point out. 2. Locate where cookies are stored on your computer. (They are probably in a folder entitled cookies within your browser program.) List the top 10 cookies you find, and write a brief report describing the kinds of sites that placed the cookies. What purpose do you think the cookies serve? Also, what do you believe are the major advantages and disadvantages of cookies? In your opinion, do the advantages outweigh the disadvantages, or vice versa? The purpose of this project is for students to begin thinking about the implications of cookie use by Web sites. The location of cookie files on a computer depends on the browser version being used. Cookie files can be accessed on a computer using Mozilla Firefox by opening the Tools menu, clicking Options, selecting Privacy and clicking the Show Cookies button. Cookie files on a computer using Internet Explorer 8 can be viewed by selecting Tools, clicking Internet Options, and on the General tab, in the Browsing History section, clicking the Settings button, and then clicking View Files. Both Internet Explorer and Firefox have menu options that allow users to accept all, some, or none of their incoming cookies. Students may not be able to identify all cookies they locate because abbreviations and acronyms are used, but they should be able to identify many of them because they are familiar with the sites they have visited. Advertising cookies that they may not have been aware of are also deposited. For example, cookies from DoubleClick,, 247RealMedia, RightMedia, and other advertising networks may be discovered. These firms use cookies to track users and serve advertising content. Most sites on the Internet do not place advertisements on their sites themselves. Rather, they subscribe to a media service that places those ads for them. When an HTTP request for an advertising image is made to a media service, it returns the ad and also a cookie. Or, if a user has received a cookie previously, it can read that first and check to see what ad to send. Advantages include the faster loading of pages on future visits and the ability to only register once when a user visits a site. Disadvantages include the privacy implications of having ones Web surfing habits tracked by cookies. Opinion will vary on whether the advantages outweigh the disadvantages. 3. Call a local ISP, cable provider and DSL provider to request information on their 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)?


Student reports should include the name of the companies they called to request information from, statistics on upload and download speeds, price, and availability. Cable companies may present the arguments listed below to discourage DSL use, and DSL providers might present some of what is discussed below to support their market position. Students should discuss at least some of these issues in summarizing the features, benefits and downsides of the three providers. With cable connections, available bandwidth decreases when the other users in the neighborhood are online because the bandwidth is shared with everyone on the block. This could particularly cause a problem at peak hours when this form of high bandwidth connection becomes very popular in a locality, and the local company has not kept pace with the growth in the number of users. One of the reasons that cable service costs less than DSL is because it is a shared facility. A coaxial cable traveling in a neighborhood from house to house can provide high-speed service to thousands of customers. DSL on the other hand, requires a separate pair of wires for each subscriber: the phone company needs to install a special DSL modem for each phone line at its central office. However, although DSL is a dedicated line, it is still only as good as the local service providers connection to the Internet backbone. This creates several potential disadvantages for DSL relative to cable modem. DSL customers each require their own line, and the provider incurs extra expense in managing each of these lines individually. DSL technology also is distance sensitive. Essentially, the longer a customers telephone line runs from their house to the phone company, the less performance they can achieve with DSL. 4. 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? The purpose of this project is for students to understand the global Internet infrastructure and the significant jump the United States still has on the rest of the world. In order to prepare this report, students should consult online reference sources. They are likely to find that New York plays a big role in connecting the United States to Europe. New York is the capital of the global Internet because it has the highest aggregation of Internet capacity that travels between the worlds regions. The United States is still a key staging ground for the rest of the worlds Internet. For example, France Telecom is not based in the United States, but it has a substantial presence in the United States. France Telecom, and other companies like it, must deploy bandwidth in the United States and connect with other ISPs to effectively serve their customers. Students may also find that Miami has more Internet capacity into Latin American countries than any Latin American city does. If they choose an African country, they will likely find that there are few regional links in Africa, and that almost all upstream Internet circuits connect to the United States (with a few to the UK, Italy and France). ISPs in countries with borders shared with South Africa benefit from low tariff policies of the public South African telecom operator for international links to neighboring countries. As a result, South Africa is a hub for some of its neighbours: Lesotho, Namibia, and Swaziland. There are no other regional backbones or links between neighbouring countries aside from Mauritius to Madagascar and the links to South Africas neighbours, so much local traffic must go via the United States. This means that significant and rapidly increasing capital outflows from the region are occurring for Internet traffic between African countries paid to United States or European telecom operators and ISPs. Vast amounts of telecom transit payments a year leave the continent that could have been invested in local infrastructure. This project should help students grasp the extent of the worldwide digital divide.


5. We have mentioned several high-speed gigabit networks throughout this chapter. Investigate the topic of high-speed networks and try to find the fastest recorded network (usually used for research purposes). Then try to find the fastest commercial network handling routine Internet traffic. To explore the topic of the fastest recorded research network, students should visit the Internet2 Web site ( The current standard is OC-768, which supports data transfer at about 40 gigabitsper-second (40 Gbps, or 40 gig). In 2010, Internet2 implemented a 100 gigabit-per-second (Gbps) nationwide research network, which is currently the fastest. The next step is OC-3072, which supports 160 Gbps. Although this exists as a standard, it is currently available only on an experimental basis. Determining the fastest commercial network handling routine Internet traffic is somewhat more difficult. Today, there are a number of backbone operatorssuch as AT&T, Verizon, Cable and Wireless, and Sprintthat offer OC-768, and several are expected to transition to 100 Gbps in the near future.


Chapter 3 Building E-commerce Web Sites Objectives

Explain the process that should be followed in building an e-commerce Web site. Describe the major issues surrounding the decision to outsource site development and/or hosting. Identify and understand the major considerations 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 Web site performance.

Key Terms
systems development life cycle (SDLC), p. 184 business objectives, p. 185 system functionalities, p. 186 information requirements, p. 186 system design specification, p. 187 logical design, p. 187 physical design, p. 187 outsourcing, p. 187 co-location, p. 191 unit testing, p. 194 system testing, p. 194 acceptance testing, p. 194 benchmarking, p. 195 system architecture, p. 197 two-tier architecture, p. 198 multi-tier architecture, p. 199 site management tools, p. 199 dynamic page generation, p. 202 Web content management system (WCMS, WebCMS), p. 203 Web application server, p. 203 e-commerce merchant server software, p. 203 online catalog, p. 204 shopping cart, p. 204 merchant server software package (e-commerce server suite), p. 205 hardware platform, p. 208 stateless, p. 210 I/O intensive, p. 210 user profile, p. 210 CPU-intensive, p. 210 scalability, p. 212 vertical scaling, p. 212 horizontal scaling, p. 213 widget, p. 219 Common Gateway Interface (CGI), p. 219 Active Server Pages (ASP), p. 220 Java, p. 220 Java Server Pages (JSP), p. 221


JavaScript, p. 221 ActiveX, p. 221 VBScript, p. 221 ColdFusion, p. 221 privacy policy, p. 222 accessibility rules, p. 222

Brief Chapter Outline

Tommy Hilfiger Right Sizes Its Web Store 3.1 Building an E-commerce Web Site: A Systematic Approach Pieces of the Site-Building Puzzle Planning: The Systems Development Life Cycle Systems Analysis/Planning: Identify Business Objectives, Systems Functionality, and Information Requirements Systems Design: Hardware and Software Platforms Building the Systems: In-House versus Outsourcing Insight on Business: Curly Hair and Motormouths: Getting Started on the Cheap Testing the System Implementation and Maintenance Factors in Optimizing Web Site Performance Web Site Budgets 3.2 Choosing Software Simple versus Multi-tiered Web Site Architecture Web Server Software Application Servers E-commerce Merchant Server Software Functionality Merchant Server Software Packages (E-commerce Suites) Building Your Own E-commerce Site: Web Services and Open Source Options 3.3 Choosing the Hardware for an E-commerce Site Right-sizing Your Hardware Platform: The Demand Side Right-sizing Your Hardware Platform: The Supply Side 3.4 Other E-commerce Site Tools Web Site Design: Basic Business Considerations Tools for Web Site Optimization Tools for Interactivity and Active Content Personalization Tools The Information Policy Set Insight on Society: Designing for Accessibility with Web 2.0 3.5 Case Study: REI Climbs the Web Mountain 3.6 Review Key Concepts Questions Projects


Figure 3.1 Pieces of the E-commerce Site-Building Puzzle, p. 184 Figure 3.2 Web Site Systems Development Life Cycle, p. 185 Figure 3.3 A Logical and Physical Design for a Simple Web Site, p. 188 Figure 3.4 Choices in Building and Hosting, p. 189 Figure 3.5 The Spectrum of Tools for Building Your Own E-commerce Site, p. 189 Figure 3.6 Costs of Customizing E-commerce Packages, p. 190 Figure 3.7 Factors in Web Site Optimization, p. 196 Figure 3.8 Components of a Web Site Budget, p. 197 Figure 3.9 Two-tier and Multi-tier E-commerce Architectures, p. 197 Figure 3.10 WebTrends Analytics; Google Analytics, p. 201 Figure 3.11 Degradation in Performance as Number of Users Increases, p. 211 Figure 3.12 Capacity of Static Page Web Servers, p. 212 Figure 3.13 The Relationship of Bandwidth to Hits, p. 213 Figure 3.14 Vertically Scaling a System, p. 214 Figure 3.15 Horizontally Scaling a System, p. 215 Figure 3.16 E-commerce Web Site Features that Annoy Customers, p. 217

Table 3.1 System Analysis: Business Objectives, System Functionality, and Information Requirements for a Typical E-commerce Site, p. 186 Table 3.2 Key Players: Hosting/Co-Location Services, p. 191 Table 3.3 Basic Functionality Provided by Web Servers, p. 200 Table 3.4 Application Servers and Their Function, p. 204 Table 3.5 Widely Used Midrange and High-end E-commerce Suites, p. 206 Table 3.6 Open Source Software Options, p. 208 Table 3.7 Factors in Right-Sizing an E-commerce Platform, p. 209 Table 3.8 Vertical and Horizontal Scaling Techniques, p. 213 Table 3.9 Improving the Processing Architecture of Your Site, p. 216 Table 3.10 The Eight Most Important Factors in Successful E-commerce Site Design, p.218

End-of-Chapter Questions
1. Name the six main pieces of the e-commerce site puzzle. The six main pieces of the e-commerce site puzzle are the organizational capabilities and human resources you will need to build and manage the site, the hardware, the software, the telecommunications infrastructure you will need to meet the demands of your customers, and the site design you will need to implement your business objectives. 2. Define the systems development life cycle and discuss the various steps involved in creating an ecommerce site. The systems development life cycle is a methodology for understanding the business objectives of any system so that an appropriate solution can be designed. The five major steps in the SDLC for an ecommerce site are: systems analysis, systems design, building the system, testing the system, and


implementation. In the systems analysis step, the business objectives for the site are identified. The list of the necessary capabilities for the site is translated into lists of the types of information systems and the elements of information that will be needed to achieve them. Next, the main components in the system and their relationships to one another must be identified. The system design includes a data flow diagram and the physical components that will need to be purchased. After the system has been built and programmed, the program modules must be tested one at a time and then the site must be tested as a whole, examining every conceivable path a user might try to utilize while on the site. Implementation of an e-commerce site includes the continuing maintenance that will be needed over the life of the site to keep it functional, including correcting mistakes and continuing to improve, update, and modify links and other site features. 3. Discuss the differences between a simple logical and simple physical Web site design. A simple, logical design for a Web site describes the flow of information at the site including the processing functions that must be performed and the databases that will provide information. It also includes a description of the security and emergency backup procedures and the controls that will be used in the system. A simple physical design, on the other hand, translates the logical design into the physical components that will be needed such as the servers, software, and size of the telecommunications link, backup servers, and security system. 4. Why is system testing important? Name the three types of testing and their relation to each other. System testing is important because there can be up to thousands of different pathways within a typical e-commerce Web site and you must make sure that customers can find what they want easily and quickly and, most importantly, that they can complete a purchase without a hitch. The three types of testing that must be completed are unit testing, which involves checking each program module; system testing, which includes testing the site as a whole in the way a typical user might navigate and make requests for functionality; and acceptance testing, which requires the firms key personnel and managers to use the system to verify that the business objectives as originally conceived are being met. 5. Compare the costs for system development and system maintenance. Which is more expensive, and why? The costs for system maintenance for an e-commerce Web site, can run anywhere from 50% to 100%, per year, of the original systems development costs. For small sites the annual maintenance cost can parallel the development costs, with larger sites achieving some economies of scale. Maintenance is more expensive because e-commerce sites are always in a process of change, improvement, and correction. E-commerce sites are in fact, never finished. They are always in the process of being built and rebuilt. 6. Why is a Web site so costly to maintain? Discuss the main factors that impact cost? Web sites are so costly to maintain because code must be debugged, hyperlinks must be tested and repaired continually; emergencies must be handled; reports, data files and links to backend databases must be maintained and updated as necessary. General administrative tasks of the site require attention including updating the products and prices. Changes and enhancements to the system are also continually being made so that the site is always adapting to changing market conditions. All of this requires a Web team that includes programmers, designers, and business managers from the marketing,


sales support, and production departments. This will ensure timely response to customer feedback and that the site is adequately monitored for correct prices and links with updated page display. 7. What are the main differences between single-tier and multi-tier site architectures? Single-tier site architecture simply consists of a server machine running the basic Web server software. Multi-tier site architecture, on the other hand, provides much more functionality by linking a Web server layer that can include multiple Web servers to a middle tier that includes many Web application servers, which provide a wide variety of transaction processing tasks. This middle layer is also linked to a backend layer that includes existing databases, human resources systems, corporate applications, financial data, and enterprise systems. A multi-tiered site typically employs several or more physical computers each running some of the software applications and sharing the workload across many computers. 8. Name five basic functionalities a Web server should provide. The basic functionalities a Web server should provide are: processing HTTP requests (requests for HTML pages). providing security services to verify the username and password or process the certificates and private/public key information required for credit card processing (Secure Sockets Layer or SSL). processing FTP requests (transfers of very large files from server to server). providing search engine services. capturing data such as logs of visits, time, duration, and referral sources. providing e-mail services including the ability to send, receive, and store e-mail. providing site management tools to calculate and display key site statistics such as unique visitors, page requests, and the origin of requests, as well as to check the links on the site. 9. What are the three main factors to consider when choosing the best platform for your Web site? In choosing the best platform to use for your Web site, the three main factors to consider are the anticipated number of simultaneous users who will likely visit your site, the customer user profile with their expected requests and behavior while at the site, and the nature of the content on your site. The more visitors you have, the greater the demand will be on your system. If the users will be viewing dynamic pages and large multimedia files, far more capacity will be required. 10. Why is Web server bandwidth an important issue for e-commerce sites? The three factors discussed in Question 9, will help to determine the telecommunications link you will need for your site. Web server bandwidth is another important consideration because the larger the bandwidth available, the more customers that can hit your site simultaneously. Most ISPs or other sitehosting providers are obligated to provide enough bandwidth so that your site can meet peak demands. By the end of 2008, about 75 million American households had broadband cable or DSL access to the Internet and this will present additional demands for more dynamic content and additional site capacity. 11. Compare and contrast the various scaling methods. Explain why scalability is a key business issue for Web sites.


In order to meet the demands for service at your site, you can scale your hardware vertically, scale your hardware horizontally, or improve the processing architecture at your site. You scale vertically by upgrading the servers from a single processor to multiple processors. You can add up to 20 processors to a machine and also increase chip speeds. The drawbacks to this method are that it can become expensive to purchase new machines with every growth cycle, and that your entire site becomes dependent on just a small number of very powerful computers. If you horizontally scale your site instead, you add multiple single processor servers to the site and balance the load among many servers. You can also create dedicated servers that only handle certain tasks such as HTTP requests or ASP pages, while others handle just database applications. This method requires the use of special load balancing software to direct the incoming requests to the appropriate server. This is a less expensive method because you can often use older PCs that otherwise might be discarded. Furthermore, if one machine fails, there is a good probability that another one of the many other machines can pick up the load. The third alternative, improving the processing architecture, is a combination of both vertical and horizontal scaling and system design changes. The main concept is that the workload is split into Input/Output intensive activities and CPU intensive activities. The servers can then be fine tuned to handle simple requests for Web pages, or more CPU-intensive activities such as order taking. Scalability is a key business issue for Web sites because firms must be able to increase the size of their sites as demand loads increase and they must be able to do so efficiently and cost effectively. 12. What are the eight most important factors impacting Web site design, and how do they affect a sites operation. The eight most important factors impacting Web site design are: Functionality: The site must have pages that load quickly, perform correctly, and send the user to the requested information about the product offerings. Informational: The site must have links that the customer can find easily in order to obtain information about the company and the products it offers. Ease of use: The site must have a simple foolproof navigation scheme. Redundant navigation: The site must have alternative paths to reach the same content. Ease of purchase: There should be no more than one or two clicks required for the purchasing procedure. Multi-browser functionality: The site should work with the popular browsers. Simple graphics: The site should not use distracting graphics and/or sounds that the user cannot control. Legible text: The site should avoid the use of backgrounds that distort text or make it difficult to read. Failure to pay attention to these factors will adversely affect the operation of a site because users will find the site frustrating to navigate and view, they will have difficulty obtaining information about the products, and they will determine that making a purchase will be far too complicated 13. What are Java and JavaScript? What role do they play in Web site design? Java is a programming language that allows programmers to create interactivity and active content on the client machine. It alleviates the load on the server because the Java programs or applets are downloaded to the client and executed on the clients computer. A Java Virtual Machine (VM) is now included in all browsers that will send a request to the server to download and execute the program and


allocate page space to display the results. Java can be used to display interesting graphics and create interactive environments such as calculators or calendars. However, different vendors have produced different versions of the language and today many firms will not allow Java applets through their security firewalls. Many Java applets crash or perform poorly, wasting system resources for sometimes not very important functions that do not add much to the page design. Hence, they are not widely in use today by corporate Web sites. Conversely, JavaScript is a programming language that is used to control the objects on an HTML page and handle interactions with the browser. It is commonly used to control verification and validation of user input, such as confirming that a valid phone number or e-mail address has been entered. It is much more acceptable to corporations because it is more stable and is restricted to the operation of requested HTML pages. 14. Name and describe three tools used to treat customers individually. Why are they significant to ecommerce? The primary method for treating customers individually through personalization and customization is the placement of cookie files on the users client machine. Cookies can be used to store information about the customer such as their customer ID, a campaign ID, and their prior purchases from the site. When a user returns to a site, the prior viewing and purchasing behavior can be accessed from a database, and the customer can be greeted by name and related products can be recommended. Other tools that enable personalization and customization include tools for interactivity and active content, such as CGI scripts, Active Server Pages, and Java Server Pages. Personalization and customization are significant to e-commerce because they can potentially make it nearly as powerful as a traditional marketplace and perhaps even more powerful than direct mail or shopping at an anonymous suburban shopping mall. Speaking directly to a customer and tailoring a product to that customer are potentially powerful marketing tools that could help to increase sales and revenues. 15. What are some of the policies e-commerce businesses must develop before launching a site and why? Some of the policies that an e-commerce business site must develop prior to launching are a privacy policy, accessibility rules, and financial reporting policies. The privacy policy is a public statement detailing to customers how the personal information that is gathered at the site will be treated. Accessibility rules are a set of design objectives that ensure disabled users can effectively access a site.

1. Go to or Both sites allow you to create a simple e-tailer Web site for a free trial period. The site should feature at least four pages, including a home page, product page, shopping cart, and contact page. Extra credit will be given for additional complexity and creativity. Come to class prepared to present your e-tailer concept and Web site. Note: Make sure to let your students know that since the time of writing, has changed its name to


Students should be able to build a basic Web site using the tools provided on either of these sites. At both of these sites, students will proceed through a series of steps. Note that it may not be possible for students to build at least four pages (depending on the free functionality provided by these two sites at the time this project is assigned), so credit should not be deducted if that is in fact the case. 2. Visit several e-commerce sites, not including those mentioned in this chapter, and evaluate the effectiveness of the sites according to the eight criteria/functionalities listed in Table 3.10. Choose one site you feel does an excellent job on all the aspects of an effective site and create a presentation including screen shots to support your choice. The purpose of this project is to extend the critical thinking skills of students as they examine Web sites. For each factor listed on Table 3.10, the students should evaluate the Web site for effectiveness of design. For example, the students should evaluate how clearly the digital catalog conveys the essence of each product using graphics, or other methods such as streaming video, and how effectively products are portrayed in textual descriptions. Students can choose sites at which they are actually shopping or they can simply browse, but they should go through the steps of executing a transaction so that they can evaluate the shopping cart/payment system and ease of purchase. They should also navigate to multiple pages at each site so that they can evaluate the ease of use, and redundancy of navigation. The presentation might include screen shots of product graphics, navigation bars, and pages from the site displayed in multiple browsers. 3. Imagine that you are the head of information technology for a fast-growth e-commerce start-up. You are in charge of development of the companys Web site. Consider your options for building the site inhouse with existing staff or outsourcing the entire operation. Decide which strategy you believe is in your companys best interest and create a brief presentation outlining your position. Why chose that approach? And what are the estimated associated costs, compared with the alternative? (Youll need to make some educated guesses heredont worry about being exact.) The purpose of this project is to get students to begin to consider the managerial decision making process. If they choose to build in-house they might mention such factors as an in-place staff of professionals who are trained for this task including graphic artists, Web designers, programmers, and project managers. They may also posit that they are prepared to purchase a top-of-the-line prepackaged site-building tool that will be scalable as the firm expands its customer base. They may also argue that their firm sells a highly specialized product so that the need for a customized Web site is high or that their staff, which is already highly trained, will be able to build a site that does exactly what the company needs. Moreover, they may believe that the staff who will participate in the building of the site will be able to change the site more rapidly to adapt to any changes in the business environment. Students who opt for outsourcing might mention such factors as the risks involved in building such complex features as shopping carts, credit card authentication and processing systems, inventory management systems, and order processing systems. They may also argue that the risk of ending up with a poorly functioning site is just too great, and that staff will face a long, difficult learning curve. Costs for building in-house might include the salaries of any additional professionals who will have to be hired, the cost of a prepackaged site-building tool, or the costs of additional software or technology that will have to be purchased to build credit card authentication systems. Costs for outsourcing may include an expensive site-building package and costs for hiring an outside vendor to modify the package. 4. Choose two of the e-commerce suite software packages listed in Table 3.5 and prepare an evaluation chart that rates the packages on key factors discussed in the section Choosing an E-commerce Suite.


Which package would you choose if you were developing a Web site of the type described in this chapter, and why? The best way for students to approach this project is to choose two of the e-commerce suites and conduct an online research study to find articles in the popular and technical press that evaluate the products based upon the key factors listed in the chapter. Reading articles and comparisons of the suites will give students insight into just how difficult the process of choosing an e-commerce suite can be for a manager. Answers of course will vary according to the suites chosen and the opinions of the authors of the articles collected. One possible comparison based upon product evaluations from various sources is: (Table is based on a scale of 1-10.) Microsoft Commerce Server Standard Edition 8.5 7.5 9.2 9 7.5 7.5 9 8 8 IBM WebSphere Commerce Express Edition 7.8 8 7.5 8 8.2 9 8 9 8

Functionality Support for different business models Business processing models Visual site management tools Performance and scalability Connectivity to existing business systems Compliance with standards Global and multicultural ability Local sales tax and shipping rules

IBMs WebSphere Commerce Express Edition provides templates, Set Up Wizards, and a large set of store and catalog editing tools. It offers a scalable architecture and extensive customizability, and can support many different business models, from B2C, B2B, and C2C, as well as electronic downloads. It offers good multilingual support, and provides good integration with back-end systems, including existing DB2 and Oracle databases. Unlike Microsofts product, it can be run on a number of different server platforms, including Linux and Windows. However, it does not appear to have as many high-end reporting tools as Microsofts product. Microsoft Commerce Server Standard Edition is also extensible, and includes many pre-defined reports that can be run to analyze site activities and product sales data. It has very good analysis tools through SQL server data mining. Its main drawback is that it only runs on IIS Web servers. It also is customizable, but to do so, knowledge of Microsofts Visual Studio.NET tools is required. 5. Choose one of the open source Web content management systems such as Joomla or Drupal or another of your own choosing and prepare an evaluation chart similar to that required by Project 4. Which system would you choose and why? The first task students must perform to complete this project is to choose an open source Web content management system. Once they have done so, the next step, as with Project 4, will be to conduct an online research study to find articles in the popular and technical press that evaluate the product. Answers will vary according to the system chosen and the opinions of the authors of the articles collected. Student evaluation charts should cover the following areas and explain whether they would purchase the system and why or why not:


Community features Shopping cart Search engine Forum creation Ability to create blogs Multimedia capability Templates/Themes Document management features Content management features Documentation for system Ease of use/learning curve required SSL compatibility/security Internationalization capabilities


Chapter 4 E-commerce Security and Payment Objectives

Understand the scope of e-commerce crime and security problems. Describe the key dimensions of e-commerce security. Understand the tension between security and other values. Identify the key security threats in the e-commerce environment. Describe how technology helps protect the security of messages sent over the Internet. Identify the tools used to establish secure Internet communications channels and protect networks, servers, and clients. Discuss the importance of policies, procedures, and laws in creating security. Describe the features of traditional payment systems. Explain the major e-commerce payment mechanisms. Describe the features and functionality of electronic billing presentment and payment systems.

Key Terms
integrity, p. 245 nonrepudiation, p. 245 authenticity, p. 246 confidentiality, p. 247 privacy, p. 247 availability, p. 247 malicious code (malware), p. 248 virus, p. 250 worm, p. 251 Trojan horse, p. 251 bot, p. 252 botnet, p 252 browser parasite, p. 254 spyware, p. 254 phishing, p. 254 hacker, p. 256 cracker, p. 256 cybervandalism, p. 256 white hats, p. 257 black hats, p. 257 grey hats, p. 257 spoof, p. 258 Denial of Service (DoS) attack, p. 259 distributed Denial of Service (dDos) attack, p. 259 sniffer, p. 259 encryption, p. 262 cipher text, p. 262 key (cipher), p. 262 substitution cipher, p. 262 transposition cipher, p. 262 symmetric key encryption (secret key encryption), p. 263 Data Encryption Standard (DES), p. 264 Advanced Encryption Standard (AES), p. 264 public key cryptography, p. 265


hash function, p. 266 digital signature (e-signature), p. 266 digital envelope, p. 268 digital certificate, p. 269 certification authority (CA), p. 269 public key infrastructure (PKI), p. 269 Pretty Good Privacy (PGP), p. 270 secure negotiated session, p. 273 session key, p. 273 Secure Hypertext Transfer Protocol (S-HTTP), p. 275 virtual private network (VPN), p. 275 Point-to-Point Tunneling Protocol (PPTP), p. 275 firewall, p. 275 proxy server (proxy), p. 276 risk assessment, p. 278 security policy, p. 279 implementation plan, p. 279 security organization, p. 380 access controls, p. 380 authentication procedures, p. 380 biometrics, p. 380 authorization policies, p. 380 authorization management system, p. 380 security audit, p. 380 CERT Coordination Center, p.383 US-CERT, p. 384 cash, p. 286 float, p. 286 checking transfer, p. 286 credit card, p. 287 credit card association, p. 287 issuing bank, p. 287 processing center (clearinghouse), p. 287 stored-value payment system, p. 287 debit card, p. 287 accumulating balance payment system, p. 288 merchant account, p. 291 digital wallet, p. 293 digital cash, p. 293 online stored value payment system, p. 294 smart card, p. 294 radio frequency identification (RFID), p. 295 digital accumulating balance payment system, p. 295 digital checking payment system, p. 296 electronic billing presentment and payment (EBPP) system, p. 297

Brief Chapter Outline

Cyberwar: Mutually Assured Destruction 2:0 4.1 The E-commerce Security Environment The Scope of the Problem


What is Good E-commerce Security? Dimensions of E-commerce Security The Tension Between Security and Other Values 4.2 Security Threats in the E-commerce Environment Malicious Code Unwanted Programs Phishing and Identity Theft Hacking and Cybervandalism Credit Card Fraud/Theft Spoofing (Pharming), and Spam (Junk) Web Sites Denial of Service (DoS) and Distributed Denial of Service (dDoS) Attacks Sniffing Insider Attacks Poorly Designed Server and Client Software Mobile Platform Security 4.3 Technology Solutions Protecting Internet Communications Encryption Insight on Society: Web Dogs and Anonymity Securing Channels of Communication Protecting Networks Protecting Servers and Clients 4.4 Management Policies, Business Procedures, and Public Laws A Security Plan: Management Policies The Role of Laws and Public Policy Insight of Technology: Think Your Smartphone is Secure? 4.5 Payment Systems Types of Payment Systems 4.6 E-commerce Payment Systems Online Credit Card Transactions Digital Wallets Digital Cash Online Stored Value Payment Systems Digital Accumulating Balance Payment Systems Digital Checking Payment Systems Mobile Payment Systems 4.7 Electronic Billing Presentment and Payment Insight of Business: Mobile Payments Future: WavePayMe, TextPayMe Market Size and Growth EBPP Business Models 4.8 Case Study: Paypal Has Company 4.9 Review


Key Concepts Questions Projects

Figure 4.1 Types of Attacks Against Computer Systems (Cybercrime), p. 242 Figure 4.2 The E-commerce Security Environment, p. 245 Figure 4.3 A Typical E-commerce Transaction, p. 249 Figure 4.4 Vulnerable Points in an E-commerce Transaction, p. 250 Figure 4.5 An Example of a Nigerian Letter E-mail Scam, p. 255 Figure 4.6 An Example of a Phishing Attack, p. 255 Figure 4.7 Tools Available to Achieve Site Security, p. 263 Figure 4.8 Public Key Cryptography A Simple Case, p. 265 Figure 4.9 Public Key Cryptography with Digital Signatures, p. 267 Figure 4.10 Public Key Cryptography: Creating a Digital Envelope, p. 268 Figure 4.11 Digital Certificates and Certification Authorities, p. 270 Figure 4.12 Secure Negotiated Sessions Using SSL, p. 274 Figure 4.13 Firewalls and Proxy Servers, p. 277 Figure 4.14 Developing an E-commerce Security Plan, p. 279 Figure 4.15 Online Payment Methods in the United States, p. 290 Figure 4.16 How an Online Credit Card Transaction Works, p. 291 Figure 4.17 Major Players in the EBPP Marketspace, p. 301

Table 4.1 The Underground Economy Marketplace, p. 243 Table 4.2 Customer and Merchant Perspectives on the Different Dimensions of E-commerce Security, p. 246 Table 4.3 Notable Examples of Malicious Code, p. 253 Table 4.4 E-commerce Security Legislation, p. 284 Table 4.5 Government Efforts to Regulate and Control Encryption, p. 285 Table 4.6 Dimensions of Payment Systems, p. 288

End-of-Chapter Questions
1. Why is it less risky to steal online? Explain some of the ways criminals deceive consumers and merchants. The potential for anonymity on the Internet can allow criminals to assume identities that look legitimate and at the same time, shield them from law enforcement agencies. Using these assumed identities, criminals can place fraudulent orders with online merchants, intercept e-mail, steal customer information, and shut down e-commerce sites using software viruses. 2. Explain why an e-commerce site might not want to report being the target of cybercriminals. E-commerce sites are often hesitant to report that they have been the target of cybercriminals because companies fear losing the trust of consumers. The actual amount of crime is difficult to estimate because of these fears. Companies fear that if they reveal the full extent of the theft of proprietary information and financial fraud legitimate customers will lose confidence in the e-marketing channel and will take their business back offline.


3. Give an example of security breaches as they relate to each of the six dimensions of e-commerce security. For instance, what would be a privacy incident? Integrity: This is the ability to ensure that information being displayed on a Web site or being transmitted/received over the Internet has not been altered in any way by an unauthorized party. One type of integrity security breach would be an unauthorized person intercepting and redirecting a bank wire transfer into a different account. Non-repudiation: the ability to ensure that e-commerce participants do not deny their online actions. An example of a repudiation incident would be a customer ordering merchandise online and later denying that he or she had done so. The credit card issuer will usually side with the customer because the merchant has no legally valid proof that the customer ordered the merchandise. Authenticity: Authenticity is the ability to identify the identity of a person or entity you are transacting with on the Internet. One instance of an authenticity security breach is spoofing, in which someone uses a fake e-mail address, or poses as someone else. This can also involve redirecting a Web link to a different address. Confidentiality: the ability to ensure that messages and data are available only to authorized viewers. One type of confidentiality security breach is sniffing in which a program is used to steal proprietary information on a network including e-mail messages, company files, or confidential reports. Privacy: the ability to control the use of information a customer provides about him or herself to an e-commerce merchant. An example of a privacy security breach is a hacker breaking into an e-commerce site and gaining access to credit card or other customer information. This violates the confidentiality of the data and also the privacy of the people who supplied the data. Availability: This is the ability to ensure that an e-commerce site continues to function as intended. One availability security breach is a DoS (Denial of Service) attack in which hackers flood a Web site with useless traffic that causes it to shut down, making it impossible for users to access the site.

4. How would you protect your firm against a Denial of Service attack? One way to protect against DoS attacks would be to increase the redundancy of your networks servers. VeriSign responded to DoS attacks made against it by tripling the size of its domain name server installation, presumably to decrease the possibility that an attack would bring down its servers entirely. Firewalls and proxy servers that filter communications directed at servers should also be used. 5. Explain why the U.S. government wants to restrict the export of strong encryption systems. And why would other countries be against it? The U.S. government wants to restrict the export of strong encryption systems because of the belief that it hinders their ability to hunt down terrorists and criminals. This push to impose further restrictions on the development, dissemination, and use of encryption technologies is based on the assumptions that regulation can prevent terrorists from acquiring strong encryption. It also assumes that regulating encryption will not harm the information security of U.S. businesses and individuals.


Other countries are against this because they believe that further regulations will not prevent terrorists from getting strong encryption. They believe that since the development and use of strong encryption has now spread worldwide and has been built into hundreds of millions of systems, including all ecommerce servers, and almost every Web browsing program that it would be impossible to regulate. Hundreds of encryption programs are available on the Internet. Approximately three-dozen countries produce commercial encryption products. Even if the United States completely banned civilian encryption, it would still be available to terrorists from dozens of other international Web sites. Even if all countries banned civilian encryption, it would still be available via underground Internet sites; and even if all of these were closed down, terrorists could create their own encryption software. Some politicians and government officials have called for a ban on products that dont include back doors for government surveillance. This would give law enforcement keys to unlock any encrypted messages. Though the keys would be securely maintained, privacy rights groups and business managers, as well as other governments, are concerned that the keys could be compromised, and that the U.S. government might abuse its power. 6. Name the major points of vulnerability in a typical online transaction. The major points of vulnerability are at the client level, at the server level, and over the Internet communications channels. 7. How does spoofing threaten a Web sites operations? Spoofing can redirect customers to a knock-off Web site where the customers are fooled into completing an online order with a fraudulent or different company from the one with whom they intended to do business. In this way, business can be stolen away from a site. Spoof hackers can also alter orders by inflating them or changing the products ordered. The orders can then be sent on to the original site for processing and delivery. Customers will become irate at the poor customer service and will take their business elsewhere. Huge inventory fluctuations caused by these actions can also significantly harm operations. 8. Why is adware or spyware considered to be a security threat? Spyware and (to a lesser degree) adware are considered to be security threats because they are covertly placed on Web users computers, where they then collect and distribute private personal information. Spyware can obtain passwords, e-mail and instant messages, and so on, whereas adware is slightly less harmful once installed. 9. What are some of the steps a company can take to curtail cybercriminal activity from within a business? One measure a company can take is to implement access controls to determine which insiders can gain access to the firms networks. Insider access controls typically consist of login procedures using usernames, passwords, and access codes. Authorization management systems regulate where and when a user is permitted to access certain parts of a Web site. Entry rules are established up front for each user, and the authorization management system knows who is permitted to go where at all times. The authorization management system encrypts a user session and functions like a passkey following a user from page to page and only allowing access to areas where the user has been granted permission based on data that has been entered in the system database.


10. Explain some of the modern-day flaws associated with encryption. Why is encryption not as secure today as it was earlier in the century? Public key encryption is computationally slow: if 128 or 256-bit keys were used to encode large documents, transmission speeds and significant increases in processing times would occur. Symmetric key encryption is computationally faster, but requires that the sender and the receiver share the same key, which must be sent over insecure transmission lines. Encryption is also not as secure today as it was earlier in the century because computers are so much more powerful and faster, that ancient means of encryption can be easily broken. Furthermore, in order to effectively use symmetric key encryption for commercial uses today, you would need a secret key for each of the parties in a transaction: one for the bank, one for the merchant, and one for the government. Thousands of millions of keys would be needed to accommodate all e-commerce users. 11. Briefly explain how public key cryptography works. Public key cryptography solves the problem of exchanging keys by creating a mathematically related public key and private key. The private key is kept secret by the owner, while the public key is widely disseminated. The main concept behind this method is that a one-way, irreversible mathematical function is used to produce the keys. Both keys can be used to encrypt and decrypt a message, but after it is encrypted, the same key cannot be used to decrypt a message. Only a person with possession of the recipients private key can decrypt a message. The addition of a digital signature ensures the authenticity of the message and guarantees non-repudiation. The sender uses his or her own private key to encrypt the message along with a hash function, which has been added to create a unique digest of the message. When used with the hash function, the digital signature is even more unique than a handwritten signature. This irreversible process creates a cipher text that can be read only by the recipient using his or her private key. 12. Compare and contrast firewalls and proxy servers and their security functions. Firewalls and proxy servers are used to build a wall around private networks as well as the attached servers and clients. Firewalls refer to either hardware or software that filter communication packets and prevent packets from entering the network based on a security policy. Proxy servers are software servers that handle all communications originating from or being sent to the Internet. Their primary function is to limit the access of internal clients to external Internet servers; user HTTP requests are routed to a proxy server. The user and the nature of the request must be validated before the request is sent on to the Internet. Pages sent by external Internet servers must pass through the proxy server and be deemed acceptable before they can enter the internal network and be routed to the client machine. Proxy servers also improve Web performance by storing frequently used pages locally, reducing upload times, and hiding the internal networks address so that hackers will have a difficult time monitoring the network. 13. Is a computer with anti-virus software protected from viruses? Why or why not? Anti-virus software will protect a computer from many, but not all, of the most common types of viruses. The software will also destroy any viruses already present on the hard drive. However, new viruses are being developed daily, so routine updates of the software are needed to prevent new viruses from causing damage. 14. Identify and discuss the five steps in developing an e-commerce security plan.


The five steps in developing an e-commerce security plan are: Perform a risk assessment: First, an inventory of the information and knowledge assets of a company is taken, and a dollar value amount is placed on each asset. Then, this amount is multiplied by the estimated probability that the information could be compromised. This computation is used to produce a ranked list of the information assets of the firm prioritized by their value. Develop a security policy: A set of statements should be developed that prioritizes the information risks, identifies acceptable risk targets, and sets out the goals for achieving these targets. Included in the security policy should be a list of the personnel who are or will be entrusted with the information assets. It should also include a description of the security policies that presently exist for these assets and suggestions for improvements. Finally, it should outline the level of risk the firm is willing to accept for each asset, and the estimated cost to achieve this level of acceptable risk. Develop an implementation plan: The actions that must be taken to achieve the security plan goals must be set out. The tools, technologies, policies and procedures needed to achieve the acceptable levels of risk must be developed. Create a security organization: A security organization must be established that will train users and keep management apprised of the security threats and breakdowns. The access controls that will determine who can gain legitimate access to the firms networks and the authentication procedures that will be used to protect data from intruders must be determined. Authorization policies must also be established for the differing levels of access to information assets for different users. Perform a security audit: A security audit must be conducted to identify how outsiders are using the site and how insiders are accessing the sites assets. A monthly report should be generated that will establish the routine and non-routine accesses to the system and identify any unusual patterns. 15. How do biometric devices help improve security? What particular type of security breach do they particularly reduce? Biometric devices help improve security by working in conjunction with digital signatures to ensure the authenticity of messages. They guarantee non-repudiation by verifying the physical attributes of an individual. Fingerprints, retina scans, or speech recognition systems can be used to identify individuals before they are allowed to access a Web site or pay for merchandise with a credit card. Biometrics devices also make a spoofing security breach less likely by making it more difficult for hackers to break into a site. 16. What are tiger teams, who uses them, and what are some of the tactics they use in their work? Tiger teams are groups whose sole purpose is to attempt to break into a site. Large corporations use them to identify security weaknesses and provide solutions to rectify the problem areas. Tiger teams will mimic the actions of hackers so that their clients can gain a true assessment of their security weaknesses and the likelihood of a break-in. They will scour dumpsters for scraps of computer paper that may contain information, steal corporate ID badges, and even crawl through ceiling tiles to access computer rooms in search of information. 17. How do the interests of the four major payment systems stakeholders impact each other?


The interests of the four major payment systems stakeholders impact each other because their interests are often not the same. Consumers want low-risk, low-cost, refutable, convenient, and reliable payment mechanisms. Merchants also want low-risk, low-cost, and reliable payment systems, but they would like to see less refutability. Merchants would prefer it if all sales were final. Presently, they carry most of the risk for checking and credit card fraud, for repudiated charges, and they must also bear the costs of the hardware used to process and verify payments. The financial intermediaries want to transfer the cost and risk of fraud or repudiation on to either the merchants or the consumers. They are most concerned with the security of financial transactions and want to maximize transaction fees. Government regulators are interested in maintaining trust in the financial system. They want to protect all parties against fraud and abuse as well as balance the interests of consumers, merchants, and financial intermediaries. Government regulations have limited the risks to individual consumers, and the major credit card companies have offered the same protections for debit cards in order to encourage their use. 18. Compare and contrast stored value payment systems and checking transfers. Stored value payment systems are created by depositing funds into accounts from which funds can be withdrawn as needed. They are similar to checking transfers in that funds are stored and withdrawn, but a paper check need not be written. Stored value payment systems include pre-paid phone cards, debit cards, gift certificates, and smart cards. Both stored value payment systems and checking transfers are dependent upon funds being available in an account. Neither is convertible without intermediation, and both involve only a small transaction fee for large purchases. However, stored value systems do not give the consumer any float time, and they are more expensive for the merchant because special hardware is required to read and process the stored numbers on the cards. 19. Why is a credit card not considered an accumulating balance payment system? A credit card is not considered an accumulating balance system because the balance accumulated is not restricted to a certain time period. Utility and phone accounts accumulate a balance that must be paid in full at the end of a time period (usually one month). Credit cards, however, permit purchases to be made on a deferred payment plan with no restriction on time and interest charged on the balance due. While credit cards involve a significant transaction cost for small purchases, accumulating balance systems involve only a small transaction cost for small purchases. 20. Name six advantages and six disadvantages of using cash as a form of payment. The advantages of using cash as a form of payment are: It is instantly convertible without intermediation. It involves only a very low or no cost transaction for small purchases. There are only low fixed transaction costs for the merchant for such items as cash registers and safes. There is no financial risk for the merchant. It is an anonymous payment system for both the consumer and the merchant. It is a tamper-proof payment system. It does not require any authentication. The sale cannot be repudiated (an advantage for the merchant). No expensive special hardware is required to complete a sale.


The disadvantages of using cash as a form of payment are: It is difficult, or would require significant transaction costs to use for large purchases such as a house or a car. There is financial risk to the consumer in carrying cash for purchases as it can be easily lost or stolen. It does not provide any float time for the consumer: there is no time period between the purchase of the item and the actual payment. Cash purchases tend to be final and irreversible unless the seller agrees upon a return policy. There is no security against unauthorized use. 21. Describe the relationship between credit card associations and issuing banks. Credit card associations such as Visa and Master Card are non-profit organizations that set the standards for the banks that issue the credit cards. The banks are the institutions that actually issue the cards, process the transactions, receive and calculate the payments, and charge and receive the interest. Third party processing centers or clearinghouses usually handle verification of accounts and balances. 22. What is Regulation Z, and how does it protect the consumer? Regulation Z limits the risk to consumers when using credit cards. It places the risks such as credit card fraud, repudiation of the transaction, or nonpayment on the merchant and the credit card issuing bank. The liability to the cardholder is limited to $50 for unauthorized transactions that occur before the card issuer is notified that a card is lost or stolen. Once the card is reported stolen, the cardholder is no longer liable for any subsequent charges. 23. Briefly discuss the disadvantages of credit cards as the standard for online payments. How does requiring a credit card for payment discriminate against some consumers? A disadvantage to credit cards is that merchants must pay a significant transaction fee of from between 3% and 5% of the sale. The risks of a transaction are largely borne by the merchant. In addition to the percentage fee, merchants must also pay an additional transaction fee of 20-30 cents per transaction as well as other set-up fees. The high transaction costs make selling small items such as articles and music tracks that are paid for by credit card undesirable. Furthermore, online merchants never see the actual card being used, no card impression is taken, and no signature is available. These last three reasons are why consumers can later dispute charges. The merchant faces the risk that transaction will be refuted and reversed even though the merchandise has already been shipped, or the digital product has already been downloaded. Existing credit card payment systems also offer poor security because neither the merchant nor the consumer can be fully authenticated. Requiring a credit card for payment also discriminates against some consumers because millions of young adults and almost one-hundred million Americans who cannot afford credit cards are denied access to online shopping. 24. Describe the major steps involved in an online credit card transaction. The major steps involved in an online transaction are: the purchase the delivery of the order to the merchant using an SSL secure connection the transfer of the order to the clearinghouse over a secure line


the verification with the consumers issuing bank of the availability of a balance sufficient to make the purchase the issuing bank crediting the merchants account a monthly statement including the charge being sent to the consumer

When a consumer wants to make a purchase, he or she first adds items to a shopping cart. Next, a secure tunnel to the Internet is created so that the consumer can send the credit card information to the merchant. Then, the merchant contacts the clearinghouse to authenticate the credit card and verify the account balance. Once the sale is approved, the issuing bank credits the merchants account at the merchants bank and finally, the debit to the consumers account is transmitted to the consumer in a monthly statement. 25. Compare and contrast smart cards and traditional credit cards. Smart cards are a type of stored value system: they are wallet-sized plastic cards which contain an embedded chip that stores personal information. While credit cards store just a single charge account number on a magnetic strip, smart cards can store the numbers for multiple credit cards as well as health insurance, bank account data, personal identification, and transportation information. They even store information on account balances for various loyalty programs like frequent flyer miles. The convenience of carrying one smart card instead of many credit and identification cards is the value proposition for firms that market smart cards. 26. How is money transferred in transactions using wireless devices? In transactions that use wireless devices, money is sometimes simply transferred by charging a sale to the users cell phone account. Other technologies use two devices that are on the same system (e.g. Bluetooth) to establish a link. This link allows a user to point the cell phone or other wireless device at a vending machine or cash register and transfer the debit to the users bank. Others use a mobile wallet to transfer money from the consumer to the vendor. 27. Discuss why EBPP systems are becoming increasingly popular. EBPP (electronic billing presentment and payment) systems are becoming increasingly popular because of the substantial cost savings that will occur if online billing becomes the norm. The savings in postage, processing, and improved cash flow can be astounding, ranging from 10 cents to $1.50 per invoice. Furthermore, online bills can be used as a sales opportunity, providing many options for marketing and promotion such as offering rebates, and savings offers on the Web. 28. How are the two main types of EBPP systems both alike and different from each other? The two main types of EBPP systems, biller-direct and consolidators, are alike because the bill payment process always involves the customer, the biller, the bank, and potentially a third-party processor. Both enable bills to be created, delivered, and paid over the Internet. Biller-direct systems often use a service bureau to provide the infrastructure necessary to implement the system. This may include the review and paying of just a single bill or increasingly, several different bills. In biller direct systems, the customer accesses the bill at the biller's Web site. Consolidators aggregate all bills for consumers and ideally provide a one-stop bill-paying destination. Customers access bills at the Biller Service Provider's consolidated Web site and/or aggregated from multiple sources at a single Customer Service Provider Web site.


1. Imagine you are the owner of an e-commerce Web site. What are some of the signs that your site has been hacked? Discuss the major types of attacks you could expect to experience and the resulting damage to your site. Prepare a brief summary presentation. To do this project, students should supplement what they have learned in the chapter with online research to explain the clues an e-commerce owner might see to know that their site has been hacked into. Research should also supplement the students discussion of what types of attacks site owners should expect to experience, and the damage to the site that might result. The summary presentation should include examples of recent viruses, worms, and Trojan horses. They should provide an explanation in each instance of the damage these types of malicious code cause to the Web sites they infect. 2. Given the shift toward mobile commerce, do a search on mobile commerce crime. Identify and discuss the new security threats this type of technology creates. Prepare a presentation outlining your vision of the new opportunities for cybercrime. The purpose of this project is for students to begin to appreciate security challenges presented by wireless technology, particularly as it is increasingly being used by employees and customers to access critical enterprise data and systems. Students should consult online research sources to identify and discuss specific threats. For instance, one could integrate wireless safeguards with security processes and technologies that are already in place to protect e-business, such as enforcing passwords and selectively defining user access levels. Some new security threats the students might discuss include the fact that PC-based applications can be secured using strong authentication and encryption while developers must work with somewhat limited memory capabilities of wireless devices. This makes the use of strong authentication and encryption difficult. A scaled-down form of SSL (Secure Sockets Layer) encryption is the only available option for most wireless developers. Another important point students might discuss is that because wireless devices such as cell phones are small and highly mobile, they are easily and frequently stolen. This means user authentication is critical for secure m-commerce. Unfortunately, experts say many current wireless protocols come up short on authentication. 3. Find three certification authorities and compare the features of each companys digital certificates. Provide a brief description of each company as well, including number of clients. Prepare a brief presentation of your findings. Students should start by conducting an online search for the names of certification authorities. Certification authorities that students might locate include, but are not limited to: VeriSign, Entrust, RSA (, GeoTrust, and IdenTrust. Students should gather information about each company and the features of each companys digital certificates. They should visit the company Web site and read the product descriptions, About Us, or comparable Web pages. This information should be supplemented with online research in the popular business and technical press. Similar information should be garnered from two other CAs and a comparison among the three constructed.


4. Research the challenges associated with payments across international borders and prepare a brief presentation of your findings. Do most e-commerce companies conduct business internationally? How do they protect themselves from repudiation? How do exchange rates impact online purchases? What about shipping charges? Summarize by describing the difficulties between a U.S. customer and an international customer who each make a purchase from a U.S. e-commerce merchant. Students should begin by using a search engine to find information about the challenges of conducting e-commerce globally. Although the text has repeatedly emphasized the global nature of e-commerce and its potential for easily crossing international boundaries, there are a number of obstacles, and much inter-firm coordination that must take place in order for e-commerce firms to truly take advantage of the global marketplace. The first challenge to international e-business is language. Companies who have taken the plunge into international e-commerce have found that simple steps such as adding a native language customerservice phone number can make sales in that country double. What holds many companies back is the price of developing a multilingual presence online. Web pages must be translated, and several different sites must be maintained, one for each country or language. It is also difficult to coordinate content and branding between the sites, and there are a myriad of business systems that must be either built or purchased. The cost of producing a Web site in another language can cost from $50,000 on up and large projects can run as much as $2 million per language, but the upside is that it can quickly turn foreign browsers into buyers. Language differences arent the only challenges: companies must be able to exchange financial information in a variety of currencies and account for currency fluctuations. Countries also use different formats for weights, measures, dates, telephone numbers, addresses, and other common information. Because of this an international customer might find a standard U.S. order form confusing. Another big problem area for e-business is global trade management. Global e-commerce firms must be able to comply with a variety of complex regulations to engage in global trade. Analysts estimate that a very high percentage of international orders to U.S. e-commerce sites arent fulfilled because companies cant handle the necessary procedures. Shipping goods across borders requires logistics software, yet many international shippers dont yet have it. Furthermore, many e-businesses dont have e-procurement software that can analyze the total landed cost. (Landed cost refers to all of the costs of sourcing and shipping a product internationally, including customs management, tariffs, transportation, and cost of goods.) The cost of these systems may be too steep for most small e-tailers budgets. Most world cultures, especially developing nations, dont rely on credit cards, which creates even more difficulty for international e-commerce. This is even the case in parts of Europe, Japan, Asia, South America and much of the Middle East. Europeans generally rely on debit cards, many of which cant be used for online transactions because their use requires a manual swipe. Forrester Research reports that few U.S. merchants offer debit/ invoice payment alternatives, while the majority of European merchants do. Fraud is a huge issue for merchants going global. As noted in the text, unlike the offline world where banks often take on the cost of fraudulent credit-card transactions, online merchants are typically responsible for fraudulent charges. Higher shipping and tax costs, the lack of address verification systems, and the high incidence of fraud in many Eastern European and African nations add considerable risk to any global venture. Third-party payment gateways are incorporating fraudprotection systems, but these services may increase already high per-transaction pricing without really


providing the necessary protections. Address-verification services work only for cardholders living within the United States, leaving foreign transactions unchecked and at risk. As fraud has increased in sophistication in the last several years, many online firms shut down their international transaction operations. As far as exchange rates are concerned, most online e-commerce Web sites do not offer any type of currency conversion from the native sales price. This makes it extremely difficult for international customers to assess the true purchase price of the item. Many times, they will not know until their credit card statement arrives to determine how much the item actually cost. For many customers, purchasing blindly in a foreign currency is a risk they wont undertake. Very few merchants have a default currency selection system that will display the sales prices in multiple currencies. Many countries also levy import fees on goods purchased from beyond their borders. The customer can only get an idea of the initial sales price of goods; and computing the additional tariffs requires extra, often done manually, steps that can substantially affect the final purchase cost and the buyers decision whether or not to complete the transaction.


Chapter 5 Business Models for E-Commerce Objectives:

Identify the key components of e-commerce business models. Describe the major B2C business models. Describe the major B2B business models. Describe business models in other emerging areas of e-commerce. Explain the key business concepts and strategies applicable to e-commerce.

Key Terms
business model, p. 319 business plan, p. 319 e-commerce business model, p. 319 value proposition, p. 320 revenue model, p. 320 advertising revenue model, p. 321 subscription revenue model, p. 321 transaction fee revenue model, p. 321 sales revenue model, p. 321 affiliate revenue model, p. 322 market opportunity, p. 322 marketspace, p. 322 competitive environment, p. 324 competitive advantage, p. 324 asymmetry, p. 324 first-mover advantage, p. 325 complementary resources, p. 325 unfair competitive advantage, p. 325 perfect market, p. 325 leverage, p. 325 market strategy, p. 326 organizational development, p. 326 management team, p. 326 portal, p. 331 e-tailer, p. 333 barriers to entry, p. 337 intellectual property, p. 338 content provider, p. 338 transaction broker, p. 339 market creator, p. 340 service provider, p. 340 community provider, p. 342 e-distributor, p. 343 e-procurement firm, p. 343 B2B service provider, p. 344 application service provider (ASP), p. 344 scale economies, p. 344 exchange, p. 345 industry consortia, p. 345 private industrial networks, p. 346


industry structure, p. 353 industry structural analysis, p. 352 value chain, p. 353 firm value chain, p. 357 value web, p. 358 business strategy, p. 359 profit, p. 359 differentiation, p. 360 commoditization, p. 360

Brief Chapter Outline

Tweet Tweet: Whats Your Business Model? 5.1 E-commerce Business Models Introduction Eight Key Elements of a Business Model Categorizing E-commerce Business Models: Some Difficulties Insight on Business: Online Grocers: Finding and Executing the Right Model 5.2 Major Business-to-Consumer (B2C) Business Models Portal E-tailer Insight on Technology: Can Bing Bong Google? Content Provider Transaction Broker Market Creator Service Provider Community Provider 5.3 Major Business-to-Business (B2B) Business Models E-distributor E-procurement Exchanges Industry Consortia Private Industrial Networks 5.4 Business Models in Emerging E-commerce Areas Consumer-to-Consumer (C2C) Business Models Peer-to-Peer (P2P) Business Models M-commerce Business Models Insight on Society: Where R U? Not Here! E-commerce Enablers: The Gold Rush Model 5.5 How the Internet and the Web Change Business: Strategy, Structure, and Process Industry Structure Industry Value Chains Firm Value Chains Firm Value Webs Business Strategy


5.6 Case Study: Pandora and the Freemium Business Model 5.7 Review Key Concepts Questions Projects

Figure 5.1 Subscription Services, p. 322 Figure 5.2 Marketspace and Market Opportunity in the Software Training Market, p. 323 Figure 5.3 [Errata: this figure was not included in the book] Figure 5.4 How the Internet Influences Industry Structure, p. 355 Figure 5.5 E-commerce and Industry Value Chains, p. 357 Figure 5.6 E-commerce and Firm Value Chains, p. 358 Figure 5.7 Internet-Enabled Value Web, p. 359

Table 5.1 Key Elements of a Business Model, p. 320 Table 5.2 Five Primary Revenue Models, p. 323 Table 5.3 B2C Business Models, p. 332 Table 5.4 B2B Business Models, p. 344 Table 5.5 Business Models in Emerging E-commerce Areas, p. 347 Table 5.6 E-commerce Enablers, p. 353 Table 5.7 Eight Unique Features of E-commerce Technology, p. 354

End-of-Chapter Questions
1. What is a business model? How does it differ from a business plan? A business model is a set of planned activities (business processes) that are designed to result in a profit in the marketplace. A business plan on the other hand, is a document that outlines the details of a business model. 2. What are the eight key components of an effective business model? The eight key components of an effective business model are: value proposition revenue model market opportunity for the firm (the marketspace and how big it is) competitive environment for the firm (who the competitors are in the marketspace) competitive advantage the firm brings to the marketspace (the unique qualities that set the firm apart from others in the marketspace) market strategy the firm will use to promote its products and services organizational development of the firm that will enable it to carry out its business plan capabilities of the management team to guide the firm in its endeavors 3. What are Amazons primary customer value propositions? Amazons primary customer value propositions are unparalleled selection and convenience.


4. Describe the five primary revenue models used by e-commerce firms. The five primary revenue models used by e-commerce firms are: the advertising revenue model the subscription revenue model the transaction fee revenue model the sale revenue model the affiliate revenue model The advertising model derives its profit by displaying paid advertisements on a Web site. The goal is to convince advertisers that the site has the ability to attract a sizeable viewership, or a viewership that meets a marketing niche sought by the advertiser. Firms that use the subscription model offer users access to some or all of their content or services for a subscription fee. Firms that use the transaction fee model derive profit from enabling or executing transaction. For instance, transaction fees are paid to eBay when a seller is successful in auctioning off a product, and E*Trade receives a transaction fee when it executes a stock transaction for a customer. In the sales revenue model, companies draw profit directly from the sale of goods, information, or services to consumers. In the affiliate model, sites receive referral fees or a percentage of the revenue from any sales that result from steering business to the affiliate. 5. Why is targeting a market niche generally smarter for a community provider than targeting a large market segment? Targeting a market niche is generally a smarter strategy for a community provider than targeting a large market segment because targeting large market segments will only pit a company against bigger and more established competitors. Small sub-segments of larger markets have a greater potential for growth without the intense competitive pressure. Communities that place a strong emphasis on the advertising revenue model will find marketers more interested in placing ads on a site that targets a specific niche. 6. Besides music, what other forms of information could be shared via peer-to-peer sites? Are there legitimate commercial uses for P2P commerce? Some other forms of information that could be shared through peer-to-peer sites using shareware are organizational materials and digital video. You can use P2P software to efficiently distribute massive amounts of information across an organization, and also make it searchable. P2P software can be used to transmit movies over the Internet as encrypted files. Furthermore, it can be used to search other computers for the sorts of information found on Web sites. For example, it can establish a direct peerto-peer exchange where buyers can gather information, check out suppliers, and collect prices not from a centralized server hub, but directly from each of the suppliers client server computers. 7. Would you say that Amazon and eBay are direct or indirect competitors? (You may have to visit the Web sites to answer.) Amazon and eBay are direct competitors because they sell products and services that are very similar, and they sell to the same market segment. They both sell books, music, computers and software, games and toys, electronics, tools, movies and DVDs, and camping equipment. However, eBay has a consumer-to-consumer business model while Amazon has a businessto-consumer business model. Even though eBay sells new, overstocked, remaindered, and used products at discounted prices, the two


compete for essentially the same market segment of consumers. eBay may attract the bargain hunter variety of shopper who would not stop at Amazon first, but it is still essentially the same market segment. 8. What are some of the specific ways that a company can obtain a competitive advantage? Some specific ways a company can obtain a competitive advantage are by developing a global market while its competitors only have a national or regional market; by obtaining favorable terms from shippers, suppliers, or labor sources that its competitors do not have; by developing a more experienced, knowledgeable, and loyal employee base than its competitors; by obtaining a patent on a product that its competitors will not be able to imitate; by having an inside track to investors willing to put up capital; by establishing a powerful brand name or a popular image that it will be difficult for competitors to duplicate; and by any type of asymmetry that will give it more resources than its competitors in any area such as financial backing, knowledge, information, and/or power. 9. Besides advertising and product sampling, what are some other market strategies a company might pursue? One market strategy is to form strategic alliances with business partners who will help you to attract new customers and extend your market reach. Another market strategy is to use product name, packaging, and advertising to create a distinct mood or feeling about each of your product lines, and carefully target each line to a specific audience. Some firms may choose to pursue a marketing strategy that positions them as a one-stop-shop which carries a broad based line of products, saving the customer search time. Others may choose to position themselves as category experts who have an indepth and personal knowledge of their customers. Such firms will offer extensive customer support networks to assist their customers in their purchasing decisions and will advertise themselves accordingly. One critical factor is that a company needs to find a way to differentiate itself from the competition. 10. What elements of FreshDirects business model may be faulty? Does this business scale up to a regional or national size? FreshDirects vertically integrated approach, in which it does its own food preparation, is really quite different from other players such as Safeway. It is unclear if FreshDirects model can scale up to be successful outside of urban areas. It is unclear if the FreshDirect model, which focuses on perishables, can also work well with frozen foods, prepared dinner dishes, and more processed foods such as cereals, where margins are quite low. FreshDirect even owns its own fleet of trucks. It is unclear if any business can be the most efficient player in all these areas. Why not use FedEx or UPS delivery? 11. Why is it difficult to categorize e-commerce business models? It is difficult to categorize e-commerce business models because the number of models is limited only by the human imagination, and new business models are being invented daily. Even within the broadbased generic types, there are overlaps, and fundamentally similar business models may appear in more than one. The type of e-commerce technology used can also affect the classification of a business model. Also, some companies may employ multiple business models. For example, e-Bay is essentially a C2C marketplace, but also functions as a B2C market maker, and in addition, has an m-commerce business model.


12. Besides the examples given in the chapter, what are some other examples of vertical and horizontal portals in existence today? Some other examples of vertical portals (vortals) include (sports), iVillage (womens issues), (sports), (African-Americans), WebMD (physicians, nurses, teachers, medical office managers and consumers), (labor issues), (games), (travel), and T-online (Pan-European portal). Some other examples of horizontal or general portals include, Lycos,, and (Canadian). Note that many of these can also be considered community sites as well. 13. What are the major differences between virtual storefronts such as and bricks-andclicks operations such as What are the advantages and disadvantages of each? The major difference between virtual storefronts and bricks-and-clicks operations is that virtual storefronts do not have any ties to a physical location. The major advantages of the virtual storefronts are that they have low barriers to entry into the Web e-tail market and that they do not bear the costs associated with building and maintaining physical stores. The disadvantages are that they must build a brand name from scratch, quickly, and become profitable with no prior brand name or experience, which can be very difficult. The major advantages of the bricks-and-clicks operations are that they have an already established brand name, an established customer base, an established sales force, and the resources to operate on the very thin margins associated with the retail industry. It is also much less expensive for them to acquire new customers than it is for the virtual storefronts. The major disadvantages of the bricks-and-clicks firms are that they face new competition in an extremely competitive environment from new firms who may have more expertise at building credible Web sites, and who can focus exclusively on building rapid response order systems. 14. Besides news and articles, what other forms of information or content do content providers offer? Besides news and articles, content providers may also supply music, photos, video, artwork, educational materials, or games. 15. What is a reverse auction? What company is an example of this type of business? A reverse auction is one in which a consumer offers to pay a certain price for a product or service and the bid is either accepted or not. The premier example of this type of business is Priceline, in which the consumer makes an offer for airline tickets, hotel rooms, car rentals, and other travel accommodations. 16. What are the key success factors for exchanges? How are they different from portals? The key factor to success for exchanges is sizethe size of the industry and the number of registered users. If the industry the exchange seeks to serve is not large enough, the site will most likely not survive. The site must also be able to reach a critical mass by attracting both a large number of sellers and a large number of buyers, or customers will go elsewhere. An exchange is a digital electronic marketplace where suppliers and commercial purchasers can converge to conduct transactions. Most portals operate in the B2C sector rather than the B2B sector, and their main business objective is to be a destination site for consumers. Although some portals provide a shopping component, that is not their main business objective. 17. What is an application service provider?


An application service provider (ASP) is a company that sells access to Internet-based software applications to other companies. ASPs typically charge transaction fees based on the number of workstations running the application, or annual licensing fees to companies for the right to use the software program. ASPs offer their customers the advantage of a best of breed application that the firm needs, but which would be expensive to build for itself or buy and install. 18. What are some business models seen in the C2C and P2P e-commerce areas? The most common business model seen in C2C e-commerce is a market creator, which helps consumers or businesses to connect with other consumers. P2P businesses are generally content providers that link users so that they can share files and computer resources without having to go through a common server. 19. How have the unique features of e-commerce technology changed industry structure in the travel business? The ubiquity of e-commerce has created new marketing channels and expanded the size of the overall market. The global reach of e-commerce has changed industry structure by lowering barriers to entry, but at the same time expanding the market. The costs of industry and firm operations have decreased, enabling global competition. The universal standards of e-commerce have also lowered barriers to entry and intensified competition. However, firms have cheaper costs for computing and communication enabling broad-scope business strategies. The richness of e-commerce reduces the strength of distribution channels, decreases a firms reliance on traditional sales forces, and helps a firm develop better post-sales support strategies. Firms can use the interactive properties of e-commerce to develop differentiation strategies and customization techniques to reduce the threat from substitutes. Interactivity, personalization, and customization techniques also decrease a firms reliance on traditional sales forces, helping them to reduce operational costs. Using these techniques, some firms are successful in differentiating themselves from the competition, thereby raising barriers to entry for potential competitors. The information density of e-commerce weakens powerful sales channels, shifting some bargaining power to consumers. It also lowers the operational costs for firms associated with obtaining, processing, and distributing information about suppliers and consumers. 20. Who are the major players in an industry value chain and how are they impacted by e-commerce technology? The major players in an industry value chain are the suppliers, manufacturers, distributors, transporters, retailers and customers. E-commerce technology has helped manufacturers to reduce the costs they pay for goods through the use of Web-based B2B exchanges. Some manufacturers have also developed direct relationships with their customers online thereby eliminating the distributors and the retailers from the value chain. 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 services to customers. Customers can use the Web to search for the best quality, delivery, and prices, thereby lowering their overall transaction costs and reducing the final price they pay for goods. 21. What are four generic business strategies for achieving a profitable business?


The four generic business strategies for achieving a profitable business are differentiation, cost, scope, and focus. Differentiation involves setting your firm or product apart from the competition by establishing some unique property or consumption experience that your competitors do not have. A firm that adopts a cost strategy must have a unique set of business processes, a unique resource, or a low cost supplier. It is essential that other firms in the marketplace do not have access to, or cannot duplicate, this since it will allow them to charge a lower price while still making a profit. A scope strategy sets out to compete in all markets around the globe, rather than just locally or regionally. A focus strategy on the other hand, is a plan to compete within a narrow market segment or product segment. Specialization strategists seek to become the premier provider in a small market segment or niche.

1. Select an e-commerce company. Visit its Web site 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 companys management team and organizational structure. (Check for a page labeled the Company, About Us, or something similar). Instructors may want to provide some parameters for students in choosing a company (i.e., sector (B2C; B2B, etc); industry (retail, services, etc.)) to limit student search time. Students can be asked to provide either a written report or an oral report accompanied by a slide presentation. A student choosing a company such as PetSmart might provide the following information: Petsmart is a B2C e-tailer. Its main customer value proposition is that it offers the broadest assortment of pet supplies at the lowest prices. Petsmart uses a sales revenue model: it operates in the specialty retail marketspace, and focuses on the pet supplies niche. Petsmart is the leading online pet supply company; many of its original online competitors, such as and, have gone out of business. Its main competitors appear to be local pet stores and pet supply catalogs and Petsmarts main comparative advantage is its brand name. Petsmart appears to be using a bricks-and-clicks market strategy: it started as a traditional pet supplies retailer with over 500 physical superstores and leveraged its brand to the online environment. Its marketing strategies include: pricing (low prices); providing interesting content and community on its Web site for its target market; affiliate marketing; and email marketing through free email newsletters. Information about Petsmarts management team and organizational structure is available if the student follows the Investor Relations link from its About Us page. 2. Examine the experience of shopping on the Web versus shopping in a traditional manner. 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. Compare and contrast your experiences. What were the advantages and disadvantages of each? Which did you prefer and why? The purpose of this assignment is to help students understand how e-commerce differs from traditional commerce. In reporting on this project, students should identify the product they shopped for and detail


how they traditionally shopped for the product. For example, they might have gathered information about the product from newspapers and magazine articles, advertisements, called or visited one or more stores, or perhaps shopped for the product via mail-order catalog. They should note what stores, if any, they visited or catalogs they looked at; how long it took them to find the product they were seeking; the level of service; the stores policies (e.g., on returns); and how long it took them to find and purchase the product. For their Internet shopping experience, students should prepare a comparable analysis. They should explain their strategy for finding information on the product (e.g., identify the search engines, if any used, the searches performed, and links followed), and then describe the shopping experience at the company from which they have decided to purchase the product. They should report which shopping experience was quicker, easier, more convenient, which offered better prices, and any other specific advantages or disadvantages of each type noted. They should explain which experience they preferred and why. 3. Visit eBay and look at the main types of auctions available. If you were considering establishing a rival specialized online auction business, what are the top three market opportunities you would pursue, based on the goods and auction community in evidence at eBay. Prepare a presentation to support your analysis and approach. One way a student might approach this project is to look at the different categories in which eBay conducts auctions. Start by clicking the All categories link on eBays home page. A student might choose to focus on those areas which have the most auctions; on commodity items such as books, CDs, electronic equipment; on a niche area; or on categories in which eBay does not appear to be strong (i.e., few auctions; or not covered in the list of categories). 4. 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 proven to be more successfulfirst mover or follower? Choose two e-commerce companies that prove your point and prepare a brief presentation to explain your analysis and position. For students that argue for first mover advantage as a way to success, examples might include Amazon, Yahoo, Travelocity, eBay, RealNetworks, VeriSign, Priceline, E*Trade, and PayPal. Although each of these has encountered competition, their early arrival and commitment to becoming the predominant player in their respective marketspace have helped to assure their continuing success. Those who argue for market followers can point to the demise of many of e-commerces first movers. Examples might include,, Webvan, eToys, Kozmo, and They might point instead to companies who were not among the first on the Web, but today are successful such as,, PetSmart,,, and 5. Prepare a research report (3 to 5 pages) on the current and potential future impacts of e-commerce technology on the book publishing industry. The publishing industry has several components: newspapers, books, and magazines. For leads, students can do a search on the following terms: online newspapers, e-books, and online magazines. A good report will describe how big the audience for each of these types of publishing, both offline and online. It will detail how online versions differ from offline versions. Students should cover how new


e-commerce technologies are changing where and how content is delivered. For instance, students might explore dedicated e-book readers such as the Amazon Kindle or Sony Reader, e-book reader software from Google (Google Editions) and iPad applications that function as dedicated readers. The concept of convergence, or the merging of technology, content, and industry ownership, is another topic reports might cover. How will recent mergers in the cable television and satellite industries affect content owners? How will the concept of the book itself change as the delivery mechanism increasingly becomes digital?


Chapter 6 E-commerce Marketing Objectives:

Identify the key features of the Internet audience. Discuss the basic concepts of consumer behavior and purchasing decisions. Explain how consumers behave online. Describe the basic marketing concepts needed to understand Internet marketing. Identify and describe the main technologies that support online marketing. Identify and describe basic e-commerce marketing and branding strategies.

Key Terms
consumer behavior, p. 384 culture, p. 384 subculture, p. 385 direct reference groups, p. 385 indirect reference groups, p. 385 opinion leaders (viral influencers), p. 386 lifestyle group, p. 386 psychological profile, p. 386 psychographic research, p. 387 clickstream behavior, p. 389 marketing, p. 395 Internet marketing, p. 395 feature set, p. 395 commodity, p. 396 core product, p. 396 actual product, p. 396 augmented product, p. 3997 brand, p. 397 branding, p. 397 closed loop marketing, p. 398 brand strategy, p. 398 brand equity, p. 399 customer acquisition costs, p. 401 customer retention costs, p. 501 Law of One Price, p. 401 price dispersion, p. 402 library effect, p. 403 transaction log, p. 405 registration forms, p. 406 shopping cart database, p. 406 database, p. 413 database management system (DBMS), p. 413 SQL (Structured Query Language), p. 413 relational databases, p. 414 data warehouse, p. 414 data mining, p. 415 customer profile, p. 415 query-driven data mining, p. 415


model-driven data mining, p. 416 rule-based data mining, p. 416 collaborative filtering, p. 416 customer relationship management (CRM) system, p. 417 advertising networks, p. 424 permission marketing, p. 426 affiliate marketing, p. 426 viral marketing, p. 427 social shopping, p. 430 brand leveraging, p. 435 one-to-one marketing, p. 436 customization, p. 438 customer co-production, p. 438 transactive content, p. 439 frequently asked questions (FAQs), p. 439 real-time customer service chat systems, p. 440 automated response system, p. 440 pricing, p. 440 demand curve, p. 441 price discrimination, p. 441 versioning, p. 443 bundling, p. 444 channel, p. 446 channel conflict, p. 446

Brief Chapter Outline

Netflix Develops and Defends Its Brand 6.1 Consumers Online: The Internet Audience and Consumer Behavior The Internet Audience Internet Traffic Patterns: The Online Consumer Profile Consumer Behavior Models Profiles of Online Consumers The Online Purchasing Decision A Model of Online Consumer Behavior Shoppers: Browsers and Buyers What Consumers Shop for and Buy Online Intentional Acts: How Shoppers Find Vendors Online Why More People Dont Shop Online Trust, Utility and Opportunism in Online Markets

6.2 Basic Marketing Concepts Feature Sets Products, Brands, and the Branding Process Segmenting, Targeting, and Positioning Are Brands Rational? Do Brands Last Forever? Can Brands Survive the Internet? Brands and Price Dispersion on the Internet


6.3 Internet Marketing Technologies The Revolution in Internet Marketing Technologies Web Transaction Logs Supplementing the Logs: Cookies and Web Bugs Databases, Data Warehouses, and Data Mining: Developing Profiles Insight on Society: Every Move You Take, Every Click You Make, Well be Tracking You Customer Relationship Management (CRM) Systems Insight on Technology: The Long Tail: Big Hits and Big Misses 6.4 B2C and B2B E-commerce Marketing and Branding Strategies Market Entry Strategies Establishing the Customer Relationship Insight on Business: Social Networking Marketing: Lets Buy Together Customer Retention: Strengthening the Customer Relationship Net Pricing Strategies Channel Strategies: Managing Channel Conflict 6.5 Case Study: Building a Brand: 6.6 Review Key Concepts Questions Projects

Figure 6.1 A General Model of Consumer Behavior, p. 384 Figure 6.2 Factors That Predict Online Buying Behavior, p. 387 Figure 6.3 The Consumer Decision Process and Supporting Communications, p. 388 Figure 6.4 A Model of Online Consumer Behavior, p. 389 Figure 6.5 Online Shoppers and Buyers. p. 391 Figure 6.6 What Consumers Buy Online, p. 393 Figure 6.7 Feature Set, p. 396 Figure 6.8 Marketing Activities: From Products to Brands, p. 398 Figure 6.9, p. 403 Figure 6.10 One Second from the Web Transaction Log of, p. 407 Figure 6.11 Firefox Cookies Dialog Box, p. 409 Figure 6.12 A Relational Database View of E-commerce Customers, p. 414 Figure 6.13 Data Mining and Personalization, p. 415 Figure 6.14 A Customer Relationship Management System, p. 420 Figure 6.15 Generic Market Entry Strategies, p. 422 Figure 6.16 How an Advertising Network Such As Doubleclick Works, p. 425 Figure 6.17 The Mass Market-Personalization Continuum, p. 436 Figure 6.18 A Demand Curve, p. 442 Figure 6.19 The Demand for Bundles of 1-20 Goods, p. 445

Table 6.1 A Growing Range of Online Activities: An Average Day in the Life of an p. 378 Table 6.2 Changing Demographic Differences in Internet Access, p. 380 Internet User,


Table 6.3 The Impact of Broadband on Internet Activities, p. 381 Table 6.4 Why Consumers Choose the Online Channel, p. 386 Table 6.5 Media That Influence Consumers to Start Search for Merchandise Online, p. 392 Table 6.6 Internet Users Major Concerns About Purchasing Online, p. 394 Table 6.7 Major Types of Online Market Segmentation and Targeting, p. 400 Table 6.8 Impact of Unique Features of E-commerce Technology on Marketing, p. 405 Table 6.9 Marketing Uses of Data from Web Transaction Logs, p. 408

End of Chapter Questions

1. Is growth of the Internet, in terms of users, expected to continue indefinitely? What will cause it to slow, if anything? The growth of the Internet is slowing, and the market penetration rates that television and the telephone (98% and 94%, respectively) have attained are not expected to be reached due to the cost and complexity of computer use required for Internet use. The growth rate will most likely continue to decrease until computer prices drop significantly, and computers become more user-friendly. 2. Other than search engines, what are some of the most popular uses of the Internet? Some of the most popular uses of the Internet are e-mail, which is the most popular; getting news; surfing the Web for fun, using an online social network, checking the weather, and watching a video on a video-sharing site.. Users also often use the Web to bank online, , look for political news and information, look for information on Wikipedia, get financial information, use instant messaging, visit government Web sites, read online journals or blogs, and look for health/medical information, among many other activities. 3. Would you say that the Internet fosters or impedes social activity? Explain your position. The Internet both fosters and impedes social activity. It fosters it because e-mail, instant messaging and social networks help people to easily stay in touch with friends and relatives. Online forums encourage people to ask questions and interact with people with similar interests, or who are going through the same stages in life. The Internet may impede social activity because it causes people to spend less quality time with family and friends since they spend more time in front of the computer. A Stanford University study has indicated that Internet users lose touch with those around them; they spend far less time talking with friends and family face-to-face and on the phone. 4. Why would the amount of experience someone has using the Internet likely increase future Internet usage? The more time an individual spends on the Internet, the more likely they will increase their future Internet usage. This is because the more time users spend online becoming comfortable and familiar with Internet features and services, the more likely they are to explore new services and offerings. Furthermore, the more time individuals devote to the Internet, the more likely they are to use the Internet instead of traditional media such as TV, newspapers, and radio.


5. Research has shown that many consumers use the Internet to investigate purchases before actually buying, which is often done in a physical storefront. What implication does this have for online merchants? What can they do to entice more online buying, rather than pure research? The fact that many consumers use the Internet to research products before actually making purchases has many implications for online merchants because it suggests that e-commerce is a major conduit and generator of offline commerce. This could mean that e-commerce and traditional commerce should integrate to alleviate the concern. It is very important for online merchants to build the information content on their sites to attract browsers, put less attention on selling, per se, and offer products in offline settings where users feel more comfortable and secure. 6. Name four improvements Web merchants could make to encourage more browsers to become buyers. Improvements that Web merchants could make to encourage more browsers to become buyers are: Target the goal-oriented, intentional shoppers with communications directed at them. Design Web sites to provide easy-to-access and simple to use product information. Make it easier to comparison shop. Make it easier to return merchandise. Create policies for better credit card and personal information security. Make it easier to locate items on the Web site. Create customer service facilities where users can get the answers to their questions and product advice. Increase delivery speeds. Present products more clearly. Create loyalty reward programs. Make the buying process quicker to complete. 7. Name the five stages in the buyer decision process, and briefly describe the online and offline marketing activities used to influence each. The five stages in the buyer decision process and the online and offline marketing activities used to influence them are: Awareness of Need: o Offline: Mass media advertising on TV, radio, in print media o Online: Targeted banner ads, interstitials, targeted event promotions and social networks. Search for Information: o Offline: Catalogs, print ads, mass media, store visits, and product raters (e.g. Consumer Reports offline), and personal social networks o Online: Search engines, online catalogs, visits to Web sites, targeted e-mails from merchants, and online social networks Evaluation of Alternatives: o Offline: Reference groups, opinion leaders, the mass media, store visits, product raters, and personal social networks o Online: Search engines, online catalogs, visits to Web sites, product reviews, user evaluations, and online social networks Actual Purchase Decision:


o Offline: Promotions, direct mailings, mass media and various print media affect the actual purchase decision o Online: Promotions, lotteries, discounts, and targeted e-mail push the actual purchase decision online. Post-Purchase Contact with Firm: o Offline: Post purchase loyalty is inculcated by firms offline using warranties, service calls, parts and repair services, through consumer groups, and personal social networks. o Online: Post purchase loyalty is encouraged through the use of communities of consumption, newsletters, e-mails to customers, online product updates, and online social networks.

8. Why are little monopolies desirable from a marketers point of view? Little monopolies are desirable from a marketers point of view because if consumers believe that a product is unique and highly differentiated from its competitors, a firm can position itself as the one trusted firm who can supply this product or fulfill this need. Consumers will believe that no substitute will suffice, and new entrants will have a difficult time matching the product or services feature set. Successful little monopolies reduce the bargaining power of consumers since they are the sole sources of supply, and they also give these firms a power advantage over their suppliers. 9. Describe a perfect market from the suppliers and customers perspectives. The perfect market from the suppliers perspective is one in which there are no substitutes. It should be difficult for new competitors to enter; customers and suppliers should have little power to influence pricing; and there should be little competition in the industry. The perfect market from the customers perspective is one in which there is lots of competition resulting in pure price competition and available substitutes. The market should be one in which new entrants can easily enter, and where customers and suppliers have strong bargaining power. Frictionless commerce where prices are driven down to their marginal costs, intermediaries are driven out of the market, and consumers deal directly with producers, would be ideal for consumers from a strictly price-oriented perspective. 10. Explain why an imperfect market is more advantageous for businesses. An imperfect market in which there is widespread price dispersion that can be exploited by marketers is more advantageous to businesses. 11. What are the components of the core product, actual product, and augmented product in a feature set? In a product feature set, the components of the core product are the core benefits a customer receives from buying the basic product. The actual product consists of the set of characteristics designed to deliver the products core benefits. For example, the components of the actual product may consist of a brand name that signals a strong product, reducing consumer risk and anxiety about a product and the features and capabilities that the product will deliver. The augmented product consists of the additional benefits the consumer receives. These include: warranties, support and repair personnel, installation and delivery guarantees, credit terms, and any additional post-sales support that a company offers. 12. List some of the major advantages of having a strong brand. How does a strong brand positively influence consumer purchasing?


The major advantage of having a strong brand is that consumers are willing to pay a premium price to reduce market uncertainty. Strong brands also lower customer acquisition costs, increase customer retention rates, and can create a long-lasting, unassailable, unfair competitive advantage. Brand names constitute an unfair competitive advantage because they cannot be purchased or duplicated by competitors. A strong brand positively influences consumer purchasing by introducing market efficiencies. In a crowded marketplace, brands carry information to the consumer so that purchases can be made quickly and easily based on past consumption, and a set of expectations that the consumer knows beforehand will be met. Search costs and decision-making costs are reduced or eliminated, reducing the probability of nasty surprises in the marketplace. 13. How are product positioning and branding related? How are they different? Product positioning and branding are related because a product is positioned within a market segment based on the brand. Marketers attempt to present a unique, high value product that is especially suited to the specific needs of the segment customers. These tactics are different because positioning refers to creating a desired image for a company and its products within a chosen user segment, whereas branding refers strictly to the set of expectations that the company wants the general population to have. 14. List the differences among databases, data warehouses, and data mining. A database stores records and attributes organized into tables. Databases are maintained for ecommerce Web transactions, shopping carts, point-of-sale-terminals, warehouse inventory levels, field sales reports, and many other types of records. A data warehouse gathers all of the database information from customer and transaction databases and stores it in one logical repository where it can be analyzed and modeled by managers without disrupting or taxing the systems of a firms primary transactional systems and databases. Using the data warehouse, managers can query multiple databases to determine the answers to many marketing and financial questions enhancing their strategic decision making capabilities. Data mining is a different set of analytical techniques that look for patterns in database information or seek to model the behavior of visitors and customers. Web site data can be mined to develop customer profiles that identify patterns in group or individual behavior on the site. Data mining can be either query driven, model driven, or rule-based. Query-driven data mining is the simplest type; both databases and data warehouses can be queried. Marketers can answer specific questions such as, What products sell better at different hours of the day? and adjust Web site content accordingly. In modeldriven data mining, a model analyzes the key variables in a strategic decision so that informed decisions can be made. In rule-based data mining, demographic and transactional data is examined, and general rules of behavior are derived for specific well-defined market segments. 15. Name some of the drawbacks to the four data mining techniques used in Internet marketing. The drawbacks to rule-based data mining are that there may be millions of rules, many of them nonsensical, and many others of only short duration. Therefore, these rules need extensive culling and validation. All of the four data mining techniques face difficulties in that there can be millions of affinity groups and other patterns in the data that are temporal or meaningless. With all data mining


techniques, it becomes tricky to isolate the valid, and therefore profitable, data and then act on it quickly enough to make sales. 16. Why have advertising networks become controversial? What, if anything, can be done to overcome any resistance to this technique? Advertising networks have become controversial because their ability to track individual consumers across the Internet is alarming to privacy advocates. Proposed legislation that would curtail the use of Web bugs and other tracking devices without consumer notification could help to overcome resistance to this technique. Giving consumers the option to opt-in or opt-out and making Web bugs visible as an icon on the screen could ease consumers concerns. Finally, privacy advocates believe that if a user clicks the icon, a disclosure statement should indicate any or all of the following: what data is being collected, how the data will be used, what other companies will receive the data, what other data it will be combined with, and if a cookie is associated with the Web bug. Consumers should be able to opt-out of any data collection done by the Web bug, and it should never be used to collect sensitive data such as medical, financial, job-related, or sexual matters. 17. Which of the four market entry strategies is most lucrative? The market entry strategy that has proven to be the most lucrative is the brand extender. This mixed clicks-and-bricks strategy integrates online marketing closely with offline physical stores. It uses the Web as an extension to already existing order processing and fulfillment, and marketing and branding campaigns. These firms have been the most successful because they already possess the financial depth, marketing and sales resources, loyal customers, strong brands, and production and/or fulfillment facilities needed to meet customer demands. 18. Compare and contrast the four marketing strategies used in mass marketing, direct marketing, micromarketing, and one-to-one marketing. Mass marketing, which is appropriate for products that are relatively simple and attractive to all consumers, uses national media messages aimed at a single national audience with a single national price. Direct marketing on the other hand, is directed at particular market segments that are deemed to be likely purchasers and uses direct mail or phone messages. Direct marketers generally do not offer wide price variations, but will offer special deals to loyal customers. It is most often used for products that can be stratified into several different categories. Micromarketing is the first form of true database marketing. It is aimed at geographical units such as neighborhoods or cities, or specialized market segments. Prices are dynamically adjusted to reflect market conditions and competitor pricing, and this can even be done on a daily basis. Personalized one-to-one marketing is suitable for products (1) that can be produced in very complex forms, depending on individual tastes, (2) whose price can be adjusted to the level of personalization, and (3) where the individuals tastes and preferences can be effectively gauged. The marketing message is changed based upon the merging of internal behavioral, transaction, and demographic data. 19. What pricing strategy turned out to be deadly for many e-commerce ventures during the early days of e-commerce? Why?


The pricing strategy that turned out to be deadly for many e-commerce firms in the early days of ecommerce was a low price leader strategy, which even resulted in free pricing. The idea was to attract enough eyeballs with free goods and services to amass a large, committed audience. It was supposed to achieve profitability through advertising and charging a small number of willing customers subscription fees for value-added services. Unfortunately, many early e-commerce businesses were unable to convert eyeballs into paying customers, and the strategy of piggybacking on a small number of users who would be willing to pay for premium services was not a great success. 20. Is price discrimination different from versioning? If so, how? Price discrimination is different from versioning because price discrimination is strictly the selling of products to different people or groups based upon their willingness to pay. Versioning involves creating multiple versions of a good or service and offering them at different prices. In versioning, reduced value versions that have less functionality can be offered for free or at reduced prices, while premium versions are sold at much higher prices. In this situation, consumers are aware that they are getting what they pay for. With price discrimination, it is the exact same product that is offered to different groups at different prices, concealing from each group the amount the other groups are paying. 21. What are some of the reasons that freebies, such as free Internet service and giveaways, dont work to generate sales on a Web site? Freebies such as free Internet service and giveaways often did not cause the stimulus to sales that firms believed they would. This is because many so-called freeloaders never had the intention of paying for the product or additional products. They would simply switch to another free service if the one they were using began to charge fees or stop usage altogether if alternatives no longer existed. 22. Explain how versioning works. How is this different from dynamic pricing? Versioning works by having a set of slightly different products that can be sold successfully to different market segments. Low-priced or free versions can be less convenient, less comprehensive, slower, less powerful, and offer less support than higher priced models. Versioning differs from dynamic pricing because each version is sold at a fixed, predetermined price, and there are slight differences in functionality between versions. In dynamic pricing, auctions can be used to establish an instant market price based upon the price the market will bear. Yield management systems can be used to set prices for different markets and appeal to different segments in order to sell excess capacity. Auctions work for pricing unusual as well as commonplace goods; the differing price an article will bring in the marketplace is not based upon the version of the good or service, but rather upon the market dynamics at that particular moment in time. Yield management systems are generally profitable for perishable goods or where there are seasonal variations in demand or rapidly changing market conditions. Again, the product itself is no more or less functional than its higher or lower yielding counterparts despite the varying prices preset by managers. 23. Why do companies that bundle products and services have an advantage over those that dont or cant offer this option?


Although consumers are apt to have very diverse ideas about the value of a single product, there is much more agreement on the value of a bundle of products. This often results in a price per product people are willing to pay for a bundle that is higher than the price they would be willing to pay for each product sold separately. Bundling reduces the variance in the market demand for goods, meaning that more people are willing to pay the same price for the bundle of goods. Bundler firms can pay higher prices to their suppliers for content, and they can charge higher prices to their customers for their bundles than can single good firms.

1. Go to the SRI site ( Take the survey to determine what lifestyle category you fit into. Write a brief, two-page paper describing how your lifestyle and values impact your use of the Web for e-commerce. How is your online consumer behavior affected by your lifestyle? Student answers will vary depending on the VALS segment profile into which they fall. For example, an actualizer/achiever, according to the profile, is supposed to be interested in possessions and recreation
that reflect a cultivated taste for the finer things in life. They prefer established, prestige products and services that demonstrate success to their peers. Such a consumer might use the Web to buy tickets to concerts, opera, and the ballet. They might frequent eBay or other auction sites in search of fine art or antiques. Actualizers and achievers might also be interested in product advertisements from such sites as Tiffany or Bloomingdales. An experiencer on the other hand, is supposed to be inclined towards exercise, sports, outdoor recreation, and social activities. This group of individuals is supposedly comprised of avid consumers who spend much of their income on clothing, fast food, music, movies, and videos. Students who fall into this segment profile might express an online purchasing penchant for such sites as, CDNow, Amazon,, and

2. Find an example of a Web site that you feel does a good job of appealing to both goal-directed and experiential consumers. Explain your choice. To approach this project, it might be helpful for students to read the Wolfinbarger and Gilly article cited on page 394 of the text: Shopping Online for Freedom, Control and Fun, California Management Review (Winter 2001). Goal-oriented consumers are focused browsers looking for specific companies, products, and services. Features that appeal to goal-oriented consumers include: accessibility, convenience, selection, and information availability. According to Wolfinbarger and Gilley, goal-oriented consumers want a complete selection and want to serve themselves so long as information is easily accessible. They are not interested in high-touch customer service unless they encounter a problem, in which case, they want speedy answers responsive to their particular problem. Features that increase a sense of control and freedom such as order tracking, purchase histories, opt-in email notifications, etc. all appeal to the goal-oriented consumer. Experiential consumers are those who engage in shopping for fun. A different set of features that offer surprise and amusement, appeals to experiential consumers, who are looking for fun. These features might include: online community tools (bulletin boards, ask the experts), auctions, online sales events, and interactive content. Amazon is a good example of a site that appeals to both goal-directed and experiential consumers. An alternative approach to this project would be to supply the students with a site which you feel does a good job of appealing to both goal-directed and experiential consumers (such as Amazon), and ask students to list and explain the features of the site that do so. 3. Choose a digital content product available on the Web and describe its feature set. Students can choose from a myriad of different digital content providers to complete this project. For example, they could choose, a graphic content publishing business that offers online


subscriptions for clip art, Web graphics, photos, and fonts. In this case, the core product consists of a downloadable collection of clipart, photographs, Web art, fonts, and sounds. The actual product as purchased includes: The brand name, which carries with it Jupiterimages position as a leading online image vendor and the brand name recognition of its parent company, Jupitermedia Corporation, which is a leading global provider of original images, information and research for creative, information technology and business professionals. The quality of the product, including quick and easy access at one portal to millions of images, animations, photos, fonts, and sounds. The product features, including the ability to use the content without paying a per-image cost, royalties, or extra payments (as long as you abide by the Usage Guidelines). Site design, including simple keyword searching; links for specific types of art, such as clipart, photos, Web graphics, fonts, etc; availability of site in different languages such as Spanish, French, German and Italian. The packaging of the site, which would also include the above site, design features. The augmented product includes: BBBOnLine Reliability participation and Better Business Bureau membership; VeriSign Secured SSL certificate for Web site. Notification on the day your subscription expires (and reminders before then if you are on the Newsletter and Updates mailing list and no automatic subscription renewals without your expressed consent). Simple downloading for product delivery. Online payment options including Visa, MasterCard, Discover, American Express, PayPal, Fax, and by check through the mail. 4. Visit and create an Internet marketing plan for it that includes each of the following: One-to-one marketing Affiliate marketing Viral marketing Blog marketing Social network marketing Describe how each plays a role in growing the business, and create a PowerPoint slide presentation of your marketing plan. Note: is no longer in business. As alternatives, students can visit any of the following sites to complete the assignment (fashion, handbags, shoes, accessories, beauty, etc.) (designer fashion) (handbags/wallets) (home products) To complete this project, all students need is the information in the chapter, a visit to the Web site, and a marketers instincts. Creativity should be rewarded. The students might suggest a campaign that includes the following with specific products on the site selected noted: One-to-one marketing: The information from the market research study must be recorded in one or more customer databases. Database mining can then be used to compile individual profiles.


These should be analyzed to identify new market opportunities to specific customers, both current and new. Combine this data with the historical purchasing data of the sites customers and create a recommendation tool for the Web site. Aggregate the purchasing psychological profile data to send buyers a personalized email message suggesting new products they might be interested in buying. As a general rule, a company can expect that 80% of revenue will be contributed by 20% of their customers. Sustaining existing customers is also much less costly than developing new ones. Needs, specific hot-button messages, and offers can be tailored both in e-mail messages and can be displayed on the Web site to different groups or individuals. Affiliate marketing: Set up an affiliate program with other like sites. Students might look for luxury hotel or vacation sites with which to partner. They could try luxury car dealerships such as Mercedes Benz, Ferrari, or Porsche. They might also set up affiliates with sites that are not direct competitors. Viral marketing: Off the Internet, viral marketing has been referred to as word-of-mouth, creating buzz, leveraging the media, or network marketing. Send e-mails to customers with an offer for a free small product of some sort and a $10 off coupon on subsequent referrals for each new customer they refer to the site that makes a purchase. The new customer will also be offered a $10 off coupon code that can be easily transferred to the new customer via e-mail. New customers can then be offered additional incentives when they make their first purchase to entice them to complete the VALS survey. Blog marketing: Set up a store-sponsored blog with commentary on the latest products; send product announcements/samples to leading blog commentators in order to encourage them to favorably mention products and the site in their blogs. Social network marketing: Create videos featuring products to post on YouTube and other videosharing sites, encourage social shopping via by providing discounts or other incentives; set up product pages for specific products on Facebook, MySpace and similar sites.


Chapter 7 E-commerce Advertising Objectives

Identify the major forms of online marketing communications. Explain the costs and benefits of online marketing communications. Discuss the ways in which a Web site can be used as a marketing communications tool.

Key Terms
online marketing communications, p. 462 promotional sales communications, p. 463 branding communications, p. 463 online advertising, p. 464 ad targeting, p. 465 banner ad, p. 465 pop-up ad, p. 466 pop-under ad, p. 466 rich media ads, p. 500 interstitial ad, p. 500 superstitial, p. 500 video ad, p. 469 banner swapping, p. 470 advertising exchanges, p. 470 organic search, p. 471 paid inclusion, p. 471 keyword advertising, p. 473 network keyword advertising (context advertising), p. 473 click fraud, p. 476 sponsorship, p. 477 affiliate relationships, p. 478 direct e-mail marketing, p. 478 spam, p. 479 ad exchange, 490 impressions, p. 494 click-through rate (CTR), p. 494 view-through rate (VTR), p. 494 hits, p. 494 page views, p. 499 stickiness (duration), p. 499 unique visitors, p. 500 loyalty, p. 500 reach, p. 500 recency, p. 500 acquisition rate, p. 500 conversion rate, p. 500 browse-to-buy ratio, p. 500 view-to-cart ratio, p. 500 cart conversion rate, p. 500 checkout conversion ratio, p. 500 abandonment rate, p. 500 retention rate, p. 500


attrition rate, p. 500 open rate, p. 501 delivery rate, p. 501 click-through rate (e-mail), p. 501 bounce-back rate, p. 501 cost per thousand (CPM), p. 504 cost per click (CPC), p. 504 cost per action (CPA), p. 504

Brief Chapter Outline

Video Ads: Shoot, Click, Buy 7.1 Marketing Communications Online Advertising E-mail Marketing and the Spam Explosion Online Catalogs Social Marketing: Blogs, Social Networks, and Games Insight on Society: Marketing to Children of the Web in the Age of Social Networks Behavioral Targeting: Getting Personal Mixing Offline and Online Marketing Communications 7.2 Understanding the Costs and Benefits of Online Marketing Communications Online Marketing Metrics: Lexicon Insight on Business: Are Very Rich Different From You and Me? How Well Does Online Advertising Work? The Costs of Online Advertising Software for Measuring Online Marketing Results 7.3 The Web Site as a Marketing Communications Tool Domain Names Search Engine Optimization Insight on Technology: Its 10 P.M. Do You Know Who is on Your Web Site? Web Site Functionality 7.4 Case Study: Instant Ads: Real Time Marketing on Ad Exchanges 7.5 Review Key Concepts Questions Projects

Figure 7.1 Online Advertising from 2001-2014, p. 464 Figure 7.2 Types of Display Ads, p. 467 Figure 7.3 Search Engine Marketing Revenues, p. 471 Figure 7.4 The Importance of Rank for Customer Viewing by Type of Search, p. 472 Figure 7.5 A Paid Listing on Google, p. 474 Figure 7.6 Percentage of E-mail That is Spam, p. 480 Figure 7.7 Bevals Online Catalog, p. 482 Figure 7.8 An Online Consumer Purchasing Model, p. 501


Figure 7.9 Comparative Returns on Investment, p. 503 Figure 7.10 Web Site Activity Analysis, p. 508 Figure 7.11 Factors in the Credibility of Web Sites, p. 513

Table 7.1 Whats New in Internet Advertising 2010-2011, p. 463 Table 7.2 Online Advertising Spending for Selected Formats, p. 466 Table 7.3 Types of Video Ads, p. 469 Table 7.4 Marketing Metrics Lexicon, p. 495 Table 7.5 Online Marketing Communications: Typical Click-through Rates, p. 502 Table 7.6 Different Pricing Models for Online Advertisements, p. 505 Table 7.7 Average Cost Per Customer Acquisition For Select Media in the U.S, 2010, p. 505 Table 7.8 Traditional and Online Advertising Costs Compared, p. 507 Table 7.9 Web Site Design Features That Impact Online Purchasing, p. 514

End of Chapter Questions

1. Explain the difference between marketing and marketing communications. Marketing encompasses all of the actions a firm takes to establish a relationship with the consumer and encourage the sale of products. Marketing communications focus strictly on methods of communicating the brand name and communications that directly promote sales. Marketing includes such things as packaging, product placement/arrangement, and departments of a physical store or on a Web site. Marketing communications encompass all methods by which consumers will receive audio, visual, text-based or any other exchange with a company to strengthen brand name or promote the sale of products. 2. Explain the difference between branding communications and sales/promotional communications. Branding communications rarely encourage consumers to buy. Instead it focuses on extolling the differential benefits of consuming the product or service. Sales/promotional communications on the other hand, almost always encourage consumers to make immediate purchases. 3. What are some reasons why online advertising constitutes only about 15% of the total advertising market? Online advertising constitutes only about 15% of the total advertising market because advertisers are still concerned about its cost versus its benefits and about how to accurately measure its results. 4. What kinds of products are most suited to being advertised online? The kinds of products that are most suited to being advertised online are high-consideration, information-intensive products that consumers will typically want to research prior to purchasing. Computer hardware, automotive and financial services companies are among the heaviest online advertisers for this reason. Financial and travel services, which have significant online commercial potential, are also well-suited to Internet advertising. Media productsbooks, music, and moviesare also suited to online advertising (discussed in later chapters) although the advertising windows appear to be quite short after initial introduction.


5. What is the difference between an interstitial ad and a superstitial ad? Interstitial ads are placed between the current Web page a user is viewing and the destination page for the link they have clicked. The interstitial ad typically gives way automatically to the page the user has requested after allowing enough time for the ad to be read. Interstitials use dead time in between the loading of requested pages. However, users may become annoyed because they believe that while they are waiting for the ad to load, the page they want to view is delayed. Superstitials, on the other hand, are pre-loaded into the cache of the browser and do not play until they are fully loaded. When the file is completely downloaded, just like an interstitial, it will wait until the user clicks a link to move to a new page before it opens in a separate window. 6. What are some of the reasons for the decline in click-through rates on banner ads today? How can banner ads be made more effective? Clickthrough rates on banner ads have declined because the Web has become inundated with them. People have had to find ways to cope with the over-stimulation. One means of coping with sensory overload is input filtering, or filtering out the vast majority of messages with which a person is being bombarded. Users have learned to recognize banner ads or anything that looks like one and will immediately close them before they have even had a chance to fully load. Essentially, this can be considered an adoption curve. At first, people will want to try something new, but eventually there will be more people who have already done that something new compared to the newcomers. These people will become less and less inclined to do it again until you end up with what appears to be declining engagement. Basically, banners used to be exotic and cool and now they are banal and unavoidable. Banner ads can be made more effective if they are targeted to a specific audience (using pre-identified user profiles), to specific occasions, or to particular keyword search arguments. Turning banner ads into video ads, or introducing any kind of animation, increases the click through rate as well. 7. Why are some affiliate relationships called tenancy deals? How do they differ from pure affiliate relationships? Some affiliate relationships are called tenancy deals because they allow a firm to become a tenant on another Web site. A firm will put its logo or a banner ad on an affiliate partners Web site so that users can easily click through to their site and vice versa. These relationships are strategic partnerships in which the interests of both parties are served and no direct exchange of money occurs. In a pure affiliate relationship, the logo or button for a firm will be placed on a site, and all of the ordering infrastructure will be available. The affiliate firm will purchase the inventory and fulfill all of the orders; the host firm will receive a commission on the sales. 8. There is some controversy surrounding paid placements on search engines. What are some of the issues surrounding paid placement search engines? Why might consumers object to this practice? The controversy surrounding the paid placement of search results erupted because originally, search engines produced unbiased results from searching the Webs vast collection of pages. However, since 1997, most search engine sites have charged firms for inclusion in the search engine index. This amounts to a guarantee that their firm will appear prominently in the results of relevant searches. In some cases, search engines do not inform the user that the results of a query have been paid for by participating firms although other search engines make this obvious and transparent by adding color or


other marks to sponsored ads. Critics and consumer advocates believe that these search engines are engaging in deceptive practices. Consumers might object to this practice because search results look like information from an objective database, and that is what they have been in the past. Now, instead of an objective list of relevant results, they are served paid ads in disguise. Consumers may legitimately worry that the impact of fees being paid for search inclusion might distort the result list and exclude otherwise valid links. This skewed list, with paid placements figuring prominently, may also take longer for the user to sift through to find the information they really need. Because search engines use secret ranking formulas, even so-called organic search results are not what they seem. Search engines can make a companys listing disappear with no explanation, or appear high in organic rankings for no apparent reason. 9. What are some of the advantages of direct e-mail marketing? The major advantage of direct e-mail marketing is that because e-mails are sent to interested users who have elected to opt-in, they have proven to be one of the most effective forms of marketing communication. These consumers have at one time or another expressed an interest in receiving messages from advertisers. Therefore the response rates are much greater than other forms of online marketing communications. Another advantage is that the cost is negligible. The primary cost is for the purchase of a list of names, which can be from 15 to 50 cents per name, depending on how targeted the list is. Sending the e-mails is virtually cost free. Furthermore, marketers can rapidly get a targeted direct e-mail advertising campaign off the ground whereas a banner ad or search engine campaign takes more time. 10. Why is offline advertising still important? Offline advertising is still important because so far the marketing communications campaigns that have been the most successful at driving traffic to a Web site have combined both offline and online tactics. Research studies have shown that the most effective online advertisements were those that incorporated consistent imagery with ads that were running simultaneously in print media and on television. Furthermore, since offline media such as television and radio have nearly 100% market penetration and millions of adults read a newspaper every day, it would be foolish to ignore these more popular media devices for driving traffic to a Web site. Meeting the objectives of drawing the attention of people who are already online and attracting the attention of those who will be going online in the near future can best be accomplished with a combined offline/online strategy. 11. What is the difference between hits and page views? Why are these not the best measurements of Web traffic? Which is the preferred metric for traffic counts? Hits are the number of http requests received by a server, while page views are the number of pages requested by visitors. Hits can be a misleading measure of site activity because one page view can include many hits if the page contains multiple images or graphics. Page views are also an inaccurate measure of site activity because of the increased usage of Web pages that use frames to divide the page into separate sections. This will cause one page to generate multiple hits: one for each frame on the page. The preferred metric for traffic counts is unique visitors, which counts the number of new visitors to a site, regardless of how many pages they view. 12. Define CTR, CPM, CPC and CPA.


CTR refers to the click-through rate or percentage of people exposed to an online advertisement who actually click it to visit the site. CPM refers to the cost per thousand impressions. Advertisers originally purchased online ads in lots of 1,000 units. CPC is a later pricing model in which the advertiser pays a prenegotiated fee for each click an ad receives. CPA refers to a cost structure where advertisers pay a prenegotiated amount only when a user performs a specific action such as a site registration or purchase. 13. What are the key attributes of a good domain name? The following are the key attributes of a good domain name: Short Memorable Not easily confused with other domain names Difficult to misspell Reflects the nature of the companys business Preferably a suffix 14. What are some of the steps a firm can take to optimize its search engine rankings? Some steps firms can take to optimize their search engine rankings are: Register with as many search engines as possible so that a user looking for similar sites has a chance of coming across yours. Make sure that keywords used in your Web site description match keywords likely to be used by prospective customers. Most search engines read home page title tags, metatags, and other text on the home page in order to index the page. Link the site to as many other sites as possible because most search engines rank sites based upon the number of links from other sites. The assumption is that the more links there are to a site, the more useful the site must be (link popularity). Search engines also look at the authority of the site linking to your site. If many people refer to a site, it is considered an authority, and sites which it links to share in that authority. 15. List and describe some Web site design features that impact online purchasing. Some Web site design features that impact online purchasing are: Compelling experience: Sites that offer entertainment and interactivity along with commerce or that are perceived as fun to use, are more successful in attracting and retaining visitors. Short download times: Sites that take too long to download will experience higher abandonment rates, although this can be diminished somewhat by providing online amusement to distract the consumer. Simplicity of design: The most important aspects of site design for generating sales are product list navigation and choice features that save consumers time. Interactive consumer decision aids: Recommendation agents (programs) that are used to recommend a product based on the consumer completing a survey, a review of the consumers profile, or based on the purchases of other consumers who have bought the same product can also drive sales. Responsiveness to consumer inquiries: Prompt and complete responses through automated customer response systems or online customer service centers can also positively affect return visits and purchases.


1. Use the Online Consumer Purchase Model (Figure 7.8) to assess the effectiveness of an e-mail campaign for a small Web site devoted to sales of apparel to the ages 18-26 young adult market in the United States. Assume a marketing campaign of 100,000 e-mails (at 25 cents per e-mail address). The expected clickthrough rate is 5%, the conversion to customer rate is 10%, and the loyal customer retention rate is 25%. The average sale is $60, and the profit margin is 50% (the cost of the goods is $30). Does the campaign produce a profit? What would you advise doing to increase the number of purchases and loyal customers? What Web design factors? What communications messages? If 100,000 e-mails are sent out at a cost of .25 per e-mail address, the cost of the marketing campaign is $25,000. A click-through rate of 5% will result in 5,000 people clicking through to the site. Of those, 10% will be converted to customers, so 500 people will make a purchase as a direct result of the e-mail. With an average sale of $60, this would produce gross revenues of approximately $30,000. The profit margin is 50% ($15,000), so the gross profit is $15,000. Subtract the $25,000 cost of the advertising campaign and the net loss on the initial campaign is $10,000 (not including additional operating costs). If the loyal customer retention rate is 25%, then 125 customers can be expected to make at least one additional purchase of $60 within the year for an additional $7,500 in gross revenue. The campaign still produces an overall net loss of $2,500 over one years time. To increase the number of purchases and the retention rate students can come up with any number of ideas. This is a chance for the marketing students in the class to let the ideas flow. Some possible ideas for Web site design and communication messages that might keep customers coming back to the site are: Give the customers recruited from this e-mail campaign regular updates. When new product lines or products arrive, or perhaps as new apparel arrives for each season, send updates so that they will be more likely to revisit the site. Add fashion magazine content to the site that discusses the latest fashion trends of your target audience. Keep your customers informed about what is happening in your company by sending them email newsletters detailing new product information, special offers, etc. Offer an e-mail based fashion advice service for your customers. Add free fashion articles and reports to the site. You can keep customers interested by putting relevant articles on your site for them to download. This will also help to establish you as a fashion authority. Set up an online forum or blog on your site. This can often help to get your customers to stay longer on the site.

2. Surf the Web for at least 15 minutes. Visit at least two different sites. Make a list describing in detail all the different marketing communication tools you see being used. Which do you believe is most effective and why? Students are likely to see all or most of the banner and rich media ads described in the chapter in 15 minutes of surfing. Reports should include what each advertised, what the method of delivery was, how effective they thought each ad was, and why it was or was not effective. For example, a recent 15minute surfing experiment began with a visit to Yahoos home page. There you could see a large animated Sears display ad, a small primarily text-based display ad for, and a Stock Quote search facility sponsored by Scottrade. Moving to the Yahoo Finance page, there was an animated banner ad from Merrill Lynch Wealth Management, as well as an additional display ad on the


side of the page. A one-line text link ad for MetLife appeared just below the top banner ad. There was also a Focus on Lifelong Investing section sponsored by Fidelity, Tech/Ticker section sponsored by Scottrade, a Currencies Investing section sponsored by Forex, and text link ads next to the label Brokers: by E*Trade, Scottrade, and TD Ameritrade and another ad by Scottrade advertising $7 trades. At the bottom of the page, a Sponsored Links section appeared with three text-based ads with links. Returning to the home page, the ads remained the same. Clicking through to the Yahoo Weather page (sponsored by The Weather Channel (, one finds a large animated banner ad from AARP, links to three advertorials by HowLife Works and another display ad advertising a new credit card from Chase. Since a pop-blocker is in effect, there were no pop-up ads. Some ads appeared to be targeted and specifically placed on the sites visited while others appeared to have been randomly placed. Students will likely find the targeted ads more effective. The effectiveness of other ads may depend on the demographic groups to which the student belongs and the delivery method. 3. Do a search for a product of your choice on at least three search engines. Examine the results page carefully. Can you discern which results, if any, are a result of a paid placement? If so, how did you determine this? What other marketing communications related to your search appear on the page? A search for bicycle helmet on Google returns around 435,000 results. At the top of the search page, there is a shaded box with three sponsored results. Beneath this the main Google search results appear, the first of which is a link to an REI Expert Advice article, How to Choose a Bicycle Helmet, and the second and third from the Bicycle Helmet Safety Institute. After the third link, a Shopping results for bicycle helmets appears, underneath which are four images of different bicycle helmets. The first links to Amazon, the second to Google Products, the third to Sports Authority (with a Nearby stores link underneath that), and the fourth to Google products again. It is unclear on what basis Google has chosen these specific products that appear. On the right side of the page, there is a list of 8 sponsored links, clearly labeled as such. A search for bicycle helmet on Microsofts Bing returns a whopping 8,450,000 results. There is a shaded box at the top of the page labeled Sponsored sites that includes four links. On the right side of the page, there is a list of 8 sponsored links, clearly labeled as such. At the bottom of the page, there is another light blue box labeled Sponsored sites with two more links. In the main results section, the first link is Shop for bicycle helmet with four images of different helmets, each of which links to the Bing Shopping page. As with the similar Google section, it is unclear on what basis Bing has chosen the specific products that appear. The rest of the main results section appears to present un-sponsored results. The first such result returned is a link to a Wikipedia article on bicycle helmets. A search for bicycle helmet on returns an unspecified number of results. . There is a box at the top of the page that highlights results for bicycle helmet, with images of 3 different products, underneath which is another lightly shaded box labeled Sponsored results with three links. Below this is the main results section, which appears to present un-sponsored results. The first unsponsored result returned is a link to the Bicycle Helmet Safety Institute. At the bottom of the page is another Sponsored Results box with four additional links. 4. Examine the use of rich media in advertising. Find and describe at least two examples of advertising using streaming video, sound or other rich media technologies (Hint: Check the sites of Internet advertising agencies for case studies or examples of their work). What are the advantages and/or disadvantages of this kind of advertising? Prepare a short 3-to-5 page report on your findings.


Some sites that offer examples of rich media/video ads include,, and (Client Showcase), among others. Advantages of rich media/video advertising include: the tendency to be more effective (generate higher click-through rates) because it entertains and engages viewers through sound, video, and interactivity, as well as allows users some level of control (i.e., users can typically stop/close the ad). Disadvantages of rich media/video advertising include its likeliness to cost more to develop and launch than simple display ads. They may also annoy users if they are deemed overly intrusive, and unresponsive to user control. As they become more commonly used, users may be more likely to tune them out, diminishing their effectiveness. 5. Visit your Facebook page and examine the ads shown in the right margin. What is being advertised and how do you believe it is relevant to your interests or online behavior? You could also search a retail product on Google several times, and related products, then visit Yahoo or another popular site to see if your past behavior is helping advertisers track you. Facebooks targeted ad functionality is currently not very impressive. Students will likely report that the ads in the right margin of their profiles are not very relevant, and seem almost random. Facebooks ad capabilities will improve with time. In general the more you search on a class of items, or a specific item, the greater the likelihood that an ad network will pick up on your behavior and start showing you related ads in visits to other sites. This works for the most popular sites, most of which are members of a variety of ad networks. This also assumes that you allow both primary and third-party cookies. If you do not allow any cookies, tracking becomes more difficult but not impossible. Web bugs and beacons often cannot be eliminated by your browser.


Chapter 8 Ethics, Law and E-commerce Objectives

Explain why e-commerce raises ethical, social and political issues. Identify the main ethical, social, and political issues raised by e-commerce. Identify a process for analyzing ethical dilemmas. Explain basic concepts related to privacy. Identify the practices of e-commerce companies that threaten privacy. Describe the different methods used to protect online privacy. Explain the various forms of intellectual property and the challenges involved in protecting it. Explain how the governance of the Internet has evolved over time. Explain why taxation of e-commerce raises governance and jurisdiction issues. Identify major public safety and welfare issues raised by e-commerce.

Key Terms
ethics, p. 531 responsibility, p. 532 accountability, p. 532 liability, p. 532 due process, p. 532 dilemma, p. 533 privacy, p. 533 information privacy, p. 533 personally identifiable information (PII), p. 536 anonymous information, p. 536 profiling, p. 539 anonymous profiles, p. 539 personal profiles, p. 539 deep packet inspection, p. 540 weblining, p. 542 informed consent, p. 546 opt-in, p. 547 opt-out, p. 547 safe harbor, p. 550 P3P (Platform for Privacy Preferences), p. 556 copyright law, p. 562 doctrine of fair use, p. 563 Digital Millennium Copyright Act (DMCA), p. 564 patent, p. 567 trademark, p. 572 dilution, p. 572 Anticybersquatting Consumer Protection Act (ACPA), p. 573 cybersquatting, p. 573 cyberpiracy, p. 573 linking, p. 576 deep linking, p. 576 framing, p. 577 governance, p. 578


Brief Chapter Outline

Discovering Law and Ethics in a Virtual World 8.1 Understanding Ethical, Social, and Political Issues in E-commerce A Model for Organizing the Issues Basic Ethical Concepts: Responsibility, Accountability and Liability Analyzing Ethical Dilemmas Candidate Ethical Principles 8.2 Privacy and Information Rights Information Collected at E-commerce Sites Social Networks and Privacy Profiling and Behavioral Targeting The Internet and Government Invasions of Privacy: E-commerce Surveillance Legal Protections Private Industry Self-Regulation Privacy Advocacy Groups The Emerging Privacy Protection Business Technological Solutions Insight on Business: Chief Privacy Officers Insight on Technology: The Privacy Tug of War: Advertisers vs. Consumers 8.3 Intellectual Property Rights Types of Intellectual Property Protection Copyright: The Problem of Perfect Copies and Encryption Patents: Business Methods and Processes Trademarks: Online Infringement and Dilution Challenge: Balancing the Protection of Property with Other Values 8.4 Governance Who Governs E-commerce and the Internet? Public Government and Law Taxation Net Neutrality 8.5 Public Safety and Welfare Protecting Children Cigarettes, Gambling, and Drugs: Is the Web Really Borderless? Insight on Society: The Internet Drug Bazaar 8.6 Case Study: The Google Book Settlement: Is it Fair? 8.7 Review Key Concepts Questions Projects

Figure 8.1 The Moral Dimensions of an Internet Society, p. 530


Figure 8.2 (a) How P3P Works, p. 556 Figure 8.2 (b) Internet Explorer 7s Implementation of P3P, p. 557 Figure 8.3 Internet and E-commerce Business Methods Patents, p. 569

Table 8.1 Unique Features of E-commerce Technology and their Potential Ethical, Social and/or Political Implications, p. 529 Table 8.2 Personal Information Collected by E-commerce Sites, p. 536 Table 8.3 The Internets Major Information Gathering Tools and Their Impact on Privacy, p. 537 Table 8.4 Federal and State Privacy Laws, p. 545-546 Table 8.5 Federal Trade Commissions Fair Information Practice Principles, p. 548 Table 8.6 FTC Recommendations Regarding Online Profiling, p. 549 Table 8.7 Privacy Advocacy Groups, p. 552 Table 8.8 Technological Protections for Online Privacy, p. 555 Table 8.9 Fair Use Considerations to Copyright Protections, p. 564 Table 8.10 The Digital Millennium Copyright Act, p. 565 Table 8.11 Selected E-commerce Patents, p. 570 Table 8.12 Internet and Trademark Law Examples, p. 574 Table 8.13 The Evolution of Governance of E-commerce, p. 579

End of Chapter Questions

1. What basic assumptions does the study of ethics make about individuals? The study of ethics makes the basic assumption that individuals are free moral agents who are in a position to make choices. 2. What are the three basic principles of ethics? How does due process factor in? The three basic principles of ethics are responsibility, accountability, and liability. As free moral agents, individuals, organizations, and societies are responsible for the actions they take and should be held accountable to others for the consequences of those actions. Liability is a characteristic of political systems in which a body of law is in place so that accountability can be enforced. It permits individuals to recover damages for the actions of other individuals, systems, or organizations that cause them damage. Due process is a feature of law-governed societies and refers to a process in which laws are known and understood and there is an ability to appeal to higher authorities to ensure that the laws have been applied correctly. 3. Explain Googles position that YouTube does not violate the intellectual property rights of copyright owners. Googles defense against accusations of copyright infringement rests upon the doctrine of fair use and the provision of the Digital Millennium Copyright Act (DMCA) of 1998. The doctrine of fair use permits limited use of copyrighted materials as long as certain conditions are met, such as the following: it does not harm the commercial value of the work it is limited to very small portions the nature of the work


the nature of use, e.g. non-commercial purpose the context of use prevents seeking permission.

Google claims that YouTube meets at least some of these criteria. They also claim that it is sometimes impossible to know whether a video is infringing or not. Google also claims that it qualifies for the safe harbor provision of the DMCA, since YouTube promptly removes infringing content if it is requested to do so by copyright holders. 4. Define universalism, slippery slope, the New York Times test, and the social contract rule as they apply to ethics. Universalism implies that if a solution is not correct for all situations then it is not right for any specific situation. In simple terms, Immanuel Kants categorical imperative asks: if the rule were to be adopted in every case, would the organization or society survive? The slippery slope rule, which is based on Descartes rule of change, states that if an action cannot be undertaken repeatedly, then it should not be taken at all. The solution might appear to work in one instance, but if the solution were repeated, negative outcomes might begin to occur, and in fact continue occurring at a pace that could not be stopped. The New York Times test, or Perfect Information Rule, states that you must assume that the results of your decision on a matter will be the subject of the lead article in the New York Times the next day. In other words, if you would not want to see the reactions of your friends, family, and neighbors when they read about the results of your decision on the front page of the newspaper, then it is probably not the correct decision. Most criminals and other unethical actors operate under the assumption of imperfect information, meaning that they never expect to be exposed. When faced with an ethical dilemma, it is best to assume that perfect information will be available to all. The social contract rule asks the decision maker to consider whether they would like to live in a society where the principle they are advocating was the organizing principle of the entire society. 5. Explain why someone with a serious medical condition might be concerned about researching his or her condition online, through medical search engines or pharmaceutical sites, for example. What is one technology that could prevent ones identity from being revealed? An individual with a serious medical condition might be concerned because in the U.S., there is no federal agency charged with enforcing privacy law. Private organizations and businesses can still use personally identifiable information gathered in commercial transactions for other business purposes. If a person with a serious medical condition were to purchase pharmaceuticals online for that illness, he or she would have cookies placed on his/her computer that would identify the person as a potential customer for other drugs for that illness. Since many companies do not even follow their own stated privacy policies, and opt-out procedures are usually difficult to find on a site, personal information or personal profiles might be sold or transferred to other companies, potentially even insurance companies. Advertising networks, or profiling companies, that have ads on the search engine site or pharmaceutical site may likely, without the persons permission, place tags or identifiers on the persons computer that will be used to track his or her movements as the person surfs the Web. In addition to collected behavioral information, a profile may contain inferential or psychographic data, information that the company infers about that person based on the sites they have visited.


The transition from fee-for-service health care to managed care has led to a demand for an unprecedented depth and breadth of personal information by a growing number of players, including health insurance companies. At the same time, the environment for information is moving rapidly from paper forms and files to electronic media, giving organizations a greater ability to tie formerly distinct information together, including data collected from the Web. The possibility of being dropped by an insurance company, not being able to transfer to a new insurance company along with new employment, or not being able to obtain health insurance at all, or of an employer finding out about a medical condition through the transfer of this data might be daunting. This is why, as people become more aware that their movements on the Web are being tracked, they might become far less likely to explore sensitive topics such as personal medical conditions. Some technologies that could prevent ones identity from being revealed include anonymous surfing products such as Freedom Websecure,, Tor and GhostSurf, and anonymous remailers, such as W3-Anonymous Remailer, Jack B Nymble, and Java Anonymous Proxy. 6. Name some of the personal information collected by Web sites about their visitors. Personal information that is collected by Web sites about their visitors includes the persons e-mail address, postal address and/or phone number. This is added to demographic data such as their age, occupation, income, education, gender, and ethnicity, and their behavioral data. Behavioral data includes: what Web sites they have visited (click-stream data), what purchases they have made (transaction data), and what preferences they have professed when filling out preference forms. Ecommerce sites also collect bank account information, credit card account data, and sometimes the social security number and type of browser the customer uses. 7. How does information collected through online forms differ from site transaction logs? Which potentially provides a more complete consumer profile? Transaction logs are anonymous information whereas online forms are personally identifiable information. The transaction log records an entry for each page a visitor views and each object they request. Online forms can be used to collect a variety of personal information about site visitors such as their name, address, e-mail address, and phone number. Online forms potentially provide a more complete consumer profile because this PII can be combined with the visitor-generated, click-stream behavior and other behavioral data to create a comprehensive personal profile. 8. How is the opt-in model of informed consent different from opt-out? In which type of model does the consumer retain more control? In the opt-in model, the default behavior on the part of the Web site operator is not to approve the collection of data. In the opt-out model, the default is to automatically collect and use information unless otherwise notified. With the opt-in model, the consumer or site visitor must give consent before information about them can be collected and used. In the opt-out model, the consumer/site visitor must take an action to prevent the collection of data. The consumer retains more control in the opt-in model because no action to collect data will be undertaken unless they first agree to it. Only sites the consumer specifically requests to receive offers and promotions from will be allowed to collect data. 9. What are the two core principles of the FTCs Fair Information Practice Principles?


The two core principles of the FTCs Fair Information Practice Principles are notice/awareness and choice/consent. The FTC guidelines, which are not yet codified in law, recommend for the notice/awareness principle that sites disclose their information practices before collecting data. This includes identifying the data collector; all uses of the data; whether the data collection will be active or inactive, voluntary or required; the consequences of refusing to allow data to be collected; and the steps that will be taken to protect the confidentiality, integrity and quality of the data. The choice/consent principle recommends that there be a choice system in place that allows consumers to choose how their information will be used for secondary purposes, other than supporting transactions. This includes internal uses by the collecting firm and transfer to third parties, and that opt-in/opt-out choices be made available. 10. How do safe harbors work? What is the governments role in them? Safe harbors are private, self-regulating policy and enforcement mechanisms that meet the objectives of government regulators and legislation but do not involve actual codified regulation and enforcement. Industry groups or other organizations submit self-regulatory policies that implement the protections set forth in the safe harbor to the overseeing governmental agency or commission. The overseeing governmental agency certifies the submitted plan if it meets the protection goals they are seeking. Commission-approved safe harbors provide Web site operators with the opportunity to tailor compliance obligations to their business models with the assurance that if they follow the safe harbor, they will be in compliance with the rule. 11. Name three ways online advertising networks have improved on, or added to, traditional offline marketing techniques. Online advertising networks now have the ability to precisely track not just consumer purchases, but also all browsing behavior on the Web. This can tell marketers much more about individual consumers than was previously known. For example, advertising networks can now compile information on all known interests of a consumer by collecting data on all content the viewer has accessed and all inclinations the consumer has expressed on preference forms. Advertising networks can also create the ability to dynamically adjust what the shopper sees on the screen. For instance, they can serve ads that conform to the inferences made from the collected data, and they can adjust the prices to conform to demographic or personal preference data. Furthermore, advertising networks create the ability to build and continually refresh these high-resolution data images or behavioral profiles of consumers. In summary, the scope and intensity of the data collection is strengthened to such an extent that merchants are now able to manipulate the shopping environment to their advantage. 12. Explain how Web profiling is supposed to benefit both consumers and businesses. Web profiling is supposed to benefit both consumers and businesses because the ability to precisely target ads will purportedly ensure that consumers only see advertisements for products and services in which they are actually interested. Businesses will save advertising dollars by not sending ads to consumers who have no interest in their product or service. Increased advertising effectiveness will also ensure that more advertising revenues go to the Internet, which in turn will subsidize more free content for consumers. Also, product designers and entrepreneurs will be able to pick up on and respond to consumer demand for new products and services by studying user searches and profiles. 13. What are some of the challenges that chief privacy officers (CPOs) face in their jobs?


One challenge faced by Chief Privacy Officers is that approximately 80% of companies do not follow their own stated privacy policies as a result of poor training and human error. CPOs have a difficult time getting business sales and production units to pay attention to their concerns. This is partially because CPOs generally do not have a budget, they generally dont have large staffs relative to the rest of the company, they are not responsible for profit and loss, and dont bring in any revenue. CPOs must coordinate the activities of an entire firm comparing the companys privacy policies and emerging technology with potential risks and then figuring out whether or not and how to implement policies. They must also manage customer-privacy disputes and inform senior executives, as well as all general employees, about how the company needs to deal with privacy issues. 14. How could the Internet potentially change protection given to intellectual property? What capabilities make it more difficult to enforce intellectual property law? The Internet could potentially change the protections given to intellectual property because once a work becomes digital, it becomes much more difficult to control its access, use, distribution, and copying. Because digital media is so easy to replicate, transmit, and alter, unique challenges are presented. Theft is made much simpler in the digital world, and it becomes more and more difficult to establish the uniqueness of a work. It also becomes harder to enforce intellectual property law since the technology now exists to create perfect digital copies of various files including books, music, plays, poems, journal articles, and films. It is also simple to distribute these copies quickly, easily, and incredibly cheaply. 15. What does the Digital Millennium Copyright Act attempt to do? Why was it enacted? What types of violations does it try to prevent? The Digital Millennium Copyright Act attempts to adjust copyright laws for the digital age. It was enacted when a confrontation erupted between the major copyright holders (the publishing, sheet music, record label and commercial film industries), the providers of Internet content, users of copyrighted materials (libraries, universities), and the general consumer population. The act tries to prevent violations by imposing fines and possible imprisonment on hackers who attempt to break encryption schemes and distribute copyrighted materials worldwide. It also attempts to control the behavior of Internet Service Providers who often host infringing Web sites, or who provide Internet service to routine infringers. The ISPs do not believe that they should be held accountable, or specifically, that they should have to put their users under surveillance or invade their privacy because they are merely the message carriers. The Digital Millennium Copyright Act makes it illegal to make, distribute, or use devices that circumvent the technology-based protections of copyrighted materials, and it also holds the ISPs responsible for infringers once they have been notified of these infringements. ISPs must immediately take down violating sites or be subject to prosecution themselves. Copyright owners can subpoena in federal court to obtain the personal identities of suspected violators from the ISP. ISPs must also inform all of their subscribers of their copyright management policies. All provisions of the DMCA are designed to prevent the widespread online violation of copyright. 16. Define cybersquatting. How is it different from cyberpiracy? What type of intellectual property violation does cybersquatting entail? Cybersquatting means registering, trafficking in, or using a domain name with the bad-faith intent to profit from a trademark belonging to someone else. It refers to the practice of buying domain names that reflect the names or trademarks of existing businesses intending to extort payments from the


businesses. Cybersquatting is different from cyberpiracy because although cyberpiracy involves the same behavior, the intent is to divert traffic away from legitimate sites to infringing sites. It is a bad faith attempt to divert traffic that dilutes the value of the legitimate trademark. Cybersquatting is considered an intellectual property violation because the creator of the trademark or company name owns it according to the general principles of intellectual property law, which state that any tangible or intangible product of the human mind is protected from infringement. 17. What is deep linking and why is it a trademark issue? Compare it to framinghow is it similar and different? Deep linking is the creation of a link to a page deep within another Web site using a publicly accessible HTML anchor tag. The home page of the target site is bypassed in order to access a page deep within that site. This becomes a trademark issue, for example, in the case of Ticketmaster vs. When did not have available tickets for a particular event, they would redirect users to a page deep within the Ticketmaster site to obtain those tickets. These customers might not ever realize that they were on a different site and that a different firm, indeed a direct competitor firm, was fulfilling their needs. Framing on the other hand, is displaying the content of another Web site on your own site within a frame or window. The user never leaves the original site but can be exposed to advertising that is not that of the content owner. Framing may trigger a dispute under copyright and trademark law theories because a framed site can alter the appearance of the content and create the impression that its owner endorses or voluntarily chooses to associate with the framer. It can also divert advertising revenue from the content owners site. It is similar to deep linking in that the site visitor is accessing content from another site, but it is different in that with framing, the site visitor never even clicks a link to leave the site. 18. What are some of the tactics illegal businesses, such as betting parlors and casinos, successfully use to operate outside the law on the Internet? The main tactic illegal businesses use to operate outside of the law on the Internet is operating from offshore sites for example, in Antigua or Costa Rica, so as to operate beyond the jurisdiction of the state and federal prosecutors.

1. Go to Google and click on the Search Settings link (at the upper-right corner of the home page). Examine its SafeSearch filtering options available on the Preferences page. Surf the Web in search of content that could be considered objectionable for children using each of the options. What are the pros and cons of such restrictions? Are there terms that could be considered inappropriate to the software but approved by parents? Name five questionable terms. Prepare a brief presentation to report on your experiences and to explain the positive and negative aspects of such filtering software. Googles SafeSearch filter screens for sites that contain explicit sexual content and deletes them from its search results. There are three SafeSearch settings: Moderate filtering excludes most explicit images from Google Image Search results but doesnt filter ordinary Web search results. Moderate filtering is the default SafeSearch setting. Strict filtering applies SafeSearch filtering to all search results (i.e., both image search and ordinary Web search). No filtering turns off SafeSearch filtering


completely. The advantage of such filtering is that it prevents children from being exposed to material that parents deem unsuitable. The disadvantage of such filtering is that in some circumstances it may filter content that has educational value. It is also possible that there might be search terms considered potentially inappropriate by Googles filter, but not by some parents.

2. Develop a list of privacy protection features that should be present if a Web site is serious about protecting privacy. Then, visit at least four well-known Web sites and examine their privacy policies. Write a report that rates each of the Web sites on the criteria you have developed. Student lists of privacy protection features may vary somewhat but will likely follow the FTCs FIP (Fair Information Practice) Principles as well as their profiling recommendations: Consumers must receive notice of network advertisers profiling activities on host Web sites and have the ability to choose not to participate in profiling. Clear notification of data collection must be given before it begins for personally identifiable information. Consumers must opt-in before data collection can begin. Clear and conspicuous notice must be given when non-personally identifiable information (or clickstream data) is collected for profiling. Consumers can opt-out of data collection. Once informed about the network advertisers information collection practices, consumers must be able to decide whether to participate in profiling. Reasonable access must be granted to personally identifiable information and other information that is associated with it to allow for inspection and correction. Sites are required to make reasonable efforts to protect the data they collect for profiling purposes from loss, misuse, alteration, destruction, or improper access. Enforcement must be done by third parties such as seal programs and accounting firms. No collection of sensitive data is permitted at all. This includes sensitive financial, medical, sexual behavior or orientation information, and Social Security numbers. Selling or renting of data to third parties is prohibited. Customers credit card data can only be transferred over secured connections. 3. Review the provisions of the Digital Millennium Copyright Act of 1998. Examine each of the major sections of the legislation and make a list of the protections afforded property owners and users of copyrighted material. Do you believe this legislation balances the interests of owners and users appropriately? Do you have suggestions for strengthening fair use provisions in this legislation? Although the DMCA has 6 sections, Title I and Title II are the two most relevant. Title I of the DMCA protects the rights of property owners by creating two new prohibitions: one on the circumvention of technological measures used by copyright owners to protect their works, and the other on tampering with copyright management information. Section 1201 of Title I divides technological measures into two categories: measures that prevent unauthorized access to a copyright work and measures that prevent unauthorized copying of a copyrighted work. Circumventing measures put into place to prevent unauthorized access is prohibited. However, Section 1201 includes a number of exceptions to this rule. For instance, non-profit library, archival, and educational institutions are not prohibited from circumventing solely for the purpose of making a good faith determination as to whether they wish to obtain authorized access to the work. There are also


exceptions for reverse engineering for the purpose of identifying and analyzing elements of a computer program necessary to achieve interoperability with other programs, for encryption research, for protection of minors (allows a court applying the prohibition to a component or part to consider the necessity of its incorporation in technology that prevents access of minors to material on the Internet), for privacy protection (when the technological measure or the work it protects is capable of collection or disseminating personally identifying information about the online activities of a person), and for security testing. Circumventing measures that prevent unauthorized copying is not prohibited, in order to assure that the public will have the continued ability to make fair use of copyrighted works. Making or selling devices that are used to circumvent either category is prohibited, however. Section 1202 of Title I addresses the integrity of copyright management information (CMI), which is defined as: identifying information about the work, the author, the copyright owner, etc. This section protects copyright owners by prohibiting the knowing provision or distribution of false CMI, if done with the intent to induce, enable, facilitate or conceal infringement. It bars the intentional removal or alteration of CMI without proper authority, as well as the dissemination of CMI or copies of works. Liability under subsection (b) requires that the act be done with knowledge or for civil remedies with reasonable grounds to know that it will induce, enable, facilitate or conceal an infringement. Section 1203 of Title I provides for civil remedies payable to injured parties, while Section 1204 provides criminal penalties of up to a $500,000 fine or five years imprisonment for a first offense, and up to a $1,000,000 fine or up to 10 years imprisonment for a subsequent offense. Title II of the DCMA adds a new section to the Copyright Act to create four new limitations on liability for copyright infringement by online service providers. The limitations are for: Transitory communications: This is where the service provider merely acts as a data conduit, transmitting digital information from one point on a network to another at someone elses request. System caching: This is the practice of retaining copies, for a limited time, of material that has been made available online by a person other than the provider, and then transmitted to a subscriber at his or her direction. Infringing material on Web sites or other information repositories hosted on service providers systems. In order to be eligible for this limitation, the provider must not have knowledge of the infringing activity, it must not receive a financial benefit directly attributable to the infringing activity, and upon receiving notification of claimed infringement, it must expeditiously take down or block access to the material. (The service provider must promptly notify the subscriber that it has removed or disabled access to the material, and provide the subscriber with the opportunity to object.) The service provider must also have filed with the Copyright Office a designation of an agent to receive notification of claimed infringement. To be eligible for any of the limitations, a service provider must: adopt and reasonably implement a policy of termination in appropriate circumstances the accounts of subscribers who are repeat infringers and accommodate and not interfere with standard technical measures. The fourth limitation relates to hyperlinks, online directories, search engines and the like. It limits liability for the acts of referring or linking users to a site that contains infringing material by using such information location tools, with the same eligibility requirements as for the third limitation. Although


these provisions appear to offer more protection to the service providers than copyright owners, they actually are a strong tool for copyright owners because they provide a mechanism by which copyright owners can force service providers to block access to or remove infringing material. Students can be expected to take varying positions as to whether the DMCA appropriately balances the interests of owners and copyright users. Some might note that the provisions of the DMCA can be used in such a way as to chill free speech. Others might argue that the DMCA does not go far enough and provides so many exceptions that it is not as strong a deterrent as it might be. In terms of strengthening the fair use provisions, in some cases, encryption schemes work to prevent fair use that would otherwise be legal. One possible suggestion would be to require copyright owners who choose to protect their works through technological measures, to provide a means by which fair use can occur. 4. Visit at least four Web sites that take a position on e-commerce taxation, beginning with The National Conference of State Legislatures ( and The National Governors Association ( You might also include national associations of local businesses or citizen groups opposed to e-commerce taxation. Develop a reasoned argument for, or against, taxation of e-commerce. Students who go to the home page should click on the Issues & Research tab, and then click on the Budget & Tax link under the Issue Areas heading. There they should find a link to State Taxes, and from there, an interactive map on collecting e-commerce taxes ( ), as well as a link to the Executive Committee Task Force on State and Local Taxation of Telecommunications and Electronic Commerce page ( ) that contains a variety of information. At the site, students should look for the link entitled Policy Positions (currently at the lowerright corner of the page under the heading Federal Relations). Clicking on this link takes you to a page listing various Policy Position Papers. Students should look for a tab labeled Economic Development & Commerce Committee, and click on the link titled Policy Positions. From there, students should click the link entitled EDC-10, Streamlining Sales Tax Systems. This takes students to a page that gives an overview of the NGAs position with respect to the issue. Both the NCSL and the NGA are proponents of Internet taxation. Another Web site that students might visit for more views from proponents of Internet taxation is Organizations opposing Internet taxation include the National Taxpayers Union ( and Citizens Against Government Waste (, among others. Arguments in favor of taxation of e-commerce might include the following: Legal: State governments have a constitutional right to levy and collect taxes on goods and services sold within the state. A federal law that bans taxation on Internet sales would be unconstitutional. Economic: Given the growth of e-commerce, if state and local governments are unable to collect sales taxes on online sales, they will lose a great deal of revenue. The loss of this revenue will result in an increase in the rate of other taxes, reduced services, and/or greater reliance on the federal government. Fairness: It is inherently unfair to traditional retailers who must collect sales taxes for Internet sales to remain untaxed. Doing so favors Internet retailers and places traditional retailers at a competitive disadvantage.


Arguments against taxation of e-commerce might include the following: Imposing state and local taxes on e-commerce will threaten the growth of e-commerce at a critical stage of development. The existing U.S. tax system is too complex and burdensome; it would be almost impossible for e-commerce companies to comply with the thousands of differing state and local tax rates. The sales tax burden from multiple jurisdictions that might have authority to levy taxes would be very high. Taxing e-commerce might drive e-commerce companies, many of which do not need to operate within the United States, to other locations. E-commerce stimulates purchases at retail stores and through catalogs, upon which taxes may already be collected. 5. Consider the issue of the Department of Justices subpoena of search query records discussed on page 544. Prepare a list of reasons why the firms subpoenaed should or should not have complied with this request. What moral dilemmas present themselves? What higher-order values, and what kind of value conflicts, are revealed in this list? How do you propose that we as a society resolve these dilemmas? You might conclude by applying each of the Candidate Ethical Principles described in Section 8.1. Note: Errata: this issue is discussed on page 544, not page 588 as printed in the text. Moral dilemmas: the obligation of firms such as Google to protect their customers privacy vs. their obligation to help the federal government the desire of firms to maintain a close, trusting relationship with their customers in order to serve them better, versus these firms obligations to conform to federal law, and the right of prosecutors to gather evidence the desire of government to protect the freedom of expression (in this case pornographic expression) versus the desire of government to protect children from exposure to pornography Higher Order Values: freedom of expression private firm control over private data (where no crime has been committed) protection of children Resolution generally requires: fact finding defining the conflict in terms of higher order values identifying the stakeholders identifying reasonable options identifying potential consequences The fact is that COPA has not yet been deemed an enforceable law, and currently it is not illegal to distribute pornographic material for commercial purposes (except for cases with child pornography). It is unclear if the governments subpoena for a weeks worth of searches is sustainable. If no law has been violated, then what legal grounds does the prosecutor have to subpoena? The government wishes to establish the incidence of searches for pornographic material. One option is, rather than subpoenaing the actual searches and potentially who made them, the government might have had a


neutral third partylike a university research centeraccess the records and report the results in order to understand the frequency or incidence of searches for lewd material on the Web. This would protect consumer privacy. Guidance from Candidate Ethical Principles (the ethical principles that seem to apply most directly to this case are): Slippery slope: Complying with the prosecutors request could lead to a nearly endless series of requests from government agencies for information about customers. New York Times Test: Complying with the request would probably be seen by readers of the New York Times (and the public in general) as a threat to their privacy, and it would likely be rejected as an immoral course of action. Social contract rule: If one universalized complying with this request and made it a rule of organizing society, many, people would probably not want to live in a society where prosecutors could obtain easy access to customer information from private firms absent the commission of some crime.


Chapter 9 Online Media Objectives

Identify the major trends in the consumption of media and online content. Discuss the concept of media convergence and the challenges it faces. Describe the five basic content revenue models. Discuss the key challenges facing content producers and owners. Explain the key factors affecting the online publishing industry. Explain the key factors affecting the online entertainment industry.

Key Terms
technological convergence, p. 615 content convergence, p. 615 industry convergence, p. 617 net value, p. 621 digital rights management (DRM), p.623 Web-accessed e-book, p. 636 Web downloadable e-book, p. 637 dedicated e-book reader, p. 637 print-on-demand e-book, p. 637

Brief Chapter Outline

Information Wants To Be Expensive 9.1 Online Content Content Audience and Market: Where are the Eyeballs and the Money? Media Industry Structure Media Convergence: Technology, Content and Industry Structure Online Content Revenue Models and Business Processes Key Challenges Facing Content Producers and Owners 9.2 The Online Publishing Industry Insight on Business: Who Owns Your Files? Online Newspapers Books: The Evolution of E-Books Insight on Society: The Future of Books 9.3 The Online Entertainment Industry Online Entertainment Audience Size and Growth Online Entertainment Industry Revenue Models Convergence Insight on Technology: Hollywood Meets the Internet: Round 3 9.4 Case Study: Google and YouTube Together: Pass the Popcorn While This Ad Plays 9.5 Review Key Concepts Questions Projects


Figure 9.1 Media Consumption, p. 609 Figure 9.2 Media Revenues by Channel, p. 614 Figure 9.3 Relative Size of the Content Market, Based on Per-Person Spending, p. 611 Figure 9.4 Paid Digital Music, TV, and Movie Content Revenues in the U.S., 2008-2014, p. 612 Figure 9.5 Convergence and the Transformation of Content: Books, p. 617 Figure 9.6 Revenue and Content Characteristics, p. 622 Figure 9.7 Monthly Unique Visitors at Top 10 Online Newspapers, p. 630 Figure 9.8 Interactive Features Offered on the Web Sites of the Top 100 U.S. Newspapers, p. 633 Figure 9.9 The Growth of E-Book Revenues 2009-2014, p. 638 Figure 9.10 The Five Major Players in the Entertainment Industry: 2010 Estimated Revenues, p. 652 Figure 9.11 Projected Growth in Online Entertainment, p. 654 Figure 9.12 User Role in Entertainment, p. 655 Figure 9.13 Entertainment Industry Value Chains, p. 658

Table 9.1 Trends in Online Content, 2010-2011, p. 608 Table 9.2 Top Ten Online Video Sites p. 613 Table 9.3 Online Content Revenue Models, p. 619 Table 9.4 Examples of the Growing Use of Mixed Revenue Models for Online Content, p. 621 Table 9.5 Types of E-books, p. 636 Table 9.6 Example E-Book Industry Firms, p. 640 Table 9.7 Standards for E-Books, p. 642

End of Chapter Questions

1. What are the three dimensions where the term convergence has been applied? What does each of these areas of convergence entail? The three dimensions where the term convergence has been applied are technology platform, content design, and industry structure. Technology platform convergence refers to the integration of previously separate platform functionalities into a singular digital device. It refers to the development of hybrid devices that can combine the functionality of many different existing media. Content convergence actually includes three dimensions: design, production, and distribution. Content design convergence has occurred when the design becomes measurably different due to the new skills that have been learned for fully exploiting the new technological capabilities. Content production convergence drives content design convergence as new tools are developed for economically producing content for delivery to multiple platforms. Content distribution convergence occurs when the distributors and consumers have the new devices needed to receive, store, and experience the product. Industry structure convergence is the merger of various enterprises into powerful synergistic combinations that can cross-market content on many different platforms and create works that use multiple platforms. 2. Why has media industry convergence not occurred as rapidly as predicted? Media industry convergence has most likely not been quickly achieved because consumers still prefer traditional media (i.e., books, film, TV, video, CDs, or even newspapers and magazines) and because the technology is not yet quite ready to distribute this content effectively and conveniently. It has also not occurred because the content creators (artists, writers, and producers) do not yet know what features consumers will be willing to pay for, and they are still creating content for each of the separate media types. Finally, it has not occurred because a profitable business model has not emerged to


transform the media into a new experience. However, many small firms are pursuing the convergence of media and text. One such firm is 3. What are the five basic revenue models for online content and what is their major challenge? What will have to be done in order to overcome this obstacle to profitability? The five basic revenue models for online content are: marketing, advertising, pay-per-view, subscription, and mixed. The major challenge for the entire content industry is that most content on the Web is free. Most Web users expect it to be free and have expressed an unwillingness to pay for it. In order to overcome this obstacle to profitability, the value proposition that these firms offer to consumers will have to be enhanced by offerings that are more focused and highly valued by the consumer. Deep information and content will have to be in a more convenient form. 4. What is the pay-per-view revenue model, what type of content is it suitable for and when is it expected to be successful? The pay-per-view revenue model is based upon charging users for each viewing of premium content (videos, books, archived newspaper articles or consulting reports). This model is suitable for targeted audiences who are looking for deep, rich, niche content. Pay-per-view is expected to be a more prevalent and successful business model when the bandwidth capability to view sporting events, feature films, and other video content is perfected and becomes more widespread. On the other hand, the payper-view model used by many cable operators is being challenged by streaming video services from Netflix and Amazon. 5. What four things must content provider firms do in order to generate meaningful revenues? In order to generate meaningful revenues, content provider firms must target a focused audience and provide specialized content for which they are the sole source monopoly. Firms must also cultivate high-perceived net value in consumers so that they believe there is value in obtaining the information instantaneously on the Web. This net value may be derived from the instant availability of the content, the fact that large historical archives can be searched, and/or because the online material can easily be moved into other documents. 6. What are the technological challenges facing content producers and owners? In the past, technology issues (including low bandwidth, poor and unstable operating systems, lowbandwidth mobile networks, and poor digital production environments) were major inhibiting factors in the growth of online content. Today, this is no longer true, and the technology platforms to deliver acceptable online content are now available. The only exception is lack of bandwidth for highdefinition full screen video, full-screen standard quality television, and CD-quality music (as opposed to MP3 quality). 7. Identify and explain the four other challenges facing content producers and owners. The other challenges facing content producers and owners are cost, consumer attitudes, cannibalization of existing distribution channels, and rights management. Cost challenges include the fact that Internet distribution is far more costly than was originally anticipated and that there are substantial costs faced by media companies for migrating, repackaging, and redesigning content for online delivery. Consumer attitudes are perhaps the key challenge facing content providers as consumers have strongly resisted paying for Web content. Cannibalization of existing distribution channels is another challenge


traditional media companies must confront. Media companies are often tempted to strike alliances with successful portals or redistributors. The risk is that the media firms brand name will become diluted or displaced by the portal or aggregators brand name. Furthermore, any revenues generated will have to be shared with the intermediary. Content producers must also be very careful about pricing and value when redesigning content for the Web. If the price is set too low, higher-priced and profitable distribution channels could be choked off. For instance, by releasing movies to Netflix too soon after introduction, movie studios face the threat of reducing sales of DVDs, and losing revenue from cable pay-per-view services, not to mention movie box office theater receipts. Rights management challenges include the ability to protect truly highquality content from being stolen, duplicated, and distributed for free and the issue of royalties paid to artists and writers. The uncertainties of content protection are clearly one of the reasons why more high-quality content is not available online. Another reason is the conflict currently being waged between authors and publishers over what a fair royalty scale is for online content, given that the production and distribution costs for each unit of work are substantially reduced. 8. How has the Internet impacted the content that newspapers can offer? Four significant content changes have occurred in the newspaper industry due to the Internet platform. Content has expanded to include current news video of high quality, premium archived content, finegrained searching, and there is more reach and depth of content, and news can now be delivered in a timely manner without the restrictions of a set printing schedule. The timeliness aspect is perhaps the most significant change because instant updates of breaking news stories are now possible, allowing newspapers to compete directly with radio and television. The growing use of video at newspaper Web sites is a clear sign of convergence between television news and newspaper news. 9. What changes have occurred for newspapers in the classified ads department? New entrepreneurial firms such as Craigslist, Monster, Autobytel, and Zillowdeveloped online classified ads for jobs, automobiles, and real estate, while others have concentrated on specialized areas such as computers, cameras, and other hobbyist topics. These new firms did not change online content; they greatly expanded the reach and depth of the content and made it available to national and international audiences. These new ventures challenged the newspaper industry and have drained some of itsr readership, putting a large dent in local newspaper classified revenues. 10. What are the key challenges facing the online newspaper industry? In the next five years, the newspaper industry faces significant challenges and opportunities as the online audience grows in both numbers and sophistication. New technology challenges and costs include developing wireless mobile delivery platforms and micropayment systems to provide a low cost mechanism for selling single articles. Consumer attitudes have remained intransigent on the issue of paying for content although some change is occurring. Some online newspapers have experienced a cannibalization of their main distribution channel (namely by Google). However, online newspapers are slowly learning to add value to their content by providing additional services, content, and depth. Another main challenge is digital leakage that occurs when a paid for and downloaded article is redistributed via e-mail or posted to a Web site where millions of others can view it for free. Current digital rights management software does not conveniently permit newspapers to charge each additional reader of a redistributed article. The DMCA does provide some protection by making it illegal for ISPs or their Web servers to store and distribute pirated copies of copyrighted works. Whether or not Google can rightfully display headlines from leading newspapers is currently being debated. In Europe


the practice has been prohibited in some countries absent the agreement of the newspapers involved. Newspapers of course receive millions of visitors because of Googles display of their headlines. The resolution will likely be a deal between content owners and Google. 11. What are the advantages and disadvantages of e-book content? E-books have advantages over published books in that instant downloading can reduce transaction costs; peoples accessibility to entire libraries will be dramatically increased; and existing text will be searchable and easily integrated with new text via cutting and pasting. They will also permit modularization down to the sentence and word level. This can be much more easily updated or changed, resulting in lower production and distribution costs and a longer lasting work. This should also increase opportunities for writers to publish, increase the availability of out-of-print works, increase the value of book archives, and reduce the cost of library functions in the society, further democratizing access to books. E-books have disadvantages: they require a battery; the devices are expensive (compared to paperback book); the print quality is not as good as printed book. Currently, consumers are learning how to deal with these disadvantages while enjoying the new technology. Print book sales are not down precipitously due to the emergence of e-book readers. 12. How has the Internet changed the packaging, distribution, marketing, and sale of traditional music tracks? Even though the music itself is nearly the same, huge online digital music archives now exist from which users can mix and match to create their own personalized content. As with print media, users can now easily search these collections and have access to timely content. Free music services change the content of the music experience by creating a worldwide community of music aficionados, and the traditional music industry has now created subscription services with their own massive archives of downloadable music. The Internet transforms the consumer experience by providing premium archives, efficient search, timeliness, and enormous reach and depth of content. Arguably, never have so many people listened to music. In this sense, the Internet has greatly expanded the market demand for music and the listening audience. Monetizing this audience is the issue. 13. What are the factors that make non-traditional distinctly Web entertainment sites so popular with users? The factors that emerge as the common themes among popular, non-traditional Web entertainment sites are that they are interactive, communicative, creative, and under the users control. For example, one main reason for the popularity of downloadable music services is that they enable users to become their own packagers and distributors of music. This is the unique feature of non-traditional online entertainment as compared to traditional entertainment; it offers users high levels of control over both program content and program focus. 14. What would complete content convergence in the entertainment industry look like? Has it occurred? Complete content convergence in the entertainment industry would entail purely digital creation, production, and distribution of content with no use of analog devices or physical products and distribution channels. This has not yet occurred. Music is the closest to being transformed today, the traditional CD album containing 15 songs is becoming a dinosaur, as consumers become more and more familiar with downloading single songs a la carte. Distribution is changing from retail stores selling physical product to Internet delivery and playback on a wide variety of digital devices.


Marketing and sales have changed as well, with musicians increasingly using the Internet (MySpace and other similar sites) to promote their music. The changes in the music industry may be a precursor to similar changes in the film and television industries, but as yet, those industries have not been transformed. For movies and television, technology convergence has been hampered by the unwillingness of the industry to make its products available on a wide range of Internet-enabled devices, largely because of concerns over piracy. From a content standpoint, although there has been significant process toward digital content creation tools, television and movies are still delivered primarily on analog platforms, with some slow movement toward digital delivery platforms.

1. Research the issue of media convergence in the newspaper industry. Do you believe that convergence will be good for the practice of journalism? Develop a reasoned argument on either side of the issue and write a 3-to-5 page report on the topic. Include in your discussion the barriers to convergence and whether these restrictions should be eased. Students who believe that convergence will be good for journalism may present arguments that the ability to deliver news across many platforms will lead to a better informed public. They may believe that reporters working more closely together will lead to more objectivity in stories than was previously the case. Furthermore, stories that are presented in one medium may drive readers to another medium to find out more information. These viewer/readers will not be satisfied with simply a rehash of the same story but rather will want in depth coverage of particular stories that interest them. If indeed, as some convergence advocates are claiming, increased advertising will result from higher ratings and increased Web site traffic, students may argue that additional resources will be available for developing news stories more fully. More visibility for a story may increase interest and consequently result in an increase in more in-depth reporting. Students may believe that they can do more together than they could as separates units (i.e., that the sum will be greater than the two parts alone). They may even go so far as to posit that convergence is the economic foundation upon which a resurgence in journalistic standards can be built. On the other side, students who argue that convergence is bad for journalism might posit that less objectivity, less aggressive reporting methods, and less editorial integrity will result with industry convergence into the hands of a few big oligopolies. Overriding corporate issues can easily dampen journalistic zeal. Students may argue that if the goal of convergence is to cut costs and produce news more cheaply, the quality of news stories cant help but be harmed. Instead, a dumbing-down of journalism will occur as print journalism takes on the entertainment values and aspects of television journalism. Furthermore, a homogenization of journalism might occur as fewer voices are heard and less variety of opinion is expressed. News stories might increasingly be used to promote large corporate partners either in their endeavors or more menacingly their viewpoints. These students will likely believe that the foundation upon which a resurgence of journalistic standards can be built, is competition, and that trends towards industry and media convergence are going to decrease competition and damage the likelihood that controversial stories will be covered, especially stories that will reveal problems in the boardrooms and business practices of corporate partners. Another possible problem students might discuss is protections for unnamed sources when multiple parties are working on a story and it is being shared across platforms. There are barriers in federal law to cross platform ownership and concentration in television and other media that are supposed to be enforced by the Federal Communications Commission (FCC). However, these barriers have been weakened over the years by the FCC and in December 2007, the FCC voted to allow media companies to own both a television station and a newspaper in the largest 20 U.S. broadcast markets and allows it in some smaller markets if companies can show they will produce at


least seven more hours of local news a week and prove they need to also own newspapers to stay in business. In 2010 and early 2011, the FCC is in the process of conducting its quadrennial review of ownership rules (as part of the Telecommunications Act of 1996, the FCC must do a review of broadcast multiple ownership rules every four years). Students should discuss the issue of lifting the ban on cross-platform ownership within the context of their arguments. 2. Go to Amazon and explore the different digital products that are available. Prepare a presentation to convey your findings to the class. For example are there Web-accessed, Web-downloadable, dedicated e-books or books for smartphones offered? Which are in greater abundance?

The purpose of this project is to familiarize students with the products that are talked about in the chapter and to keep them apprised of changes in the e-book industry. Presently, Amazon has a Kindle Store that offers both the Kindle Reader and thousands of Kindle edition products. For instance, as of December 2010, there were more than 750,000 books available, as well as subscriptions to many top newspapers and magazines worldwide. Amazon also offers a Kindle for PC and an Apple app that allows readers to read Kindle books on their PCs and iPads and iPhones. Amazon also has a Digital Downloads section that, in addition to the Kindle Store, offers access to Video on Demand, MP3 Downloads, and Game Downloads.

3. Go to (Tampa Bay Online). Surf the site and sample the offerings. Prepare a Microsoft PowerPoint or other form of presentation to describe and display the efforts you see at technology, content, and industry structure convergence as well as the revenue model being used. Who owns this site? At TBO, students will see a convergence strategy in action. Owner Media General operates 21 daily newspapers, 18 TV stations, and a number of different online enterprises, mostly in the southeastern U.S. On this site, the news staffs of TV station WFLA, The Tampa Tribune, and their joint Web site,, interchange stories and reporters, and often work together on their coverage of the Tampa Bay area. News broadcasts can be viewed on the site. Breaking news can be covered on the Internet live, clips used on the 6 oclock and 11 oclock news, and the full story written up for the Tampa Tribune. Content is adapted across platforms, however, content convergence is not terribly significant as yet. The WFLA site looks unmistakably like a television news show and the Tampa Tribune looks unmistakably like a newspaper. Users can define personalized news pages so that the news, information, and advertising that are the most relevant to them can be displayed. The revenue model is primarily advertising supported. Banner ads, search engine ads, classified ads, and a job recruitment center make up the other revenue streams. Communication and collaboration across platforms can be seen along with the adaptation of content from one medium to another.

4. Examine and report on the progress, if any, made with respect to the delivery of movies on demand over the Internet. Students should do a search on the Internet for recent news articles with respect to Internet movies, Internet movies on demand or streaming movies. Students are likely to articles about the increased online viewing of movies and TV shows via such sites as and, an effort by Best


Buy in conjunction with Cinema Now which it purchased in 2010 to allow customers to rent or buy and view movies online, and a similar effort by Walmart in conjunction with Vudu. 5. Has technology platform, content design or industry structure convergence occurred in the online magazine industry and in what ways? Up until recently, there had been very little convergence in the online magazine industry. This is changing some, especially in the fashion industry as fashion Web sites take on many of the features of slick fashion magazines ( Content convergence in the areas of creation, production, and distribution has begun to occur. Online editions of national news magazines increasingly use streaming video, social network links, and user comments ( Newsweek has merged with the DailyBeast. The Web has created the opportunity to leverage print content to the new distribution channel, and single content staffs developing for both the print and online editions have receded as a production model. Increasingly, magazines are developing online content developers, as well as leveraging their star reporters. Industry structure convergence has not occurred, although in the early days of e-commerce it was believed that an entirely new set of online zines would rise to challenge the old giants.


Chapter 10 Social Networks and Communities Objectives

Explain the difference between a traditional social network and an online social network. Explain how a social network differs from a portal. Describe the different types of social networks and online communities and their business models. Describe the major types of auctions, their benefits and costs, and how they operate. Explain when to use auctions in a business. Recognize the potential for auction abuse and fraud. Describe the major types of Internet portals. Explain the business models of portals.

Key Terms
social network, p. 670 online social network, p. 671 general communities, p. 674 practice networks, p. 674 interest-based social networks, p. 674 affinity communities, p. 675 sponsored communities, p. 675 auctions, p. 679 dynamic pricing, p. 679 fixed pricing, p. 679 trigger pricing, p.680 utilization pricing, p. 680 personalization pricing, p. 680 consumer-to-consumer (C2C) auctions, p. 680 business-to-consumer (B2C) auctions, p. 680 watch lists, p. 683 proxy bidding, p. 683 fair market value, p. 685 uniform pricing rule, p. 685 discriminatory pricing, p. 686 bid rigging, p. 686 price matching, p. 686 English auction, p. 686 Dutch Internet auction, p. 688 Name Your Own Price auction, 688 demand aggregators, p. 690 auction aggregators, p. 691 herd behavior, p. 694 winners regret, p. 694 sellers lament, p. 695 losers lament, p. 695 enterprise portals, p. 698 general purpose portals, p. 700 vertical market portals, p. 704


Brief Chapter Outline

Social Network Fever Spreads to the Professions 10.1 Social Networks and Online Communities What Is An Online Social Network? The Difference Between Social Networks and Portals The Growth of Social Networks and Online Communities Turning Social Networks Into Businesses Types of Social Networks and Their Business Models Social Network Features and Technologies The Future of Social Networks Insight on Technology: Social Operating Systems: Facebook vs. Google 10.2 Online Auctions Defining and Measuring the Growth of Auctions and Dynamic Pricing Why Are Auctions So Popular? Benefits and Costs of Auctions Types and Examples of Auctions When to Use Auctions (and for What) in Business Seller and Consumer Behavior at Auctions When Auction Markets Fail: Fraud and Abuse in Auctions Insight on Society: Swoopo: Online Auction or Game of Chance? 10.3 E-commerce Portals The Growth and Evolution of Portals Types of Portals: General Purpose and Vertical Market Insight on Business: The Transformation of AOL Portal Business Models 10.4 Case Study: eBay: Is the Party Over 10.5 Review Key Concepts Questions Projects

Figure 10.1 Top 10 Social Network Sites 2010, p. 672 Figure 10.2 Ad Spending on Social Networks, p. 673 Figure 10.3 Bias in Dynamically Priced Markets, p. 685 Figure 10.4 Auction Profits, p. 694 Figure 10.5 The Top 5 Portal/Search Engine Sites in the United States, p. 704 Figure 10.6 Two General Types of Portals: General Purpose and Vertical Market Portals, p. 705 Figure 10.7 Revenue per Customer and Market Focus, p.752

Table 10.1 Types of Social Networks and Online Communities, p. 674 Table 10.2 Social Network Features and Technologies, p. 676 Table 10.3 Leading Online Auction Sites, p. 681 Table 10.4 Types of Auctions and Dynamic Pricing Mechanisms, p. 687 Table 10.5 A Multi-unit Dutch Internet Auction, p. 689 Table 10.6 Pricelines Name Your Own Price Offerings, p. 689


Table 10.7 Factors to Consider When Choosing Auctions, p. 691 Table 10.8 Types of Auction Frauds, p. 699 Table 10.9 Typical Portal Revenue Sources, p. 706

End of Chapter Questions

1. Why did most communities in the early days of e-commerce fail? What factors enable some online social networks to prosper today? Most communities in the early years of e-commerce failed because non-commercial sites such as The Well could not survive or grow based on subscription fees alone and most for-profit communities experienced great difficulty in generating profits. The costs of content, technology, and customer acquisition as well as the marketing required to achieve a large audience, typically overwhelmed the puny stream of revenues from advertising, tenancy/sponsorship, and subscriptions for premium content. The availability of venture capital finance and Internet technology resulted in many sites serving the same interest and affinity groups, splitting the market into fragments, making it impossible for any one of them to become profitable. The factors that may enable some online vertical communities to prosper today are first, consolidation, which may enable them to attract sufficient market share to become profitable. Second, some are focusing on narrow vertical communities of intensely interested members and keeping marketing costs to a minimum. Third, some are showing signs of enjoying network effects, becoming the dominant players in their small vertical niches. Fourth, as the Internet audience becomes more sophisticated and targeted in its behavior, engaging in less general surfing and more purposive use of the Internet, online vertical communities may yet prosper. Fifth, the growth and acceptance of advertising revenue model even for online communities has greatly enhanced the revenue potential of small but focused communities (an example is which displays ads from Proctor & Gamble). 2. How does a social network differ from a portal? How are the two similar? Social networks involve a group of people, shared social interaction, common ties among members, and people who share an area for some period of time. Portals are general-purpose content providers that have a varied selection of features and capabilities. Social networks are different from portals in that content creation is done almost exclusively by the members of social networks, whereas portals both create and aggregate content from elsewhere. The two are similar in that their goal is to keep visitors on their sites for a long time, or to mold themselves as a sticky destination site. Also, many portals have social networking features. 3. What is an affinity community and what is its business model? An affinity community is one in which members can participate in focused discussions with others who share the same affinity, or group identification, such as religion, ethnicity, gender, sexual orientation, or political beliefs. The business model is a mixture of subscription revenue from premium content and services, advertising, tenancy/sponsorships, and distribution agreements. 4. What is personalization or personal value pricing and how can it be used at the beginning of a products life cycle to increase revenues?


Personalization or personal value pricing is when merchants adjust prices based on their estimate of how much a customer truly values the product. For example, Web merchants may charge committed fans of a musician a higher price for the privilege of receiving a newly released song from a popular artist online before its official release to retail stores. It is a specific type of dynamic pricing in which merchants match their prices to the personal value that consumers will receive from a purchase by estimating what they believe any given consumer is willing to pay. It can be used at the beginning of a products life cycle to increase revenues because a certain consumer segment, the so-called earlyadopter, is willing to pay more for a newly released product. 5. List and briefly explain three of the benefits of auction markets. The benefits of auction markets are: Liquidity: Sellers and buyers are connected in a global marketplace. Price discovery: Even difficult to price items can be competitively priced based on supply and demand. Price transparency: Everyone in the world can see the asking and bidding prices for items, although prices can vary from auction site to auction site. Market efficiency: Consumers are offered access to a selection of goods that would be impossible to access physically, and consumer welfare is often increased due to reduced prices. Lower transaction costs: Merchants and consumers alike are benefited by the reduced costs of selling and purchasing goods compared to the physical marketplace. Consumer aggregation: A large number of consumers who are motivated to buy are amassed in one marketplace: a great convenience to the seller. Network effects: The larger an auction site becomes, in both the numbers of users and products, the greater all of the above benefits become and therefore the more valuable a marketplace it becomes. Market maker benefits: Auction sites have no inventory carrying costs or shipping costs, making them perhaps the ideal online business in that their main function is the transfer of information. 6. What are the four major costs to consumers of participating in an auction? The major costs to consumers of participating in an auction are: Delayed consumption: Auctions can go on for days and the product must then be shipped to the buyer. Buyers will typically want to pay less for an item they cannot immediately obtain. Monitoring costs: Buyers must spend time monitoring the bidding. Equipment costs: Buyers must purchase, or have already purchased, computer systems and Internet service, and learned how to operate these systems. Trust risks: Consumers face an increased risk of experiencing a loss as online auctions are the largest source of Internet fraud. Fulfillment costs: Buyers must pay for packing, shipping, and insurance, and will factor this cost into their bid price. 7. Under what conditions does a seller bias exist in an auction market? When does a buyer bias exist? A seller bias exists in an auction market when there is a single, or only a few sellers and multiple buyers, such that buyers compete against one another to determine the ultimate price of the product. If there are a small number of sellers there is also the possibility that they could freely and openly signal acceptable prices to one another through a transparent marketplace, thereby disadvantaging the


buyer. A buyer bias exists in an auction market when there are one or only a few buyers and many sellers. Sellers must compete against one another for the available business. Examples include: Pricelines reverse auctions and auctions that are conducted in a sealed bid atmosphere like construction or other contracting bids. 8. What are the two price allocation rules in auction markets? Explain the difference. The two price allocation rules in auction markets are uniform pricing and discriminatory pricing. When a uniform pricing rule is in effect, there are multiple winners who all pay the same price, usually the lowest winning bid. The lowest accepted offer sets the price. When a discriminatory pricing rule is in effect, winners pay different amounts depending on the amount they bid. Each customer pays its winning bid. 9. What is an auction aggregator and how does it work? An auction aggregator uses a web crawler or another similar type of search engine computer program to search thousands of Web auction sites, scouring for information on products, bids, auction duration, and bid increments. Consumers can use auction aggregator sites to look for products of interest, and the program will return a list of both fixed-price sales locations and auction locations where the product is for sale. 10. What types of products are well-suited for an auction market? At what points in the product life cycle can auction markets prove beneficial for marketers? The types of products that are well-suited for an auction market include rare and unique products where prices are difficult to discover and where there may have been no market for the goods. These include perishable items such as airline tickets, hotel rooms, car rentals, or tickets to plays, concerts, and sporting events. Traditionally, auctions have been used by businesses to generate a higher profit on items at the end of their life cycle than they would receive from product liquidation sales. However, they are now more frequently being used at the beginning of a products life cycle to generate premium prices from highly motivated early adopters, for example: early releases of music, books, DVDs, video games, and digital appliances. 11. What three characteristics define a portal site today? The three characteristics that define a portal site today are navigation of the Web, providing content, and serving as the starting point for pursuing commerce. Web portals are gateways to the more than four billion Web pages available on the Internet. Originally, their primary purpose was to help users find information on the Web, but they have evolved into destination sites that provide a myriad of content from news to entertainment. 12. What is a vertical market portal and how might recent trends in consumer behavior prove advantageous to this business model? A vertical market portal is a destination site that attempts to attract a highly focused, loyal audience with an intense interest in either a community they belong to or an interest they hold. Recent trends in consumer behavior might prove advantageous to this business model because recent studies have found that users with limited time resources are interested in concentrating their Web site visiting on focused searches in areas that appeal to them.


13. What are the two main types of vertical market portals and how are they distinguished from one another? The two main types of vertical market portals are affinity group portals and focused content portals. Affinity group portals seek to attract statistical aggregates of people who identify themselves by their attitudes, values, beliefs, and behavior. They exist to serve such broad constituencies as women, African Americans and gays, as well as much more focused constituencies like union members, religious groups, and even home schooling families. Focused content portals contain in-depth information on a particular topic in which all members are interested. They can provide content on such broad topics as sports, news, weather, entertainment, finance and business, or they can appeal to a much more focused interest group such as boat, horse, or video game enthusiasts. 14. List and briefly explain the main revenue sources for the portal business model. The main revenue sources for the portal business model are: providing ISP services such as Web access and email services for a monthly fee. general advertising such as charging for the number of banner ad impressions delivered. tenancy deals whereby companies that value having access to their audience will lock in long-term multiple-year deals in which they are guaranteed a certain number of impressions with premium placement on home pages and through exclusive marketing deals, for example, subscription fees. charging for premium content. garnering commissions on sales that are generated from consumers originating from the portal site.

1. Find two examples of an affinity portal and two examples of a focused content portal. Prepare a presentation explaining why each of your examples should be categorized as an affinity portal or a focused content portal. For each example, surf the site and describe the services each site provides. Try to determine what revenue model each of your examples is using and if possible how many members or registered visitors the site has attracted. One example of an affinity portal is the Gifted Homeschoolers Forum ( The group is a non-profit, all-volunteer organization that works to educate and advocate for homeschooling families with gifted children. The groups Web site includes resources and articles from parents and experts, an online community for support and advice, sponsorship of events with nationally known speakers, and a schedule of conferences, lectures and other opportunities. The group also has a Facebook page and a Twitter feed. For men, theres, and for women theres and (aimed at WAHMwork at home mothers). One focused content portal is, which offers a central location for gamers to access information related to gaming across the Web. It offers previews of new games, reviews, news, and an online forum. A games-specific search engine is also available. The site is free to members, and the revenue model, although obviously an advertising mix, is a bit unclear from the site. Students might run into this difficulty for some of their choices. This is a focused content portal providing in-depth information on all aspects of gaming in which all of its members have a keen interest.


Information such as that presented above should be included for all four examples chosen by the students in their presentation. Presentations might also include any recent information the students can find on the status of these companies, and whether or not their niche strategies are in fact working. 2. Examine the use of auctions by businesses. Go to any auction site of your choosing and look for outlet auctions or auctions of items directly from merchants. Research at least three products up for sale. What stage in the product life cycle do these products fall into? Are there quantity purchasing requirements? What was the opening bid price? What are the bid increments? What is the auction duration? Analyze why these firms have used the auction channel to sell these goods and prepare a short report on your findings. For instance at the auction site, students may find a Ubid-certified merchant selling a variety of different products. One example auction offered five new leather case USB keyboards for a 7 Android tablet netbook for a winning bid of $21. For this particular auction, there were 5 available, and no quantity purchasing requirements or reserve prices. The starting bid was $21.00, and the bid increment was $1.00. With about 2 hours left in the auction, there was 1 bid at $21. At Ubid, winning bids follow this order of precedence: bid price, bid quantity (larger over smaller), and initial bid time (earlier over later). 3. Visit one for-profit and one non-profit sponsored social network. Create a presentation to describe and demonstrate the offering at each site. What organizational objectives is each pursuing? How is the for-profit company using community building technologies as a customer relations management tool? The Campbell Soup Company has a sponsored community site at that offers links to the Campbells Kitchen recipes site. The site offers articles on nutrition basics, fitness and exercise, simple steps to eating smart, lifestyle changes and making them work. The objective: to promote the inclusion of Campbells soups in a healthy diet. Visitors can participate in a searchable recipes exchange, create their own personal recipe box, and sign up for Campbells meal mail so that Campbells recipes or offers can be sent to them via e-mail. Visitors are also invited to build a user profile that will help the company to tailor information for customers needs and of course, help them to build a customer database. A daily menu plan index has been set up to give users recipes for all three meals of the day including snacks that meet the daily recommended guidelines for fat, saturated fat, protein, carbohydrates, and sodium. The obvious goals are to extend brand influence and loyalty and to increase offline product sales. In addition to the recipes exchange, other community building technologies that are being used as customer relations management tools on the site are relating company news and product information including a complete listing and product information on all Campbells brands (Pepperidge Farms, V8, Pace, Prego, etc.). At a non-profit sponsored community site such as, offerings include information on communities, home buying, including home buying incentive programs, renting, calendars of community events, lists of schools, and lists of books written about and movies filmed in the area. Objectives of this site include: relaying community information and events to current residents; helping newcomers to settle in the area; and most of all, to promote Baltimore and its many communities as vibrant and active communities in which to live. Relocation products and services are a major offering of the site. Preferred real estate agents are recommended, houses are listed for sale or rent, and listings are offered for attractions, events, bars, restaurants, entertainment, employers, and local media. This site has no interactive community building technologies in use, mainly concentrating on the distribution of information. Projects might include visual presentations of site offerings that back up the organizational objectives students believe the sites are pursuing.


Chapter 11 E-commerce Retailing and Services Objectives

Describe the environment in which the online retail sector operates today. Explain how to analyze the economic viability of an online firm. Identify the challenges faced by the different types of online retailers. Describe the major features of the online service sector. Discuss the trends taking place in the online financial services industry. Describe the major trends in the online travel services industry today. Identify current trends in the online career services industry.

Key Terms
durable goods, p. 724 nondurable goods, p. 724 economic viability, p. 731 gross margin, p. 732 operating margin, p. 732 net margin, p. 732 balance sheet, p. 733 assets, p. 733 current assets, p. 733 liabilities, p. 733 current liabilities, p. 733 long-term debt, p. 733 working capital, p. 733 virtual merchant, p. 733 bricks-and-clicks, p. 742 catalog merchants, p. 744 manufacturer-direct, p. 745 supply-push model, p. 745 demand-pull model, p. 745 service occupations, p. 751 service industries, p. 751 transaction brokering, p. 751 financial portals, p. 758 account aggregation, p. 759 corporate online-booking solutions (COBS), p. 766

Brief Chapter Outline

Blue Nile Sparkles for Your Cleopatra 11.1 The Online Retail Sector The Retail Industry Online Retailing 11.2 Analyzing the Viability of Online Firms Strategic Analysis Financial Analysis 11.3 E-commerce in Action: E-tailing Business Models Virtual Merchants


E-commerce in Action: Multi-channel Merchants: Bricks-and-Clicks Catalog Merchants Manufacturer-Direct Common Themes in Online Retailing 11.4 The Service Sector: Offline and Online Insight on Technology: Using the Web to Shop Till You Drop What Are Services? Categorizing Service Industries Knowledge and Information Intensity Personalization and Customization 11.5 Online Financial Services Financial Services Industry Trends Online Financial Consumer Behavior Online Banking and Brokerage Online Mortgage and Lending Services Online Insurance Services Online Real Estate Services Insight on Society: Hotel Tax Battle: The Online Travel Industry vs. Local Government 11.6 Online Travel Services Why Are Online Travel Services So Popular? The Online Travel Market Online Travel Industry Dynamics Insight on Business: Zipcars 11.7 Online Career Services Its Just Information: The Ideal Web Business? Online Recruitment Industry Trends 11.8 Case Study: Open Table: Your Reservation is Waiting 11.9 Review Key Concepts Questions Projects

Figure 11.1 Composition of the U.S. Retail Industry, p. 725 Figure 11.2 Online Retail and B2C Commerce is Alive and Well, p. 728 Figure 11.3 Industry Consolidation and Integrated Financial Services, p. 754 Figure 11.4 The Growth of Online Banking, p. 757 Figure 11.5 Online Travel Services Revenues, p. 763 Figure 11.6 Projected Growth of Online Travel Market Segments, p. 769

Table 11.1 Whats New in Online Retail, 2010-2011, p. 723


Table 11.2 Advantages and Challenges to Online Retail, p. 729 Table 11.3 Retail E-commerce: Multi-channel Integration Methods, p. 730 Table 11.4 Amazons Consolidated Statement of Operations and Summary Balance Sheet 2007-2009, p. 739 Table 11.5 Traditional Providers of Financial Services, p. 753 Table 11.6 Interest in Online Personal Financial Services, p. 756 Table 11.7 Top Online Banks: September 2010, p. 756 Table 11.8 Top Online Brokerages 2010, p. 758 Table 11.9 Major Online Travel Sites, p. 770 Table 11.10 Popular Online Recruitment Sites, p. 772 Data,

End of Chapter Questions

1. Why were so many entrepeneurs drawn to start businesses in the online retail sector initially? Many entrepreneurs were drawn to start businesses in the online retail sector initially because it was one of the largest market opportunities in the U.S. economy. Many believed that the Internet would revolutionize the retail industry because: Search costs and transaction costs would both be dramatically reduced Market entry costs would be comparatively low Traditional offline physical stores would be forced out of business by falling prices on the Internet Many industries would be disintermediated, destroying the middleman and the associated markups, establishing the Web as the single dominant marketing channel. 2. What frequently makes the difference between profitable and unprofitable online businesses today? Today, the difference between profitable and unprofitable online businesses is, for the most part, dependent upon a strong brand name. Multi-channel firms with a strong brand name have leveraged their supportive infrastructures and financial resources to exploit the new marketing channel. 3. Which segment of the offline retail business is most like online retailing? Why? Of the different retail segments, the one that is the most like online retailing is MOTO, mail order/telephone order. It is similar because MOTO retailers and pure Web retailers do not have physical stores; they both use a catalog to display products and are both very dependent on credit card technologies, without which neither would be possible on a national scale. They both must also have very effective order fulfillment systems and procedures. 4. Name the largest segment of U.S. retail sales. Explain why businesses in this segment have achieved and continue to dominate online retailing.


The largest single segment of U.S. retail sales is durable goods. In the early days of e-commerce, sales of small-ticket non-durable goods vastly outnumbered those of large-ticket items. But the recent growth of big ticket, durable goods has changed the overall sales mix. In addition, retailers of durable goods use the Web as an information tool, and this also translates into sales. It is probably not accurate to say at this time that any one sector dominates online retailing. 5. Describe the technological retailing revolution that preceded the growth of e-commerce. What were some of the innovations that made later online retailing possible? The technological revolution that preceded the growth of e-commerce was the mail order/telephone business. Without physical stores, MOTO retailers distribute millions of printed catalogs and operate large telephone call centers to accept orders. They have developed highly efficient order fulfillment centers that can ship orders within 24 hours. The innovations that occurred in the 1970s and 1980s that made this the fastest growing retail segment during this time period were improvements in the national toll-free call system and the growth of the credit card industry. The efficiencies that were developed in order fulfillment and credit card technologies were the necessary precursors to online retailing. 6. Name two assumptions e-commerce analysts made early on about consumers and their buying behavior that turned out to be false. Two assumptions that e-commerce analysts made early on about consumers and their buying behavior that turned out to be false were that they would be rational and cost-driven. Instead, consumers are attracted to stable, well-known retail brands and have demonstrated that other factors such as reliability, trust, fulfillment, and customer service are equally important. This does not mean consumers are non-rational, but simply that they are willing to pay extra for branded goods and services. 7. Why were customer acquisition costs assumed early on to be lower on the Web? What was supposed to reduce those costs? It was assumed that customer acquisition costs would be lower on the Web because search engines would almost instantaneously connect customers to online vendors. 8. Explain the distinction between disintermediation and hypermediation as it relates to online retailing. Disintermediation in online retailing occurs when manufacturers or their distributors build a direct relationship with the consumer and the traditional retail intermediaries or middlemen are eliminated. Hypermediation on the other hand, occurs when virtual firms outsource all of their warehousing and order fulfillment functions, creating a number of new intermediaries who are necessary for these firms to function.


9. How would you describe the top 10 online retailers as a group? Do they account for a small or large percent of online business, for example? The top online shopping destinations include both pure-play and multi-channel firms. In general, they are merchants of relatively small-ticket nondurable goods (computers, consumer electronics, office supplies, apparel, books, etc). Together they account for about one-third of all online buying. 10. Compare and contrast virtual merchants and bricks-and-clicks firms. What other type of online retailer is most like the virtual merchant? Virtual merchants are single-channel Web firms that generate almost all of their revenue from online sales. Bricks-and-clicks firms, on the other hand, have a network of physical stores as their primary retail channel, but have also introduced online offerings. They are often multi-channel firms with catalog or other retail channels already established. Virtual merchants do not have to bear the costs associated with building and maintaining physical stores, but they face large costs in building and maintaining Web sites and in building a brand name presence. Bricks-and-clicks firms have the high costs of maintaining physical buildings and large sales staffs, but they have an already established brand name, a national customer base, warehouses, large scale, an already trained staff, and consequently, much lower customer acquisition costs. Virtual merchants, like all retail firms, face very low margins (the difference between the retail price for goods and the cost of the goods to the retailer) therefore they must achieve highly efficient operations in order to make a profit. Bricks-and-clicks firms are already used to operating in these thin margins and have already invested in the purchasing and inventory control systems that enable them to control costs. Bricks-and-clicks firms must figure out how to leverage their strengths and assets to the Web. They face the costs of building and maintaining a creditable Web site, hiring new skilled staff, and building rapid response order entry and fulfillment systems, but so do virtual merchants. MOTO (with an online presence) is the retailing group most like virtual merchants because they typically did not have a physical store presence. For MOTO firms, making the transition from catalog marketing to online marketing is comparatively easy because they have well developed fulfillment and delivery processes. 11. What is the difference between a supply-push and a demand-pull sales model? Why do most manufacturer-direct firms have difficulty switching to one of these? A supply-push sales model refers to a business model in which products are manufactured prior to orders for them being received, based upon calculations of what the estimated demand for the product will be. Demand-pull, on the other hand, refers to a business model in which products are not manufactured until orders are received. Manufacturers attempting to successfully pursue a demand-pull sales model must have the supporting supply chain management capabilities, an efficient order center, and the manufacturing capabilities to support it. Many manufacturer-direct firms have difficulty switching to the demand-pull model because they lack these necessary ingredients. They have difficulty in using either sales model when they develop an online strategy of selling directly to consumers because they face channel conflict with the


physical retailers of their products. The risk is that the traditional retailers of the manufacturers goods will become disadvantaged from a price standpoint as they have to compete directly with the manufacturer. They may also be disadvantaged in their ability to maintain inventory that is as current as the manufacturer. The result can be that these traditional marketing channels are cannibalized by the manufacturers efforts to establish a direct relationship with its customers. Unless manufacturers can be assured that the elimination of this marketing channel will not negatively impact sales and revenue, they must proceed with caution in pursuing the manufacturer-direct business model, or they must take the necessary steps to assure the continued existence of their retailing business partners. 12. What are five strategic issues specifically related to a firms capabilities? How are they different from industry-related strategic issues? The five strategic issues that are specifically related to a firms capabilities are an evaluation of the firms value chain, its core competencies, its available synergies, and the social and the legal challenges. In analyzing the economic viability of a firm one must understand whether the firm, has adopted business systems that will enable it to operate at peak efficiency and whether there are looming technological changes that might force it to change its processes or methods; this is the firms value chain. It is also necessary to assess whether the firm has any unique skills that cannot be easily duplicated by its competitors and whether technological changes might invalidate these core competencies. Furthermore, one must examine whether there are competencies or assets available to the firm from related establishments that it owns or with which it has established strategic partnerships. Finally, the social and legal horizon must be considered to determine if the firm may be vulnerable to legal challenges or if it has taken into account consumer trust and privacy issues that could cause it to lose business or cause public relations problems. These strategic issues are different from those used to assess the industry as a whole because they focus on the particular issues and capabilities of an individual firm. The industry strategic factors concentrate on the competitive forces within the industry such as: the facility with which competitors can enter the market. the existence of substitute products. the basis of the competition within the industry. the power of the suppliers and customers in the industry. the structure and possible changes in the industry production and distribution chains. 13. Which is a better measure of a firms financial health: revenues, gross margin, or net margin? Why? The best measure of a firms financial health is net margin, which sums up in one number how successful a company has been at making a profit on each dollar of sales. A negative net margin means that a company is losing money on each sale. 14. What are some of the difficulties in providing services in an online environment? What factors differentiate the services sector from the retail sector, for example?


Some of the difficulties involved in providing services online are that many are hands-on type industries such as the legal, medical, and accounting professions. These professionals need to interact directly with their clients in order to provide their service, but the Internet can be used to assist these services by providing consumers with information, knowledge, and communication. The factors that differentiate the services sector from the retail sector are that instead of an actual physical product that has value, the value for services is based mainly on the collecting, storing, and exchanging of information. 15. Compare and contrast the two major types of online service industries. What two major features differentiate services from other industries? The two major types of service industries are transaction brokering and hands-on services. Transaction brokers act as intermediaries to facilitate a transaction. For example, stockbrokers facilitate a stock transfer between a buyer and a seller; online mortgage companies refer customers to the actual issuing mortgage company. In contrast, the hands-on services use the Internet by and large to impart information and to communicate with their customers. The two major features that differentiate the service industry from other industries are that they are for the most part knowledge and information intense, and that just about all services entail some amount of personalization and customization. Except for the providers of physical services such as cleaning and gardening, service industries generally process a lot of information and employ a highly-skilled, educated workforce. Many services, such as the legal, medical, and accounting services, require extensive personalization. Others, such as financial services, benefit from customization by allowing clients to choose from a menu of options that are of interest to them. 16. Name and describe the three types of online mortgage vendors. What are the major advantages of using an online mortgage site? What factors are slowing the growth of such service businesses? The three types of online mortgage vendors are: established banks, brokerages, and lending organizations such as Chase Manhattan and Wells Fargo pure online mortgage bankers/brokers such as and which expedite mortgage shopping, and provide loan comparisons and professional advice mortgage brokers such as that offer visitors access to hundreds of vendors. The major advantages of using an online mortgage site are that there are reduced application times, increased market interest rate intelligence, and process simplification. These take place because all of the participants in the process, including the lending, insurance, and title companies, share a common information base. The factors that are slowing the growth of these companies, however, are that the mortgage process is sufficiently complex that it requires multiple signatures on multiple documents and there are financial detail complexities. These complexities include closing cost differences and mortgage loan points which make it difficult for consumers to make online comparisons between firms. 17. What is the biggest deterrent to growth of the online insurance industry nationally? The biggest deterrent to online insurance industry growth is that insurance products are complex with many different types of coverage in each insurance group (e.g., non-automotive property and casualty, workers compensation, marine, accident, liability, fire, homeowners, commercial, etc.). Furthermore, writing a policy can be very information intense, requiring a personal inspection of property or


considerable actuarial experience and data. Complicating this situation is the fact that there is no federal regulation of the industry. Instead, each state has its own set of regulations overseen by the 50 different state insurance commissions. Web sites must obtain licenses to enter the insurance business in every state where they intend to provide quotes or sell insurance. 18. Define channel conflict and explain how it currently applies to the mortgage and insurance industries. Name two online insurance companies or brokers. Channel conflict is defined as the conflict that occurs when a new venue for selling products or services threatens to destroy existing venues for selling these items. It has discouraged growth in the online mortgage and insurance industries; up until recently, it had deterred the major insurance and mortgage underwriting companies from offering competitive products directly on the Web because they did not want to damage the business operations of their traditional local agents. Some of the leading online insurance companies are Answerfinancial,, InsWeb, Quotesmith, Accuquote, SelectQuote, and eHealthinsurance. 19. What is the most common use of real estate Web sites? What do most consumers do when they go there? The most common use of real estate Web sites is conducting research, which influences offline decisions. Users visit real estate sites to view the properties that are available for purchase and to research appraisal reports, neighborhood sales histories, school district data, crime reports, as well as social and historical information on neighborhoods. They can also link to mortgage lenders, credit reporting agencies, house inspectors, or surveyors, and use other features such as loan mortgage calculators. 20. Name and describe the four types of services provided by financial services firms on the Web. The four types of services provided are storage and access to funds, protection of assets, means to grow assets, and movement of funds. Storage of and access to funds is provided by banking institutions through checking and savings accounts; protection of assets is provided through insurance; the means to grow assets is provided by brokerage and investment firms through financial planning or brokerage and trading accounts; and the movement of funds is provided by electronic bill paying, digital wallets, or credit and debit card services. 21. Who are the major players in the financial industry consolidation currently occurring worldwide? The major players are the banks, brokerages, and insurance firms, which since the Financial Reform Act of 1998 can merge and develop nationwide banks. Citibank for example, purchased Travelers Insurance while E* purchased Telebank. Previously, the Glass-Steagall Act of 1934 legally separated the banking, finance, brokerage, and insurance industries, and large banks were prevented from owning banks in other states. 22. Explain the two global trends impacting the structure of the financial services industry and their impact on online operations. The two global trends are industry consolidation and the movement towards integrated financial services. Once the banks, brokerages, and insurance companies were permitted by the Financial


Reform Act of 1998 to own one another, they could begin to provide customers with integrated cash management and brokerage accounts and financial supermarkets where consumers could find any financial product or service found at a physical branch bank. While this vision has not yet become a reality, the Internet has provided the technical foundations for the online financial supermarket where eventually, a customer will be able to arrange for a car loan, obtain a mortgage, receive investment planning advice, and establish a pension fund at one institution with one account. Consolidation of the financial industry has lead to the integration of financial services, which will eventually result in financial supermarkets where a customized, integrated financial services package can be offered to consumers based upon a complete understanding of their financial behavior, life cycle status, and unique needs. 23. How have travel services suppliers benefited from consumer use of travel Web sites? Travel services suppliers have benefited from consumer use of travel Web sites since the Internet is becoming the most common channel used by consumers to research travel options, search for prices, and book reservations for airline tickets, rental cars, hotel rooms, cruises and tours. For the suppliers: the owners of the hotels, rental cars, and airlines, this means that millions of consumers are aggregated into a singular focused customer pool that can be efficiently reached with advertising and promotions. Furthermore, the suppliers of travel services often have excess capacity that they are always looking to fill, and this aggregation of customers makes it easy for them to do so. 24. Name and describe the five traditional recruitment tools companies have used to identify and attract employees. What are the disadvantages of such tools in light of new online sites? The five traditional recruitment tools that companies have used to identify and attract employees are: classified and print advertising, career expos, on-campus recruiting, private employment agencies, and internal referral programs. The disadvantages of these tools in light of the new online sites are first, that print advertising usually includes a per-word charge that limits the amount of detail employers will provide about a job opening and also limits the amount of time an ad will run. Second, career expos do not allow for a pre-screening process to weed out unsuitable candidates, and they are limited by the amount of time a recruiter can spend with each candidate. Third, staffing firms charge high fees and they have a limited, usually local, pool of candidates. Fourth, on-campus recruiting firms are also limited in the amount of time that can be spent per candidate as well as in how many candidates can be seen each visit, necessitating multiple visits to some campuses. Fifth, internal referral programs can sometimes encourage employees to propose unqualified candidates so that they will qualify for the rewards and incentives offered. 25. In addition to matching job applications with available positions, what larger function do online job sites fill? Explain how such sites can affect salaries and going rates? In addition to matching job applicants with available positions, online sites also serve the larger function of automating this information-intense business process, reducing search times and costs for all parties. These sites can also affect salaries and going rates by establishing market prices and terms. Online recruitment sites identify salary levels for both employers and job hunters and lay out the skill sets required to achieve those salary levels. They serve as online national marketplaces to establish the terms of trade in the labor market, thus their existence should lead to a rationalization of wages, greater labor mobility, and higher efficiency in recruitment and operations as employers are able to more quickly fill positions.


1. Find the Securities and Exchange Web site at and access the EDGAR archives, where you can review 10-K filings for all public companies. Search for the 10-K report for the most recent completed fiscal year for two online retail companies of your choice (preferably ones operating in the same area, such as Staples Inc. and Office Depot). Prepare a presentation that compares the financial stability and prospects of the two businesses, focusing specifically on the performance of their respective Internet operations.

Students who choose to investigate Staples and Office Depot will find their most recent Form 10-Ks (annual report) and 10-Qs (quarterly report) in the EDGAR archives. Because neither Staples nor Office Depot report Internet sales from their retail sales results, students will need to supplement the information they can extract from the SEC filings with further research on the Internet sales channel performance of these two companies. This is done by searching industry Web sites and other information available online.

2. Examine the financial statements for Amazon and Best Buy Co. Inc. What observations can you make about the two businesses? Which one is stronger financially and why? Which ones business model appears to be weaker, and why? If you could identify two major problem areas for each, what would they be? Prepare a presentation that makes your case.

Both Amazon and Best Buy Co. Inc. are public companies, so their most recent financial reports can be obtained at This research should be supplemented by searching industry publications such as Internet Retailer, and the popular financial press, as well as examining any relevant press releases issued by the companies. Best Buy is a clicks-and-bricks firm, whereas Amazon is strictly online. Both operate very large logistics and warehousing operations, but Best Buy also has to support physical stores.

3. Conduct a thorough analysisstrategic and financialof one of the following companies or another of your own choosing: Bluefly Inc.,, Inc., or Prepare a presentation that summarizes your observations about the companys Internet operation and future prospects. Bluefly Inc.,, Inc., and are all public companies, so much strategic and financial information can be derived from their financial statements and other reports filed with the SEC at This research should be supplemented with additional information gleaned from online research about the company chosen, as discussed for Project #2 above. 4. Find an example not mentioned in the text of each of the four types of online retailing business models. Prepare a short report describing each firm and why it is an example of the particular business model. Students may find for example:


Bricks-and-clicks: Macys (formerly called Federated Department Stores), is a successful department store with stores around the country. Virtual merchant: Bluefly This is an online outlet store with no physical outlets. They provide brands found in upscale department stores at discounts by buying from resellers (rather than the designers) on the wholesale prices. They pass the savings on to the customer. However, they must buy what is available to them at a deep discount, so not all sizes of a particular item will always be in stock. Bluefly is a NASDAQ public company (ticker symbol BFLY). Catalog merchant: Fingerhut was already a successful catalog business and has now leveraged that success to an online presence. They offer a broad range of products in a variety of categories. Manufacturer direct: Fortin Iron Works has always been a manufacturer direct merchant of ornamental ironworks. This metal fabrication company based in Columbus, Ohio and founded in 1946, employs skilled craftsmen, artisans, estimators, salesmen and installers. They sell ornamental iron products such as driveway gates, walkway gates, fence, rail, curtain rods, production components, and also several lines of outdoor and indoor furniture with accessories. They also carry a line of sporting equipment including complete basketball units, soccer goals and lacrosse goals. Most products can now be purchased online including fencing, gates, planters and accessories such as pot rings, brackets, trellises, lamps and tables.

5. Drawing on material in the chapter and your own research, prepare a short paper describing your views on the major social and legal issues facing online retailers. Some issues students might discuss in their research paper might include: What will organizations have to do in order to protect their intellectual property rights? What measures will have to be taken regarding privacy issues? How will they address consumer concern over the lack of control they feel they have over personally identifiable information? Are online retailers going to be prepared to answer inquiries from customers regarding the content of their specific files? Will management-level positions be needed for procedures like the deletion and updating of consumer information? If there are mistakes in those files, could it result in legal trouble for companies? How will they address consumer privacy concerns, convincing consumers that purchasing goods online is a confidential transaction between the consumer and the merchant? What will online retailers have to do to be prepared for any changes in tax law? 6. Conduct a thorough analysis strategic and financial of one of the following web sites:,, or Prepare a PowerPoint or other presentation that summarizes your observations about the companys operations and future prospects. Progressive Corp (OH),, and are all public companies so students should first go to and access the EDGAR archives for the companys most recent Form 10-K and Form 10Q. Students should also visit the company Web sites to find current information. They should check About the Company pages, press releases, and use Google to search for popular articles. 7. Choose a services industry not discussed in the chapter (such as legal services, medical services, accounting services, or another of your choosing). Prepare a 3-to-5 page report discussing recent trends affecting online provision of these services.


Students may find, for example, legal service firms that provide legal self-help, forms, and occasionally advice; one such site is Nolos mission is to make the legal system work for everyonenot just lawyers. Nolo tries to help people handle their own everyday legal matters or learn enough about them to make working with a lawyer a more satisfying experience. They offer plain-English books, software, and forms. Nolos value proposition is, of course, convenience and 24-hour access to legal help. 8. Together with a teammate, investigate the use of wireless applications in the financial services industries. Prepare a short joint presentation on your findings. Students will likely discover that in the highly competitive financial services industries in which the value proposition for customers is convenience, that banks and financial institutions have some of the most advanced wireless and mobile applications. Smartphones have suddenly increased the demand for mobile financial services. Analysts and industry experts believe this is so because wireless is a natural fit for the financial services industries, which are high-demand and high-value and must be conducted in real-time. Students might also include in their papers: a discussion of the security issues involved with the use of wireless applications in the financial services industries, how wireless safeguards will be integrated with security processes and technologies that are already in place, and what new security threats exist. Students might discuss the limitations facing developers due to the limited screen size of smartphones (requiring a reformatted Web page), how strong authentication and encryption will play a part, and whether security concerns might put a damper on the market for mobile financial services. One example of a financial services wireless application is Fidelity Investments Fidelity Anywhere, which has applications that span 14 business units (including 401(k) services, insurance, portfolio advisory services and even its transportation business, Boston Coach). The services are available from any wireless device, including cell phones. 9. Find at least two examples of companies not mentioned in the text that act as transaction brokers and at least two examples of companies that provide a hands-on service. Prepare a short memo describing the services each company offers and why the company should be categorized as a transaction broker or a hands-on service provider. Students may find, for example: Transaction broker: Liberty Trading ( is a member of the National Futures Association and is a full service brokerage firm in the commodities trade. It performs research and analysis of the commodities market and passes this information along to its clients. The firm trades in all markets, on all the major U.S. exchanges, and accepts both speculative and hedge accounts. The company has an operation in St. Petersburg, Florida as well as a Web presence, and requires a minimum opening deposit of $10,000. It offers full-service, semimanaged, and managed accounts and also provides Web access to charting, quotes, daily worldwide research, and online market commentary. In a full-service account, hands-on service is promised, but this company still falls into the transaction broker category because it is serving as an intermediary for its clients in the futures trading business. It fits the transaction broker business model because it gathers information together and offers this collection of information and its services as the broker in commodities trading transactions. Transaction broker: is an online career site for technology, engineering, and securitycleared professionals. Employers and recruiters in a variety of industries pay Dice for access to its online recruiting services to help them find the right employee or contractor. Job seekers post


resumes, search Dices database of consulting and contract job postings, and also use its career resources. Hands-on service: National Medical Services ( is a full-service, independent laboratory providing bio-analyses for a broad range of compounds. It also offers analytical and consultative services in therapeutic drug monitoring, environmental/occupational toxicology, forensic toxicology, and criminology. It performs preclinical safety studies to support the development of pharmaceutical products, forensic autopsy analysis to assist coroners, medical examiners and pathologists in making cause-of-death determinations, poison identification, crime lab services including serology, physical evidence analysis and substance identification, and will also provide expert witness testimony in support of its testing. The Web presence is for information, communication, and contacting purposes only, with a full alphabetical listing of all analyses/tests available from NMS and all sales literature available online. Hands-on service: One Point BPO ( provides real-time online accounting services to small and medium-sized businesses. The Web-based service utilizes an easy to use online interface to provide anytime/anywhere financial reporting.


Chapter 12 B2B E-commerce Objectives

Define B2B commerce and explain its scope and history. Explain the procurement process, the supply chain, and collaborative commerce. Identify the main types of B2B commerce: Net marketplaces and private industrial networks. Explain the four types of Net marketplaces. Identify the major trends in the development of Net marketplaces. Identify the role of private industrial networks in transforming the supply chain. Explain the role of private industrial networks in supporting collaborative commerce.

Key Terms
total inter-firm trade, p. 795 B2B commerce, p. 795 Internet-based B2B commerce (B2B e-commerce), p. 795 automated order entry systems, p. 795 seller-side solutions, p. 796 electronic data interchange (EDI), p. 796 buyer-side solutions, p. 796 hub-and-spoke system, p. 796 vertical market, p. 796 horizontal markets, p. 796 B2B electronic storefronts, p. 796 Net marketplace, p. 796 private industrial networks (private trading exchange, PTX) p. 797 procurement process, p. 799 supply chain, p. 799 direct goods, p. 800 indirect goods, p. 800 MRO goods, p. 800 contract purchasing, p. 800 spot purchasing, p. 800 multi-tier supply chain, p. 801 legacy computer systems, p. 802 materials requirement planning (MRP) system, p. 802 enterprise resource planning (ERP) system, p. 802 supply chain management (SCM), p. 803 tight coupling, p. 803 supply chain management (SCM) systems, p. 806 collaborative commerce, p. 807 e-distributor, p. 814 e-procurement Net marketplace, p. 815 value chain management (VCM) services, p. 815 exchange, p. 816 liquidity, p. 817 industry consortium, p. 819 trans-organizational business process, p. 823 collaborative resource planning, forecasting, and replenishment (CPFR), p. 825


Brief Chapter Outline

Volkswagen Builds its B2B Net Marketplace 12.1 B2B E-commerce and Supply Chain Management Defining and Measuring the Growth of B2B Commerce The Evolution of B2B Commerce The Growth of B2B Commerce 2009-2014 Potential Benefits of B2B E-commerce The Procurement Process and the Supply Chain Trends in Supply Chain Management and Collaborative Commerce Insight on Technology: RFID Autoidentification: Making Your Supply Main Types of Internet-based B2B Commerce 12.2 Net Marketplaces The Variety and Characteristics of Net Marketplaces Types of Net Marketplaces The Long-Term Dynamics of Net Marketplaces 12.3 Private Industrial Networks What Are Private Industrial Networks? Characteristics of Private Industrial Networks Private Industrial Networks and Collaborative Commerce Insight on Business: Wal-Mart Develops a Private Industrial Network Implementation Barriers Industry-Wide Private Industrial Networks The Long-Term Dynamics of Private Industrial Networks 12.4 Case Study: Elemica: Cooperation, Collaboration, and Community 12.5 Review Key Concepts Questions Projects

Chain Visible

Figure 12.1 The Evolution of the Use of Technology Platforms in B2B Commerce, p. 795 Figure 12.2 Growth of B2B Commerce 2000-2014, p. 796 Figure 12.3 The Procurement Process, p. 800 Figure 12.4 The Multi-Tier Supply Chain, p. 802 Figure 12.5 The Evolution of EDI as a B2B Medium, p. 804 Figure 12.6 Supply Chain Management Systems, p. 807 Figure 12.7 Elements of a Collaborative Commerce System, p. 810 Figure 12.8 Two Main Types of Internet-Based B2B Commerce, p. 811 Figure 12.9 Pure Types of Net Marketplaces, p. 813 Figure 12.10 E-distributors, p. 814 Figure 12.11 E-procurement Net Marketplaces, p. 816 Figure 12.12 Exchanges, p. 817 Figure 12.13 Industry Consortia, p. 819 Figure 12.14 Net Marketplace Trends, p. 822 Figure 12.15 Procter & Gambles Private Industrial Network, p. 824 Figure 12.16 Pieces of the Collaborative Commerce Puzzle, p. 828


Figure 12.17 An Industry-wide Private Industrial Network, p. 830

Table 12.1 Major Trends in B2B E-commerce, 2010-2011, p. 794 Table 12.2 Other Characteristics of Net Marketplaces: A B2B Vocabulary, p. 813 Table 12.3 Examples of Independent Exchanges, p. 818 Table 12.4 Industry Consortia by Industry (September 2010), p. 820

End of Chapter Questions

1. Explain the differences among total inter-firm trade, B2B commerce, and B2B e-commerce. Before the Internet, business-to-business transactions were referred to as the procurement process. Today, the procurement process can be thought of as total inter-firm trade, which is the total flow of value among firms. B2B commerce describes all types of computer assisted, inter-firm trade. B2B ecommerce specifically describes that portion of B2B commerce that uses the Internet to assist firms in buying and selling a variety of goods to each other. 2. What are the key attributes of electronic storefronts? What early technology are they descended from? The two key attributes that distinguish an electronic storefront are: they use the Internet as the communication media instead of private networks they tend to serve horizontal markets, that is, they carry products that serve a wide variety of industries. Automated order entry systems preceded electronic storefronts. 3. List at least five potential benefits of B2B e-commerce B2B e-commerce promises many strategic benefits for participating firms, both the buyers and the sellers including: lower administrative costs. lower search costs for buyers. reduced inventory costs due to increased competition among the suppliers (which increases price transparency) and reducing inventory to a bare minimum. lower transaction costs due to the elimination of paperwork and the partial automation of the procurement process. increased production flexibility by ensuring delivery of parts just-in-time. improved quality of products due to increased cooperation among buyers and sellers, reducing quality issues. decreased product cycle time due to the sharing of designs and production schedules with suppliers. increased opportunities for collaborating with suppliers and distributors. increased price transparency. 4. Name and define the two distinct types of procurements firms make. Explain the difference between the two.


The two types of procurements that firms make are for direct goods and indirect goods. Direct goods are directly involved in the production process such as the sheet steel used to produce an automobile body. Indirect goods are all other goods that are needed to carry out the production process, but are not directly involved in creating the end product. They include office supplies and maintenance products, which are often called MRO (maintenance, repair and operations) goods. 5. Name and define the two methods of purchasing goods. The two methods of purchasing goods are contract purchases and spot purchases. Contract purchases are long-term agreements to buy a specified amount of a product. There are pre-specified quality requirements and pre-specified terms. Spot purchases are for goods that meet the immediate needs of a firm. Indirect purchases are most often made on a spot purchase basis in a large marketplace that includes many suppliers. 6. Define the term supply chain and explain what SCM systems attempt to do. What does supply chain simplification entail? The supply chain refers to the series of transactions that links sets of firms that do business with each other. It includes not only the firms themselves, but also the relationships between them and the processes that connect them. SCM (supply chain management) systems attempt to coordinate and link the activities of suppliers, shippers, and order entry systems to automate the order entry process from start to finish. This includes the purchase, production, and moving of a product from a supplier to a purchasing firm. Supply chain simplification refers to the reduction of the size of a firms supply chain. Firms today generally prefer to work closely with a strategic group of suppliers in order to reduce both product costs and administrative costs. Long-term contract purchases containing pre-specified product quality requirements and pre-specified timing goals have been proven to improve end product quality and ensure uninterrupted production. 7. Explain the difference between a horizontal market and a vertical market. Horizontal markets serve a myriad of different industries. An electronic storefront is an example of a horizontal market in that it tends to carry a wide variety of products that are useful to any number of different industries. Vertical markets, on the other hand, provide expertise and products targeted to a specific industry. EDI (electronic data interchange) systems usually serve vertical markets. 8. How do the value chain management services provided by e-procurement companies benefit buyers? What services do they provide to suppliers? The value chain management services benefit buyers by automating a firms entire procurement process including purchase orders, requisitions, sourcing, business rules enforcement, invoicing, and payment. For the suppliers, they provide automation of the entire selling business process including catalog creation and content management, order management, fulfillment, invoicing, shipment, and settlement. 9. What are the three dimensions that characterize an e-procurement market based on its business functionality? Name two other market characteristics of an e-procurement Net marketplace. The three dimensions that characterize an e-procurement market based on its business functionality are that (1) they are horizontal marketplaces (2) in which long-term contractual purchasing agreements are


used (3) to buy indirect goods. Other market characteristics of e-procurement Net marketplaces are that they are independently owned, that they are many-to-many markets, and that they use fixed price catalogs. E-procurement companies serve as intermediaries connecting hundreds of online suppliers offering millions of MRO goods to business firms who pay a fee to join the market, thus it is a public marketplace. They are mediated by an independent third party that purports to represent both buyers and sellers; however, they are likely to have a bias in favor of the buyer because they include the catalogs of competing suppliers and competing e-distributors. 10. Identify and briefly explain the anti-competitive possibilities inherent in Net marketplaces. The anti-competitive possibilities inherent in Net marketplaces include: The possibility that they may provide some firms with an ideal platform to collude on pricing, market sharing, and market access. For example, in a Net marketplace owned by large industry players, owner-members could collude with one another on the prices they are willing to pay for inputs. The sharing of information in order to reach market-sharing agreements in which they divide the market up into segments and agree to produce only enough for their allocated segment. The coordination of a reduction in purchases, forcing the suppliers to sell their inputs below market prices. The restriction of market access if large industry players exclude smaller rivals, thus forcing them to pay higher prices for their inputs. 11. List three of the objectives of a private industrial network. The objectives of a private industrial network may include to: develop efficient industry-wide purchase and selling business processes. develop industry-wide resource planning to supplement enterprise-wide resource planning. create increasing supply chain visibility so that the inventory levels of buyers and suppliers will be known to the participants. achieve closer buyer-supplier relationships, including demand forecasting, communications, and conflict resolution. foster operations on a global scale. reduce industry risk by preventing imbalances in supply and demand, including developing financial derivatives, insurance, and future markets. 12. What is the main reason why many of the independent exchanges developed in the early days of ecommerce failed? The main reason is they failed to attract enough players to achieve liquidity. That is, the number of buyers and sellers in the market, the transaction volume, and the size of the transactions were insufficient to sustain a profit. 13. Explain the difference between an industry consortium and a private industrial network. Private industrial networks, which presently dominate B2B commerce, are Web-enabled networks for coordinating trans-organizational business processes (collaborative commerce). These networks range in scope from a single firm to an entire industry. Although the central purpose of a private network is to provide industry-wide global solutions to achieve the highest levels of efficiency, they generally start


with a single sponsoring company that owns the network. This differentiates private markets from industry consortia, which are usually owned collectively by major firms through equity participation. 14. What is CPFR, and what benefits could it achieve for the members of a private industrial network? CPFR (collaborative resource planning, forecasting, and replenishment) involves working with network members to forecast demand, develop production plans, and coordinate shipping, warehousing, and stocking activities. The goal is to ensure that retail and wholesale shelf space is precisely maintained. The benefits it could achieve for private industrial network members are that hundreds of millions of dollars of excess inventory and capacity could be wrung out of an industry. 15. What are the barriers to the complete implementation of private industrial networks? One barrier is that participating firms are required to share sensitive data with their business partners up and down the supply chain. This is a huge corporate mindset change since what was previously considered proprietary and secret must now be shared. Furthermore, in the digital environment, it can be difficult to control the limits of this information sharing. Information that a firm willingly gives to its largest customer may wind up being shared with its closest competitor. Other barriers include difficulties in integrating private industrial networks into existing ERP (enterprise resource planning) systems and EDI (electronic data interchange) networks. Most ERP systems were not designed initially to work with extranets or even to be particularly Internet compliant; they were based on business models that use entirely internal business processes. Furthermore, changes in corporate culture and attitudes organization-wide and among all employees are essential so that a shifting of allegiances occurs from the firm to the wider trans-organizational enterprise. This is difficult to achieve. Employees must recognize that the firms fate is intertwined with that of their suppliers and distributors. Suppliers in turn, must change how they manage and allocate resources because their own production is closely aligned with the demands of the private industrial network partners. A loss of independence among all participants in the supply and distribution chains occurs and this requires huge behavioral changes in individual organizations in order for their participation to reap the benefits of participation.

1. Choose an industry and a B2B vertical market maker that interests you. Investigate the site and prepare a report that describes the size of the industry served, the type of Net marketplace provided, the benefits promised by the site for both the suppliers and purchasers, and the history of the company. You might also investigate the bias (buyer versus seller), ownership (suppliers, buyers, independents), pricing mechanism(s), scope, focus, and access (public versus private) of the Net marketplace. Students should go to, click the Worldwide Directory link, choose an industry and then choose a Net marketplace company within that industry. For instance, a student might select the Building & Construction industry. The next step is for the student to select a company, for example, within the industry. This displays a directory entry for that company. The directory provides further information on the company. Finally, to perform the analysis required by the project, the student should visit the Web site of the company chosen, and also use Google or other search engines to find relevant information in trade, industry, popular journals, and newspapers. 2. Examine the Web site of one of the e-distributors listed in Figure 12.9, and compare and contrast it to one of the Web sites listed for e-procurement Net marketplaces. If you were a business manager of a


medium-sized firm, how would you decide where to purchase your indirect inputs from an edistributor or an e-procurement Net marketplace? Write a short report detailing your analysis. A student choosing to compare (e-distributor) vs. Ariba (e-procurement) might provide the following analysis: E-distributors are the most common type of electronic marketplace; they sell products on an as needed basis. efficiently organizes goods from more than one source for potential buyers. E-distributors such as offer a reasonable compromise between price and service, and provide the convenience of one-stop shopping for a wide range of products from processed materials to finished goods. This is especially valuable to customers in the MRO or office supplies market. Buyers like placing one order, tracking one order, and having only one invoice to pay. E-procurement companies are typically used for long-term contractual purchasing of indirect goods. They expand on the business model of e-distributors by including the online catalogs of their suppliers and value chain management services. Ariba encourages new levels of communication and collaboration between buyers and suppliers. An e-procurement system automates and streamlines the purchasing process by eliminating managers and multiple orders while reducing the cost of processing an order. For a medium-sized company, the advantages of an e-procurement system allow the company to control expenses on indirect goods as well as direct goods. This gives companies more control over the bottom line. However, if a company does not want to make an expensive investment into an e-procurement or get locked into one eprocurement system, then e-distributors are another way companies can make their indirect purchases less expensive and more streamlined.

3. Assume you are an e-procurement officer for an office furniture manufacturer of steel office equipment. You have a single factory located in the Midwest with 2,000 employees. You sell about 40% of your office furniture to retail-oriented catalog outlets such as Quill in response to specific customer orders, and the remainder of your output is sold to resellers under long-term contracts. You have a choice of purchasing raw steel inputs mostly cold rolled sheet metal from an exchange and/or from an industry consortium. Which alternative would you choose and why? Prepare a PowerPoint presentation for management supporting your position. An e-procurement officers goal is to find the best product at the best prices. Exchanges and consortia offer both of these qualities. The benefits of exchanges are reduced search costs for parts, spare capacity, and lower prices due to a global marketplace fueled by competition among suppliers. Suppliers are often reluctant to join exchanges due to the fierce competition and price wars that can make profit margins miniscule, so the exchange might not have all the suppliers with which a company might wish to do business. Exchanges also usually dont provide value-added services. An industry consortium helps to develop longterm, stable relationships between buyers and sellers. Consortia are mainly developed by established Fortune 1000 companies. Both supplier and buyer benefit in a consortia. The buyer benefits because buyers control access to market channels. Suppliers benefit by having access to large procurement systems and large order sizes. This in turn leads to long term purchasing relationships.


The best alternative is to join the industry consortia in order to secure long-term, low prices on the firms basic inputs. This does not mean that the e-procurement officer should ignore prices and goods available from an exchange: these should be purchased when good deals become available, but they should not be relied upon as the major source of sheet steel. 4. Find a Net marketplace that has failed (possible candidates include;;;, or another of your choosing). Investigate the reasons behind its failure. Prepare a short report on your findings and your analysis of the lessons that can be learned from its demise. Specific reasons for the demise of a particular net marketplace will be fact-specific and dependent upon the company chosen by the student. However, there are several general factors in most net marketplace failures including: the time and cost required to implement them (more lengthy and costly than anticipated). the fact that price alone is often not the primary factor upon which businesses make purchase decisions. the fact that during the early years of e-commerce, venture capitalists funded a plethora of sites, which lead to multiple sites competing for a limited amount of investment and opportunity for sales. difficulties in getting enough suppliers and buyers to participate and thus failing to achieving the all-important market liquidity. the technical challenges of running an e-marketplace. the difficulties of changing old habits and cultures in many industries . Students should start their search with Google and then go deeper into the archives of business journals such as the Wall Street Journal, the New York Times, Fortune, and Forbes.