E-commerce: Digital Markets, Digital Goods ppt

Global Reach E-commerce technology permits commercial transactions to cross cultural and national boundaries far more conveniently and cost effectively than is true in traditional TABLE

2. How has Internet technology changed business models?

3. What are the various types of e-commerce, and how has e-commerce has changed consumer retailing and

Business Problem-Solving Case: Can J&R Electronics

Grow with E-commerce?

PHOTOBUCKET: THE NEW FACE OF E-COMMERCE

Photobucketmay very well be the most important site on the Web that few

peo-ple understand Its name is well-chosen The purpose of the site is to create a “bucket”

for storing your photos that allows you to show them anywhere else you want on the

Internet

While rival photo sites such as Kodak Gallery, Snapfish, or Shutterfly, are known for

storing photos and providing services for making prints or picture books, Photobucket

is best known for linking Founded in 2003 by Alex Welch and Darren Crystal,

Photobucket pioneered the concept of linking media from one Web site to multiple

online sites You store your photo or video there, and then link it to whatever other site

you want—your MySpace page, an eBay auction page, or your personal blog

Photobucket makes it so easy to post photos to blogs or social networking sites that you

can do it in one step

Photobucket lets users create a Remix—a presentation of photos or videos that have beenmixed with music, graphics, special effects, and captions These presentations take justseconds to make Photobucket will also store avatars that people have created for use inInternet forums and let its users share their presentations via e-mail, instant messaging, andmobile devices.

What if you’ve outgrown MySpace and you want to switch to Facebook? No problem

You just link the photos you want to use that are stored in Photobucket to your new Web site

According to Photobucket CEO Alex Welch, “We’re fad-proof If one social networkingsite goes away and another comes up, the user just moves, but their content stays withPhotobucket We focus very much on not being a community We let the communities buildaround us.”

Photobucket is free for basic use and storage up to 1 gigabyte, but charges $25 per yearfor a premium subscription that includes extra storage space (up to 5 gigabytes) and theability to store videos more than 5 minutes long Photobucket also receives revenue fromdisplaying advertisements to users when they manage their accounts About 80 percent ofPhotobucket’s revenue comes from these ads

With these capabilities, Photobucket has become the largest and fastest-growing photo-sharing service on the Web As of July 2007 it had 48 million users, compared to 14million a year earlier, and 17 million unique visitors per month Photobucket hosts over 3billion images, and its visitors come to manage that photo and video stream About 300,000unique Web sites link back to Photobucket

Photobucket’s ability to attract and keep visitors makes the company a very hot target foradvertisers and a very lucrative business So lucrative, that it was acquired by FoxInteractive Media in July 2007

Sources: David Kirkpatrick, “The Biggest Web Site You’ve Never Heard Of,” CNNMoney.com, March 28, 2007; Brad

Stone, “Fox Interactive Nears Deal to Buy Photobucket,” The New York Times, May 8, 2007; and Walter Mossberg,

“How the Big Photo-Sharing Sites Stack Up,” The Wall Street Journal, August 1, 2007.

Photobucket very much epitomizes the “new” e-commerce Selling physical goods on theInternet is still important, but much of the excitement and interest now centers aroundservices—services for photo sharing, social networking, sharing music, sharing ideas, andsoftware applications that you can put on your Web page or blog Photobucket, MySpace,Facebook, Stylehive, Digg, and del.icio.us are examples The ability to link with other usersand with other Web sites has unleashed a huge wave of new businesses built around linkingand sharing

The chapter-opening diagram calls attention to important points raised by this case andthis chapter Photobucket was created to answer these questions: How do we make money

on the Web today? How can we take advantage of more widespread broadband access to theInternet and to new Web 2.0 technologies? Photobucket’s founders Alex Welch and DarrenCrystal created a new service for people who want to share their photos and videos or storethem in a single convenient location for use in other Web sites Photobucket pioneered inlinking media from one Web site to multiple online sites The company’s goal is to providethe easiest and most reliable Web site for sharing and linking all the media people use intheir online lives By making it so easy and inexpensive to store photos and link them toother Web sites, Photobucket has huge numbers of visitors and advertisers, and a continuingstream of revenue

HEADS UP

This chapter focuses on e-commerce and how businesses use e-commerce to achieve

operational excellence and customer intimacy E-commerce is also transforming

business and industries E-commerce advertising revenues are growing faster than

other forms of advertising Every large company, and most medium and small

companies, have Web sites that speak directly to customers If you work in business

today, you need to know about e-commerce

9.1 Electronic Commerce and the Internet

Have you ever purchased music over the Web? Have you ever used the Web to search for

information about your sneakers before you bought them in a retail store? If so, you’ve

participated in e-commerce So have hundreds of millions of people around the globe And

although most purchases still take place through traditional channels, e-commerce continues

to grow rapidly and to transform the way many companies do business

E-COMMERCE TODAY

E-commerce refers to the use of the Internet and the Web to transact business More

formally, e-commerce is about digitally enabled commercial transactions between and

among organizations and individuals For the most part, this means transactions that occur

over the Internet and the Web Commercial transactions involve the exchange of value

(e.g., money) across organizational or individual boundaries in return for products and

services

E-commerce began in 1995 when one of the first Internet portals, Netscape.com,

accepted the first ads from major corporations and popularized the idea that the Web could

be used as a new medium for advertising and sales No one envisioned at the time what

would turn out to be an exponential growth curve for e-commerce retail sales, which tripled

and doubled in the early years Only since 2006 has consumer e-commerce “slowed” to a

25-percent annual growth rate (Figure 9-1)

Mirroring the history of many technological innovations, such as the telephone, radio,and television, the very rapid growth in e-commerce in the early years created a marketbubble in e-commerce stocks Like all bubbles, the “dot-com” bubble burst in March 2001.

A large number of e-commerce companies failed during this process Yet for many others,such as Amazon, eBay, Expedia, and Google, the results have been more positive: soaringrevenues, fine-tuned business models that produce profits, and rising stock prices By 2006,e-commerce revenues returned to solid growth again

• Online consumer sales increased by more than 25 percent in 2007 to an estimated $225billion (including travel services), with 116 million people purchasing online and an addi-tional 17 million shopping (gathering information) but not purchasing (eMarketer, 2007)

• The number of individuals online in the United States expanded to 170 million in 2007,

up from 147 million in 2004 In the world, over one billion people are now connected tothe Internet Growth in the overall Internet population has spurred growth in e-commerce

• On the average day, 92 million people go online, 76 million send e-mail, 11 millionwrite on their blogs, 4 million share music on peer-to-peer networks, 26 million work ontheir social network profile, 26 million visit Wikipedia, and 3 million use the Internet torate a person, product, or service (Pew Internet, 2007)

• B2B e-commerce—use of the Internet for business-to-business commerce—expanded

17 percent to more than $3.6 trillion and continues to strengthen

The e-commerce revolution is still unfolding Individuals and businesses will increasingly use the Internet to conduct commerce as more products and services comeonline and households switch to broadband telecommunications More industries will betransformed by e-commerce, including travel reservations, music and entertainment,news, software, education, and finance Table 9.1 highlights these new e-commercedevelopments

WHY E-COMMERCE IS DIFFERENT

Why has e-commerce grown so rapidly? The answer lies in the unique nature of the Internetand the Web Simply put, the Internet and e-commerce technologies are much more rich andpowerful than previous technology revolutions Table 9.2 on page 302 describes the uniquefeatures of the Internet and Web as a commercial medium Let’s explore each of theseunique features in more detail

Ubiquity

In traditional commerce, a marketplace is a physical place, such as a retail store, that youvisit to transact business E-commerce is ubiquitous, meaning that is it available just abouteverywhere, at all times It makes it possible to shop from your desktop, at home, at work, or

and have only recently

“slowed” to a very rapid

even from your car, using mobile commerce The result is called a marketspace—a

marketplace extended beyond traditional boundaries and removed from a temporal and

geographic location

From a consumer point of view, ubiquity reduces transaction costs—the costs of

participating in a market To transact business, it is no longer necessary that you spend time

or money traveling to a market, and much less mental effort is required to make a purchase

Global Reach

E-commerce technology permits commercial transactions to cross cultural and national

boundaries far more conveniently and cost effectively than is true in traditional

TABLE 9.1

New Developments in E-commerce

BUSINESS TRANSFORMATION

• The first wave of e-commerce transformed the business world of books, music, and air travel In

the second wave, eight new industries are facing a similar transformation scenario: advertising, telephones, movies, television, jewelry, real estate, hotels, bill payments, and software.

• The breadth of e-commerce offerings grows, especially in the services economy of social

networking, travel, information clearinghouses, entertainment, retail apparel, appliances, and home furnishings.

• The online demographics of shoppers broaden to match that of ordinary shoppers.

• Pure e-commerce business models will be refined further to achieve higher levels of profitability,

whereas traditional retail brands, such as Sears, JCPenney, L.L.Bean, and Wal-Mart, will use e-commerce to retain their dominant retail positions.

• Small businesses and entrepreneurs continue to flood the e-commerce marketplace, often

riding on the infrastructures created by industry giants, such as Amazon, eBay, and Overture.

TECHNOLOGY FOUNDATIONS

• Wireless Internet connections (Wi-Fi, WiMax, and 3G mobile phone) grow rapidly.

• New digital gadgets appear as powerful, handheld devices that support cellular telephone and

music, with Wi-Fi connections Podcasting takes off as a new medium for distribution of video, radio, and user-generated content.

• The Internet broadband foundation becomes stronger in households and businesses as

transmission prices fall More than 52 million households had broadband cable or DSL access to the Internet in 2007—about 43 percent of all households (eMarketer, 2007)

• RSS grows to become a major new form of user-controlled information distribution that rivals

e-mail in some applications.

• New Internet-based models of computing, such as NET and Web services, expand B2B

opportunities.

NEW BUSINESS MODELS EMERGE

• More than half the Internet user population join an online social network, contribute to social

bookmarking sites, create blogs, and share photos Together these sites create a massive online audience that is attractive to marketers.

• The advertising business model is severely disrupted as Google and other technology players

such as Microsoft and Yahoo! seek to dominate online advertising, and expand into offline ad brokerage for television and newspapers.

• Newspapers and other traditional media adopt online interactive models but are losing

advertising revenues to the online players.

commerce As a result, the potential market size for e-commerce merchants is roughlyequal to the size of the world’s online population (more than 1 billion, and growingrapidly)

In contrast, most traditional commerce is local or regional—it involves local merchants

or national merchants with local outlets Television and radio stations and newspapers, forinstance, are primarily local and regional institutions with limited, but powerful, nationalnetworks that can attract a national audience but not easily cross national boundaries to aglobal audience

Universal Standards

One strikingly unusual feature of e-commerce technologies is that the technicalstandards of the Internet and, therefore, the technical standards for conducting e-commerce are universal standards They are shared by all nations around the world andenable any computer to link with any other computer regardless of the technologyplatform each is using In contrast, most traditional commerce technologies differ from

E-commerce Technology Dimension Business Significance

Ubiquity Internet/Web technology is available

everywhere: at work, at home, and elsewhere via mobile devices, anytime.

Global Reach The technology reaches across

national boundaries, around the Earth.

Universal Standards There is one set of

technology standards, namely Internet standards.

Richness Video, audio, and text messages are

possible.

Interactivity The technology works through

interaction with the user.

Information Density The technology reduces

information costs and raises quality.

Personalization/Customization The

technology allows personalized messages to be delivered to individuals as well as groups.

Social Technology The technology

promotes user content generation and social networking.

The marketplace is extended beyond traditional boundaries and is removed from a temporal and geographic location “Marketspace”

created; shopping can take place anywhere.

Customer convenience is enhanced, and shopping costs are reduced.

Commerce is enabled across cultural and national boundaries seamlessly and without modification The marketspace includes, potentially, billions of consumers and millions

of businesses worldwide.

There is one set of technical standards across the globe so that disparate computer systems can easily communicate with each other.

Video, audio, and text marketing messages are integrated into a single marketing message and consumer experience.

Consumers are engaged in a dialog that dynamically adjusts the experience to the individual, and makes the consumer a co-participant in the process of delivering goods to the market.

Information processing, storage, and communication costs drop dramatically, whereas currency, accuracy, and timeliness improve greatly Information becomes plentiful, cheap, and more accurate.

Personalization of marketing messages and customization of products and services are based on individual characteristics.

New Internet social and business models enable user content creation and distribution, and support social networks.

one nation to the next For instance, television and radio standards differ around the

world, as does cell telephone technology

The universal technical standards of the Internet and e-commerce greatly lower market

entry costs—the cost merchants must pay simply to bring their goods to market At the

same time, for consumers, universal standards reduce search costs—the effort required to

find suitable products

Richness

Information richness refers to the complexity and content of a message Traditional

markets, national sales forces, and small retail stores have great richness: they are able to

provide personal, face-to-face service using aural and visual cues when making a sale The

richness of traditional markets makes them powerful selling or commercial environments

Prior to the development of the Web, there was a trade-off between richness and reach: the

larger the audience reached, the less rich the message The Web makes it possible to deliver

rich messages with text, audio, and video simultaneously to large numbers of people

Interactivity

Unlike any of the commercial technologies of the twentieth century, with the possible

exception of the telephone, e-commerce technologies are interactive, meaning they allow for

two-way communication between merchant and consumer Traditional television, for

instance, cannot ask viewers any questions or enter into conversations with them, and it

can-not request that customer information be entered into a form In contrast, all of these

activi-ties are possible on an e-commerce Web site Interactivity allows an online merchant to

engage a consumer in ways similar to a face-to-face experience but on a massive, global

scale

Information Density

The Internet and the Web vastly increase information density—the total amount and

quality of information available to all market participants, consumers and merchants alike

E-commerce technologies reduce information collection, storage, processing, and

communication costs while greatly increasing the currency, accuracy, and timeliness of

information

Information density in e-commerce markets make prices and costs more transparent

Price transparency refers to the ease with which consumers can find out the variety of

prices in a market; cost transparency refers to the ability of consumers to discover the

actual costs merchants pay for products

There are advantages for merchants as well Online merchants can discover much more

about consumers than in the past This allows merchants to segment the market into groups

who are willing to pay different prices and permits the merchants to engage in price

discrimination—selling the same goods, or nearly the same goods, to different targeted

groups at different prices For instance, an online merchant can discover a consumer’s avid

interest in expensive, exotic vacations and then pitch high-end vacation plans to that

consumer at a premium price, knowing this person is willing to pay extra for such a

vacation At the same time, the online merchant can pitch the same vacation plan at a lower

price to a more price-sensitive consumer Information density also helps merchants

differentiate their products in terms of cost, brand, and quality

Personalization/Customization

E-commerce technologies permit personalization: Merchants can target their marketing

messages to specific individuals by adjusting the message to a person’s name, interests, and

past purchases The technology also permits customization—changing the delivered

product or service based on a user’s preferences or prior behavior Given the interactive

nature of e-commerce technology, much information about the consumer can be gathered in

the marketplace at the moment of purchase With the increase in information density, a great

deal of information about the consumer’s past purchases and behavior can be stored and

used by online merchants

The result is a level of personalization and customization unthinkable with traditionalcommerce technologies For instance, you may be able to shape what you see on television

by selecting a channel, but you cannot change the content of the channel you have chosen

In contrast, the Wall Street Journal Online allows you to select the type of news stories you

want to see first and gives you the opportunity to be alerted when certain events happen

Social Technology: User Content Generation and Social Networking

In contrast to previous technologies, the Internet and e-commerce technologies have evolved

to be much more social by allowing users to create and share with a worldwide communitycontent in the form of text, videos, music, or photos Using these forms of communication,users are able to create new social networks and strengthen existing ones

All previous mass media in modern history, including the printing press, use a broadcastmodel (one-to-many) where content is created in a central location by experts (professionalwriters, editors, directors, and producers), and audiences are concentrated in huge numbers toconsume a standardized product The new Internet and e-commerce empower users to createand distribute content on a large scale, and permit users to program their own content consump-tion The Internet provides a many-to-many model of mass communications which is unique

KEY CONCEPTS IN E-COMMERCE: DIGITAL MARKETS AND DIGITAL GOODS IN A GLOBAL MARKETPLACE

The location, timing, and revenue models of business are based in some part on the cost anddistribution of information The Internet has created a digital marketplace where millions ofpeople all over the world are able to exchange massive amounts of information directly,instantly, and for free As a result, the Internet has changed the way companies conductbusiness and increased their global reach

The Internet shrinks information asymmetry An information asymmetry exists when

one party in a transaction has more information that is important for the transaction than theother party That information helps determine their relative bargaining power In digitalmarkets, consumers and suppliers can “see” the prices being charged for goods, and in thatsense digital markets are said to be more “transparent” than traditional markets

For example, until auto retailing sites appeared on the Web, there was a pronouncedinformation asymmetry between auto dealers and customers Only the auto dealers knew themanufacturers’ prices, and it was difficult for consumers to shop around for the best price

Auto dealers’ profit margins depended on this asymmetry of information Today’sconsumers have access to a legion of Web sites providing competitive pricing information,and three-fourths of U.S auto buyers use the Internet to shop around for the best deal Thus,the Web has reduced the information asymmetry surrounding an auto purchase The Internethas also helped businesses seeking to purchase from other businesses reduce informationasymmetries and locate better prices and terms

Digital markets are very flexible and efficient because they operate with reduced search

and transaction costs, lower menu costs (merchants’costs of changing prices), price

discrimination, and the ability to change prices dynamically based on market conditions

In dynamic pricing, the price of a product varies depending on the demand characteristics

of the customer or the supply situation of the seller

These markets may either reduce or increase switching costs, depending on the nature ofthe product or service being sold, and they may cause some extra delay in gratification

Unlike a physical market, you can’t immediately consume a product such as clothingpurchased over the Web (although immediate consumption is possible with digital musicdownloads and other digital products.)

Digital markets provide many opportunities to sell directly to the consumer, bypassingintermediaries, such as distributors or retail outlets Eliminating intermediaries in thedistribution channel can significantly lower purchase transaction costs To pay for all thesteps in a traditional distribution channel, a product may have to be priced as high as 135percent of its original cost to manufacture

Figure 9-2 illustrates how much savings result from eliminating each of these layers in

the distribution process By selling directly to consumers or reducing the number of

intermediaries, companies are able to raise profits while charging lower prices The removal

of organizations or business process layers responsible for intermediary steps in a value

chain is called disintermediation.

Disintermediation is affecting the market for services Airlines and hotels operating their

own reservation sites online earn more per ticket because they have eliminated travel agents

as intermediaries Table 9.3 summarizes the differences between digital markets and

traditional markets

Digital Goods

The Internet digital marketplace has greatly expanded sales of digital goods Digital goods

are goods that can be delivered over a digital network Music tracks, video, software,

newspapers, magazines, and books can all be expressed, stored, delivered, and sold as

Figure 9-2The Benefits ofDisintermediation

to the Consumer

The typical distribution channel has several intermediary layers, each

of which adds to the final cost of a product, such

as a sweater Removing layers lowers the final cost to the consumer.

TABLE 9.3

Digital Markets Compared to Traditional Markets

Digital Markets Traditional Markets

Information asymmetry Asymmetry reduced Asymmetry high

Search costs Low High

Transaction costs Low (sometimes virtually nothing) High (time, travel)

Delayed gratification High (or lower in the case of a Lower: purchase now

digital good) Menu costs Low High

Dynamic Pricing Low cost, instant High cost, delayed

Price discrimination Low cost, instant High cost, delayed

Market segmentation Low cost, moderate precision High cost, less precision

Switching costs Higher/lower (depending on High

product characteristics) Network effects Strong Weaker

Disintermediation More possible/likely Less possible/unlikely

purely digital products Currently, most of these products are sold as physical goods, forexample, CDs, DVDs, and hard-copy books But the Internet offers the possibility ofdelivering all these products on demand as digital products

In general, for digital goods, the marginal cost of producing another unit is about zero (it costs nothing to make a copy of a music file) However, the cost of producing the originalfirst unit is relatively high—in fact, it is nearly the total cost of the product because there arefew other costs of inventory and distribution Costs of delivery over the Internet are verylow; marketing costs remain the same; and pricing can be highly variable (On the Internet,the merchant can change prices as often as desired because of low menu costs.)

The impact of the Internet on the market for these kinds of digital goods is nothingshort of revolutionary, and we see the results around us every day Businesses dependent

on the physical products for sales—such as bookstores, book publishers, music labels,and film studios—face the possibility of declining sales and even destruction of theirbusinesses Newspapers and magazines are losing readers to the Internet, and losingadvertisers Record label companies are losing sales to Internet piracy and record storesare going out of business Video rental firms, such as Blockbuster, based on a physicalDVD market and physical stores, have lost sales to NetFlix using an Internet model

Hollywood studios also face the prospect that Internet pirates will distribute their ucts as digital streams, bypassing Hollywood’s monopoly on DVD rentals and sales,which now accounts for more than half of industry film revenues (see the Chapter 3ending case) Table 9.4 describes digital goods and how they differ from traditionalphysical goods

prod-INTERNET BUSINESS MODELS

The bottom-line result of these changes in the economics of information is nearly arevolution in commerce, with many new business models appearing and many old businessmodels no longer tenable Table 9.5 describes some of the most important Internet businessmodels that have emerged All, in one way or another, use the Internet to add extra value toexisting products and services or to provide the foundation for new products and services

Communication and Social Networking

Some of these new business models take advantage of the Internet’s rich communicationcapabilities eBay is an online auction forum that uses e-mail and other interactive features

of the Web The system accepts bids entered on the Internet, evaluates the bids, and notifiesthe highest bidder eBay collects a small commission on each listing and sale eBay hasbecome so popular that its site serves as a huge trading platform for other companies,hosting hundreds of thousands of “virtual storefronts.” The Interactive Session onOrganizations discusses eBay and its business model in greater detail

Digital Goods Traditional Goods

Marginal cost/unit Zero Greater than zero , high Cost of production High (most of the cost) Variable

Copying cost Approximately zero Greater than zero, high Distributed delivery cost Low High

Inventory cost Low High Marketing cost Variable Variable Pricing More variable (bundling, Fixed, based on unit costs

random pricing games)

TABLE 9.4

How the Internet

Changes the Markets

for Digital Goods

Business-to-business auctions have also emerged GoIndustry, for instance, features

Web-based auction services for business-to-business sales of industrial equipment and

machinery

The Internet has created online communities where people with similar interests are able

to communicate with each other from many different locations A major source of revenue

TABLE 9.5

Internet Business Models

E*Trade.com Expedia.com

eBay.com Priceline.com ChemConnect.com

WSJ.com GettyImages.com iTunes.com Games.com

Linkedin.com MySpace.com iVillage.com

Yahoo.com MSN.com StarMedia.com Google Maps Photobucket.com YouTube.com Xdrive.com

Sells physical products directly to consumers or to individual businesses

Provides product, pricing, and availability information to individuals and businesses Generates revenue from advertising or from directing buyers to sellers.

Saves users money and time by processing online sales transactions and generating a fee each time a

transaction occurs Also provides information on rates and terms.

Provides a digital environment where buyers and sellers can meet, search for products, display products, and establish prices for those products Can provide online auctions or reverse auctions in which buyers submit bids to multiple sellers to purchase at a buyer- specified price as well as negotiated or fixed pricing Can serve consumers or B2B e-commerce, generating revenue from transaction fees

Creates revenue by providing digital content, such as digital news, music, photos, or video, over the Web The customer may pay to access the content, or revenue may be generated

by selling advertising space

Provides an online meeting place where people with similar interests can communicate and find useful information

Provides initial point of entry to the Web along with specialized content and other services.

Provides Web 2.0 applications such as photo sharing, video sharing, and user- generated content (in blogs and social networking sites) as services Provides other services such as online data storage and backup.

INTERACTIVE SESSION: ORGANIZATIONS Can eBay Continue Growing?

eBay advertises itself as the place to get “it,” whatever

it may be “It” used to be goods and services

purchased through its gigantic online auction and

marketplace services eBay derives the bulk of its

revenue from fees and commissions associated with its

trading services Since the company was founded in

1995 by Pierre Omidyar and Jeff Skoll, the company

has been profitable, and now boasts over 233 million

registered users In 2006, eBay users exchanged $50

billion worth of goods and were headed toward $60

billion in 2007

A portion of eBay’s revenue comes from direct

advertising on the site, as well as end-to-end service

providers whose services increase the ease and speed

of eBay transactions Deals with Yahoo! and Google

will bring large streams of advertising revenue to eBay

for the first time in 2007

Not long ago, eBay’s growth strategy focused on

expansion in geography and scope and on continuing

innovation to enhance the variety and appeal of

products on its sites More recently, after failing to

take control of the Asian online auction market, the

company’s growth strategy has focused on

diversifica-tion eBay is now trying to develop and acquire new

products and services that encompass all the activities

people perform on the Internet It is creating a

diversified portfolio of companies with a hand in each

of the Internet’s big cash pots: shopping,

communicat-ing, search, and entertainment

PayPal, whose service enables the exchange of

money between individuals over the Internet, brings

additional transaction-based fee revenue eBay is

banking on PayPal becoming the standard payment

method for online transactions The service already

receives 40 percent of its $11.4 billion business from

payment transactions that are not associated with

eBay PayPal has performed very well for eBay, even

after Google Checkout emerged as a possible

competitor

In mid-2005, eBay agreed to buy Shopping.com,

an online shopping comparison site, for $620 million

In September of that year, eBay acquired VoIP service

provider Skype Technologies for $2.6 billion Skype

provides a service for free or low-cost voice calls over

the Internet eBay is betting heavily that Internet

telephony will become an integral part of the

e-commerce experience and accelerate trade on its

Web site The service could potentially generate $3.5

billion in revenue from markets that eBay traditionally

had trouble penetrating, such as real estate, travel,

new-car sales, and expensive collectibles Those

markets require more communication among buyers

and sellers than eBay currently offers, and Skype willprovide voice communication services to help

eBay also paid $310 million for the ticket resellingWeb site StubHub, acquired a 25 percent stake inclassified ad site Craigslist, and purchased Kurant,now ProStores, whose technology helps users set uponline stores With these moves, eBay extended itsreach to new segments of e-commerce The company

is also working on new ways to bring its services tousers, rather than expecting them to visit eBay.com

In the Web 2.0 era, users are spending their time onblogs, wikis, and mobile sites rather than on singularlypurposed sites

eBay recognized that today’s Web surfers seekentertainment, socializing, and networking Sites such

as Facebook, MySpace, and YouTube have become theWeb’s gathering places In response, eBay begandeveloping tools and services that promote e-commerce anywhere on the Web For example, thecompany is testing a tool that enables users to monitortheir auctions without visiting eBay.com through theuse of an embedded software widget called To Go

eBay is also having discussions with MySpace toallow eBay listings on MySpace pages eBay wants tomake it easier for all users to display eBay listings ontheir personal Web sites

Some analysts report that while many of eBay’sindividual acquisitions appear successful, their overallcost is not justified because they haven’t created thesynergy that was intended Analysts and shareholdersdon’t necessarily agree that diversification is thecorrect strategy for growth They are especiallyconcerned that this expansion has come at the expense

of eBay’s core business, auctions

Shopping was responsible for almost 70 percent ofthe company’s revenue in 2006, but sales growth hasdropped from 40 percent annually to 23 percent

New users are no longer joining the site at the samerate they used to join The overall volume of itemslisted is also down nearly 4 percent Sales havesuffered as a result of sellers filling their eBay storeswith slow-selling and undesirable merchandise, orpricing their quality merchandise at unattractiveprices Fraud, identity theft, and abuse are still bigproblems for the company, but eBay is paying moreattention to them

In light of these problems, eBay is trying toimprove its site’s user experience to keep its loyalcustomer base happy It is reducing the clutter of itsWeb page design, especially the home page, which hasbeen described as one of the most confusing andcluttered in the industry The overhaul is also

1. What is eBay’s business model and business

strategy? How successful has it been? What arethe problems that eBay is currently facing?

2. How is eBay trying to solve these problems?

Are these good solutions? Are there any othersolutions that eBay should consider?

3. What people, organization, and technology factors

play a role in eBay’s response to its problems?

4. Will eBay be successful in the long run?

Why or why not?

enhancing the feedback criteria that buyers use to rate

sellers and make sellers’ shipping costs more

transpar-ent eBay is looking to improve product search results

and give buyers more guidance in finding the products

they are looking for without having to scour through

hundreds of listings

One area in which eBay seems to be ahead ofthe curve is in its Web services architecture eBay has

opened up its application programming interfaces

(APIs), free of charge, to a growing community of

independent developers This network of developers

builds applications that connect to eBay’s core

computing platform and help the site grow in new

ways For example, one such program sends auction

status information to buyers on their mobile phones

Keeping the community happy is of utmostimportance to the future of eBay A loyal user base

Go to the home page of eBay at www.eBay.com andanswer the following questions:

1. How would you describe eBay’s home page?Does it appear cluttered? Does the site seem like

it would be easy to use? What suggestions wouldyou make for improving the appearance or organi-zation of the site from a user’s perspective?

2. Search eBay’s auction listings for a highdefinition, LCD flat panel TV How would youdescribe the results you get? Are they helpful?How would you feel about buying this productfrom an eBay auction?

3. What evidence do you see on eBay.com that thecompany is moving toward being a diversifiedportfolio of Internet businesses rather than just anonline auction site? Have you seen evidence ofthis elsewhere on the Internet?

may be the company’s most valuable asset, and onewhich competitors will be challenged to replicate.But even if eBay deals successfully with theseissues, how much more can it grow? As GlobalCrown Capital analyst Martin Pyykkonen put it,

“They’re not really screwing up, and it’s not thatMeg Whitman needs to go or they’ve gone in thewrong direction It’s just that there are some finitelimits to growth, and they’re reaching that.”

Sources: Catherine Holahan, “Going, Going…Everywhere,” Business Week, June

18, 2007, “eBay’s Changing Identity,” Business Week, April 23, 2007, and “eBay

Holds Its Turf Against Google,” January 25, 2007; Edward Cone, “Inside eBay’s

Innovation Machine,” CIO Insight, December 6, 2006; Brad Stone, “Stirring Up the Cubicles at eBay,” The New York Times, February 21, 2007; Rob Hof, “Is eBay

on the Mend,” Business Week, April 18, 2007; The Associated Press, “eBay

Rethinks Its Ways as It Enters Middleage,” accessed via Cnn.com, June 18, 2007;

and Bob Tedeschi, “eBay Moves to Recharge Its Auctions,” The New York Times,

June 18, 2007.

for these communities involves providing ways for corporate clients to target customers,

including the placement of banner ads and pop-up ads on their Web sites

A banner ad is a graphic display on a Web page used for advertising The banner is linked

to the advertiser’s Web site so that a person clicking the banner is transported to a Web page

with more information about the advertiser Pop-up ads work in the opposite manner They

automatically open up when a user accesses a specific Web site, and the user must click the

ad to make it disappear

Social networking sites are a type of online community that has become extremely

popular Social networking is the practice of expanding the number of one’s business or

social contacts by making connections through individuals MySpace, Facebook, and

Friendster appeal to people who are primarily interested in extending their friendships,while LinkedIn focuses on job networking.

Members of social networking sites spend hours surfing pages, checking out othermembers, and exchanging messages, revealing a great deal of information about themselves

Businesses harvest this information to create carefully targeted promotions that far surpassthe typical text and display ads found on the Web They also use the sites to interact withpotential customers The most popular of these sites attract so many visitors and are so

“sticky” that they have become very powerful marketing tools The Interactive Session onPeople discusses MySpace as a business model

Social networking is so appealing that it has inspired a new type of e-commerce

experi-ence called social shopping Social shopping sites such as Kaboodle, ThisNext, and

StyleHive provide online meeting places for swapping shopping tips and for displayingfavorite purchases

Digital Content, Entertainment, and Services

The ability to deliver digital goods and digital content over the Web has created newalternatives to traditional print and broadcast media There are Web sites for digital versions

of print publications, such as the New York Times or the Wall Street Journal, and for new

online journals such as Salon.com Some of the most popular Web sites deliver entertainment in digital form Online gamesattract huge numbers of players For example, Blizzard Entertainment’s online role-playinggame World of Warcraft has 8 million subscribers

You can listen to some of your favorite radio channels, such as Classic Rock or the BBC,

on the Web as well as many independent channels Because the radio signal is relayed overthe Internet, it is possible to access stations from anywhere in the world Services such asYahoo!’s LAUNCHcast and RealNetworks Rhapsody even put together individualized radiochannels for listeners

Broadband connections now make it possible for Web sites to display full-length filmsand television shows Apple, Amazon, Movielink, and CinemaNow have downloading ser-vices for full-length movies MLB.com, the Web site for Major League Baseball, deliverslive streaming video of MLB baseball games to paid subscribers Some online television andvideo services, such as iVillage Live, provide instant messaging capabilities allowingviewers to discuss the show as it is being broadcast

Many of you use the Web to preview and download music Although some of thisInternet music is free of charge, Apple’s iTunes and other sites are generating revenue bycharging for each song or album downloaded from their Web sites The phenomenalpopularity of Apple’s iTunes music service and Apple’s iPod portable music player have

inspired a new form of digital content delivery called podcasting Podcasting is a method of

publishing audio broadcasts via the Internet, allowing subscribing users to download audiofiles onto their personal computers or portable music players Video clips designed to be

downloaded and viewed on a portable device are called vcasts

Podcasts also have internal uses for businesses who want to distribute information inaudio form to their employees Internet security firm SonicWALL uses podcasts to demon-strate its expertise to customers and to provide new product information to its resellers

Portals have emerged as an Internet business model to help individuals and

organiza-tions locate information more efficiently In Chapter 2, we defined a portal as a Web face for presenting integrated, personalized information from a variety of sources As an e-

inter-commerce business model, a portal is a “supersite” that provides a comprehensive entry

point for a huge array of resources and services on the Internet

Yahoo! is an example It provides capabilities for locating information on the Internetalong with news, sports, weather, telephone directories, maps, games, shopping, e-mail,chat, discussion boards, and links to other sites Specialized portals help users with spe-cific interests For example, StarMedia is a portal customized for Hispanic Internet users

Yahoo! and other portals and Web content sites often combine content and applicationsfrom many different sources and service providers Other Internet business models use

INTERACTIVE SESSION: PEOPLE The Allure of MySpace

MySpace.com is nothing short of a phenomenon It is

the most popular social networking site on the Web

and competes with Yahoo as the most highly visited

Web site in the United States Its ascent has been

exceptionally swift, since it has only been in business

since January 2004

MySpace offers a rich array of features, includingmessage boards, e-mail, instant messaging, video

clips, classified ads, online games, blogs, job searches,

music, and, of course, the ability to network with other

people online and perhaps meet them in person

It provides tools for users to customize personal Web

pages using their own video, graphics, and music

Although MySpace touts itself as a private community

for people to talk about the things they love in a

personal way, it’s also big business News Corp paid

$580 million to acquire MySpace in late 2005

Advertisers are enthralled with the opportunity tocreate personal relationships with millions of young

people “What we really struck upon is the power of

friendship,” said Michael Barrett, chief revenue officer

for News Corp.’s Fox Interactive Media And

MySpace’s circle of friends is huge About 105 million

people visit the site each month with users spending

an average of 30 minutes on each visit to the site In

early August 2007, MySpace was hosting about 180

million personal profiles

Companies are allowed to pay MySpace to set upprofiles of their products as if they were members of

the community MySpace users can become “friends”

of Toyota Motor’s Yaris car, Burger King, or films,

such as Punk’s Not Dead Profile sponsors are able to

see exactly who is interested in their product and

gather rich data on age, marital status, location,

language, gender, occupation, and personal interests

Procter & Gamble used MySpace to launch itsSecret Sparkle deodorant for 16- to 24-year-old

women by linking the product to the Web pages of

musicians that used MySpace and appealed to the

same demographic group When users listened to new

songs by The Donnas and Bonnie McKey, they were

exposed to ads for Secret Sparkle and offered a chance

to participate in a Secret Sparkle sweepstakes

On August 8, 2006, Google agreed to pay FoxInteractive Media $900 million to have MySpace use

its search engine so that it could place text ads

alongside search results generated by MySpace users

Besides the Google deal, MySpace will be able to

generate revenue from display advertising, video

advertising, and ads on key MySpace destinations

such as the music page, the main comedy page, or the

home page MySpace also has its own technology for

tailoring online ads to the personal informationmaintained by its active users on their profile pages.The company is expected to generate nearly $500million in advertising revenue in 2007

Sounds like good business—except that MySpace

is also very controversial Many teenage subscriberspost suggestive photos of themselves and lie abouttheir age About one-fourth of all MySpace users areregistered as minors under 18 years of age, but thatnumber could be much larger Connecticut AttorneyGeneral Richard Blumenthal called MySpace a

“virtual playground” for predators Media outletsreported almost 100 criminal incidents across theUnited States involving adults who used MySpace toprey or attempt to prey on children in 2006

Blumenthal and attorneys general from sevenother states demanded that MySpace identifyregistered sex offenders who use the site and removetheir profiles MySpace agreed to turn over registeredsex offenders’ names, addresses, and online profilesand to delete profiles of convicted sex offendersidentified by matching its profile data againstdatabases of registered sex offenders

MySpace has some restrictions on how adultscontact its younger users It prohibits children under

13 from setting up accounts and displays only partialprofiles of registered 14- or 15-year-olds unless theperson viewing the profile is already on the teen’s list

of friends (Partial profiles display gender, age, andcity, while full profiles describe hobbies, schools, andother personal details.) Friends’ lists are no longeravailable to MySpace users over 18 unless theyalready know the youth’s full name or e-mail address.However, users under 18 can still make contact, andMySpace has no mechanism for verifying that userssubmit their true age when registering So adults cansign up as minors and join a 14-year-old’s list offriends

To further appease critics, MySpace is planning tooffer free parental notification software that allowsparents to find out the name, age, and location theirchildren are using to represent themselves on MySpace.The software doesn’t enable parents to see their child’s e-mail or profile page MySpace is also fine-tuning itsad-targeting to avoid displaying gambling and otheradult-themed sites on minors’ profile pages

Sources: K.C Jones, “On the Defensive, MySpace Emphasizes Its Progress,”

Information Week, July 30, 2007; Julia Angwin, “MySpace Moves to Give Parents

More Information,” The Wall Street Journal, January 17, 2007; Brad Stone,

“MySpace to Share Data with States on Offenders,” The New York Times, May 22,

2007; Elizabeth Holmes, “On MySpace, Millions of Users Make ‘Friends’ with

Ads,” The Wall Street Journal, August 7, 2006; “MySpace Plans New Age

Restrictions,” Associated Press, June 21, 2006; Anick Jesdanun, “Online Age Verification May Prove Complex,” Associated Press, July 17, 2006.

1. How do businesses benefit from MySpace? How

do MySpace members benefit?

2. Does MySpace create an ethical dilemma? Why

or why not?

3. Do parent and schools’ objections to MySpace

have any merit? Should a site such as MySpace be

allowed to operate? Why or why not?

4. Is there anything that MySpace management can

do to make the site less controversial?

Explore MySpace.com, examining the features andtools that are not restricted to registered members

View the profile created for a product such as theToyota Yaris, Burger King, or a movie of your choiceand related profiles about individuals who are

“friends” of that product Then answer the followingquestions

1. What information can you find out about theproduct from its MySpace profile?

2. What features of the profile would attract teenageand college buyers? How does this profile differfrom display advertising on the Web?

3. Explore some of the profiles of “friends” of thisproduct What kind of information is availableabout them?

4. Is using MySpace a good way to promote thisproduct? Why or why not?

Toyota set up a MySpace

profile for the Yaris to

attract the attention of

young buyers and gather

marketing data.