Understanding E-commerce
Adam Immerwahr and Alyssa Nobile ’01

Flashback: 1995 -- the founding of two companies, Amazon.com and eBay.  One sells books and the other sells Pez dispensers.  Cut to: 1996 -- an Advertising Age/Market Facts survey shows that 44.7 percent of consumers had never heard of the World Wide Web.  Fade to: today -- the Web is an ever-present force in business and commerce.  In April 2000, the National Association for Business Economics declared that three out of every five U.S. companies are using e-commerce in some way, and another 20% plan to join the crowd sometime in the future.  ActivMedia Research LLC, (www.activmediaresearch.com) estimates that e-commerce in the year 2000 will reach $132 billion in global revenues.

So what happened?  How did the company that started out selling books branch into the software, music, video, electronics and garden supply markets?  How did that Pez dispensing auction site become the buzz of economics class?  And where did a company like Priceline.com, that lets consumers bid on airline tickets, hotel reservations and lobsters, come from?

E-commerce is an elusive idea.  The American Heritage Dictionary defines commerce as “the buying or selling of goods, especially on a large scale,” but it also includes “intellectual exchange or social interaction.”  E-commerce would then imply any electronic buying or selling of goods, or any electronic transaction.  But that loose definition would also include ordering products by telephone, or e-mailing mail-order catalogues. Those are beyond the range of e-commerce as most people view it.  And while intellectual exchange and social interaction can both occur online, most people would not consider them commerce.  Dr. Jim Otto, professor of management, defines e-commerce as, “The conduct of business transactions electronically using computers and telecommunications.”  In this instance the “and” is inclusive.  The transactions cannot just use telecommunications or computers, they must use the two technologies together.  How is the conduct of business transactions related to the buying and selling of goods?  In an e-world we no longer simply buy goods, we also buy services, information and attention.  Even using a search engine such as Yahoo involves e-commerce, since the consumer is accessing information in exchange for giving attention to subscribers’ advertisements.
  So where does all this lead?  Is e-commerce just an extension of traditional retail models or has the entire system of buying and selling changed?  And if e-commerce is here to stay, what does that mean to the average consumer and to the traditional retailer?  To examine these questions, we will have to take a look at the short history of e-commerce.

E-commerce in a nutshell

Flashback (take two): 1994 -- According to the U.S. Internet Council, only 90,000 Americans are online.  With such a small fraction of people using the Internet, the notion of buying products from a computer is strange, suspicious and completely unheard of.  Flash forward to the year 2000.  According to Cyber Atlas (http://cyberatlas.internet.com), more than 118.4 million Americans were online in July 2000 and the number has grown since then.  E-commerce sales in just the first quarter 2000 were at $5.26 billion, according to the U.S. Department of Commerce. How did this phenomenon go from being virtually non-existent to becoming a daily routine for many consumers in such a short time?

Experts feel that the e-commerce phenomenon has its roots in television shopping networks such as QVC and the Home Shopping Network.  The idea of shopping from home, 24 hours a day, is appealing to many people.  As soon as the notion of shopping over the Web sprung up, companies quickly formed to meet the demand. 

The year 1995 was an important one for e-commerce – it marked the founding of both eBay and Amazon.com.  eBay (www.ebay.com) is an online auction site that allows individuals to buy or sell items to other online consumers.  There are over 4 million new auctions and 450,000 new items on the site every day.  Amazon.com (www.amazon.com) began as a glorified Internet bookstore and has become an online department store selling everything from kitchen supplies to videos.  In 1998, Priceline.com (www.priceline.com) was founded, enabling consumers to name their own prices for products from airline tickets to groceries.  Each business model -- Amazon.com, eBay and Priceline.com -- offers a unique system of buying different products, and each has been widely imitated.  Said Stephen Stryker ‘93, a former e-commerce consultant, “Something that in the past may have taken weeks to find or purchase is now at consumers’ fingertips.  From a convenience standpoint, e-commerce makes life much easier.”

Because of the convenience of online shopping, the customer base and product offerings of these online companies have grown considerably.  Amazon.com is now the leading online shopping site, with over 17 million customers in more than 160 countries.  eBay is the world’s largest personal online trading community, and Priceline.com’s grocery division alone has more than one million members.  With such rapid growth and such new technology, e-commerce poses a whole new set of questions for consumers, lawmakers and the economy.

Is it all about convenience?

It’s easy to talk about how convenient it may or may not be to load up your Web browser and buy some books from Amazon.com or one of its competitors.  But is e-commerce just an Internet extension to the traditional retail world?  According to some Villanova faculty and alumni, e-commerce offers more than just convenience; it offers unique market structures and many consumer advantages that could never be replicated in the traditional retail world.

According to Internet e-commerce consultant Mike Russell ’83, e-commerce is “A revolutionary way to pool the buying power of millions of people who would otherwise just be individual consumers.”  Russell, whose company, the Russell Organization (www.planetrussell.net), has consulted for both Tiger Woods’ (www.tigerwoods.com) and the American Association of Retired Persons’ (www.aarp.org) Web sites, has been involved in e-commerce consulting since 1995.  He sees e-commerce not just as the latest fad but as a crucial component in social equality.  “E-commerce is incredibly exciting from a global and even a spiritual standpoint, much less an economic one, because it levels the playing field in such an incredibly dramatic way,” said Russell.  “Anyone who has access to the public internet, which you can now get for free, anyone who can get a hold of even the most broken down, serviceable computer that has a modem, can actually get themselves online, set up a site and start making money or building a legacy for themselves.”

E-commerce offers the consumer many different ways of buying.  One model for e-commerce is a modified retail store like Amazon.com.  It is easy to see how Amazon.com offers convenience to the consumer who doesn’t want to go to a bookstore to pick out their books.  But this “webified” retail model also gives the consumer many other benefits that the traditional store does not.  Otto points out that a major difference between e-commerce and traditional commerce is the consumer’s ability to gather competitive information.  “One advantage I have as the consumer is that I have reach.  I can look at a lot of different products, a lot of different vendors, a lot of different prices very rapidly, whereas I can’t do that for physical stores.  That reduces transaction friction.  My search costs go down on the Internet, which in theory would help reduce prices because I have a broader array of suppliers that I can check.”

Does this explain Amazon.com’s low prices?  Not entirely.  Russell points out that many companies have “this false notion that if you’re the first guy over the fence you’ll gain a sustainable advantage.  Not only will you be profitable, but by virtue of being the first you would have this following and you would get a network effect.”  Stores lower their prices in order to draw more customers to their site.  Apparently this has worked for Amazon.com, as demonstrated by its use as the universal example in most e-commerce articles, including this one.  Russell notes a flaw in this notion.  “It’s a nice theory,” he says, “but in actual practice it doesn’t work.  These traditional first mover type advantages don’t really amount to much.  These companies failed to realize that it’s very easy to replicate a business when your main inventory is a bunch of electrons.  Any time there’s any kind of profit pool, everybody else says ‘Hey, we can do that.’  Market share gets driven up and profitability can get driven down.”  Merchant loyalty in the online market space is drastically reduced because of the ease in going from store to store and also because of “shopping bots,” which are online programs that automatically compare prices between different e-vendors (www.dealtime.com).  The consumer benefits by getting the best possible price and perhaps the supplier loses because of the tough competition.

There also are other models for selling online.  One of the rising stars of the e-commerce world is the online auction site, eBay.com.  Says Q Chung, professor of decision and information technologies in the College of Commerce and Finance, “I’d like to think of the online auction model as a virtual rendition of the fair market.  What prohibited the fair market in the past was the lack of information flow.  Now if you bring this idea to the online auction business, anybody who enters into this market space has an equal chance to benefit, either by selling or buying.  That’s the theory.  What is not guaranteed is the quality of goods delivered.  Also, although this type of marketplace beats the time and space limitations, a lot of potential buyers and sellers are excluded from the mercantile activities, either by choice or due to the lack of access to the infrastructure."

Wenhong Luo, who teaches the College of Commerce and Finance’s Intro to E-Business class, points out some other benefits of the online auction idea.  “Of course, auctions are not new.  There are a whole lot of businesses conducted purely in auction, but at the retail level you don’t see many.  It’s very difficult to have an auction with thousands of people.  The Internet, the networking technology, has made auctions easier to do.”  Auctions have always given producers a guarantee that they will be able to sell their product at the highest price consumers are willing to pay for it, and consumers know that they will only have to pay slightly more than the next highest bidder.  Auctions also ensure that the consumer who values the product most will be able to purchase it.

Priceline.com is another model closely related to the online auction.  At Priceline.com, consumers name the price that they are willing to pay for various products, and Priceline.com matches them with possible suppliers who would be willing to sell for that amount of money.  “The supply side is rather unknown when the transaction starts,” says Chung.  “In the case of Priceline, you have a limited number of suppliers.  On the other hand, you have an unlimited open number of consumers.  eBay let’s you bid on what’s available, Priceline lets you bid on what you need.  In other words, in eBay you start with the supplier, in Priceline you start with the consumer.”  Priceline.com allows consumers to pick the exact price they want, but not exactly the product they may want.  A consumer may get the product they need but not the brand they want.  This model can be illustrated with airline tickets, Priceline.com’s first venture.  Airlines have a relatively large fixed cost.  It does not matter much whether an airplane is flying full or flying half empty; the flight will still cost the airline about the same amount of money.  The variable costs - ticket collectors and meals – are relatively small compared with the fixed cost.  If an airline can choose between flying its planes half empty or flying them full but with half of the customers paying only half price, it will choose to fly the airplanes full and allow some consumers to pay less.  Says Russell, “In essence what Priceline is doing is taking surplus capacity -  airline seats that would otherwise be empty, and saying to the vendor, ‘look, you can have an empty seat, or you can have one of our 8 million customers who will give you 60 cents on the dollar.  Wouldn’t you rather sell it like that?  I think these companies exploit market efficiencies in a manner that is so smooth and effective that it really changes the rules altogether.”  Russell also points out that this method of buying empowers the consumer and gives them a sense of community.

So how does Priceline.com sell groceries online?  Obviously they cannot ship them to customers’ houses (although there are companies that do that as well – www.netgrocer.com). Consumers bid on how much they are willing to pay for certain common and brand specific food items.  Then, if their bids are accepted they pay online and go to their local participating grocery store to pick up the goods.  How does this benefit the grocery stores?  Participating stores do not have the high fixed costs that airlines do; if fewer consumers buy bananas the stores simply order less bananas from their wholesalers.  “A lot of products that grocery stores already sell probably don’t have a profit,” explains Luo.  “What they want is to bring you into the store.  While you’re in the store, you may pick up the cheap products, but you may also pick up the expensive ones.”

Another e-commerce model is informational e-commerce.  More and more of Internet transactions do not involve physical goods at all, merely digital data.  Stock quotes, newspapers and software are all available online. The Web site can supply information, chat rooms and advanced discussion forums based around a common interest and shared passion.

E-commerce tends to center on goods that hide some of the Internet’s potential flaws as a market space.  Obviously, most people would not want to buy an expensive piece of women’s clothing online.  They would want to try it on, see how it looks and ensure its fit.  But there is no difference between different copies of the same software, book or CD.  What makes these products ideal e-commerce goods is their homogeneity.  In April 2000, Greenfield Online (www.emarketer.com/estats) reported that books and CDs dominated 50 per cent of the online market.

E-commerce also offers other advantages to online consumers.  Computers offer the ability to track customers in a different way than ever before.  Using “cookies,” downloaded files that allow Web sites to follow individual consumers’ online footprints and other technology, companies can track your movement patterns on their Web sites.  Amazon.com uses this technology to know which books you browsed and which you bought, and gradually shapes the Web site that you see on your computer screen.  This “mass-customization” allows e-commerce stores to offer things that traditional retailers have never been able to offer, like promotions or even products geared directly to consumers with specific buying patterns.  But Chung points out the flaw in mass-customization, “Our personal information is always there, stored somewhere.  How much do you want to give away, and how much do you possibly want to receive the benefits of giving away your privacy?”

According to Scott O’Neil ’83, a performance team and metrics manager for Avaya Communication (www.avaya.com), “privacy and security online are huge issues and big concerns, not only to businesses, but to individuals as well.”  Many people feel uncomfortable putting their credit card information and personal information into an arena that they fear virtually anyone can access.  Opinions differ about how secure the Web really is and whether it is smart to put personal information on the Internet.  Many experts point out that while the connection may be secure, consumers don’t necessarily know where the information is going. “I think that security between you and the server is probably fairly robust.  The only thing you have to worry about is what happens after your information gets to the server,” Otto says.  Chung agrees with this view and asserts that “there’s not much difference between online credit card number exposure and physical mercantile activity credit card exposure.  The clerk can do the same thing that the online bad guys do.”  Despite these concerns, a Fortune magazine article says that security threats are not dampers to e-commerce, and cautious optimism seems to be the outlook that companies and consumers are taking.

Another concern of the e-commerce phenomenon is the so-called “digital divide,” the socioeconomic technology gap.  Says Stryker, “If you don’t have the access or money to buy a computer, you as a consumer are basically shut out of these markets.  This increases the divide between rich and poor, which is a major concern.  Information is a very powerful tool.  If part of a society is automatically shut out from this information, it can have some serious social ramifications.”  Others feel that this divide is not nearly as dramatic as Stryker claims.  A study done by the Center for Research on Information, Technology and Organizations found that over 90 per cent of U.S. public schools have some sort of access to the Internet.  In addition, many public libraries now have computers with Internet access, meaning that virtually anyone can log on the Web.  Luo feels that this will make a difference.  “I think this [divide] may be an issue, but I think that we are doing something about it to make computers available to even people who don’t have the means,” he said.

E-commerce in the global world

How will e-commerce affect the global economy?  The digital divide between the United States and the rest of world is large; the U.S has progressed significantly in the last five years.  An ActivMedia Research LLC study showed that 74.73 per cent of Internet-derived revenue comes from United States.  The potential for a true global economy rests largely on the shoulders of e-commerce’s instantaneous connections over great distances, but there are a obstacles: Internet taxation, content restriction, and most importantly, global telecommunications infrastructure.

Critics of e-commerce taxation say that the very nature of the Internet stands in the way of taxes.  Because e-commerce knows no borders, the complexities of dealing with each state’s tax code could cripple e-commerce.  Some point to the IRS, saying that it would need to expand exponentially to handle the added burden of e-commerce taxes.  They also argue that e-commerce consumers are already investing in computers, telephone lines and ISP surcharges to pay for their goods; additional charges could discourage online investment.  Many disagree, afraid that the loss of tax revenue will only grow, keeping states from reaping the benefits of a booming market.  Tax critics retaliate that while e-commerce is a growing trend, it still only accounts for less than one per cent of all business to consumer sales.  The argument over Internet taxes will only continue to grow.

If there are so many objections to domestic Internet taxes, imagine the uproar that would erupt  if countries tried to enforce international e-commerce taxation.  “It would probably bring online commerce to its knees,” says Russell.  In a 1997 briefing, Framework for Global Electronic Commerce, the White House stated that, “For over 50 years, nations have negotiated tariff reductions because they have recognized that the economies and citizens of all nations benefit from freer trade.  Given this recognition, and because the Internet is truly a global medium, it makes little sense to introduce tariffs on goods and services delivered over the Internet.”  The document also argues that because many of e-commerce transactions do not involve physical goods, it may be very hard to enforce any legislation.

Even without concerns over taxes, many nations are worried about access to and control of online content.  The Internet is an uncensored entity, and free trade of information does not appeal to all governments.  It makes little sense to try to regulate domestic Web sites if browsers can easily access any other nation’s potentially illegal content.  But Russell argues that nations won’t be able to control their people when it comes to Internet access.  “Technology is incredibly liberating,” he says.  “People will figure out how to use it.”

While some believe it is easy for anyone to access the Internet (www.freeatlast.com), in many countries getting even a telephone line is a huge barrier.  According to the White House document, “Global electronic commerce depends upon a modern, seamless, global telecommunications network and upon the computers and information appliances that connect to it.  Unfortunately, in too many countries, telecommunications policies are hindering the development of advanced digital networks.  Customers find that telecommunications services are too expensive, bandwidth is too limited, and services are unavailable or unreliable.  Likewise, many countries maintain trade barriers to imported information technology, making it hard for both merchants and customers to purchase the computers and information systems they need to participate in electronic commerce.” 

While the global divide may be large, many experts think that developing countries aren’t out of the race yet.  “It’s possible for some of these countries to catch up fast,” says Luo.  “In the United States, the Internet has been widespread for only five or six years.  If other countries start now, they have a short time span to check.”  Luo also argues that countries building new networks today can use technological advances like fiber optic networks rather than the obsolete copper lines with which the United States built theirs.  With new technology, they can end up ahead of the game.  “Developing countries are a lot more optimistic.  They can leapfrog in terms of the infrastructure,” says Luo.

By any standards, the World Wide Web is aptly named.  The Internet can only serve to further globalize an already international world.  Says Otto, “Unless you shut down the Internet, it’s very hard to keep it closed to other countries and other ideas.  It’s a very open system.”

The future of e-tailing

What is the future of e-commerce?  Although experts once thought that e-commerce would replace all other forms of commerce, most now see a chance for e-commerce to fill a specialized niche.  “I think that brick and mortar retailers will continue to do just fine, but they will need to be responsive to their customers,” Russell says.  “The two [physical and online stores] can’t be divorced from one another.  Traditional retailers are going to have to make their goods available online.”  Many share Russell’s sentiments and are not in a hurry to wave goodbye to their favorite mall.  Not everyone buys online, and not every product is ideal for online sales.  Consumers have a sense of security knowing that there is a physical store connected to each online merchant.  And studies have shown that a vast number of e-commerce site visits are the result of customers researching products that they will then buy at a traditional retail store.  “There’s something to be said for the experience of going out to buy things and interacting with people,” said Stryker.  Many also point out that a lot of e-commerce and e-business is done between businesses and that business to consumer retail is relatively small in comparison.  Business to business e-commerce can save producers and suppliers money which can in turn be passed along to the consumer, whether they are buying from a store or buying online.  According to Peter Carparso ’88, vice-president of Sales and Business Development for Mangosoft (www.mangosoft.com), a company that sells software to improve the performance of Internet and Intranet access, “E-commerce is here to stay.  I still think it will take a while before it becomes fully entrenched in our society, but slowly e-commerce is becoming a part of our daily routine.”

SIDEBAR
Is e-commerce invading Villanova?     

At Villanova University, the most exciting work is being done on e-business, not e-commerce.  What is the distinction?  According to Steve Merritt ‘78, dean of Enrollment Management, “E-business is any net-enabled business activity that transforms internal and external operations.  Any Web-based transactions that enable our students to use their time efficiently is e-business.”

In terms of e-business, Villanova is significantly ahead of other higher education facilities.  The majority of student transactions can be handled online.  All grading has been “webified”; professors can submit their students’ grades online and students can view the grades from any Web-enabled computer.  Class registration that once took an entire day only takes a few minutes on a computer.  Students can easily access their transcripts, academic records and class schedules online.

In the e-commerce arena (remember, now we’re talking about transactions involving computers and telecommunications) Villanova is fast shooting ahead of the pack.  With an exponentially expanding distance learning program and new plans for a “click and mortar” University Shop, e-commerce will soon become a way of life at Villanova.

Villanova’s largest e-commerce project to date has been its distance learning endeavors.  The innovative online classes allow current students and alumni alike to tap in to both the intellectual center and the community of Villanova.  The distance learning classes are most popular during the summer when students are not living on campus. The 2000 summer semester had 408 registrants for 22 online distant learning classes.  All classroom interactions take place online through chat rooms, electronic bulletin boards and lectures posted on the Web.  Said Merritt, “This is a great way to connect the extended Villanova community.  It is a way to learn from wherever you may be.” 

Villanova also practices a more traditional form of e-commerce through its University Shop.   As mentioned in the summer 2000 issue of this magazine, some of the University Shop’s merchandise can now be found online (www.villanovabookstore.com).  Faculty, students and alumni can purchase Villanova merchandise from anywhere in the world using only a computer, a phone line and a credit card.   New freshman can buy school and room supplies online and have them waiting when they arrive on campus.  This e-commerce system has been available for over a year, so it has already outlived most other dot-coms. Frank Henninger, director of the University Shop, sees the bookstore not as a traditional brick and mortar shop, but as more of a “click and mortar” shop, achieved by combining the convenience of an online market with the value of a physical place.  “The University Shop has a physical presence that we greatly enhance by having an online presence as well,” Henninger said.

In addition to these already existing structures, plans are now in progress for many new e-commerce programs that will make life easier and more convenient.  Eventually students may be able to pay their entire tuition bill and purchase parking passes and textbooks online.  Says Karin Steinbrenner, executive director of University Informational Technologies, “Things will drastically change.  We are seeing a change in communication, operation, how everything happens.  And we have just started to scratch the surface.