IT questions homework

Many of us have become accustomed to electronic payment systems. These systems will continue to increase as businesses and banks present more opportunities to use them.

Resource: Ch. 9 of Essentials of Management Information SystemsAnswer the following questions in 200 to 300 words:

Name and describe various categories of e-commerce.
Compare and contrast electronic payment systems. Which type do you use most often? Which type is most applicable for organizations you interact with regularly?
Explain how Internet technology supports business-to-business e-commerce.

S T U D E N T L E A R N I N G O B J E C T I V E S

After completing this chapter, you will be able to answer the
following questions:

1. What are the unique features of e-commerce, digital markets,
and digital goods?

2. What are the principal e-commerce business and revenue
models?

3. How has e-commerce has transformed marketing?

4. How has e-commerce affected business-to-business
transactions?

5. What is the role of m-commerce in business, and what are the
most important m-commerce applications?

6. What issues must be addressed when building an e-commerce
Web site?

E-commerce: Digital
Markets, Digital Goods 9C H A P T E R

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CHAPTER OUTLINE
Chapter-Opening Case: Nexon Games: E-commerce Goes

Social

9.1 E-commerce and the Internet

9.2 E-commerce: Business and Technology

9.3 The Mobile Digital Platform and Mobile E-commerce

9.4 Building an E-commerce Web Site

9.5 Hands-On MIS Projects

Business Problem-Solving Case: Facebook’s Dilemma:
Profits (Theirs) Versus Privacy (Yours)

NEXON GAMES: E-COMMERCE GOES SOCIAL

If you like to play online games, you may already be familiar with MapleStory. It’s
an online role-playing game in which players assume the identities of warriors,
magicians, and thieves to collectively fight monsters. You can play the game for free,
but if you want your avatar to have a new outfit, wacky hairstyle, or funny pet, you’ll
need to pay for these extras. And if you want your MapleStory characters to marry
each other in an elaborate Las Vegas ceremony attended by other in-game buddies, it
will cost $20 to $29.

MapleStory is a recent creation of Nexon Holdings Inc., the world leader in
massively multiplayer online role-playing games. Nexon is headquartered in South
Korea, with branch offices in China, Japan, and the United States. Nexon pioneered the
“item” (microtransactions) business model, where users can access the full game for
free but later opt to pay for game enhancements (items). Nexon is a real pioneer in the
development of the “fremium” business model where some content is free, but premium
content or service is charged for. Nexon charges players anywhere from 30 cents to $30
each for virtual “items” to enhance their game experiences. MapleStory has 92 million
users globally, with over 6 million registered in North America. In 2007, players world-

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304 Part III: Key System Applications for the Digital Age

wide purchased more than 1.3 million articles of clothing and over 1 million hair makeovers
for their MapleStory characters.

One source of Nexon’s popularity is the ability to socialize with other users. According
to Min Kim, vice president of marketing at Nexon’s U.S. division, “we sell social experi-
ences, not packaged products.” During much of the last decade, most games were played
alone. As the Internet and PCs developed more capabilities for rich-media experiences,
solitary gaming has given way to social gaming. Whether it’s integrated instant messaging,
voice over IP, or text messaging, there are now multiple mechanisms for players to commu-
nicate with their friends. Video games now attract a whole new type of consumer—people
who want to have a social experience.

In 2009, Nexon America introduced a new, free service initiative called BlockParty that
will centralize all of Nexon’s games into one online portal and combine it with a social
network designed to expand players’ gaming experience. According to Nexon America
executives, BlockParty is one part game, one part portal with a twist of social networking.
Nexon America’s goal for BlockParty is to create the biggest online party with great games
and awesome gamers.

Other popular Nexon games include Mabinogi, Combat Arms, and Dungeon Fighter
Online. Mabinogi allows players to participate in mundane tasks such as farming, writing
music, and marrying as well as fighting. The game continuously evolves through the release
of patches (termed “Generations” and “Chapters”) that introduce new areas to explore and
advance the story line. Combat Arms is a first-person shooter with over 3 million registered
players featuring highly advanced graphics, and Dungeon Fighter Online is a unique fight-
ing game where players choose one of several different “classes”. Nexon games feature
forums where players are invited to socialize with friends, share hints, or just hang out.

Nexon looks like it has a winning formula for success online. Despite the recession,
2009 revenues are estimated to be $349 million, up 29 percent from 2008. Prepaid cards
used to purchase Nexon game items are now the second best-selling entertainment gift card
(after Apple’s iTunes Store) at Target Stores.

Sources: Mike Crouch, “Nexon America Unveils BlockParty,” Melodika.net, October 6, 2009; Yukari Iwatani Kane,
“Online Gaming—the Family Edition,” The Wall Street Journal, March 26, 2009; Nick Wingfield, “Korea’s Nexon Bets
on Sales of Virtual Gear for Free Online Games,” The Wall Street Journal, May 23, 2008; Kara Swisher, “Playing with
Others,” The Wall Street Journal, June 9, 2008; and www.nexon.com, accessed May 25, 2008.

Nexon’s online games exemplify the new face of e-commerce. Selling physical goods on
the Internet is still important, but much of the excitement and interest now centers around
services and social experiences—social networking, photo sharing, sharing music, sharing
ideas, and multiplayer online games where users communicate and interact with other users.
The ability to link with other users and with other Web sites has spawned a huge wave of
new businesses built around linking and sharing.

The chapter-opening diagram calls attention to important points raised by this case and
this chapter. The business challenge facing Nexon is that Internet technology is changing
rapidly, along with consumer tastes. Nexon customers want to play games online in a Web
2.0 environment with other friends in a social atmosphere. Customers wanted games with a
virtual life quality so they could differentiate their warriers and game characters, and enrich
their social experiences online. To meet these changing market requirements, Nexon needed
to marry its strength in game design and online delivery, with the growing market demand
for social interaction. Nexon pioneered in the microtransactions business model and became
a leading provider of massively multiplayer online games. The company provides games
replete with action and interactivity where players can socialize with friends or other
players. By playing up social features of online games, and providing the ability to make
online micropayments for small purchases, Nexon’s games have huge numbers of users and
a continuing stream of revenue.

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9.1 E-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 for-
mally, 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 dou-
bled and tripled in the early years. E-commerce grew at double-digit rates until the recession
of 2008–2009 when growth slowed to a crawl. In 2009, e-commerce revenues were flat
(Figure 9-1), not bad considering that traditional retail sales were shrinking by 5% annually.
In fact, e-commerce during the recession was the only stable segment in retail. Some online
retailers forged ahead at a record pace: Amazon’s 2009 revenues were up 25 percent over
2008 sales (eMarketer, 2009; U.S. Census, 2009).

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 market bub-
ble 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: soaring
revenues, fine-tuned business models that produce profits, and rising stock prices. By 2006,
e-commerce revenues returned to solid growth, and have continued to be the fastest growing
form of retail trade in the United States, Europe, and Asia.

• Online consumer sales grew to an estimated $228 billion in 2009, an increase of more
than 1 percent since 2008 (including travel services and digital downloads), with 123
million people purchasing online and 152 million shopping and gathering information
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306 Part III: Key System Applications for the Digital Age

• The number of individuals online in the United States expanded to 199 million in 2009,
up from 147 million in 2004. In the world, over 1.4 billion people are now connected to
the Internet. Growth in the overall Internet population has spurred growth in
e-commerce.

• About 73 million Americans now access the Internet using a smartphone such as an
iPhone or a BlackBerry. Mobile e-commerce has begun a rapid growth based on apps,
ringtones, downloaded entertainment, and location-based services.

• On the average day, 143 million people go online, 113 million send e-mail, 100 million
use a search engine, 20 million read a blog, 6 million write on their blogs, 13 million
share music on peer-to-peer networks, 40 million work on their social network profile,
24 million visit Wikipedia, and 32 million watch a video. (Pew Internet, 2009).

• B2B e-commerce-use of the Internet for business-to-business commerce and collabora-
tion among business partners expanded 2 percent to more than $3.7 trillion.

The e-commerce revolution is still unfolding. Individuals and businesses will increas-
ingly use the Internet to conduct commerce as more products and services come online and
households switch to broadband telecommunications. More industries will be transformed
by e-commerce, including travel reservations, music and entertainment, news, software,
education, and finance. Table 9.1 highlights these new e-commerce developments.

WHY E-COMMERCE IS DIFFERENT

Why has e-commerce grown so rapidly? The answer lies in the unique nature of the Internet
and the Web. Simply put, the Internet and e-commerce technologies are much more rich and
powerful than previous technology revolutions like radio, television, and the telephone.
Table 9.2 describes the unique features of the Internet and Web as a commercial medium.
Let’s explore each of these unique features in more detail.

Ubiquity
In traditional commerce, a marketplace is a physical place, such as a retail store, that you
visit to transact business. E-commerce is ubiquitous, meaning that is it available just about
everywhere, at all times. It makes it possible to shop from your desktop, at home, at work, or
even from your car, using mobile commerce. The result is called a marketspace—a market-

Figure 9-1

The Growth of
E-commerce

Retail e-commerce
revenues grew 15%–25%
a year until the recession
of 2008–2009, when they
slowed measurably. In
2010, e-commerce
revenues are expected to
begin growing again at
an estimated 10% annual
clip.

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Business Transformation

• E-commerce remains the fastest growing form of commerce when compared to physical
retail stores, services, and entertainment.

• The first wave of e-commerce transformed the business world of books, music, and air
travel. In the second wave, nine new industries are facing a similar transformation scenario:
marketing and advertising, telecommunications, 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 are refined further to achieve higher levels of profitability,
whereas traditional retail brands, such as Sears, JC Penney, L.L. Bean, and Wal-Mart, 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 and eBay.

• Mobile e-commerce begins to take off in the United States with location-based services and
entertainment downloads including e-books.

Technology Foundations

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

• Powerful handheld mobile devices support music, Web surfing, and entertainment as well as
voice communication. Podcasting takes off as a 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 80 million households had broadband cable or DSL access
to the Internet in 2009—about 72 percent of all households in the United States (eMarketer,
2009).

• Social networking software and sites such as Facebook, MySpace, Twitter, LinkedIn and
thousands of others become a major new platform for e-commerce, marketing, and
advertising.

• New Internet-based models of computing, such as cloud computing, software as a service
(SaaS), and Web 2.0 software greatly reduce the cost of e-commerce Web sites.

New Business Models Emerge

• More than half the Internet user population join an online social networks, contribute to
social bookmarking sites, create blogs, and share photos. Together these sites create a
massive online audience as large as television that is attractive to marketers.

• The traditional 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 despite gaining online readers.

• Online entertainment business models offering television, movies, music, sports, and
e-books surge, with cooperation among the major copyright owners in Hollywood and New
York with the Internet distributors like Google, YouTube, Facebook, and Microsoft.

TABLE 9.1

The Growth of
E-commerce
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place 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 commerce. As
a result, the potential market size for e-commerce merchants is roughly equal to the size of the
world’s online population (estimated to be more than 1.5 billion, and growing rapidly).

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, for
instance, are primarily local and regional institutions with limited, but powerful, national
networks that can attract a national audience but not easily cross national boundaries to a
global audience.

308 Part III: Key System Applications for the Digital Age

E-commerce Technology Dimension Business Significance

Ubiquity. Internet/Web technology is The marketplace is extended beyond traditional
available everywhere: at work, at home, boundaries and is removed from a temporal
and elsewhere via mobile devices. and geographic location. “Marketspace” anytime.

is created; shopping can take place anywhere.
Customer convenience is enhanced, and shopping
costs are reduced.

Global Reach. The technology reaches Commerce is enabled across cultural and national
across national boundaries, around boundaries seamlessly and without modification.
the Earth. The marketspace includes, potentially, billions of

consumers and millions of businesses worldwide.

Universal Standards. There is one set of With one set of technical standards across the
technology standards, namely Internet globe, disparate computer systems can easily
standards. communicate with each other.

Richness. Video, audio, and text messages Video, audio, and text marketing messages are
are possible. integrated into a single marketing message and

consumer experience.

Interactivity. The technology works through Consumers are engaged in a dialog that
interaction with the user. dynamically adjusts the experience to the

individual, and makes the consumer a
co-participant in the process of delivering
goods to the market.

Information Density. The technology Information processing, storage, and
reduces information costs and raises quality. communication costs drop dramatically, whereas

currency, accuracy, and timeliness improve greatly.
Information becomes plentiful, cheap, and more
accurate.

Personalization/Customization. The Personalization of marketing messages and
technology allows personalized messages to customization of products and services are based
be delivered to individuals as well as groups. on individual characteristics.

Social Technology. User content generation New Internet social and business models enable
and social networking. user content creation and distribution, and

support social networks.

TABLE 9.2

Eight Unique Features
of E-commerce
Technology

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Chapter 9: E-commerce: Digital Markets, Digital Goods 309

Universal Standards
One strikingly unusual feature of e-commerce technologies is that the technical standards of
the Internet and, therefore, the technical standards for conducting e-commerce are universal
standards. They are shared by all nations around the world and enable any computer to link
with any other computer regardless of the technology platform each is using. In contrast,
most traditional commerce technologies differ from 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. Television, for instance, cannot
ask viewers any questions or enter into conversations with them, and it cannot request that
customer information be entered into a form. In contrast, all of these activities 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 communi-
cation 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 differen-
tiate 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 interactiveIS

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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 traditional
commerce 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.

You can see these features of e-commerce at work in the Interactive Session on
Technology. Turner Sports New Media operates a series of Web sites for NASCAR, the
NBA, and other sports organizations. It uses interactivity and richness, and is able to
combine the reach of cable TV with deep relationships with consumers. For instance, at the
Major League Baseball Web site (mlb.com) you can watch the postseason games from any
of four different camera angles! Your choice.

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 their personal friends (and
a larger worldwide community) content 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 broadcast
model (one-to-many) where content is created in a central location by experts (professional
writers, editors, directors, and producers) and audiences are concentrated in huge numbers
to consume a standardized product. The new Internet and e-commerce empower users to
create and distribute content on a large scale, and permit users to program their own content
consumption. The Internet provides a unique many-to-many model of mass communica-
tions.

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 and
distribution of information. The Internet has created a digital marketplace where millions of
people 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 conduct
business and increased their global reach.

The Internet reduces information asymmetry. An information asymmetry exists when
one party in a transaction has more information that is important for the transaction than the
other party. That information helps determine their relative bargaining power. In digital
markets, consumers and suppliers can “see” the prices being charged for goods, and in that
sense digital markets are said to be more “transparent” than traditional markets.

For example, before auto retailing sites appeared on the Web, there was a significant
information asymmetry between auto dealers and customers. Only the auto dealers knew the
manufacturers’ 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’s
consumers 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 Internet
has also helped businesses seeking to purchase from other businesses reduce information
asymmetries 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

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Chapter 9: E-commerce: Digital Markets, Digital Goods 311

INTERACTIVE SESSION: TECHNOLOGY Turner Sports Marries TV and the Internet, then Goes Social

Sports are hot on the Internet. Sports Web sites in the
United States drew over 86 million monthly visitors in
2009; next to social networks, sports sites were the
most popular destination sites. The single-site leader
in sports sites is ESPN (23 million monthly visitors
and owned by Disney), but close behind are a family
of sites like NASCAR.com, PGA.com, MLB.com
(Major League Baseball), NBA.com, and a host of
related sites, that are all operated by Turner Sports Inc.
The Turner Sports sites collectively draw even more
fans than ESPN. In 2009, Turner Sports is embracing
the techniques and technologies of social media to
promote its clients’ Web programs, making Turner the
leading innovator in Internet sports programming. In
the past few years, Turner Sports established itself as
an innovator through its ability to combine TV and the
Web more successfully than rivals. Turner’s success
allows them to both sell more ads and persuade sports
leagues such as the PGA Tour and NASCAR to pay
Turner millions per year to run their Web operations.
Turner’s formula is to provide rich, interactive features
that use TV and the Web simultaneously to enhance
the viewer’s experience. With today’s new social
media, this formula is hitting on all cylinders.

Turner Sports is the division of Turner
Broadcasting System responsible for sports broadcasts
on Turner cable channels (TBS, TNT, and Peachtree
TV) and for operating a family of online interactive
properties for professional sports organizations. While
Turner dominated cable television sports since its
inception in 1975, it was late coming to the Internet
and creating an integrated Web-TV platform. Turner’s
Internet sports program started out in 2001 with
NASCAR.com. By 2006, Turner had added PGA.com
and PGATour.com, and in early 2008 reached an
agreement with the NBA to jointly manage NBA.com,
which has 5.5 million unique monthly visitors.
Turner’s latest target is Major League Soccer’s Web
operations, which, oddly enough, are managed by
Major League Baseball. Turner earns fees for manag-
ing the sites and splits ad revenues with each league.
With each site that Turner Sports New Media man-
ages, its goal is to get fans switching between TV and
unique features on their desktops or laptops. For
example, PGATour.com visitors can watch play on
certain holes, watch a certain player, get aerial views
of the course, and get tips from pros on the site while
events are in progress.

Many sports leagues don’t like to relinquish con-
trol of their Web sites to outside organizations, prefer-
ring to handle their Web operations themselves in
order to control their brands and Web site content. In
the case of Turner Sports, the same business that

controls your cable TV distribution also can control
your Web distribution. For instance, the NFL recently
reacquired rights to its Web site back from CBS. But
Turner’s value proposition to sports leagues is a
compelling one. Turner offers to provide an integrated
platform that connects the league’s television broad-
casts with its Web site activities. Why rely on two or
more separate organizations when its all “media”? The
league’s official site will benefit from Turner’s reach
and the Web’s relationship with consumers. Turner’s
experience with running Web sites is extensive, as is
it’s track record for success in increasing site traffic
and developing innovative interactive applications.
Marketers can place ads in multiple formats (TV and
the Internet).

Turner’s oldest client is NASCAR, and the recent
contract extension signed between the two suggests
that NASCAR is more than happy with Turner’s
results. NASCAR.com has been one of the top three
sports league sites on the Internet in the past few years.
Since Turner assumed control of the league’s Web
rights, the site has seen double-digit growth in page
views and an increase in average monthly unique
visitors of 25 percent over the last 7 years. Over the
past calendar year the site had 1.4 billion page views.
Turner will continue to operate NASCAR.com
through 2014, collaborating on content creation,
e-commerce, and race ticket sales. Turner will
continue to have oversight over news content, broad-
band coverage, wireless platforms, video downloads,
and ad sales, and will seek to provide fans with better
information and NASCAR merchandise.

Turner has implemented a wide array of cutting-
edge applications and offerings to NASCAR.com,
including TrackPass, its most interactive feature.
TrackPass is a premium service that consists of several
interactive applications, including TrackPass Scanner,
TrackPass PitCommand, and TrackPass RaceView.
RaceView renders each car digitally and offers a
multitude of camera angles and viewing options for
each and every car and driver. Users can pause,
rewind, and replay live races and listen to any driver’s
in-car audio, in addition to a variety of other features
that give the viewer unparalleled customization over
how they watch and enjoy each race.

Other features that Turner has implemented on
NASCAR.com include a 24-hour news center, live
streaming for some races, a social networking “com-
munity” section, an extensive video library, live and
interactive broadband shows, and a merchandise
superstore.

Turner’s contract extension with the NBA extends
the longest-running partnership between a league and

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312 Part III: Key System Applications for the Digital Age

1. Describe the unique features of e-commerce
technology illustrated in this case.

2. How does the Web enhance the TV businesses
for the companies discussed in this case? How
does it add value?

3. Why is NASCAR TrackPass a good example of
Turner Sports New Media’s value to sports
league sites?

4. Do you think Turner Sports will be successful
migrating its content to social media sites where
its viewers are moving? Why or why not?

programming network in professional sports to a
whopping 32 years. The contract also grants Turner
Sports access to the NBA.com network, which
includes WNBA.com and NBADleague.com in
addition to the flagship site. Under the contract, TNT
will continue to televise NBA games, broaden their
Internet involvement, and jointly manage NBA’s digi-
tal businesses along with the league. These businesses
include NBA TV (a 24-hour digital TV network),
operating the NBA.com network of sites, NBA
League Pass, advertising, and availability of TNT’s
on-air TV talent for NBA.com’s interactive features.
Turner is likely to develop features like TrackPass
RaceView for NBA games to provide a similar level
of richness and customizability to the viewer experi-
ence.

One feature that Turner hopes to further develop is
TNT NBA Overtime—a broadband feature on
NBA.com that streams TNT-televised games, high-
lights, exclusive interviews, expert analysis, and more,
which users can get live, delayed, and on demand.
Turner’s contract with the NBA is slated to run
through the 2015–16 NBA season. If Turner’s track
record continues, NBA.com will continue to be an
example of rich, interactive media done right. But
Internet technologies change rapidly, and Turner is just
starting to exploit the power of social media.

Visit PGA.com, PGATour.com, or NASCAR.com,
explore the Web site, and then answer the following
questions:

1. What unique features of e-commerce technology
can you find on the site? What purposes do they
serve?

2. How does the Web site promote TV viewing?
How does it create value for the company?

3. What e-commerce business and revenue models
are being used?

In April 2009, Turner Sports announced its new
social media marketing campaign that utilizes
Facebook, YouTube, and Twitter to promoted TNT’s
“40 Games in 40 Nights” coverage of the 2009 NBA
Playoffs. The campaign includes player-specific
videos on YouTube, messaging on Facebook coordi-
nated with sponsored ads, and a special program to
encourage Facebook users to “Become a Fan” of the
NBA. Turner Sports is adding to its social media cam-
paign with a coordinated Twitter full-court press fea-
turing updates from popular announcers, with links to
the NBA’s Twitter page.

Turner is starting to experiment with user-gener-
ated content and Web experience control in a 2009 deal
with MLB.com to give online fans user-controlled
cameras to view every MLB postseason game through
a subscription service at MLB.com/Postseason.TV.
Users can control their experience of the games. To
promote more user involvement at NASCAR.com,
NASCAR announced a new program called
“NASCAR Citizen Journalist,” where the best-known
independent NASCAR bloggers and Web site operators
are republished at NASCAR.com.

Sources: “MLB.com, Turner Sports, and FOX Sports Give Fans Live User-
Controlled Views for Every MLB Postseason Game,” Reuters, October 6, 2009;
“ComScore Media Metrix Ranks Top 50 US Web Properties,” ComScore,
September 21, 2009; “NASCAR Openly Embraces Changing Media Landscape,”
NASCAR Press Release, June 2, 2009; “Turner Sports Engages Fans Online
Through Robust Social Media Campaign for 2009 NBA Playoffs,” Time Warner
Inc. Press Release, April 14, 2009.

CASE STUDY QUESTIONS MIS IN ACTION

dynamic pricing, the price of a product varies depending on the demand characteristics of
the customer or the supply situation of the seller.

These new digital markets may either reduce or increase switching costs, depending on
the nature of the 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
clothing purchased over the Web (although immediate consumption is possible with digital
music downloads and other digital products.)

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Digital markets provide many opportunities to sell directly to the consumer, bypassing
intermediaries, such as distributors or retail outlets. Eliminating intermediaries in the distri-
bution channel can significantly lower purchase transaction costs. To pay for all the steps in
a traditional distribution channel, a product may have to be priced as high as 135 percent 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.

Dig i ta l 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, Hollywood
movies, software, newspapers, magazines, and books can all be expressed, stored, delivered,
and sold as purely digital products. Currently, most of these products are sold as physical
goods, for example, CDs, DVDs, newspapers, and hard-copy books. But the Internet offers
the possibility of delivering 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 original
first unit is relatively high—in fact, it is nearly the total cost of the product because there are
few other costs of inventory and distribution. Costs of delivery over the Internet are very
low, 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 nothing short
of revolutionary, and we see the results around us every day. Businesses dependent on physi-
cal products for sales—such as bookstores, book publishers, music labels, and film studios—
face the possibility of declining sales and even destruction of their businesses. Newspapers
and magazines are losing readers to the Internet, and losing advertisers even as online news-
paper readership soars. Record label companies are losing sales to Internet piracy, and record
stores are going out of business. Video rental firms, such as Blockbuster, based on a physical
DVD market and physical stores have lost sales to NetFlix using an Internet catalog and
streaming video model. Hollywood studios as well face the prospect that Internet pirates will
distribute their product as a digital stream, bypassing Hollywood’s monopoly on DVD rentals
and sales, which now accounts for more than half of industry film revenues. Table 9.4
describes digital goods and how they differ from traditional physical goods.

Chapter 9: E-commerce: Digital Markets, Digital Goods 313

Figure 9-2
The Benefits of
Disintermediation
to the Consumer
The typical distribution
channel has several inter-
mediary 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.

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9.2 E-commerce: Business and Technology

E-commerce has grown from a few advertisements on early Web portals in 1995, to over 5
percent of all retail sales in 2010 (an estimated $245 billion), surpassing the mail order cat-
alog business. E-commerce is a fascinating combination of business models and new infor-
mation technologies. Let’s start with a basic understanding of the types of e-commerce,
and then describe e-commerce business and revenue models. We’ll also cover new tech-
nologies that help companies reach over 200 million online consumers in the United States,
and an estimated 600 million more worldwide.

TYPES OF E-COMMERCE

There are many ways to classify electronic commerce transactions. One is by looking at the
nature of the participants in the electronic commerce transaction. The three major electronic
commerce categories are business-to-consumer (B2C) e-commerce, business-to-business
(B2B) e-commerce, and consumer-to-consumer (C2C) e-commerce.

314 Part III: Key System Applications for the Digital Age

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

Digital Markets Traditional Market

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 Lower: purchase now
a 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

TABLE 9.3

Digital Markets
Compared to
Traditional Markets

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• Business-to-consumer (B2C) electronic commerce involves retailing products and
services to individual shoppers. BarnesandNoble.com, which sells books, software, and
music to individual consumers, is an example of B2C e-commerce.

• Business-to-business (B2B) electronic commerce involves sales of goods and services
among businesses. ChemConnect’s Web site for buying and selling chemicals and
plastics is an example of B2B e-commerce.

• Consumer-to-consumer (C2C) electronic commerce involves consumers selling
directly to consumers. For example, eBay, the giant Web auction site, enables people to
sell their goods to other consumers by auctioning their merchandise off to the highest
bidder, or for a fixed price. Craigslist is the most widely used platform used by
consumers to buy and sell directly from others.

Another way of classifying electronic commerce transactions is in terms of the plat-
forms used by participants in a transaction. Until recently, most e-commerce transactions
took place using a personal computer connected to the Internet over wired networks. Two
wireless mobile alternatives have emerged: mobile smartphones and dedicated e-readers like
the Kindle using cellular networks, and mobile smartphones and small tablet computers
using Wi-Fi wireless networks. The use of handheld wireless devices for purchasing goods
and services from any location has been termed mobile commerce or m-commerce. Both
business-to-business and business-to-consumer e-commerce transactions can take place
using m-commerce technology, which we discuss in detail in Section 9.3.

E-COMMERCE BUSINESS MODELS

Changes in the economics of information described earlier have created the conditions for
entirely new business models to appear, while destroying older business models. Table 9.5
describes some of the most important Internet business models that have emerged. All, in
one way or another, use the Internet to add extra value to existing products and services or to
provide the foundation for new products and services.

Portal
Portals such as Google, Bing, Yahoo, MSN, and AOL offer powerful Web search tools as
well as an integrated package of content and services, such as news, e-mail, instant messag-
ing, maps, calendars, shopping, music downloads, video streaming, and more, all in one
place. Initially, portals were primarily “gateways” to the Internet. Today, however, the portal
business model provides a destination site where users start their Web searching and linger
to read news, find entertainment, meet other people, (and be exposed to advertising). Portals
generate revenue primarily by attracting very large audiences, charging advertisers for ad
placement, collecting referral fees for steering customers to other sites, and charging for
premium services. In 2009, portals generated an estimated $36 billion in revenues. Although
there are hundreds of portal/search engine sites, the top five sites (Google, Yahoo,
MSN/Bing, AOL, and Ask.com) gather more than 95 percent of the Internet traffic because
of their superior brand recognition (Nielsen Online, 2009).

E-tailer
Online retail stores, often called e-tailers, come in all sizes, from giant Amazon with 2009
revenues of more than $20 billion, to tiny local stores that have Web sites. E-tailers are
similar to the typical bricks-and-mortar storefront, except that customers only need to
connect to the Internet to check their inventory and place an order. Altogether online retail
generated about $131 billion in revenues for 2009. The value proposition of e-tailers is to
provide convenient, low-cost shopping 24/7, offering large selections and consumer choice.
Some e-tailers, such as Walmart.com or Staples.com, referred to as “bricks-and-clicks,” are
subsidiaries or divisions of existing physical stores and carry the same products. Others,
however, operate only in the virtual world, without any ties to physical locations.
Amazon.com, BlueNile.com, and Drugstore.com are examples of this type of e-tailer.

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Several other variations of e-tailers—such as online versions of direct mail catalogs, online
malls, and manufacturer-direct online sales—also exist.

Content Provider
While e-commerce began as a retail product channel, it has increasingly turned into a global
content channel. “Content” is defined broadly to include all forms of intellectual property.
Intellectual property refers to all forms of human expression that can be put into a tangible
medium such as text, CDs, DVDs, or stored on any digital (or other) media, including the
Web. Content providers distribute information content, such as digital video, music, photos,
text, and artwork, over the Web. The value proposition of online content providers is that
consumers can find a wide range of content online, conveniently, and purchase this content
inexpensively, to be played, or viewed, on multiple computer devices or smartphones.

Providers do not have to be the creators of the content (although sometimes they are like
Disney.com), and are more likely to be Internet-based distributors of content produced and
created by others. For example, Apple sells music tracks at its iTunes Store, but it does not
create or commission new music.

The phenomenal popularity of iTunes 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 or video broadcasts via the Internet, allowing subscribing users to down-
load audio or video files onto their personal computers or portable music players.

Estimates vary, but total download and subscription media revenues are somewhere
between $4 billion and $8 billion annually. They are the fastest growing segment within
e-commerce, growing at an estimated 20 percent annual rate (eMarketer, 2009).

316 Part III: Key System Applications for the Digital Age

Category Description Examples

E-tailer Sells physical products directly to consumers Amazon.com
or to individual businesses. RedEnvelope.com

Transaction broker Saves users money and time by processing online ETrade.com
sales transactions and generating a fee each Expedia.com
time a transaction occurs.

Market creator Provides a digital environment where buyers eBay.com
and sellers can meet, search for products, Priceline.com
display products, and establish prices for ChemConnect.com
those products. Can serve consumers or
B2B e-commerce, generating revenue from
transaction fees.

Content provider Creates revenue by providing digital content, WSJ.com
such as digital news, music, photos, or video, GettyImages.com
over the Web. The customer may pay to iTunes.com
access the content, or revenue may be Games.com
generated by selling advertising space.

Community Provides an online meeting place where iVillage.com
provider people with similar interests can MySpace.com

communicate and find useful information. Facebook.com

Portal Provides initial point of entry to the Web Yahoo.com
along with specialized content and other Bing.com
services. Google.com

Service Provider Provides Web 2.0 applications such as photo Google Apps
sharing, video sharing, and user-generated Photobucket.com
content as services. Provide other services such Xdrive.com
as online data storage and backup.

TABLE 9.5

Internet Business
Models

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Transaction Broker
Sites that process transactions for consumers normally handled in person, by phone, or by
mail are transaction brokers. The largest industries using this model are financial services
and travel services. The online transaction broker’s primary value propositions are savings
of money and time, as well as providing an extraordinary inventory of financial products and
travel packages, in a single location. Online stock brokers and travel booking services
charge fees that are considerably less than traditional versions of these services.

Market Creator
Market creators build a digital environment in which buyers and sellers can meet, display
products, search for products, and establish prices. The value proposition of online market
creators is that they provide a platform where sellers can easily display their wares and
where purchasers can buy directly from sellers. Online auction markets like eBay and
Priceline are good examples of the market creator business model. Another example is
Amazon’s Merchants platform (and similar programs at eBay) where merchants are allowed
to set up stores on Amazon’s Web site and sell goods at fixed prices to consumers. This is
reminiscent of open air markets where the market creator operates a facility (a town square)
where merchants and consumers meet. Online market creators will generate about $14 bil-
lion in revenues for 2009.

Service Provider
While e-tailers sell products online, service providers offer services online. There’s been an
explosion in online services. Web 2.0 applications, photo sharing, and online sites for data
backup and storage all use a service provider business model. Software is no longer a
physical product with a CD in a box, but increasingly software as a service (SaaS) that you
subscribe to online rather than purchase from a retailer (see Chapter 4). Google has led the
way in developing online software service applications such as Google Apps, Gmail, and
online data storage services.

Community Provider
Community providers are sites that create a digital online environment where people with
similar interests can transact (buy and sell goods); share interests, photos, videos; communi-
cate with like-minded people; receive interest-related information; and even play out
fantasies by adopting online personalities called avatars. The social networking sites
Facebook, MySpace, LinkedIn, and Twitter, online communities such as iVillage, and
hundreds of other smaller, niche sites such as Doostang and Sportsvite, all offer users
community building tools and services. Social networking sites have been the fastest
growing Web sites in recent years, often doubling their audience size in a year. However,
they are struggling to achieve profitability. The Interactive Session on Organizations and
chapter-ending case study explore this topic.

E-COMMERCE REVENUE MODELS

A firm’s revenue model describes how the firm will earn revenue, generate profits, and
produce a superior return on investment. Although there are many different e-commerce
revenue models that have been developed, most companies rely on one, or some combina-
tion, of the following six revenue models: advertising, sales, subscription, free/freemium,
transaction fee, and the affiliate model.

Advertising Revenue Model
In the advertising revenue model, a Web site generates revenue by attracting a large audience
of visitors who can then be exposed to advertisements. The advertising model is the most
widely used revenue model in e-commerce, and arguably, without advertising revenues the
Web would be a vastly different experience from what it is now. Content on the Web—
everything from news to videos and opinions—is “free” to visitors because advertisers pay

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318 Part III: Key System Applications for the Digital Age

INTERACTIVE SESSION: ORGANIZATIONS Twitter Searches For a Business Model

Twitter, the social networking site based on 140-
character text messages, is the buzz social networking
phenomenon of the year. Like all social networking
sites, such as Facebook, MySpace, YouTube, Flickr,
and others, Twitter provides a platform for users to
express themselves by creating content and sharing it
with their “followers,” who sign up to receive some-
one’s “tweets.” And like most social networking sites,
Twitter faces the problem of how to make money. As
of October 2009, Twitter has failed to generate rev-
enue as its management ponders how best to exploit
the buzz and user base it has created.

Twitter began as a Web-based version of popular
text messaging services provided by cell phone car-
riers. Executives in a podcasting company called
Odeo were searching for a new revenue-producing
product or service. In March 2006 they created a
stand-alone, private company called Twitter.

The basic idea was to marry short text messaging
on cell phones with the Web and its ability to create
social groups. You start by establishing a Twitter
account online, and identifying the friends that you
would like to receive your messages. By sending a
text message called a “tweet” to a short code on your
cell phone (40404), you can tell your friends what
you are doing, your location, and whatever else you
might want to say. You are limited to 140 characters,
but there is no installation and no charge. This social
network messaging service to keep buddies
informed was a smash success.

Coming up with solid numbers for Twitter is not
easy because the firm is not releasing any “official”
figures. By September 2009, Twitter, according to
some estimates, had around 20 million unique
monthly users in the United States, and perhaps 50
million worldwide. Industry observers believe
Twitter is the third largest social networking site
behind Facebook and MySpace.

The number of individual tweets is also known
only by the company. According to the company, by
early 2007, Twitter had transmitted 20,000 tweets,
which jumped to 60,000 tweets in a few months.
During the Iranian rebellion in June 2009, there
were reported to be over 200,000 tweets per hour
worldwide. On the other hand, experts believe that
80 percent of tweets are generated by only 10 per-
cent of users, and that the median number of tweet
readers per tweet is 1 (most Tweeters tweet to one
follower). Even more disturbing is that Twittter has a
60 percent churn rate: only 40 percent of users
remain more than one month. Obviously, many users
lose interest in learning about their friends’ break-

fast menu, and many feel “too connected” to their
“friends,” who in fact may only be distant acquain-
tances, if that. On the other hand, celebrities such as
Britney Spears have hundreds of thousands of
“friends” who follow their activities, making Twitter
a marvelous, free public relations tool. Twitter
unfortunately does not make a cent on these activi-
ties.

The answer to these questions about unique users,
numbers of tweets, and churn rate are critical to
understanding the business value of Twitter as a firm.
To date, Twitter has generated losses and has
unknown revenues, but in February 2009, it raised a
$35 million in a deal that valued the company at $255
million. The following September, Twitter announced
it had raised $100 million in additional funding, from
private equity firms, previous investors, and mutual
fund giant T. Rowe Price, based on a company valua-
tion of a staggering $1 billion!

So how can Twitter make money from its users,
and their tweets? What’s their business model and
how might it evolve over time? Twitter’s main asset
is user attention and audience size (eyeballs per
day). An equally important asset is the database of
tweets that contains real-time, spontaneous com-
ments, observations, and opinions of the audience,
and the search engine that mines those tweets for
patterns.

Yet another asset has emerged in the last year:
Twitter is a powerful alternative media platform for
the distribution of news, videos, and pictures. Once
again, no one predicted that Twitter would be the
first to report on terrorist attacks in Mumbai, the
landing of a passenger jet in the Hudson River, or the
Iranian rebellion in June 2009.

How can these assets be monetized? Twitter
could ask users to pay a subscription fee, especially
for premium services such as videos and music
downloads. However, it may be too late for this idea
because users have come to expect the service to be
free. Twitter could sell display ads or text ads on its
screens, something it is testing in Japan. But social
media sites are known to be poor advertising venues
with very low response rates, although this could
change with better targeting. Twitter could charge
advertisers to pay a fee for inserting messages into
individual tweets. Message your friend to meet you
in Times Square, and the message contains an ad for
a nearby restaurant. Twitter could charge service
providers such as doctors, dentists, lawyers, and hair
salons for providing their customers with unex-
pected appointment availabilities.

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Chapter 9: E-commerce: Digital Markets, Digital Goods 319

1. Based on your reading in this chapter, how would
you characterize Twitter’s business model?

2. If Twitter is to have a revenue model, which of the
revenue models described in this chapter would
work?

3. What is the most important asset that Twitter has,
and how could it monetize this asset?

4. What impact will a high customer churn rate have
on Twitter’s potential advertising revenue?

Twitter’s most likely steady revenue source might
be the intelligence embedded in its database of hun-
dreds of millions of real-time tweets. Major firms such
as Starbucks, Amazon, Intuit (makers of QuickBooks
and the Mint.com site), and Dell have used Twitter to
understand how their customers are reacting to prod-
ucts, services and Web sites, and then making correc-
tions or changes in those services and products.

The company is coy about announcing its busi-
ness model. In a nod to Apple’s iTunes and
Amazon’s merchant services, Twitter has turned
over its messaging capabilities and software plat-
form to others, one of which is CoTweet.com, a
company that organizes multiple Twitter exchanges

1. Go to Twitter.com and enter a search on your
favorite (or least favorite) car. Can you find the
company’s official site? What else do you find?
Describe the results and characterize the potential
risks and rewards for companies that would like to
advertise to Twitter’s audience.

2. How would you improve Twitter’s Web site to
make it more friendly for large advertisers?

3. Teenagers are infrequent users of Twitter because
they use their cell phones for texting, and most
users are adults 18–34 years of age. Find five
users of Twitter and ask them how long they have
used the service, are they likely to continue using
the service, and how would they feel about banner
ads appearing on their Twitter Web screen and
phone screens. Are loyal users of Twitter less
likely (or more likely) to tolerate advertising on
Twitter?

for customers so they can be tracked more easily.
Google is selling ad units based around a company’s
last five tweets (ads are displayed to users who have
created or viewed tweets about a company). Twitter
is not charging for this service. In the meantime,
observers wonder if Twitter is twittering away its
assets.

Sources: Alexei Oreskovic, “Twitter Snags $100 Million Investment, New
Backers,” Reuters, September 25, 2009; Claire Cain Miller, “Putting Twitter’s
World to Use,” The New York Times, April 14, 2009; Jon Fine, “Twitter Makes a
Racket. But Revenues?” BusinessWeek, April 9, 2009; Jessica Vascallaro, “Firms
Seek Profit in Twitter’s Chatter,” The Wall Street Journal, March 26, 2009; Taylor
Buley, “Twitter’s Analytical Business Plan,” Forbes, February 15, 2009; Ben
Kunz, “The Trouble With Twitter,” BusinessWeek, August 18, 2008.

CASE STUDY QUESTIONS MIS IN ACTION

the production and distribution costs in return for the right to expose visitors to ads.
Companies will spend an estimated $240 billion on advertising in 2009, and an estimated $24
billion of that amount on online advertising (in the form of a paid message on a Web site, paid
search listing, video, widget, game, or other online medium, such as instant messaging). In
the last five years, advertisers have increased online spending and cut outlays on traditional
channels such as radio, television, and newspapers.

Web sites with the largest viewership or that attract a highly specialized, differentiated
viewership and are able to retain user attention (“stickiness”) are able to charge higher
advertising rates. Yahoo, for instance, derives nearly all its revenue from display ads (banner
ads) and to a lesser extent search engine text ads. Ninety-eight percent of Google’s revenue
derives from selling keywords to advertisers in an auction-like market (the AdSense pro-
gram).

Sales Revenue Model
In the sales revenue model, companies derive revenue by selling goods, information, or
services to customers. Companies such as Amazon.com (which sells books, music, andI

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other products), LLBean.com, and Gap.com, all have sales revenue models. Content
providers make money by charging for downloads of entire files such as music tracks
(iTunes Store) or books or for downloading music and/or video streams (Hulu.com TV
shows–see Chapter 3). Apple has pioneered and strengthened the acceptance of micropay-
ments. Micropayment systems provide content providers with a cost-effective method for
processing high volumes of very small monetary transactions (anywhere from $.25 to $5.00
per transaction). MyMISLab has a Learning Track with more detail on micropayment and
other e-commerce payment systems.

Subscription Revenue Model
In the subscription revenue model, a Web site offering content or services charges a
subscription fee for access to some or all of its offerings on an ongoing basis. Content
providers often use this revenue model. For instance, the online version of Consumer
Reports provides access to premium content, such as detailed ratings, reviews, and
recommendations, only to subscribers, who have a choice of paying a $5.95 monthly
subscription fee or a $26.00 annual fee. The Wall Street Journal has the largest online
subscription newspaper with more than 1 million online subscribers. To be successful, the
subscription model requires that the content be perceived as a having high added value,
differentiated, and not readily available elsewhere nor easily replicated. Companies
successfully offering content or services online on a subscription basis include Match.com
and eHarmony (dating services), Ancestry.com and Genealogy.com (genealogy research),
Microsoft’s Xboxlive.com (video games), and Rhapsody.com (music).

Free/Fremium Revenue Model
In the free/fremium revenue model, firms offer basic services or content for free, while
charging a premium for advanced or special features. For example, Google offers free
applications, but charges for premium services. The Flickr photo-sharing service offers
free basic services for sharing photos with friends and family, and also sells a $24.95
“premium” package that provides users unlimited storage, high-definition video storage
and play back, and freedom from display advertising. The idea is to attract very large
audiences with free services, and then to convert some of this audience to pay a sub-
scription for premium services. One problem with this model is converting people from
being “free loaders” into paying customers. “Free” can be a powerful model for losing
money.

Transaction Fee Revenue Model
In the transaction fee revenue model, a company receives a fee for enabling or executing a
transaction. For example, eBay provides an online auction marketplace and receives a small
transaction fee from a seller if the seller is successful in selling an item. E*Trade, an online
stockbroker, receives transaction fees each time it executes a stock transaction on behalf of
a customer. The transaction revenue model enjoys wide acceptance in part because the true
cost of using the platform is not immediately apparent to the user.

Affiliate Revenue Model
In the affiliate revenue model, Web sites (called “affiliate Web sites) send visitors to
other Web sites in return for a referral fee or percentage of the revenue from any resulting
sales. For example, MyPoints makes money by connecting companies to potential cus-
tomers by offering special deals to its members. When members take advantage of an
offer and make a purchase, they earn “points” they can redeem for free products and ser-
vices, and MyPoints receives a referral fee. Community feedback sites such as Epinions
receive much of their revenue from steering potential customers to Web sites where they
make a purchase. Amazon uses affiliates who steer business to the Amazon Web site by
placing the Amazon logo on their blogs. Personal blogs may be involved in affiliate mar-
keting. Some bloggers are paid directly by manufacturers, or receive free products, for
speaking highly of products and providing links to sales channels.

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WEB 2.0, SOCIAL NETWORKING AND THE WISDOM OF CROWDS

One of the fastest growing areas of e-commerce revenues are Web 2.0 online services, which
we described in Chapter 6. The most popular Web 2.0 service is social networking, online
meeting places where people can meet their friends and their friends’ friends. Every month
over 80 million Internet users in the United States visit a social networking site like
Facebook, MySpace, LinkedIn, and hundreds of others.

Social networking sites link people through their mutual business or personal connec-
tions, enabling them to mine their friends (and their friends’ friends) for sales leads,
job-hunting tips, or new friends. MySpace, Facebook, and Friendster appeal to people who
are primarily interested in extending their friendships, while LinkedIn focuses on job net-
working for professionals.

Social networking sites and online communities offer new possibilities for e-commerce.
Networking sites like Facebook and MySpace sell banner, video, and text ads; sell user
preference information to marketers; and sell products such as music, videos, and e-books.
Corporations set up their own Facebook and MySpace profiles to interact with potential
customers. For example, Procter & Gamble set up a MySpace profile page for Crest
toothpaste soliciting “friends” for a fictional character called “Miss Irresistable.” Business
firms can also “listen” to what social networkers are saying about their products, and obtain
valuable feedback from consumers. At user-generated content sites like YouTube, high-qual-
ity video content is used to display advertising, and Hollywood studios have set up their own
channels to market their products. The chapter-ending case study provides a detailed discus-
sion of social networking on Facebook.

At social shopping sites like Kaboodle, ThisNext, and Stylehive you can swap shopping
ideas with friends. Facebook offers this same service on a voluntary basis. Online commu-
nities are also ideal venues to employ viral marketing techniques. Online viral marketing is
like traditional word-of-mouth marketing except that the word can spread across an online
community at the speed of light, and go much further geographically than a small network
of friends.

The Wisdom of Crowds
Creating sites where thousands, even millions, of people can interact offers business firms
new ways to market and advertise, to discover who likes (or hates) their products. In a
phenomenon called “the wisdom of crowds,” some argue that large numbers of people can
make better decisions about a wide range of topics or products than a single person or even
a small committee of experts (James Surowiecki, 2004).

Obviously this is not always the case, but it can happen in interesting ways. In market-
ing, the “wisdom of crowds” concept suggests that firms should consult with thousands of
their customers first as a way of establishing a relationship with them, and second, to better
understand how their products and services are used and appreciated (or rejected). Actively
soliciting the comments of your customers builds trust and sends the message to your
customers that you care what they are thinking, and that you need their advice.

Beyond merely soliciting advice, firms can be actively helped in solving some business
problems using what is called crowdsourcing. For instance, in 2006, Netflix announced a con-
test in which it offered to pay $1 million to the person or team who comes up with a method for
improving by 10 pecent Netflix’s prediction of what movies customers would like as measured
against their actual choices. By 2009, Netflix received 44,014 entries from 5,169 teams in 186
countries. The winning team improved a key part of Netflix’s business: a recommender system
that recommends to its customers what new movies to order based on their personal past movie
choices and the choices of millions of other customers who are like them (Howe, 2008).

Firms can also use the wisdom of crowds in the form of prediction markets. Prediction
markets are established as peer-to-peer betting markets where participants make bets on
specific outcomes of, say, quarterly sales of a new product, designs for new products, or
political elections. The world’s largest commercial prediction market is Betfair, founded in
2000, where you bet for or against specific outcomes on football games, horse races, and

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322 Part III: Key System Applications for the Digital Age

whether or not the Dow Jones will go up or down in a single day. Iowa Electronic Markets
(IEM) is an academic market focused on elections. You can place bets on the outcome of
local and national elections.

E-COMMERCE MARKETING

While e-commerce and the Internet have changed entire industries and enable new business
models, no industry has been more affected than marketing and marketing communications.
The Internet provides marketers with new ways of identifying and communicating with
millions of potential customers at costs far lower than traditional media, including search
engine marketing, data mining, recommender systems, and targeted e-mail. The Internet
enables long tail marketing. Before the Internet, reaching a large audience was very expen-
sive, and marketers had to focus on attracting the largest number of consumers with popular hit
products, whether music, Hollywood movies, books, or cars. In contrast, the Internet allows
marketers to inexpensively find potential customers for which demand is very low, people on
the far ends of the bell (normal) curve. For instance, the Internet makes it possible to sell inde-
pendent music profitably to very small audiences. There’s always some demand for almost any
product. Put a string of such long tail sales together and you have a profitable business.

The Internet also provides new ways—often instantaneous and spontaneous—to gather
information from customers, adjust product offerings, and increase customer value.
Table 9.6 describes the leading marketing and advertising formats used in e-commerce.

Many e-commerce marketing firms use behavioral targeting techniques to increase the
effectiveness of banner, rich media, and video ads. Behavioral targeting refers to tracking
the click-streams (history of clicking behavior) of individuals on thousands of Web sites for
the purpose of understanding their interests and intentions, and exposing them to advertise-
ments which are uniquely suited to their behavior. Ultimately, this more precise understand-
ing of the customer leads to more efficient marketing (the firm pays for ads only to those
shoppers who are most interested in their products) and larger sales and revenues.
Unfortunately, behavioral targeting of millions of Web users also leads to the invasion of
personal privacy without user consent (see our discussion in Chapter 12).

Behavioral targeting takes place at two levels: at individual Web sites and on various
advertising networks that track users across thousands of Web sites. All Web sites collect
data on visitor browser activity and store it in a database. They have tools to record the site
that users visited prior to coming to the Web site, where these users go when they leave that
site, the type of operating system they use, browser information, and even some location
data. They also record the specific pages visited on the particular site, the time spent on each
page of the site, the types of pages visited, and what the visitors purchased (see Figure 9-3).
Firms analyze this information about customer interests and behavior to develop precise
profiles of existing and potential customers.

This information enables firms to understand how well their Web site is working, create
unique personalized Web pages that display content or ads for products or services of
special interest to each user, improve the customer’s experience, and create additional value
through a better understanding of the shopper (see Figure 9-4). By using personalization
technology to modify the Web pages presented to each customer, marketers achieve some of
the benefits of using individual salespeople at dramatically lower costs. For instance,
General Motors will show a Chevrolet banner ad to women emphasizing safety and utility,
while men will receive different ads emphasizing power and ruggedness.

What if you are a large national advertising company with many different clients trying
to reach millions of consumers? What if you were a large global manufacturer trying to
reach potential consumers for your products? With millions of Web sites, working with each
one would be impractical. Advertising networks solve this problem by creating a network of
several thousand of the most popular Web sites visited by millions of people, tracking the
behavior of these users across the entire network, building profiles of each user, and then
selling these profiles to advertisers. Looking for young, single consumers, with college
degrees, living in the Northeast, in the 18–34 age range who are interested purchasing a

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Chapter 9: E-commerce: Digital Markets, Digital Goods 323

Marketing Format 2009 Revenue Description

Search engine $11.95 Text ads targeted at precisely what the customer
is looking for at the moment of shopping and
purchasing. Sales oriented.

Display ads $4.65 Banner ads (pop-ups and leave-behinds) with
interactive features; increasingly behaviorally
targeted to individual Web activity. Brand
development and sales.

Classified $2.67 Job, real estate, and services ads; interactive, rich
media, and personalized to user searches. Sales
and branding.

Affiliate and blog $1.76 Blog and Web site marketing steers customers to
marketing parent sites; interactive, personal, and often with

video. Sales orientation.

Rich media $1.69 Animations, games, and puzzles. Interactive,
targeted, and entertaining. Branding orientation.

Video $1.05 Fastest growing format, engaging and
entertaining; behaviorally targeted, interactive.
Branding and sales.

E-mail $.39 Effective, targeted marketing tool with interactive
and rich media potential. Sales oriented.

Sponsorships $.32 Online games, puzzle, contests, and coupon sites
sponsored by firms to promote products. Sales
orientation.

TABLE 9.6

Online Marketing and
Advertising Formats
Revenue (Billions)

Figure 9-3
Web Site Visitor
Tracking
E-commerce Web sites
have tools to track a
shopper’s every step
through an online store.
Close examination of
customer behavior at a
Web site selling women’s
clothing shows what the
store might learn at each
step and what actions it
could take to increase
sales.

European car? Not a problem. Advertising networks can identify and deliver hundreds of
hundreds of thousands of people who fit this profile to expose to ads for European cars as
they move from one Web site to another. Estimates vary, but behaviorally targeted ads are
ten times more likely to produce a consumer response than a randomly chosen banner or
video ad (see Figure 9-5). IS

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B2B E-COMMERCE: NEW EFFICIENCIES AND RELATIONSHIPS

The trade between business firms (business-to-business commerce or B2B) represents a
huge marketplace. The total amount of B2B trade in the United States in 2009 is about $11.5
trillion, with B2B e-commerce (online B2B) contributing about $3.36 trillion of that amount
(U.S. Census Bureau, 2009a, b; authors’ estimates). By 2013, B2B e-commerce should
grow to about $4.75 trillion in the United States, assuming an average growth rate of about
9 percent. The process of conducting trade among business firms is complex and requires
significant human intervention, and therefore, it consumes significant resources. Some firms
estimate that each corporate purchase order for support products costs them, on average, at

324 Part III: Key System Applications for the Digital Age

Figure 9-4
Web Site
Personalization
Firms can create unique
personalized Web pages
that display content or
ads for products or ser-
vices of special interest
to individual users,
improving the customer
experience and creating
additional value.

Figure 9-5
How an Advertising
Network such as
Doubleclick Works
Advertising networks
have become controver-
sial among privacy advo-
cates because of their
ability to track individual
consumers across the
Internet. We discuss pri-
vacy issues further in
Chapter 12.

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least $100 in administrative overhead. Administrative overhead includes processing paper,
approving purchase decisions, spending time using the telephone and fax machines to
search for products and arrange for purchases, arranging for shipping, and receiving the
goods . Across the economy, this adds up to trillions of dollars annually being spent for pro-
curement processes that could potentially be automated. If even just a portion of inter-firm
trade were automated, and parts of the entire procurement process assisted by the Internet,
then literally trillions of dollars might be released for more productive uses, consumer prices
potentially would fall, productivity would increase, and the economic wealth of the nation
would expand. This is the promise of B2B e-commerce. The challenge of B2B e-commerce
is changing existing patterns and systems of procurement, and designing and implementing
new Internet-based B2B solutions.

Business-to-business e-commerce refers to the commercial transactions that occur
among business firms. Increasingly these transactions are flowing through a variety of dif-
ferent Internet-enabled mechanisms. About 80 percent of online B2B e-commerce is still
based on proprietary systems for electronic data interchange (EDI). Electronic data
interchange enables the computer-to-computer exchange between two organizations of stan-
dard transactions such as invoices, bills of lading, shipment schedules, or purchase orders.
Transactions are automatically transmitted from one information system to another through
a network, eliminating the printing and handling of paper at one end and the inputting of
data at the other. Each major industry in the United States and much of the rest of the world
has EDI standards that define the structure and information fields of electronic documents
for that industry.

EDI originally automated the exchange of documents such as purchase orders, invoices,
and shipping notices. Although some companies still use EDI for document automation, firms
engaged in just-in-time inventory replenishment and continuous production use EDI as a sys-
tem for continuous replenishment. Suppliers have online access to selected parts of the pur-
chasing firm’s production and delivery schedules and automatically ship materials and goods
to meet prespecified targets without intervention by firm purchasing agents (see Figure 9-6).

Although many organizations still use private networks for EDI, they are increasingly
Web-enabled because Internet technology provides a much more flexible and low-cost
platform for linking to other firms. Businesses are able to extend digital technology to a
wider range of activities and broaden their circle of trading partners.

Take procurement, for example. Procurement involves not only purchasing goods and
materials but also sourcing, negotiating with suppliers, paying for goods, and making deliv-
ery arrangements. Businesses can now use the Internet to locate the most low-cost supplier,
search online catalogs of supplier products, negotiate with suppliers, place orders, make
payments, and arrange transportation. They are not limited to partners linked by traditional
EDI networks.

The Internet and Web technology enable businesses to create new electronic storefronts
for selling to other businesses with multimedia graphic displays and interactive features
similar to those for B2C commerce. Alternatively, businesses can use Internet technology to

Chapter 9: E-commerce: Digital Markets, Digital Goods 325

Figure 9-6
Electronic Data Interchange (EDI)
Companies use EDI to automate transactions for B2B e-commerce and continuous inventory replen-
ishment. Suppliers can automatically send data about shipments to purchasing firms. The purchasing
firms can use EDI to provide production and inventory requirements and payment data to suppliers.IS

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create extranets or electronic marketplaces for linking to other businesses for purchase and
sale transactions.

Private industrial networks typically consist of a large firm using an extranet to link to
its suppliers and other key business partners (see Figure 9-7). The network is owned by the
buyer, and it permits the firm and designated suppliers, distributors, and other business part-
ners to share product design and development, marketing, production scheduling, inventory
management, and unstructured communication, including graphics and e-mail. Another
term for a private industrial network is a private exchange.

An example is VW Group Supply, which links the Volkswagen Group and its suppliers.
VW Group Supply handles 90 percent of all global purchasing for Volkswagen, including all
automotive and parts components.

Net marketplaces, which are sometimes called e-hubs, provide a single, digital
marketplace based on Internet technology for many different buyers and sellers (see
Figure 9-8). They are industry owned or operate as independent intermediaries between
buyers and sellers. Net marketplaces generate revenue from purchase and sale transac-

326 Part III: Key System Applications for the Digital Age

Figure 9-7
A Private Industrial
Network
A private industrial net-
work, also known as a
private exchange, links a
firm to its suppliers, dis-
tributors, and other key
business partners for
efficient supply-chain
management and other
collaborative commerce
activities.

Figure 9-8
A Net Marketplace
Net marketplaces are
online marketplaces
where multiple buyers
can purchase from
multiple sellers.

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tions and other services provided to clients. Participants in Net marketplaces can
establish prices through online negotiations, auctions, or requests for quotations, or they
can use fixed prices.

There are many different types of Net marketplaces and ways of classifying them. Some
Net marketplaces sell direct goods and some sell indirect goods. Direct goods are goods
used in a production process, such as sheet steel for auto body production. Indirect goods
are all other goods not directly involved in the production process, such as office supplies or
products for maintenance and repair. Some Net marketplaces support contractual purchasing
based on long-term relationships with designated suppliers, and others support short-term
spot purchasing, where goods are purchased based on immediate needs, often from many
different suppliers.

Some Net marketplaces serve vertical markets for specific industries, such as automo-
biles, telecommunications, or machine tools, whereas others serve horizontal markets for
goods and services that can be found in many different industries, such as office equipment
or transportation.

Exostar is an example of an industry-owned Net marketplace, focusing on long-term
contract purchasing relationships and on providing common networks and computing
platforms for reducing supply chain inefficiencies. This aerospace and defense industry-
sponsored Net marketplace was founded jointly by BAE Systems, Boeing, Lockheed
Martin, Raytheon, and Rolls-Royce plc to connect these companies to their suppliers and
facilitate collaboration. More than 16,000 trading partners in the commercial, military, and
government sectors use Exostar’s sourcing, e-procurement, and collaboration tools for both
direct and indirect goods.

Exchanges are independently owned third-party Net marketplaces that connect thou-
sands of suppliers and buyers for spot purchasing. Many exchanges provide vertical markets
for a single industry, such as food, electronics, or industrial equipment, and they primarily
deal with direct inputs. For example, Gotopaper enables a spot market for paper, board, and
kraft among buyers and sellers in the paper industries from over 75 countries.

Exchanges proliferated during the early years of e-commerce, but many have failed.
Suppliers were reluctant to participate because the exchanges encouraged competitive
bidding that drove prices down and did not offer any long-term relationships with buyers or
services to make lowering prices worthwhile. Many essential direct purchases are not
conducted on a spot basis because they require contracts and consideration of issues such as
delivery timing, customization, and quality of products.

9.3 The Mobile Digital Platform and Mobile E-commerce

Walk down the street in any major metropolitan area and count how many people are pecking
away at their iPhones or BlackBerries. Ride the trains, fly the planes, and you’ll see your fel-
low travelers reading an online newspaper, watching a video on their phone, or reading a
novel on their Kindle. In five years, the majority of Internet users in the United States will
rely on mobile devices as their primary device for accessing the Internet. M-commerce has
taken off.

In 2009, m-commerce represented less than 10 percent of all e-commerce, with about $5
billion in annual revenues generated by selling music, videos, ring tones, applications,
movies, television, and location-based services like local restaurant locators and traffic
updates. However, m-commerce is the fastest growing form of e-commerce, expanding at a
rate of 50 percent or more per year, and is estimated to grow to $27 billion in 2013 (see
Figure 9-9). In 2009, there were an estimated 3 billion cell phone subscribers worldwide,
with over 600 million in China and 281 million in the United States (eMarketer, 2009).

M-COMMERCE SERVICES AND APPLICATIONS

The main areas of growth in mobile e-commerce are location-based services, about $134
million in revenue in 2009; software application sales at stores such as iTunes (about $3

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billion); entertainment downloads of ringtones, music, video, and TV shows (about $1
billion); mobile display advertising ($760 million); direct shopping services such as Slifter
($200 million); and e-book sales ($100 million).

M-commerce applications have taken off for services that are time-critical, that appeal to
people on the move, or that accomplish a task more efficiently than other methods. They are
especially popular in Europe, Japan, South Korea, and other countries with strong wireless
broadband infrastructures. The following sections describe some examples.

Location-Based Services
Wikitude.me provides a special kind of browser for smart phones equipped with a built-in
global positioning system (GPS) and compass that can identify your precise location and
where the phone is pointed. Using information from over 800,000 points of interest avail-
able on Wikipedia, plus thousands of other local sites, the browser overlays information
about points of interest you are viewing, and displays that information on your smart-
phone screen, superimposed on a map or photograph that you just snapped. For example,
users can point their smart phone cameras towards mountains from a tour bus and see the
names and heights of the mountains displayed on the screen. Lost in a European medieval
city, or downtown Los Angeles? Open up the Wikitude browser, point your camera at a
building, and then find the address and other interesting details. Wikitude.me also allows
users to geo-tag the world around them, and then submit the tags to Wikitude in order to
share content with other users.

Banking and Financial Services
Banks and credit card companies are rolling out services that let customers manage their
accounts from their mobile devices. JPMorgan Chase and Bank of America customers can
use their cell phones to check account balances, transfer funds, and pay bills.

Wireless Advertising
Although the mobile advertising market is currently small ($760 million), it is rapidly
growing (up 17 percent from last year and expected to grow to over $3.3 billion by 2013), as
more and more companies seek ways to exploit new databases of location-specific informa-
tion. For example, in May 2009, Alcatel-Lucent announced a new service to be managed by
1020 Placecast that will identify cell phone users within a specified distance of an adver-
tiser’s nearest outlet and notify them about the outlet’s address and phone number, perhaps
including a link to a coupon or other promotion. 1020 Placecast’s clients include Hyatt,
FedEx, and Avis Rent A Car.

Burger King and Suburu have recently run trial campaigns using Useful Networks’
Store Finder application that allowed users to click a mobile banner ad to find the nearest

328 Part III: Key System Applications for the Digital Age

Figure 9-9
Consolidated
Mobile Commerce
Revenues
Mobile e-commerce is
the fastest growing type
of B2C e-commerce
although it represents
only a small part of all e-
commerce in 2009.

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store location. The trial showed that the location-enabled campaign significantly increased
Store Finder conversion rates compared to users who had to manually enter zip codes to find
locations.

Loopt is a free social networking application that allows you to share your status and
track the location of friends via smartphones such as the iPhone, BlackBerry, and over 100
other mobile devices. Loopt has more than 1 million users. Loopt doesn’t sell information to
advertisers, but does post ads based on user location. Loopt’s target is to deal with advertis-
ers at the walking level (within 200 to 250 meters).

Yahoo! displays ads on its mobile home page for companies such as Pepsi, Procter &
Gamble, Hilton, Nissan, and Intel. Google is displaying ads linked to cell phone searches by
users of the mobile version of its search engine, while Microsoft offers banner and text
advertising on its MSN Mobile portal in the United States. Ads are starting to be embedded
in downloadable applications such as games and videos.

Games and Entertainment
Cell phones are quickly turning into portable entertainment platforms. Mobile phone
services offer downloadable digital games, music, and ringtones. More and more handset
models combine the features of a cell phone and a portable music player.

Users of broadband services from the major wireless vendors can download on-demand
video clips, news clips, and weather reports. MobiTV, offered by Sprint and AT&T Wireless,
features live TV programs, including MSNBC and Fox Sports. Film companies are starting
to produce short films explicitly designed to play on mobile phones. User-generated content
is also appearing in mobile form. Facebook, MySpace, YouTube, and other social network-
ing sites have versions for mobile devices.

9.4 Building an E-commerce Web Site

Building a successful e-commerce site requires a keen understanding of business, tech-
nology, and social issues, as well as a systematic approach. A complete treatment of the
topic is beyond the scope of this text, and students should consult books devoted to just
this topic (Laudon and Traver, 2010). The two most important management challenges in
building a successful e-commerce site are (1) developing a clear understanding of your
business objectives and (2) knowing how to choose the right technology to achieve those
objectives.

PIECES OF THE SITE-BUILDING PUZZLE

Let’s assume you are a manager for a medium-sized, industrial parts firm of around 10,000
employees worldwide, operating in eight countries in Europe, Asia, and North America.
Senior management has given you a budget of $1 million to build an e-commerce site
within one year. The purpose of this site will be to sell and service the firm’s 20,000 cus-
tomers, who are mostly small machine and metal fabricating shops around the world.
Where do you start?

First, you must be aware of the main areas where you will need to make decisions On the
organizational and human resources fronts, you will have to bring together a team of
individuals who possess the skill sets needed to build and manage a successful e-commerce
site. This team will make the key decisions about technology, site design, and the social and
information policies that will be applied at your site. The entire site development effort must
be closely managed if you hope to avoid the disasters that have occurred at some firms.

You will also need to make decisions about your site’s hardware, software, and telecom-
munications infrastructure. The demands of your customers should drive your choices of
technology. Your customers will want technology that enables them to find what they want
easily, view the product, purchase the product, and then receive the product from your ware-
houses quickly. You will also have to carefully consider your site’s design. Once you have
identified the key decision areas, you will need to think about a plan for the project.

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BUSINESS OBJECTIVES, SYSTEM FUNCTIONALITY, AND
INFORMATION REQUIREMENTS

Planning needs to answer the question, “What do we want the e-commerce site to do for our
business?” The key lesson to be learned here is to let the business decisions drive the
technology, not the reverse. This will ensure that your technology platform is aligned with
your business. We will assume here that you have identified a business strategy and chosen
a business model to achieve your strategic objectives. (Review Chapter 3.) But how do you
translate your strategies, business models, and ideas into a working e-commerce site?

Your planning should identify the specific business objectives for your site, and then
develop a list of system functionalities and information requirements. Business objectives
are simply capabilities you want your site to have. System functionalities are types of
information systems capabilities you will need to achieve your business objectives. The
information requirements for a system are the information elements that the system must
produce in order to achieve the business objectives.

Table 9.7 describes some basic business objectives, system functionalities, and informa-
tion requirements for a typical e-commerce site. The objectives must be translated into a
description of system functionalities and ultimately into a set of precise information require-
ments. The specific information requirements for a system typically are defined in much
greater detail than Table 9.7 indicates (see Chapter 11). The business objectives of an e-com-
merce site are similar to those of a physical retail store, but they must be provided entirely in
digital form, twenty-four hours a day, seven days a week.

330 Part III: Key System Applications for the Digital Age

Business System Information
Objective Functionality Requirements

Display goods Digital catalog Dynamic text and graphics catalog

Provide product information Product database Product description, stocking
(content) numbers, inventory levels

Personalize/customize Customer on-site Site log for every customer visit;
product tracking data mining capability to identify

common customer paths and
appropriate responses

Execute a transaction Shopping cart/payment Secure credit card clearing; multiple
payment system options

Accumulate customer Customer database Name, address, phone, and e-mail
information for all customers; online customer

registration

Provide after-sale Sales database Customer ID, product, date,
customer support payment, shipment date

Coordinate marketing/ Ad server, e-mail server, Site behavior log of prospects
advertising e-mail, campaign manager, and customers linked to e-mail and

ad banner manager banner ad campaigns

Understand marketing Site tracking and reporting Number of unique visitors, pages
effectiveness system visited, products purchased,

identified by marketing campaign

Provide production and Inventory management Product and inventory levels,
supplier links system supplier ID and contact, order

quantity data by product

TABLE 9.7

System Analysis:
Business Objectives,
System Functionality,
and Information
Requirements for a
Typical E-commerce
Site

BUILDING THE WEB SITE: IN-HOUSE VERSUS OUTSOURCING

There are many choices for building and maintaining Web sites. Much depends on how
much money you are willing to spend. Choices range from outsourcing the entire Web site
development to an external vendor to building everything yourself (in-house). You also have
a second decision to make: will you host (operate) the site on your firm’s own servers or will
you outsource the hosting to a Web host provider? There are some vendors who will design,
build, and host your site, while others will either build or host (but not both). Figure 9-10
illustrates the alternatives.

The Building Decision
If you elect to build your own site, there are a range of options. Unless you are fairly skilled,
you should use a pre-built template to create the Web site. For example, Yahoo Merchant
Solutions, Amazon Stores, and eBay all provide templates that merely require you to input
text, graphics, and other data, as well as the infrastructure to run the Web site once it has
been created. This is the least costly and simplest solution but you will be limited to the
“look and feel” and functionality provided by the template and infrastructure.

If you have some experience with computers, you might decide to build the site yourself.
There is a broad variety of tools, ranging from those that help you build everything truly
“from scratch,” such as Adobe Dreamweaver, Adobe InDesign, and Microsoft Expression,
to top-of-the-line prepackaged site-building tools that can create sophisticated sites
customized to your needs.

The decision to build a Web site on your own has a number of risks. Given the complex-
ity of features such as shopping carts, credit card authentication and processing, inventory
management, and order processing, development costs are high, as are the risks of doing a
poor job. You will be reinventing what other specialized firms have already built, and your
staff may face a long, difficult learning curve, delaying your entry to market. Your efforts
could fail. On the positive side, you may able to build a site that does exactly what you want,
and develop the in-house knowledge to revise the site rapidly if necessitated by a changing
business environment.

If you choose more expensive site-building packages, you will be purchasing state-of-
the art software that is well tested. You could get to market sooner. However, to make a
sound decision, you will have to evaluate many different software packages and this can take
a long time. You may have to modify the packages to fit your business needs and perhaps
hire additional outside consultants to do the modifications. Costs rise rapidly as modifica-
tions mount. (We discuss this problem in greater detail in Chapter 11.) A $4,000 package
can easily become a $40,000 to $60,000 development project.

In the past, bricks-and-mortar retailers typically designed their e-commerce sites them-
selves (because they already had the skilled staff and IT infrastructure in place to do this).
Today, however, larger retailers rely heavily on external vendors to provide sophisticated
Web site capabilities, while also maintaining a substantial internal staff. Medium-size start-
ups will often purchase a sophisticated package and then modify it to suit their needs. Very
small mom-and-pop firms seeking simple storefronts will use templates.

Chapter 9: E-commerce: Digital Markets, Digital Goods 331

Figure 9-10
Choices in Building
and Hosting Web
Sites
You have a number of
alternatives to consider
when building and host-
ing an e-commerce site.

The Hosting Decision
Now let’s look at the hosting decision. Most businesses choose to outsource hosting and pay
a company to host their Web site, which means that the hosting company is responsible for
ensuring the site is “live” or accessible, twenty-four hours a day. By agreeing to a monthly
fee, the business need not concern itself with technical aspects of setting up and maintaining
a Web server, telecommunications links, or specialized staffing.

With a co-location agreement, your firm purchases or leases a Web server (and has total
control over its operation) but locates the server in a vendor’s physical facility. The vendor
maintains the facility, communications lines, and the machinery. In this case, you do not
purchase the server, but rent its capabilities on a monthly basis. There is an extraordinary
range of prices for co-hosting, ranging from $4.95 a month, to several hundred thousands of
dollars per month depending on the size of the Web site, bandwidth, storage, and support
requirements. Very large providers (such as IBM and Qwest) achieve large economies of
scale by establishing huge “server farms” located strategically around the country and the
globe. What this means is that the cost of pure hosting has fallen as fast as the fall in server
prices, dropping about 50 percent every year.

Web Site Budgets
Simple Web sites can be built and hosted with a first-year cost of $5,000 or less. The Web
sites of large firms with high levels of interactivity and linkage to corporate systems can
cost several hundred thousand to millions of dollars a year to create and operate. For
instance, in September 2006, Bluefly, which sells women’s and men’s designer clothes
online, embarked on the process of developing an improved version of its Web site based
on software from Art Technology Group (ATG). It launched the new site in August 2008.
To date, it has invested over $5.3 million in connection with the redevelopment of the Web
site (Bluefly, Inc., 2009).

Figure 9-11 provides some idea of the relative size of various Web site cost compo-
nents. In general, the cost of hardware, software, and telecommunications for building and
operating a Web site has fallen dramatically (by over 50 percent) since 2000, making it
possible for very small entrepreneurs to create fairly sophisticated sites. At the same time,
the costs of system maintenance and content creation have risen to make up more than
half of typical Web site budgets. Providing content and smooth 24/7 operations are both
very labor-intensive.

9.5 Hands-On MIS Projects

The projects in this section give you hands-on experience developing e-commerce strategies
for businesses, using spreadsheet software to research the profitability of an e-commerce
company, and using Web tools to research and evaluate e-commerce hosting services.

332 Part III: Key System Applications for the Digital Age

Figure 9-11
Components of a
Web Site Budget

MANAGEMENT DECISION PROBLEMS

1. Columbiana is a small, independent island in the Caribbean. It wants to develop its
tourist industry and attract more visitors. The island has many historical buildings, forts,
and other sites, along with rain forests and striking mountains. A few first-class hotels
and several dozen less-expensive accommodations can be found along its beautiful
white sand beaches. The major airlines have regular flights to Columbiana, as do several
small airlines. Columbiana’s government wants to increase tourism and develop new
markets for the country’s tropical agricultural products. How can a Web presence help?
What Internet business model would be appropriate? What functions should the Web site
perform?

2. Explore the Web sites of the following companies: Blue Nile, J.Crew, Circuit City,
Black&Decker, Peet’s Coffee & Tea, and Priceline. Determine which of these Web sites
would benefit most from adding a company-sponsored blog to the Web site. List the
business benefits of the blog. Specify the intended audience for the blog. Decide who in
the company should author the blog, and select some topics for the blog.

IMPROVING DECISION MAKING: USING SPREADSHEET
SOFTWARE TO ANALYZE A DOT-COM BUSINESS

Software skills: Spreadsheet downloading, formatting, and formulas
Business skills: Financial statement analysis

Publicly traded companies, including those specializing in e-commerce, are required to file
financial data with the U.S. Securities and Exchange Commission. By analyzing this
information, you can determine the profitability of an e-commerce company and the
viability of its business model.

Pick one e-commerce company on the Internet, for example, Ashford, Buy.com, Yahoo,
or Priceline. Study the Web pages that describe the company and explain its purpose and
structure. Use the Web to find articles that comment on the company. Then visit the
Securities and Exchange Commission’s Web site at www.sec.gov and select Filings &
Forms to access the company’s 10-K (annual report) form showing income statements and
balance sheets. Select only the sections of the 10-K form containing the desired portions of
financial statements that you need to examine, and download them into your spreadsheet.
(MyMISLab provides more detailed instructions on how to download this 10-K data into a
spreadsheet.) Create simplified spreadsheets of the company’s balance sheets and income
statements for the past three years.

• Is the company a dot-com success, borderline business, or failure? What information
dictates the basis of your decision? Why? When answering these questions, pay special
attention to the company’s three-year trends in revenues, costs of sales, gross margins,
operating expenses, and net margins.

• Prepare an overhead presentation (with a minimum of five slides), including appropriate
spreadsheets or charts, and present your work to your professor and classmates.

ACHIEVING OPERATIONAL EXCELLENCE: EVALUATING
E-COMMERCE HOSTING SERVICES

Software skills: Web browser software
Business skills: Evaluating e-commerce hosting services

This project will help develop your Internet skills in commercial services for hosting an
e-commerce site for a small start-up company.

You would like to set up a Web site to sell towels, linens, pottery, and tableware from
Portugal and are examining services for hosting small business Internet storefronts. Your
Web site should be able to take secure credit card payments and to calculate shipping costs

Chapter 9: E-commerce: Digital Markets, Digital Goods 333
IS

Review Summary

1 What are the unique features of e-commerce, digital markets, and digital goods?E-commerce involves digitally enabled commercial transactions between and among
organizations and individuals. Unique features of e-commerce technology include ubiquity,
global reach, universal technology standards, richness, interactivity, information density,
capabilities for personalization and customization, and social technology.

Digital markets are said to be more “transparent” than traditional markets, with reduced
information asymmetry, search costs, transaction costs, and menu costs, along with the
ability to change prices dynamically based on market conditions. Digital goods, such as
music, video, software, and books, can be delivered over a digital network. Once a digital
product has been produced, the cost of delivering that product digitally is extremely low.

2 What are the principal e-commerce business and revenue models? The principal e-commerce business models are e-tailers, transaction brokers, market creators,
content providers, community providers, service providers, and portals. The principal
e-commerce revenue models are advertising, sales, subscription, free/freemium, transaction
fee, and affiliate.

3 How has e-commerce transformed marketing? The Internet provides marketers withnew ways of identifying and communicating with millions of potential customers at
costs far lower than traditional media. Crowdsourcing utilizing the “wisdom of crowds”
helps companies learn from customers in order to improve product offerings and increase
customer value. Behavioral targeting techniques increase the effectiveness of banner, rich
media, and video ads.

4 How has e-commerce affected business-to-business transactions? B2B e-commercegenerates efficiencies by enabling companies to locate suppliers, solicit bids, place
orders, and track shipments in transit electronically. Net marketplaces provide a single,
digital marketplace for many buyers and sellers. Private industrial networks link a firm with
its suppliers and other strategic business partners to develop highly efficient and responsive
supply chains.

and taxes. Initially, you would like to display photos and descriptions of 40 different
products. Visit Yahoo! Small Business, GoDaddy, and Volusion and compare the range of
e-commerce hosting services they offer to small businesses, their capabilities, and costs.
Also examine the tools they provide for creating an e-commerce site. Compare these ser-
vices and decide which you would use if you were actually establishing a Web store. Write
a brief report indicating your choice and explaining the strengths and weaknesses of each.

334 Part III: Key System Applications for the Digital Age

LEARNING TRACKS

The following Learning Tracks provide content relevant to topics covered in this
chapter:

1. Building a Web page
2. E-commerce Challenges: The Story of Online Groceries
3. Build an E-commerce Business Plan
4. Hot New Careers in E-commerce

Chapter 9: E-commerce: Digital Markets, Digital Goods 335

5 What is the role of m-commerce in business, and what are the most important m-commerce applications? M-commerce is especially well-suited for location-based
applications, such as finding local hotels and restaurants, monitoring local traffic and weather,
and providing personalized location-based marketing. Mobile phones and handhelds are being
used for mobile bill payment, banking, securities trading, transportation schedule updates, and
downloads of digital content, such as music, games, and video clips. M-commerce requires
wireless portals and special digital payment systems that can handle micropayments.

6 What issues must be addressed when building an e-commerce Web site? Buildinga successful e-commerce site requires a clear understanding of the business objectives
to be achieved by the site and selection of the right technology to achieve those objectives.
E-commerce sites can be built and hosted in-house or partially or fully outsourced to exter-
nal service providers.

Electronic data interchange
(EDI), 325

E-tailer, 315
Exchanges, 327
Free/freemium revenue

model, 320
Information asymmetry, 310
Information density, 309
Intellectual property, 316
Long tail marketing, 322
Market creator, 317
Market entry costs, 309
Marketspace, 306
Menu costs, 310
Micropayment systems, 320
Mobile commerce (m-com-

merce), 315
Net marketplaces, 326

Personalization, 309
Podcasting, 316
Prediction market, 321
Price discrimination, 309
Price transparency, 309
Private exchange, 326
Private industrial

networks, 326
Procurement, 325
Revenue model, 317
Richness, 309
Search costs, 309
Social shopping, 321
Transaction costs, 308
Transaction fee revenue

model, 320
Wisdom of crowds, 321

Affiliate revenue model, 320
Behavioral marketing, 322
Business-to-business (B2B)

electronic commerce, 315
Business-to-consumer (B2C)

electronic commerce, 315
Co-location, 332
Community providers, 317
Consumer-to-consumer

(C2C) electronic
commerce, 315

Cost Transparency, 309
Crowdsourcing, 321
Customization, 309
Digital goods, 313
Disintermediation, 313
Dynamic pricing, 312

Key Terms

Review Questions

1. What are the unique features of e-commerce, digital markets, and digital goods?

• Name and describe four business trends and three technology trends shaping
e-commerce today.

• List and describe the eight unique features of e-commerce.
• Define a digital market and digital goods and describe their distinguishing features.

2. What are the principal e-commerce business and revenue models?

• Name and describe the principal e-commerce business models.
• Name and describe the e-commerce revenue models.

3. How has e-commerce transformed marketing?

• Explain how social networking and the “wisdom of crowds” help companies improve
their marketing.

• Define behavioral targeting and explain how it works at individual Web sites and on
advertising networks.IS

336 Part III: Key System Applications for the Digital Age

Discussion Questions

1. How does the Internet change consumer
and supplier relationships?

2. The Internet may not make corporations
obsolete, but the corporations will have to
change their business models. Do you
agree? Why or why not?

Video Cases

Video Cases and Instructional Videos illustrating some of the concepts in this chapter are
available. Contact your instructor to access these videos.

Collaboration and Teamwork

Performing a Competitive Analysis of E-commerce Sites
Form a group with three or four of your classmates. Select two businesses that are competi-
tors in the same industry and that use their Web sites for electronic commerce. Visit these
Web sites. You might compare, for example, the Web sites for iTunes and Napster,
Amazon.com and BarnesandNoble.com, or E*Trade and Scottrade. Prepare an evaluation of
each business’s Web site in terms of its functions, user friendliness, and ability to support the
company’s business strategy. Which Web site does a better job? Why? Can you make some
recommendations to improve these Web sites? If possible, use Google Sites to post links to
Web pages, team communication announcements, and work assignments; to brainstorm;
and to work collaboratively on project documents. Try to use Google Docs to develop a pre-
sentation of your findings for the class.

4. How has e-commerce affected business-to-business transactions?

• Explain how Internet technology supports business-to-business electronic commerce.
• Define and describe Net marketplaces and explain how they differ from private

industrial networks (private exchanges).

5. What is the role of m-commerce in business, and what are the most important
m-commerce applications?

• List and describe important types of m-commerce services and applications.
• Describe some of the barriers to m-commerce.

6. What issues must be addressed when building an e-commerce Web site?

• List and describe each of the factors that go into the building of an e-commerce Web
site.

• List and describe four business objectives, four system functionalities, and four infor-
mation requirements of a typical e-commerce Web site.

• List and describe each of the options for building and hosting e-commerce Web sites.

Chapter 9: E-commerce: Digital Markets, Digital Goods 337

BUSINESS PROBLEM-SOLVING CASE

Facebook’s Dilemma: Profits (Theirs) versus Privacy (Yours)

average of 169 minutes per month there, compared to 13
minutes per month at Google News.

Despite these advantages, Facebook’s path to
profitability has not been smooth. It’s a very expensive
site to maintain. Users upload more than 2 billion photos
and 14 million videos each month and share more than 2
billion pieces of content, such as news stories, photos,
and blog posts each week. Maintaining and transmitting
such vast amounts of data requires huge expenditures for
servers and networking. Facebook’s traffic continues to
rise at a healthy rate, and the company’s sales reached
about $265 million in 2008, but the company continues
to spend more money than it earns.

Attempts to sell online ads on Facebook and other
social networking sites have not been successful. Banner
ads sell for as little as 15 cents per 1,000 clicks, com-
pared to $8 per 1,000 clicks on a targeted portal such as
Yahoo! Auto because Facebook members largely ignore
them. More than 70 percent of Facebook users are out-
side the United States, and much less likely to make
online purchases. Social networkers don’t like banner
ads interfering with their banter.

The company has also encountered more than its fair
share of controversy, mostly concerning its handling and
usage of the extensive information it collects from its
users. Though users contribute most of their information
to Facebook willingly, the privacy and user controls over
the information granted to Facebook are the biggest
concerns most users have with the site.

To truly capitalize on the massive audience and
immersive environment of the site, Facebook needs to
innovate and find new ways to grow revenue that do not
alienate the very users that the company is depending on
to spur its growth. The personal information collected on
the site represents a mother lode to advertisers, but one
that will remain largely untapped if Facebook users do
not feel comfortable enough or have sufficient incentive
to share it.

Facebook’s dilemma is finding a way to turn a profit
and increase revenues using the information its users
voluntarily provide without violating privacy (and
creating a firestorm of user protests). Thus far, its
attempts to do so have not been successful. In fact,
Facebook is a prime example of a senior management
that just didn’t get it when it comes to members’ sense
of their privacy.

In December 2007, Facebook CEO Mark Zuckerberg
announced the Beacon Program, sponsored by over 40
large firms, that would track what Facebook members
purchased at their corporate sites, send the information

Facebook is the largest social networking site in the
world and a pioneer of the social networking industry.
Founded in 2004 by Mark Zuckerberg, the site had over
300 million worldwide users by the fall of 2009.
Facebook allows users to create a profile and join
various types of self-contained networks, including
college-wide, workplace, and regional networks. The
site includes a wide array of tools that allow users to
connect and interact with other users, including messag-
ing, groups, photo-sharing, and user-created applica-
tions.

Facebook was originally open only to a small handful
of colleges, but the site has grown explosively since it
opened its doors to all college students and eventually
the general public. Facebook is now one of the most
recognizable sites on the Web. Compared to its biggest
rival, MySpace, Facebook’s interface is simple and
clean, and tends to attract those looking for a crisp, more
structured social networking environment. With
MySpace fading from view in the rearview mirror,
Twitter has emerged as the most viable future challenger
to Facebook’s social networking dominance. But the
company has taken many steps to fend off Twitter and
other competitors as it continues its quest for dominance
on the Web, not to mention profitability.

Facebook represents a unique opportunity for
advertisers to reach highly targeted audiences based on
their demographic information, hobbies, personal
preferences, and other narrowly specified criteria in a
comfortable and engaging environment. Businesses can
place advertisements that are fully integrated into
primary features of the site, such as the News Feed, a
continually updating list of news stories about members’
friends’ activities on Facebook. Firms and individuals
also can create Facebook pages for viewers to learn
more about and interact with them. For example, a
restaurant can advertise by having Facebook place items
in the News Feeds of its customers indicating that those
people ate there recently. Blockbuster had recent rentals
and reviews of its movies appearing in similar fashion.
Many companies, including eBay, Sony Pictures, The
New York Times, and Verizon maintain Facebook pages
where users can learn more about these companies’
products and services.

For advertisers, Facebook represents a gold mine of
opportunity because of the information the site has
gathered and because of the richness of the social
networking environment. The site has amassed a huge
audience. It’s also an extremely “sticky” site. According
to comScore, the typical Facebook user spends an

338 Part III: Key System Applications for the Digital Age

to Facebook, who would then share that information
with their friends without asking permission. In a few
days, hundreds of thousands of members had orga-
nized a fierce resistance to the program. Management
then declared that members could opt-out of the
program and turn it off completely. Coca-Cola with-
drew from sponsorship because it thought the program
was an opt-in program only. Other corporate sponsors
started pulling out from the program, as member
resistance mounted. In 2009, Beacon still exists, but
keeps a lower profile. Many open source programs
exist on the Internet to block Beacon, and the Firefox
Web browser has a Beacon Blocker add-on to prevent
corporate sites from sending any information to
Facebook.

In a similar gaffe, in February 2009, Facebook sought
to change its information retention and collection policy
(Terms of Service), granting Facebook nearly unlimited
data collection and control over user-generated informa-
tion forever, without redress. If you were a photographer
and shared your photos with your friends on Facebook,
you would lose your ownership of the content under the
new policy. Management acted without warning, pro-
vided no opportunity for public comment, and applied
the new policy to personal information that had been
collected under the old policy. Over 100,000 people
joined various blog sites and privacy groups to protest,
based on the belief that their information belonged to
them, not Facebook. Within days the firm retreated to the
old policy, and set up user forums to discuss the Terms
of Service and user attitudes about personal information.

In the meantime, however, millions of people on
Facebook continue to use third-party quiz applications
(such as “Which Cocktail Best Suits Your Personality?”)
without realizing the extent to which developers of the
quizzes and other applications have access to personal
information. Facebook’s default privacy settings allow
nearly unfettered access to a user’s profile information.
Only “sensitive information” such as contact information
is not available.

Facebook has also come under fire for its handling of
the personal information of people who attempt to
remove their profiles from the site. Facebook offers users
the ability to deactivate their accounts, but the
company’s servers maintain copies of the information
contained in those accounts indefinitely. The company’s
reasoning for this is that reactivating accounts is far
easier if Facebook retains copies of profile content and
other personal information. Users that attempted to
delete their accounts were met with resistance and often
required outside assistance from watchdog groups. One
user spent two months attempting to delete his profile
unsuccessfully while still receiving updates and
messages through the site.

In August 2009, Facebook announced a simplification
of its privacy policy in response to a Canadian ruling
that the site was unlawfully retaining information from
deleted accounts. Facebook will now require third-party
application developers to conform to a more rigid set of
rules regarding the use of users’ information, and will
reach out to users to better communicate its simplified
privacy options. Users will now easily be able to choose
between account deletion and account deactivation.

Currently, one of Facebook’s most promising
prospects to become profitable involves the development
of applications for use on Facebook Platform. Facebook
Platform, launched in May 2007, opened up the site to
serve as a “platform” for applications that are indepen-
dently developed by third parties. These applications
consist of games, plug-in features for user profiles, and
other programs, which are fully integrated with the
Facebook site.

Facebook Platform makes Facebook’s environment
even more engaging, and gives developers unparalleled
exposure for their applications. There are currently more
than 350,000 applications on the Facebook Platform.
A small percentage of these applications have turned
into viable businesses. Companies attracting large
numbers of users to their applications on Facebook are
able to sell goods, services, or advertising. All of these
applications earn advertising revenue.

It’s currently unclear whether Facebook will generate
significant revenue from these applications. Some
believe that Facebook applications are “the next big
thing” and that traditional advertisers will gravitate
towards Facebook to reach highly targeted audiences
with their applications. On the flip side, others believe
Facebook’s own popularity will injure its chances to
attract advertisers to its site, claiming that the engaging
and immersive environment that draws visitors to the site
makes users less likely to click on ads. Skeptics also
believe that the current application system, where
applications tend to support one another via advertising
through other applications without the aid of extensive
external advertising, is an unsustainable model over the
long term. So far, only 250 Facebook applications have
attracted more than 1 million users per month, and 60
percent failed to attract even 100 daily users.

Twitter, one of Facebook’s largest rivals, experienced
explosive growth in 2009. Eager to maintain its
dominance in the marketplace, Facebook wasted no time
in making several moves in response. Facebook’s pur-
chase of FriendFeed and its rollout of the Facebook Lite
variant suggest its desire to offer an alternative to
Twitter’s pared-down design.

FriendFeed allows users to aggregate all of the content
from the social media sites they belong to (Facebook and
Twitter included) in one central location. Industry
analysts have described FriendFeed’s user base as most

Chapter 9: E-commerce: Digital Markets, Digital Goods 339

popular among “uber social geeks,” but Facebook is
more interested in incorporating the technology behind
FriendFeed with their own site.

More specifically, Facebook sees opportunities to
harness FriendFeed’s aggregation technology to
develop a richer, more developed internal search
engine. By organizing personal information, status
updates, and other Facebook activity into a user
friendly format, users will more easily be able to search
for anything or anyone they want on Facebook. What’s
unclear is the extent to which that information will be
available outside the “walled garden” of Facebook—for
example, to advertisers.

Facebook Lite is a stripped-down, simplified version of
the richer Facebook interface. Only the basic features of
the site are offered: making comments, viewing photos,
and accepting friend requests. Facebook Lite was
intended for users in countries without widespread access
to broadband Internet connections, and the company
hopes that this option will help it continue its growth into
emerging Internet marketplaces, but it’s probably no
coincidence that its design looks much like Twitter’s.

Given that Facebook’s growth outstripped Twitter’s in
the month prior to these moves, it looks like the reigning
social media champion is poised to retain its edge.
But Facebook’s goals are even loftier: The site hopes to
outstrip Microsoft, Google, and other tech giants as a
portal for sharing information seamlessly throughout the
globe. The company still has a ways to go before it
should be grouped with the other titans of their industry.

In 2007, Microsoft purchased a small stake in
Facebook, buying 1.6 percent of the company for $246
million. That investment put Facebook’s valuation at
approximately $15 billion. Since then, other valuations
have been as low as $3.7 billion or as large as $10
billion, representing the uncertainty surrounding
Facebook’s eventual profitability. The precipitous drop
in valuation suggests that investors lack confidence that
Facebook will be as profitable as was initially expected.
In many ways, users’ insistence on privacy has been the
major stumbling block.

The initial furor and subsequent acceptance of the
News Feed feature shows that Facebook users’ stances
on their privacy may be subject to change or persuasion,
and many users may not even be aware or care about the
dissemination of their personal information. Even if they
did, the benefits of being a part of Facebook, thanks to
its large audience and wealth of features and content,
may still outweigh the reservations its users have regard-
ing their privacy. But it appears that enough Facebook
users are concerned and aware of their privacy to prevent
services as invasive as Beacon’s initial incarnation from
becoming realities.

Sources: Brad Stone, “Tinker Away, Facebook Says,” The New York Times, May 3,
2009; Jessica E. Vascellaro, “Facebook Opens Site to Developers of Services.”
The Wall Street Journal, April 27, 2009; Jessi Hempl, “Is Facebook Losing
Its Glow?” Fortune, April 15, 2009; “How Facebook Is Taking Over Our Lives,”
Fortune, March 2, 2009; Julia Angwin, “Facebook: Can It Be Tamed?” The Wall
Street Journal, April 21, 2009; Carl Bialik, “Facebook Users-and Research-Need
Further Study,” The Wall Street Journal, April 22, 2009; Brian Stelter, “Facebook’s
Users Ask Who Owns Information,” The New York Times, February 17, 2009; Jessica
E. Vascellaro, “Facebook Seeks Input from Users on Policies,” The Wall Street
Journal, February 27, 2009 and Facebook’s About Face on Data, February 19, 2009;
Brad Stone, “Is Facebook Growing Up too Fast?” The New York Times, March 29,
2009; www.facebook.com, accessed October 14, 2009; “Facebook Aims to Extend
Its Reach Across the Web,” The New York Times, December 2, 2008; and Jessica E.
Vascellaro, “Facebook Pushes New Service,” The Wall Street Journal, December 5,
2008.

Case Study Questions

1. What concepts in this chapter are illustrated in this
case?

2. What is the role of e-commerce and Web 2.0
technologies in Facebook’s widespread popularity?

3. Describe the weaknesses of Facebook’s privacy
policies and features. What people, organization, and
technology factors have contributed to those
weaknesses?

4. Does Facebook have a viable business model?
Explain your answer.

5. If you were responsible for coordinating Facebook’s
advertising, how would you balance the desire to
become increasingly profitable with the need to
protect the privacy of your users?

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