Table of Contents
For some introductory reading on the types of online business and some of the issues surrounding them, see [Bambury1998]. A more comprehensive treatment of the practical aspects of e-commerce can be found in [OBrien2005], especially Chapter 9. For a full synthesis through the window of economic theory, see [Foray2004], and for a wider look at the social and legal issues surrounding e-commerce, look at [Benkler2006].
In what has become known as the “Long Tail” [Anderson2006], many businesses are now able to specialise to a degree previously unknown and uneconomic; the Internet provides access to a market so wide that any interest, no matter how unusual, is marketable to.
As information exchange to and from their customers becomes more vital to the design and production process, manufacturers are taking advantage of this contact to remove the intermediaries such as traditional retailers and other middlemen, and are able to deal with their consumers directly. This disintermediation process gives them a significant cost advantage over more traditional models involving wholesale and retail sectors.
As this begins to happen, the intemediaries must evolve to offer some “added value” over the manufacturer, in order to keep competing in the virtual marketplace. One common strategy here involves the “one-stop” store offering a large range of goods from many manufacturers, adding value through convenience (e.g. dabs.com, tesco.com).
And most interestingly, there is the trust-based model, where the manufacturers/sellers are able to sell through a trusted intermediary (often known as a cybermediary), giving the customer confidence in an otherwise unknown brand (e.g. Amazon Marketplace, abebooks.co.uk).
One of the most important successes in Internet business in recent years is eBay, the online auction site. The idea behind eBay is that it acts as a global auction house, allowing you to sell your goods to a very wide audience for relatively little cost.
The eBay business model gives the company a measure of immunity from the problems that many online businesses face. eBay acts as a cybermediary, which provides a medium through which others transact, isolating the company from problems such as providing customer service for individual transactions, and dealing with poor payers. In effect, they act merely as an advertiser and mediator for each transaction.
Perhaps the most revolutionary part of eBay's business model is the highly transparent system of reputation generated by buyers and sellers giving feedback on transactions. In a global marketplace, it's difficult to know who is trustworthy, so the feedback system gives a measure of virtual trust. Although the system isn't perfect, it is difficult enough to subvert, and policed well enough by eBay itself, that most transactions are safe and reliable.
In some ways, the feedback system emulates the reputation of a traditional business which, by word of mouth in a geographical locality, can generate trust within a neighbourhood.
Whilst eBay began aiming its auctions at low-value items, its biggest market is now in more substantial transactions, notably motor cars. It has also encouraged growth in business-to-consumer markets, inviting large companies to offer goods and services through its marketplace.
For a look at bidder behaviour on eBay, see [Steiglitz2007].
A typical “traditional” retail business will go through a number of stages in the process of entering the e-commerce market:
The first step was usually to place catalogues or other information on the web, usually converted from paper-based materials. This was seen as a form of advertising, but failed as it was too static.
The next step was to allow ordering by email--primitive but useful, though not without its problems. Sending private information (such as credit card details) via email is always risky, as it is an unsecured medium.
This phase is often referred to as the “Web 2.0” phase, where the consumer is less a passive buyer and more an active player in a shopping game - providing feedback and reviews that are used to create a rich shopping environment.
This has been most successful with large online stores such as Amazon, where the volume of customers for each product means that there is a greater likelihood of someone writing a review. Of course, there's also the kudos of providing the best reviews, which almost becomes a gift culture (the section called “Something for Nothing? Gift Economies”./>
There were several false-starts by companies trying to sell digital music online. Most famously, Napster fell foul of the Recording Industry Association of America, and was closed down overnight, even though its business model was sound.
It needed a company with some weight and authority to take the lead and overcome the paranoia of the music copyright holders before virtual music really took off. Apple were able to bundle a new application with their Quicktime software which would manage music files and ensure that copyright was not breached; this application (a form of Digital Rights Management software) was enough to make the venture successful.
Apple's iTunes service allows you to download tunes at a fixed price, and play them an unlimited number of times. You are restricted, however, in how many times you can copy that tune from device to device, which to some extent enforces copyright. It was this compromise that the big media companies needed in order to feel comfortable with Apple distributing their songs.
There are other forms of DRM technology, which will be discussed in Legal Issues 1.
Internet technologies have enabled new methods of advertising to dominate the Web. Google's AdSense, for example, uses context from the page hosting the ad, coupled with information from previously clicked ads, to place relevant advertising to the page's tartget audience. Their revenue model is also innovative, only generating a charge when a user clicks-through to the advertiser, ensuring that charges are based on how attractive and relevant the advert is, rather than how popular the page might be.
Technologies such as social networks and media sites can also be employed in more subtle forms of advertising. Viral campaigns ([Penenberg2009]) encourage people to pass adverts or links to advertising media around, forming a “buzz” around the object, and generating greater exposure to the advert. A recent example of this is Cadbury's “Gorilla” campaign, which used various social networks to spread the ad and generate discussion.
Viral marketing is often difficult for companies to control - once a viral ad is “out there”, then it may be replicated, modified or subverted into something less favourable to the company. In extreme cases, culture jamming may occur, where media advertising a brand or product is deliberately modified to work against the original intent of the advert.
Viral techniques can also be coupled with guerilla strategies, where the subject of the advertising is not disclosed until there is sufficient marketing “buzz”. Guerilla techniques are often risky for the company involved, as they may just as easily create a backlash against the company . Subverted media artefacts can be extremely persistent on the internet!
One of the most unusual aspects of the web is the amount of free information that exists on it. Often this material is valuable in terms of its reliability and expertise level, and often is it freely given to the Internet community. This has led theorists to analyse what has become known as Gift Economies on the Internet.
The most well known example of this is Wikipedia, a freely available, user-contributed encyclopedia. Here, the information contained in the encylcopedia is created by interested individuals, then mediated by any number of moderators, all of whom have equal access to change any part of the entry. This seems like a recipe for anarchy, but most often produces a considered consensus of knowledge which has the reliability of the collective moderators, many of whom may be experts in the field under discussion.
Another example of a gift economy is more technical - the GNU/Linux operating system. A replacement for Microsoft Windows, this software is
again written by its users, and is provided free to anyone who wishes to install it.
With GNU/Linux, the motivation for contributing is often the prestige of taking
part, and having your name and your programming code embedded in the final product.
Linux is on the edge of the commercial and FLOSS (Free/Libre Open Source Software)
ways of creating software - some commercial companies offer support for Linux, or
repackage it with 'value-added' features for sale, though the core software must
always remain free and open. A good example of FLOSS development is the Debian
flavour of GNU/Linux [
There have been many studies of the organisation and motivation of these gift economies, see for example, [Barbrook1998]. A key commentator is Eric Raymond, whose paper entitled The Cathedral and the Bazaar (Raymond, 1998) has sparked much discussion.
The problem of jurisdiction on the Internet crops up in many discussions - it does not respect national boundaries, and has little sense of “place” in many ways. Taxation is a “place-based” entity; you are taxed based on where you live, work and shop. In the early days of the web, this was seen as a considerable paradox.
However, it does seems that many of the fears expressed (mainly by governments facing lost revenues) were unfounded. The processes involved in e-commerce mostly have to take place in real locations with real companies and real money changing hands. On the whole, governments have quickly adapted their existing taxation policies to encompass the new markets.
One problem that does recur is the possibility of locating businesses in low-taxation countries, with obvious benefits. When virtual products, such as digital music, software or even online casinos are involved, the location of the company is immaterial, and can be chosen to provide the best financial advantage.
This highlights the question of “at which location should tax be applied?” Goods despatched from Jersey, for example, will have no sales tax added, but may be subject to import duty; the point of taxation moves from the company to the point of entry to the UK, which is much harder to manage, and the tax less likely to be applied. Where virtual products are sold, the point of taxation is even harder to determine. Some have argued for border controls on the ISP's points of entry into the UK, but as most commercial data is encrypted, this would not help.
Two topics relating to e-commerce are discussed in later lectures. The problems of copyright, patents and intellectual property are discussed in Legal Issues 1. Aspects of secure data transfer, protection of private information, etc., are discussed in Legal Issues 2.