E-Commerce Copyright © 2004 Pearson Education, Inc.

Early Visionary introduced new terminologies Disintermediation: displacement of market middlemen who traditionally are intermediaries between producers and consumers by a new direct relationship between manufacturers and content originators with their customers. friction-free commerce : a vision of commerce in which information is equally distributed, transaction costs are low, prices can be dynamically adjusted to reflect actual demand, intermediaries decline, and unfair competitive advantages are eliminated. first mover: a firm that is first to market in a particular area and that moves quickly to gather market share. network effect: occurs where users receive value from the fact that everyone else uses the same tool or product

Assessing E-commerce Many early visions not fulfilled Friction-free commerce Consumers less price sensitive Considerable price dispersion Perfect competition Information asymmetries persist Disintermediation Smart people/ firms buy and sell goods using their expertise, end-user is still paying more. First mover advantage Fast-followers often overtake first movers

New Developments in E-commerce, 2003 Table 1.1, Page 8

Technology and E-commerce in Perspective First, the Internet and Web are just two of a long list of technologies, such as automobiles and radio, that have followed a similar historical path: Creation of business models designed to leverage the technology and explosive early growth, followed by retrenchment and then a long-term successful exploitation of the technology by larger established firms Second, although e-commerce has grown explosively, eventually its growth will cap as it confronts its own fundamental limitations.

E-commerce I and E-commerce II E-commerce I: A period of explosive growth and extraordinary innovation; key concepts developed and explored Begins in 1995, ends in March 2000 when stock market valuations for dot.com companies begin to collapse Thousands of dot.com companies formed, backed by over $125 billion in financial capital E-commerce II: Characterized by a reassessment of e-commerce companies and their value Begins in January 2001; ongoing

The Visions and Forces Behind E-commerce 1: 1995-2000 For computer scientists: A vindication of the vision of a universal communications and computing environment Belief that Internet should not be controlled by government, and remain free for all For economists: Vision of a perfect Bertrand market and friction-free commerce, characterized by low transaction costs, low search costs, price transparency, low menu costs, dynamic pricing, disintermediation, and elimination of unfair competitive advantages

The Visions and Forces Behind E-commerce I: 1995-2000 (cont’d) For entrepreneurs, their financial backers and marketing professionals, e-commerce represented an extraordinary opportunity to return far above normal returns on investment based on: Worldwide access to consumers New marketing communications technologies that were universal, inexpensive and powerful Ability to segment market First mover advantages – by building in switching costs Network effects

Quarterly Amounts Raised by Venture-Backed Firms Figure 1.8, Page 29

Insight on Business: A Short History of Dot.Com IPOs Between 1998-2000, over $120 billion invested by venture capitalists in over 12,450 dot.com start-up ventures Over 1,260 of these firms went public in initial public offerings (IPOs) During E-commerce I heyday (1998-2000), shares often tripled or quadrupled in value on 1st day of trading By 2003, many of these firms either are trading at much lower values or have shut down Second wave of dot.com investment is focusing on acquisition of Web companies

E-commerce II: 2001-2007 Crash in stock market values for e-commerce companies throughout 2000 marks end of E-commerce I period Reasons for crash: Run-up in technology stocks due to enormous information technology capital expenditure of firms rebuilding their internal business systems to withstand Y2K Telecommunications industry had built excess capacity in high-speed fiber optic networks 1999 Christmas season provided less sales growth that anticipated and demonstrated e-commerce was not easy (eToys.com) Valuations of dot.com and technology companies had risen so high supporters were questioning whether earnings could justify the prices of the shares.

E-commerce Today: Successes and Failures E-commerce I a stunning technological success E-commerce I a mixed success from a business perspective Many visions developed during E-commerce I not fulfilled Economists’ visions of “friction-free” commerce and Bertrand model of extreme market efficiency not entirely realized Entrepreneurs and venture capitalists’ visions have not materialized exactly as predicted either

E-commerce I and E-commerce II Compared Table 1.5, Page 35

Predictions for the Future Technology of e-commerce will continue to propagate through all commercial activity E-commerce prices will rise to cover the real cost of doing business on Web and pay investors reasonable rate of return E-commerce margins and profits will rise to levels more typical of all retailers In B2C and B2B, traditional Fortune 500 companies will play growing and dominant role Number of successful pure online companies will decline and most successful e-commerce firms will adopt mixed “clicks and bricks” strategies Growth of regulatory activity worldwide

NRF/Forrester Online Retail Index, December 2002 Table 1.6, Page 37

Fastest Growing Non-Travel E-commerce Categories 2002 Table 1.7, Page 38

Top 25 Shopping Web Sites for Week Ending November 10, 2002 Table 1.8, Page 39