Looking back on the past ten years in e-commerce, it is clear that there have been a lot of changes in how e-commerce business models are perceived. New business models have emerged every year following developments in Internet technologies and telecommunications. The speed of the Internet has increased dramatically with the advent of broadband and supporting hardware and software are more sophisticated. Businesses and entrepreneurs are more familiar with trading online than they previously were; the online environment is a lot more open, enabling businesses to predict consumer behaviour and expectations. The successes and failures of e-commerce, from pioneers and firms that have participated throughout its progression, have played a key role in making e-commerce what it is today. Today's e-commerce is driven by a wider availability of tools and realistic business strategies and models. These emerged through innovations and have made electronic commerce capable of sustaining and developing further.
Technologists, businesses, entrepreneurs, governments and academics have all invested time, money and other resources to test the boundaries of what is possible in e-commerce. Fortunately, these investments have been worthwhile, resulting in a better technological infrastructure to support the growth of e-commerce.
In tracing the progression of e-commerce, it is difficult to define exactly what changed the perception of e-commerce as a business model. E-commerce experienced a very fast growth, doubling annually, and became prevalent, impacting not just on businesses but on all aspect of our lives. Televisions are connected to the Internet; if you miss one of your favourite programs shown on the BBC, you can download it from their website; local government agencies are encouraging people to make payments, for council tax, parking fines etc. via their websites; in fact, some consumers find online banking more convenient than using a local branch. Undoubtedly, the perceptions of e-commerce have changed given the high number of people who are connected online, expanding the opportunities for businesses.
To track the changes in perceptions that have occurred over the last ten years, I will look at events that have had a significant impact during that time, such as the dot com boom and bust in late 1990s and early 2000s and the recent arrival of social networking websites, which have shifted the power to consumers who are targeted for advertising. I will also look at firms, which have invented business models that have impacted radically on e-commerce, such Amazon and e-Bay. Their business models are perceived as successful by many of the other e-commerce firms and sectors that exist today. My essay will therefore discuss the occurrences of events, businesses, innovations that have fundamentally changed the perception of e-commerce, not just from a business perspective but also from a consumer perspective. To support some of my arguments, I have reviewed surveys from The Economist dated 1997, 2000 and 2004 and consulted other recent and relevant literature written by industry experts, which helped to provide accounts of events in e-commerce.
Before examining the surveys, one of the most obvious observations about e-commerce is how the term 'electronic' is now used to prefix many different activities that can take place online. Terms such as e-banking and e-gaming are now commonly used not just by industries but also by consumers, who are becoming familiar with these terms and other aspects of e-commerce. This phenomenon can be interpreted as a sign of how e-commerce has developed, and also that consumers are now much more aware of the various e-commerce models than they previously were.
Ten years ago many consumers would have been very wary of using their credit cards online. Nowadays, the majority of consumers recognise the convenience of having services, such as online banking, and being able to purchase goods online. This combined with the fact that technologies and business models have matured enough to provide the security required for banks and their customers to trade online has resulted in a greater confidence in e-commerce.
Two key questions are "how did it get to this and where is it going?" Ten years ago the number of online users was still doubling; firms were experimenting with how money could be made online. Given that e-commerce was seen as an easy market to enter, many entrepreneurs embraced the opportunity and the number of online companies that were started also increased. Large firms benefited from e-commerce, not just in terms of increased revenue but conducting their businesses online made them more efficient in their operations. An example of this is General Electric which was saved money by buying up to $1 billion worth of goods from its suppliers online, according to a survey in The Economist published in May 1997.
Although there are signs of a great deal of money being made online, not all firms enjoyed the success of General Electric. Hard goods, traditionally sold through catalogues and retail stores, were selling poorly online, as consumers were not able to inspect the goods before purchasing. Furthermore, the prices were not much lower than in bricks-and mortar shops. Information goods, from software to news, seemed better suited to the online environment.
Despite the increase in number of websites, many were being used as information brochures rather than for conducting transactions. Setting up a website would have cost a lot more in the late 1990s than it would now especially if transaction functionalities were required. Research by Forrester, a Massachusetts consultancy firm suggested "their main reasons for setting up web sites were to market wares and help customers." This suggestion can be supported also by saying that there were less financial risks in setting up a website to support a business (for example, to increase its brand awareness) than to set up a website that was an integral part of a business in those early days.
Making money was not the only concern; there were security concerns from consumers who feared that hackers could get hold of their card details and use them. A poll by USA Today conducted in 1997 highlighted that 95% of Americans would not give out their credit card details online. An Internet currency, known as digital cash, was invented as a more appealing alternative to using card details online. It was to be used not just for purchasing but also to facilitate micro transactions for information goods, such as news articles. However, it was rejected by consumers and failed to take off. Consumers were more familiar with payment systems of the 'physical' world such as credit cards and subscriptions and these were eventually adapted to the online world.
Business models were also start to take shape and one of the most popular models was "virtual malls", but it encountered problems as it did not meet the consumers' expectations and as a result, it failed. The reasons for its failure were due to inadequacies of the websites, software bugs, baffling interfaces and a limited selection of products, which led to dissatisfied customers. Many early entrants spent large amounts of money implementing online systems but ended up losing money and were forced to shut down.
However, profits were not to be made in consumer shopping but rather in business-to-business transactions, mirroring the physical world where business transactions are worth about ten times as much as consumer sales. The reason being that the majority of business transactions were already done at a distance, whether by fax, telephone, post, or private electronic links; therefore moving this process online made it cheaper, faster and easier.
Jeff Bezos, a former financial analyst founder of Amazon.com, knew nothing about books when started his venture, he simply understood the power of electronic commerce: "He picked books because of the existing margins and distribution patterns seemed favourable to an online business".
The early days of the last decade of e-commerce appear to be very important in terms of reviewing how the perceptions of it have changed. Based on the phenomenon discussed already, e-commerce was an experimental terrain with lots of uncertainty. Businesses were still finding and testing better ways of doing things, adopting what worked and rejecting what didn't; and as always, trying to avoid mistakes made by their competitors. For consumers, however, the positive feedback was slower than businesses expected. Consumers approached the Internet with caution, but the opportunity for wide availability of information changed their purchase behaviour. Many would research their purchases online and then buy in some other way.
Andy Grove, then CEO of Intel, responded to a question when asked about the return of investment from his firm's Internet ventures he replied, "What return of investment? This is a Columbus in the new world - what was his ROI?"
Following Mr Grove's comment, it suggests that the early years of e-commerce were perceived as an opportunity where it was possible that those who ventured in e-commerce would not get a return on their investment. However what they discovered was likely to generate huge revenues in future.
As mentioned previously, a good example of a successful business model is Amazon.com, used as a case study by many companies around the world. Described in The Economist 1997 surveys as "perhaps the best model for tomorrow success in e-commerce", in the quote below Bezos reiterates the model behind Amazon's success and accurately predicts the expansion of his firm.
"The consequence is that we have two sets of customers: consumers looking for books and publishers looking for consumers. Readers find books or books find readers. This is a generic model that could work in plenty of industries: anywhere with enough different products-and consumer tastes-to call for a big catalogue and a lot of advice. In future, Amazon may expand into music and videos. Once you understand the model, the applications seem almost limitless."
After the initial phase of discovering and experimenting e-commerce, the next period was the 'bubble boom', which lasted until the late 2000s. This phenomenon had a much greater impact on e-commerce. The indication that online ventures had the potential to generate huge profits led the financial market to falsely valuing existing and new e-commerce firms. Financial experts argued that in this new world of rapid technological change, old methods of share valuation had become irrelevant; e-commerce models were not about making profits but rather acquiring market share.
The bubble eventually burst in 2000; the extreme valuations for Internet firms vanished with it and many businesses ceased operation. The survivors carried on as best they could, encouraged by the growing number of Internet users. The cost of communications continued to drop dramatically, leading to more and more computers being linked together. Much more knowledge, stored as a sequence of zeros and ones, could be sent anywhere in the world at negligible cost. The reduction in cost of communications and information technology helped to globalise production and capital markets. In turn, globalisation spurred competition and hence innovation, speeding up the diffusion of new technology through trade and investment.
The value of online firms that survived the dotcom bust was rising again and some of these firms were starting to make real profits. The number of other businesses moving online increased dramatically; however the business world became much more cautious about the Internet's potential. Wild predictions, made at the height of the boom-namely, that vast parts of the world economy would move into cyberspace-were, in one way or another, coming true.
One of the biggest commercial advantages the Internet brought to commerce is the lowering of transaction costs, which usually translated directly into lower prices for consumers. If the lowest prices could be found on the Internet and people like the service they get, why would they buy anywhere else? One reason may be convenience; another, concern about fraud, which still poses the biggest threat to online trade. But as long as the Internet continues to deliver low prices and product information quickly and securely, e-commerce will continue to grow. Increasingly, companies are assuming that customers will know exactly where to look for the best buy. E-commerce is getting closer to Adam Smith's theory of a perfect market.
The advancement of innovation had merged offline and online markets; the new business model integrates all selling channels combining traditional shops, printed catalogues, home-shopping channel on TV, a phone-in order service and an e-commerce-enabled website. However, customers are encouraged to place their orders via the website.
For Internet users in general, search engines have revolutionised the way they use the Internet; they have become the first point of entry to the Internet. Google, the best-known search engine, is now recognised as a verb: people say they have "Googled" a product or a company. The search engine market has also developed one of the most effective forms of advertising on the Internet, and it is already one of the most effective ways to reach consumers.
The latest model of social networking websites has become a staple in the Internet landscape as it allows people to put their lives online. A person's profile becomes a representation of who they are in the offline world. Social networks are blurring online and offline worlds, evolving into social destinations that are driving directions of the web affecting industries, such as advertising, music and politics. The evolution of social networking is kick-starting a broad global shift to how people, content and culture interact on the web.
What has been shown throughout my discussion is that electronic commerce is more than just another way of sustaining or enhancing existing business practices. E-commerce is a paradigm shift, it is a "disruptive" innovation that has and still is radically changing the traditional way of doing business. E-commerce firms operate under totally different business principles and work rules in the digital economy. The growth in Internet based businesses has triggered the need to better understand the characteristics of special business models adopted by successful organisations. Businesses must be ready to change, adopt and adapt at short notice, if necessary, in order to continue being successful. Flexibility is very important in e-commerce; as we've seen, there is no simple direction and almost no such thing as an established business or revenue model for companies, even within the same industry.
Business models however seem to play an important role in success and failure of Internet based companies. The reason many firms failed during the dot com bust is primarily due to the rash, impractical business models that they employed. However, failures and successes in the early days of e-commerce have been the reference for success in future.
But firms operating today have an advantage; they have strategies and can draw on past experience in order to minimise the risks associated with experimenting and operating in uncertainty.
As predicted in The Economist's 1997 survey "...lessons have been for the firms that lost millions identifying dead ends in electronic commerce, their bloodstained maps will be the guides to tomorrow's online marketplace."
The arrival of social networking sites, the power of search engines and the idea that the current internet is driven by consumer-generated content - blogs, online forums, etc. - have again interfered with existing practices. This phenomenon has again upset existing e-commerce models, however businesses are responding much quicker. Personalisation, membership, blogs, video sharing are all common features of many of today's e-commerce websites and are being adopted exponentially. The current phenomenon of e-commerce has become more portable, more personal and more collaborative.
