By now it's almost cliché to take note of the Internet's vast potential as a business resource, but triteness doesn't diminish the fact that this once-obscure computer network has changed—and will continue to change—business and society profoundly. A number of estimates pegged the value of Internet commerce in 1998 around $100 billion for the United States, and more than one projection for the early 2000s foresaw worldwide e-commerce surpassing a trillion dollars within the first five years of the 21st century. Although much attention has been devoted to the vast consumer market accessible via the Internet (which is a multibillion-dollar franchise in its own right), business-to-business transactions make up the large majority of e-commerce sales in terms of value. Total U.S. 1998 economic activity surrounding the Internet, including computer hardware purchases, Web authoring services, commerce, and so forth, was estimated at more than $300 billion in sales and 1.2 million jobs. And these statistics don't even address the non commerce efficiencies and savings that Internet-based technologies bestow on businesses in areas such as supply-chain management.
Whereas during the Internet's early commercialization companies were consumed with simply getting online, perhaps without much forethought about what to do once they got there, increasingly corporations are formulating exacting Internet strategies to capitalize on the network's strengths as well as to cope with its shortfalls. Despite the popular metaphor of a virtual store serving all the same functions as a physical store, conventional transaction-based commerce is not the appropriate Internet business model for all companies. Rather, businesses must evaluate the financial and competitive advantages of using the Internet as a primary vehicle for communication and exchange versus traditional and hybrid options. Some firms may find, for example, that it's more profitable to provide users with Internet tools to help make a purchasing decision than to try to facilitate the entire transaction electronically. Meanwhile, other types of companies will find that doing business exclusively over the Internet is the best approach. No blanket policy is likely to work across dissimilar business lines; the key to determining which model is best is intricately tied to the specific market being served, the logistics of delivering the product or service being offered, and what other non-Internet alternatives exist.
The Internet originated as an experimental communication system funded by the U.S. Department of Defense and hosted by several universities. Its impetus was a defense experiment to create a cost-efficient, decentralized, widely distributed electronic communications network for linking research centers. This network was named Arpanet, after its sponsoring agency, the Defense Advanced Research Projects Agency (DARPA). Arpanet began operating in 1969, but it took several years before it became reliable, thanks to packet switching (breaking information into small manageable pieces that could each be routed separately and reassembled at the receiving computer), and acquired familiar functions like electronic mail. Arpanet's first international links were established in 1973, when hosts in Great Britain and Norway signed on.
The Internet's first commercial forebear was called Telenet and was run by Bolt, Beranek & Newman (BBN), a defense contractor with close ties to the Arpanet project. Introduced
Despite its relative obscurity at the time, the 1980s were the Internet's most defining years. By the early 1980s Arpanet had adopted the TCP/IP communications standards that would become commonplace on the Internet, and more importantly, other interconnected research networks began to spring up, both within the United States and abroad. One of the most important was the National Science Foundation's NSFNET, which came online in the mid-1980s to link several supercomputing laboratories with U.S. universities. In this period the collective network was increasingly known as the Internet, although the generic term of internetworking, or connecting networks to other networks, had existed since at least the mid-1970s. Enjoying rapid growth and technical upgrading, the NSF's network became the official backbone of the Internet by the late 1980s, eclipsing Arpanet, which by that time was comparatively small, slow, and outmoded. From just 213 host computers on Arpanet in 1981, the Internet had burgeoned to include some 10,000 hosts by 1987, and topped 300,000 by 1990, the year Arpanet was officially decommissioned.
The final major breakthrough of the 1980s—and one that would decidedly set the course for the 1990s and beyond—was a 1989 proposal at the Swiss physics lab CERN to create a World Wide Web. The idea came from Tim Berners-Lee, a British-born physicist working at CERN at the time. His plan, which was not well received initially, was to allow colleagues at laboratories around the world to share information through a simple hypertext system of linked documents. Eventually gaining CERN's approval, Berners-Lee and others at the research center began developing the now familiar standards for the Web: hypertext transfer protocol (HTTP) to delineate how servers and browsers would communicate; hypertext mark up language (HTML) to encode documents with addressed links to other documents; and a uniform resource locator (URL) format for addressing Internet resources (e.g., http://www.cern.ch or mailto:firstname.lastname@example.org). By 1990, Berners-Lee had likewise created the first Web browser and server software to feed information to the browser.
Although Berners-Lee's vision was for a collaborative, informal medium of information exchange, perhaps that typified in chat rooms and newsgroups and whiteboard applications, more commercially motivated Web innovations soon followed. Most important was Marc Andreessen's Mosaic browser, which he developed as an undergraduate employee at the National Center for Supercomputing Applications (NCSA) of the University of Illinois at Urbana Champaign. Mosaic, which debuted in early 1993, was more graphical and user friendly than other Web applications up to that point. It was an instant success, albeit not a money maker because it was mostly distributed for free. Andreessen finished his degree in computer science later that year, and in early 1994 established Netscape Communications Corp. with Silicon Valley titan Jim Barksdale, founder of the high-end computer hardware maker Silicon Graphics. Netscape's Navigator quickly became the dominant browser on the Internet, at one point claiming 75 percent of all users. Curiously, the NCSA claimed rights to Mosaic and wrangled with Andreessen over the commercial use of the browser application code and its name; the NCSA would later license Mosaic to Microsoft Corp. to use in a competing browser, enabling
As the browser wars fed on the phenomenal public interest in the Internet in the mid-1990s, the network became a predominantly commercial entity, as businesses set up Internet sites in droves and millions of new users—both private individuals and corporate users—began logging on. The NSF officially bowed out of running the Internet backbone in 1995, when commercial operators took over; however, the NSF continued its policies of funding research into advanced networking applications that could improve the Internet and newer high-speed research networks.
Although there are scores of specific Internet applications that benefit businesses, they can all be grouped under two broad categories: (1) information exchange and dissemination, and (2) facilitating e-commerce.
The information exchange function is the broader of the two and includes such diverse applications as:
The economic value of these applications is difficult to measure, but for large organizations they have the potential to save millions of dollars in costs, and depending on the application, to stimulate sales as well. Only a couple of the possibilities will be discussed here.
The internal information management and knowledge-sharing abilities of corporate intranets can be substantial. Intranets, which are corporate information networks based on Internet technology but are usually restricted access sites available only to select users, allow central storage and versatile dissemination of diverse information, including corporate handbooks and manuals, customer or marketing databases, employee databases, project discussion boards, and other internal documentation. Intranets are substantially more efficient than circulating paper copies of documents, both in terms of immediacy of information and, in most cases, maintenance costs. Because they rely on simple, Web-based client/server technology, they're also typically easier to implement and use than proprietary databases.
The extranet, which enables supply-chain integration and automation, is an especially powerful use of the Internet, and one that is increasingly being adopted by large corporations. Although there are many variations, supply-chain management is generally a hybrid of data exchange and electronic commerce that allows companies to better coordinate their procurement and distribution practices with those of their suppliers and clients. Based on the efficiency principles of electronic data interchange (EDI) and just-in-time inventory, this coordination can afford several benefits. The streamlining effects can include eliminating paperwork, reducing staff hours, and improving data accuracy. Web-based ordering systems likewise tend to be easier to use than their old-line counterparts, which also contribute faster and more accurate results. Such automated systems can also provide management with more timely and detailed information about corporate purchasing habits and needs, allowing better resource planning and even providing a blueprint for cost control. Extranets can also be established to provide customer service and other external communications functions.
As an information source, the Web is also a particularly efficient means of comparison shopping for business procurement. With relative ease, a procurement officer can find price quotes from several vendors, some of which may not even be aware the other exists. The buyer can then use this information to either choose the low-cost vendor or to gain concessions from established vendors. The downside to this, of course, is when companies are on the receiving end of this informed negotiation, which usually leads to tighter profit margins.
There are also multiple facets to e-commerce, although they are much more closely integrated than information-exchange functions. Specifically, businesses may focus on one or more of these aspects of commerce:
It may not be feasible or profitable to do all three in equal proportion, or even at all. For example, the most logical commerce-related application for Federal Express and similar companies is delivery tracking, which is done after the transaction is completed. It also makes sense to provide pre-transaction services, such as account set-up and drop-off center locators, on the site. However, in this example the transaction itself is more difficult to accomplish. It consists of two main parts, dropping off a package and arranging for payment. The latter could easily be done over the Internet, but it's less clear how the company would profitably obtain the packages for delivery. Federal Express offers pick-up services, but it's uncertain whether it would be profitable for the company to pick up the majority of the parcels it carries, which are traditionally dropped off at local retail centers.
In other trades, of course, the Internet may well be the ideal locus of transaction. The case is particularly compelling for products or services that can be delivered online, such as software applications via high speed connection, musical recordings, or databases. But strong—if not initially profitable—business models have also been adopted in many other fields, notably by booksellers such as Amazon.com and auction houses like eBay, not to mention vendors that electronically service the mundane but lucrative business-to-business supply chain.
Thus, while e-commerce is commonly the more celebrated business application, as noted above it isn't the appropriate model for all types of trade. Companies contemplating a new e-commerce initiative would do well to consider this maxim: all e-commerce is not the same. Internet-era mythology holds that (1) competitors big and small are all on equal footing on the Internet, and (2) anything and everything can be sold online.
Equal footing is only possible in the limited sense that minor players in some line of business can, assuming they have the funding (in 1998 the median development price for a mid-sized Web site was estimated at $100,000 and rising briskly) and technical resources, build Internet sites that are as good as—or better than—those of their major competitors, as measured by site convenience, functionality, marketing tactics, and so forth. However, this doesn't mean that the smaller company will be any more effective in the larger sense. The smaller company must also have a cost-efficient system for order fulfillment, a powerful marketing operation that ensures potential customers are reached, and many other supporting capabilities in order to succeed. For instance, say a small Internet-only start-up wants to sell high-end home appliances online. They may create the best site in the business, but will they be equipped to serve a national market? Probably not. For such large and expensive products, traditional retailers like Sears, Roebuck and Co. and the so called appliance superstores have tremendous competitive advantages in the online arena as well, not the least of which is an established and already profitable physical distribution system. That's not to mention that the marketing model may be off target; Internet transactions may not appeal to potential buyers of expensive appliances, as these people might value the ability to see the product in the showroom and talk with sales staff. While that conclusion in this example is arguable, there are clearly some product and service transactions in which customers place a high value on in-person contact and immediate fulfillment (real life examples being health care, video rental, and grocery shopping), and these so far haven't been good candidates for an Internet-only approach.
The point here is not to deny the Internet's revolutionary implications for the business world, or to suggest that its entry barriers can't be significantly lower than in traditional industries. Instead, the lesson is that many traditional business principles and practices still apply to successful e-commerce. Market research, customer service before and after the sale, cost-benefit analysis, and return on investment all have essential roles in fashioning an Internet commerce strategy.
As a point of commerce, the Internet has a number of unique features that must be reckoned with in order to successfully compete in its terrain. Most importantly, customers, whether individuals or businesses, tend to associate different values and expectations with online commerce versus traditional means. Many of these can be summarized under the heading of value. Put simply, many customers expect to come away with something of greater value from an Internet transaction than they do from a conventional physical purchase. Value may present itself in many forms. Examples include greater convenience, better information about the purchase, reliability of service, personalization/customization, security of the transaction, and lower costs. If an online vendor fails to offer better value—perhaps it is only as good as the real-life alternative—it is likely to have trouble making the grade in Internet markets.
Value creation is but one of several aspects of Internet marketing that many ill-conceived Internet ventures fail to address. A technically competent Web site is only a starting point, a baseline. Effective Internet business plans must also identify a clear market need, be highly sensitive to competition from all sources, articulate a strong value proposition for customers, and be flexible to respond to market changes.
Divining exactly what the future holds for the Internet is no easy task—and all such projections must be taken with a grain or two of salt—but it is possible to observe a number of trends that are likely to influence that future. Perhaps the broadest and most obvious is the continued growth of the Internet by all measures. As mentioned at the outset, the value of commerce conducted over the Internet will probably be measured in the trillions of dollars within the first few years of the 2000s. Compared to late 1990s levels, this will represent a geometric annual growth rate in the multi-thousand percent range. By some estimates Internet commerce may constitute nearly 10 percent of U.S. gross domestic product by 2005. While it often has a higher profile, some observers expect retail commerce to account for only a small fraction, perhaps only 3-5 percent, of that total. Meanwhile, the number of Web users worldwide is expected to reach a half a billion or more people by then, up from 170 million as of 1999.
Not surprisingly, another noteworthy area of development will be technological. Since the mid-1990s there have been several government and commercial ventures to develop a new, faster breed of technology for the Internet, which has been straining under the aggressive demands of modern networking. More precisely, the research efforts are looking to build new internets, which will ultimately transfer technology to the public Internet, either in the direct sense, as was the case historically, or in a knowledge transfer scenario in which the government provides a roadmap for commercial developers to follow.
The main thrust of U.S. government efforts is behind a program called the Next Generation Internet (NGI) initiative, a high-speed government research network being created under the direction of an interagency committee. The NSF, the National Institutes of Health, the Department of Defense (through DARPA), the Department of Energy, NASA, and the National Institute for Technology and Standards are the primary agencies contributing to NGI. The NGI was scheduled to reach the advanced development and testing stages by 2002, at which time it was intended to demonstrate transfer speeds up to a trillion bits (terabits) per second. Some $300 million in federal grants has been earmarked for NGI and related initiatives.
The NGI project is also feeding funds to a separate Internet research project known as Internet2 (I2), a collaboration between some 154 U.S. colleges and universities. I2 is intended to return institutions of higher learning to the days when they had a relatively private, high-speed network to themselves, i.e., before the commercialization of the Internet. There are also about a dozen and a half commercial firms participating in the 12 effort, mostly from the telecommunications services and network hardware sectors. A related effort being undertaken by many of the same organizations was called Abilene.
While these new networks were being conceived, the NSF, and its contractor MCI WorldCom, deployed a limited-use system known as the Very High Speed Backbone Network Service (vBNS). The vBNS project was the immediate successor to NSFNET when it was transferred to the commercial domain in 1995. Since then, the NSF has financed ongoing upgrades to keep it current with the highest performance standards of current commercial networking technology, including fiber optics. Access to vBNS is restricted to NSF computing centers and merit-based research centers. As a result, only a handful of mostly academic institutions use vBNS. In 1999, an upgrading project brought its bandwidth up to 2.2 gigabits per second (Gbps), but overall it is a much less ambitious endeavor than that of the new Internet projects.
[ Scott Heil ]
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