Electronic commerce (or e-commerce) can be defined as the process of two or more parties making business transactions via computers and some type of network, either a direct connection or the Internet. E-commerce began in the 1970s when large corporations began creating private networks to transfer information between business partners using a process called electronic data interchange (EDI). The goal was to eliminate large amounts of paperwork. Nearly every Fortune 1000 company used EDI, and many of those companies began conducting business over the Internet, which is cheaper than expensive private networks.

Online retailing began around 1993-94 and experienced dramatic growth. Online sales were $600 million in 1996 and grew dramatically to $2.4 billion in 1997. The industry developed so rapidly in the latter half of the 1990s that projections quickly became outdated.

In its December 31, 1998, issue, USA Today named electronic commerce—defined as the buying and selling of goods and services over the Internet—as the top technology story of the year, and Jeff Bezos, CEO of amazon.com , was named the technology person of the year. During 1998 shares of amazon.com , which began by selling books over the Internet and then added videos and music CDs, rose from $26 a share to $321 a share. Remarkably, the company did not turn a profit as it saw its market capitalization grow from $503 million when its initial public offering hit the market on May 11,1997, to $22.1 billion in January 1999.


Several structural problems affecting e-commerce had been solved in time for the fourth-quarter 1998 shopping season. Clearly established shopping channels had emerged, including Yahoo's newly expanded shopping channel and the merger of America Online and Netscape. Yahoo was offering more than 2 million products from more than 27,000 stores on its Internet shopping channel. Online malls had also established a presence on the Internet. Perhaps most importantly, vendors could offer consumers the promise of secure credit card transactions over the Internet.

Other factors contributing to the rapid growth of consumer e-commerce at the end of 1998 included improved web site design. Newly designed web sites were more colorful and contained more pictures. Improved designs allowed consumers to get where they wanted with fewer clicks. In addition, new features were being added continuously to existing web sites. Altogether, these factors dramatically improved the quality of online shopping during 1998.

Developments in the area of computer hardware also contributed to the growth of consumer e-commerce. Cheaper PCs, handheld devices, and WebTV all served to bring more users online. Internet connections were getting faster, due to the availability of cable and other broadband services as well as speedier modems.

One of the newest developments that empowered online consumers was bot technology ("bot" is short for "robot"). This new technology enabled personal search agents to scout numerous web sites to find a particular product at the lowest price. Yahoo and Excite both rolled out their versions of bot technology toward the end of 1998. Consumers could also visit sites that specialized in comparative shopping. Some individual vendors, however, chose to restrict bot access to their web sites, preferring not to be part of comparative shopping online.

The effects of e-commerce on consumer behavior are many. First, consumers have access to more information about specific products and prices. Such information empowers consumers in their dealings with retailers and manufacturers. Secondly, manufacturers began to offer their products directly to consumers, bypassing traditional retail outlets. Sooner or later most manufacturers will have to decide how they are going to balance their commitment to their established retail and dealer networks with their ability to sell directly to consumers over the Internet.

E-commerce also enables consumers to order customized products online. Computer manufacturers such as Dell and Gateway allow customers to write their own specifications for computers they order online. Toy manufacturer Mattel allows customers to customize dolls they order by specifying skin and hair color and other features. Musicmaker.com and other sites let customers create their own customized music CD.

E-commerce can be expected to change consumer expectations with regard to convenience, speed, comparability, price, and service. Shopping on the Internet offers consumers choice, freedom, and control. There are no interruptions from vendors. As a result companies are developing new online advertising strategies. They recognized that a growing number of consumers would rather spend an hour online than in front of a television set. In just a few years online advertising has evolved from a push strategy that placed product announcements in front of as many eyeballs as possible, to one that involves educating, entertaining, and enticing the online consumer. Unlike television viewers, who are for the most part passive, online consumers are interactively involved with their online activity. Some innovations in online marketing have included the airlines e-mailing bargain fare information to a list of subscribers. Other companies, such as Yoyodyne (a subsidiary of Yahoo), design games and contests that drive traffic to client web sites.

Estimates of the amount of money spent on online advertising vary widely. Computerworld reported that approximately $1 billion was spent on online advertising in 1997. estimated actual spending at much lower levels: $175 million for 1996 and $650 million for 1997. qualified those figures as being low compared to other research firms. They represented actual spending rather than the value of advertising, some of which can be accounted for by bartering and discounts, which could account for at least 25 percent of reported Internet advertising dollars

According to an InterWatch survey conducted by InterMedia Advertising Solutions, the top 25 industries spent 86.7 percent more on Internet advertising during the first three quarters of 1998 compared to 1997. Computers and software accounted for nearly half of all Internet advertising (47.3 percent at $321 million). Medicine (up 403 percent), government and organizations (up 351 percent), direct response companies (up 273 percent), and retail (up 163 percent) were the leading industries in terms of spending growth in Internet advertising.

Major players in online shopping enjoyed tremendous growth in 1998. Dell Computer debuted its web site in March 1997 with sales of $1 million a day. During 1998 its online sales tripled to $10 million a day, and by the end of the first quarter of 1999 Dell's online sales were reported to be $14 million a day, including telephone sales generated by its web site. Of those sales an estimated 40 percent were to consumers and 60 percent to other businesses. Clothing retailer The Gap enjoyed similar success in 1998, with its web site generating more sales than any of its stores except one.

According to the National Retail Federation, 26 percent of all retailers had an Internet site in 1998, compared to 8 percent in 1996. Computer hardware and travel services each accounted for about 30 percent of online retail sales in 1998, books another 9.2 percent, and other goods and services took up the remaining 30 percent.

During 1998 America Online (AOL) had the most e-shoppers of any other site. Some 42 percent of its 10.5 million subscribers purchased goods online as of January 1998. By year-end (before it acquired Netscape), AOL had 14 million subscribers, and 48 percent of those subscribers shopped online. With the acquisition of Netscape, even more consumers would be converted to shopping online.

According to some predictions, online shopping could overtake catalog shopping in 1999. Seeing the trend, many mail-order businesses added a web site to their marketing mix in 1998. Even home-shopping cable channel QVC launched a web site to complement its TV sales.

Forecasts of the growth of online shopping vary. The two main research firms that track online spending, Jupiter Communications and Forrester Research, project different volume levels in the future. As of 1998, Jupiter was projecting that online shopping would grow to $41 billion by 2002. Forrester Research, on the other hand, was projecting a volume of $108 billion by 2003, or 6 percent of all U.S. retail sales. Estimates of online shopping for 1998 ranged from $7 billion to $13 billion. That was still less than I percent of the $2.4 trillion Americans were expected to spend on retail goods in 1998. By 2003 it seemed likely that consumer e-commerce could account for as much as 3 or 4 percent of retail sales.


Electronic commerce over the Internet has been beneficial to large and small companies. For 1997-98 business-to-business e-commerce made up the largest portion of Internet commerce, but online wholesale and retail sales were projected to surpass business-to-business e-commerce in 1999. Forrester Research estimated that 1998 business-to-business Internet trade reached $43 billion and that it would grow to $1.3 trillion by 2003, an annual growth rate of nearly 100 percent. An estimated 75 percent of Internet sales were business-to-business in nature in 1998.

Before widespread use of the Internet, large corporations set up private networks called VANs (virtual area networks) to link electronically with their suppliers and contractors. Using EDI they made financial transactions and exchanged documents electronically. Since 1996 large corporations began moving some of their electronic business to the Internet, allowing more small businesses to link to them electronically. For most small businesses, VANs were prohibitively expensive, while linking via the Internet hardly represented any additional cost. Among the benefits to small suppliers were speedier payments for electronically submitted invoices. Small businesses found they could improve their competitive position by delivering information quickly over the Internet.

With the Internet replacing or complementing VANs, many suppliers were required to trade online with bigger corporations. Chrysler Corporation's Internet program began with 16 contractors and grew to more than 1,000 companies. Rather than eliminating the middleman, the Internet has enabled companies to link their supply and distribution channels into a unified electronic network. As a result large corporations can outsource and still maintain control over the process. They can also open up their contracts to a wider range of small firms.

An estimated 2.5 million U.S. small businesses had Internet access in 1997-98, and 900,000 had their own web sites. Of those, some 450,000 conducted online sales with consumers or other businesses.


Amazon.com opened for business in July 1995, offering books over the Internet. By September it was selling $20,000 worth of books a week, and a trend was clearly developing. The company went public on May 11, 1997, with a market capitalization of $503 million. By January 1999 the company's market value was $22.1 billion. In the fourth quarter of 1998 the company registered approximately $250 million in sales, well ahead of analysts' projections of $190 million. Yet the company was not making money. Through the third quarter of 1998 it reported net losses of $85 million on sales of $360 million. Amazon.com had 8 million customers in 1998 and sales of $610 million. In 1998 amazon.com became the Internet's leading music retailer, and in March 1999 it became the Internet's top video seller, passing Reel.com . In March 1999 amazon.com announced it would add an auction service to its web site. The Internet's most popular auction site at the time was eBay, which generated $47 million in sales during 1998. Unlike eBay, amazon.com promised to offer its customers a guarantee against fraud.

Nike opened its web site in February 1999. Initially it offered a new high-end line of shoes, apparel, and equipment, with plans to broaden its online product selection. Nike was not sure how offering products online would affect in-store traffic, but expected the site to boost rather than deplete the ranks of offline shoppers. Other features of the web site included a store locator, where shoppers could find retail locations in their area based on their address and zip code. Nike felt that shoppers would use the site to obtain specific information about available Nike products, then go to the nearest store to purchase them. Serious runners were considered the consumer group most likely to buy through Nike's online store. The site was receiving about I million hits per month, even before it was capable of processing any transactions. Nike also noted that its products were available online through the virtual stores opened by large retailers such as Just for Feet Inc. and the Venator Group (formerly Woolworth Corporation), which owned Foot Locker and Champs Sports.

E * Trade was the second-largest online securities firm in the world with more than 544,000 online accounts at the start of 1999. It was founded in 1992, went public in 1996, and for fiscal 1998 had revenues of $245.3 million. Its market capitalization was more than $1 billion. The company operated in the fast-growing industry of online trading. At the beginning of 1999 more than 5 million individual investors were estimated to have online trading accounts, giving them the ability to buy and sell securities online 24 hours a day, seven days a week. Online access gave them the ability to access their accounts instantly, have the latest financial information and research at their fingertips, share information with other investors, and execute their trades instantaneously and without error.


Taxation and the ability to make secure financial transactions over the Internet are two key issues affecting the development of e-commerce. While state governments perceive taxes on Internet transactions as a potential source of revenue, the Internet Tax Freedom Act established a national policy preventing state and local government interference with interstate commerce on the Internet or interactive computer services. The 1998 bill established a three-year moratorium on the imposition of Internet taxes, including federal taxes as well as state and local taxes. But existing federal taxes that applied to Internet transactions, such as the purchase of airline tickets, were left in place.

Now that secure credit card transactions are possible over the Internet, new methods of making and processing online payments are likely to be introduced. Smart cards, which employ either a personal identification number or biometric identifier to control access and prevent fraud, are now widely accepted by retailers at point-of-sale locations. Some 3.5 billion cards are expected to be on the worldwide market by the year 2000. In terms of Internet commerce, electronic purse cards, a type of smart card, could be used to make small value or anonymous payments over the Internet. Value can be added to the cards from a home banking application over the Internet. It was expected that consumers would appreciate the convenience and safety of loading electronic cash onto a card in their own home for use in making purchases over the Internet.

Online payment processing services are becoming more widely available to Internet retailers. Companies such as CyberSource Corporation provide Internet retailers with the benefits of outsourcing complex Internet transactions worldwide. Businesses can remotely access a variety of on-demand applications, either through software installed on their commercial server or through a URL link from a web page. These services include multicurrency payment processing, credit card fraud protection, automatic sales and value-added tax calculations, distribution and export control, and fulfillment messaging, among others.

[ David P. Bianco ]


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