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Electronic Commerce - Measuring, and Globalization, Effects on the Business Enterprise

internet transactions websites issues

Although use of the term “electronic commerce” (or “e-commerce”) dates back only to the 1970s, broadly interpreted it includes all commercial transactions that use any electronic communications facilities. Used this way, its origins extend back to the commercial use of the telegraph in 1861. However, the term was widely adopted in the 1990s to describe business transactions involving the Internet. There is, nonetheless, historical continuity between earlier technologies and the Internet since Internet-based commerce is rooted in prior technologies, policies, and business practices.

Measuring Electronic Commerce

Before addressing the changes that the Internet-as-business-tool has brought about, a few words about the concept of “electronic commerce” and its measurement may be useful in putting industry statistics into context.

There is no single, universally accepted definition of “electronic commerce.” Definitions range from extremely inclusive to a narrow requirement that the entire transaction, including payment and delivery, be conducted over the Internet. In its most common usage, e-commerce refers to a transaction some part of which has been conducted over the Internet (although this does not usually reflect transactions in which the Internet was used to collect information used to consummate a transaction elsewhere). This lack of a universal definition is one, but not the only, challenge in interpreting studies purporting to measure “electronic commerce.” The amount of e-commerce varies depending on the scope of what is being measured. For example, one estimate released in early 2000 estimated that there would be $7.29 trillion in e-commerce transactions by the year 2004. However, such large numbers can be misleading.

The Internet is most often used as a substitute for another form of communication (e.g., EDI, telephone, facsimile). Thus, in many cases, there may be little or no net new business occurring, just the same old business being conducted through a new medium. The real benefits to companies of doing business online are more difficult to measure: increased efficiency, fewer errors, lower cost, smaller inventory, elimination of paper, and better relationships with customers.

Furthermore, electronic commerce is typically divided into two kinds: business-to-business and business-to-consumer (some also add consumer-to-consumer and consumer-to-business). These “virtual” divisions mirror physical reality in that business-to-business transactions represent eight to ten times the dollar volume of business-to-consumer transactions. In overall statistics, these numbers are often combined. Moreover, these figures say nothing about profitability. As of 2000, the businesses primarily receiving profits from use of the Internet were companies facilitating electronic commerce, rather than the online businesses themselves.

It is clear nonetheless that there is an extraordinary expansion of e-commerce around the world. This global growth of electronic commerce has raised significant regulatory and legal issues at the national and global levels. The resolution of these issues may either facilitate or hinder the growth of e-commerce.

Electronic Commerce and Globalization

The period following World War II saw a steady growth in the volume and importance of international trade. In the mid-1980s, large parts of the world experienced a “sea change” in their view of the relationship of government and business. Many governments moved from a highly regulatory and national protectionist posture to one of deregulation, privatization, and the opening of domestic markets. The result was the globalization of markets, corporations, finance, banking, and consumerism. The collapse of the bipolar political world with the breakup of the Soviet Union emphasized the dominant role of the United States. The United States was the leader in Internet development, is the home of the largest number of commercial websites, and stands to be the largest gainer from increased global electronic commerce, at least in the short term. Consequently, the United States has adopted a very aggressive policy position in international forums insisting that the global Internet be free from regulation, tariffs, and new taxes. The majority of the developed nations generally support this view. A number of lesser-developed nations do not support this view, because they see “globalization” as a euphemism for “Americanization” and as a threat to their sovereignty and interests.

The organization that most embodies the open-market approach in the trade arena is the World Trade Organization (WTO). Through a series of market-opening agreements, it has been able to reduce or eliminate many tariff barriers to trade, particularly in telecommunications and electronic equipment. This, along with the liberalization of banking and investment rules, helped lay the foundation for a system of electronic global trade.

At the same time, since the Internet is inherently global, cross-border electronic trade raises many policy issues that can only be addressed by international bodies. These include issues of consumer protection, privacy and encryption, advertising, intellectual property, the protection of children, and harmful content. Several international organizations have taken up these themes. These included the WTO, the International Telecommunications Union (ITU), the Organization for Economic Cooperation and Development (OECD), and the World Intellectual Property Organization (WIPO), among others. Some issues have proven quite contentious, such as the differing views on an individual’s right of privacy that are held in Europe and in the United States.

These developments also create new challenges (or opportunities) for lawyers. Unresolved legal issues include jurisdiction (who can be sued where), uniform commercial codes, contract law, recognition of digital signatures and digital documents, and uniform consumer protection laws. The process of resolving these issues is ongoing.

Another area vexing governments has been taxation. There is as yet no easy and reliable mechanism for taxing transactions over the Internet. Countries that rely on a value-added tax (such as most European countries) are concerned about possible loss of revenues, as are countries (and states of the United States) that rely heavily on sales-tax revenues and fear losing them—and sales—to enterprises outside their taxing jurisdictions. Some new tax concepts, such as a “bit tax” on the number of bits transferred, have been suggested, but so far, they have all been rejected. Both among nations and within the states of the United States there is a search underway for “global” solutions—uniform taxes across jurisdictions for Internet transactions.

Effects on the Business Enterprise

It is easiest to explain the business effects of electronic commerce by emphasizing two main areas: (1) the website itself and (2) the implications of integrated information technology for the structure of the enterprise (called “e-business”). They are not antithetical but complementary. There is also a general, underlying condition for the continued rapid growth of electronic commerce that is summed up in the word “trust.” In this context, it means businesses being able to trust one another, consumers being able to trust businesses, and all of them trusting that the system is both reliable and secure. Attacks on web-sites, or on the Internet, that erode this trust deter electronic commerce in two ways: (1) by reducing its use and (2) by reducing investment that will support future growth. Thus, stock market dips directed at Internet-based (“dot-com”) companies tend to follow negative publicity about security breaches or technical difficulties.

The Website

A company’s website is its virtual storefront, which can be designed with varying degrees of sophistication, complexity, and interactivity. It can be a catalog, providing product information; it can permit real-time transactions (purchase, payment, and, if an electronic product, delivery); and it can provide a window for customers into the enterprise.

Although considerably lower in dollar volume than business-to-business e-commerce, much publicity has been focused on sales through retail websites, called “e-tailing.” The U.S. Department of Commerce estimates that there was $5.3 billion in Internet sales during the 1999 holiday season. Impressive as it may sound, this represents only about 0.64 percent of all retail sales—but the trend line suggests continued rapid growth.

There are numerous models for websites, typically involving some kind of catalog, a search capability, “shopping carts,” and payment systems. Some websites allow for “click to talk,” which can put customers directly in touch with a customer service agent. Some websites use other approaches, such as auctions and barter.

For many commercial websites, third-party advertising is perceived as a significant source of revenue—a part of the process of “monetizing the traffic,” that is, converting site visits (“clicks” or “hits”) into a revenue stream. The measurement and evaluation of the advertising value of traffic to a website remains problematic, but it is receiving intense study by the advertising community. Some commercial websites use “cookies,” small bits of software that are implanted by a website into the computer of a visitor and are then used for tracking purposes. Websites that aggregate traffic either vertically (one industry) or horizontally (general purpose), which are used as start points or consistent return points, are called “portals.” Other important sites for electronic commerce are called “search engines” (e.g., Yahoo, Alta Vista, Lycos), which help potential customers locate resources online.

Doing retail business online has also produced a new set of intermediaries, companies that provide ancillary, but useful or necessary, services to facilitate electronic commerce. These services include privacy codes, security verification, payment systems, networked advertising, order fulfillment, and digital certificates (authentication of identity). There are numerous techniques for attracting consumers to a website, and a variety of possible payment systems, both online and offline, for purchases.

The rapid growth of “dot-com” companies in the late 1990s was fueled by heavy speculative investment in their stocks. While company managers focused on developing market share instead of traditional profits, investors focused on future expectations of earnings, sometimes to a degree inexplicable by past investment theories. The belief seemed to be that a few dominant websites would develop early in each area (the “first mover” advantage), called “category killers,” which would be so well known they would dominate the field. Established companies with known brands often have not been among the first to move to e-tailing, for a variety of reasons. However, almost all major retailers are now making the Internet at least a part of their strategy.

The Internet does not seem to be equally hospitable to all kinds of retail commerce. In 1999, the top five categories—computers/software, travel, financial/brokerage, collectables, and music and videos—constituted 75 percent of the dollar volume of sales.

The fundamental lessons for successful web-sites so far seem to be the importance of (1) creating a brand, (2) building a sense of community with customers, and (3) adding value to the experience of the users.

E-Commerce and the Structure of the Enterprise

Entry into electronic commerce over the Internet is almost inevitably connected with the realization that the introduction of the information technology necessary to provide a full-purpose website also has major implications for the structure of the business enterprise. This transformation has already been initiated in some corporations, often under the name “business process reengineering.” It typically involves increased outsourcing, a flattened management structure, reordering of the channels of supply and distribution, and a greater sense of customer orientation. Consulting companies and others offer products for “enterprise resource planning” that integrate all of the functions of the enterprise under one information system.

Social Implications

Concerns have been raised by a number of groups about possible adverse effects of the spread of electronic commerce. These include nationalists, who fear loss of sovereignty to multilateral organizations and global corporations; labor unions, which fear a loss of jobs and a “race to the bottom” as capital migrates freely while labor does not; environmentalists, who fear that “dirty” production facilities will move to countries with the lowest environmental requirements; child-protection organizations, which fear that the search for the lowest-cost production will lead to exploitation of minors; and the traditional political left, which sees the further erosion of the role of the government as provider for the common good and the social safety-net.

Collectively, these groups represent a minority in most developed countries, but when organized together, they create a powerful political statement, as occurred at the December 1999 meeting of the World Trade Organization in Seattle, Washington, where protests and civic disturbances caused the meeting to fail. Following that, there were signs that the United States began to recognize that the views of these groups needed to be heard.

Conclusion

The use of the Internet for business transactions between and among businesses and with consumers is gradually becoming the norm, bringing with it major changes in corporate structure and a reordering of the chains of supply and distribution. There remain significant technical, regulatory, and political issues that could present impediments to further growth. Barring unforeseen catastrophic failures, electronic commerce will become the new business model, moving from a focus on the office machine in the early twentieth century to a focus on information flows in the early twenty-first century.

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