Maplestory friend story chapter 5 quiz

S T U D E N T L E A R N I N G O B J E C T I V E S

After completing this chapter, you will be able to answer the following questions:

1. What are the unique features of e-commerce, digital markets, and digital goods?

2. What are the principal e-commerce business and revenue models?

3. How has e-commerce has transformed marketing?

4. How has e-commerce affected business-to-business transactions?

5. What is the role of m-commerce in business, and what are the most important m-commerce applications?

6. What issues must be addressed when building an e-commerce Web site?

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CHAPTER OUTLINE Chapter-Opening Case: Nexon Games: E-commerce Goes

Social

9.1 E-commerce and the Internet

9.2 E-commerce: Business and Technology

9.3 The Mobile Digital Platform and Mobile E-commerce

9.4 Building an E-commerce Web Site

9.5 Hands-On MIS Projects

Business Problem-Solving Case: Facebook’s Dilemma: Profits (Theirs) Versus Privacy (Yours)

NEXON GAMES: E-COMMERCE GOES SOCIAL

If you like to play online games, you may already be familiar with MapleStory. It’s an online role-playing game in which players assume the identities of warriors, magicians, and thieves to collectively fight monsters. You can play the game for free, but if you want your avatar to have a new outfit, wacky hairstyle, or funny pet, you’ll need to pay for these extras. And if you want your MapleStory characters to marry each other in an elaborate Las Vegas ceremony attended by other in-game buddies, it will cost $20 to $29.

MapleStory is a recent creation of Nexon Holdings Inc., the world leader in massively multiplayer online role-playing games. Nexon is headquartered in South Korea, with branch offices in China, Japan, and the United States. Nexon pioneered the “item” (microtransactions) business model, where users can access the full game for free but later opt to pay for game enhancements (items). Nexon is a real pioneer in the development of the “fremium” business model where some content is free, but premium content or service is charged for. Nexon charges players anywhere from 30 cents to $30 each for virtual “items” to enhance their game experiences. MapleStory has 92 million users globally, with over 6 million registered in North America. In 2007, players world-

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wide purchased more than 1.3 million articles of clothing and over 1 million hair makeovers for their MapleStory characters.

One source of Nexon’s popularity is the ability to socialize with other users. According to Min Kim, vice president of marketing at Nexon’s U.S. division, “we sell social experi- ences, not packaged products.” During much of the last decade, most games were played alone. As the Internet and PCs developed more capabilities for rich-media experiences, solitary gaming has given way to social gaming. Whether it’s integrated instant messaging, voice over IP, or text messaging, there are now multiple mechanisms for players to commu- nicate with their friends. Video games now attract a whole new type of consumer—people who want to have a social experience.

In 2009, Nexon America introduced a new, free service initiative called BlockParty that will centralize all of Nexon’s games into one online portal and combine it with a social network designed to expand players’ gaming experience. According to Nexon America executives, BlockParty is one part game, one part portal with a twist of social networking. Nexon America’s goal for BlockParty is to create the biggest online party with great games and awesome gamers.

Other popular Nexon games include Mabinogi, Combat Arms, and Dungeon Fighter Online. Mabinogi allows players to participate in mundane tasks such as farming, writing music, and marrying as well as fighting. The game continuously evolves through the release of patches (termed “Generations” and “Chapters”) that introduce new areas to explore and advance the story line. Combat Arms is a first-person shooter with over 3 million registered players featuring highly advanced graphics, and Dungeon Fighter Online is a unique fight- ing game where players choose one of several different “classes”. Nexon games feature forums where players are invited to socialize with friends, share hints, or just hang out.

Nexon looks like it has a winning formula for success online. Despite the recession, 2009 revenues are estimated to be $349 million, up 29 percent from 2008. Prepaid cards used to purchase Nexon game items are now the second best-selling entertainment gift card (after Apple’s iTunes Store) at Target Stores.

Sources: Mike Crouch, “Nexon America Unveils BlockParty,” Melodika.net, October 6, 2009; Yukari Iwatani Kane, “Online Gaming—the Family Edition,” The Wall Street Journal, March 26, 2009; Nick Wingfield, “Korea’s Nexon Bets on Sales of Virtual Gear for Free Online Games,” The Wall Street Journal, May 23, 2008; Kara Swisher, “Playing with Others,” The Wall Street Journal, June 9, 2008; and www.nexon.com, accessed May 25, 2008.

Nexon’s online games exemplify the new face of e-commerce. Selling physical goods on the Internet is still important, but much of the excitement and interest now centers around services and social experiences—social networking, photo sharing, sharing music, sharing ideas, and multiplayer online games where users communicate and interact with other users. The ability to link with other users and with other Web sites has spawned a huge wave of new businesses built around linking and sharing.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. The business challenge facing Nexon is that Internet technology is changing rapidly, along with consumer tastes. Nexon customers want to play games online in a Web 2.0 environment with other friends in a social atmosphere. Customers wanted games with a virtual life quality so they could differentiate their warriers and game characters, and enrich their social experiences online. To meet these changing market requirements, Nexon needed to marry its strength in game design and online delivery, with the growing market demand for social interaction. Nexon pioneered in the microtransactions business model and became a leading provider of massively multiplayer online games. The company provides games replete with action and interactivity where players can socialize with friends or other players. By playing up social features of online games, and providing the ability to make online micropayments for small purchases, Nexon’s games have huge numbers of users and a continuing stream of revenue.

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9.1 E-commerce and the Internet

Have you ever purchased music over the Web? Have you ever used the Web to search for information about your sneakers before you bought them in a retail store? If so, you’ve participated in e-commerce. So have hundreds of millions of people around the globe. And although most purchases still take place through traditional channels, e-commerce continues to grow rapidly and to transform the way many companies do business.

E-COMMERCE TODAY

E-commerce refers to the use of the Internet and the Web to transact business. More for- mally, e-commerce is about digitally enabled commercial transactions between and among organizations and individuals. For the most part, this means transactions that occur over the Internet and the Web. Commercial transactions involve the exchange of value (e.g., money) across organizational or individual boundaries in return for products and services.

E-commerce began in 1995 when one of the first Internet portals, Netscape.com, accepted the first ads from major corporations and popularized the idea that the Web could be used as a new medium for advertising and sales. No one envisioned at the time what would turn out to be an exponential growth curve for e-commerce retail sales, which dou- bled and tripled in the early years. E-commerce grew at double-digit rates until the recession of 2008–2009 when growth slowed to a crawl. In 2009, e-commerce revenues were flat (Figure 9-1), not bad considering that traditional retail sales were shrinking by 5% annually. In fact, e-commerce during the recession was the only stable segment in retail. Some online retailers forged ahead at a record pace: Amazon’s 2009 revenues were up 25 percent over 2008 sales (eMarketer, 2009; U.S. Census, 2009).

Mirroring the history of many technological innovations, such as the telephone, radio, and television, the very rapid growth in e-commerce in the early years created a market bub- ble in e-commerce stocks. Like all bubbles, the “dot-com” bubble burst (in March 2001). A large number of e-commerce companies failed during this process. Yet for many others, such as Amazon, eBay, Expedia, and Google, the results have been more positive: soaring revenues, fine-tuned business models that produce profits, and rising stock prices. By 2006, e-commerce revenues returned to solid growth, and have continued to be the fastest growing form of retail trade in the United States, Europe, and Asia.

• Online consumer sales grew to an estimated $228 billion in 2009, an increase of more than 1 percent since 2008 (including travel services and digital downloads), with 123 million people purchasing online and 152 million shopping and gathering information but not necessarily purchasing (eMarketer, 2009).IS

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306 Part III: Key System Applications for the Digital Age

• The number of individuals online in the United States expanded to 199 million in 2009, up from 147 million in 2004. In the world, over 1.4 billion people are now connected to the Internet. Growth in the overall Internet population has spurred growth in e-commerce.

• About 73 million Americans now access the Internet using a smartphone such as an iPhone or a BlackBerry. Mobile e-commerce has begun a rapid growth based on apps, ringtones, downloaded entertainment, and location-based services.

• On the average day, 143 million people go online, 113 million send e-mail, 100 million use a search engine, 20 million read a blog, 6 million write on their blogs, 13 million share music on peer-to-peer networks, 40 million work on their social network profile, 24 million visit Wikipedia, and 32 million watch a video. (Pew Internet, 2009).

• B2B e-commerce-use of the Internet for business-to-business commerce and collabora- tion among business partners expanded 2 percent to more than $3.7 trillion.

The e-commerce revolution is still unfolding. Individuals and businesses will increas- ingly use the Internet to conduct commerce as more products and services come online and households switch to broadband telecommunications. More industries will be transformed by e-commerce, including travel reservations, music and entertainment, news, software, education, and finance. Table 9.1 highlights these new e-commerce developments.

WHY E-COMMERCE IS DIFFERENT

Why has e-commerce grown so rapidly? The answer lies in the unique nature of the Internet and the Web. Simply put, the Internet and e-commerce technologies are much more rich and powerful than previous technology revolutions like radio, television, and the telephone. Table 9.2 describes the unique features of the Internet and Web as a commercial medium. Let’s explore each of these unique features in more detail.

Ubiquity In traditional commerce, a marketplace is a physical place, such as a retail store, that you visit to transact business. E-commerce is ubiquitous, meaning that is it available just about everywhere, at all times. It makes it possible to shop from your desktop, at home, at work, or even from your car, using mobile commerce. The result is called a marketspace—a market-

Figure 9-1 The Growth of E-commerce

Retail e-commerce revenues grew 15%–25% a year until the recession of 2008–2009, when they slowed measurably. In 2010, e-commerce revenues are expected to begin growing again at an estimated 10% annual clip.

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Business Transformation

• E-commerce remains the fastest growing form of commerce when compared to physical retail stores, services, and entertainment.

• The first wave of e-commerce transformed the business world of books, music, and air travel. In the second wave, nine new industries are facing a similar transformation scenario: marketing and advertising, telecommunications, movies, television, jewelry, real estate, hotels, bill payments, and software.

• The breadth of e-commerce offerings grows, especially in the services economy of social networking, travel, information clearinghouses, entertainment, retail apparel, appliances, and home furnishings.

• The online demographics of shoppers broaden to match that of ordinary shoppers.

• Pure e-commerce business models are refined further to achieve higher levels of profitability, whereas traditional retail brands, such as Sears, JC Penney, L.L. Bean, and Wal-Mart, use e-commerce to retain their dominant retail positions.

• Small businesses and entrepreneurs continue to flood the e-commerce marketplace, often riding on the infrastructures created by industry giants, such as Amazon and eBay.

• Mobile e-commerce begins to take off in the United States with location-based services and entertainment downloads including e-books.

Technology Foundations

• Wireless Internet connections (Wi-Fi, WiMax, and 3G smart phones) grow rapidly.

• Powerful handheld mobile devices support music, Web surfing, and entertainment as well as voice communication. Podcasting takes off as a medium for distribution of video, radio, and user-generated content.

• The Internet broadband foundation becomes stronger in households and businesses as transmission prices fall. More than 80 million households had broadband cable or DSL access to the Internet in 2009—about 72 percent of all households in the United States (eMarketer, 2009).

• Social networking software and sites such as Facebook, MySpace, Twitter, LinkedIn and thousands of others become a major new platform for e-commerce, marketing, and advertising.

• New Internet-based models of computing, such as cloud computing, software as a service (SaaS), and Web 2.0 software greatly reduce the cost of e-commerce Web sites.

New Business Models Emerge

• More than half the Internet user population join an online social networks, contribute to social bookmarking sites, create blogs, and share photos. Together these sites create a massive online audience as large as television that is attractive to marketers.

• The traditional advertising business model is severely disrupted as Google and other technology players such as Microsoft and Yahoo! seek to dominate online advertising, and expand into offline ad brokerage for television and newspapers.

• Newspapers and other traditional media adopt online, interactive models but are losing advertising revenues to the online players despite gaining online readers.

• Online entertainment business models offering television, movies, music, sports, and e-books surge, with cooperation among the major copyright owners in Hollywood and New York with the Internet distributors like Google, YouTube, Facebook, and Microsoft.

TABLE 9.1

The Growth of E-commerce

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place extended beyond traditional boundaries and removed from a temporal and geographic location.

From a consumer point of view, ubiquity reduces transaction costs—the costs of participating in a market . To transact business, it is no longer necessary that you spend time or money traveling to a market, and much less mental effort is required to make a purchase.

Global Reach E-commerce technology permits commercial transactions to cross cultural and national boundaries far more conveniently and cost effectively than is true in traditional commerce. As a result, the potential market size for e-commerce merchants is roughly equal to the size of the world’s online population (estimated to be more than 1.5 billion, and growing rapidly).

In contrast, most traditional commerce is local or regional—it involves local merchants or national merchants with local outlets. Television and radio stations and newspapers, for instance, are primarily local and regional institutions with limited, but powerful, national networks that can attract a national audience but not easily cross national boundaries to a global audience.

308 Part III: Key System Applications for the Digital Age

E-commerce Technology Dimension Business Significance

Ubiquity. Internet/Web technology is The marketplace is extended beyond traditional available everywhere: at work, at home, boundaries and is removed from a temporal and elsewhere via mobile devices. and geographic location. “Marketspace” anytime.

is created; shopping can take place anywhere. Customer convenience is enhanced, and shopping costs are reduced.

Global Reach. The technology reaches Commerce is enabled across cultural and national across national boundaries, around boundaries seamlessly and without modification. the Earth. The marketspace includes, potentially, billions of

consumers and millions of businesses worldwide.

Universal Standards. There is one set of With one set of technical standards across the technology standards, namely Internet globe, disparate computer systems can easily standards. communicate with each other.

Richness. Video, audio, and text messages Video, audio, and text marketing messages are are possible. integrated into a single marketing message and

consumer experience.

Interactivity. The technology works through Consumers are engaged in a dialog that interaction with the user. dynamically adjusts the experience to the

individual, and makes the consumer a co-participant in the process of delivering goods to the market.

Information Density. The technology Information processing, storage, and reduces information costs and raises quality. communication costs drop dramatically, whereas

currency, accuracy, and timeliness improve greatly. Information becomes plentiful, cheap, and more accurate.

Personalization/Customization. The Personalization of marketing messages and technology allows personalized messages to customization of products and services are based be delivered to individuals as well as groups. on individual characteristics.

Social Technology. User content generation New Internet social and business models enable and social networking. user content creation and distribution, and

support social networks.

TABLE 9.2

Eight Unique Features of E-commerce Technology

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Universal Standards One strikingly unusual feature of e-commerce technologies is that the technical standards of the Internet and, therefore, the technical standards for conducting e-commerce are universal standards. They are shared by all nations around the world and enable any computer to link with any other computer regardless of the technology platform each is using. In contrast, most traditional commerce technologies differ from one nation to the next. For instance, television and radio standards differ around the world, as does cell telephone technology.

The universal technical standards of the Internet and e-commerce greatly lower market entry costs—the cost merchants must pay simply to bring their goods to market. At the same time, for consumers, universal standards reduce search costs—the effort required to find suitable products.

Richness Information richness refers to the complexity and content of a message. Traditional markets, national sales forces, and small retail stores have great richness: They are able to provide personal, face-to-face service using aural and visual cues when making a sale. The richness of traditional markets makes them powerful selling or commercial environments. Prior to the development of the Web, there was a trade-off between richness and reach: The larger the audience reached, the less rich the message. The Web makes it possible to deliver rich messages with text, audio, and video simultaneously to large numbers of people.

Interactivity Unlike any of the commercial technologies of the twentieth century, with the possible exception of the telephone, e-commerce technologies are interactive, meaning they allow for two-way communication between merchant and consumer. Television, for instance, cannot ask viewers any questions or enter into conversations with them, and it cannot request that customer information be entered into a form. In contrast, all of these activities are possible on an e-commerce Web site. Interactivity allows an online merchant to engage a consumer in ways similar to a face-to-face experience but on a massive, global scale.

Information Density The Internet and the Web vastly increase information density—the total amount and quality of information available to all market participants, consumers, and merchants alike. E-commerce technologies reduce information collection, storage, processing, and communi- cation costs while greatly increasing the currency, accuracy, and timeliness of information.

Information density in e-commerce markets make prices and costs more transparent. Price transparency refers to the ease with which consumers can find out the variety of prices in a market; cost transparency refers to the ability of consumers to discover the actual costs merchants pay for products.

There are advantages for merchants as well. Online merchants can discover much more about consumers than in the past. This allows merchants to segment the market into groups who are willing to pay different prices and permits the merchants to engage in price discrimination—selling the same goods, or nearly the same goods, to different targeted groups at different prices. For instance, an online merchant can discover a consumer’s avid interest in expensive, exotic vacations and then pitch high-end vacation plans to that consumer at a premium price, knowing this person is willing to pay extra for such a vacation. At the same time, the online merchant can pitch the same vacation plan at a lower price to a more price-sensitive consumer. Information density also helps merchants differen- tiate their products in terms of cost, brand, and quality.

Personalization/Customization E-commerce technologies permit personalization: Merchants can target their marketing messages to specific individuals by adjusting the message to a person’s name, interests, and past purchases. The technology also permits customization—changing the delivered product or service based on a user’s preferences or prior behavior. Given the interactiveIS

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nature of e-commerce technology, much information about the consumer can be gathered in the marketplace at the moment of purchase. With the increase in information density, a great deal of information about the consumer’s past purchases and behavior can be stored and used by online merchants.

The result is a level of personalization and customization unthinkable with traditional commerce technologies. For instance, you may be able to shape what you see on television by selecting a channel, but you cannot change the content of the channel you have chosen. In contrast, the Wall Street Journal Online allows you to select the type of news stories you want to see first and gives you the opportunity to be alerted when certain events happen.

You can see these features of e-commerce at work in the Interactive Session on Technology. Turner Sports New Media operates a series of Web sites for NASCAR, the NBA, and other sports organizations. It uses interactivity and richness, and is able to combine the reach of cable TV with deep relationships with consumers. For instance, at the Major League Baseball Web site (mlb.com) you can watch the postseason games from any of four different camera angles! Your choice.

Social Technology: User Content Generation and Social Networking In contrast to previous technologies, the Internet and e-commerce technologies have evolved to be much more social by allowing users to create and share with their personal friends (and a larger worldwide community) content in the form of text, videos, music, or photos. Using these forms of communication, users are able to create new social networks and strengthen existing ones.

All previous mass media in modern history, including the printing press, use a broadcast model (one-to-many) where content is created in a central location by experts (professional writers, editors, directors, and producers) and audiences are concentrated in huge numbers to consume a standardized product. The new Internet and e-commerce empower users to create and distribute content on a large scale, and permit users to program their own content consumption. The Internet provides a unique many-to-many model of mass communica- tions.

KEY CONCEPTS IN E-COMMERCE: DIGITAL MARKETS AND DIGITAL GOODS IN A GLOBAL MARKETPLACE

The location, timing, and revenue models of business are based in some part on the cost and distribution of information. The Internet has created a digital marketplace where millions of people all over the world are able to exchange massive amounts of information directly, instantly, and for free. As a result, the Internet has changed the way companies conduct business and increased their global reach.

The Internet reduces information asymmetry. An information asymmetry exists when one party in a transaction has more information that is important for the transaction than the other party. That information helps determine their relative bargaining power. In digital markets, consumers and suppliers can “see” the prices being charged for goods, and in that sense digital markets are said to be more “transparent” than traditional markets.

For example, before auto retailing sites appeared on the Web, there was a significant information asymmetry between auto dealers and customers. Only the auto dealers knew the manufacturers’ prices, and it was difficult for consumers to shop around for the best price. Auto dealers’ profit margins depended on this asymmetry of information. Today’s consumers have access to a legion of Web sites providing competitive pricing information, and three-fourths of U.S. auto buyers use the Internet to shop around for the best deal. Thus, the Web has reduced the information asymmetry surrounding an auto purchase. The Internet has also helped businesses seeking to purchase from other businesses reduce information asymmetries and locate better prices and terms.

Digital markets are very flexible and efficient because they operate with reduced search and transaction costs, lower menu costs (merchants’ costs of changing prices), price discrimination, and the ability to change prices dynamically based on market conditions. In

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INTERACTIVE SESSION: TECHNOLOGY Turner Sports Marries TV and the Internet, then Goes Social

Sports are hot on the Internet. Sports Web sites in the United States drew over 86 million monthly visitors in 2009; next to social networks, sports sites were the most popular destination sites. The single-site leader in sports sites is ESPN (23 million monthly visitors and owned by Disney), but close behind are a family of sites like NASCAR.com, PGA.com, MLB.com (Major League Baseball), NBA.com, and a host of related sites, that are all operated by Turner Sports Inc. The Turner Sports sites collectively draw even more fans than ESPN. In 2009, Turner Sports is embracing the techniques and technologies of social media to promote its clients’ Web programs, making Turner the leading innovator in Internet sports programming. In the past few years, Turner Sports established itself as an innovator through its ability to combine TV and the Web more successfully than rivals. Turner’s success allows them to both sell more ads and persuade sports leagues such as the PGA Tour and NASCAR to pay Turner millions per year to run their Web operations. Turner’s formula is to provide rich, interactive features that use TV and the Web simultaneously to enhance the viewer’s experience. With today’s new social media, this formula is hitting on all cylinders.

Turner Sports is the division of Turner Broadcasting System responsible for sports broadcasts on Turner cable channels (TBS, TNT, and Peachtree TV) and for operating a family of online interactive properties for professional sports organizations. While Turner dominated cable television sports since its inception in 1975, it was late coming to the Internet and creating an integrated Web-TV platform. Turner’s Internet sports program started out in 2001 with NASCAR.com. By 2006, Turner had added PGA.com and PGATour.com, and in early 2008 reached an agreement with the NBA to jointly manage NBA.com, which has 5.5 million unique monthly visitors. Turner’s latest target is Major League Soccer’s Web operations, which, oddly enough, are managed by Major League Baseball. Turner earns fees for manag- ing the sites and splits ad revenues with each league. With each site that Turner Sports New Media man- ages, its goal is to get fans switching between TV and unique features on their desktops or laptops. For example, PGATour.com visitors can watch play on certain holes, watch a certain player, get aerial views of the course, and get tips from pros on the site while events are in progress.

Many sports leagues don’t like to relinquish con- trol of their Web sites to outside organizations, prefer- ring to handle their Web operations themselves in order to control their brands and Web site content. In the case of Turner Sports, the same business that

controls your cable TV distribution also can control your Web distribution. For instance, the NFL recently reacquired rights to its Web site back from CBS. But Turner’s value proposition to sports leagues is a compelling one. Turner offers to provide an integrated platform that connects the league’s television broad- casts with its Web site activities. Why rely on two or more separate organizations when its all “media”? The league’s official site will benefit from Turner’s reach and the Web’s relationship with consumers. Turner’s experience with running Web sites is extensive, as is it’s track record for success in increasing site traffic and developing innovative interactive applications. Marketers can place ads in multiple formats (TV and the Internet).

Turner’s oldest client is NASCAR, and the recent contract extension signed between the two suggests that NASCAR is more than happy with Turner’s results. NASCAR.com has been one of the top three sports league sites on the Internet in the past few years. Since Turner assumed control of the league’s Web rights, the site has seen double-digit growth in page views and an increase in average monthly unique visitors of 25 percent over the last 7 years. Over the past calendar year the site had 1.4 billion page views. Turner will continue to operate NASCAR.com through 2014, collaborating on content creation, e-commerce, and race ticket sales. Turner will continue to have oversight over news content, broad- band coverage, wireless platforms, video downloads, and ad sales, and will seek to provide fans with better information and NASCAR merchandise.

Turner has implemented a wide array of cutting- edge applications and offerings to NASCAR.com, including TrackPass, its most interactive feature. TrackPass is a premium service that consists of several interactive applications, including TrackPass Scanner, TrackPass PitCommand, and TrackPass RaceView. RaceView renders each car digitally and offers a multitude of camera angles and viewing options for each and every car and driver. Users can pause, rewind, and replay live races and listen to any driver’s in-car audio, in addition to a variety of other features that give the viewer unparalleled customization over how they watch and enjoy each race.

Other features that Turner has implemented on NASCAR.com include a 24-hour news center, live streaming for some races, a social networking “com- munity” section, an extensive video library, live and interactive broadband shows, and a merchandise superstore.

Turner’s contract extension with the NBA extends the longest-running partnership between a league and

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1. Describe the unique features of e-commerce technology illustrated in this case.

2. How does the Web enhance the TV businesses for the companies discussed in this case? How does it add value?

3. Why is NASCAR TrackPass a good example of Turner Sports New Media’s value to sports league sites?

4. Do you think Turner Sports will be successful migrating its content to social media sites where its viewers are moving? Why or why not?

programming network in professional sports to a whopping 32 years. The contract also grants Turner Sports access to the NBA.com network, which includes WNBA.com and NBADleague.com in addition to the flagship site. Under the contract, TNT will continue to televise NBA games, broaden their Internet involvement, and jointly manage NBA’s digi- tal businesses along with the league. These businesses include NBA TV (a 24-hour digital TV network), operating the NBA.com network of sites, NBA League Pass, advertising, and availability of TNT’s on-air TV talent for NBA.com’s interactive features. Turner is likely to develop features like TrackPass RaceView for NBA games to provide a similar level of richness and customizability to the viewer experi- ence.

One feature that Turner hopes to further develop is TNT NBA Overtime—a broadband feature on NBA.com that streams TNT-televised games, high- lights, exclusive interviews, expert analysis, and more, which users can get live, delayed, and on demand. Turner’s contract with the NBA is slated to run through the 2015–16 NBA season. If Turner’s track record continues, NBA.com will continue to be an example of rich, interactive media done right. But Internet technologies change rapidly, and Turner is just starting to exploit the power of social media.

Visit PGA.com, PGATour.com, or NASCAR.com, explore the Web site, and then answer the following questions:

1. What unique features of e-commerce technology can you find on the site? What purposes do they serve?

2. How does the Web site promote TV viewing? How does it create value for the company?

3. What e-commerce business and revenue models are being used?

In April 2009, Turner Sports announced its new social media marketing campaign that utilizes Facebook, YouTube, and Twitter to promoted TNT’s “40 Games in 40 Nights” coverage of the 2009 NBA Playoffs. The campaign includes player-specific videos on YouTube, messaging on Facebook coordi- nated with sponsored ads, and a special program to encourage Facebook users to “Become a Fan” of the NBA. Turner Sports is adding to its social media cam- paign with a coordinated Twitter full-court press fea- turing updates from popular announcers, with links to the NBA’s Twitter page.

Turner is starting to experiment with user-gener- ated content and Web experience control in a 2009 deal with MLB.com to give online fans user-controlled cameras to view every MLB postseason game through a subscription service at MLB.com/Postseason.TV. Users can control their experience of the games. To promote more user involvement at NASCAR.com, NASCAR announced a new program called “NASCAR Citizen Journalist,” where the best-known independent NASCAR bloggers and Web site operators are republished at NASCAR.com.

Sources: “MLB.com, Turner Sports, and FOX Sports Give Fans Live User- Controlled Views for Every MLB Postseason Game,” Reuters, October 6, 2009; “ComScore Media Metrix Ranks Top 50 US Web Properties,” ComScore, September 21, 2009; “NASCAR Openly Embraces Changing Media Landscape,” NASCAR Press Release, June 2, 2009; “Turner Sports Engages Fans Online Through Robust Social Media Campaign for 2009 NBA Playoffs,” Time Warner Inc. Press Release, April 14, 2009.

CASE STUDY QUESTIONS MIS IN ACTION

dynamic pricing, the price of a product varies depending on the demand characteristics of the customer or the supply situation of the seller.

These new digital markets may either reduce or increase switching costs, depending on the nature of the product or service being sold, and they may cause some extra delay in gratification. Unlike a physical market, you can’t immediately consume a product such as clothing purchased over the Web (although immediate consumption is possible with digital music downloads and other digital products.)

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Digital markets provide many opportunities to sell directly to the consumer, bypassing intermediaries, such as distributors or retail outlets. Eliminating intermediaries in the distri- bution channel can significantly lower purchase transaction costs. To pay for all the steps in a traditional distribution channel, a product may have to be priced as high as 135 percent of its original cost to manufacture.

Figure 9-2 illustrates how much savings result from eliminating each of these layers in the distribution process. By selling directly to consumers or reducing the number of intermediaries, companies are able to raise profits while charging lower prices. The removal of organizations or business process layers responsible for intermediary steps in a value chain is called disintermediation.

Disintermediation is affecting the market for services. Airlines and hotels operating their own reservation sites online earn more per ticket because they have eliminated travel agents as intermediaries. Table 9.3 summarizes the differences between digital markets and traditional markets.

Dig i ta l Goods The Internet digital marketplace has greatly expanded sales of digital goods. Digital goods are goods that can be delivered over a digital network. Music tracks, video, Hollywood movies, software, newspapers, magazines, and books can all be expressed, stored, delivered, and sold as purely digital products. Currently, most of these products are sold as physical goods, for example, CDs, DVDs, newspapers, and hard-copy books. But the Internet offers the possibility of delivering all these products on demand as digital products.

In general, for digital goods, the marginal cost of producing another unit is about zero (it costs nothing to make a copy of a music file). However, the cost of producing the original first unit is relatively high—in fact, it is nearly the total cost of the product because there are few other costs of inventory and distribution. Costs of delivery over the Internet are very low, marketing costs remain the same, and pricing can be highly variable. (On the Internet, the merchant can change prices as often as desired because of low menu costs.)

The impact of the Internet on the market for these kinds of digital goods is nothing short of revolutionary, and we see the results around us every day. Businesses dependent on physi- cal products for sales—such as bookstores, book publishers, music labels, and film studios— face the possibility of declining sales and even destruction of their businesses. Newspapers and magazines are losing readers to the Internet, and losing advertisers even as online news- paper readership soars. Record label companies are losing sales to Internet piracy, and record stores are going out of business. Video rental firms, such as Blockbuster, based on a physical DVD market and physical stores have lost sales to NetFlix using an Internet catalog and streaming video model. Hollywood studios as well face the prospect that Internet pirates will distribute their product as a digital stream, bypassing Hollywood’s monopoly on DVD rentals and sales, which now accounts for more than half of industry film revenues. Table 9.4 describes digital goods and how they differ from traditional physical goods.

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Figure 9-2 The Benefits of Disintermediation to the Consumer The typical distribution channel has several inter- mediary layers, each of which adds to the final cost of a product, such as a sweater. Removing layers lowers the final cost to the consumer.

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9.2 E-commerce: Business and Technology

E-commerce has grown from a few advertisements on early Web portals in 1995, to over 5 percent of all retail sales in 2010 (an estimated $245 billion), surpassing the mail order cat- alog business. E-commerce is a fascinating combination of business models and new infor- mation technologies. Let’s start with a basic understanding of the types of e-commerce, and then describe e-commerce business and revenue models. We’ll also cover new tech- nologies that help companies reach over 200 million online consumers in the United States, and an estimated 600 million more worldwide.

TYPES OF E-COMMERCE

There are many ways to classify electronic commerce transactions. One is by looking at the nature of the participants in the electronic commerce transaction. The three major electronic commerce categories are business-to-consumer (B2C) e-commerce, business-to-business (B2B) e-commerce, and consumer-to-consumer (C2C) e-commerce.

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Digital Goods Traditional Goods

Marginal cost/unit Zero Greater than zero , high

Cost of production High (most of the cost) Variable

Copying cost Approximately zero Greater than zero, high

Distributed delivery cost Low High

Inventory cost Low High

Marketing cost Variable Variable

Pricing More variable (bundling, Fixed, based on unit costs random pricing games)

TABLE 9.4

How the Internet Changes the Markets for Digital Goods

Digital Markets Traditional Market

Information asymmetry Asymmetry reduced Asymmetry high

Search costs Low High

Transaction costs Low (sometimes virtually nothing) High (time, travel)

Delayed gratification High (or lower in the case of Lower: purchase now a digital good)

Menu costs Low High

Dynamic pricing Low cost, instant High cost, delayed

Price discrimination Low cost, instant High cost, delayed

Market segmentation Low cost, moderate precision High cost, less precision

Switching costs Higher/lower (depending on High product characteristics)

Network effects Strong Weaker

Disintermediation More possible/likely Less possible/unlikely

TABLE 9.3

Digital Markets Compared to Traditional Markets

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• Business-to-consumer (B2C) electronic commerce involves retailing products and services to individual shoppers. BarnesandNoble.com, which sells books, software, and music to individual consumers, is an example of B2C e-commerce.

• Business-to-business (B2B) electronic commerce involves sales of goods and services among businesses. ChemConnect’s Web site for buying and selling chemicals and plastics is an example of B2B e-commerce.

• Consumer-to-consumer (C2C) electronic commerce involves consumers selling directly to consumers. For example, eBay, the giant Web auction site, enables people to sell their goods to other consumers by auctioning their merchandise off to the highest bidder, or for a fixed price. Craigslist is the most widely used platform used by consumers to buy and sell directly from others.

Another way of classifying electronic commerce transactions is in terms of the plat- forms used by participants in a transaction. Until recently, most e-commerce transactions took place using a personal computer connected to the Internet over wired networks. Two wireless mobile alternatives have emerged: mobile smartphones and dedicated e-readers like the Kindle using cellular networks, and mobile smartphones and small tablet computers using Wi-Fi wireless networks. The use of handheld wireless devices for purchasing goods and services from any location has been termed mobile commerce or m-commerce. Both business-to-business and business-to-consumer e-commerce transactions can take place using m-commerce technology, which we discuss in detail in Section 9.3.

E-COMMERCE BUSINESS MODELS

Changes in the economics of information described earlier have created the conditions for entirely new business models to appear, while destroying older business models. Table 9.5 describes some of the most important Internet business models that have emerged. All, in one way or another, use the Internet to add extra value to existing products and services or to provide the foundation for new products and services.

Portal Portals such as Google, Bing, Yahoo, MSN, and AOL offer powerful Web search tools as well as an integrated package of content and services, such as news, e-mail, instant messag- ing, maps, calendars, shopping, music downloads, video streaming, and more, all in one place. Initially, portals were primarily “gateways” to the Internet. Today, however, the portal business model provides a destination site where users start their Web searching and linger to read news, find entertainment, meet other people, (and be exposed to advertising). Portals generate revenue primarily by attracting very large audiences, charging advertisers for ad placement, collecting referral fees for steering customers to other sites, and charging for premium services. In 2009, portals generated an estimated $36 billion in revenues. Although there are hundreds of portal/search engine sites, the top five sites (Google, Yahoo, MSN/Bing, AOL, and Ask.com) gather more than 95 percent of the Internet traffic because of their superior brand recognition (Nielsen Online, 2009).

E-tailer Online retail stores, often called e-tailers, come in all sizes, from giant Amazon with 2009 revenues of more than $20 billion, to tiny local stores that have Web sites. E-tailers are similar to the typical bricks-and-mortar storefront, except that customers only need to connect to the Internet to check their inventory and place an order. Altogether online retail generated about $131 billion in revenues for 2009. The value proposition of e-tailers is to provide convenient, low-cost shopping 24/7, offering large selections and consumer choice. Some e-tailers, such as Walmart.com or Staples.com, referred to as “bricks-and-clicks,” are subsidiaries or divisions of existing physical stores and carry the same products. Others, however, operate only in the virtual world, without any ties to physical locations. Amazon.com, BlueNile.com, and Drugstore.com are examples of this type of e-tailer.

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Several other variations of e-tailers—such as online versions of direct mail catalogs, online malls, and manufacturer-direct online sales—also exist.

Content Provider While e-commerce began as a retail product channel, it has increasingly turned into a global content channel. “Content” is defined broadly to include all forms of intellectual property. Intellectual property refers to all forms of human expression that can be put into a tangible medium such as text, CDs, DVDs, or stored on any digital (or other) media, including the Web. Content providers distribute information content, such as digital video, music, photos, text, and artwork, over the Web. The value proposition of online content providers is that consumers can find a wide range of content online, conveniently, and purchase this content inexpensively, to be played, or viewed, on multiple computer devices or smartphones.

Providers do not have to be the creators of the content (although sometimes they are like Disney.com), and are more likely to be Internet-based distributors of content produced and created by others. For example, Apple sells music tracks at its iTunes Store, but it does not create or commission new music.

The phenomenal popularity of iTunes and Apple’s iPod portable music player have inspired a new form of digital content delivery called podcasting. Podcasting is a method of publishing audio or video broadcasts via the Internet, allowing subscribing users to down- load audio or video files onto their personal computers or portable music players.

Estimates vary, but total download and subscription media revenues are somewhere between $4 billion and $8 billion annually. They are the fastest growing segment within e-commerce, growing at an estimated 20 percent annual rate (eMarketer, 2009).

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Category Description Examples

E-tailer Sells physical products directly to consumers Amazon.com or to individual businesses. RedEnvelope.com

Transaction broker Saves users money and time by processing online ETrade.com sales transactions and generating a fee each Expedia.com time a transaction occurs.

Market creator Provides a digital environment where buyers eBay.com and sellers can meet, search for products, Priceline.com display products, and establish prices for ChemConnect.com those products. Can serve consumers or B2B e-commerce, generating revenue from transaction fees.

Content provider Creates revenue by providing digital content, WSJ.com such as digital news, music, photos, or video, GettyImages.com over the Web. The customer may pay to iTunes.com access the content, or revenue may be Games.com generated by selling advertising space.

Community Provides an online meeting place where iVillage.com provider people with similar interests can MySpace.com

communicate and find useful information. Facebook.com

Portal Provides initial point of entry to the Web Yahoo.com along with specialized content and other Bing.com services. Google.com

Service Provider Provides Web 2.0 applications such as photo Google Apps sharing, video sharing, and user-generated Photobucket.com content as services. Provide other services such Xdrive.com as online data storage and backup.

TABLE 9.5

Internet Business Models

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Transaction Broker Sites that process transactions for consumers normally handled in person, by phone, or by mail are transaction brokers. The largest industries using this model are financial services and travel services. The online transaction broker’s primary value propositions are savings of money and time, as well as providing an extraordinary inventory of financial products and travel packages, in a single location. Online stock brokers and travel booking services charge fees that are considerably less than traditional versions of these services.

Market Creator Market creators build a digital environment in which buyers and sellers can meet, display products, search for products, and establish prices. The value proposition of online market creators is that they provide a platform where sellers can easily display their wares and where purchasers can buy directly from sellers. Online auction markets like eBay and Priceline are good examples of the market creator business model. Another example is Amazon’s Merchants platform (and similar programs at eBay) where merchants are allowed to set up stores on Amazon’s Web site and sell goods at fixed prices to consumers. This is reminiscent of open air markets where the market creator operates a facility (a town square) where merchants and consumers meet. Online market creators will generate about $14 bil- lion in revenues for 2009.

Service Provider While e-tailers sell products online, service providers offer services online. There’s been an explosion in online services. Web 2.0 applications, photo sharing, and online sites for data backup and storage all use a service provider business model. Software is no longer a physical product with a CD in a box, but increasingly software as a service (SaaS) that you subscribe to online rather than purchase from a retailer (see Chapter 4). Google has led the way in developing online software service applications such as Google Apps, Gmail, and online data storage services.

Community Provider Community providers are sites that create a digital online environment where people with similar interests can transact (buy and sell goods); share interests, photos, videos; communi- cate with like-minded people; receive interest-related information; and even play out fantasies by adopting online personalities called avatars. The social networking sites Facebook, MySpace, LinkedIn, and Twitter, online communities such as iVillage, and hundreds of other smaller, niche sites such as Doostang and Sportsvite, all offer users community building tools and services. Social networking sites have been the fastest growing Web sites in recent years, often doubling their audience size in a year. However, they are struggling to achieve profitability. The Interactive Session on Organizations and chapter-ending case study explore this topic.

E-COMMERCE REVENUE MODELS

A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on investment. Although there are many different e-commerce revenue models that have been developed, most companies rely on one, or some combina- tion, of the following six revenue models: advertising, sales, subscription, free/freemium, transaction fee, and the affiliate model.

Advertising Revenue Model In the advertising revenue model, a Web site generates revenue by attracting a large audience of visitors who can then be exposed to advertisements. The advertising model is the most widely used revenue model in e-commerce, and arguably, without advertising revenues the Web would be a vastly different experience from what it is now. Content on the Web— everything from news to videos and opinions—is “free” to visitors because advertisers pay

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INTERACTIVE SESSION: ORGANIZATIONS Twitter Searches For a Business Model

Twitter, the social networking site based on 140- character text messages, is the buzz social networking phenomenon of the year. Like all social networking sites, such as Facebook, MySpace, YouTube, Flickr, and others, Twitter provides a platform for users to express themselves by creating content and sharing it with their “followers,” who sign up to receive some- one’s “tweets.” And like most social networking sites, Twitter faces the problem of how to make money. As of October 2009, Twitter has failed to generate rev- enue as its management ponders how best to exploit the buzz and user base it has created.

Twitter began as a Web-based version of popular text messaging services provided by cell phone car- riers. Executives in a podcasting company called Odeo were searching for a new revenue-producing product or service. In March 2006 they created a stand-alone, private company called Twitter.

The basic idea was to marry short text messaging on cell phones with the Web and its ability to create social groups. You start by establishing a Twitter account online, and identifying the friends that you would like to receive your messages. By sending a text message called a “tweet” to a short code on your cell phone (40404), you can tell your friends what you are doing, your location, and whatever else you might want to say. You are limited to 140 characters, but there is no installation and no charge. This social network messaging service to keep buddies informed was a smash success.

Coming up with solid numbers for Twitter is not easy because the firm is not releasing any “official” figures. By September 2009, Twitter, according to some estimates, had around 20 million unique monthly users in the United States, and perhaps 50 million worldwide. Industry observers believe Twitter is the third largest social networking site behind Facebook and MySpace.

The number of individual tweets is also known only by the company. According to the company, by early 2007, Twitter had transmitted 20,000 tweets, which jumped to 60,000 tweets in a few months. During the Iranian rebellion in June 2009, there were reported to be over 200,000 tweets per hour worldwide. On the other hand, experts believe that 80 percent of tweets are generated by only 10 per- cent of users, and that the median number of tweet readers per tweet is 1 (most Tweeters tweet to one follower). Even more disturbing is that Twittter has a 60 percent churn rate: only 40 percent of users remain more than one month. Obviously, many users lose interest in learning about their friends’ break-

fast menu, and many feel “too connected” to their “friends,” who in fact may only be distant acquain- tances, if that. On the other hand, celebrities such as Britney Spears have hundreds of thousands of “friends” who follow their activities, making Twitter a marvelous, free public relations tool. Twitter unfortunately does not make a cent on these activi- ties.

The answer to these questions about unique users, numbers of tweets, and churn rate are critical to understanding the business value of Twitter as a firm. To date, Twitter has generated losses and has unknown revenues, but in February 2009, it raised a $35 million in a deal that valued the company at $255 million. The following September, Twitter announced it had raised $100 million in additional funding, from private equity firms, previous investors, and mutual fund giant T. Rowe Price, based on a company valua- tion of a staggering $1 billion!

So how can Twitter make money from its users, and their tweets? What’s their business model and how might it evolve over time? Twitter’s main asset is user attention and audience size (eyeballs per day). An equally important asset is the database of tweets that contains real-time, spontaneous com- ments, observations, and opinions of the audience, and the search engine that mines those tweets for patterns.

Yet another asset has emerged in the last year: Twitter is a powerful alternative media platform for the distribution of news, videos, and pictures. Once again, no one predicted that Twitter would be the first to report on terrorist attacks in Mumbai, the landing of a passenger jet in the Hudson River, or the Iranian rebellion in June 2009.

How can these assets be monetized? Twitter could ask users to pay a subscription fee, especially for premium services such as videos and music downloads. However, it may be too late for this idea because users have come to expect the service to be free. Twitter could sell display ads or text ads on its screens, something it is testing in Japan. But social media sites are known to be poor advertising venues with very low response rates, although this could change with better targeting. Twitter could charge advertisers to pay a fee for inserting messages into individual tweets. Message your friend to meet you in Times Square, and the message contains an ad for a nearby restaurant. Twitter could charge service providers such as doctors, dentists, lawyers, and hair salons for providing their customers with unex- pected appointment availabilities.

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1. Based on your reading in this chapter, how would you characterize Twitter’s business model?

2. If Twitter is to have a revenue model, which of the revenue models described in this chapter would work?

3. What is the most important asset that Twitter has, and how could it monetize this asset?

4. What impact will a high customer churn rate have on Twitter’s potential advertising revenue?

Twitter’s most likely steady revenue source might be the intelligence embedded in its database of hun- dreds of millions of real-time tweets. Major firms such as Starbucks, Amazon, Intuit (makers of QuickBooks and the Mint.com site), and Dell have used Twitter to understand how their customers are reacting to prod- ucts, services and Web sites, and then making correc- tions or changes in those services and products.

The company is coy about announcing its busi- ness model. In a nod to Apple’s iTunes and Amazon’s merchant services, Twitter has turned over its messaging capabilities and software plat- form to others, one of which is CoTweet.com, a company that organizes multiple Twitter exchanges

1. Go to Twitter.com and enter a search on your favorite (or least favorite) car. Can you find the company’s official site? What else do you find? Describe the results and characterize the potential risks and rewards for companies that would like to advertise to Twitter’s audience.

2. How would you improve Twitter’s Web site to make it more friendly for large advertisers?

3. Teenagers are infrequent users of Twitter because they use their cell phones for texting, and most users are adults 18–34 years of age. Find five users of Twitter and ask them how long they have used the service, are they likely to continue using the service, and how would they feel about banner ads appearing on their Twitter Web screen and phone screens. Are loyal users of Twitter less likely (or more likely) to tolerate advertising on Twitter?

for customers so they can be tracked more easily. Google is selling ad units based around a company’s last five tweets (ads are displayed to users who have created or viewed tweets about a company). Twitter is not charging for this service. In the meantime, observers wonder if Twitter is twittering away its assets.