Chapter 10 E-commerce: Digital Markets, Digital Goods 403

10.1 E-COMMERCE AND THE INTERNET

B
ought an iTunes track lately, streamed a Netflix movie to your home
TV, purchased a book at Amazon, or a diamond at Blue Nile? If so
you’ve engaged in e-commerce. In 2012, an estimated 184 million
Americans went shopping online, and 150 million purchased
something online as did millions of others worldwide. 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. In
2012, e-commerce consumer sales of goods, services, and content will reach
$363 billion, about 9 percent of all retail sales, and it is growing at 15 per-
cent annually (compared to 3.5 percent for traditional retailers) (eMarketer,
2012a). In just the past two years, e-commerce has expanded from the desk-
top and home computer to mobile devices, from an isolated activity to a new
social commerce, and from a Fortune 1000 commerce with a national audi-
ence to local merchants and consumers whose location is known to mobile
devices. The key words for understanding this new e-commerce in 2013 are
“social, mobile, local.”

E-COMMERCE TODAY
E-commerce refers to the use of the Internet and the Web to transact business.
More formally, e-commerce is about digitally enabled commercial transac-
tions 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 doubled and tripled in the early years. E-commerce
grew at double-digit rates until the recession of 2008–2009 when growth slowed to
404 Part Three Key System Applications for the Digital Age

FIGURE 10.1 THE GROWTH OF E-COMMERCE

Retail e-commerce revenues grew 15–25 percent per year until the recession of 2008–2009, when they slowed measurably. In 2012,
e-commerce revenues are growing again at an estimated 15 percent annually.

a crawl. In 2009, e-commerce revenues were flat (Figure 10.1), not bad consid-
ering that traditional retail sales were shrinking by 5 percent 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. Despite the continuing slow growth in 2012, the number
of online buyers increased by 5 percent to 150 million, and the number of online
retail transactions was up 7 percent. Amazon’s sales grew to $48 billion in 2011, up
an incredible 41 percent from 2010!
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 bubble 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 $362 billion in 2012, an increase
of more than 15 percent over 2010 (including travel services and digital
downloads), with 150 million people purchasing online and an additional 34
million shopping and gathering information but not purchasing (eMarketer,
2012a).
• The number of individuals of all ages online in the United States expanded
to 239 million in 2012, up from 147 million in 2004. In the world, over 2.3
billion people are now connected to the Internet. Growth in the overall
Internet population has spurred growth in e-commerce (eMarketer, 2012b).
• Approximately 82.5 million households have broadband access to the
Internet in 2012, representing about 69 percent of all households (96 percent
of all Internet households have broadband).
 Chapter 10 E-commerce: Digital Markets, Digital Goods 405

• About 122 million Americans now access the Internet using a smartphone
such as an iPhone, Droid, or BlackBerry. Mobile e-commerce has begun a
rapid growth based on apps, ring tones, downloaded entertainment, and
location-based services. Mobile commerce will add up to about $11.7 billion
in 2012 (roughly double 2010’s revenue). Amazon sold an estimated $1.5
billion in retail goods to mobile users in 2011. In a few years, mobile phones
will be the most common Internet access device. Currently half of all mobile
phone users access the Internet using their phones.
• On an average day, an estimated 158 million adult U.S. Internet users go
online. About 114 million send e-mail, 114 million use a search engine, and
87 million get news. Around 93 million use a social network, 46 million do
online banking, 54 million watch an online video, and 33 million look for
information on Wikipedia (Pew Internet & American Life Project, 2012).
• B2B e-commerce-use of the Internet for business-to-business commerce and
collaboration among business partners expanded to more than $4.1 trillion.
The e-commerce revolution is still unfolding. Individuals and businesses
will increasingly use the Internet to conduct commerce as more products
and services come online and households switch to broadband telecommu-
nications. More industries will be transformed by e-commerce, including
travel reservations, music and entertainment, news, software, education, and
finance. Table 10.1 highlights these new e-commerce developments.

WHY E-COMMERCE IS DIFFERENT

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
smartphones. The result is called a marketspace—a marketplace 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 2 billion).
In contrast, most traditional commerce is local or regional—it involves local
merchants or national merchants with local outlets. Television, radio stations