E-commerce (sometimes called web-based commerce) is the term used to describe the activity of doing business on the Internet. It includes business-to-business, business-to-consumer, and even consumer-to-consumer transactions that involve the buying and selling of goods and services, the transfer of funds, and even the exchange of ideas. E-commerce includes functions such as marketing, manufacturing, finance, selling, and negotiations. The phrase can also refer to downloading software, accessing games, or downloading content such as journal articles and books.
Business-to-business transactions are commonly accomplished through Electronic Data Interchange (EDI). This protocol is now used by most Fortune 1,000 companies. EDI enables large organizations to transmit information over private networks; it has also found a role on corporate web sites (intranet ).
Business-to-consumer e-commerce can provide customers with convenience and access to a wide range of goods and services, while allowing businesses to reach large or unique markets. Components of business-to-consumer e-commerce include security measures, "shopping carts," payment options, and marketing.
A business web site must be secure if it is going to handle financial transactions. A standard option is SSL (Secure Sockets Layer) using public key encryption , one of the strongest encryption methods available. SSL ensures that private information—such as passwords, credit card numbers, and customer profile data—is secure and encrypted as it is transmitted. Consumers will know they are using secure sites when they see closed padlock icons on the status bars of their web browsers. Another security protocol is called SET (Secure Electronic Transactions). SET encodes the credit card numbers on a business server. Created by Visa and MasterCard, SET is very popular in the banking community.
The electronic shopping cart is a popular feature that allows consumers simply to click on a button to select one or more products for purchase. When the customer has finished shopping, the cart system allows the consumer to "check out."
Various payment options exist to facilitate business-to-consumer e-commerce. These include digital or electronic cash, electronic wallets, and micropayments.
Digital or Electronic Cash (E-cash).
With digital cash, a consumer can pay for goods or services by transmitting a number. The numbers, similar to those on a dollar bill, are issued by a bank and represent specific sums of real money. Key features of digital cash are that it is anonymous and it can be reused, just like real cash. Various forms of e-cash have been around for awhile but consumers seem to prefer to use their credit cards. Federal laws provide credit card users the right to dispute any payments charged to their cards and limit theft losses to $50.
These "wallets" store credit card numbers on personal computers in encrypted forms. Consumers can make purchases using their credit cards at web sites that support one of these wallets. A secure transaction is created by the electronic wallet company's server.
These transactions are in amounts up to $10, usually made in order to download or gain access to games or graphics. This method of paying for online content is not as widespread as others.
Because e-commerce allows businesses to reach a worldwide market and to compete around the globe, creative marketing and promotion of a web site is crucial to the success of an Internet-based business. This must be balanced with sound business practices, however. Although many of the dot.com businesses that were heavily marketed to consumers during the late 1990s and into the new millenium managed to acquire good name recognition, a significant number were unable to stay in business, in part because they failed to provide the level of service consumers had been led to expect.
E-Commerce vs. Traditional Commerce
The Internet has changed the nature and structure of competition. In the past, most businesses had to compete within a single industry (such as groceries) and often within a specific geographic area, but the Internet is blurring those boundaries. An example is Amazon.com. The company began as an online bookstore but quickly expanded into new products and markets such as music, videos, home improvement supplies, zShops (used music, books, etc.), and even the auction business. Through the Internet, customers can purchase products from virtually anywhere in the world.
A traditional business may have large overhead costs associated with maintaining a storefront. But a web-based business does not necessarily have that type of overhead, which may mean that continued growth becomes easier. With e-commerce, businesses can move more quickly and usually less expensively to reach a worldwide audience. For example, the cost of reaching a consumer in Minneapolis, Minnesota, is the same as reaching one in Clifton, Colorado.
An important difference between traditional business and e-commerce is the elimination of the middleman, known as disintermediation . Businesses and consumers can communicate directly to carry out transactions, which can help entrepreneurs market their products or services without the cost of salespeople or product representatives. Although e-commerce is still a developing part of the economy, some people believe that traditional stores and mail-order companies may eventually go out of business. Other observers believe that traditional and electronic commerce will find new ways to work together.
Despite some consumer wariness, due in part to reports of hackers breaking into allegedly secure web sites and downloading credit card information, businesses have found that financial transactions on the Internet can actually be more secure than in traditional retail environments. Much credit card fraud is caused by store employees who mishandle card numbers. Most consumers do not seem to realize their credit card numbers are vulnerable every time they hand their cards to waiters, place orders by phone, or toss out receipts. The encryption of card numbers for online transactions protects both the consumer and the business from credit card fraud.
Finally, the Internet is revolutionizing competition in the area of pricing. At any point, a business may choose to simply give away a service, free of charge, that others sell. One example was when Microsoft began to include a "free browser" with Windows software. Such businesses generate income through other means, such as by selling ads or products and services related to the give-away item. Such strategies can help business attract customers. In addition, when "products" do not require manufacturing and packaging, as is the case with software downloaded via the Internet by a user, the reduction in business costs can be passed on to customers.
The Influence of the Internet
Research by Jupiter Media Metrix showed that 13.4 million households banked online from July 2000 to July 2001, a 77.6 percent increase in one year alone. In late 2001 Jupiter predicted online sales would reach $104 billion in 2005.
Statistics aside, the Internet has made strong inroads into the lives of people in virtually all demographic groups. Computer businesses, telephone companies, cable retailers, Internet providers, public libraries, and even coffeehouses have made Internet access available to almost anyone. School children are taught how to access the Internet, but so are patrons of libraries, community centers, and senior citizen centers. Readily available Internet access has opened the door wide for the world of e-commerce.
The Future of E-Commerce
Many analysts believe that e-commerce will reshape the business world. Some predict that the huge growth of virtual communities—people getting together in ad hoc interest groups online—promises to shift the balance of economic power from the manufacturer to the consumer, eroding the marketing and sales advantages of large companies. A small company with a higher quality product and better customer service can use these communities to challenge larger competitors—something it might not be able to do in the traditional world of commerce.
Non-business organizations are using lessons learned in the early years of e-commerce. An example of what the future may hold is "eduCommerce," a concept combining online course offerings with advertising content. Some experts believe that universities may eventually face stiff competition from organizations that offer their courses at no charge, counting on sales generated from ads to make their profits and draw new customers. Other forms of e-commerce will surely emerge as consumers explore the vast reaches of doing business via the Internet.
see also Internet; Intranet; World Wide Web.
Melissa J. Harvey
May, Paul. Business of E-commerce. Cambridge: Cambridge University Press, 2000.
Shapiro, Carl, and Hal Varian. Information Rules: A Strategic Guide to the Network Economy. Boston: Harvard Business School Press, 1999.
Shaw, Michael. Handbook on Electronic Commerce. Berlin: Springer, 2000.
Standing, Craig. Internet Commerce Development. Boston: Artech House, 2000.
Varian, Hal. "Commerce." School of Information Management and Systems, University of California, Berkeley. <http://www.sims.berkeley.edu/resources/infoecon/Commerce.html>
Web Commerce Today. Wilson Internet. <http://www.wilsonweb.com/wct/>
What It Means
E-Commerce, or electronic commerce, is the conducting of business through electronic means (typically computer systems and the Internet) rather than through traditional face-to-face, mail-order, or telephone transactions. There are two major categories of e-commerce transactions: business-to-business and business-to-consumer. A business-to-business transaction occurs when one business makes a purchase from another business, for example, when a store manager orders merchandise from a supplier. A person who runs a landscaping business would likely purchase more peat moss by going to his supplier’s website and entering a code to access his online account (the record of his purchases and payments to the supplier). The landscaper would request more supplies by clicking on the proper links and icons, the fees would be automatically deducted from his business’s bank account, and the supplier would ship the peat moss to him.
An electronic business-to-consumer transaction occurs when a customer goes to a business’s website to purchase goods or services. For example, many people buy books and DVDs at Amazon.com rather than going to a traditional store to purchase these items. Most business-to-consumer transactions require the consumer to visit the company’s website and place items in an online “shopping cart” (by clicking on computer images or links that signal a request to purchase an item). The customer “checks out” by providing credit-card and mailing information in the appropriate boxes. There are, however, other types of business-to-consumer e-commerce. For instance, people can arrange to pay bills electronically. If a customer were to set up a bill payment plan with his or her telephone company, the phone company would automatically deduct the amount of the phone bill from the customer’s checking account at the end of each month.
When Did It Begin
Charting the beginnings of electronic commerce depends on how one defines the term electronic. In the broadest sense of the definition, electronic commerce was first made possible in 1844 when Samuel Morse (1791–1872) invented the telegraph. By 1858 stock brokers (agents who negotiate purchases and sales of stock) in Europe were telegraphing orders to buy and sell stock (shares of ownership in corporations) to brokers in North America. Almost 20 years later, in 1877, Western Union, the world’s largest telegraph company, arranged for a total of $2.5 million in electronic financial transactions.
What contemporary American consumers normally consider e-commerce (the buying and selling of goods over the Internet) was made possible in 1994, when the World Wide Web became available to large numbers of people. Amazon.com and eBay, two of the largest e-commerce websites, were both created in 1995. Amazon.com originally sold books online but has since expanded; it sells a wide range of merchandise that includes clothes, appliances, auto parts, computer software, and home appliances. eBay is an auction website, which means that sellers put products up for sale and potential buyers bid against each other for the products. When a transaction is complete, the buyer and seller make arrangements for shipping the merchandise. eBay makes money by charging the seller in the transaction a fee for facilitating the sale.
More Detailed Information
Most market analysts (people who analyze trends in the economy) agree that the success of e-commerce depends primarily on consumers’ faith in the technology that conducts the transaction. This was true even before before the Internet was first used to sell products. In the 1980s automated teller machines (ATMs), which offer another form of e-commerce, became commonplace in the United States. These machines had taken a long time to catch on in this country, however. The first ATM was installed in 1939 in New York City but was removed after just six months because the customers of the City Bank of New York were reluctant to use it. The next ATM is believed to have been installed in the late 1960s in London. This time bank clients gradually came to trust the technology and by the mid-1970s ATMs, sponsored mostly by Lloyd’s Bank, were being installed throughout the United Kingdom.
By comparison, the general population developed faith in web-based technology and online purchasing quickly, taking approximately five years to grow comfortable with Internet transactions. Several factors restricted the early growth of online markets, however. First, many customers were not comfortable entering their credit-card numbers onto a website to be transported to the company via the Internet. These consumers worried that hackers (people who gain illegal access to other people’s and businesses’ computer systems) could use the Internet to break into a company’s computer files and steal all of the credit-card numbers stored in a database there. This problem was largely resolved by 1998 with the development of a secure encryption system, which is a very complex method of scrambling, or encoding, credit-card information so that only the vendor’s computer system can read it.
Though encryption is a highly technical process that is difficult for the average consumer to understand, it is relatively easy for a consumer to know whether or not his credit-card information will be encrypted. Normally, the initial portion of a website’s address reads “When a customer begins the check-out portion of online shopping, however, the initial part of the web address should read “https://.” The added “s” indicates that all data entered onto that web page will be encrypted. Even though this secure technology existed in 1998, consumer purchasing statistics indicate that the average consumer did not become comfortable with online transactions until 2001-02.
Another factor that slowed the growth of online shopping was that the average consumer did not have access to web technology in the 1990s. According to most reports, about 40 million people across the globe were connected to the Internet by the end of 1996. That number grew to 605 million people in 2002. Customers were also reluctant to give up the social aspects of shopping, such as gathering in a common area (a mall or large store) with large numbers of people and speaking with check-out clerks. Perhaps the most important obstacle to online shopping was the fact that consumers generally want to have their products or services immediately after they make a purchase, which is frequently impossible when buying online.
By 1996 Internet use was doubling every 100 days, and business people viewed the World Wide Web as a remarkable new opportunity to reach more customers. At that time some economists predicted that business-to-consumer e-commerce would be a $300 billion dollar industry by the early 2000s. Thus between 1998 and 2000, the number of dotcom companies (businesses that sell goods and services exclusively on the Internet rather than in traditional brick-and-mortar, or actual, stores) increased drastically. Two examples of online-only or dotcom enterprises were Pets.com, which sold pet food, and Webvan, which sold groceries. In the spring of 2000, the e-commerce boom ended, primarily because many of the companies attempted to grow too large too quickly, and a general recession followed, lasting through 2001 followed. Many of the dotcoms, including Pets.com and Webvan, went out of business.
Since 2002 e-commerce has gradually increased, but the market has changed. Whereas before the recession there were numerous businesses like Pets.com and Webvan, there are now fewer enterprises that sell merchandise exclusively on the Internet. Most large brick-and-mortar businesses, however, such as Barnes and Noble (a bookstore) and Macy’s (a clothing store) offer online shopping. In addition many medium-sized and small local businesses conduct sales online as well as offering a traditional in-store shopping experience.
e-com·merce • n. commercial transactions conducted electronically on the Internet.