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

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E-commerce: Digital Markets, Digital Goods...

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CH APT ER

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E-commerce: Digital Markets, Digital Goods

LEARNING OBJECTIVES

CHAPTER CASES

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

YouTube Transforms the Media Landscape Uber: Digital Disruptor “Socializing” with Customers A Nasty Ending for Nasty Gal

10-1 What are the unique features of e-commerce, digital markets, and digital goods? 10-2 What are the principal e-commerce business and revenue models? 10-3 How has e-commerce transformed marketing? 10-4 How has e-commerce affected business-to-business transactions? 10-5 What is the role of m-commerce in business, and what are the most important m-commerce applications?

VIDEO CASES Walmart Takes On Amazon: A Battle of IT and Management Systems Groupon: Deals Galore Etsy: A Marketplace and Community Instructional Videos: Walmart’s E-commerce Fulfillment Center Network Behind the Scenes of an Amazon Warehouse

10-6 What issues must be addressed when building an e-commerce presence? 10-7 How will MIS help my career?

MyLab MIS Discussion Questions: 10-7, 10-8, 10-9; Hands-on MIS Projects: 10-10, 10-11, 10-12, 10-13; Writing Assignments: 10-18, 10-19; eText with Conceptual Animations

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Youtube Transforms the Media Landscape

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he first video posted on YouTube was a 19-second clip from 2005 of one of the company’s founders standing in front of the San Diego Zoo elephant cage. Who would have thought that the online video-sharing service would mushroom into the world’s second most popular website, with more than 1.8 billion monthly users? YouTube viewers worldwide now watch more than 5 billion YouTube videos per day. Three hundred hours of video are uploaded to YouTube every minute. YouTube allows users to view, rate, share, add to favorites, report, and comment on videos and subscribe to other users’ video channels. Although hundreds of millions of people love to post YouTube videos of their growing children, dogs, and cats, YouTube offers much more: clips from major motion pictures and TV shows, music videos, sports videos, videos from companies promoting their brands, and numerous “how-to” videos about home repair, gardening, and computer troubleshooting. Most YouTube content has been uploaded by individuals, but media corporations such as CBS, the BBC, Vevo, and Hulu offer some of their material via YouTube as part of a partnership program. YouTube maintains very large databases for video content and tracking the behavior of its users. It carefully mines data to give each user personalized video recommendations that will entice that person to watch longer. There are so many eyeballs affixed to YouTube—it’s a gold mine for marketers, and YouTube content gets richer by the minute. More than half of YouTube views come from mobile devices. YouTube was purchased by Google in 2006 and benefits from Google’s enormous reach, since Google handles about 80 percent of global Internet searches. YouTube revenue comes from ads accompanying videos that are targeted to site content and audiences. YouTube also offers subscription-based premium channels, film rentals, and a subscription service called YouTube Red that provides ad-free access to the website and some exclusive content. It is unclear if YouTube is actually profitable at this point. Experts believe that annual costs for running and maintaining YouTube exceed $6 billion. Once known as a magnet for pirated video, YouTube has been embraced by Hollywood and the entertainment world. Almost every movie trailer or music

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video is released onto YouTube; all major sports leagues upload highlights there; and networks supplement traditional programming with videos that can be shared, like the talk show host James Corden’s “Carpool Karaoke” series. YouTube has become a major destination entertainment site, and it is about to alter the media landscape even further. YouTube has joined services targeting consumers who want to give up cable or satellite TV without losing access to live television. In early 2017, YouTube announced a subscription service called YouTube TV. For $40 per month, the service offers more than 60 channels, including the major networks, FX, ESPN, and the Disney Channel, as well as the ability to store an unlimited number of programs on a cloud-based digital video recorder for up to six accounts. YouTube TV subscribers will be able to watch content on any platform, including PCs, tablets, smartphones, and big-screen TVs. After the cost of acquiring all this television content is considered, Google may not make much on YouTube TV subscription revenue. That’s fine right now, because Google is using YouTube TV to break into the television advertising market, selling targeted advertising in ad slots that typically went to cable operators. In the long term, that could be significant: Roughly $70 billion is spent annually in the United States on TV ads. Sources: David Pierce, “Why You Should Cut Cable—and What You’ll Miss,” Wall Street Journal, February 14, 2018; Douglas MacMillan, “Investors Want More Transparency about YouTube’s Sales, Profit,” Wall Street Journal, April 10, 2018; “37 Mind Blowing YouTube Facts, Figures and Statistics—2018,” MerchDope, August 4, 2018; www.tv.youtube.com, accessed July 30, 2018; Jack Nicas, “YouTube Tops 1 Billion Hours of Video a Day, on Pace to Eclipse TV,” Wall Street Journal, February 27, 2017; Jack Nicas and Shalini Ramachandran, “Google’s YouTube to Launch $35-a-Month Web-TV Service,” Wall Street Journal, February 28, 2017; and Peter Kafka and Rani Molla, “2017 Was the Year Digital Ad Spending Finally Beat TV,” Recode, December 4, 2017.

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ouTube exemplifies some of the major trends in e-commerce today. It does not sell a product, it sells an innovative service, as e-commerce businesses are increasingly trying to do. YouTube’s service delivers streaming video content either for free (supported by advertising) or by subscription, and also enables users to upload and store their own videos. YouTube makes use of advanced data mining and search technology to generate revenue from advertising. YouTube is “social,” linking people to each other through their shared interests and fascination with video. And it is mobile: YouTube can be viewed on smartphones and tablets as well as conventional computers and TV screens, and more than half of YouTube views are on mobile devices. The chapter-opening diagram calls attention to important points raised by this case and this chapter. YouTube’s primary business challenge is how to take advantage of opportunities presented by the Internet and new developments in search and data mining technology to wring profits from the billions of videos it streams to viewers. Obviously YouTube had to make major investments in technology to support video uploads and downloads, gigantic databases of videos and users, tagging images, and social networking tools. YouTube generates revenue from ads targeted to video viewers and from subscriptions to its streaming content services, including its new lineup of major TV channels. It is unclear

Chapter 10 E-commerce: Digital Markets, Digital Goods

Business Challenges

• Opportunities presented

• Design business and revenue model

Management

by new technology

Organization

Information System

• Maintain social networks

• Partner with content providers

Video Content Serving Platform

• Databases • Social networking tools

• Data mining • Video streaming

Technology

Business Solutions

• Increase revenue

• Personalize streaming video • Piggyback advertising • Provide content subscription service

whether YouTube has achieved long-term profitability, but it is very valuable to Google as another outlet for its advertising. Here are some questions to think about: How does YouTube provide value? Why is YouTube an expensive business to operate? Is it a viable business model? Why or why not?

10-1 What are the unique features of e-commerce, digital markets, and digital goods? In 2019, purchasing goods and services online by using smartphones, tablets, and desktop computers is ubiquitous. In 2019, an estimated 224 million Americans (about 92 percent of the Internet population) will shop online, and 195 million will purchase something online, as did millions of others worldwide. Although most purchases still take place through traditional channels, e-commerce continues to grow rapidly and to transform the way many companies do business (eMarketer, 2018h). E-commerce is composed of three major segments: retail goods, travel and services, and online content. In 2019, e-commerce consumer sales of goods ($598 billion), travel and services ($213 billion), and online content ($23 billion) will total about $830 billion. Sales of retail goods alone will be about 11 percent of total U.S. retail sales of $5.9 trillion, and are growing at 12percent annually (compared with 3.3 percent for traditional retailers) (eMarketer, 2018e; 2018c). E-commerce is still a small part of the much larger retail goods market that takes place in physical stores. E-commerce has expanded from the desktop and home computer to mobile devices, from an isolated activity to a new social commerce, and from a Fortune 1000 commerce with a national audience to local merchants and consumers whose location is known to mobile devices. At the top 100 e-commerce retail sites, more than half of online shoppers arrive from their smartphones, and 48 percent of e-commerce sales are now mobile, while 52 percent of purchases occur on the desktop. The key words for understanding this new e-commerce in 2019 are “social, mobile, local” (eMarketer, 2018d).

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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 transactions between and among organizations and individuals. For the most part, this refers to 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 a crawl and revenues flattened (see Figure10.1), which is not bad considering that traditional retail sales were shrinking by 5 percent annually. Since then, offline retail sales have increased only a few percentage points a year, whereas online e-commerce has been a stellar success. The very rapid growth in e-commerce in the early years created a market bubble in e-commerce stocks, which 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 (including travel and digital content) will grow to an estimated $830 billion in 2019, an increase of more than 12 percent over 2018 with 195 million people purchasing online and an additional 224 million shopping and gathering information but not purchasing (eMarketer, 2017b).

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 2018, e-commerce revenues grew at an estimated 12 percent annually. Sources: Based on data from eMarketer, “US Retail Ecommerce Sales, 2018–2022,” 2018c; eMarketer, “US Digital Travel Sales, 2018–2022,” 2018a; and eMarketer chart, “US Mobile Downloads and In-App Revenues, 2013–2017,” 2017a.

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Chapter 10 E-commerce: Digital Markets, Digital Goods The Internet influences more than $2 trillion in retail commerce that takes place in physical stores, about 40 percent of all retail sales. • The number of individuals of all ages online in the United States is expected to grow to 279 million in 2018, up from 147 million in 2004. In the world, more than 3.7 billion people are now connected to the Internet. Growth in the overall Internet population has spurred growth in e-commerce (Internet World Stats, 2018). • Approximately 106 million U.S. households will have broadband access to the Internet in 2018, representing about 82 percent of all households. • About 232 million Americans will access the Internet by using a smartphone in 2019. Mobile e-commerce has begun a rapid growth based on apps, ringtones, downloaded entertainment, and location-based services. Mobile e-commerce will account for about $267 billion in 2019, 44 percent of all e-commerce. Mobile phones and tablets are becoming the most common Internet access device. Currently, more than 80 percent of all mobile phone users access the Internet using their phones, although they also use their desktops (eMarketer, 2018b). • B2B e-commerce (use of the Internet for business-to-business commerce and collaboration among business partners) expanded to more than $7.7 trillion. Table 10.1 highlights these new e-commerce developments.

The New E-commerce: Social, Mobile, Local One of the biggest changes is the extent to which e-commerce has become more social, mobile, and local. Online marketing once consisted largely of creating a corporate website, buying display ads on Yahoo, purchasing search-related ads on Google, and sending email messages. The workhorse of online marketing was the display ad. It still is, but it’s increasingly being replaced by video ads, which are far more effective. Display ads from the very beginning of the Internet were based on television ads, where brand messages were flashed before millions of users who were not expected to respond immediately, ask questions, or make observations. If the ads did not work, the solution was often to repeat the ad. The primary measure of success was how many eyeballs (unique visitors) a website produced and how many impressions a marketing campaign generated. (An impression was one ad shown to one person.) Both of these measures were carryovers from the world of television, which measures marketing in terms of audience size and ad views.

From Eyeballs to Conversations: Conversational Commerce After 2007, all this changed with the rapid growth of Facebook and other social sites, the explosive growth of smartphones beginning with the Apple iPhone, and the growing interest in local marketing. What’s different about the new world of social-mobile-local e-commerce is the dual and related concepts of conversations and engagement. In the popular literature, this is often referred to as conversational commerce. Marketing in this new period is based on firms engaging in multiple online conversations with their customers, potential customers, and even critics. Your brand is being talked about on the web and social media (that’s the conversation part), and marketing your firm, building, and restoring your brands require you to locate, identify, and participate in these conversations. Social marketing means all things social: listening, discussing, interacting, empathizing, and engaging. The emphasis in online marketing has shifted from a focus on eyeballs to a focus on participating in customer-oriented conversations. In this sense, social marketing is not simply a new ad channel

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378 Part Three Key System Applications for the Digital Age TABLE 10.1 THE GROWTH OF E-COMMERCE BUSINESS TRANSFORMATION E-commerce remains the fastest-growing form of commerce when compared to physical retail stores, services, and entertainment. Social, mobile, and local commerce have become the fastest-growing forms of e-commerce. The breadth of e-commerce offerings grows, especially in the services economy of social networking, travel, entertainment, retail apparel, jewelry, 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, and traditional retail firms, such as Walmart, JCPenney, L.L.Bean, and Macy’s, are developing omnichannel business models to strengthen their dominant physical retail assets. Walmart, the world’s largest retailer, has decided to take on Amazon with a more than $1 billion investment in its e-commerce efforts. Small businesses and entrepreneurs continue to flood the e-commerce marketplace, often riding on the infrastructures created by industry giants, such as Amazon, Apple, and Google, and increasingly taking advantage of cloud-based computing resources. Mobile e-commerce has taken off in the United States with location-based services and entertainment downloads, including e-books, movies, music, and television shows. Mobile e-commerce will generate more than $267 billion in 2019.

TECHNOLOGY FOUNDATIONS Wireless Internet connections (Wi-Fi, WiMax, and 4G smartphones) continue to expand. Powerful smartphones and tablet computers provide access to music, web surfing, and entertainment as well as voice communication. Podcasting and streaming take off as platforms for distribution of video, radio, and user-generated content. Mobile devices expand to include wearable computers such as Apple Watch and Fitbit trackers. The Internet broadband foundation becomes stronger in households and businesses as communication prices fall. Social networking apps and sites such as Facebook, Twitter, LinkedIn, Instagram, and others seek to become a major new platform for e-commerce, marketing, and advertising. Facebook has 2.2 billion users worldwide and 214 million in the United States (Facebook, 2018). Internet-based models of computing, such as smartphone apps, cloud computing, software as a service (SaaS), and database software greatly reduce the cost of e-commerce websites.

NEW BUSINESS MODELS EMERGE More than 70 percent of the Internet population has joined an online social network, created blogs, and shared photos and music. Together, these sites create an online audience as large as that of television that is attractive to marketers. In 2018, social networking will account for an estimated 15 percent of online time. Social sites have become the primary gateway to the Internet in news, music, and, increasingly, products and services. (eMarketer, 2018f) The traditional advertising industry is disrupted as online advertising grows twice as fast as TV and print advertising; Google, Yahoo, and Facebook display more than 1 trillion ads a year. On-demand service e-commerce sites such as Uber, Lyft, and Airbnb extend the market creato...