Some Definitions:

Electronic Business

Electronic business is a useful general term for:

the conduct of business with the assistance of telecommunications and telecommunications-

based tools

It comprises many overlapping segments, which are identified in the following sections.

Electronic Commerce

Electronic commerce is usefully defined as:

the conduct of commerce in goods and services, with the assistance of

telecommunications and telecommunications-based tools

Some people use the term `electronic trading' to mean much the same thing. Others use 'electronic
procurement', 'electronic purchasing' or 'electronic marketing'.

Note, however, that 'EC' is often used in a much broader sense, to mean essentially the same as
'electronic business', as defined above. Examples of EB that are not EC include registration and licensing
processes, student enrolment, and court administration.

Note that EC comprises many segments, some of which have their own names. For example:

'Electronic catalogues' refers to means whereby sellers can communicate their offerings to
potential buyers;
Electronic Data Interchange refers to a particular family of standards for expressing the
structured data that represent EC transactions; and
'Electronic auctions' for a particular set of mechanisms for setting prices.

Two basic models of the electronic commerce process are used, which are 'deliberative purchasing' and
'spontaneous purchasing'. These are described in a later section.

Electronic Publishing

Electronic publishing is usefully defined as:

Electronic commerce in digital goods and services that are intended for consumption by
the human senses

It encompasses a range of formats, including text, structured data, image, raster/bit-map and vector,
moving image (animation and video), sound, and combinations of the above ('multi-media').

Electronic Services Delivery

Electronic services delivery is usefully defined as:

Electronic commerce in services, i.e. the provision of services with the assistance of
telecommunications and telecommunications-based tools

ESD excludes the question of traffic in physical goods, and hence is concerned with applications of
electronic business where, at least in principle, the entire activity can be performed electronically.

The term is commonly used to refer to government applications of EC. It is also used in relation to such
industry sectors as banking and other financial services, trading in commodities, reservations for travel
and entertainment events, and distance education.

Deliberative Purchasing

We use the term 'deliberative purchasing' to refer to the kind of process practised by corporations when
they undertake major acquisitions. The following diagram provides an abstract (and of course idealised)
description of the processes involved.

We depict deliberative purchasing as a succession of phases, described below. In many real-world cases
these Phases are readily identifiable, although in some circumstances some of them may be merged, or
may occur in a different sequence. Nonetheless this model proves very useful when analyzing the
application of particular information technologies to electronic commerce.

(1) The Pre-Contractual Phase

At the commencement of the process, the buyer and seller are concerned with the gathering of market
intelligence.
The buyer seeks information about suppliers of goods and services, about the goods and services
themselves, and about the prices, availability, terms and conditions applicable to a purchase.

The seller seeks information about prospective purchasers of their goods and services. This is the area
commonly referred to as 'marketing', including advertising.

(2) The Contractual Phase

During this phase, a formal relationship is established between buyer and seller, including terms and
conditions to be applied to transactions under the contract.

In some cases, only a single transaction is envisaged, and hence these activities are likely to merge with
those of the following phase; in other cases, many orders may be placed within the context of a single
'head' contract, and hence it is useful to separate the activities into two phases.

(3) The Ordering Phase

This involves the placement and processing of purchase orders (or, in contractual terms, an offer), and
acknowledgement by the seller of its preparedness to deliver (in contractual terms, an acceptance).

Other transactions, which may be involved, include purchase order amendments, re-negotiations and
cancellations.

(4) The Logistics Phase

This phase deals with the delivery of goods and/or the performance of services. In addition, some post-
delivery functions may be involved, in particular inspection, and acceptance or rejection.

(5) The Settlement Phase

During this phase, the goods or services are paid for. Relevant transactions include invoicing, payment
authorization, payment, and remittance advice transmission.

Particularly in the case of contracts, which involve cyclical deliveries or service performance (e.g. the
hiring of temporary or contract staff for an extended period), a succession of payments may be involved.

Associated with this phase is the provision by financial institutions to their customers of confirmations of
transactions affecting their accounts, and statements of transactions and balances.

(6) The Post-Processing Phase

After the basic transaction has been completed, a number of additional activities may be undertaken.
Most commonly, management information is gathered and reported. In some cases, an obligation may
exist to store and report trading statistics to an industry association or a national statistical authority.

In addition, the sale may have resulted in a relationship between the buyer and the seller, relating to the
servicing, maintenance, upgrading and eventual replacement of the goods or asset (e.g. a photocopying
or fax machine), or the replenishment of supplies used by the asset (e.g. paper and ink-cassettes).

This six-phase model has the advantage of ensuring rational and effective procurement. In return for
those advantages, however, it is resource-intensive and expensive.
The model is abstract, and requires specialisation when it is applied in particular settings.

Spontaneous Purchasing

A great many acquisitions, by corporations and by individuals alike, involve relatively small amounts of
money; and the consequences of paying too high a price, or of buying inappropriately, are unlikely to be
dramatic.

Rather than being taken deliberatively, small purchases are generally performed intuitively or
spontaneously. The following diagram relates to those kinds of procurement in which the purchaser
performs a minimum of rational decision-making.

This model is applicable to situations as diverse as supermarkets and on-line stock exchanges.

A Classification Scheme for Traded Items

We use `traded items' as a collective term for the entities that are purchased and sold. The characteristics
of traded items are a major determinant of the form of the trading mechanism. It is useful to classify those
characteristics across the following three dimensions.

(1) Goods and Services

Two groups can be readily distinguished, which are conventionally referred to as `goods' and `services'. A
good is an identifiable physical entity, which is `delivered', whereas a service is an act, which is
`performed'.

(2) Physical and Digital Traded Items

It is also valuable to distinguish physical from digital traded items. A `digital item' is one, which may be
delivered or performed entirely through a telecommunications network. On the other hand, the delivery or
performance of a `physical item' involves logistical activities such as the transportation of goods, or of the
person and/or facilities whereby the service will be performed.

This is a separate dimension from the previous one, because both goods and services may be either
physical or digital; for example, an audio-CD is a physical good, whereas an audio-file downloaded over
the Internet is a digital good; and a haircut is a physical service, whereas the display of an animated
graphic on a purchaser's screen is a digital service.

(3) The Degree of Productization of Traded Items

Traded items are valuably distinguished according to the degree to which they are productised. A product
is a normal offering by a supplier, which can be ordered simply by nominating a product-identifier.

For the purposes of strategic analysis of electronic commerce, the following four classes need to be
considered:
* Standard Products

The industrial revolution involved the automation of repetitive processes, and the standardisation of
goods and services into a limited number of forms, with pre-determined features. The term `standard
products' is used to refer to goods or services that are available in quantity from a particular supplier, and
have an identity, such that they can be ordered from the supplier's catalogue. Standard products may be
the subject of a Request for Quotation (RFQ), particularly where signficant volumes are involved.

Notwithstanding the onrush of the 'third wave' or 'information economy', it remains common for goods and
services to be 'productised', because this generally reduces their unit cost, and hence makes them
accessible to a wide range of customers.

* Commodities

A commodity is a particular class of products that exist in identifiable form, in considerable quantity, and
in essentially identical form, and that are available from a variety of sources. Common examples are
stocks, shares and derivative financial instruments such as futures and options, foreign currency, and
primary produce such as coffee and crude oil. Buyers regard commodities as undifferentiated, and are
therefore unconcerned as to which ones they receive.

(It is important to distinguish this sense of the word from another that is in common usage among
economists, meaning anything that is capable of being traded, as in the hackneyed expression
'information has become a commodity').

* Custom-Built Products

These are not products in the accepted sense of the word, because each is a `once-off', designed to meet
the specific needs of a specific client for a specific purpose. Factories and ships are examples of custom-
built goods, and business consultancy is an example of a custom-built service. They are typically the
subject of Requests for Information (RFI), Proposal (RFP), Offer (RFO) or Tender (RFT).

* Customized Products

The apparently clear distinction among the above three classes is not sufficient to cope with all forms of
trading. Many circumstances exist in which base products are modified to suit a particular customer's
requirements, or a standard specification is modified according to customer need and a semi-custom-built
good or service constructed. This is particularly common where there is a combination of goods with
services. Means whereby customization may be achieved include:

`Product options', e.g. color, size;

`Optional extras' e.g. alloy wheels, leather upholstery;
`Parameterization' e.g. in an accounting package, the number of branches;
`Specialization', e.g. the insertion of the entity-name into an accounting package;
`Custom extensions', whereby additional elements are provided beyond the base-product; and
`Custom modifications', whereby the product is changed to meet a particular specification;
`Supplementary services', whereby a good is delivered, and additionals services provided that
meet the particular need.

Customized products are often the subjects of a Request for Quotation (RFQ), or Tender (RFT).

These four classes represent points on a dimension, ranging from commodities via standard products and
customised products to custom-built products.
Digital Goods and Services

Electronic commerce can support most of the processes involved in the purchasing of physical goods
and services, with the exception of the Logistics phase of the Deliberative model, and the Get phase of
the Spontaneous model.

Digital goods and services are those that can be delivered using the information infrastructure.
Hence, for digital goods and services, the marketspace provides a context sufficient for the entire
procurement process.

Digital goods and services include:

Documents, including articles and books

Data, including statistics
Reference information, including dictionaries and encyclopedias
News
Weather forecasts
Projected sound, such as speeches and musical performances
Projected video and video-with-sound, including television, video-conferencing and video-clips
Interactive voice, such as telephone conversations and tele-conferencing
Interactive video and video-with-sound, such as video-conferencing
Images, including structured graphics such as diagrams and musical scores, and photographs
Entertainment, infotainment, edutainment and education via multi-media
Bookings and tickets for live events
Software, quite generally
Commerce in insurance
Commerce in money, including foreign currencies
Commerce in securities, and financial derivatives such as stock-based, interest-rate-based and
index-based options
Commerce in commodities, and commodities derivatives such as futures

The Marketspace

The concept of 'marketspace' (Rayport & Sviokla 1994) is used to distinguish the 'location' in which
electronic commerce is conducted, from conventional, physical marketplaces.

It refers to the virtual context in which buyers and sellers discover one another, and transact
business. It is the working environment that arises from the complex of increasingly rich and mature
telecommunications-based services and tools, and the underlying information infrastructure.

Supra-Organisational Systems

Information systems are complexes of human and machine-performed activities, which together assist an
organisation in the performance of its functions. Intra-organisational systems are those that are
substantially internal to one organisation.

Electronic commerce involves interaction among the information systems of two or more organisations.
As these interactions have matured, it has become increasingly sensible to conceive of a single system
that extends beyond the boundaries of a single organisation. `Supra-organisational systems' is a
collective term for all of the various forms that such information systems can take.

The following classes of supra-organisational system are usefully distinguished:

 Inter-organisational (1-to-1) systems (IOS), which involve two organisations between which a
degree of trust and commitment exists, e.g. through an explicit business partnership or alliance;
Multi-organisational systems, which involve more than two organisations related in one of
several ways, including:
o Cascading (1-to-1-to-1) systems, which integrate a succession of inter-organisational
systems, along an industry value-chain. Examples include Quick-Response and
Customer-Response systems;
o Hub-and-spoke (1-to-n) systems, in which an organisation exercises its market power
over organisations it is associated with. Organisations which have successfully
established hub-and-spoke schemes include downstream assemblers in industries such
as automobiles, regionally dominant corporations such as remotely located steel and
aluminium smelters, large supermarket chains, and government purchasing
organisations; and
o Networking (m-to-n) systems, in which multiple organisations interact collaboratively
with multiple other organisations in a lattice, web or network. The Australian automobile
assembly industry has established such a scheme for communications with its
components suppliers. International trade communities, and inter-corporate payment
schemes, also tend to work in this manner; and
Extra-organisational systems (EOS), which cross organisational boundaries, but which include
key participants who are not organisations, but rather small, unincorporated enterprises, and
consumers. Examples include ATM and EFT/POS systems.

Strategic Stances

Organisations can adopt a variety of strategic stances when they implement electronic commerce tools.
The following are identified:

Passive implementation, which occurs semi-accidentally, in the form of:

o 'Functional reallocation', in which functions are transferred among corporations
o Architectural re-structuring, in which some organisations are destroyed and perhaps new
ones created, particularly in the forms of dis- and re-intermediation
o Industry redefinition, in which the entire industry undergoes revolutionary change
Strategic implementation, which arises where organisations apply EC:
o As a defence against intruders
o As a threat to competitors
o As a facilitator of improvements within an entire industry.

Some questions and answers on E-Commerce:

Q: What do we mean by electronic commerce?

The term "electronic commerce" has evolved from its meager notion of electronic shopping to mean all
aspects of business and market processes enabled by the Internet and the World Wide Web
technologies.
 Electronic Commerce as online selling:

Narrowly defined, electronic commerce means doing business online or selling and buying
products and services through Web storefronts. Products being traded may be physical products such as
used cars or services (e.g. arranging trips, online medical consultation, and remote education).

Increasingly, they include digital products such as news, audio and video, database, software and all
types of knowledge-based products. It appears then electronic commerce is similar to catalog shopping or
home shopping on cable TV.

Electronic Commerce As a Market:

Electronic commerce is not limited to buying and selling products online.

For example, a neighborhood store can open a Web store and find the world in its doorstep. But, along
with customers, it will also find its suppliers, accountants, payment services, government agencies and
competitors online. This online or digital partners demand changes in the way we do business from
production to consumption, and they will affect companies who might think they are not part of electronic
commerce. Along with online selling, electronic commerce will lead to significant changes in the way
products are customized, distributed and exchanged and the way consumers search and bargain for
products and services and consume them.

In short, the electronic commerce revolution is in its effects on processes. Process-oriented definition
of electronic commerce offers a broader view of what electronic commerce is. Within-business processes
(e.g. manufacturing, inventorying, corporate financial management, operation), and business-to-business
processes (e.g. supply-chain management, bidding) are affected by the same technology and network, as
are business-to-consumer processes. Even government functions, education, social and political
processes undergo changes.

Q: Why is the Internet different from other computer and network technologies?

Computers and networks are nothing new. They have existed and business applications such as LAN
and EDI are well established long before the World Wide Web took over.

Two things make the Internet quite different from any other existing communications media. Unlike
broadcasting media, the Internet (1) allows two-way communications and (2) is built around open
standards. A two-way communication means targeting audience and the possibility of feedback.
Broadcasting sends out messages to "no one in particular" and without knowing quite who has gotten the
message. An open standard (e.g. TCP/IP) means interoperability and the advantage of a large market
and the possibility of integrating one product or process with another.

Both of these characteristics are being challenged.(1) To the Web-TV generation, the digital future
looks like another version of the passive one-way broadcasting. The "new media" sums up how
publishers and media companies view the digital medium. We are so accustomed to "receiving random
messages" that we often forget the fact that broadcasting was a 20th century phenomenon. Even
"interactive television" envisioned by today's media is a way of providing a more lively entertainment,
offering more information "related to existing contents" (e.g. detailed information about characters, plots,
and commercials shown on TV). Multichannel, digital TV broadcasting may very well be a model for future
entertainment, but it needs to be remembered that it is only one application of the digital communications
network. (2) The commercialization of the Internet is forcing businesses to differentiate their products from
others by making products incompatible. Unlike the public Internet where standards were open, firms
attempt to capture and dominate the market with their proprietary products. In such an environment,
TCP/IP would have had a very slim chance of becoming a standard and opening up the digital, networked
economy. Whether markets driven by private interests can bring about a better result (e.g., more efficient,
technologically superior, etc. system) is still a concern left for arguments.

Perhaps telephone networks are quite similar to the Internet (and indeed most Internet traffic goes
through telephone networks). But unlike telephones, the Internet's user interface (computers) is much
more sophisticated and flexible. Because of its beginning as a public research network, the Internet has
no pricing regime of telephone companies. The worldwide connection, then, may be considered to have
been an accident. When usage-based, long-distance charges are implemented, the Internet may look
quite similar to the telephone network.

Q: Why should one care about electronic commerce?

Participants in the electronic marketplace are not limited to so-called digital product companies such
as those in publishing, software, entertainment and information industries. The Digital Age and the digital
revolution affect all of us by virtue of their process innovations. At the least, through Web-TV and digital
television, the way we watch TV news and entertainment programs will change. Changes in
telecommunication will affect the way we receive information, product announcements, orders, etc. As
phones, fax machines, copiers, PCs and printers have become essential ingredients in doing business,
so will be emails, Web sites, and integrated digital communications and computing.

While today's office business machines are not integrated (e.g. faxed orders have to be typed in on
computers), the much talked about "convergence" will drive all these equipment into one digital platform,
whether it be a computer connected to the Internet and intranets, or a new kind of device capable of
interacting with other devices, because that device will prove to be more efficient and productive.
(Although, will it be easier to use?

That depends on how developers and industry leaders promote interoperability and standardization.)

Even seemingly mundane bookstores face different challenges in the electronic marketplace by virtue
of having digital processes in their business operations. The case of Amazon.com vs. Barnes & Noble
shows that the very definition of "stores" has to be re-evaluated. This also touches upon the issue of
taxable nexus and sales tax collection on the Internet.

Distributing books require numerous local outlets (local book stores) to provide convenient access to
customers.

At the same time, mail order distribution has been used for many decades through various book clubs.
Taking this direction into the Internet, Amazon.com has become the leading online bookstore, billing itself
as the "largest bookstore" on earth not by opening numerous branch stores but via the Internet. The
"biggest bookstore", Barnes & Noble with a towering share of revenues and physical bookstores, has
been forced to respond to

Amazon.com's challenge by opening its own Web store as well as by bringing a law suit against its
challenger. Will any business selling physical products be facing a similar competition?
Q: What is the electronic marketplace?

Electronic markets ordinarily refer to online trading and auctions, for example, online stock trading
markets, online auction for computers and other goods. The electronic marketplace refers to the
emerging market economy where producers, intermediaries and consumers interact electronically or
digitally in some way. The electronic marketplace is a virtual representative of physical markets. The
economic activities undertaken by this electronic marketplace collectively represent the digital economy.
Electronic commerce, broadly defined, is concerned with the electronic marketplace.

The electronic marketplace resembles physical markets (the one we know) in many aspects. As in
physical:

markets, components of the digital economy include:

players (market agents such as firms, suppliers, brokers, shops and consumers)
products (goods and services;) and
processes (supply, production, marketing, competition, distribution, consumption

The difference is that, in the electronic marketplace, at least some of these components are electronic,
digital, virtual or online (whichever term you may prefer). For example, a digital player is someone with an
email or a Web page. Purely "physical" sellers may be selling a digital product, e.g. digital CD-ROM. One
that sells physical products at a physical store may offer product information online (thereby allowing
consumers to "search online"), while production, ordering, payment and delivery are done conventionally.
Currently, the emphasis is on the core of the electronic marketplace where everything (i.e. all value
chains or business activities) is online. But, if any aspect of your business or consumption dwells upon
the digital process, you are already part of the electronic marketplace. That is, almost all of us are already
players in the electronic marketplace!

Q: How is the electronic marketplace different from physical markets?

Business strategies must be based on a sound understanding of the market dynamics, for which we
rely on standard economics. Is the electronic marketplace a perfect, "friction-less" market? Will
transaction costs become zero? Will the market be perfectly competitive, yielding lowest possible prices?
Should the market be left alone to march toward those predictions?

On the surface, the electronic marketplace appears to be something of a perfect market, where there
are numerous, worldwide sellers and buyers, who in turn have bountiful information about the market and
products, and where no intermediaries are necessary. Such a market is very competitive and efficient
(with no need to regulate or intervene arbitrarily).
 However, closer looks indicate that consumer searches are not very efficient (due to the cost of having
a complete, easily searchable database, and because sellers may not provide all information necessary).
Although wholesalers and retail outlets may not be needed, other types of intermediaries appear to be
essential for the electronic market to function adequately (e.g. certification authorities, electronic malls
who guarantee product quality, mediators for bargaining and conflict resolution, etc.). All these brokers
add transaction costs.

Will prices be lower? Digital products are highly customizable due to its transmutability, i.e. easy to
revise, reorganize and edit. With information about consumer tastes, products will be differentiated (or
"customized", e.g. custom news). The number of potential sellers may be low, or even only one, in a
highly differentiated and segmented market, and the price will tend to approach the maximum price the
buyer is willing to pay. (In economic terms, sellers practice "first degree or perfect" price discrimination,
which is exact opposite to the result we get in a perfectly competitive market.)

How about the often-heard "zero marginal cost" argument that digital products will be priced at zero
(given out free) because their reproduction costs will be minimal? The price will approach zero only if (1)
the marginal cost is really approaching zero and (2) there is effective competition among sellers. In short,
the marginal cost of a digital product may be substantial. Even when it is close to zero, prices in a non-
competitive market will be determined more by demand (or the buyer's willingness to pay) than by
marginal cost. Unless we think all information and digital products are of no value, they will never be
priced at zero by sellers with market power. (Giving out free products today does not mean that sellers
are doing it because the costs are zero nor that they will continue to do so when they monopolize the
market.)

Q. What is supply chain management?

A supply chain is a collection of inter-dependent steps that, when followed, accomplish a certain
objective such as meeting customer requirements. Supply-chain management is a generic term that
encompasses the coordination of order generation, order taking, and offer fulfillment/distribution of
products, services, or information. Numerous, independent firms and customers are involved in a supply
chain (e.g., manufacturers and parts suppliers; parcel shippers, senders and receivers; wholesalers and
retailers). The WWW and extranets (connected intranets) have shown a great potential in linking and
managing these entities into a virtual organization. For over 20 years, EDI has promised such
revolutionary gains but failed to extend its benefit to small and medium companies. The remarkable
nature of electronic commerce is its power in enabling all types and sizes of firms to interact.

Q. What are the benefits of using the Internet for supply chain
management?

Interoperable intranets make it easy for supply-chain partners to share and exchange information, and
at the same time, the whole management process may be contracted to a third party instead of
developing one's own applications and investing in separate systems. In this intermediated market,
sophisticated logistics management and automated supply-chain management are available almost
universally.
Q: What's new with today's EDI?

Traditional electronic data interchange (EDI) is an automated system of business-to-business data

exchange. Two primary areas of EDI are data interchange (for orders, invoices) and electronic funds
transfer (EFT) used among banks, which have high volume in relatively small number of data items, and
long-term relationship. Setting up an EDI is expensive such that only large firms could justify investing in
EDI. Security-wise, EDI offers robust transactions compared to the Internet since EDI runs on closed,
private value added networks (VANs). But for that reason, the number of trading partners is always
limited to those who are connected to these VANs. An open EDI is a more flexible EDI, which can carry
more diverse types of data (including graphics) and is cost effective for short-term interactions. New
standards for forms and communications are necessary to support open data interchanges.

The cost advantage of the Internet will cause much of the existing EDI traffic to move into Internet-
based EDI/VAN or secure "extranets" that connect business sites via private communication channels
("tunnels"). Private VAN service providers themselves will play a role in the Internet traffic business. But
with EDI on the Internet, EDI-enabled transactions and business processes will be available to and used
by firms who couldn't afford to invest in EDI/VAN networks. More EDI-like services will be offered more
widely, which may finally bring about "paperless" business that EDI-pioneers promised two decades ago.

Q: Will manufacturers sell products directly to consumers?

Will all businesses sell their products through their company Web pages? Dell Computers certainly
proved that you could do a lot of business via Web storefronts. Does that mean everyone should follow its
example?

With a global network, we can imagine an earth-wide market where distance means nothing. You can
visit any manufacturer, any store on the net anytime. But, even in this seemingly ideal market where all
buyers and all sellers can transact business face to face and one on one, there are needs for
intermediaries. First, you need a way to

find a buyer or a seller. The sheer number of market participants becomes a deterrent. When you
found potential partners, do you trust those sellers or buyers to be reliable, their products to have
satisfactory quality, and payments to be truthfully carried out? In case of Dell Computers, its customers
already know about the company and its products. If you are presented with 10 Web sellers of light bulbs
by an Internet search engine, will you visit each one of their Web sites and negotiate for price? Do you
believe what they say who they are, how good their products are, and whether you will get the product
after you pay for it?

Various phases of transactions may ultimately move to the Internet. The Internet may become the
channel for marketing, product ordering and delivery (for digital products). However, direct producer-to-
consumer transactions will be as rare as they are in physical markets even when that is physically
possible. The primary reason is because buying a product involves much more than moving it spatially.
Q: What are the roles of Internet intermediaries?

Two types of intermediation will emerge in the electronic marketplace. One is to extend what we are
familiar in physical markets into the virtual world. For example, search services and electronic malls are
virtual counterparts of directory services, yellow pages and buying guides. Certification authorities play
similar roles of notary, ID-issuing agencies (DMV), insurers, etc. Ecash banks and digital credit card
services extend payment clearing functions into the Internet.

The other type of intermediation may evolve from the unique capabilities or needs of the networked
market. This may involve breaking down the value-creating chain of the physical market into separate
entities or combine them into a different type of service. For example, retailers have functions other than
distribution. A posh department store transmits a message about the product it carries and their quality.
Does a fancy Web site tell as much? A Web intermediary may sell quality information and nothing else. A
toy retailer not only distributes but also presents a line of products toy buyers are interested in examining
and comparing. Thus, an intermediary is needed if we are to avoid visiting each and every manufacturer
of a toy item.

A retailer sells products as well as reputation about quality. Sometimes, that reputation might be a
more important function of that business. For example, we presume the quality of news if it appears on
CNN or the New York Times. But will we accept news from those on the Internet we never heard of? CNN
and NYT are in reality just an intermediary, who collects news and information, re-package and distribute
them. In the information age, they cannot (or should not) wish to dominate the market. Online versions of
CNN and NYT may emerge as the trusted source of digital information but their value-creation processes
are influenced by the needs of the physical market: costs of gathering information, being selective due to
the constraints of time and space, the idiosyncracies of broadcast and print media, predominant ad-
supported business models, etc. However the news business changes, however, the greatest asset of
CNN and NYT is their reputation for quality, by which they can become the ultimate information
intermediary in the digital economy.

Q: What's the difference between physical stores and Web stores?

Web storefronts integrate various functions such as physical presence as a store, sales
representatives, ordering and payment functions (combined cash register, credit card reader, etc.),
backoffice supports and various data interchanges (for inventorying, supply ordering, etc.)

Q: Should Web pages be jazzy or content-oriented?

Those accustomed to the old text-based Internet seem to favor simple, information-driven Web sites
with not much fancy graphics. New generations of Web designers prefer graphic-rich, jazzy layouts. This
is not surprising since they come predominantly from graphics professionals, and newspaper and
magazine layout artists. In fact, most fancy Web sites decidedly look a lot like a magazine or a front page
of a newspaper. As both these print media and screen-restricted Web page have the same spatial
limitation and the need to grab "eyeballs", this jazzy approach seems to make a lot of sense.
Furthermore, popular sites tend to have jazzy graphics.

However, are jazzy sites drawing more visitors, or do (already) popular sites tend to employ a lot of
graphics?

That is, New York Times Online does have the definite advantage of being well known so that even if
its Web site is text-oriented, easy to navigate, and well classified for organization, it might still draw heavy
traffic. Greater emphasis on contents than on appearance will reduce congestion and unnecessary delay.
Too much emphasis on graphics and multimedia (although that may be interesting and act as a drawing
factor) but not enough contents will ultimately convince us that the Internet is indeed as shallow as the
media we have known all along.

Q: All these electronic payment systems, are they any different?

There are dozens of electronic payment systems proposed or already in practice. But they can be
grouped into three based on what information is being transferred online.

The first type uses a trusted third party who maintains all sensitive information (such as bank account
and credit card numbers) for its clients, which include both buyers and sellers. When there is a
transaction, order information is transmitted along with information about payment confirmation and
clearing, all of which do not include sensitive information. In effect, no real financial transaction is done
online. The primary example of this type is First Virtual. In this type of system, the information need not be
encrypted since financial transactions are done completely off-line.

The second type is an extension of the conventional notational fund transfer. In credit card or check
transactions, sensitive information is being exchanged. For example, you give your credit card to a
merchant, who sends the card number through phone line and receives confirmation. Banks meanwhile
receive the same information and adjust buyer's and merchant's accounts accordingly. The information
being transmitted online in

this case is encrypted for security. The primary example is the use of digital credit cards (e.g.
CyberCash and VISA/Mastercard's SET-based transactions). This type is becoming the mainstay of
online payment methods because consumers are familiar with this system and current players have
vested interest in extending that system to the Internet. The problem with transactional security has been
overly played on the traditional media, but with proper caution and encryption, the Internet may be more
secure than phone lines for this same old payment methods. (Can you encrypt your voice when you give
your credit card number over the phone? Can you be sure who the other person is?)

The third type include variations of digital cash, electronic money and coins. What distinguish these
systems from the other two is not simply the anonymity they afford, but the fact that what is being
transferred is "value" or "money" itself. With the second type described above, some one can commit
fraud by lifting your message (credit

card number) by running up the charge on your account. With digital currency, intercepting a message
is an outright "theft" of your property, not just information.
Q: What's the deal with digital currency? Do we need them?

Digital money, currency or coins are but an encrypted serial number representing money, but money
in all sense since they are convertible to real money (e.g. US dollar) if desired. (Just as US dollar bill is
only a paper with funny graphics.) It took hundreds of years before people accepted paper money (and
checks) as payment. Digital currency will become dominant when paper-based economy finally turns into
the digital economy.

In the short run, digital money is just a convenient form of existing money since digital money is
created against existing money. However, in the long run, digital money may be created on its own if
users accept it on its face value, which will be determined by how dependable its issuers are. All monies
are only as good as their issuers.

Why do we need digital currency? Not because it is the ultimate in anonymous money. Rather, digital
money is necessary if we are to operate fully in the digital marketplace. Non-currency electronic payment
systems will be sufficient for some transactions; for others, digital currency will be more efficient, e.g.
microtransactions as well as anonymous trades. Furthermore, digital currency is very flexible since it can
be made to behave like electronic checks or anonymous cash as situation warrants. Electronic checks or
digital credit cards become useless if their sensitive payment information is erased, or become costly if
that information is hidden and calls for an elaborate process of verification.

Q: Smart cards, what are they good for?

The smart card will emerge as the ultimate interface device for the mobile digital economy. It will hold
your cash, ID information, house and office keys, subway tokens, all types of preference files (for house
temperature setting, driver seat setting, etc.) and other information. You will exchange these information
and digital products with other

people, transact business, present to police officers, check into a hotel or a sports arena, and all other
things yet to be imagined.

Q: Why is the consumer's search process important?

 Marketing and consumer's search are two sides of the same coin: both are concerned with
product/price information. Marketing and advertising represent sellers' initiative (searching for potential
buyers), while search activities are undertaken by buyers who are looking for information about products
and services.

In marketing, the issue is "targeting" audience to maximize the benefit of expenses. In search, locating
relevant information is the goal. In both, costs must be compared with the amount of information
sent/acquired. Broadcast-based advertising has influenced marketers to think in terms of seller-to-buyer
information dissemination. The two-way Internet communication enables the other way of information
flow. Although marketers may want to stay with the familiar, there are significant economic gains from
promoting buyer-initiated information search.