By now it's almost clich to take note of the Internet's vast potential as a busin ess resource, but triteness

doesn't diminish the fact that this once-obscure com puter network has changed and will continue to change business and society profoundl y. A number of estimates pegged the value of Internet commerce in 1998 around $1 00 billion for the United States, and more than one projection for the early 200 0s foresaw worldwide e-commerce surpassing a trillion dollars within the first f ive years of the 21st century. Although much attention has been devoted to the v ast consumer market accessible via the Internet (which is a multibillion-dollar franchise in its own right), business-to-business transactions make up the large majority of e-commerce sales in terms of value. Total U.S. 1998 economic activi ty surrounding the Internet, including computer hardware purchases, Web authorin g services, commerce, and so forth, was estimated at more than $300 billion in s ales and 1.2 million jobs. And these statistics don't even address the non comme rce efficiencies and savings that Internet-based technologies bestow on business es in areas such as supply-chain management. Whereas during the Internet's early commercialization companies were consumed wi th simply getting online, perhaps without much forethought about what to do once they got there, increasingly corporations are formulating exacting Internet str ategies to capitalize on the network's strengths as well as to cope with its sho rtfalls. Despite the popular metaphor of a virtual store serving all the same fu nctions as a physical store, conventional transaction-based commerce is not the appropriate Internet business model for all companies. Rather, businesses must e valuate the financial and competitive advantages of using the Internet as a prim ary vehicle for communication and exchange versus traditional and hybrid options . Some firms may find, for example, that it's more profitable to provide users w ith Internet tools to help make a purchasing decision than to try to facilitate the entire transaction electronically. Meanwhile, other types of companies will find that doing business exclusively over the Internet is the best approach. No blanket policy is likely to work across dissimilar business lines; the key to de termining which model is best is intricately tied to the specific market being s erved, the logistics of delivering the product or service being offered, and wha t other non-Internet alternatives exist. A SHORT HISTORY OF THE INTERNET The Internet originated as an experimental communication system funded by the U. S. Department of Defense and hosted by several universities. Its impetus was a d efense experiment to create a cost-efficient, decentralized, widely distributed electronic communications network for linking research centers. This network was named Arpanet, after its sponsoring agency, the Defense Advanced Research Proje cts Agency (DARPA). Arpanet began operating in 1969, but it took several years b efore it became reliable, thanks to packet switching (breaking information into small manageable pieces that could each be routed separately and reassembled at the receiving computer), and acquired familiar functions like electronic mail. A rpanet's first international links were established in 1973, when hosts in Great Britain and Norway signed on. EARLY COMMERCIAL NETWORKS. The Internet's first commercial forebear was called Telenet and was run by Bolt, Beranek & Newman (BBN), a defense contractor with close ties to the Arpanet pro ject. Introduced Figure 1 Growth of Internet Host Computers in the 1990s Source: Network Wizards, 1999(www.nw.com) in 1974, Telenet enjoyed only a lukewarm reception and its founders couldn't kee

p up with the steep level of investment needed to make it truly commercially via ble. Five years later BBN sold Telenet Communications Corp., by then a publicly traded company, to General Telephone & Electronics, better known as the telecomm unications company GTE Corp. GTE would eventually spin Telenet off in a joint ve nture that formed US Sprint, the long-distance and networking giant, but Telenet never became a dominant player. More important were the originally closed (prop rietary, non-Internet) networks of CompuServe, Prodigy, and America Online, whic h would provide the commercial model for consumer Internet service providers (IS Ps) and Web content centers, and large commercial network backbone operators, wh ich would give businesses fast access to the Internet and eventually take over t he Internet's operation. EMERGENCE OF THE MODERN INTERNET. Despite its relative obscurity at the time, the 1980s were the Internet's most d efining years. By the early 1980s Arpanet had adopted the TCP/IP communications standards that would become commonplace on the Internet, and more importantly, o ther interconnected research networks began to spring up, both within the United States and abroad. One of the most important was the National Science Foundatio n's NSFNET, which came online in the mid-1980s to link several supercomputing la boratories with U.S. universities. In this period the collective network was inc reasingly known as the Internet, although the generic term of internetworking, o r connecting networks to other networks, had existed since at least the mid-1970 s. Enjoying rapid growth and technical upgrading, the NSF's network became the o fficial backbone of the Internet by the late 1980s, eclipsing Arpanet, which by that time was comparatively small, slow, and outmoded. From just 213 host comput ers on Arpanet in 1981, the Internet had burgeoned to include some 10,000 hosts by 1987, and topped 300,000 by 1990, the year Arpanet was officially decommissio ned. WORLD WIDE WEB. The final major breakthrough of the 1980s and one that would decidedly set the cou rse for the 1990s and beyond was a 1989 proposal at the Swiss physics lab CERN to create a World Wide Web. The idea came from Tim Berners-Lee, a British-born phys icist working at CERN at the time. His plan, which was not well received initial ly, was to allow colleagues at laboratories around the world to share informatio n through a simple hypertext system of linked documents. Eventually gaining CERN 's approval, Berners-Lee and others at the research center began developing the now familiar standards for the Web: hypertext transfer protocol (HTTP) to deline ate how servers and browsers would communicate; hypertext mark up language (HTML ) to encode documents with addressed links to other documents; and a uniform res ource locator (URL) format for addressing Internet resources (e.g., http://www.c ern.ch or mailto:webmaster@domain.com). By 1990, Berners-Lee had likewise create d the first Web browser and server software to feed information to the browser. Although Berners-Lee's vision was for a collaborative, informal medium of inform ation exchange, perhaps that typified in chat rooms and newsgroups and whiteboar d applications, more commercially motivated Web innovations soon followed. Most important was Marc Andreessen's Mosaic browser, which he developed as an undergr aduate employee at the National Center for Supercomputing Applications (NCSA) of the University of Illinois at Urbana Champaign. Mosaic, which debuted in early 1993, was more graphical and user friendly than other Web applications up to tha t point. It was an instant success, albeit not a money maker because it was most ly distributed for free. Andreessen finished his degree in computer science late r that year, and in early 1994 established Netscape Communications Corp. with Si licon Valley titan Jim Barksdale, founder of the high-end computer hardware make r Silicon Graphics. Netscape's Navigator quickly became the dominant browser on the Internet, at one point claiming 75 percent of all users. Curiously, the NCSA claimed rights to Mosaic and wrangled with Andreessen over the commercial use o f the browser application code and its name; the NCSA would later license Mosaic to Microsoft Corp. to use in a competing browser, enabling

Leading Internet Domain Types Worldwide Source: Network Wizards, 1999(www.nw.com) the software giant to outmaneuver Netscape within a couple years with its Intern et Explorer product. By this time the Web was nearly synonymous with the Interne t. As the browser wars fed on the phenomenal public interest in the Internet in the mid-1990s, the network became a predominantly commercial entity, as businesses set up Internet sites in droves and millions of new users both private individuals and corporate users began logging on. The NSF officially bowed out of running the Internet backbone in 1995, when commercial operators took over; however, the NS F continued its policies of funding research into advanced networking applicatio ns that could improve the Internet and newer high-speed research networks. BUSINESS USES OF THE INTERNET Although there are scores of specific Internet applications that benefit busines ses, they can all be grouped under two broad categories: (1) information exchang e and dissemination, and (2) facilitating e-commerce. INFORMATION EXCHANGE. The information exchange function is the broader of the two and includes such di verse applications as: e-mail and other person-to-person communications, e.g., computer conferencing online marketing and brand building employee recruitment investor and public relations information distribution intranets for employee knowledge sharing and collaboration extranets to enable outsourcing and supply-chain integration The economic value of these applications is difficult to measure, but for large organizations they have the potential to save millions of dollars in costs, and depending on the application, to stimulate sales as well. Only a couple of the p ossibilities will be discussed here. The internal information management and knowledge-sharing abilities of corporate intranets can be substantial. Intranets, which are corporate information networ ks based on Internet technology but are usually restricted access sites availabl e only to select users, allow central storage and versatile dissemination of div erse information, including corporate handbooks and manuals, customer or marketi ng databases, employee databases, project discussion boards, and other internal documentation. Intranets are substantially more efficient than circulating paper copies of documents, both in terms of immediacy of information and, in most cas es, maintenance costs. Because they rely on simple, Web-based client/server tech nology, they're also typically easier to implement and use than proprietary data bases. The extranet, which enables supply-chain integration and automation, is an espec ially powerful use of the Internet, and one that is increasingly being adopted b y large corporations. Although there are many variations, supply-chain managemen t is generally a hybrid of data exchange and electronic commerce that allows com panies to better coordinate their procurement and distribution practices with th ose of their suppliers and clients. Based on the efficiency principles of electr onic data interchange (EDI) and just-in-time inventory, this coordination can af ford several benefits. The streamlining effects can include eliminating paperwor k, reducing staff hours, and improving data accuracy. Web-based ordering systems likewise tend to be easier to use than their old-line counterparts, which also contribute faster and more accurate results. Such automated systems can also pro

vide management with more timely and detailed information about corporate purcha sing habits and needs, allowing better resource planning and even providing a bl ueprint for cost control. Extranets can also be established to provide customer service and other external communications functions. As an information source, the Web is also a particularly efficient means of comp arison shopping for business procurement. With relative ease, a procurement offi cer can find price quotes from several vendors, some of which may not even be aw are the other exists. The buyer can then use this information to either choose t he low-cost vendor or to gain concessions from established vendors. The downside to this, of course, is when companies are on the receiving end of this informed negotiation, which usually leads to tighter profit margins. E-COMMERCE. There are also multiple facets to e-commerce, although they are much more closel y integrated than information-exchange functions. Specifically, businesses may f ocus on one or more of these aspects of commerce: preparing customers for the sale facilitating the actual transaction managing any follow-up to the sale It may not be feasible or profitable to do all three in equal proportion, or eve n at all. For example, the most logical commerce-related application for Federal Express and similar companies is delivery tracking, which is done after the tra nsaction is completed. It also makes sense to provide pre-transaction services, such as account set-up and drop-off center locators, on the site. However, in th is example the transaction itself is more difficult to accomplish. It consists o f two main parts, dropping off a package and arranging for payment. The latter c ould easily be done over the Internet, but it's less clear how the company would profitably obtain the packages for delivery. Federal Express offers pick-up ser vices, but it's uncertain whether it would be profitable for the company to pick up the majority of the parcels it carries, which are traditionally dropped off at local retail centers. In other trades, of course, the Internet may well be the ideal locus of transact ion. The case is particularly compelling for products or services that can be de livered online, such as software applications via high speed connection, musical recordings, or databases. But strong if not initially profitable business models ha ve also been adopted in many other fields, notably by booksellers such as Amazon .com and auction houses like eBay, not to mention vendors that electronically se rvice the mundane but lucrative business-to-business supply chain. Thus, while e-commerce is commonly the more celebrated business application, as noted above it isn't the appropriate model for all types of trade. Companies con templating a new e-commerce initiative would do well to consider this maxim: all e-commerce is not the same. Internet-era mythology holds that (1) competitors b ig and small are all on equal footing on the Internet, and (2) anything and ever ything can be sold online. Equal footing is only possible in the limited sense that minor players in some l ine of business can, assuming they have the funding (in 1998 the median developm ent price for a mid-sized Web site was estimated at $100,000 and rising briskly) and technical resources, build Internet sites that are as good as or better than th ose of their major competitors, as measured by site convenience, functionality, marketing tactics, and so forth. However, this doesn't mean that the smaller com pany will be any more effective in the larger sense. The smaller company must al so have a cost-efficient system for order fulfillment, a powerful marketing oper ation that ensures potential customers are reached, and many other supporting ca pabilities in order to succeed. For instance, say a small Internet-only start-up wants to sell high-end home appliances online. They may create the best site in

the business, but will they be equipped to serve a national market? Probably no t. For such large and expensive products, traditional retailers like Sears, Roeb uck and Co. and the so called appliance superstores have tremendous competitive advantages in the online arena as well, not the least of which is an established and already profitable physical distribution system. That's not to mention that the marketing model may be off target; Internet transactions may not appeal to potential buyers of expensive appliances, as these people might value the abilit y to see the product in the showroom and talk with sales staff. While that concl usion in this example is arguable, there are clearly some product and service tr ansactions in which customers place a high value on in-person contact and immedi ate fulfillment (real life examples being health care, video rental, and grocery shopping), and these so far haven't been good candidates for an Internet-only a pproach. The point here is not to deny the Internet's revolutionary implications for the business world, or to suggest that its entry barriers can't be significantly low er than in traditional industries. Instead, the lesson is that many traditional business principles and practices still apply to successful e-commerce. Market r esearch, customer service before and after the sale, cost-benefit analysis, and return on investment all have essential roles in fashioning an Internet commerce strategy. THE INTERNET MARKETING ENVIRONMENT As a point of commerce, the Internet has a number of unique features that must b e reckoned with in order to successfully compete in its terrain. Most importantl y, customers, whether individuals or businesses, tend to associate different val ues and expectations with online commerce versus traditional means. Many of thes e can be summarized under the heading of value. Put simply, many customers expec t to come away with something of greater value from an Internet transaction than they do from a conventional physical purchase. Value may present itself in many forms. Examples include greater convenience, better information about the purch ase, reliability of service, personalization/customization, security of the tran saction, and lower costs. If an online vendor fails to offer better value perhaps it is only as good as the real-life alternative it is likely to have trouble makin g the grade in Internet markets. Value creation is but one of several aspects of Internet marketing that many ill -conceived Internet ventures fail to address. A technically competent Web site i s only a starting point, a baseline. Effective Internet business plans must also identify a clear market need, be highly sensitive to competition from all sourc es, articulate a strong value proposition for customers, and be flexible to resp ond to market changes. THE FUTURE MARKET GROWTH. Divining exactly what the future holds for the Internet is no easy task and all su ch projections must be taken with a grain or two of salt but it is possible to obs erve a number of trends that are likely to influence that future. Perhaps the br oadest and most obvious is the continued growth of the Internet by all measures. As mentioned at the outset, the value of commerce conducted over the Internet w ill probably be measured in the trillions of dollars within the first few years of the 2000s. Compared to late 1990s levels, this will represent a geometric ann ual growth rate in the multi-thousand percent range. By some estimates Internet commerce may constitute nearly 10 percent of U.S. gross domestic product by 2005 . While it often has a higher profile, some observers expect retail commerce to account for only a small fraction, perhaps only 3-5 percent, of that total. Mean while, the number of Web users worldwide is expected to reach a half a billion o r more people by then, up from 170 million as of 1999.

TECHNICAL ADVANCEMENTS. Not surprisingly, another noteworthy area of development will be technological. Since the mid-1990s there have been several government and commercial ventures t o develop a new, faster breed of technology for the Internet, which has been str aining under the aggressive demands of modern networking. More precisely, the re search efforts are looking to build new internets, which will ultimately transfe r technology to the public Internet, either in the direct sense, as was the case historically, or in a knowledge transfer scenario in which the government provi des a roadmap for commercial developers to follow. The main thrust of U.S. government efforts is behind a program called the Next G eneration Internet (NGI) initiative, a high-speed government research network be ing created under the direction of an interagency committee. The NSF, the Nation al Institutes of Health, the Department of Defense (through DARPA), the Departme nt of Energy, NASA, and the National Institute for Technology and Standards are the primary agencies contributing to NGI. The NGI was scheduled to reach the adv anced development and testing stages by 2002, at which time it was intended to d emonstrate transfer speeds up to a trillion bits (terabits) per second. Some $30 0 million in federal grants has been earmarked for NGI and related initiatives. The NGI project is also feeding funds to a separate Internet research project kn own as Internet2 (I2), a collaboration between some 154 U.S. colleges and univer sities. I2 is intended to return institutions of higher learning to the days whe n they had a relatively private, high-speed network to themselves, i.e., before the commercialization of the Internet. There are also about a dozen and a half c ommercial firms participating in the 12 effort, mostly from the telecommunicatio ns services and network hardware sectors. A related effort being undertaken by m any of the same organizations was called Abilene. While these new networks were being conceived, the NSF, and its contractor MCI W orldCom, deployed a limited-use system known as the Very High Speed Backbone Net work Service (vBNS). The vBNS project was the immediate successor to NSFNET when it was transferred to the commercial domain in 1995. Since then, the NSF has fi nanced ongoing upgrades to keep it current with the highest performance standard s of current commercial networking technology, including fiber optics. Access to vBNS is restricted to NSF computing centers and merit-based research centers. A s a result, only a handful of mostly academic institutions use vBNS. In 1999, an upgrading project brought its bandwidth up to 2.2 gigabits per second (Gbps), b ut overall it is a much less ambitious endeavor than that of the new Internet pr ojects.

ELECTRONIC COMMERCE Electronic commerce (or e-commerce) can be defined as the process of two or more parties making business transactions via computers and some type of network, ei ther a direct connection or the Internet. E-commerce began in the 1970s when lar ge corporations began creating private networks to transfer information between business partners using a process called electronic data interchange (EDI). The goal was to eliminate large amounts of paperwork. Nearly every Fortune 1000 comp any used EDI, and many of those companies began conducting business over the Int ernet, which is cheaper than expensive private networks. Online retailing began around 1993-94 and experienced dramatic growth. Online sa les were $600 million in 1996 and grew dramatically to $2.4 billion in 1997. The industry developed so rapidly in the latter half of the 1990s that projections quickly became outdated. In its December 31, 1998, issue, USA Today named electronic commerce defined as th

e buying and selling of goods and services over the Internet as the top technology story of the year, and Jeff Bezos, CEO of amazon.com , was named the technology person of the year. During 1998 shares of amazon.com , which began by selling b ooks over the Internet and then added videos and music CDs, rose from $26 a shar e to $321 a share. Remarkably, the company did not turn a profit as it saw its m arket capitalization grow from $503 million when its initial public offering hit the market on May 11,1997, to $22.1 billion in January 1999. CONSUMER E-COMMERCE Several structural problems affecting e-commerce had been solved in time for the fourth-quarter 1998 shopping season. Clearly established shopping channels had emerged, including Yahoo's newly expanded shopping channel and the merger of Ame rica Online and Netscape. Yahoo was offering more than 2 million products from m ore than 27,000 stores on its Internet shopping channel. Online malls had also e stablished a presence on the Internet. Perhaps most importantly, vendors could o ffer consumers the promise of secure credit card transactions over the Internet. Other factors contributing to the rapid growth of consumer e-commerce at the end of 1998 included improved web site design. Newly designed web sites were more c olorful and contained more pictures. Improved designs allowed consumers to get w here they wanted with fewer clicks. In addition, new features were being added c ontinuously to existing web sites. Altogether, these factors dramatically improv ed the quality of online shopping during 1998. Developments in the area of computer hardware also contributed to the growth of consumer e-commerce. Cheaper PCs, handheld devices, and WebTV all served to brin g more users online. Internet connections were getting faster, due to the availa bility of cable and other broadband services as well as speedier modems. One of the newest developments that empowered online consumers was bot technolog y ("bot" is short for "robot"). This new technology enabled personal search agen ts to scout numerous web sites to find a particular product at the lowest price. Yahoo and Excite both rolled out their versions of bot technology toward the en d of 1998. Consumers could also visit sites that specialized in comparative shop ping. Some individual vendors, however, chose to restrict bot access to their we b sites, preferring not to be part of comparative shopping online. The effects of e-commerce on consumer behavior are many. First, consumers have a ccess to more information about specific products and prices. Such information e mpowers consumers in their dealings with retailers and manufacturers. Secondly, manufacturers began to offer their products directly to consumers, bypassing tra ditional retail outlets. Sooner or later most manufacturers will have to decide how they are going to balance their commitment to their established retail and d ealer networks with their ability to sell directly to consumers over the Interne t. E-commerce also enables consumers to order customized products online. Computer manufacturers such as Dell and Gateway allow customers to write their own specif ications for computers they order online. Toy manufacturer Mattel allows custome rs to customize dolls they order by specifying skin and hair color and other fea tures. Musicmaker.com and other sites let customers create their own customized music CD. E-commerce can be expected to change consumer expectations with regard to conven ience, speed, comparability, price, and service. Shopping on the Internet offers consumers choice, freedom, and control. There are no interruptions from vendors . As a result companies are developing new online advertising strategies. They r ecognized that a growing number of consumers would rather spend an hour online t han in front of a television set. In just a few years online advertising has evo

lved from a push strategy that placed product announcements in front of as many eyeballs as possible, to one that involves educating, entertaining, and enticing the online consumer. Unlike television viewers, who are for the most part passi ve, online consumers are interactively involved with their online activity. Some innovations in online marketing have included the airlines e-mailing bargain fa re information to a list of subscribers. Other companies, such as Yoyodyne (a su bsidiary of Yahoo), design games and contests that drive traffic to client web s ites. Estimates of the amount of money spent on online advertising vary widely. Comput erworld reported that approximately $1 billion was spent on online advertising i n 1997. estimated actual spending at much lower levels: $175 million for 1996 an d $650 million for 1997. qualified those figures as being low compared to other research firms. They represented actual spending rather than the value of advert ising, some of which can be accounted for by bartering and discounts, which coul d account for at least 25 percent of reported Internet advertising dollars According to an InterWatch survey conducted by InterMedia Advertising Solutions, the top 25 industries spent 86.7 percent more on Internet advertising during th e first three quarters of 1998 compared to 1997. Computers and software accounte d for nearly half of all Internet advertising (47.3 percent at $321 million). Me dicine (up 403 percent), government and organizations (up 351 percent), direct r esponse companies (up 273 percent), and retail (up 163 percent) were the leading industries in terms of spending growth in Internet advertising. Major players in online shopping enjoyed tremendous growth in 1998. Dell Compute r debuted its web site in March 1997 with sales of $1 million a day. During 1998 its online sales tripled to $10 million a day, and by the end of the first quar ter of 1999 Dell's online sales were reported to be $14 million a day, including telephone sales generated by its web site. Of those sales an estimated 40 perce nt were to consumers and 60 percent to other businesses. Clothing retailer The G ap enjoyed similar success in 1998, with its web site generating more sales than any of its stores except one. According to the National Retail Federation, 26 percent of all retailers had an Internet site in 1998, compared to 8 percent in 1996. Computer hardware and trav el services each accounted for about 30 percent of online retail sales in 1998, books another 9.2 percent, and other goods and services took up the remaining 30 percent. During 1998 America Online (AOL) had the most e-shoppers of any other site. Some 42 percent of its 10.5 million subscribers purchased goods online as of January 1998. By year-end (before it acquired Netscape), AOL had 14 million subscribers , and 48 percent of those subscribers shopped online. With the acquisition of Ne tscape, even more consumers would be converted to shopping online. According to some predictions, online shopping could overtake catalog shopping i n 1999. Seeing the trend, many mail-order businesses added a web site to their m arketing mix in 1998. Even home-shopping cable channel QVC launched a web site t o complement its TV sales. Forecasts of the growth of online shopping vary. The two main research firms tha t track online spending, Jupiter Communications and Forrester Research, project different volume levels in the future. As of 1998, Jupiter was projecting that o nline shopping would grow to $41 billion by 2002. Forrester Research, on the oth er hand, was projecting a volume of $108 billion by 2003, or 6 percent of all U. S. retail sales. Estimates of online shopping for 1998 ranged from $7 billion to $13 billion. That was still less than I percent of the $2.4 trillion Americans were expected to spend on retail goods in 1998. By 2003 it seemed likely that co nsumer e-commerce could account for as much as 3 or 4 percent of retail sales.

BUSINESS E-COMMERCE Electronic commerce over the Internet has been beneficial to large and small com panies. For 1997-98 business-to-business e-commerce made up the largest portion of Internet commerce, but online wholesale and retail sales were projected to su rpass business-to-business e-commerce in 1999. Forrester Research estimated that 1998 business-to-business Internet trade reached $43 billion and that it would grow to $1.3 trillion by 2003, an annual growth rate of nearly 100 percent. An e stimated 75 percent of Internet sales were business-to-business in nature in 199 8. Before widespread use of the Internet, large corporations set up private network s called VANs (virtual area networks) to link electronically with their supplier s and contractors. Using EDI they made financial transactions and exchanged docu ments electronically. Since 1996 large corporations began moving some of their e lectronic business to the Internet, allowing more small businesses to link to th em electronically. For most small businesses, VANs were prohibitively expensive, while linking via the Internet hardly represented any additional cost. Among th e benefits to small suppliers were speedier payments for electronically submitte d invoices. Small businesses found they could improve their competitive position by delivering information quickly over the Internet. With the Internet replacing or complementing VANs, many suppliers were required to trade online with bigger corporations. Chrysler Corporation's Internet progra m began with 16 contractors and grew to more than 1,000 companies. Rather than e liminating the middleman, the Internet has enabled companies to link their suppl y and distribution channels into a unified electronic network. As a result large corporations can outsource and still maintain control over the process. They ca n also open up their contracts to a wider range of small firms. An estimated 2.5 million U.S. small businesses had Internet access in 1997-98, a nd 900,000 had their own web sites. Of those, some 450,000 conducted online sale s with consumers or other businesses. SOME E-COMMERCE VENTURES Amazon.com opened for business in July 1995, offering books over the Internet. B y September it was selling $20,000 worth of books a week, and a trend was clearl y developing. The company went public on May 11, 1997, with a market capitalizat ion of $503 million. By January 1999 the company's market value was $22.1 billio n. In the fourth quarter of 1998 the company registered approximately $250 milli on in sales, well ahead of analysts' projections of $190 million. Yet the compan y was not making money. Through the third quarter of 1998 it reported net losses of $85 million on sales of $360 million. Amazon.com had 8 million customers in 1998 and sales of $610 million. In 1998 amazon.com became the Internet's leading music retailer, and in March 1999 it became the Internet's top video seller, pa ssing Reel.com . In March 1999 amazon.com announced it would add an auction serv ice to its web site. The Internet's most popular auction site at the time was eB ay, which generated $47 million in sales during 1998. Unlike eBay, amazon.com pr omised to offer its customers a guarantee against fraud. Nike opened its web site in February 1999. Initially it offered a new high-end l ine of shoes, apparel, and equipment, with plans to broaden its online product s election. Nike was not sure how offering products online would affect in-store t raffic, but expected the site to boost rather than deplete the ranks of offline shoppers. Other features of the web site included a store locator, where shopper s could find retail locations in their area based on their address and zip code. Nike felt that shoppers would use the site to obtain specific information about available Nike products, then go to the nearest store to purchase them. Serious runners were considered the consumer group most likely to buy through Nike's on line store. The site was receiving about I million hits per month, even before i

t was capable of processing any transactions. Nike also noted that its products were available online through the virtual stores opened by large retailers such as Just for Feet Inc. and the Venator Group (formerly Woolworth Corporation), wh ich owned Foot Locker and Champs Sports. E * Trade was the second-largest online securities firm in the world with more t han 544,000 online accounts at the start of 1999. It was founded in 1992, went p ublic in 1996, and for fiscal 1998 had revenues of $245.3 million. Its market ca pitalization was more than $1 billion. The company operated in the fast-growing industry of online trading. At the beginning of 1999 more than 5 million individ ual investors were estimated to have online trading accounts, giving them the ab ility to buy and sell securities online 24 hours a day, seven days a week. Onlin e access gave them the ability to access their accounts instantly, have the late st financial information and research at their fingertips, share information wit h other investors, and execute their trades instantaneously and without error. ISSUES AFFECTING E-COMMERCE Taxation and the ability to make secure financial transactions over the Internet are two key issues affecting the development of e-commerce. While state governm ents perceive taxes on Internet transactions as a potential source of revenue, t he Internet Tax Freedom Act established a national policy preventing state and l ocal government interference with interstate commerce on the Internet or interac tive computer services. The 1998 bill established a three-year moratorium on the imposition of Internet taxes, including federal taxes as well as state and loca l taxes. But existing federal taxes that applied to Internet transactions, such as the purchase of airline tickets, were left in place. Now that secure credit card transactions are possible over the Internet, new met hods of making and processing online payments are likely to be introduced. Smart cards, which employ either a personal identification number or biometric identi fier to control access and prevent fraud, are now widely accepted by retailers a t point-of-sale locations. Some 3.5 billion cards are expected to be on the worl dwide market by the year 2000. In terms of Internet commerce, electronic purse c ards, a type of smart card, could be used to make small value or anonymous payme nts over the Internet. Value can be added to the cards from a home banking appli cation over the Internet. It was expected that consumers would appreciate the co nvenience and safety of loading electronic cash onto a card in their own home fo r use in making purchases over the Internet. Online payment processing services are becoming more widely available to Interne t retailers. Companies such as CyberSource Corporation provide Internet retailer s with the benefits of outsourcing complex Internet transactions worldwide. Busi nesses can remotely access a variety of on-demand applications, either through s oftware installed on their commercial server or through a URL link from a web pa ge. These services include multicurrency payment processing, credit card fraud p rotection, automatic sales and value-added tax calculations, distribution and ex port control, and fulfillment messaging, among others.

Rea