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OUM Business School

BBED4103
E-Commerce

Copyright © Open University Malaysia (OUM)


BBED4103
E-COMMERCE
Siti Hadijah Bachok
Yap Ching Seng

Copyright © Open University Malaysia (OUM)


Project Directors: Prof Dato’ Dr Mansor Fadzil
Prof Dr Wardah Mohamad
Open University Malaysia

Module Writers: Siti Hadijah Bachok


Yap Ching Seng
Universiti Putra Malaysia

Moderators: Akhbar Ali Mohamed Noordin


Universiti Teknologi MARA

Dr Abdul Rahman S Senathirajah


Open University Malaysia

Developed by: Centre for Instructional Design and Technology


Open University Malaysia

First Edition, December 2007


Second Edition, December 2013 (rs)
Copyright © Open University Malaysia (OUM), December 2013, BBED4103
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).

Copyright © Open University Malaysia (OUM)


Table of Contents
Course Guide xi-xv

Topic 1: Introduction to E-commerce 1


1.1 Traditional Commerce and E-commerce 2
1.1.1 Traditional Commerce 2
1.1.2 E-commerce 4
1.1.3 Differences between E-commerce and Traditional 6
Commerce
1.1.4 Business Processes in commerce 10
1.1.5 Advantages of E-commerce 13
1.1.6 Disadvantages of E-commerce 15
1.1.7 Differences between E-commerce and E-business 16
1.2 Categories of E-commerce 18
1.2.1 Business-to-Consumer E-commerce 18
1.2.2 Business-to-Business E-commerce 19
1.2.3 Consumer-to-Consumer E-commerce 20
1.2.4 Consumer-to-Business E-commerce 21
1.2.5 Mobile Commerce (M-commerce) 22
1.3 Origin and Growth of E-commerce 23
1.3.1 Innovation (1995-2000) 24
1.3.2 Consolidation (2001-2006) 27
1.3.3 Reinvention (2007-Future) 29
1.3.4 Predictions for the Future 31
1.4 Understanding E-commerce: Organising Themes 33
1.4.1 Technology 33
1.4.2 Business 34
1.4.3 Society 34
Summary 36
Key Terms 37

Topic 2: E-commerce Business Models 38


2.1 Eight Key Elements of a Business Model 39
2.1.1 Value Proposition 40
2.1.2 Revenue Model 42
2.1.3 Market Opportunity 46
2.1.4 Competitive Environment 47
2.1.5 Competitive Advantage 49
2.1.6 Market Strategy 51

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2.1.7 Organisational Development 51


2.1.8 Management Team 52
2.2 Major B2C Business Models 54
2.2.1 Portal 54
2.2.2 E-tailer 57
2.2.3 Content Provider 58
2.2.4 Transaction Broker 59
2.2.5 Market Creator 61
2.2.6 Service Provider 62
2.2.7 Community Provider 63
2.3 Major B2B Business Models 65
2.3.1 Exchange (B2B Hub) 66
2.3.2 E-distributor 68
2.3.3 E-procurement 69
2.3.4 B2B Service Provider 69
2.3.5 Matchmaker 70
2.3.6 Infomediary 71
2.4 C2C Business Models 72
2.4.1 Peer-to-Peer (P2P) Business Models 74
Summary 75
Key Terms 76

Topic 3: Internet and World Wide Web 77


3.1 The Internet 78
3.1.1 Origins and Growth of the Internet 78
3.1.2 The Internet Backbone 80
3.2 Key Technology Concepts of Internet 83
3.2.1 Packet Switching 83
3.2.2 TCP/IP 85
3.2.3 Client/Server Computing 89
3.2.4 Intranets 90
3.2.5 Extranets 91
3.2.6 Internet II 92
3.3 The World Wide Web 93
3.3.1 Hypertext, HTML and Web Browsers 94
3.3.2 Applications of Internet and WWW 96
3.3.3 Web 2.0 Features and Services 103
Summary 107
Key Terms 108

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TABLE OF CONTENTS v

Topic 4: Wireless Technology and Mobile Commerce 109


4.1 Wireless Technology 110
4.1.1 Hardware 111
4.1.2 Software 113
4.1.3 Wireless Telecommunications Networks 113
4.2 M-commerce Applications 118
4.2.1 Mobile Financial Applications 118
4.2.2 Mobile Shopping, Advertising and Content
Provision 119
4.2.3 Mobile Entertainment 121
4.2.4 Location-based M-commerce 122
4.3 Mobile Enterprises 123
4.4 Security and Ethical Issues in M-commerce 124
Summary 126
Key Terms 127

Topic 5: Wireless E-commerce Website Development 128


5.1 Building a Successful E-commerce Website 129
5.1.1 Developing an E-commerce Website 129
5.1.2 System Development Life Cycle 130
5.2 Choosing Server Software 139
5.2.1 Simple versus Multi-tiered Website Architecture 139
5.2.2 Web Server Software 140
5.2.3 Application Servers 144
5.2.4 E-commerce Merchant Server Software
Functionality 146
5.3 Choosing the Hardware for an E-commerce Website 149
5.3.1 Right-sizing the Hardware Platform: The
Demand Side 150
5.3.2 Right-sizing the Hardware Platform:
The Supply Side 152
5.4 Other E-commerce Site Tools 154
Summary 160
Key Terms 161

Topic 6: E-commerce Security 162


6.1 Security for E-commerce 163
6.1.1 The Scope of E-commerce Crime 163
6.1.2 What is Good E-commerce Security? 164
6.1.3 Dimensions of E-commerce Security 165
6.1.4 Security Threats in the E-commerce Environment 168

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6.2 Technology Solutions 181


6.2.1 Encryption 181
6.2.2 Limitations to Encryption Solutions 192
6.2.3 Securing Channels of Communication 192
6.2.4 Protecting Network 195
6.2.5 Protecting Servers and Clients 198
6.3 Policies and Procedures 200
6.3.1 A Security Plan: Management Policies 200
6.3.2 CyberSecurity Malaysia 204
Summary 205
Key Terms 206

Topic 7: E-commerce Payment Systems 207


7.1 Payment Cards 208
7.1.1 Advantages and Disadvantages of Payment Cards 210
7.1.2 Payment Acceptance and Processing 211
7.2 Digital Cash 216
7.2.1 Advantages and Disadvantages of Digital Cash 218
7.2.2 Digital Cash Systems 220
7.3 Digital Wallets 221
7.3.1 Survivor in the Digital Wallet Arena 224
7.4 Stored Valued Payment Systems 226
7.4.1 PayPal 226
7.4.2 Magnetic Strip Cards 227
7.4.3 Smart Cards 227
7.5 Other E-commerce Payment Systems 231
7.5.1 Digital Accumulating Balance Payment Systems 232
7.5.2 Digital Checking Payment Systems 232
7.5.3 Electronic Billing Presentment and Payment 234
7.5.4 Types of EBPP Systems 235
Summary 237
Key Terms 238

Topic 8: E-commerce Marketing Concepts 239


8.1 Basic Marketing Concepts 240
8.1.1 Feature Sets 241
8.1.2 Products, Brands and the Branding Process 242
8.1.3 Segmenting and Positioning 245
8.1.4 Are Brands Rational? 246
8.2 Internet Marketing Technologies 248
8.2.1 The Revolution in Internet Marketing
Technologies 249
8.2.2 Web Transaction Logs 250

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TABLE OF CONTENTS vii

8.2.3 Supplementing the Logs: Cookies and Web Bugs 254


8.2.4 Databases, Data Warehouses and Data Mining:
Developing Profiles 256
8.2.5 Advertising Networks 261
8.2.6 Customer Relationship Management (CRM)
Systems 263
8.3 E-commerce Marketing and Branding Strategies 265
8.3.1 Market Entry Strategies 266
8.3.2 Establishing Customer Relationship 268
8.4 Online Market Research 275
8.4.1 Primary Research 276
8.4.2 Secondary Research 279
Summary 280
Key Terms 282

Topic 9: E-commerce Marketing Communications 283


9.1 Online Marketing Communications 284
9.1.1 Online Advertising 284
9.1.2 Direct E-mail Marketing 294
9.1.3 Online Catalogues 295
9.1.4 Social Network Marketing 296
9.1.5 Mixing Offline and Online Marketing
Communications 298
9.2 The Website as Marketing Communications Tool 300
9.2.1 Appropriate Domain Names 301
9.2.2 Search Engine Optimisation 301
9.2.3 Website Functionality 303
Summary 305
Key Terms 306

Topic 10: Legal, Ethical and Societal Impact of E-commerce 307


10.1 Legal Issues versus Ethical Concept 308
10.2 Legal Issues versus Ethical Issues 309
10.3 Privacy 310
10.3.1 Information Collection 311
10.3.2 Privacy Protection 313
10.3.3 Technological Solutions to Privacy Invasion 315
10.4 Intellectual Property Rights 317
10.4.1 Copyrights 318
10.4.2 Trademarks 320
10.4.3 Patents 324
10.4.4 Fan and Hate Websites 325
10.5 Free Speech versus Censorship and other Legal Issues 326

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viii TABLE OF CONTENTS

10.6 Other Legal Issues 328


10.6.1 Electronic Contracts 328
10.6.2 Electronic Agents 329
10.6.3 Electronic Gambling 330
10.7 E-commerce Fraud and Societal Issues 331
10.7.1 Internet Fraud 332
10.7.2 Consumer Protection 333
10.7.3 Societal Issues 333
Summary 336
Key Terms 337

Answers 338

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COURSE GUIDE

Copyright © Open University Malaysia (OUM)


Copyright © Open University Malaysia (OUM)
COURSE GUIDE xi

COURSE GUIDE DESCRIPTION


You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course material. It also suggests the amount of time you are likely to spend in
order to complete the course successfully. Please keep on referring to the Course
Guide as you go through the course material as it will help you to clarify
important study components or points that you might miss or overlook.

INTRODUCTION
BBED4103 E-commerce is one of the courses offered by the Faculty of Business
and Management at Open University Malaysia (OUM). This course is worth 3
credit hours and should be covered over 15 weeks.

COURSE AUDIENCE
This is a core course for students pursuing the degree in Bachelor of Business
Administration programme.

As an open and distance learner, you should be able to learn independently and
optimise the learning modes and environment available to you. Before you begin
this course, please confirm the course material, the course requirements and how
the course is conducted.

STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.

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xii COURSE GUIDE

Table 1: Estimation of Time Accumulation of Study Hours

STUDY
STUDY ACTIVITIES
HOURS
Briefly go through the course content and participate in initial discussion 3
Study the module 60
Attend 3 to 5 tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS 120

COURSE OUTCOMES
By the end of this course, you should be able to:
1. Explain e-commerce business models;
2. Discuss the history and development of global e-commerce;
3. Apply skills to provide information via the Internet;
4. Consolidate basic knowledge of network security risk and solutions,
encryption and payment systems;
5. Organise skills to market people and organisations on the Internet; and
6. Explore the issues and problems surrounding e-commerce such as privacy,
intellectual property rights and e-commerce fraud.

COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic is presented
below:

Topic 1 introduces e-commerce. It touches on traditional commerce, different


types of e-commerce business models, and e-commerce eras. It also describes the
three interrelated themes of e-commerce: technology, business and society.

Topic 2 describes the e-commerce business models. It also touches on the


concepts involved in both B2C and B2B firms.

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COURSE GUIDE xiii

Topic 3 focuses on the Internet and the World Wide Web. You will learn on the
origin, concepts and roles of Internet in e-commerce. This topic also touches on
World Wide Web, intranet and extranet.

Topic 4 introduces wireless technologies underlying the development of m-


commerce. It discusses on major type of wireless telecommunications networks
and the applications of m-commerce in various areas. It also touches on security
and ethical issues in m-commerce.

Topic 5 focuses on the development of e-commerce website. It discusses on how


to choose software, hardware and other tools that can improve website
performance.

Topic 6 explores on online security. It defines on key dimensions, key security


threats and encryption technology of e-commerce. It also touches on the tools
used to establish secure Internet communications channels and to protect
networks, servers and clients.

Topic 7 identifies the various types of e-commerce payment systems. It describes


digital cash, digital wallets, stored-value cards, digital accumulating balance,
digital checking and electronic billing presentment and payment systems.

Topic 8 concentrates on marketing concepts in e-commerce. It touches on online


marketing, online market research and e-commerce marketing and branding
strategies.

Topic 9 focuses on e-commerce marketing communication. It explains on the


forms and advertising methods used in marketing communication.

Topic 10 explains the legal, ethical and social issues in e-commerce. It also
touches on privacy protection, intellectual property and e-commerce fraud.

TEXT ARRANGEMENT GUIDE


Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:

Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.
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xiv COURSE GUIDE

Self-Check: This component of the module is inserted at strategic locations


throughout the module. It may be inserted after one sub-section or a few sub-
sections. It usually comes in the form of a question. When you come across this
component, try to reflect on what you have already learnt thus far. By attempting
to answer the question, you should be able to gauge how well you have
understood the sub-section(s). Most of the time, the answers to the questions can
be found directly from the module itself.

Activity: Like Self-Check, activities are also placed at various locations or junctures
throughout the module. Compared to Self-Check, Activity can appear in various
forms such as questions, short case studies or it may even ask you to conduct an
observation or research. Activity may also ask your opinion and evaluation on a
given scenario. When you come across an Activity, you should try to widen what
you have gathered from the module and introduce it to real situations. You should
engage yourself in higher order thinking where you might be required to analyse,
synthesise and evaluate instead of just having to recall and define.

Summary: You can find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge and retention level. Should you find points
inside the summary that you do not fully understand, it would be a good idea for
you to revisit the details from the module.

Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargons used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms from the module.

References: References is where a list of relevant and useful textbooks, journals,


articles, electronic contents or sources can be found. This list can appear in a few
locations such as in the Course Guide (at References section), at the end of every
topic or at the back of the module. You are encouraged to read and refer to the
suggested sources to elicit the additional information needed as well as to
enhance your overall understanding of the course.

PRIOR KNOWLEDGE
Learners of this course are required to pass BBPP1103 Principles of Management
course.

There is no prerequisite requirement for learners prior taking this subject.

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COURSE GUIDE xv

ASSESSMENT METHOD
Please refer to myINSPIRE.

REFERENCES
Schneider, G. P. (2009). Electronic commerce (8th ed.). Boston: Cengage Learning.

Laudon, K. C., & Traver, C. G. (2010). E-commerce: Business, technology, society


(6th ed.). Upper Saddle River, New Jersey: Pearson Education.
Turban, E., King, D., Lee, J., Liang, T. P., & Turban, D. (2010). Electronic
commerce: A managerial perspective (6th ed.). Upper Saddle River, New
Jersey: Pearson Education.

TAN SRI DR ABDULLAH SANUSI (TSDAS)


DIGITAL LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for the
use of its learners. This comprehensive digital library, which is accessible
through the OUM portal, provides access to more than 30 online databases
comprising e-journals, e-theses, e-books and more. Examples of databases
available are EBSCOhost, ProQuest, SpringerLink, Books24x7, InfoSci Books,
Emerald Management Plus and Ebrary Electronic Books. As an OUM learner,
you are encouraged to make full use of the resources available through this
library.

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xvi COURSE GUIDE

Copyright © Open University Malaysia (OUM)


T op i c Introduction
1 to E-commerce

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Differentiate the activities between e-commerce and traditional
commerce;
2. Explain the attributes of e-commerce;
3. Explain the elements of e-commerce;
4. Discuss the advantages and disadvantages of e-commerce;
5. Identify categories of e-commerce business models;
6. Describe the success and failure of e-commerce in different eras; and
7. Identify major themes underlying the study of e-commerce.

INTRODUCTION
What is meant by electronic commerce or more commonly known as e-commerce?
Have you ever heard of this term?

Figure 1.1: Online shopping


Source: http://www.cartoonstock.com
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2 TOPIC 1 INTRODUCTION TO E-COMMERCE

To many people, e-commerce means shopping on the Internet or online as


illustrated in Figure 1.1. However, e-commerce is much broader and
encompasses many business activities than just online shopping. This topic will
provide a comprehensive description and definition of e-commerce. We will see
the unique features of e-commerce and its differences from traditional
commerce as well as describe the categories of e-commerce business models.
Then, the origin and growth of e-commerce will be explained and followed by
the discussion of the three broad interrelated themes in e-commerce.

1.1 TRADITIONAL COMMERCE AND


E-COMMERCE
Before we venture into e-commerce, it is good to learn about the activities that
companies undertake manually when they do any kind of business, and then
learn how these firms might undertake these activities electronically. Therefore,
in the following sections, we will look into two types of commerce: traditional
and electronic.

1.1.1 Traditional Commerce


Commerce or doing business is a negotiated exchange of valuable objects or
services between two or more parties and includes all activities that each party
undertakes to complete the transaction.

We can examine any commerce transaction from either the buyer or the sellerÊs
viewpoint. Let us look at the activities involved in traditional commerce for
buyers as shown in Table 1.1.

Table 1.1: Activities of Traditional Commerce for Buyers

Activities Description

Identify specific need A buyer begins by identifying a need. This may be a


simple need, such as when an individual decides to buy a
sandwich as he feels hungry, or it could be a very complex
need such as looking for the most suitable school.
Search for products or Once the buyers h a v e identified their specific needs, they
services that will must find the products or services that will satisfy those
satisfy the specific needs. In traditional commerce, buyers use a variety of search
need techniques. They may refer to catalogues, ask friends, read
advertisements, or examine directories. Buyers may consult
salespersons to gather information about specific features and
capabilities of the products they are considering.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 3

Select a vendor After t h e buyers h a v e selected a product or service that


will meet their identified need, they must select a vendor that
can supply that product or service. Buyers in traditional
commerce contact vendors in a variety of ways, for instance,
by telephone, by mail and by meeting face-to-face at trade
shows.
Negotiate a purchase After choosing a vendor, the buyer negotiates a purchase
transaction transaction. This transaction might have many elements,
including delivery date, logistic information, method of
shipment, price, warranty, payment terms and will often
include detailed specification to be confirmed by inspection
when the product is delivered or the service is performed.
Make payment When the buyer is satisfied that the purchased product or
service meets the terms and conditions agreed by the buyer
and seller, the buyer pays for the purchase.
Perform regular After the sale is completed, the buyer may have further
maintenance and contact with the seller regarding warranty claims, upgrades
make warranty claims and regular maintenance.

Do you know that each action taken by a buyer engaging in commerce will
trigger a corresponding action by the seller? The activities involved in traditional
commerce from a sellerÊs viewpoint are as shown in Table 1.2.

Table 1.2: Activities of Traditional Commerce for Sellers

Activities Description

Conduct market Sellers often undertake market research to identify potential


research to identify customersÊ needs. Even businesses that have been selling the
customer needs same product or service for many years look for ways to
improve and expand their offerings. Firms conduct surveys,
have salespeople talk with the customers, run focus groups and
hire outside consultants to help them in this identification
process.
Create product or Once customer needs are identified, sellers create the products
service that will meet and services that they believe will meet those needs. This
customersÊ needs includes design, testing and production activities.
Advertise and The next step for the sellers, is to make potential customers
promote product or aware of the new products or services. T o communicate
service information about their products and services, sellers engage in
many different kinds of advertising and promotional activities
to the existing and potential customers.

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4 TOPIC 1 INTRODUCTION TO E-COMMERCE

Negotiate a sale Once a customer responds to the sellerÊs promotional


transactions, activities, the two parties must negotiate the details of the
including delivery purchase transaction. In some cases, this is simple; for example,
logistic, inspection, many retail transactions involve nothing more than a buyer
testing and entering a sellerÊs store, selecting and inspecting items to
acceptance purchase and paying for them. In other cases, purchase
transactions require prolonged negotiations to settle the
terms of delivery, inspection, testing and acceptance.
Ship goods and After the seller and buyer resolve the delivery logistics, the seller
invoice customer ships the goods or provides the service and sends an invoice to the
buyer.
Receive and process In some cases, the seller requires payment before or at the time of
customer payments shipment. However, most businesses sell to each other on credit, so
the seller must keep a record of the sale and wait for the customer to
pay. Most businesses maintain sophisticated systems for receiving
and processing customer payments. They need to track the
outstanding amounts and ensure that payments they received are
credited to the proper customers accounts and invoiced.

SELF-CHECK 1.1
What are the similarities between the activities of commerce from
the viewpoints of a buyer and a seller ?

1.1.2 E-commerce
For decades, firms have used various electronic communication tools to conduct
different kinds of business transaction. Banks have used Electronic Fund
Transfers (EFT) to move customersÊ money around the world. All kinds of
businesses have used Electronic Data Interchange (EDI) to place orders and send
invoices. Retailers have used television advertising to generate telephone orders
from the general public for various types of merchandise.

Are you aware that some people use the term „e-commerce‰ for activities that
specifically uses the Internet to conduct business? In essence, e-commerce is
characterised by several attributes as shown in Figure 1.2.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 5

Figure 1.2: E-commerce attributes

ACTIVITY 1.1

1. In your own words, describe what you understand of


e-commerce.
2. Give some examples of e-commerce activities. You can search the
Internet or any related books to find out.

Let us look at the detailed explanation for each attribute as depicted in Table 1.3.

Table 1.3: E-commerce Attributes

E-commerce Attribute Description

Exchange of digitised This information exchange can represent communication


information between between two parties, coordination of the flow of goods and
parties services, or transmission of electronic orders. These
exchanges can be between organisations, individuals or both.
Technology-enabled E-commerce uses technology-enabled transactions such as
Internet browsers in the World Wide Web (WWW),
Automated Teller Machine (ATM), and Electronic Data
Interchange (EDI) between business-to-business partners,
and electronic banking. Businesses used to manage such
transactions with customers and markets strictly through
face-to-face interaction; in e-commerce, such transactions can
be managed by using technology.

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6 TOPIC 1 INTRODUCTION TO E-COMMERCE

Technology-mediated Gradually, from technology-enabled transactions, e-commerce


is moving into technology-mediated relationship. Buyers and
sellers no longer meet to transact in the physical worldÊs
„marketplace‰ but meet in the virtual worldÊs „market-space‰.
Business transactions and relationship with the customers in
the market-space are largely managed by technology. Hence,
the success of a business rests on how well the screens and
machines manage customers and their expectations.

Based on Table 1.3, e-commerce can be summarised as follows:

E-commerce involves digitally enabled commercial transactions between


and among organisations and individuals.

1.1.3 Differences between E-commerce and Traditional


Commerce
How to distinguish e-commerce from traditional commerce? The following are
the elements that make e-commerce unique or different from traditional
commerce as shown in Figure 1.3:

Figure 1.3: Elements of e-commerce

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TOPIC 1 INTRODUCTION TO E-COMMERCE 7

There are eight elements of e-commerce. Each will be elaborated in Table 1.4.

Table 1.4: Elements of E-commerce

Elements Description

Core Strategic The strategic decisions about the virtual storefront, customer service,
Decisions are and customer experience, the content of site are co-mingled with the
Technology-Based technological decisions. These decisions are related to the following:
(i) Selection of service providers;
(ii) Common business systems; and
(iii) Approaches to web design.

In contrast to the traditional commerce, digital business cannot


extract technological choices from the strategic decision-making
process. This does not mean that technology is unimportant to
traditional commerce; but rather their technological decisions are
not as tightly linked to strategy.
Ubiquitousness E-commerce is ubiquitous, meaning that it is available just about
everywhere and at all times. The Web storefront is expected to be
open seven days a week, 24 hours a day, and 365 days a year. This
level of access has significant implications for the following parties:

(a) Customers
The customers are always able to do the following:
(i) Gather information;
(ii) Conduct product searches;
(iii) Compare prices across multiple websites;
(iv) Order products; and

Customers are also able to shop at home, at work, or even


from the car by using mobile commerce or wireless digital
devices such as hand phones, laptops and Personal Digital
Assistants (PDA) to enable transactions on the Web (refer to
Figure 1.4).

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8 TOPIC 1 INTRODUCTION TO E-COMMERCE

Figure 1.4: Wireless digital devices


Source: http://www.topnews.in

(b) Firms
For the firm, the level of access has forced businesses to
adjust both tactical responsiveness to competitive moves
and strategic responsiveness. It also reduces transaction
costs and the cost of participating in a market. To transact,
it is no longer necessary to spend time and money travelling
to the market.
Real-Time E-commerce storefronts are frequently engaged in dynamic
Competitive dialogues on the public platform on the Web. Hence, it is easier for
Responsiveness companies to duplicate their competitorsÊ success. In e-commerce
markets, prices and costs become more transparent. Price
transparency refers to the ease with which consumers can find out
the variety of prices in the market.

This does not mean that the e-commerce marketplace will


eventually evolve to commodity-like status, with price being the
only consideration. Quite the contrary, speed of innovation,
branding, ease of use, operational effectiveness, product assortment
and affiliate agreements can be used by companies to maintain or
increase differentiation.
Technology-Based In traditional commerce, customers conduct transactions either
Customer b y face-to-face or over the phone with store clerks, account
Interface managers, or other individuals. In contrast, the e-commerce
customers interface is in a „screen-to-face‰ interaction. This
includes computer-based monitors, ATM machines, PDAs, or other
electronics devices.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 9

These types of interfaces place enormous responsibility on the


organisation to capture and represent the customer experience
because there are often no opportunity for direct human
intervention during the encounter. If the interface is designed
correctly, the customer will have no need for simultaneous or
follow-up phone conversation.
Customer In most websites, the customer is in control during screen-to-
Controlled face interactions. The customer controls the following elements:
Interaction
(a) Search process;
(b) Time spent on various sites;
(c) Degree of price or product comparison;
(d) People with whom the customers comes into contact; and
(e) Decision to buy.

In a face-to-face interchange, the control can rest with the buyer,


seller or community member. The virtual store can attempt to
shape the customer experience with uniquely-targeted promotions,
reconfiguration of storefronts to reflect past search behaviour,
recommendations based on previous behaviour of other similar
users, and access to proprietary information. However, the seller
has much less power in the online environment due to the control
and information flow that the online world puts into customersÊ
hands.
Knowledge of While the customer controls the interaction, the firm has
Customer unprecedented access to observe and track individual consumer
Behaviour behaviour. Companies, through third-party measurement firms,
can track a host of behaviours such as:
(a) Websites visited;
(b) Length of stay on a site;
(c) Content of wish lists and shopping carts;
(d) Amount purchased;
(e) Repeat purchase behaviour; and
(f) Other metrics.

This level of customer behaviour tracking as compared with


tracking consumerÊs attitude, knowledge, or behavioural intentions
is not possible in traditional commerce.

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10 TOPIC 1 INTRODUCTION TO E-COMMERCE

Permit E-commerce technologies permit the following:


Personalisation (a) Personalisation
and
Merchants can target their marketing messages to specific
Customisation
individuals by adjusting the message to a personÊs
name, interests and past purchases.
(b) Customisation
Changing the delivered product or service based on a
userÊs preferences or prior behaviour.

In sum, each of these differences from traditional commerce


makes e-commerce business unique. The combination of screen-
to-customer interfaces, real-time competitive responses, and one-
to-one customisation lead to „value increases‰ for both customer
and firm.
Global Reach E-commerce technology permits commercial transactions to cross
cultural and national boundaries far more conveniently and cost-
effectively than traditional commerce. As a result, the potential
market size for e-commerce merchants is roughly equal to the
size of the worldÊs online population. The total number of
customers that can be obtained by an e-commerce business is a
measure of its reach.

In contrast, most traditional commerce is local or regional and it


involves local merchants or national merchants with local outlets.
Television, radio stations and newspapers, for instance, are
primarily local and regional institutions with limited but powerful
national networks that can attract a national audience. In contrast
to e-commerce technology, these older commerce technologies do
not easily cross national boundaries to a global audience.

1.1.4 Business Processes in Commerce


Do you know that since the introduction of e-commerce, many new terms have
evolved to describe the various types of business? For example, look at the
following terms:

(a) Brick and Mortar Business


A business that has a physical location, such as a store, which we can walk
into and purchase merchandise; and

(b) Clicks and Brick Business


A business that has a physical location and an online presence.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 11

However, in this section, we will look into the common business processes
involved in commerce. In many cases, business processes use traditional
commerce activities very effectively, and technology cannot improve upon them.
Products that buyers prefer to touch, smell, or examine closely are difficult to sell
using electronic commerce. For example, customers might be reluctant to buy
high-fashion clothing and perishable food products as shown in Figure 1.5, such
as meat and fruits, if they cannot closely examine the products before agreeing to
purchase them.

Figure 1.5: Perishable food items


Source: http://www.akumal-villas.com

Retail merchants have years of traditional commerce experience in creating store


environments that help convince customers to buy. This combination of store
design, layout and product display knowledge is called merchandising. In
addition, many salespeople have developed skills that allow them to identify
customer needs and find products or services that meet those needs. The art of
merchandising and personal selling can be difficult to practise remotely.

On the other hand, some products are easier to sell on the Internet than others.
As can be seen in Figure 1.6, products such as books or CDs are good candidates
for e-commerce because customers do not need to experience the physical
characteristics of the particular item before they buy it. Since one copy of a new
book is identical to other copies, and since the customer is not concerned about
fit, freshness or other such qualities, customers are usually willing to order a title
without examining the specific copy they will receive.

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12 TOPIC 1 INTRODUCTION TO E-COMMERCE

Figure 1.6: Books are potential e-commerce products


Source: http://earth911.com

Let us look at Table 1.5 which shows examples of business processes. They can be
divided as follows:
(a) Processes well-suited to e-commerce;
(b) Processes better-suited to traditional commerce; and
(c) Processes well-suited to e-commerce and traditional commerce.

Table 1.5: Examples of Business Processes

E-commerce and
E-commerce Traditional Commerce
Traditional Commerce

Sale/purchase of books, Sale/purchase of impulse Sale/purchase of


CDs and travel services items for immediate use automobiles

Online delivery of software Sale/purchase of perishable Online banking


food products

Sale purchase of investment Small-denomination Roommate-matching


and insurance products purchases and sales services

Online shipment tracking Sale/purchase of high value Sale/purchase of residential


jewellery and antiques real estate

Of course, these suitability classifications depend on the current state of


available technologies, and thus, might change as new tools emerge for
implementing e-commerce. One business process that is especially well-suited
to electronic commerce is the selling of commodity items.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 13

A commodity item is a product or service that is hard to distinguish from


the same products or services provided by other sellers. Its features have
become standardised and well- known. Gasoline, books, CDs office
supplies, soap, computers, and furniture are all examples of commodity
products or services.

A product that has a strong brand identity such as a Sony CD player is easier to
sell on the Web than an unbranded item, as the brandÊs reputation reduces or
increases the buyerÊs concerns about the itemÊs quality. Other items that are well-
suited to e-commerce are those that appeal to small, but geographically dispersed
groups of customers. Collectible comic books are an example of this type of
product.

A combination of traditional and e-commerce strategies works best when the


business process includes both commodity and personal inspection elements. For
example, many people are finding information on the Web about new and used
automobiles, but only a few people would be willing to buy a used car without
driving and personally inspecting it.

In the above case, e-commerce provides a good platform for buyers to obtain
information about available models, options, reliability, prices and dealerships.
However, the variability in the condition of used cars makes the traditional
commerce component of personal inspection a key part of the transaction
negotiation. The next two sections summarise some advantages and
disadvantages of e-commerce.

SELF-CHECK 1.2
In which business process does a combination of traditional and e-
commerce strategies work best? Explain.

1.1.5 Advantages of E-commerce


Do you know why firms are interested in e-commerce? Firms are interested in
it because, quite simply, it can help increase the profits. All the advantages of
e-commerce for businesses can be summarised in one statement as shown.

E-commerce can increase sales and decrease costs.

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14 TOPIC 1 INTRODUCTION TO E-COMMERCE

The advantages of e-commerce are as shown in Table 1.6:

Table 1.6: Advantages of E-commerce

Advantages Description

Easily reach the target Well-planned Web advertising can get even a small firmÊs
market promotional message out to potential customers in every
country in the world. A firm can use e-commerce to reach
narrow market segments that are geographically scattered. The
Web is particularly useful in creating virtual communities,
gathering of people who share common interests on the
Internet, that become ideal target markets for specific types of
products or services.
Cost-effective A business can reduce the costs of handling sales inquiries,
providing price quote and determining product availability by
using e-commerce in its sales support and order-taking
processes. Just as e-commerce increases sales opportunities for
the seller, it increases purchasing opportunities for the buyer.
Negotiating price and delivery terms is easier in e-commerce
because the Internet can help companies efficiently obtain
competitive bid information. E-commerce increases the speed
and accuracy with which businesses can exchange information,
which reduces costs on both sides of transactions.
Great variety E-commerce provides buyers with a wider range of choices
than traditional commerce because buyers can consider many
different products and services from a wider variety of sellers.
Some buyers prefer a great deal of information in deciding on a
purchase; others prefer less. E-commerce provides buyers with
an easy way to customise the level of detail in the information
they obtain about a prospective purchase.
Fast access Instead of waiting for days for the mail to bring a catalogue or
product specification sheet, or even minutes for a fax
transmission, buyers can have instant access to detailed
information on the Web. Some products such as software, audio
clips or images can even be delivered through the Internet,
which reduces the time buyers must wait to begin enjoying
their purchases.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 15

Safe Electronic payment can be easier to audit and monitor than


payment made by cheque, providing protection against fraud
and theft losses.
Availability E-commerce enables people to work from home and this brings
the benefit of avoiding commuter-caused traffic and pollution.
E-commerce can also make products and services available in
remote areas. For example, distance education is making it
possible for people to learn skills and earn degrees no matter
where they live.

1.1.6 Disadvantages of E-commerce


We have looked at the advantages of e-commerce. Now, let us move on to the
disadvantages of e-commerce. Most of the disadvantages stem from the newness
and rapidly developing pace of underlying technologies. These disadvantages
will disappear as e-commerce matures and becomes more available and
acceptable by the general population.

The disadvantages of e-commerce are as shown in Table 1.7.

Table 1.7: Disadvantages of E-commerce

Disadvantages Description

Difficulty in Some business processes may never adopt e-commerce. For


examining and example, perishable foods, unique high-cost items and antiques
selecting as it might be impossible to inspect adequately from a remote
location, regardless of any technologies that may be devised in
the future.

Many products and services require that a significant mass of


potential buyers to be equipped and willing to buy through the
Internet. Most online grocers focus their sales efforts on
packaged goods and branded items. Perishable grocery products,
such as fruit and vegetables, are much harder to sell online
because customers want to examine and select specific items that
are still fresh and appealing.
Difficulty in Businesses often calculate return-on-investment numbers before
calculating the committing to any new technology. In e-commerce, investments
cost are difficult to calculate, because the costs and benefits are
unquantifiable. Costs, which are a function of technology, can
change dramatically even during a short-lived e-commerce
implementation projects, as the underlying technologies are
changing too fast.

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16 TOPIC 1 INTRODUCTION TO E-COMMERCE

Difficulty in Many firms have had trouble recruiting and retaining employees
recruiting and with the technological, design, and business process skills
retaining needed to create an effective e-commerce presence.
employees
Difficulty in Business face the difficulty of integrating existing databases and
integrating transaction-processing software designed for traditional
existing databases commerce into the software that enables e-commerce.
and software
Difficulty in terms Many businesses face cultural and legal obstacles in conducting
of cultural and e-commerce as some consumers are fearful to send their credit
legal aspects card details to online merchants that they have never met.

However, as more businesses and individuals find the benefits of e-commerce to


be compelling, many of these technology and culture-related disadvantages will
be resolved and become less challenging.

1.1.7 Differences between E-commerce and


E-business
The rapid advancement of technology and its application in the business seem to
be accompanied by similar rapid changes in terminology. The use of the term
„e-commerce‰ has been supplemented by additional terms such as „e-business‰.
There is a debate among consultants and academicians about the meaning and
limitations of both terms: e-commerce and e-business.

Some argue that e-commerce encompasses the entire world of electronically


based organisational activities that support a firmÊs market exchanges including
a firmÊs entire information systemÊs infrastructure. On the other hand, others
argue that e-business encompasses the entire world of internal and external
electronically based activities, including e-commerce.

For the purposes of this module, we will use the term „e-business‰ to refer
primarily to the digital enabling of transactions and processes within a firm,
involving information systems under the control of the firm. For most of the part,
e-business does not include commercial transactions involving an exchange of
value across organisational boundaries.

For example, a companyÊs online inventory control mechanisms are a component


of e-business, but such internal processes do not directly generate revenue for the
firm from outside businesses or consumers, as e-commerce does.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 17

It is true; however, that an e-business infrastructure can also support e-commerce


exchanges.

For example, an e-commerce and e-business systems can blend together at the
business firm boundary, at the point where internal business systems link up
with suppliers for example, e-business applications turn into e-commerce
precisely when an exchange of value occurs.

In simple words, we can conclude that e-commerce primarily involves


transactions that cross firm boundaries. In contrast, e-business primarily
concerns the applications of digital technologies to business processes within the
firm.

ACTIVITY 1.2
1. Name one type of business process which is not listed in the topic
that you believe would be a good candidate for e-commerce.
Explain why.
2. Surf the following websites which deal with business processes in
E-commerce. Then, answer the questions.
http://www.mphonline.com (Books)
http://www.cimbclicks.com (E-banking)
http://www.airasia.com (Airline tickets reservation)
http://www.parksononline.com (Department stores)

(a) What does these business deal with?


(b) What are other examples of business processes which
involve e-commerce?

EXERCISE 1.1

1. Define e-commerce.
2. By using your own words, explain how e-commerce is unique and
different from traditional commerce.

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18 TOPIC 1 INTRODUCTION TO E-COMMERCE

1.2 CATEGORIES OF E-COMMERCE


In this section, you will get to know the different categories of e-commerce. There
are four major categories (refer to Figure 1.7):
(a) Business-to-consumer (B2C);
(b) Business-to-business (B2B);
(c) Consumer-to-consumer (C2C);
(d) Consumer-to-business (C2B).

Figure 1.7: Four categories of e-commerce


Source: Adapted from Rayport, J. F., & Jaworski, B. J. (2008).
Introduction to e-commerce. Boston: McGraw-Hill

In the following sections, you will learn in depth, the categories of e-commerce
and m-commerce.

1.2.1 Business-to-Consumer E-commerce


What is business-to-consumer e-commerce?

Business-to-consumer (B2C) e-commerce consists of the sale of product


or services from a business to the general public or an end user.

In this model, the seller is the business and the buyer is the consumer (public).
Products for sale can be physical objects such as books, flowers, computers,
groceries, prescription drugs, music, movies, and cars. They also can be

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TOPIC 1 INTRODUCTION TO E-COMMERCE 19

intangible items. For example, an online magazine or download purchase


software. Popular services offered by B2C businesses include online banking,
stock trading, and airline reservations.

Sellers that use a B2C business model can maximise benefits by eliminating the
middleman. Businesses sell products directly to consumers without using
traditional retail channels. This enables some B2C companies to sell products at a
lower cost and with faster service than comparable traditional commerce.

Consumers also derive benefits from the B2C business model. They have access
to a variety of products and service without the constraints of time or distance.
Consumers easily can make comparisons between shops to find the best buy.
Many B2C websites provide consumer services such as access to product
reviews, chat rooms and other product-related information. These services often
attract and retain customers.

Many B2C businesses personalise their websites to consumers by tracking


visitorsÊ preference while they browse through the web pages. This enables the
B2C business to target advertisement, determine customer needs, and personalise
offerings to a customer Ês profile.

You will learn more on B2C businesses in Topic 2. For now, we will move on to
the second category of e-commerce: Business-to-Business (B2B).

1.2.2 Business-to-Business E-commerce


What is meant by business-to-business e-commerce?

Business-to-business (B2B) e-commerce consists of the sale and exchange


of products and service between businesses.

An example of B2B is when, a company that manufactures bicycles uses the


Internet to purchase tires from its supplier.

Many businesses use the unique advantages of Internet to communicate with


business partners. For example, some companies provide services to assist a
manufacturer with locating suppliers. The Internet enables all participants in a
supply chain to relay information to each other. A supply chain consists of the
interrelated network of facilities and a distribution method that obtains
materials, transforms materials into finished products and delivers the finished
products to customers.

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20 TOPIC 1 INTRODUCTION TO E-COMMERCE

Most businesses that engage in B2C e-commerce also participate in B2B


e-commerce. Thus, many companyÊs websites also provide goods and services to
other businesses. A company engages in B2B e-commerce when stocking its
warehouse and engages in B2C e-commerce when selling goods in the
warehouse to consumers.

Basic examples of B2B e-commerce sites are vendor, service, broker and info-
mediary sites. A vendor for B2B site, also called an e-procurement site, is a
product supplier that allows purchasing agents to use a network to shop, submit
request for quotes (RFQs), and purchased items. A service B2B site uses the
network to provide one or more services to businesses such as financing,
warehousing or shipping. A brokering B2B site acts as a middleman by
negotiating the contract of a purchase and a sale. An info-mediary (acronym for
information intermediary) B2B site provides specialised information about
suppliers and other businesses.

1.2.3 Consumer-to-Consumer E-commerce


Now, let us look at the meaning of C2C.

Consumer-to-consumer (C2C) e-commerce consists of individuals using


the Internet to sell products and service directly to other individuals.

The most popular vehicle for C2C e-commerce is the online auction. An online
auction is similar to negotiating, in which a consumer auctions goods to other
consumers. If you are interested in an item, then you will bid on it. The highest
bidder at the end of the bidding period purchases the item.

In C2C e-commerce, the consumer does the following:


(a) Prepares the product for market;
(b) Places the product for auction or sale; and
(c) Relies on the market-maker to provide a catalogue, search engine and
transaction-clearing capabilities so that products can be easily displayed,
discovered and paid for. Websites like eBay (www.ebay.com.my) and
lelong (www.lelong.com.my) are the perfect examples for C2C e-commerce.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 21

Another form of C2C e-commerce is Internet peer-to-peer (P2P) as shown below.

Internet peer-to-peer (P2P) describes an Internet network that enables


users with the same networking software to connect to each otherÊs hard
disks and exchange files directly without having to go through a central
web server.

With the appropriate software and Internet connection, users can copy files from
someone elseÊs hard disk to their hard disks. Although music-sharing services are
now fee based, these programmes initially stirred controversy related to musicÊs
copyright infringement. They allowed users to easily copy MP3 music files from
one computer to another.

Other activities in C2C e-commerce include:


(a) Classified ads (e.g. www.freeclassifields.com);
(b) C2C exchange (e.g. www.targetbarter.com)
(c) Personal service (e.g. www.match.com).
(d) Virtual property (e.g. www.mmorpg.com)

1.2.4 Consumer-to-Business E-commerce


What is meant by consumer-to-business e-commerce?

Consumer-to-business (C2B) e-commerce is a complete reversal of the


business-to-consumer (B2C) model. In a consumer-to-business model, a
consumer offers goods or services to companies and the companies pay
for them.

These groups may be economically-motivated, as with demand aggregators, or


socially-oriented, as with cause-related advocacy groups at SpeakOut.com.
Examples of C2B are in the forms of affiliate marketing, answering online polls
for companies, being a freelance developer, etc.

For example, a shampoo-producing company sends you an online survey and


asks you to fill it out. When you have filled in the survey, you will be paid a
particular amount of money for your service in the form of answers given for the
questions posed in the survey.

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22 TOPIC 1 INTRODUCTION TO E-COMMERCE

1.2.5 Mobile Commerce (M-commerce)


Even though it is not regarded as one of the main categories of e-commerce, m-
commerce still plays a significant role in e-commerce.

Mobile-commerce (m-commerce) takes traditional e-commerce models


and leverages emerging new wireless technologies to permit mobile
access to the web.

Traditional e-commerce provides access to anyone, anytime and anywhere via


wireless devices such as the Internet.

In essence, wireless networks utilise newly available bandwidth and


communication protocols to connect mobile users to the Internet. While existing
wireless networks have limited bandwidth capacity, soon their capacity will
increase significantly. In general, wireless web technology will enable the
extension of existing Web business models to service the mobile work force and
consumer of the future.

For instance, Amazon.com recently made its site accessible by wireless mobile
devices. Currently, there are many more cell phone subscribers than there are
Internet users. When cell phones become truly Web-ready, a development
expected within the next several years, analysts predict an explosion of interest in
m-commerce.

SELF-CHECK 1.3

What traditional barriers are almost eliminated by e-commerce?


Discuss your answers.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 23

ACTIVITY 1.3

Visit these websites to get a clear view of each category of e-commerce


below:
Business-to-consumer (B2C)
http://www.amazom.com
http:// www.yahoo.com
Business-to-business (B2B)
http://www.alibaba.com
http://www.dell.com
Consumer-to-consumer (C2C) http://www.ebay.com.my
http://www.lelong.com.my
Consumer-to-business (C2B)
http://www.freelancer.com
http://www.google.com/adsense
Mobile commerce (m-commerce)
http://www.cimbclicks.com.my/mobilebankinguide.htm

After viewing each website, describe how the features of websites in


each categories are different compared to others.

EXERCISE 1.2

1. How does B2C business model maximise their benefits?


2. Describe B2B e-commerce.
3. What is the role of consumer in a C2C e-commerce?

1.3 ORIGIN AND GROWTH OF E-COMMERCE


Although e-commerce is a very recent phenomenon of the 1990s, it already has a
history. The history of e-commerce can be divided into three periods:
(a) Innovation (1995-2000);
(b) Consolidation (2001-2006); and
(c) Reinvention (2007-future).

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24 TOPIC 1 INTRODUCTION TO E-COMMERCE

Let us look at the definition given for each period.

Innovation era was a period of explosive growth, beginning in 1995 with


the first widespread use of the web to advertise products, and ending in
2000 when stock market valuations for dot.com companies began to
collapse.

Consolidation era began in 2001, by which time the sobering reassessment of


e-commerce companies and the value of their stock had occurred. Emphasis
was shifted to business-driven approach rather than technology-driven
approach where large traditional firms learned to use the web to strengthen
their market position.

Reinvention era began in 2007 and extends through the present day and
into the uncertain future. This period involves the extension of Internet
technologies, the discovery of new business models based on consumer-
generated content, social networking and virtual-online lives.

Each of these e-commerce periods is characterised by a set of visions and driving


forces. In the following sections, we will take a look at each period in detail.

1.3.1 Innovation Era (1995-2000)


The early years of e-commerce were the time where key e-commerce concepts
were developed and explored. Thousands of dot.com companies were formed
and backed by over $125 billion in financial capital in the United States. For
computer scientists and information technologists, the earlier success of
e-commerce was attributed to a powerful set of information technologies
developed over 40 years, from mainframe computer to personal computer,
Internet and networking technologies. The vision was that everyone in the world
could afford inexpensive computer with access to Internet.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 25

For economists, e-commerce raised the realistic prospect of a perfect Bertrand


market. Let us look at the definition provided.

Bertrand market is a market where price, cost, and quality information is


equally distributed, where a nearly infinite set of suppliers compete
against one another, and where customers have access to all relevant
market information worldwide.

Merchants in turn would have equal direct access to hundreds of millions of


customers. In this near-perfect information market-space, transaction costs would
plummet because the costs of searching for prices, product descriptions, payment
settlement, and order fulfilment would all fall drastically.

New „shopping bot‰ programmes would automatically search the entire web for
the best prices and delivery times. For merchants, the cost of searching for
customers would also fall, reducing the need for wasteful advertising. Prices and
even costs would be increasingly transparent to the customer, who could now
know exactly, and instantly the worldwide best cost, quality, and availability of
most products.

In turn, the market middleman would disappear. The distributors, wholesalers


and other factors in the marketplace that are intermediates between producers
and consumers, each demanding a payment and raising costs while adding little
value.

Manufacturers and content originators would develop a direct market


relationship with their customers. The resulting intense competition, the decline
of intermediaries, and the lower transaction costs would eliminate products
brands, and along with it, the possibility of monopoly profits based on brands,
geography, or special access to factors of production.

Prices for products and services would fall to the point where prices covered
costs of production plus a fair, „market rate‰ of return on capital, plus additional
small payments for entrepreneurial effort (that would not last long). Unfair
competitive advantages (which occur when one competitor has an advantage
that others cannot purchase) would be eliminated, as would extraordinary
returns on invested capital.

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26 TOPIC 1 INTRODUCTION TO E-COMMERCE

That vision was called friction-free commerce as explained below.

Friction-free commerce is a vision of commerce in which information is


equally distributed, transaction costs are low, prices can be dynamically
adjusted to reflect actual demand, intermediaries decline and unfair
competitive advantages are eliminated.

For real-world entrepreneurs, their financial backers and marketing professionals


in the Innovation period, the idea of friction-free commerce was far from their
own visions. For these players, e-commerce represented an extraordinary
opportunity to earn far above normal returns on investment, far above the cost of
borrowing capital. The e-commerce market space represented access to millions
of consumers worldwide that used the Internet and a set of marketing
communications technologies (e-mail and web pages) that was universal,
inexpensive and powerful.

These new technologies permit marketers to practise what they have always
done which is segmenting the market into groups with different needs and price
sensitivity, targeting the segments with branding and promotional messages, and
positioning the product and pricing for each group; but with even more
precision.

In this new market space, extraordinary profits would go to first movers. Let us
look at the following to figure out who are first movers.

First movers are firms which were the first to market in a particular area
and which moved quickly to gather market share. First movers could
establish a large customer base quickly, build brand name recognition
early, build an entirely new distribution channel, and then inhibit
competitors (new entrants) by building in switching costs for their
customers through proprietary interface designs and features available
only at one site.

Online businesses using the new technology could create informative,


community-like features unavailable to traditional merchants. The thinking was
that once customers became accustomed to using a companyÊs unique Web
interface and feature set, they could not easily be switched to competitors.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 27

E-commerce was, after all, a totally new way of shopping that would have to
offer some immediate cost benefits to consumers. Doing business on the Web
was thought to be much more efficient compared to traditional commerce, or
even when compared to direct mail catalogue, the costs of customer acquisition
and retention were also supposed be so much lower, profit would inevitably
materialise out of these efficiencies.

Given that the market share and the number of visitors to the site are dynamic,
revenue became far more important in the earlier stages than earnings or profits.
Entrepreneurs and their financial backers in the Innovation period expected that
extraordinary profitability would come, but only after several years of losses.

Thus, the Innovation period of e-commerce was driven largely by visions of


profiting from new technology, with the emphasis on quickly achieving very
high market visibility. Overall, the Innovation period of e-commerce was
characterised by experimentation, capitalisation and hyper competition.

1.3.2 Consolidation Era (2001-2006)


The crash in stock market values for dot.com companies throughout 2000 is a
convenient mark to the end of that period. There were a number of reasons for
that crash such as:

(a) Rebuilding the Internal Business Systems


A part of the run-up technology stocks was due to enormous information
technology capital expenditure of large American firms who were
rebuilding their internal business systems to withstand the challenges of
‰the year 2000 problem (Y2K)„. The simple change from year 1999 to 2000
was believed to be a major threat to corporate systems. Once these systems
were rebuilt, this information technology capital expenditure declined,
sending the earnings forecasts of technology companies down.

(b) Built Excess Capacity in High-Speed Networks


In early 2000, it became clear that the telecommunications industry had
built excess capacity in high-speed fibre optic networks. Price wars were
breaking out in telecommunications markets, and it was clear that earnings
in this sector would fall dramatically, with many smaller firms going
bankrupt and unable to pay debts incurred to build high-speed networks.

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28 TOPIC 1 INTRODUCTION TO E-COMMERCE

(c) Less Sales Growth


The 1999 e-commerce Christmas season provided less sales growth than
anticipated, and more importantly, demonstrated that e-commerce was not
easy. Many dot-com retailers could not deliver in time and this hurt the
credibility of B2C e-commerce in general.

(d) Rise in Valuations of Dot.Com and Technology Companies


The valuations of dot.com and technology companies had risen so high that
even supporters were questioning whether earnings of these companies
could ever grow fast enough to justify the prices of the shares. Some high-
tech companies had stock values 400 times earnings. And as it turned out,
most dot-com companies especially those specifically devoted to e-commerce
in fact did not have any earnings!

Most, in fact, were losing money while showing revenue growth. Even
supporters of the e-commerce phenomenon began to wonder if the
dot.com companies would ever become profitable. The stock market crash
of dot.com companies led to a sobering reassessment of the prospects for
e-commerce and the methods for achieving business success.

While the Consolidation period continues in an extremely rapid pace of growth


in customers and revenues, it is clear that many of the visions for e-commerce
developed during the Innovation period have not been fulfilled. For instance,
economistsÊ visions of „friction free‰ commerce have not been entirely realised.
Prices are sometimes lower on the Web, but the low prices are primarily a
function of entrepreneurs selling products below their costs.

Consumers are less price sensitive than expected; surprisingly, the websites with
the highest revenue also have the highest prices. There remains considerable
persistent price dispersion on the web, and the concept of one world, one market,
and one price has weakened as entrepreneurs discover new ways to differentiate
their products and services. For instance, prices on books and CDs vary by as
much as 50% and prices for airline tickets as much as 20%.

Brands remain very important in e-commerce as consumers trust some firms


more than others to deliver a high quality product on time. Search costs may
have fallen, but the overall transactions costs of actually completing a transaction
in e-commerce remains very high. About 65% of e-commerce purchases are
terminated in the shopping cart stage because of these consumer uncertainties:
(a) Will the merchant actually deliver?
(b) What is the time frame of delivery?
(c) Does the merchant really have stock on this item?

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TOPIC 1 INTRODUCTION TO E-COMMERCE 29

In many product areas, it is easier to call a trusted catalogue merchant than order on
a website. Intermediaries may have not disappeared as predicted, and few
manufactures or producers have actually developed a one-to-one sales relationship
with their ultimate customers. If anything, e-commerce has created many new
opportunities for middlemen to aggregate content, products, and services into
portals and thereby introduce themselves as the new intermediaries. Yahoo.com
and Amazon.com are two examples of this kind of new intermediaries.

Nor have the visions of many entrepreneurs and venture capitalists for
e-commerce during the Innovation period materialised exactly as predicted.
First-mover advantage appears to have succeeded only for a small group of
sites. Historically, first movers have been the long-term losers, with the early-
to-market innovators usually being displaced by established „fast follower‰
firms with the financial, marketing, legal and production assets needed to
develop mature markets, and this has proved true for e-commerce as well.

The overall costs of doing business on the Web including the costs of technology,
site design and maintenance, and warehouses for fulfilment are no lower than
the costs faced by the most efficient brick-and-mortar stores. The start-up costs
can be staggering. Attempting to achieve profitability by raising prices has often
led to large customer defections. If you want to know, from the e-commerce
merchantÊs perspective, the „e‰ in e-commerce does not stand for „easy.‰

1.3.3 Reinvention Era (2007-Future)


E-commerce entered the Reinvention period in 2007 which extends through the
present day and into the uncertain future. This is the period of reinvention
involving the extension of Internet technologies, the creation of new business
models based on consumer-generated content, social networking and virtual
online lives, exemplified by the fast moving entrepreneurial firms such as
Facebook, YouTube, MySpace and Twitter. Even though, only a few of the new
models have been profitable from their huge audience, many still have the
potential to be profitable in the future.

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30 TOPIC 1 INTRODUCTION TO E-COMMERCE

Table 1.8 summarises the differences among the three periods of e-commerce
evolution.

Table 1.8: Evolution of E-commerce

Innovation Consolidation Reinvention


(1995-2000) (2001-2006) (2007-Future)
Technology-driven Business-driven Audience, customer and
community driven
Revenue growth Earnings and profits Audience and society
emphasis emphasis network growth
emphasis
Venture capital Traditional financing Smaller venture capital
financing financing, early small
firms buyouts by large
online players
Ungoverned Stronger regulation and Extensive government
governance surveillance
Entrepreneurial Large traditional firms Large pure web-based
firms
Disintermediation Strengthening Proliferation of small
intermediaries online intermediaries
renting business
processes of larger firms
Perfect markets Imperfect markets, Online market
brands and network imperfections
effects
Pure online strategies Mixed „bricks and Return of pure online
clicks‰ strategies strategies in new markets;
extension of mixed
bricks- and -clicks in
traditional retail markets
First mover Strategic follower First-mover advantages
advantages strength return in new markets as
traditional web players
catch up
Low complexity retail High complexity retail Services
products products

Source: Laudon, K. C., & Traver, C. G. (2010).

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TOPIC 1 INTRODUCTION TO E-COMMERCE 31

1.3.4 Predictions for the Future


The future of e-commerce is now clearer, although not certain. There are six main
factors that will help define the future of e-commerce and they are:

(a) Rise on Overall Revenues, Technology Products, and Customers


There is little doubt that the technology of e-commerce, the Internet, the
Web, and the growing number of wireless Internet appliances will continue
to propagate through all commercial activities. The overall revenues from
e-commerce will continue to rise on a very steep growth path, most likely in
the range 12% to 18% per year through 2012.

The number of products and services sold on the web and the size of
average purchase order are both growing at double-digit rates. There has
been a significant broadening of online product mix compared to the earlier
years when books, computer software and hardware are the main products
sold online. The faster growing e-commerce categories include home
products, office supplies, sporting goods and apparel/accessories.

(b) Rise in the e-commerce Prices


E-commerce prices will rise to cover the real costs of doing business on the
web and to pay investors a reasonable rate of return on their capital. When
a company or a business model managed to attract consumers towards it,
costs such as tax, governmentÊs regulation and other additional costs will
be imposed to it. Thus, the increase in price will cover the imposed costs
and make it possible to cover the costs of conducting the business.

(c) Rise in the e-commerce Margins and Profits


E-commerce margins (the difference between the revenues from sales and
the costs of goods) and profits will rise to levels more typical of all retailers.
However, there is a possibility that the profit margin will reduce in the case
of tight competition with other online businesses.

(d) Radical Change in the Cast of Players


The cast of players will change radically. In the B2C and B2B market spaces,
traditional well-endowed, experienced online companies such as AirAsia
will continue to play a growing and dominant role in e-commerce while
new start-up ventures will gain large online audiences for new products
and services not dominated by large players.

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32 TOPIC 1 INTRODUCTION TO E-COMMERCE

(e) Large Number of Successful Integrated Firms


The number of successful pure online companies will remain smaller than
integrated firms that adopt mixed click-and-brick strategies, combining
traditional sales channels and online efforts. Examples of integrated firms are
as follows:
(i) Amazon.com will increasingly use printed catalogues;
(ii) Procter & Gamble will continue to develop informative websites such
as Tide.com; and
(iii) Major automotive companies will continue to improve the content and
value of their websites even if they do not enter into direct sales
relationships with consumers but instead use the web to assists sales
through dealers which thereby strengthens the traditional intermediaries
and channels.

In summary, the future of e-commerce will be a mixture of traditional retail


extending their brands to online markets. E-commerce firms in the earlier period
such as Amazon and eBay will strengthen their financial results and dominant
positions. New entrepreneurs and venture capitalist in e-commerce firms have
the potential to be in the prominent position by developing new audiences from
the growth of social network and community based activities.

To get more information on history and growth of e-commerce, please check


the following websites:
http://www.internetworldstats.com/
http://www.ecommerceland.com/history_ecommerce.html

SELF-CHECK 1.4

What is the difference between market space and marketplace?

EXERCISE 1.3

1. Discuss the ways in which the e-commerce era can be considered


both a success and a failure.
2. What factors will help define the future of e-commerce over the
next four to five years?

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TOPIC 1 INTRODUCTION TO E-COMMERCE 33

1.4 UNDERSTANDING E-COMMERCE:


ORGANISING THEMES
E-commerce as shown in Figure 1.8 involves three broad interrelated themes as
follows:
(a) Technology;
(b) Business; and
(c) Society.

Figure 1.8: E-commerce three broad interrelated themes

Technologies were the first to be developed. Then these developments were


exploited commercially. Once commercial exploitation of these technology
become widespread, a host of social, cultural and political issues arise. In the
following sections, we will explore more on the three themes in e-commerce.

1.4.1 Technology
The development and mastery of digital computing and communications
technology is at the heart of the newly emerging global digital economy
known as e-commerce. To understand the likely future of e-commerce, you
need a basic understanding of the information technologies upon which it is
built. E-commerce is a technologically driven phenomenon that relies on a
host of information technologies as well as fundamental concepts from
computer science developed over a 50 year period.

At the core of e-commerce are the Internet and the World Wide Web (WWW).
Behind these technologies, there are a host of complementary technologies,
personal computers, local area networks, relational databases, client/server

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34 TOPIC 1 INTRODUCTION TO E-COMMERCE

computing and fibre optic switches, to name just a few. These technologies lie at
the heart of sophisticated business computing applications such as enterprise-
wide computing systems, supply chain management systems and customer
relationship management systems.

E-commerce relies on all these basic technologies and not just on the Internet. The
Internet, while representing a sharp break from prior corporate computing and
communications technologies, is nevertheless just the latest development in the
evolution of corporate computing and part of the continuing chain of computer-
based innovations in business.

To truly understand e-commerce, you need to know something about


client/server computing, packet-switched communications, and protocols such
as TCP/IP, Web servers and HTML. All of these topics are described fully in
Topic 3.

1.4.2 Business
While the technology provides the infrastructure, it is the business applications
that provide the potential for the extraordinary returns on investment that create
the interest and excitement in e-commerce. New technologies present new ways
of organising production and business transaction. It change the strategies of
existing firms: Old strategies were made obsolete and new ones need to be
invented. New technologies are the birthing grounds for thousands of new
companies to offer new products and services.

To truly understand e-commerce, you will need to be familiar with some key
business concepts, such as the nature of electronic markets, information goods,
business models, firms and industry value chains, industry structure and
consumer behaviour in electronic markets.

1.4.3 Society
E-commerce is increasingly subject to the laws of nations and global entities. In
order to conduct successful e-commerce business, we need to understand the
pressures that global e-commerce places on contemporary society. Among the
common issues are intellectual property, individual privacy and public policy.

The cost of distributing digital copies of copyrighted or intellectual property


tangible works of minds such as music, books and videos are nearly zero on the
Internet. This caused e-commerce to present special challenges to the various
methods societies have used to protect intellectual property rights in the past.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 35

Since the Internet and the Web are exceptionally proficient at tracking the
identity and behaviour of individuals online, e-commerce raises difficulties for
preserving privacy, or the ability of individuals to place limits on the type and
amount of information collected about them, and to control the uses of their
personal information.

The global nature of e-commerce also poses public policy issues of equity, equal
access, content regulation, and taxation. If some societies choose to ban selected
images, selected commercial activity (i.e., online sports betting) or political
messages from their public media, then how can that society exercise content and
activity control over a global e-commerce site? What rights do nation-states and
their citizens have with respect to the Internet, the web, and e-commerce?

ACTIVITY 1.5

Is it ethical and legal to download copyrighted music to your computer


for personal use? Give reasons for your answer.

To get more information on computer and society, visit these websites:

http://www.copyright.gov/
http://www.myipo.gov.my/
http://www.uspto.gov/trademarks/index.jsp
http://www.privacy.org/
http://www.sigcas.org/

EXERCISE 1.4

List and briefly explain the major themes underlying the study of
e-commerce.

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36 TOPIC 1 INTRODUCTION TO E-COMMERCE

Commerce, the negotiated exchange of goods and services, has been


practised in traditional ways for thousands of years.

E-commerce is the application of new technologies; particularly Internet and


web technologies, to help individuals, business and other organisations to
better conduct business.

The four main attributes of e-commerce are:


Intra and inter-organisational activities that support the exchange;
Technology-enabled;
Technology-mediated; and
Exchange of digitised information between.

The eight elements of e-commerce are:


Core strategic decisions are technology-based;
Ubiquitousness;
Real-time competitive responsiveness;
Technology-based customer interface;
Customer controlled interaction;
Knowledge of customer behaviour;
Permit personalisation and customisation; and
Global reach.

The four major categories of e-commerce are:


Business-to-consumer;
Business-to-business;
Consumer-to-business; and
Consumer-to-consumer.

The advantages of e-commerce include easy-to-access target market, cost


effectiveness, great variety, fast access, safe and avaibility.

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TOPIC 1 INTRODUCTION TO E-COMMERCE 37

However, the disadvantages are include:


Difficulty in examining and selecting;
Difficulty in calculating the cost;
Difficulty in recruiting and retaining employees;
Difficulty in integrating existing databases and software; and
Difficulty in terms of cultural and legal aspects.

Three major themes in e-commerce are technology, business and society.

Brick and mortar E-commerce


Business process First movers
Business-to-business Friction-free
Business-to-consumer Innovation
Clicks-and-brick Internet peer-to-peer
Consolidation Reinvention
Consumer-to-business Traditional commerce
Consumer-to-consumer M-commerce

Copyright © Open University Malaysia (OUM)


Topic E-commerce
2 Business
Models
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Identify key components of e-commerce business models;
2. Describe business-to-consumer (B2C) business models;
3. Describe business-to-business (B2B) business models; and
4. Describe consumer-to-consumer (C2C) business models.

INTRODUCTION
Do you know how hard it is for new firms to establish a profitable e-commerce
business in an entirely new market niche? Thousands of firms in the innovation
era of e-commerce discovered that they could spend other peopleÊs invested
capital much faster than they could get customers to pay for their products and
services. In most instances of failure, the business model of the firm was faulty
from the very beginning.

In contrast, successful e-commerce firms have business models that are able to
leverage the unique qualities of the web, avoid legal and social entanglements
that can harm the firm, and produce profitable business results. But what is a
business model and how can you tell if a firmÊs business model is going to
produce a profit? This topic will focus on business models that you must be
familiar with in order to understand e-commerce.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 39

We have learned about the business models involved in e-commerce in the


previous topic. Can you recall what are the models used in e-commerce? There
are four main models; however, in this topic, we will only look at three models
consumer-to-consumer (C2C), business-to-consumer (B2C) and business-to-
business (B2B).

2.1 KEY ELEMENTS OF A BUSINESS MODEL


What is meant by the terms „business model‰ and ‰business plan„?

A business model is a set of planned activities (business processes)


designed to generate profit in marketplace. The business model is an
essential component of the business plan. An e-commerce business model
aims is to use and leverage the unique qualities of the Internet and the
World Wide Web.

A business plan is a document that describes a firmÊs business model and


ways to achieve it.

ACTIVITY 2.1

„Developing a business plan is very important in any business


organisation. ‰

Based on the above statement, what exactly is a business plan and


how does an e-commerce business plan differ from other traditional
business plans?

You need to be aware that there are eight key elements of a successful business
model in any area, not only in e-commerce. These elements are as shown in Table
2.1 and will be discussed further in the following sections.

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40 TOPIC 2 E-COMMERCE BUSINESS MODELS

Table 2.1: Key Elements of a Business Model

Business Model Key Questions


Components
1. Value proposition Why should the customer buy from you?
2. Revenue model How will you earn money?
3. Market opportunity What market space do you intend to serve, and
what is its size?
4. Competitive environment Who else occupies your intended market space?
5. Competitive advantage What special advantages does your firm bring to
the market space?
6. Market strategy How do you plan to promote your products or
services to attract your target audience?
7. Organisational development What types of organisational structures within the
firm are necessary to carry out the business plan?
8. Management team What kinds of experiences and background are
important for the companyÊs leaders to have?

Source: Adapted from Laudon, K. C., & Traver, C. G. (2009). E-commerce: Business,
technology, society (5th ed.). Boston: Addison Wesley.

ACTIVITY 2.2

Based on the key elements of a business model, which element is the most
important to be taken care of in order to develop a successful e-commerce
business model? Discuss with your coursemates.

2.1.1 Value Proposition


The first step in the articulation of the business model is to clearly specify the
value proposition for the business.

Value proposition defines how a companyÊs product or service fulfils the


customer's needs.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 41

From the consumer point of view, successful e-commerce value propositions


include the following:
(a) Personalisation and customisation of product offerings;
(b) Reduction of product search costs;
(c) Reduction of price discovery costs; and
(d) Facilitation of transactions by managing product delivery.

For instance, Kozmo.com sold the same snacks, entertainment and toiletries that
other businesses did. However, Kozmo made speedy home deliveries. Although
convenience stores, restaurants and pharmacies could also offer home delivery to
their customers, Kozmo handled its competitors by bundling items from several
types of businesses and dropping them off within an hour. Therefore,
convenience and speed were KozmoÊs two main value propositions.

Before Amazon.com existed, most customers personally travelled to book


retailers to place an order. In some cases, the desired book might not be available
and the customer would have to wait for several days or weeks and then return
to the bookstore to pick it up. Amazon made it possible for book lovers to shop
for virtually any books in print from the comfort of their home or office, without
any time limit and to know immediately whether a book is in stock or not. Thus,
AmazonÊs primary value propositions are unparalleled selection and
convenience.

Figure 2.1: Online flower-selling websites


Source: http://www.ferns-flowers.co.uk/

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42 TOPIC 2 E-COMMERCE BUSINESS MODELS

In many cases, companies develop their value proposition based on current


market conditions or trends. ConsumerÊs increasing reliance on delivery services
was surely a trend that founders of Kozmo.com took note of, just as StarbucksÊ
founders saw the growing interest in and demand for coffee bars nationwide.
Both companies watched the market and then developed their value proposition
to meet what they perceived to be consumersÊ demand for certain products and
services.

ACTIVITY 2.3

1. Identify two local companies that offer services or products


online; and
2. Compare the value propositions that are developed between the
two companies.

2.1.2 Revenue Model


Now, let us move on to the second element involved in business model. A firmÊs
revenue model describes how the firm will earn revenue, generate profits,
and produce a superior return on invested capital. The function of business
organisations is both to generate profits and to produce returns on invested
capital that exceed alternative investments. Profits alone are not sufficient to
make a company „successful‰. In order to be considered successful, a firm must
produce returns greater than alternative investments. Firms that fail this test will
go out of existence.

For example, retailers sell a product such as personal computer to a customer


who pays for the computer using cash or a credit card. This produces revenue
and the merchant typically charges more for the computer than it pays out in
operating capital expenses, thus, producing a profit. But in order to go into
business, the computer merchant had to invest capital either by borrowing or by
dipping into personal savings. The profits from the business constitute the return
on invested capital, and these returns must be greater than the merchant could
obtain elsewhere, say, by investing in real estate or by just putting the money in a
savings account.

Although there are many different e-commerce revenue models that have been
developed, most companies rely on one, or some combination of the major
revenue models as illustrated in Figure 2.2.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 43

Figure 2.2: E-commerce revenue models

Let us look on each revenue model in detail.

(a) Advertising Revenue Model


In this model, a website that offers its users with content, services, and/or
products also provides a forum for advertisements and receives fees from
the advertisers. Those websites that are able to attract the greatest viewer
ship or that advertising revenue which have a highly specialised,
differentiated viewer ship and are able to retain userÊs attention are able to
charge higher advertising rates.

Let us look at companies which adopt the advertising revenue models:


(i) Yahoo.com, as shown in Figure 2.3, derives a significant amount of
revenue from search engine and other forms of online advertising.
Because many people use Yahoo! as a starting point for searching the
web, it has always attracted a large number of visitors; and
(ii) Sites such as AOL, AltaVista, Excite, Lycos and MSN.

Smaller general-interest sites, such as the web directory, refdesk.com, have


had much more difficulty attracting advertisers than the larger search
engines.

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44 TOPIC 2 E-COMMERCE BUSINESS MODELS

Figure 2.3: Yahoo! website


Source: http://www.yahoo.com/

(b) Title Subscription Revenue Model


In this model, a website that offers its users content or services charges a
subscription fee for access to some or all of its offerings. To successfully
overcome the reluctance of users to pay for content on the web, the content
offered must be perceived as a high-value added premium. This means that
the offering is not readily available elsewhere or easily replicated.

Malaysiakini.com, for instance, allows non-subscribers to view certain


articles from the website (i.e., comments), but full access to all the content in
English is restricted to subscribers who pay a monthly fee of RM20. While
some news agency, including Bernama, do not charge any subscription fees
for access to their websites. Instead, they offer current stories free of charge
on their websites, but require visitors to pay for archival news.

Companies that have successfully offering online content on a subscription


model include MicrosoftÊs Xboxlive.com (video games), Ancestry.com
(genealogy), and eHarmony (dating services) and among others.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 45

ACTIVITY 2.4
Visit the two local newspaper websites shown below and answer the
following questions:
http://www.nst.com.my/
http://www.thestar.com.my/
(a) Identify the differences between their subscription fees.
(b) What type of subscription fees does each company charge to
their customers?

(c) Transaction Fee Revenue Model


In this model, businesses offer services for which they charge a fee that is
based on the number or size of transactions they process. Some of these
services are well-operated on the web. The companies can offer web
visitors the information they need about the transaction and offer much
of the personal service formerly provided by the human agents. If
customers are willing to enter transaction information into website forms,
these sites can provide options and execute transaction much less costly
than traditional transaction service providers.

Now, let us look at companies which adopt the transaction fee revenue
model:
(i) CarsDirect.com, which offers customers the ability to select a specific car
(model and colour options) at a price it determines. CarsDirect.com then
finds a local dealer that has such a car and is willing to sell it for the
CarsDirect.com price;
(ii) Alternatively, Autoweb.com locate dealers in the buyer Ês area that are
willing to sell the car specified by the buyer (including make, model,
options, and colour) for small premium over the dealer Ês nominal
cost. The buyer can purchase the car from the dealer without
negotiating with a salesperson; and
(iii) Stock brokerage firms, such as E-Trade.com charges their customers a
commission for each trade executed.

(d) Sales Revenue Model


In this model, companies derive revenue by selling goods, information, or
services to customers. This revenue model has proven to be successful for a
wide variety of consumer items, including apparel, computers, electronics,
house wares, and gifts. Customers can place orders through the website or
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46 TOPIC 2 E-COMMERCE BUSINESS MODELS

by telephone. This flexibility is important because many consumers are still


reluctant to buy on the web.

Most companies that use the sales revenue model do give customers a way
to complete the payment part of the transaction by telephone or by mail.
Companies which adopt the sales revenue model are as follows:
(i) Amazon.com, which sells books, music, and other products;
(ii) DoubleClick.net, which gather information about online users and
then sells it to other companies; and
(iii) Salesforce.com, which sells sales force management services over the
web.

(e) Affiliate Revenue Model


In this model, sites that steer business to an „affiliate‰ receive a referral fee
or percentage of the revenue from any resulting sales. For example,
MyPoints.com makes money by connecting companies with potential
customers by offering special deals to its members. When they take
advantage of an offer and make a purchase, members earn „points‰ that
they can redeem for freebies, and while MyPoints.com gains a referral fee
or percentage.

ACTIVITY 2.5

For each revenue model, identify a local company that relies on the
model to gain profits. Compare your answers with your course mates.

2.1.3 Market Opportunity


Do you know what is meant by market opportunity? Refer below to find out the
meaning.

Market opportunity refers to the companyÊs intended market space (i.e.,


market opportunity an area of actual or potential commercial value) and
the overall potential financial opportunities available to the firm in that
market space.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 47

The market opportunity is usually divided into smaller market niches. The
realistic market opportunity is defined by the revenue potential in each of the
market niches where you hope to compete.

For instance, let assume that you are analysing a software training company that
creates software-learning systems for sale to corporations over the Internet. The
overall size of the software training market for all market segments is
approximately RM70 billion. Furthermore, the overall market can be broken
down into two major market segments:
(a) Instructor led training products, which comprise about 70% of the market
(RM49 billion in revenue); and
(b) Computer-based training, which accounts for 30% of the market (RM21
billion in revenue).

Within each of those major market segments, there are further market niches,
such as the Fortune 100 computer-based training market, and the small business
computer-based training market. Because the firm is a start-up firm, it cannot
compete effectively in the large business, computer-based training market (about
RM15 million).

Large brand-name training firms dominate this niche. Its real market opportunity
is to sell to the thousands of small business firms who spend about RM6 billion
on computer-based software training and who desperately need a cost-effective
training solution. This, then, is the size of the firmÊs realistic market opportunity.

2.1.4 Competitive Environment


A firmÊs competitive environment refers to the other companies operating in the
same market space selling similar products. The competitive environment for a
company is influenced by several factors as shown below:
(a) How many competitors are active?
(b) How large are their operations?
(c) What is the market share of each competitor?
(d) How profitable are these firms?
(e) How do they price their products?

Firms typically have both direct and indirect competitors. The following are the
definitions and the examples.

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48 TOPIC 2 E-COMMERCE BUSINESS MODELS

Direct competitors are companies that sell products and services that are
very similar and involved in the same market segment.

For example, Priceline.com and Hotwired.com, both sell discounted airline


tickets online, are direct competitors because both companies sell products that
can be considered close substitutes for one another.

Indirect competitors are companies that may be in different industries


but still compete indirectly.

Priceline.com and Amazon.com, can be considered as indirect competitors.


Although Amazon.com currently does not offer airline tickets, its expertise in
developing online commerce and in facilitating the Internet traffic, either alone or
in conjunction with other e-commerce or offline companies, gives it the ability to
quickly do so.

Automobile manufacturers and airline companies operate in different industries


but they still compete indirectly because they offer consumers alternative means
of transportation. The online music service provided by MyMP3.com competes
indirectly with Amazon.comÊs book sales because both websites offer consumers
alternative modes of entertainment.

The existence of a large number of competitors in any one segment may be a sign
that the market is saturated and that it may be difficult to become profitable. On
the other hand, a lack of competitors could either signal an untapped market
niche ripe for the picking or a market that has already been tried without success
because there is no profit to be made. Analysis of the competitive environment
can help you decide which segment is lucrative and which is not.

ACTIVITY 2.6

1. Based on your understanding, identify two local companies that


operate in different industries but still compete indirectly.
2. Describe in what form they are competing with each other.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 49

2.1.5 Competitive Advantage


Firms achieve a competitive advantage when they can produce a superior
product and/or bring the product to market at a lower price than most/all of
their competitors. Firms also compete on scope. Some firms can develop a global
market while other firms can only develop a national or regional market. Firms
that can provide superior products at lowest cost on a global basis are truly
advantaged.

Firms achieve competitive advantages in the following situations:


(a) They have somehow been able to obtain different access to the factors of
production that are denied to their competitors at least in the short term;
(b) They have been able to obtain very favourable terms from suppliers,
shippers or sources of labour;
(c) They have more experienced, knowledgeable, loyal employees than any
competitors; and
(d) They have a patent on a product that others cannot imitate, or access to
investment capital through a network of former business colleagues or a
brand name and popular image that other firms cannot duplicate.

Now, let us move on to asymmetry. Do you know the meaning of this term? If
you do not, refer below to equip yourself with the definition.

Asymmetry exists whenever one participant in a market has more


resources such as financial backing, knowledge, information, and/or
power than other participants. Asymmetries lead to some firms having an
edge over others, permitting them to come to market with better products,
faster than the competitors, and sometimes at lower cost.

For instance, when Papa JohnÊs Pizza began advertising that its founder was the
former founder of Pizza Hut, the company earned instant credibility. Similarly,
when Geraldine Laybourne left her senior position at Disney to start the online
womenÊs network, Oxygen.com, her company was given better-than-average
odds of success simply because of her background and her connections, which
included several larger investors who were willing to invest significant capital to
start the company.

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50 TOPIC 2 E-COMMERCE BUSINESS MODELS

One rather unique competitive advantage derives from being a first mover. A
first mover advantage is a competitive market advantage for a firm that results
from being the first into a marketplace with a serviceable product or service. If
first movers develop a loyal following or a unique interface that is difficult to
imitate, they can sustain their first mover advantage for long periods.
Amazon.com is a good example. However, in the history of technology-driven
business innovation, most first movers lack the resources to sustain their
advantages and reap the largest rewards.

Are you aware that some competitive advantages are called unfair? An unfair
competitive advantage occurs when one firm develops an advantage based on a
factor that other firms cannot purchase. For instance, a brand name cannot be
purchased and is, in that sense, an „unfair‰ advantage. Brands are built upon
loyalty, trust, reliability and quality. Once obtained, they are difficult to copy or
imitate, and they permit firms to charge premium prices for their products.

In perfect markets, there are no competitive advantages because all firms have
access to all the factors of production (including information and knowledge)
equally. However, real markets are imperfect, competitive advantages do exist at
least in the short-term. Most competitive advantages are short-term, although
some are long-term. For example, the competitive advantage enjoyed by Coca-
Cola because of its brand name can be sustained for very long periods, but not
forever. CokeÊs sweet soft drink is increasingly challenged by fruit juices, and
healthy and unique flavoured drinks.

Companies are said to leverage their competitive assets when they use their
competitive advantages to achieve more advantages in surrounding markets. For
instance, Amazon.comÊs move into the online auction arena leveraged the
companyÊs huge customer database, offering customers one more way to buy
from Amazon and giving them new access to just about any item someone else
had to sell. AmazonÊs competitive advantages included the years of e-commerce
experience the company had already amassed by the time it ventured into online
auctions and plus its database of millions of customers.

ACTIVITY 2.7

Visit the following websites and compare the competitive advantage


that differs between them.

http://www.airasia.com.my/
http://www.mas.com.my/

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TOPIC 2 E-COMMERCE BUSINESS MODELS 51

2.1.6 Market Strategy


Do you know that no matter how tremendous a firmÊs qualities are, its
marketing strategy and execution are often just as important? The best business
concept, or idea, will fail if it is not properly marketed to the potential customers.

Everything you do to promote your companyÊs products and services to


potential customers is known as marketing. While, market strategy is the plan
you put together that details exactly how you intend to enter a new market and
attract new customers.

Part of Kozmo.comÊs marketing strategy, for instance, was to use partners such
as Starbucks Coffee to help attract new customers. By partnering with other
companies that could benefit from fast customer deliveries, Kozmo attempted to
extend its reach.

Other companies, such as Yahoo.com, have used a different marketing strategy.


They invest heavily in advertising to get the word out about their site. Simply
introducing someone to a new site can be all that is needed to encourage him or
her to use it. AOL enclosed CDs with a free trial offer in magazines and
newspapers across the country. By distributing a huge volume of samples, AOL
hoped that at least a small percentage would opt to try the software and decide
to become its new subscriber. This strategy has proven to be very successful for
AOL, and today they have almost 30 million subscribers.

2.1.7 Organisational Development


Although many entrepreneurial ventures are started by one visionary individual,
it is rare that one person alone can grow an idea into a multi-million dollar
company. In most cases, fast-growth companies especially e-commerce
businesses need employees and a set of business procedures.

In short, all new firms need an organisation to efficiently implement their


business plans and strategies. Many e-commerce firms and many traditional
firms who attempt an e-commerce strategy have failed because they lacked
organisational structures and supportive cultural values required to support new
forms of commerce.

Companies that hope to grow and thrive need to have a plan for organisational
development that describes how the company will organise the work that needs
to be accomplished. Typically, work is divided into functional departments, such
as production, shipping, marketing, customer support, and finance. Jobs within

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52 TOPIC 2 E-COMMERCE BUSINESS MODELS

these functional areas are defined, and then recruitment begins for specific
job titles and responsibilities.

Typically, in the beginning, generalists who can perform multiple tasks are hired.
As the company grows, recruiting becomes more specialised. For instance, at the
outset, a business may have one marketing manager. But after two or three years
of steady growth, that one marketing position may be broken down into seven
separate new positions done by seven individuals.

For instance, eBay.comÊs founder, Pierre Omidyar, started an online auction site to
help his girlfriend trade some candy dispensers with other collectors, but within a
few months the volume of business had far exceeded what he alone could handle.
So he began hiring people with more business experience to help out in the
business. Soon the company had many employees, departments, and managers
who were responsible for overseeing the various aspects of the company.

2.1.8 Management Team


Finally, we have arrived at the last key element involved in a business model.
Arguably, the single most important element of a business model is the
management team responsible for making the model work. A strong
management team gives a model instant credibility to outside investors,
immediate market- specific knowledge, and experience in implementing business
plans. A strong management team may not be able to salvage a weak business
model, but they should be able to change the model and redefine the business as
it becomes necessary.

Eventually, most companies get to the point of having several senior executives
or managers. However skilled managers, can be a source of competitive
advantage or disadvantage. The challenge is to find people who have both the
experience and the ability to apply that experience to new situations.

To be able to identify good managers for a business start-up, first consider asking
the following questions that would be helpful for you and to the manager joining
your company:

(a) What kind of technical background is desirable?


(b) What kind of supervisory experiences job functions should be fulfilled first:
marketing, production, finance, or operations?
(c) Especially in situations where financing will be needed to get a company
off the ground, do prospective senior managers have experience and
contacts for raising financing from outside investors?
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TOPIC 2 E-COMMERCE BUSINESS MODELS 53

ACTIVITY 2.8

1. Visit the following websites and identify whether Amazon.com


and Half.com are direct or indirect competitors. Discuss with your
course mates.
http://www.amazon.com
http://www.half.com

2. Visit the following websites. Describe how each of the online


companies generates their revenue.
(a) Companies using the advertising revenue model
http://www.comiclink.com
http://www.mudah.my
(b) Companies using the subscription model
http://www.eliterecriting.com
http://www.espn.com
(c) Companies using the transaction fee model
http://www.travelocity.com
http://www.lelong.com.my
(d) Companies using the sales model
http://www.apple.com
http://www.parksononline.com
(e) Companies using the affiliate model
http://www.beyond.com

EXERCISE 2.1
1. What is a business model?
2. List eight key components of an effective business model.
3. What are the five primary revenue models used by
e-commerce firms?

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54 TOPIC 2 E-COMMERCE BUSINESS MODELS

2.2 B2C BUSINESS MODELS


Business-to-consumer (B2C), in which online businesses seek to reach individual
consumers, is the most well-known and familiar type of e-commerce. Major
business models utilised in the B2C arena are as shown in Figure 2.4.

Figure 2.4: Major B2C business models

All seven models will be discussed in depth in the following sections.

2.2.1 Portal
Have you ever heard of the term „portal‰? Refer to the following to find out the
meaning of this term.

A portal (web portal) is a site that people use as a launching point to enter
the web. A portal almost always includes a web directory and search
engine, but it also includes other features that help visitors to find what
they are looking for on the web and thus make the web more useful.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 55

Most portals include features such as shopping directories, white pages and
yellow pages lookup databases, free e-mail, chat rooms, instant messaging,
calendar, music downloads, video streaming, games and many more.

Five years ago, portals were viewed as „gateways‰ to the Internet. However,
today, the portal business model is seen as a destination site. Portals do not sell
anything directly, thus, presenting themselves as unbiased. Portals generate
revenue primarily by charging advertisers for advertisement placements,
collecting referral fees for steering customers to other sites, and charging for
premium services. AOL and MSN, in addition to being portals, are also Internet
Service Providers (ISP) that provide access to the Internet and the web.

Some web observers believe that web portal sites could be the great revenue
generating businesses of the future. Thus, adding portal features to existing sites
or converting sites to portals is seen as a wise business strategy. However, even
though there are numerous portal/search engine sites, the top five sites gather
more than 95% of the search engine traffic because of their superior brand
recognition.

The top five portal/search engine sites are Google, Yahoo!, MSN/Windows Live,
AOL, and Ask.com. Most of them were among the first to appear on the web and
therefore had first mover advantages. Being first confers advantage because
customers come to trust a reliable provider and experience switching costs if they
change to late arrivals in the market.

Yahoo!, AOL, MSN/Windows Live, and others like them are considered to be
horizontal portals because they define their market space to include all users of
the Internet. Vertical portals attempt to provide similar services as horizontal
portals, but are focused around a particular subject matter or market segment.
Although the total number of vertical portals may be much lower than the
number of portal users, if the market segment is attractive enough, advertisers
are willing to pay a premium in order to reach a targeted audience. Figure 2.5
illustrates the portal site of MSN.

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56 TOPIC 2 E-COMMERCE BUSINESS MODELS

Figure 2.5: MSN portal site


Source: http://www.msn.com/

A growing number of large organisations have built web portals to provide


information to their employees. These portals can save significant amounts of
money by replacing the printing and distribution of paper memos, newsletters,
and other correspondence with a website. Organisations use internal Web portals
to publish employee handbooks, newsletters, and employee benefits information.

ACTIVITY 2.9

Visit the Open University Malaysia (OUM) portal at www.oum.edu.


my. Identify the features that are unique and add values to students
as compared to other educational portals.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 57

2.2.2 E-tailer
Do you know what an e-tailer is? If you do not, let us look at the definition
provided.

E-tailers or online retail stores are much like the typical brick-and-mortar
storefront, except that customers only have to connect to the Internet to
check their inventory and place an order.

Many of the most successful e-tailers are firms that were already operating in the
mail order business and simply expanded their operations to the web. Other
firms began using the web to sell their products after realising that the products
they sold in their physical stores could also be sold on the web. This additional
sales outlet did not require them to build additional stores, yet provided them
with the access to customers throughout the world.

For example, Wal-Mart and Banes & Noble also opened websites to sell the same
products that they had been selling in their stores. Others have been operating
solely in the virtual world, without having a physical store. The examples are
Amazon.com, BlueNile.com, and Drugstore.com.

Another variation of e-tailers is online versions of direct mail catalogues. The


Sharper Image, for instance, expanded their successful mail order catalogue
operations to include websites. Other variations such as online malls, and
manufacturer-direct online sales, also exist. The growing population of Internet
users reflects a growing number of potential consumers. Every Internet user is a
potential customer. Customers who feel time-starved are even hotter prospects,
since they want shopping solutions that will eliminate the need to drive to the
mall or store.

The e-tail revenue model is product based, with customers paying for the
purchase of a particular item. However, this sector is extremely competitive.
Since barriers to entry (the total cost of entering a new market place) into the e-
tail market are low, tens of thousands of small e-tail shops have sprung up on the
web. Becoming profitable and surviving is very difficult for e-tailers with no
prior brand name or experience.

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58 TOPIC 2 E-COMMERCE BUSINESS MODELS

Since 1999, hundreds, if not thousands, of e-tailers have failed and closed shop.
The e-tailersÊs challenge is in differentiating its business from other existing
stores. For example, how is a new toy e-tailer going to perform better than or
differently from eToys.com, an online toy e-tailer, which was well funded and
still could not survive?

Companies that try to reach every online consumer are likely to deplete their
resources quickly. Those that develop a niche strategy, clearly identifying their
target market and its needs, are best prepared to make profit. Keeping expenses
low, selection broad, and inventory controlled are keys to success in e-tailing,
with inventory being the most difficult to gauge.

2.2.3 Content Provider


What is meant by content provider? The following explanation will answer the
question.

Content providers distribute information content, such as digital news,


music, photos, video and artwork over the web.

Although there are many ways the Internet can be useful, „Information content,‰
which can be defined broadly to include all forms of intellectual property, is one
of the largest types on Internet usage. Intellectual property refers to all forms of
human expression that can be put into a tangible medium such as text, CDs, or
the web. In 2005, the US consumers spent $2 billion for online content and this
figure is expected to be over $3.6 billion in 2008.

Content providers make money by charging subscribers a subscription fee. For


instance, in the case of MP3.com, a monthly subscription fee provides users
with access to thousands of song tracks. Other content providers are such as WSJ.
com (the Wall Street JournalÊs online newspaper), HBR Online (Harvard
Business Review), and many others charge customers for content downloads in
addition to or in place of a subscription fee.

Micropayment systems technology, such as QPass system, provides content


providers with a cost effective method for processing high volumes of very small
monetary transactions. Micropayment systems have greatly enhanced the
revenue model prospects of content providers who wish to charge by the
download. Content providers, such as MP3.com, also make money by selling
advertising space on their sites.

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Of course, not all online content providers charge for their information. Just look
at the online versions of many other newspapers and magazines (e.g., CNN.com,
Sportsline.com), users can access news and information at these sites without
paying a cent. These sites make money in other ways, such as through
advertising and partner promotions on the site.

The key to becoming a successful content provider is to own the content.


Traditional owners of copyrighted content publishers of books and newspapers,
broadcasters of radio and television content, music, publishers, and movie
studios have powerful advantages over newcomers to the web. Some content
providers, however, do not own content, but syndicate (aggregate) and then
distribute content produced by others.

Syndication is a major variation of the standard content provider model.


IntoNetworks.com, and intertainment.com, for instance, licensed content such as
games, videos and software training programmes from owners and then
distribute the content on high-speed Internet connections to small business and
homes.

Any e-commerce start-up that intends to make money by providing content


is likely to face difficulties unless it has a unique information source that
others cannot access. For the most part, this business category is dominated by
traditional content providers.

One example of a successful content provider start-up is drudgereport.com, a


political and entertainment site started by a journalist, Matt Drudge, who has no
training or experience. Through word-of-mouth, Drudge garnered support and a
long list of information tipsters. Ultimately, a tipster leaked word of the Monica
Lewinsky-Bill Clinton scandal and the Drudge Report was the first media source
anywhere to report it. Since then, the site has grown tremendously, and has
inked licensing deals with AOL, TV and radio shows. Despite Matt DrudgeÊs lack
of experience and business savvy, The Drudge Report has attracted thousands of
regular readers through smart promotional moves and luck.

2.2.4 Transaction Broker


Do you know what a transaction broker does? If you do not, refer to below
explanation.

Transaction brokers normally handle transactions for consumers in


person, by phone or mail.

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60 TOPIC 2 E-COMMERCE BUSINESS MODELS

The largest industries using the transaction broker model are financial
services, travel services, and job placement services. Online stock brokers such
as E-Trade.com, Ameritrade.com and Schwab.com have captured about 20% of
retail stock transactions. The online transaction brokerÊs primary value
propositions are savings of money and time.

In addition, most transaction brokers provide timely information and opinion.


Sites such as Monster.com, as shown in Figure 2.6, offer job searchers a national
market place for their talents, and offer employers a national resource for talent.
Both employers and job seekers are attracted by the convenience and currency of
information. Online stock brokers charge commissions that are considerably less
than traditional brokers, with many offering substantial deals, such as cash and a
certain number of free trades, to lure new customers.

Figure 2.6: Monster.com


Source: http://www. monster.com/

Given the rising consumer interest in financial planning and the stock market,
the market opportunity for online transaction brokers appears to be large.
However, while millions of customers have shifted to online brokers, many have
been wary to switch from their traditional broker who provides personal advice
and a brand name. Fear of privacy invasion and the loss of control over personal
financial information also contribute to market resistance. Consequently, the
challenge for online brokers is to overcome the consumerÊs fears by emphasising
on the security and privacy measures in place.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 61

Transaction brokers make money each time a transaction occurs. Each stock
trade, for example, nets the company a fee, based either on a flat or sliding scale
related to the size of the transaction. Attracting new customers and encouraging
them to trade frequently are the keys to generating more revenue for these
companies. Job sites generate listing fees from employers up front, rather than a
fee when a position is filled.

Competition among brokers has become more fierce in the past few years,
due to the new entrants offering ever more appealing offers to consumers to sign
on. Those who prospered initially were the first movers such as E-Trade. com,
Ameritrade.com, Schwab.com, and OptionsXpress.com.

Online brokerages are now in direct competition with traditional brokerages


firms who have now joined the online market space. Significant consolidation is
occurring in this industry. The number of job sites has also multiplied, but the
largest sites with the largest number of job listings are pulling ahead of smaller
niche companies. In both industries, only a few very large firms are likely to
survive in the long term.

2.2.5 Market Creator


What is the function of market creators? Let us look at the following to figure out
their function.

Market creators build a digital environment where buyers and sellers can
meet, display products, search for products, and establish a price for
products.

Traditionally, market creators relied on physical places to establish a market.


There were few private digital network market places prior to the web. The web
changed this phenomenon by making it possible to separate markets from
physical space. A prime example is Priceline.com, which allows consumers to set
the price they are willing to pay for various travel accommodations and other
products and eBay.com, the online auction site utilised by both businesses and
consumers.

For example, eBayÊs auction business model is to create a digital electronic


environment for buyers and sellers to meet, agree on price, and transact. This is
different from transaction brokers who actually carry out the transaction for their
customers, acting as agents in larger markets. At eBay, the buyers and sellers are
their own agents. Each sale on eBay nets the company a fee, in addition to a

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62 TOPIC 2 E-COMMERCE BUSINESS MODELS

listing fee upfront. EBay is one of the few websites that have been profitable
virtually from the beginning. Do you know why? One reason is that eBay has no
inventory or production costs; it is simply a middleman.

The market opportunity for market creators is potentially vast, but only if the
firm has financial resources and a marketing plan to attract sufficient sellers and
buyers to the marketplace. About seven million people use eBay each month and
this makes for an efficient market. There are many sellers and buyers for each
type of product and sometimes for the same product. New firms wishing to
create a market require an aggressive branding and awareness programme to
attract a sufficient critical mass of customers. Some very large web-based firms
such as Amazon.com have leveraged their large customer base and started
auctions. Many other digital auctions have sprung up in smaller, more
specialised vertical market segments such as jewellery and automobiles.

In addition to marketing and branding, a companyÊs management team and


organisation can make a difference in creating new markets, especially if some
managers have had experience in similar businesses. Speed is often the key in
such situations. The ability to become operational quickly can make the
difference between success and failure.

2.2.6 Service Provider


Do you know what a service provider does? While e-tailers sell products online,
service providers offer services online. Some charge a fee, while others generate
revenue from other sources, such as advertising and by collecting personal
information that is useful in direct marketing.

Obviously, some services cannot be provided and executed via online such as
plumbing and car repair. Arrangements can be made, however, for car repair and
for plumbing via the Internet. The examples for service providers are as follows:
(a) SugarSync.com, an online information storage and backup services;
(b) WhatsItWorthToYou.com, where consumers can have antiques and
collectibles appraised online;
(c) Netgrocer.com, which offers grocery shopping services;
(d) Financial transaction brokers which provide services such as college tuition
and pension planning; and
(e) Travel brokers which provide vacation planning services and transactions
with airlines and hotels.

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The basic value proposition of service providers is that they offer consumers a
valuable, convenient, time-saving, and low-cost alternative to traditional service
providers. Research has found, for instance, that a major factor in predicting
online buying behaviour is time starvation. Time-starved people tend to be busy.
Professionals who work long hours and simply do not have the time to pick up
packages or buy groceries.

Service providers make money through the following ways:


(a) Subscription fees, if there is a recurring need for the service. For example,
SugarSync.com makes money when a new subscriber signs on for monthly
information storage; or
(b) Through one-time payments for single use of the service; or
(c) Through commissions on items purchased or delivered.

Much like retailers, who trade products for cash, service providers trade
knowledge, expertise and effort for revenue. The market opportunity for service
providers is as large as the variety of services that can be provided and
potentially is equal to the market opportunity for physical goods. We live in a
service-based economy and society. Opportunity and potential can be witnessed
with the growth of fast food restaurants, package delivery services and wireless
cellular phone services. ConsumersÊ increasing demand for convenience products
and services bodes well for current and future service providers.

However, there are challenges that must be tackled by the service providers and
they are:
(a) Diminish the consumer fears about hiring an online vendor;
(b) Build confidence and familiarity among current and potential customers;
(c) Build the name recognition; and
(d) Enticing consumers to try the service.

2.2.7 Community Provider


Although community providers are not a new entity, the Internet made many
sites for like-minded individuals to meet and converse much easier, without the
limitations of geography to hinder participation. Before we move on the
explanation for community provider, let us look at the following description.

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64 TOPIC 2 E-COMMERCE BUSINESS MODELS

Community providers are sites that create a digital online environment where
people with similar interests can transact (buy and sell goods), communicate
with like-minded people, receive interest-related information and even play
out fantasies by adopting online personalities.

The basic value proposition of community providers is to create a fast,


convenient, one-stop site where users can focus on their most important concerns
and interests. Community providers, typically, rely on a hybrid revenue model
that includes subscription fees, sales revenues, transaction fees, affiliate fees and
advertising fees from other firms who are attracted by a tightly focused audience.

Community sites such as iVillage.com, Oxygen.com, and About.com make


money through affiliate relationships with retailers and from advertising. For
instance, a parent might visit iVillage.com for tips on hair grooming and
accessories and be presented with a link to ByLilla.com. If the user clicks the link
and then makes a purchase from ByLilla.com, iVillage.com will get a
commission. Likewise, banner advertisements also generate revenue.

At About.com, visitors can share tips and buy a recommended book from
Amazon.com which gives About.com a commission on every purchase. Some of
the oldest communities on the web are Well.com, which provides a forum for
technology and Internet-related conversation and discussions since 1985, and The
Motley Fool (Fool.com), founded in 1993, which provides financial advice, news
and opinions to the investment community.

ConsumersÊ interest in communities seems to be increasing, with the market


opportunity expanding as well. The key in developing a new community is to
carve out a well-defined niche that is currently not being served. Targeting large
market segments will only pit a company against bigger, better-established
competitors. Small pockets-sub segments of larger markets have the potential for
future growth without as much competitive pressure. The greatest challenge
faced by community sites is in balancing the cost of high-quality content with the
revenue derived from advertising. Currently, community sites are finding it
difficult to make a profit, thus, endangering their existence.

Firm qualities that are important among community providers are breadth and
depth of knowledge. Since the purpose of communities is to link consumers with
similar interests and personal situations, having managers who can relate to such
experiences is crucial. Community members frequently request guidance and
advice. Lack of experienced personnel can severely hamper the growth of a
community which needs facilitators and managers to keep discussions on course
as relevant.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 65

Enticing new participants to join a community is the focus of most marketing


strategies, with larger communities generating powerful word-of-mouth
advertising and rising commissions. The greater the number of community
members, the higher the advertising rates that can be charged and the better the
chances for sales at partner sites.

ACTIVITY 2.10

Besides news and articles, what are other forms of information or


matter that content providers offer?

Visit the following website. Describe the features explained in the


website.

http://www.cio.com/article/40298/E_Commerce_Definition_and_
Solutions

EXERCISE 2.2

1. What is a portal? What are other examples of portals in


existence today?
2. Describe the major differences between service providers and
community providers.

2.3 B2B BUSINESS MODELS


As learned in Topic 1, business-to-business (B2B) e-commerce, which focuses on
selling to other businesses, is about three times the size of B2C e-commerce,
even though most of the public attention has focused on B2C.

Major business models utilised in the B2B e-commerce include the following:
(a) Exchange (B2B hub);
(b) E-distributor;
(c) E-procurement;
(d) B2B service provider;

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66 TOPIC 2 E-COMMERCE BUSINESS MODELS

(e) Matchmaker; and


(f) Infomediary.

Let us check out of each model in the following sections.

2.3.1 Exchange (B2B Hub)


Exchanges, or B2B hubs, have garnered most of the B2B attention and funding
because of their potential market size. Before we go in-depth into the explanation
provided for exchange, let us look at the definition given.

An exchange is an independent digital electronic marketplace where


suppliers and commercial purchasers can conduct transactions.

For buyers, B2B hubs make it possible to gather information, check out suppliers,
collect prices, and keep up-to-date on the latest happenings all in one place.
Sellers, on the other hand, benefit from expanded access to buyers. The greater
the number of potential buyers, the lower the sales cost and the higher the
chances of making a sale. Some sites also have experienced higher average
revenue per buyer.

Marketplaces make it significantly less expensive and time consuming to identify


potential suppliers, customers, and partners, and to do business with each
other. As a result, B2B hubs can lower the following costs:
(a) Product Costs
A cost incurred by a business when manufacturing a good or producing a
service. Product costs combine the cost for raw material and labour.
(b) Transaction Costs
This is the cost of making a sale or purchase. For instance, the cost for a
corporate purchasing agent to place an order typically starts at RM100;
(c) Inventory-carrying Costs
This is the cost of keeping a product on hand or in a warehouse.

They are two forms of marketplaces and they are:

(a) Vertical Marketplaces


These marketplaces serve specific industries, such as the steel, aerospace,
automobile, chemical, floral, or logging industry. Mainly, vertical

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TOPIC 2 E-COMMERCE BUSINESS MODELS 67

marketplaces supply a smaller number of companies with products and


services of specific interest to their industry.

One of the largest vertical B2B marketplaces is Covisint, the auto parts
exchange backed by DaimlerChrysler, Ford, General Motors, Renault,
CommerceOne, and Oracle. Formed in October 2000, Covisint had logged
over $350 million in transactions, conducted 100 auctions and placed over
100 catalogues online.

While, AgWeb.com and Agriculture.com serve the agricultural market,


providing farmers and suppliers with news, commodities pricing and
forecasts, as well as volume purchasing opportunities that help users to
save time and money on purchases.

(b) Horizontal Marketplaces


These marketplaces sell specific products and services to a wide range of
companies. Horizontal marketplaces supply companies in different
industries with a particular type of product and service, such as
marketing-related, financial or computing.

TradeOut.com auctions surplus equipment off to the highest bidder in any


industry, which is why it is an example of a horizontal marketplace. It is
specialised in helping companies with excess inventory and idle assets to
sell their products and services to other companies that have a need for
them. Businesses can buy from and sell to each other, free up the cash and
unload inventory that is no longer of any use to them.

The key to success with marketplaces are as follows:

(i) The Size of the Industry


If the industry that the marketplace seeks to serve is not large
enough, it is not likely that the site will be profitable.

(ii) The Number of Registered Users


Similarly, if the site cannot reach critical mass by attracting a large
number of buyers and sellers, users will go elsewhere.

In the next few years, experts predict a sharp consolidation within


e-marketplaces, with the number of sites diminishing dramatically,
leaving just a few major B2B hubs. In addition, the concept of a
centralised hub may slowly be replaced by direct peer-to-peer
exchanges.

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2.3.2 E-distributor
Do you know the meaning of e-distributors? E-distributors are companies that
supply products and services directly to individual businesses.

Whereas B2B hubs pull together many businesses, making it possible for them to
do business with other companies, e-distributors are set up by one company
seeking to serve many customers. However, as with B2B hubs, critical mass is a
factor in e-distributors. With e-distributors, the more products and services a
company makes available on its site, the more attractive that site is to potential
customer. One-stop shopping is always preferred as one can visit numerous
items or locate a particular part or product in one single site.

Let us look below at the example provided for e-distributor.

W. W. Grainger is the largest distributor of maintenance, repair, and


operations (MRO) supplies. In the past, it relied on catalogue sales and
physical distribution centres in metropolitan areas. Its catalogue of
equipment went online in 1995 at grainger.com, giving businesses access to
more than 220,000 items. Company purchasing agents can search by type
of product, such as motors, HVAC, or fluids, or by specific brand name.

Although W. W. Grainger established its website in order to conduct


business with its customers, General Electric Aircraft Engines backed into
its role as an e-distributor. GE Aircraft Engines is a large purchaser of
aircraft engine parts that other purchasers in the aircraft industry almost
always need the same parts GE is ordering from vendors.

GE decided to make its internal procurement system public, allowing


fellow buyers of industrial products and equipment to visit its site,
geae.com, in search of needed parts and machinery. GE and other
purchasers can buy together and receive larger discounts for larger orders.
In setting itself up as a focal point for such purchasing inquiries, GE
improved its own purchasing power and relationships. This decision has
created a new profit centre for GE and reduced its own cost of acquisition.

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2.3.3 E-procurement
What is meant by e-procurement? Refer to below to find out the meaning of the
term.

An e-procurement firm creates and sells digital market where sellers and
buyers transact for indirect inputs by earning fee for market-making
services, supply chain management and fulfilment services.

For example, Ariba.com creates a unique web-based platform, called Ariba


Commerce Cloud, which includes applications for spend management,
collaborative finance management and sales acceleration management. This
platform connects to more than 300,000 global businesses, and claim to be one of
the largest web-based trading communities in the world.

2.3.4 B2B Service Provider


Just as e-distributors provide products to other companies, B2B service providers
sell business services to other firms. „Traditional‰ B2B service providers offer
online equivalents to common business services, such as accounting, financial
services, human resource management and printing. Application service
providers are another type of B2B service provider. Look below to know its
meaning.

An application service provider (ASP) is a company that sells access to


Internet-based software applications to other companies.

For example, Salesforce.com enables companies to manage their sales forces.


Businesses license Salesforce.comÊs software based on the number of salespeople
who will be accessing the system. This eliminates the need for firms to buy or
install a complex sales force automation system.

As for how B2B gain its profit, B2B service providers make the money through
the following ways:
(a) Transaction fees; or
(b) Fees based on the number of workstations using the service; or
(c) Annual licensing fees (the method used by Salesforce.com).

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70 TOPIC 2 E-COMMERCE BUSINESS MODELS

They offer purchasing firms significant advantages. Services tend to be


knowledge-intensive and based on expensive professional employees.
Computer-based software management systems are difficult to build or
customise to oneÊs business.

A B2B service provider such as Salesforce.com can build force management


system to achieve scale economies. If you want to know the meaning of the term,
refer below.

Scale economies occur when companies spread the cost of the system over
many users. It arises when large fixed-cost production systems (such as
factories or software systems) can be operated at full capacity with no idle
time.

In the case of software, the marginal cost of a digital copy of a software


programme is nearly zero, and finding additional buyers for an expensive
software programme is exceptionally profitable. This is much more efficient than
having every firm build its own sales force management system, and it permits
Salesforce.com to specialise in a single type of system and offer the market place
a „best of breed‰ system.

2.3.5 Matchmaker
What is meant by the term ‰matchmaker„? If you answer that it means
individuals who try to bring together a couple with the aim of making them to
fall in love, then you have a wrong answer. In commerce, matchmaker has a
different meaning. Refer below to find out the meaning of the term.

Matchmakers are companies that make money by linking other businesses


and taking a cut of any business that occurs via a transaction or usage fee.
They are a form of the transaction broker (one of the models in B2C).

For example, iShip.com helps businesses to find the cheapest shipper for their
packages. Although other companies sell expensive multicarrier shipping
software, iShip lets companies to access its website free of charge to compare the
rates from several major carriers, including Federal Express, Airborne, and the
U.S. Postal Service. Once a company has located the cheapest shipper for its
particular package, it pays iShip a fee in order to proceed with the shipment.

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2.3.6 Infomediary
What is an infomediary? Refer below to find out its meaning.

The term infomediary was originally coined by Hagel and Rayport (1997)
to describe a new breed of company that would act as custodians, agents,
and brokers of customer information and marketing it to businesses on
consumersÊ behalf while protecting their privacy at the same time.

Today, although the privacy-protection aspects of their proposed definition have


not necessarily come to fruition, there are a number of companies whose business
model is premised upon gathering information about consumers and selling it to
other businesses. A vendor-oriented infomediary sells the information it gathers
to vendors who use it to target products, services and promotions to particular
consumers.

Vendor oriented infomediaries can be classified into two basic subcategories:

(a) Audience Brokers


Audience brokers capture information about customers and use it to help
advertisers reach the most appropriate audiences for their advertising. A
leading example is DoubleClick.

(b) Lead Generators


Lead generators gather customer data, from which they then create
customer profiles and preferences. They then direct vendors of products
and services that fit these customer profiles to the customers. For example,
AutoByTel operates a national network of auto dealers to whom web
users are referred to in return for a fee per lead.

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72 TOPIC 2 E-COMMERCE BUSINESS MODELS

SELF-CHECK 2.1
Describe how B2B hubs are different from B2C portals.

Visit the following websites and describe the features of each website
in relation to B2B:
http://www.alibaba.com/
http://www.b2btoday.com/
http://www.b2byellowpages.com/
http://www.btobonline.com/

EXERCISE 2.3

1. List five major B2B business models.


2. Describe the application service providers (ASP).

2.4 C2C BUSINESS MODELS


As we have discussed in Topic 1, consumer-to-consumer (C2C) business models
connect consumers with other consumers. The most successful has been the
market creator business model used by eBay.com and Half.com. As shown in
Figure 2.7, eBay.com is a consumer auction website.

Let us continue our discussion to find out the operational system of eBay.com
and Half.com.

Before eBay, individual consumers used garage sales, flea markets, and
thrift shops to both dispose of and acquire used merchandise. With the
introduction of online auctions, consumers no longer had to venture out
of their home or office in order to bid on items of interest, and sellers
could relinquish expensive retail space that was no longer needed in
order to reach buyers.

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TOPIC 2 E-COMMERCE BUSINESS MODELS 73

eBay makes money through a small commission taken from linking like-
minded buyers and sellers. eBay is one of the websites that is profitable
since it first starts to operate and has retained its record till now. Sellers
and buyers must register with eBay and agree to the siteÊs basic term of
doing business. Seller pays eBay a listing fee and a sliding percentage of
the final selling price while buyers pay nothing to eBay. Sellers can
choose from a variety of enhanced and extra cost services, including
having their auctions listed in boldface type and featured in lists of
preferred auctions.

Consumers that do not like auctions but still want to find used
merchandise can visit Half.com, another well-doing website. It enables
consumers to sell off unwanted books, movies, music, and games to other
consumers. Unlike eBay, it allows sellers to set a fixed-price for each item,
rather than putting it up for bid. In return for facilitating a transaction,
Half.com takes a 15% commission on the sale, plus a fraction of the
shipping fee it charges.

Figure 2.7: eBay.com


Source: http://www.eBay.com/

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74 TOPIC 2 E-COMMERCE BUSINESS MODELS

2.4.1 Peer-to-Peer (P2P) Business Models


One type of C2C business model is P2P. It ventures by linking users and enabling
them to share files and computer resources without a common server. The focus
in P2P companies is on making information available for anyoneÊs use by
connecting users on the web. Historically, peer-to-peer technology has been used
to allow file sharing among users for free. Thus, the challenge for P2P ventures is
to develop a viable business model that will enable them to make money.

MP3.com, a music sites, makes it possible for music lovers to share files and to
download free MP3 songs. MP3.com also stores songs made available for free by
lesser-known artists and bands, who have given permission for the music to be
stored at the MP3 site. MP3 has become a heaven for bands waiting to be
discovered. MP3.com makes money through advertising and charging for some
downloads and has recently been acquired by Vivendi Universal, a major music
industry player. Another example of P2P business model is Kazaa
(www. kazaa.com) as shown in Figure 2.8.

Figure 2.8: Kazaa.com


Source: http://www.Kazaa.com/

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TOPIC 2 E-COMMERCE BUSINESS MODELS 75

ACTIVITY 2.11
Besides music, what other forms of information could be shared
through peer-to-peer sites?

Visit the following website and describe the features of the website in
relation to C2C:
• http://www.ebay.com,
• http://www.c2c-online.co.uk/
• http://www.c2c-guide.co.uk/
• http://www.lelong.com.my

EXERCISE 2.4

Describe the P2P business model.

There are eight key components that comprise business models and they are:
Value proposition;
Revenue model;
Market opportunity;
Competitive environment;
Competitive advantage;
Market strategy;
Organisational development; and
Management team.

There are seven major business models utilised in the B2C area and they are:
Portal;
E-tailer;

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76 TOPIC 2 E-COMMERCE BUSINESS MODELS

Content provider;
Transaction broker;
Market creator;
Service provider; and
Community provider.

There are six major business models utilised in the B2B area and they are:
Exchange;
E-distributor;
E-procurement;
B2B service provider;
Matchmaker; and
Infomediary.

Peer-to-peer is one type of C2C business model.

Community provider Market creator


Competitive advantage Market opportunity
Competitive environment Market place
Content provider Market strategy
E-distributor Matchmaker
E-procurement Portal
E-tailer Revenue model
Exchange Service provider
Infomediary Transaction broker
Management team Value proposition

Copyright © Open University Malaysia (OUM)


T op i c Internet and
3 World Wide
Web
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the concept, origin, growth and current structure of
Internet;
2. Identify the key technology concepts of Internet;
3. Describe the role of Internet protocols and utility programmes;
4. Discuss how the World Wide Web works; and
5. Differentiate between Internet, Intranet and Extranet.

INTRODUCTION
What are the aspects that bring e-commerce to the forefront? The technological
aspects that move e-commerce are the Internet and World Wide Web. Without
these technologies, e-commerce would be impossible. It is very important for a
business to understand how the Internet and World Wide Web work.
Implementing key e-commerce strategies such as personalisation, customisation,
market segmentation, and price discrimination all require understanding of web
technology. This topic examines the Internet and World Wide Web of today and
tomorrow, how it evolves, how it works, and how the present and future
infrastructure of the Internet and the web enables e-commerce.

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78 TOPIC 3 INTERNET AND WORLD WIDE WEB

3.1 THE INTERNET


You must have heard the term Internet countless times in your life. However, do
you know what is the definition of the term? Refer below to equip yourself with
the definition given.

The word Internet is derived from the word Âinter-networkÊ. In simpler


words, it refers to the connection made by two or more computer
networks. The Internet is an interconnected network of thousands of
networks and millions of computers (sometimes called as host computers)
linking businesses, educational institutions, government agencies, and
individuals together.

The Internet provides 1.996 billion people around the world with services such as
e-mail, newsgroups, shopping, research, instant messaging, music, videos, and
news. No one controls the Internet or its functions, nor is it owned by anybody,
yet it has provided the infrastructure for transformations in commerce, scientific
research, and culture. In recent years, the Internet has allowed commercial
enterprises to connect with one another and with customers. Today, all kinds of
business provide information about their products and services on the Internet
for the purpose of marketing and selling their products and services.

3.1.1 Origins and Growth of the Internet


Let us move on to the growth of Internet. Table 3.1 will show you the chronicles
of the InternetÊs development.

Table 3.1: Chronicles of the InternetÊs Development

Year Description
1960s The U.S. Department of Defence became concerned about the possible
effects of nuclear attack on its computing facilities. The Defence
Department realised that the future weapons would require powerful
computers for coordination and control. The powerful computers of that
time were all large mainframe computers. Therefore, the Defence
Department began examining ways to connect these computers to each
other and also to weaponsÊ installations distributed all over the world.
The Defence Department hired many of the best communications
technology researchers to explore the task of creating a worldwide
network that could remain operational, even if parts of the network
were destroyed by enemyÊs military action or sabotage.

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TOPIC 3 INTERNET AND WORLD WIDE WEB 79

Early computer networks used leased telephone company lines for


their connections. Telephone company systems of that time
established a single connection between sender and receiver for each
telephone call, and that connection carried all data along a single
path. The Defence Department was concerned about the inherent risk
of this single channel method for connecting computers. Thus, its
researchers developed a different method of sending information
through multiple channels. In this method, files and messages are
broken into packets that are labelled electronically with codes for their
origins, sequences, and destinations.
1969 The Defence Department researchers used this network model to
connect four computers; one each at the University of California at
Los Angeles, SRI International, the University of California at
Santa Barbara, and the University of Utah. This network was called
as ARPANET. In subsequent years, many researchers in the academic
community connected to this network and contributed to the
technological developments that increased the speed and efficiency
with which the network operated.
1972 E-mail was born when a researcher wrote a programme that could
send and receive messages over the network. This new method of
communicating became widely used very quickly. The number of
network users in the military and education research communities
continued to grow. Many of these participants used the networking
technology to transfer files and access computers remotely. The first
e-mail mailing lists, an e-mail address that forwards any messages it
receives to any user who has subscribed to the list, also appeared on
these networks.
1979 - 1985 The network applications were improved and tested by an
increasing number of users. The explosion of personal computer
(PC) during the 1980s also helped more people t o become
comfortable with computers.
1986 The National Science Foundation (NSF) connected its huge
network of five supercomputer centres called as NSFnet, to
ARPANET. This configuration of complex networks gives birth to
the Internet.
1990s People from all walks of life, not just scientists or academic
researchers, started thinking of these networks as the global
resource. Although this network had grown from Defence
Department computers in 1969 to more than 300,000 computers on
many interconnected networks by 1990, the greatest growth of the
Internet was yet to come.

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80 TOPIC 3 INTERNET AND WORLD WIDE WEB

1995, Previously, NSFnet handled the bulk of the communications activity


or traffic on the Internet. However, after that, NSFnet terminated its
network on the Internet and returned its status to a research
network. Today, a variety of corporations, commercial firms, and
other companies provide networks to handle the Internet traffic.
These networks, along with telephone companies, cable and
satellite companies, and the government all contribute toward the
internal structure of the Internet. Many donate resources, such as
servers, communication lines, and technical specialist making the
Internet truly collaborative.

The Internet was a phenomenon that had truly sneaked up on an unsuspecting


world. The researchers who had been so involved in the creation and growth of
the Internet just accepted it as part of their working environment. However,
people outside the research community were largely unaware of the potential
offered by a large interconnected set of computer networks.

In 30 years, the Internet has grown to become one of the amazing technological
and social accomplishments of the last century. Millions of people now use this
complex, interconnected network of computers. These computers run thousands
of different software packages. The computers are located in almost every
country of the world. Every year, billions of dollars change hands over the
Internet in exchange for all kinds of products and services.

Even as the Internet grows, it remains a public, cooperative and independent


network. Although no single person, company, institution, or government
agency controls or owns the Internet, several organisations contribute towards its
success by advising, defining standards, and addressing other issues. The World
Wide Web Consortium (W3C) is the group which oversees research and sets
standards and guidelines for many areas of the Internet.

3.1.2 The Internet Backbone


The InternetÊs backbone is formed by Network Service Providers (NSPs), which
own and control the major networks. The backbone has been likened to a giant
pipeline that transports data around the world in milliseconds. Nowadays, most
of the backbone is composed entirely of fibre optic cable, with bandwidths
ranging from 155 Mbps to 2.5 Gbps. Before we move on, let us look at the
definition provided for the term „bandwidth‰.

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TOPIC 3 INTERNET AND WORLD WIDE WEB 81

Bandwidth measures how much data can be transferred over a


communication medium within a fixed period of time. It is usually
expressed in bits per second (bps), kilobits (thousands of bits) per second
(Kbps), megabits (millions of bits) per second (Mbps), or gigabits (billions
of bits) per second (Gbps).

Connections to other continents are made via a combination of undersea fibre


optic cables and satellite links. The backbone has built-in redundancy, multiple
duplicate devices and paths in a network. Thus, if one part breaks down, data
can be re-routed to another part of the backbone. The Internet backbone
connects regional networks, which in turn provide access to the Internet to
Internet Service Providers (ISP), large firms, and government agencies.

Let us look at the definition given for ISP before going further.

An Internet service provider (ISP) is a business that has a permanent


Internet connection and offers temporary connections to individuals and
companies free or for a fee. Examples of ISPs in Malaysia are JARING
(managed by MIMOS Bhd) and TMNet (managed by TM).

There are two types of ISPs and they are:

(a) Regional
A regional ISP usually provides access to the Internet through one or more
local telephone numbers to a specific geographic area.

(b) National
A national ISP is a large business that provides local telephone numbers in
major cities and towns nationwide. Some national ISPs also provide a toll-
free telephone number. Due to their large size, national ISPs usually offer
more services and generally have a larger technical support staff than
regional ISPs.

Employees and students often connect to the Internet through a


business or school network. In this case, the computers usually are
part of a Local Area Network (LAN) that connects to a service provider
through a high-speed connection line leased from the local telephone
company. Home or small-business users often connect to the Internet
through dial-up access. With dial-up access, a user uses a computer, a

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82 TOPIC 3 INTERNET AND WORLD WIDE WEB

modem, and a regular telephone line to dial into an ISP. Dial up access
provides an easy and inexpensive way for users to connect to the Internet.
A dial-up connection, however, is a low-speed technology.

Some home and small business users opt for newer high-speed
technologies, which cost about twice as much as dial-up access, such as:

(a) Digital Subscriber Lines (DSL)


DSL provides high-speed connections over a regular copper
telephone line.

(b) Cable Television Internet Services


A cable modem provides high-speed Internet connection through the
cable television network.

To get more information on the history of the Internet and the Internet backbone,
visit these websites:

http://www.isoc.org/internet/history/
http://www.livinginternet.com/i/ii.ht

ACTIVITY 3.1

1. Discuss the development of Internet.


2. If the Internet is not restricted, it also may be used as a forum for
covert and illegal activities. Discuss whether the Internet should
be regulated or not.

EXERCISE 3.1

1. What is the Internet?


2. Explain briefly the term Internet Service Provider (ISP).

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TOPIC 3 INTERNET AND WORLD WIDE WEB 83

3.2 KEY TECHNOLOGY CONCEPTS OF


INTERNET
There are six important concepts that are the basis for understanding the Internet
and they are:
(a) Packet switching;
(b) The TCP/IP communications protocol;
(c) Client/server computing;
(d) Intranets;
(e) Extranets; and
(f) Internet II.

Although the Internet has evolved and changed dramatically in the last 30 years,
these six concepts are at the core of how Internet functions today and are the
foundation for Internet II, which will be discussed in the coming sections.

Let us look at these six significant concepts in the coming sections.

3.2.1 Packet Switching


What is packet switching? If you do not know the answer, refer below to know
its meaning.

Packet switching is a method of slicing digital messages into parcels called


„packets,‰ sending the packets along different communication paths as
they become available, and then reassembling the packets once they arrive
at their destination.

Prior to the development of packet switching, early computer networks used the
circuit switching (refer below).

Circuit switching is a centrally controlled, single connection model. Early


networks used leased, dedicated telephone circuits to communicate with
terminals and other computers. These connected circuits form a single
electrical path between caller and receiver, and this path is maintained for
the entire length of the call.

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84 TOPIC 3 INTERNET AND WORLD WIDE WEB

However, these circuit switching techniques were expensive. It also wasted the
available communication capacity as the circuit would be maintained regardless of
whether any data was being sent or not. Although circuit-switching works well for
telephone calls, it does not work as well for sending data across a large Wide Area
Network (WAN) or an interconnected network like the Internet. The Internet was
designed to be resistant to failure. In a circuit-switched network, a failure in any
one of the connected circuits causes the whole connection to be interrupted and
data to be lost.

Thus, better technology was needed to overcome those problems and this resulted
in the birth of packet switching. The Internet uses packet switching to move data
between two points. In packet switched networks, messages are first broken down
into packets. In each packet, there is a digital code that indicates the following
elements:
(a) Source address (the origination point);
(b) Destination address;
(c) Sequencing information; and
(d) Error-control information.

Rather than being sent directly to the destination address, in a packet network,
the packets travel from a computer to another computer until they reach their
destination. These computers are called as routers. Look below to know the
meaning of the term ‰router„.

Routers are special purpose computers that interconnect the thousands of


different computer networks that make up the Internet and route packets
along their ultimate destination as they travel. To ensure that the packets
take the best available path toward their destination, the routers use
computer programmes called routing algorithms.

Packet switching makes nearly full use of almost all available communication
lines and capacity. Moreover, if some lines are disabled or too busy, the packets
can be sent on any available line that eventually leads to the destination point.

To gain better understanding on how packet switching works, visit this website:

http://www.pbs.org/opb/nerds2.0.1/geek_glossary/packet_switching_
flash.html

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TOPIC 3 INTERNET AND WORLD WIDE WEB 85

3.2.2 TCP / IP
The Internet uses two main protocols and they are:
(a) Transmission Control Protocol (TCP); and
(b) Internet Protocol (IP).

Let us look at the definitions provided for both terms.

The Transmission Control Protocol (TCP) controls the disassembly of a


message or a file into packets before it is transmitted over the Internet,
and it controls the reassembly of those packets into their original formats
when they reach their destinations.

The Internet Protocol (IP) specifies the addressing details for each packet,
labelling each with the packetÊs origination and destination addresses.

TCP/IP is divided into four separate layers and with each layer handling a
different aspect of the communication problem. These four layers are:

(a) Network Interface Layer


This layer is responsible for placing packets on and receiving them from
the network medium, which could be a Local Area Network (Ethernet) or
Token Ring Network, or other network technologies. TCP/IP is
independent from any local network technology and can adapt to changes
in the local level.

(b) Internet Layer


This layer is responsible for addressing, packaging, and routing messages
on the Internet.

(c) Transport Layer


This layer is responsible for providing communication with the application
by acknowledging and sequencing the packets to and from the application.

(d) Application Layer


This layer provides a wide variety of applications with the ability to access
the services of the lower layers. Some of the best known applications are:

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(i) Hypertext Transfer Protocol (HTTP)


HTTP is the Internet application protocol used for transferring web
pages. A HTTP session begins when a clientÊs browser requests a
webpage from a remote Internet server. When the server responds by
sending the page requested, the HTTP session for that object ends. As
web pages may have many objects on them such as graphics, sound
or video files, frames and so forth, each object must be requested by a
separate HTTP message.

(ii) Simpler Mail Transfer Protocol (SMTP)


SMTP is the Internet application protocol used to send mail to a
server.

(iii) POP (Post Office Protocol)


In contrast to SMTP, the client retrieves mail from an Internet server
by using POP. You can see how your browser handles SMTP and
POP by looking in your browserÊs „Preferences or „Tools‰ section,
where the mail settings are defined.

(iv) IMAP (Internet Message Access Protocol)


IMAP is a more current e-mail protocol supported by many servers
and all browsers. IMAP allows users to search, organise, and filter
their mail prior to downloading it from the server.

(v) File Transfer Protocol (FTP)


FTP is one of the original Internet services. It is a part of the TCP/IP
protocol and permits users to transfer files from the server to their
client machine, and vice versa. The files can be in the forms of
documents, programmes, or large database files. FTP is the fastest
and most convenient way to transfer files larger than 1 megabyte,
which many mail servers will not accept.

The following applications are not owned by any one organisation but are
services that were developed over many years and given to all Internet users.
(a) IP address; and
(b) Domain names.

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Let us look at the explanations provided for each of the applications.

(a) IP Address
TCP handles the packetising and routing of Internet messages, while IP
provides the InternetÊs addressing scheme. Every computer connected to
the Internet must be assigned an address otherwise it cannot send or
receive TCP packets. For instance, when you sign onto the Internet using a
dial-up telephone modem, your computer is assigned with a temporary
address by your Internet Service Provider (ISP).

These Internet addresses, which are known as IP address, are 32-bit


numbers that appear as a series of four separate numbers marked off by
periods (refer to Figure 3.1), such as 201.61.186.227. Each of the four
numbers can range from 0 to 255. This „dotted quad‰ addressing scheme
contains up to 4 billion addresses. The leftmost number typically indicates
the network address of the computer, while the remaining numbers help to
identify the specific computer within the group that is sending or receiving
a message. This version of IP that has been used for the past 20 years on the
Internet is called as Internet Protocol version 4 (IPv4).

Figure 3.1: IP address


Source: http://www.usr.com/support/2450/2450-files/24xx-ug/three.html

With all the new networks and new Internet-enabled devices requiring
unique IP addresses being attached to the Internet, a new version of the IP
protocol, called as Internet Protocol version 6 (IPv6) is being adopted. This
scheme contains 128-bit addresses. Since the IPv6 address space is much
larger, its notation system is more complex.

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An example of an IPv6 address expressed in the above notation is as


follows:

CD18:0000:0000:AF23:0000:FF9E:61B2:884D
To save space, the zeros can be omitted, which would reduce this
address to:
CD18:::AF23::FF9E:61B2:884D
This notation system is called as colon hexadecimal (colon hex. A).

(b) Domain Names


Most people cannot remember 32-bit numbers. To replace the numbering
system, the founder of Internet created an alternative addressing method
that uses words. In this system, an address such as www.course.com is
called as a domain name (refer below for its explanation).

Domain names are sets of words that are assigned to specific IP addresses.
Domain names can contain two or more word groups separated by
periods. The rightmost part of a domain name is the most general. Each
part of the domain name becomes more specific as you move to the left.

Let us take the domain name of our very own website www.business.oum.edu.my,
which contains five parts separated by periods, as an example. The following are the
features of this domain name:
(a) Beginning at the right, the word „my‰ indicates the country, Malaysia;
(b) The word „edu‰ indicates that the computer belongs to an educational
institution;
(c) The institution, Open University Malaysia, is identified by the word
„OUM‰;
(d) The word „business‰ is the name of a specific computer or group of
computers at the university; and
(e) The word „www‰ indicates that the computer is running a software that
makes it part of the World Wide Web (WWW).

We have looked at how domain name is created, now let us move on how to
initiate a webpage request using a web browser.

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First of all, the user need to type the name of the protocol, followed by the
characters „//:‰ before the domain name. As we discussed earlier, the set of rules
for delivering webpage files over the Internet are in the HTTP protocol. Thus, a
user would type the following: http://www.business.oum.edu.my, to go to the
OUMÊs Faculty of Business website. The combination of the protocol name and
the domain name is called as the Uniform Resource Locator (URL).

3.2.3 Client / Server Computing


While packet switching exploded the available communications capacity and
TCP/IP provided the communications rules and regulations, it took a revolution
in computing to bring the Internet and the Web. That revolution is called as
client/server computing and without it, the web in all its richness would not
exist. In fact, the Internet is a giant example of client/server computing in which
over 70 million host server computers store Web pages and other content that can
be easily accessed by nearly a million local area networks and hundreds of
millions of client machines worldwide.

Let us look at the definitions provided for the components in this computing model:

(a) Clients
Clients are very powerful personal computers that are connected together
in a network together with one or more server computers. These clients are
sufficiently powerful to accomplish complex tasks such as displaying rich
graphics, storing large files, and processing graphics and sound files; all on
a local desktop or hand-held device.

(b) Servers
Servers are networked computers dedicated to common functions that the
client machines on the network need, such as storing files, software
applications, utility programmes such as Web connections and printers.

Client/server computing has many advantages over centralised mainframe


computing and they are:

(a) It is easy to expand capacity by adding servers and clients;

(b) It is less vulnerable than centralised computing architectures. For example,


if one server goes down, the backup or mirror servers can pick up the slack
or if a client machine is inoperable, the rest of the network continues
operating;

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(c) The processing load is balanced over many powerful smaller machines
rather than being concentrated in a single huge machine that performs
processing for everyone; and

(d) Both software and hardware in client/server environments can be built


more simply and economically.

3.2.4 Intranets
The very same Internet technologies that make it possible to operate a worldwide
public network can also be used by private and government organisations as
internal networks or more commonly known as intranets (refer below for its
definition).

An intranet is a TCP/IP network located within a single organisation


for purposes of communications and information processing.

Many corporations are moving away from proprietary local area networks such
as Windows 2000 and Novell, and toward a single internal intranet to handle the
firmÊs information processing and communication needs.

Intranets are an excellent low-cost way to distribute internal corporate


information. Based on the client/server model, intranet requests for files,
documents or schematic drawings, work the same way they do on the Internet.
An intranet uses web browsers and Internet-based protocol, including
TCP/IP, FTP and HTTP. Because intranets are compatible with the Internet,
information from intranets can be shared among departments that use different
technologies as well as among external consumers.

Intranets are often the most efficient way to distribute internal corporate
information as producing and distributing paper is usually slower and more
expensive than using Web-based communications. Companies can also use
intranets to reduce software maintenance and update costs for their employeesÊ
computer workstations. Computing staff can place software updates and patches
on the intranet, and employeesÊ workstations will be updated automatically the
next time they log on.

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3.2.5 Extranets
You may wonder whether an extranet has a similar function as an intranet.
Basically, an extranet is an intranet that has been extended to include specific
entities outside the boundaries of the organisation, such as business partners,
customers, or suppliers. Although fax, telephone, e-mail, and overnight express
carriers have been the main communications tools for business for many years,
extranets can replace many of them at a lower cost.

Let us look at the explanation given for extranet.

Extranets are networks that connect companies with suppliers, business


partners, or with other authorised users. Each participant in the extranet has
access to the database, files, or other information stored on computers
connected to the extranet. An extranet can be set up through the Internet, or
it can use a separate network. Some extranets start out as intranets that
eventually provide access of intranet data to Internet users.

For example, for many years, FedEx let customers to track their packages by
calling a FedEx toll-free number, and then giving the operator a tracking number.
In the early 1990s, FedEx began giving package-tracking software, as shown in
Figure 3.2, to any customer who wanted the software. Once it was installed in the
customerÊs computer, the software dialled the FedEx computer by using a
modem, queried the status of the customerÊs package, and displayed the results
on the customer Ês computer with no operator required.

Figure 3.2: FedEx package-tracking


Source: https://www.fedex.com/fedextrack/

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FedEx eliminated client-machine software and made package-tracking available


on its website. Instead of having thousands of programmes running on
customersÊ computers, FedEx has its customers to use their web browsers to run
one programme on its website. This Web-based system gives customers web
access (from any browser on any computer on the web) to package tracking, air-
bill creation, shipment logging, and FedEx supply shipments.

To get more information on Internet technologies, you can visit the following
websites:
http://www.nsf.gov/about/history/nsf0050/pdf/internet.pdf
http://www.livinginternet.com/i/i.htm

SELF-CHECK 3.1

1. What are the main concepts behind the Internet?


2. What is the definition for the following terms: intranets and
extranets?
3. What are the four layers of TCP/IP?

EXERCISE 3.2

1. Explain how packet switching works.


2. What do you understand by IP address and domain name?
3. How is intranet different from extranet?

3.2.6 Internet II
The Internet is changing as new technologies appear and new applications are
developed. As this happens, the second era of the Internet is being built by
private corporations, universities and government agencies. This new era of
Internet is referred to as Internet II.

Internet II is a consortium of more than 200 universities working in partnership


with government agencies and private businesses in an effort to make the
Internet more efficient. The idea behind Internet II is to create a „giant test bed‰

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where new technologies can be tested without impacting the current Internet.
The three primary goals of Internet II are as follows:
(a) Enable revolutionary Internet application;
(b) Ensure the rapid transfer of new network services and applications to the
broader Internet community; and
(c) Create a leading-edge high speed network capability for the national
research community.

Some of the areas being focused in this pursuit are as follows:


(a) Advanced network architecture;
(b) New networking capabilities;
(c) Improved middleware; and
(d) More advanced applications that incorporate video and audio.

Several new networks have been established in Internet II. Abilene and very high
performance Backbone Network Service (vBNS) are high performance backbone
with bandwidths ranging from 2.5 Gbps to 10 Gbps. In 2007, Internet II deployed a
100 Gbps East-West link. At these speeds, the ability of network to process data
begins to exceed the speed at which client computers can pull off their hard drives.

With a 100 Gbps Internet, a high-quality version of the movie „The Matrix‰ could
be sent in a few seconds rather than half a minute over the current Internet II and
two days over a typical home-broadband line. These improvements will make
possible the followings:
(a) Feature film distribution to millions of viewers;
(b) Differentiated quality of service;
(c) Guaranteed service levels; and
(d) Lower error rates.

3.3 THE WORLD WIDE WEB


Are you aware of the fact that without the World Wide Web, there would be no
e-commerce? The inventions of the Web brought an extraordinary expansion of
digital services to millions of amateur computer users, including colour text and
pages, formatted text, pictures, animations, video and sound. In short, the Web
makes nearly all the rich elements of human expression needed to establish a
commercial marketplace available to non-technical computer users worldwide.

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3.3.1 Hypertext, HTML and Web Browsers


Are you aware that Web pages can be accessed through the Internet because the
Web browser software operating your PC can request web pages stored on an
Internet host server using the HTTP protocol?

In this section, we will learn more on Hypertext, HTML and Web Browsers
which are the some of the essential components in computing. Let us equip
ourselves with the definition of Hypertext as shown below.

Hypertext is a way of formatting pages with embedded links that connect


documents to one another, and that also link pages to other objects such as
sound, video, or animation files. When you click on a graphic and a video
clip plays, you have clicked on a hyperlink.

For example, when you type a web address in your browser such as
http://www.oum.edu.my, your browser sends a HTTP request to oum.edu.my
server requesting the homepage of oum.edu.my.

As discussed earlier, http is the first set of letters at the start of every web
address, followed by the domain name. Together, the address is called a Uniform
Resource Locater (URL). When typed into a browser, a URL tells it exactly where
to look for the information.

The most common domain extensions currently available are as shown in Table
3.2. Countries also have domain names such as .uk, .au, .my, and .sg which
represent United Kingdom, Australia, Malaysia, and Singapore respectively. In
the near future, this list will expand to include many more types of organisations
and industries.

Table 3.2: List of Generic Top Level Domain

1980s 2001 & 2002 2003


.com .biz .asia
.edu .info .cat
.gov .name .jobs
.mil .pro .mobi
.net .aero .tel
.org .museum .travel

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We have looked at the Hypertext, now let us move on to find out the meaning of
HTML.

Hypertext Mark-up Language (HTML) provides webpage designers with


a fixed set of mark-up „tags‰ that are used to format a webpage. When
these tags are inserted into a webpage, they are read by the browser and
interpreted into a page display.

You can see the source of HTML code for any webpage by simply clicking on the
„Page Source‰ command found in all browsers as shown in Figure 3.3.

Figure 3.3: Page source command


Source: http://articles.sitepoint.com/article/html-css-beginners-guide/3

The function of HTML is to define the structure and style of a document, including the
headings, graphic positioning, tables, and text formatting. Since its introduction, the
two major browsers, NetscapeÊs Navigator and MicrosoftÊs Internet Explorer, have
continuously added features to HTML to enable programmers to further refine their
page layouts. HTML web pages can be created through these ways:
(a) By using text editor, such as Notepad or Word pad; or
(b) By using Microsoft Word (simply save the Word document as a web page); or
(c) By using any one of several web page editors.
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Let us look at the explanation provided for web browsers.

The primary purpose of web browsers is to display web pages. As at


August 2010, majority of web users use either Internet Explorer (51%) or
Mozilla Firefox (31%), but recently some new browsers have been
developed that are beginning to attract the userÊs attention. Google
Chrome, for instance, is becoming very popular (11%) because of its speed,
it is currently the worldÊs fastest browser and because it is much smaller
than existing browsers (PCWorld, 2009).

3.3.2 Applications of Internet and WWW


Do you know that The Internet and the Web have spawned a number of
powerful new software applications upon which the foundations of e-commerce
are built? Let us take a look at some of these applications which will be explained
in detail later.
E-mail;
Search engine;
Intelligent agents;
Instant messaging;
Chat; and
Cookies.

(a) E-mail
Electronic mail (E-mail) is the transmission of messages and files via
computer networks. E-mail was one of the original services on the Internet,
enabling scientists and researchers working on government-sponsored
projects to communicate with colleagues at other locations. Today, e-mail is
primary communications method for both personal and business use. E-mail
uses a series of protocol to enable messages containing text, images, sound,
and video clips to be transferred from one Internet user to another. Because
of its flexibility and speed, it is now the most popular form of business
communication, more popular than the phone and fax.

In addition to text typed within the message, e-mail also allows


attachments, which are files inserted within the e-mail message. The files
can be in the forms of documents, images, audio or video clips.

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Although e-mail was designed to be used for interpersonal messages, it can


also be a very effective marketing tool. E-commerce sites purchase e-mail
lists from list providers and send mail to prospective customers, as well as
existing customers. The response rate from targeted e-mail campaigns can
be as high as 20%, extraordinary when compared to banner advertisement
response rates of less than 1%. Most e-commerce sites also have a „Contact
Us‰ section that includes an e-mail contact, to make requests and comments
easier for customers.

However, in addition to this acceptable practice of communicating with people


who have requested such contact, some companies also use e-mail as a mass
mailing technique, also known as spam, or unsolicited e-mail. There are a
number of state laws against spamming, but it is still the bane of the Web.
Examples of free e-mail on the Web include Gmail, Hotmail and Yahoo! Mail.

(b) Search Engine


Search engines can be websites themselves, such as Google and Yahoo!, or a
service within a site that allows users to ask for information about various topics.
A search engine identifies web pages that appear to match keyword, also called
queries, typed by the user and provides a list of the best matches. A query can be
a question, series of words, or single word for the search engine to look for.

Figure 3.4 shows some of the commonly used search engines.

Figure 3.4: Search engines


Source: http://www.searchengineready.co.uk/

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How exactly individual search engines work is a proprietary secret, and at


times defies explanation. Some search engines such as Alta Vista seek to
visit every webpage in existence, and create a huge database of domain
names with keywords. Sometimes, the search engines will just read the
meta tags and other keywords sections of the home page. This is faster, but
web designers often put an extraordinary number of keywords into their
meta tags.

The programme that search engines unleash on the web to perform this
indexing function is called as a spider or crawler. Unfortunately, as the
number of web pages climbs to over two billion, more and more pages are
missed by the search engines. Google, perhaps the most complete search
engine, contains reference to only about half (one billion) of web pages.
And the engine does not always overlap, which means you may miss a
page on one engine, but pick it up on another. It is best, therefore, to use
multiple search engines rather than rely on one single search engine.

One of the newest trends in search engines is focus; instead of trying to


cover every possible information need that users have, some search engines
are electing to specialise in one particular area. By limiting their coverage to
such topics as sports, news, medicine, or finance, niche search engines are
hoping to differentiate themselves from the crowd and provide better
quality results for users.

FindLaw.com, for instance, a search engine and directory of legal


information, has seen its searches rising steadily. The same is true of
Moreover.com, a search engine that specialises in collecting and reporting
news headlines from 800 industries and special interest groups, 100 plus
countries, and 50 languages.

Although the major search engines are used for tracking down general
information of interest to users, they have also become a crucial tool within
e-commerce sites. Customers can more easily search for the exact item they
want with the help of a search programme; the difference is that within
websites, the search engine is limited to finding matches from that one site.
Sites without search engines are asking visitors to spends lots of time
exploring the site; something which few people are willing to do when
most sites offer a quick and easy way to find what they are looking for.

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ACTIVITY 3.2

1. Discuss with your course mates on how the World Wide Web
operates.
2. What is your favourite search engine on the Internet? How
does it differ from other search engines?

(c) Intelligent Agents (Bots)


Intelligent agents or software robots (bots) are software programmes that
gather and/or filter information on a specific topic, and then provide a list
of results for the user. Intelligent agents were originally invented by
computer scientists who were interested in the development of artificial
intelligence (a family of related technologies that attempt to instil
computers with human-like intelligence).

However, with the advent to e-commerce on the Web, interest quickly turned
to exploiting the intelligent agent technology for commercial purposes.
Today, there are a number of different types of bots used in e-commerce on
the Web, and more are being developed every day. For instance, as
previously noted, many search engines employ web crawlers or spiders that
crawl from server to server, compiling lists of URLs that form the database
for the search engine. These web crawlers and spiders are actually bots.

Below are some of the types of bot used by the consumer:

(i) Shopping Bot


Shopping bots search online retail sites all over the Web and then
report back on the availability and pricing of a range of products. For
instance, you can use MySimon.comÊs shopping bot to search for a
Sony digital camera. The bot provides a list of online retailers that
carry a particular camera model, as well as a report about whether it
is in inventory and what the price and shipping charges are.

(ii) Update Bot


An update bot allows you to monitor for updates on the Web and will
e-mail you when a selected site has new or changed information.
News bots will create custom newspapers or clip articles for you in
newspapers around the world.

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(d) Instant Messaging


E-mail message have a time lag of several seconds to minutes between when
messages are sent and received, but Instant Messaging (IM) displays words
typed on a computer almost instantaneously. Recipients can then respond
immediately to the sender the same way, making the communication more
like a live conversation than is possible through e-mail.

There are few commonly used Instant Messaging services as illustrated in


Figure 3.5.

Figure 3.5: Instant Messaging services


Source: http://www.techglow.com/10-instant-messaging-tips-for-effective-
communications-etiquette.html

One of the key components of an IM service is a buddy list (refer to Figure


3.6). The buddy list is a private list of people when whom you might want
to communicate. If a person is on your buddy list, IM service will alert you
when that individual signs on, enabling an IM to be sent. Interestingly,
despite the wild popularity of these services, no one seems to know yet
how to make money from it. AOL, Yahoo, and MSN have all offered IM
free to their users and they have no immediate plans to charging a fee.

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Figure 3.6: Buddy List


Source: http://www.askdavetaylor.com/how_do_i_video_conference_with_ichat.html

Nevertheless, some companies have added IM to their websites as means of


offering instant access to customer service. They hope that by encouraging
consumersÊ need for immediate gratification whether in the form of
questions answered or products ordered, IM will boost revenues and
customer satisfaction.

(e) Chat
Like IM, chat enables users to communicate via computer in real time, that
is, simultaneously. However, unlike IM, which can only work between two
people, chat can occur between several users. For many websites,
developing a community of like-minded users has been critical for their
growth and success. Once those community members come together on a
site, chat can be a service that enables them to further bond and network,
endearing them further to the website. Chat is also used frequently in
distance learning, for class discussions and online discussions sponsored by
a company.

ACTIVITY 3.3

1. Identify the service provided in chat rooms. You can start with
Yahoo.com and lists its services.
2. Why do some vendors provide free chat rooms?

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(f) Cookies
You may think that cookies are a food, similar to biscuits. However, they
are not. In computing, cookies are a tool used by websites to store
information about a user. When a visitor enters a website, the site sends a
small text file (the cookie) to the userÊs computer so that information from
the site can be loaded more quickly on future visits. The cookie can contain
any information desired by the site designers, including customer number,
pages visited, product examined, and other detailed information on the
behaviour of the customer at the site.

Below are the roles played by cookie in the website:


(i) Cookies are useful to consumers because the site will recognise the
returning patrons and not ask them to register again;
(ii) Cookies help to personalise a site by allowing the site to recognise
returning customers and make special offers to them based on their
past behaviour at the site;
(iii) Cookies permit customisation and market segmentation through the
ability to change the product or the price based on prior consumer
information; and
(iv) Cookies also can pose a threat to consumer privacy, and at times they
are bothersome. Many people clear their cookies at the end of every
day and while, some disable them entirely.

To get a clear view on Internet applications, visit the following websites.

(a) E-mail, Instant Messaging, Chat


http://www.yahoo.com
http://www.skype.com
(b) Search engine/Intelligent agents (bots)
http://www.altavista.com (Search bot)
http://www.mysimon.com (Shopping bot)
http://www.webclipping.com (News bot)

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3.3.3 Web 2.0 Features and Services


TodayÊs broadband Internet infrastructure has greatly expanded the services
available to users. These new capabilities have formed the basis for new business
models. Digital content and digital communications are the two areas where
innovation is most rapid.

Below are some of the latest innovations made in the Internet and each of the
innovation will be elaborated:
Blogs;
Really Simple Syndication;
Podcasting;
Wikis; and
Internet Television.

(a) Blogs
There are so many „killer applications‰ on the Web that it is hard to pick
one super application. But blogs are arguably a super application. A blog,
(originally called as a weblog), is a personal webpage that typically contains
a series of chronological entries (newest to oldest) by its author and links to
related web pages (refer to Figure 3.7).

Figure 3.7: Blog


Source: http://cet.emory.edu/cet/blogs.cfm

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104 TOPIC 3 INTERNET AND WORLD WIDE WEB

The blog may include a blog roll (a collection of links to other blogs) and
trackbacks (a list of entries in other blogs that refer to a post on the first
blog). Most blogs allow readers to post comments on the blog entries as
well. The act of creating a blog is often referred to as blogging. Blogs are
either hosted by a third-party site such as Blogger.com (Google),
LiveJournal, TypePad, Xanga, WordPress, Microsoft's Windows Live
Spaces or prospective blog that is hosted by the userÊs ISP.

The content of blogs may range from individual musings to corporate


communications. Blogs have had a significant impact on political affairs,
and have gained increasing noticable for their role in breaking and shaping
the news. An example of a blog is Malaysia Today (http://www.malaysia-
today.net/) Blogs have become hugely popular. While estimates on the
number of blogs vary, Technorati, a blog research firm claims there were
over 133 million blogs as of 2009 (Technorati, 2009).

No one knows how many of these blogs are kept up-to-date or just
yesterdayÊs news. And no one knows how many of these blogs have a
readership greater than one (the blog author). In fact, there are so many
blogs you need a blog search engine just to find them (Google or
Technorati), or you can just go to a list of the most popular l00 blogs and
dig in.

(b) Really Simple Syndication (RSS)


The rise of blogs is correlated with a new distribution mechanism for news
and information from websites that regularly update their content. Really
Simple Syndication (RSS) is an XML format that allows users to have digital
content, including text, articles, blogs and podcast audio files automatically
sent to their computers over the Internet.

An RSS aggregator software application that you install on your computer


gathers material from the websites and blogs that you tell it to scan and it
brings new information from those sites to you. Sometimes this is referred
to as "syndicated" content because it is distributed by news organisations
and other syndicators or distributors.

RSS has turned from a „techie‰ pastime to a broad-based movement. The


New York Times, the subscriber based for RSS feed (which include
headlines, summaries and links to full articles) went from 500,000 when
first introduced in 2003 to more than 8 million today.

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TOPIC 3 INTERNET AND WORLD WIDE WEB 105

(c) Podcasting
A podcast is an audio presentation, such as radio show, audio from a
movie, or simply personal audio presentations which is stored as an audio
file and posted to the Web. Listeners download the fi1es from the Web and
play them on their p1ayers or computers. While commonly associated with
AppleÊs iPod portable music player, you can listen to Mp3 podcast files
with any Mp3 player. Podcasting has transitioned from an amateur
independent producer media in the „pirate radio" tradition, to a
professional news and talk content distribution channel.

(d) Wikis
A Wiki is a web application that allows users to easily add and edit content
on a webpage. The term Wiki derives from the "wiki wiki' (quick or fast)
shuttle buses at Honolulu Airport. Wiki software enables documents to be
written collectively and collaboratively. Most Wiki systems are open
source, server-side systems that store content in a relational database.

Since Wikis, which are another Web 2.0 killer application, by their very nature
are very open in allowing anyone to make changes to a page, most Wikis
provide a means to verify the validity of changes via a "Recent changes" page.
This enables members of the Wiki communities to monitor and review the
work of other users, correct mistakes, and hopefully deter „vandalism."

The most well-known Wiki is Wikipedia, an online encyclopaedia that


contains over three million English-language articles on a variety of topics.
The Wikimedia Foundation, which operates Wikipedia, also operates the
following projects:
(i) Wiki books which is a collection of collaboratively written free
textbooks and manuals;
(ii) Wiki news which is a free content news source; and
(iii) Wikitionary which is a collaborative project to produce a free
multilingual dictionary in every language.
Wikimedia sites had 60 to 65 million unique visitors in July 2009 and are
routinely among the top ten visited sites on the web (comScore, 2009b).

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106 TOPIC 3 INTERNET AND WORLD WIDE WEB

(e) Internet Television


There are three ways in which people watch television over the Internet
and they are:

(i) Streaming Flash-based Video


By far, the most common type of Internet video is provided by
YouTube, with more than ten billion video streams a month, where
some of them are short clips taken from television networks.

(ii) Downloaded Video Casts


Sites like Apple's iTunes and video podcasts TV distribute millions of
television download a month. Television and movie producers used
these sites to distribute their products. This makes the largest source
of legal, paid television content. This site, will enable you to purchase
the entire season of TV shows such as in the iTunes store.

(iii) High-definition Streaming Files that use the IPTV Protocol


IPTV uses high-bandwidth Internet connections to deliver television
programming to the home of the viewers. Standard quality television
requires about 3 Mbps Internet connectivity using MPEG2
compression, but high definition TV requires about 19 Mbps. The
definition of IPTV is still fluid and many different protocols are used,
such as IP multicasting to move compressed digital television streams
over the Internet.

In Malaysia, one of the ISP, TM has recently launched an initiative on


High Speed Broadband (HSBB) known as Unifi. Unifi is a package
that incorporates Internet, phone line as well as IPTV. Several
packages are offered to suit customersÊ needs. Since this is still in
installation process, the penetration rate is yet to be determined.

SELF-CHECK 3.2

What are the differences between a webpage, a website and a


homepage?

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TOPIC 3 INTERNET AND WORLD WIDE WEB 107

EXERCISE 3.3

1. Describe what Intelligent Agent (bot) and Search Engine are.


2. What are Cookies?

Internet is an interconnected network of thousands of networks and millions


of computers linking businesses, educational institutions, government
agencies and individuals together.

There are six important concepts that are the basis for understanding the
Internet and they are:
Packet switching;
The TCP/IP communications protocol;
Client/server computing;
Intranets;
Extranets;
Internet II.

There are a number of powerful new Internet software applications upon


which the foundations of e-commerce are built, and they are:
E-mail;
Search engine;
Intelligent agents;
Instant messaging;
Chat; and
Cookies.

The two main Internet protocols are:


Transmission Control Protocol (TCP); and
Internet Protocol (IP).

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108 TOPIC 3 INTERNET AND WORLD WIDE WEB

There are some latest innovations made in the Internet and they are:
Blogs;
Really Simple Syndication;
Podcasting;
Wikis; and
Internet Television.

Bandwidths Intranets
Blogs IP address
Chat
Packet switching
Circuit switching
Podcasting
Client/server computing
Protocol
Cookies
Really simple syndication
Domain names
Routers
E-mail
Extranets Search engine
Hypertext markup language Server
Intelligent agents TCP/IP
Internet II Uniform resource locater
Internet service provider Web browser
Internet television Wikis
Instant messaging

Copyright © Open University Malaysia (OUM)


Topic Wireless
4 Technology and
Mobile
Commerce
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the concept of mobile commerce.
2. Describe the wireless technology that supports mobile commerce;
3. Explain the major types of wireless telecommunications networks;
4. Discuss m-commerce applications in various areas; and
5. Discuss security and ethical issues in m-commerce.

INTRODUCTION
What is mobile commerce? Have you ever come across this term before? If you
have not, let us look at the following.

Mobile commerce (m-commerce), which is an extension of e-commerce, involves


any business activities conducted over a wireless telecommunications network.
Similar to other e-commerce activities, m-commerce can be done via the Internet,
private communication lines, or other computing networks.

The advancement of powerful mobile devices such as smartphones has created


opportunities for businesses to deliver services to existing customers and to
attract the new customers.

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110 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

In this topic, you will be given an overview of wireless technology and the major
types of wireless telecommunications networks. You will also get to know the
applications of m-commerce in various areas and the security and ethical issues
involved in m-commerce.

4.1 WIRELESS TECHNOLOGY


In the traditional computing environment, people are working at a fixed location
with desktop computer connected to the Internet and other peripherals with
cable. This environment has created difficulties for people who wish to be
connected to the Internet anytime and anywhere, especially among sales
personnel, field-service workers, inspectors and executives who travel
frequently. Wireless technology has been one solution to this situation.

Figure 4.1 shows different types of computing devices used:

(a) The old-style wired desktop computer; and


(b) The modern-style wireless laptop.

(a) (b)
Figure 4.1: Computing devices
Source: http://computersight.com/hardware/which-is-most-
reliable-computer-laptop-or-desktop/
http://blog.loaz.com/timwang/laptop-notebook.php

A wireless computing environment consists of the following infrastructures:


(a) Hardware;
(b) Software; and
(c) Wireless communication network.

These infrastructures will be explained in the following sections.


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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 111

4.1.1 Hardware
Mobile devices come in different shapes and sizes such as laptop, netbook, PDA,
and smartphone. Most of these devices have the basic function of supporting
audio, video, Internet browser, email and Internet connection. The following
devices are converging toward a small footprint that combines all the capabilities
of the devices into one package, thus, making it difficult to differentiate them in
terms of functionality:

(a) Personal Digital Assistant (PDA)


PDA (also called as palmtop), as can be seen in Figure 4.2, was originally a
standalone hand-held device which provides user access to address book
and calendar, and supported calculation and desktop application such as
word processor and spreadsheet.

Figure 4.2: Personal Digital Assistant


Source: http://kellepcharles.blogspot.com/2008/09/personal-
digital-assistant-pda-security.html

In recent years, PDA received intense competition from smart-phone, in


terms of the functionality aspect. It was reported that the sales of PDA
dropped 40% from 2006 to 2007. As a result, PDA manufacturers such as
Palm Inc. have created PDA models with cell phone capabilities and
produced devices called Palm Treo and Palm Pre.

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112 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

(b) Smartphone
As shown in Figure 4.3, a Smartphone is a mobile phone with PDA-like or
PC-like functionality, including email, web browsing, address book,
calendar, calculator, digital camera, word processor, spreadsheet and
multimedia capabilities.

Figure 4.3: NOKIA smartphone


Source: http://www.slashphone.com/87/1943.html

Top smartphone manufacturers in the world include Nokia, Research in


Motion (RIM), Apple, HTC, Samsung and Motorola. Some of the latest
smartphone models available in the market include, Apple iPhone and
Samsung Galaxy.

ACTIVITY 4.1

Access a smartphone review website. What are the criteria that play a
part in your selection of a smartphone?

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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 113

4.1.2 Software
Do you know that the software for mobile devices must be customised to the
unique features of mobile devices such as small display screen, small bandwidth,
limited input capabilities and limited memory? The major software components
of a mobile device include the following:

(a) Mobile Operating System


The function of mobile operating system or mobile OS is to control a mobile
device, in the similar way an operating system such as Windows, Mac OS
or Linux controls a desktop computer. The function of mobile OS deals
more with wireless connection, various mobile multimedia format and
input methods.

The mobile OS must be able to handle a variety of input method/interface


approach such as a touch screen, mini-joystick, jog dial and thumb wheel.
The major mobile operating systems that support the mobile devices are
Symbian platform, RIM Blackberry OS, Apple iOS, Microsoft Windows
Mobile, and Google Android.

(b) Microbrowser
Microbrowsers (also called as mobile browser, minibrowser or wireless
Internet browser) resemble standard Internet browsers on desktop
computers. Microbrowsers are used to access the Internet via mobile
devices. Similar to mobile operating systems, microbrowsers are adapted to
deal with the unique features of mobile devices which are small screen,
limited bandwidth and small memory. Examples of microbrowsers include
Internet Explorer Mobile and Opera Mobile.

4.1.3 Wireless Telecommunications Networks


Mobile devices are able to connect to other devices and the Internet via
telecommunication network. The criteria used in selecting a telecommunication
network depend on the following elements:
(a) The purpose of the connection;
(b) The capabilities and location of the device; and
(c) The availability of connection options.

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114 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

Typically, there are four types of telecommunication network for mobile


environment and they are:

(a) Personal Area Networks (PAN)


A personal area network (PAN) is used for mobile users who make short-
range devices-to-device wireless connection within a small area, such as a
room. Bluetooth is the common way to establish a PAN.

Bluetooth is a set of standards (IEEE 802.15) that enables wireless


communication between mobile devices over short distances of up to 20 m.
Bluetooth uses low-power radio technology in the 2.4 GHz radio spectrum.
Today, most mobile devices are Bluetooth-enabled. Limitations of Bluetooth
technology include short range capability and interference from devices,
such as microwave oven and cordless phone, that use the same radio range.

(b) Wireless Local Area Networks (WLAN) or Wi-Fi


A wireless local area network (WLAN) is a wireless network within a
building and is equivalent to a wired local area network (LAN) but without
cable. There are five forms of Wi-Fi protocols as shown in Table 4.1 below.

Table 4.1: Forms of Wi-Fi Protocol

Form/Release Description
802.11 (1997) Offers transfer rate of up to 2 Mbps and a signal range of up to 20 m for
indoors and 100 m for outdoors.
802.11a (1999) Offers faster transfer rate (54 Mbps) but a weaker signal range (maximum
of 30 m indoors and 120 m outdoors).
802.11b (1999) Most widely used standard, with 11 Mbps for signal ranges up to 100m
for indoors and up to 275 m for open space.
802.11g (2003) Combines the strength of both 802.11a and 802.11b in terms of transfer
rate and coverage range. It is backward compatible with the two
standards. It has become the new 802.11 standard.
802.11n (2009) A standard under development with the promised bandwidth of up to
600 Mbps using 4 MIMO streams (4 MIMO X 150 Mbps).

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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 115

ACTIVITY 4.2
In September 2008, Penang Government announced a state-wide Wi-Fi
project which was expected to be ready in two years time.

Find out the latest progress of this project and whether it has been
successful or otherwise. Discuss it with your course mates.

Wi-Fi protocol 802.11g is used in commercial environment. If cost is not a


major issue, mobile devices can take advantage of the 54 Mbps transfer rate.
However, 802.11b is still the Wi-Fi standard of choice for inexpensive
installations in most homes and public areas. In Malaysia, TM currently has
more than 2,300 Streamyx Zone (using 802.11b/g) locations nationwide at
selected public places in major cities such as shopping malls, F&B outlets
such as Pizza Hut, Secret Recipe and Burger King, airports, convention
centres, hotels, university campuses, hospitals, golf club houses and other
locations.

ACTIVITY 4.3

Access the following Streamyx website shown below. Identify the


nearest Streamyx Zone from your home and office.

http://www.streamyx.com.my/related_products/related_products.p
hp?id=streamyx_hotspot_faq

(c) Wireless Metropolitan Area Networks (WMAN) or WiMax


Wireless Interoperability for Microwave Access (WiMax) is a wireless
standard using IEEE 802.16 for making broadband network access for data
and voice over an area of up to 50 km, which is about the size of a
metropolitan. WiMAx does not require a clear line of sight to function,
similar to how satellites operate. WiMax uses radio-based, ultra-wide
bandwidth transfer speeds of up to 268 Mbps.

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116 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

In 2007, four firms were given the licence to operate WiMax in Malaysia
and they are:
(a) Packet One Network P1 WiMax (in operations since August 2008);
(b) REDtone WiMax (launched in April 2009 and only available in East
Malaysia);
(c) YTL Communications Y-Max Networks (expected to start the
operations in November 2010); and
(d) Asiaspace Amax WiMax (launched in February 2010 but offline since
April 2010).

(d) Wireless Wide Area Networks (WWAN)


A wireless wide area network (WWAN) is the largest wireless network that
covers over a large geographical area and is usually operated by
telecommunication companies. Currently, there are six generations of
communication technology as shown in Table 4.2 below.

Table 4.2: Generations of Communication Technology

Generation Description
IG Analog-based technology from 1979 to 1992. Used exclusively for
voice.
2G Based on digital radio technology and still in use today. Includes
text messaging (SMS).
2.5G Based on cell phone protocol such as GPRS and CMDMA 2000.
Includes limited images in text messaging.
3G Started in 2001 in Japan. Supports rich media such as video.
3.5 G Expected to be seven times better than 3G with download speeds
of 14 Mbps and upload speeds of 1.8 Mbps. Includes mobile voice
telephony, video telephony and mobile TV.
4G Also called as Long Term Evolution (LTE) technology with 2.6
Ghz bandwidth and is expected better display in multimedia
content.

Malaysian government awarded two 3G licences to Telekom Malaysia (currently


known as Celcom Axiata, after merged and demerged) and Maxis in 2002 and
two more to TIME dotCom (the service is taken over by Digi), and U Mobile in
2006. According to the Malaysia Communications and Multimedia Commission
(MCMC), there are 7.347 million 3G subscribers at the end of 2009. It is also
expected that the tender for 4G license will be announced in 2011 and made
commercially available in 2012 or 2013.

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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 117

ACTIVITY 4.4

Access the following MCMC website: (http://www.skmm.gov.my/);


1. Find out the latest statistics of broadband subscribers in
Malaysia; and
2. Do you think Malaysia will achieve 50% household broadband
penetration by the end of 2010? State your reasons.

SELF-CHECK 4.1

1. What are the differences between WiMax and 3G?


2. What is a Wi-Fi?
3. Using your own word, explain why you prefer a Wi-Fi
connection compared to a fixed-line connection at home.

You can visit the following websites to get more information on:

(a) Mobile Devices


http://www.apple.com/iphone/
http://www.palm.com/my/

(b) Mobile Computing Software


http://www.symbian.org/
http://www.android.com/

(c) WiMax Operators in Malaysia


http://www.p1.com.my/
http://www.ytlcomms.my/
http://www.asiaspace.com.my/
http://www.redtone.com/wimax

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118 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

4.2 M-COMMERCE APPLICATIONS


Let us look at the areas where mobile commerce is applied. In this section, we
will mainly concentrate on the following aspects:
(a) Mobile financial applications;
(b) Mobile shopping, advertising, and content provision;
(c) Mobile entertainment; and
(d) Location-based m-commerce.

4.2.1 Mobile Financial Applications


Mobile financial applications allow users to conduct financial transactions via
mobile devices anytime and anywhere, replacing ATM, credit cards, and bank
branches. The common mobile financial applications include mobile banking and
mobile payment. Today, banking institutions are offering customers mobile
access to financial and account information in addition to Internet banking. For
instance, customers are able to access account balances, transfer funds and pay
bills.

Let us look at banks which have applied the m-commerce concept successfully in
their operation:

(a) Standard Chartered Bank


Standard Chartered Bank is the first bank in Malaysia to offer mobile
banking services using smartphone in 2008. Without the need to download
and install any software, the mobile banking services allow customers to
view account information, perform transfer to personal and third party
accounts, pay utility, credit card bills and check latest foreign currency rate.

(b) CIMB
CIMB Clicks Mobile Banking is the first to have Internet banking features
and capabilities, unlike other mobile banking services which use SMS to
make transactions.

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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 119

ACTIVITY 4.5

Identify the features and capabilities of CIMB Clicks Mobile Banking


at the following website:

http://www.cimbclicks.com.my/faq_mobilebanking.htm#1

4.2.2 Mobile Shopping, Advertising and Content


Provision
Do you know that an increasing number of online vendors allow customer to
shop from mobile devices such as search for information, compare prices, use a
shopping cart, place order and view order status? For example, the major US
pizza chains, such as Pizza Hut and Domino, allow customers to order pizza via
SMS (refer to Figure 4.4). Amazon and eBay also allow customers to access their
accounts, browse, search, bid and rebid on items.

Figure 4.4: DominoÊs Pizza advertisement


Source: http://mobile.engadget.com/2007/08/17/dominos-now-
accepting-pizza-orders-via-sms-in-the-uk/

In Malaysia, more advertisers are expected to tap into the growth of mobile
advertising, due to the huge number of mobile phone users in this country. For
example, insurance firms, restaurants and health-care companies are sending out
advertising messages through SMS and MMS to mobile phone users.

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120 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

Using the permission-based mobile advertising model, Maxis offers „myDeals‰.


This feature makes mobile advertising available to all customers with various
models of mobile phones if they permit the advertisers to send them advertising
material. MaxisÂs clients include Malaysia Airlines System (MAS), Colgate
Palmolive, Panasonic and BMW.

Now, let us look at the term ‰mobile portal„ and its definition.

A mobile portal is a customer access and interaction channel, optimised for


mobility that aggregates and provides content and services for mobile
users.

For example, MASÊs MHmobile at http://flymas.mobi, allows passengers with


the following privileges:
(a) Book and pay for the flight with a credit card;
(b) Share the itinerary on social media;
(c) Check-in with one click access;
(d) Choose a preferred seat;
(e) Get a mobile boarding pass;
(f) Check real-time flight status and latest arrival/departure times;
(g) Find out contacts of MAS offices and the way to get there with Google
maps;
(h) Check any lost baggage status; and
(i) Enjoy exclusive mobile deals.

While, Go2HomeStay.com provides Homestay Mobile Portal for information on


Homestay directory, theme of the month and contest details via video calls.
Media Prima launched a mobile content portal hosted at http://mobsta.my to
offer ringtones, games, wallpapers, animation, music streaming, mobile comics,
news and TV highlights, among others.

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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 121

ACTIVITY 4.6

1. Access MaxisÊs website and find out more information on


myDeals.
2. Will you permit the advertisers to send promotional messages to
you via your mobile phone? State your reasons.

4.2.3 Mobile Entertainment


Mobile entertainment is available on many mobile devices such as the following:

(a) Music and Video


Users may download music and videos from the Internet to their PC and
then transfer them through a USB cable, Bluetooth or Wi-Fi to their mobile
devices, such as smartphone and MP3 player. Examples of companies
which provide such services are Apple iTunes, Microsoft Zune and
Amazon MP3.

(b) Mobile Games


Mobile gaming is one of the largest mobile applications. With more than 2
billion mobile phone users worldwide, the number of potential mobile
gamers is substantially larger than the market for other platforms, such as
PlayStation and GameBoy.

This phenomenon has resulted in an increasing number of companies


involved in creating, distributing, and running mobile games. According to
IBTimes.com, there will be 4.6 billion mobile applications downloaded by
the end of 2010. Examples of popular mobile games include Microsoft Xbox
360 S and Apple App Store (>250k applications).

(c) Mobile Sports


Mobile sports allow sports enthusiasts to keep themselves up-to-date with
information about the performance of their favourite athletes or teams.
Sports scores, statistics and news are available from Yahoo! Sports for
Mobile and ESPN Mobile Web (http://espn.mobi).

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122 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

4.2.4 Location-based M-commerce


Location-based m-commerce (l-commerce) refers to the use of GPS-enabled devices
or similar technologies to locate a customer and deliver products and services
based on the customerÊs location. L-commerce offers benefits to both merchants
and customers in terms of safety (identification of exact location during
emergency), convenience (ability to locate nearby desired destination for products
and services) and productivity (time optimisation within close proximity).

L-commerce provides services to customers based on five key factors as follows:

(a) Location
Determine a position of a person or object (i.e., car).
(b) Navigation
Plot a route from one location to another.
(c) Tracking
Monitor the movement of a person or object.
(d) Mapping
Create maps of specific geographical location.
(e) Timing
Specify the precise time at an exact location.

Let us look at the example shown below to enhance our knowledge on i-commerce.

In May 2010, you, as the Mayor of Starbucks on Foursquare, received


location-based advertising via your mobile device when you checked-in.
The deal offered a $1 discount on a Frappucino. The special deal greeted
you with this message: „As mayor of this store, enjoy $1 off a NEW
however-you-want-it Frappuccino blended beverage. Any size, any
flavour. Offer valid until 6/28.‰

Source: http://epdm.com.cn/news/starbucks-frappuccino-flavors-i16.png

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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 123

The underlying technologies behind l-commerce are the following:

(a) Global Positioning Systems (GPS)


GPS is a system based on a worldwide satellite-based tracking system that
enables users to determine exact position of an object anywhere on earth.

(b) Geographical Information System (GIS)


GIS is a computer system capable of integrating, storing, editing, analysing,
sharing and displaying geographically referenced (spatial) information. GIS
data visualisation technology can integrate GPS data into digitised map
displays.

ACTIVITY 4.7

Discuss on the following:


(a) The applications of m-commerce in various areas; and
(b) The security and ethical issues in m-commerce.

You can visit the following websites to get more information on GPS application:
http://www.geocaching.com
http://www.trimble.com/gps

4.3 MOBILE ENTERPRISES


Mobile devices and technologies are widely used within an organisation for
intra-business applications. It is useful specifically for work that requires
employees to be on the move when performing their job such as sales, retail,
operations, dispatch, maintenance and repair at remote sites. Let us just
concentrate on the following two duties performed by the business personnel:

(a) Sales Force Mobilisation and Automation


Many sales personnel are required to travel to meet their clients outside of
the office. Mobile devices like laptops and PDAs allow the sales personnel
to demonstrate new products, check inventory and maintain good
relationship with the customers. Mobile devices can keep sales personnel
better informed about new product launches, product information, pricing
updates, order status, inventory level and delivery schedule.

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124 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

Sales personnel are equipped with up-to-date information when it is time to


close a deal. This will also portray a good image to customers. Orders are
able to be recorded in real time which will benefit business operation,
delivery scheduling and reduce data entry error. Common mobile devices
used by sales personnel include Palm Treo and RIM Blackberry.

(b) Job Dispatch


Another group of mobile employees are those involved in delivery and
dispatch services such as transportation, utilities, field services, health care
and security. Mobile devices assist in assigning jobs to mobile employees
and provide them with detailed information about their task.

For example, AirIQ, a Canadian firm, provides GPS locating and


management solutions for commercial fleets, service fleets, construction
equipment fleets and consumers. AirIQÊs Online system which combines
Internet, GPS, mapping and intelligent technologies is used by truck service
company to improve their workforce efficiency.

4.4 SECURITY AND ETHICAL ISSUES IN


M-COMMERCE
Do you know that similar to desktop computing environment, mobile computing
also suffers from security threats? As the functionalities and capabilities of
mobile devices increase, the threat of attack from malicious code will certainly
increase.

Let us look at the examples of malicious attacks as follows:


(a) In 2004, Cabir becomes the first known worm which spreads through
mobile phone. Cabir only runs on series 60 Symbian mobile phone;
(b) Brador, which runs on Windows CE and Windows Mobile; and
(c) Red Browser, a Trojan horse which affects smartphone running on Java
environment.

The unique features of mobile computing environment also pose security


challenges to m-commerce. The open-air transmission of signals across multiple
networks creates opportunities for security threats. Smartphone and other mobile
devices are easily lost and stolen because of their small size. Lost or damaged
device is a security threat because of the data stored and device settings.

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TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE 125

In general, many procedures, policies, processes and technology used for


e-commerce security also apply to m-commerce security such as password,
encryption, and education. However, there are also unique security measures for
m-commerce, for instance:
(a) SIM-based authentication for mobile phone;
(b) Wireless tether to prevent the theft of mobile devices; and
(c) Built-in Wi-Fi security system known as Wired Equivalent Privacy (WEP).

The increasing use of mobile devices in workplace raises new ethical, legal and
health issues. Field service workers who work remotely could result in reduced
organisational transparency. It is also difficult to separate business and personal
work and life by using the same mobile phone for both occasions. Health issues
such as health damage from cellular radio frequency emissions and cell phone
addiction have yet to be proven but received much attention from various
parties.

M-commerce also suffers from technological barriers such as:


(a) The small size of most mobile devices has limited usability in terms of data-
input screen, storage capacity and access speed;
(b) In the local context, some mobile service operators are unable to provide
transmission bandwidth and stability of services as promised; and
(c) Some operators even turn offline soon after it was launched. This situation
has definitely affected the users who signed up their services and the
subsequent adoption of new technologies in future.

You can visit the following website to get more information on M-commerce
security: http://www.cto.int/

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126 TOPIC 4 WIRELESS TECHNOLOGY AND MOBILE COMMERCE

Mobile commerce (m-commerce), which is an extension of e-commerce, involves


any business activities conducted over a wireless telecommunications network.
Similar to other e-commerce activities, m-commerce can be done via the Internet,
private communication lines, or other computing networks.

Wireless computing environment consists of the various components such as


hardware (mobile devices), software (operating systems and application),
and wireless telecommunication networks.

Bluetooth technology is used for short range wireless communication within


a room in a personal area network (PAN).

The major types of telecommunication network are:


(i) Personal Area Networks;
(ii) Wireless Local Area Networks; and
(iii) Wireless Metropolitan Area Networks.

3G is the current wireless wide area network (WWAN) technology and the
development of 4G is underway.

Common m-commerce applications include in the areas of financial services,


shopping, advertising, content provision, entertainments and location-based
services.

M-commerce applications are also used within organisation for employees


who are required to travel or on the move, such as sales, dispatch, field works
and maintenance and repair.

Similar to brick-and-mortar commerce and e-commerce, m-commerce also


suffers from security threats and deals with ethical, legal and health issues.

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Location-based commerce Personal digital assistant


M-commerce applications Smartphone
Microbrowser Wi-fi
Mobile devices WiMax
Mobile operating system Wireless communications
Mobile portal Wireless computing
Personal area Wireless wide area

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Topic Wireless
5 E-commerce
Website
Development
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the processes involved in developing e-commerce website;
2. Explain the steps in the System Development Life Cycle;
3. Examine the major considerations involved in choosing a web
server and e-commerce merchant server software;
4. Describe the issues involved in choosing the most appropriate
hardware for an e-commerce site; and
5. Identify optional tools that can be used to improve website
performance.

INTRODUCTION
Do you know that developing a successful e-commerce website requires a keen
understanding of business, technology and social issues? In many firms today,
e-commerce is just too important to be left totally to technologists and
programmers.

This topic will describe the processes involved in developing an e-commerce


website. The major considerations involved in choosing the software and hardware
for a successful e-commerce website will also be discussed, followed by an
explanation of other tools that can be used to improve website performance.

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TOPIC 5 WIRELESS E-COMMERCE WEBSITE DEVELOPMENT 129

5.1 BUILDING A SUCCESSFUL E-COMMERCE


WEBSITE
Let us assume that you are a manager for a medium-sized, industrial parts firm
of around 10,000 employees worldwide, operating in ten countries in Europe,
Asia, and North America. Senior management has given you a budget of RM1
million to build an e-commerce site within one year. The purpose of this site is to
offer products and services to over 20,000 customers, who are mostly from small
machine and metal-fabricating shops around the world. Where do you start?

In order to prepare for the above task, it is vital for you to take into consideration
the following two most important management challenges in building a
successful e-commerce site:
(a) Developing clear understanding of the business objectives which requires
managers to build a plan for developing their firmÊs site; and
(b) Knowing how to choose the right technology to achieve those objectives which
requires the manager to understand some of the basic elements of e-commerce
infrastructure.

5.1.1 Developing an E-commerce Website


The first thing that you must consider when deciding to develop a website for
your firm is having a site development plan and some understanding of the basic
e-commerce infrastructure issues such as cost, capability, and constraints.
Without a plan and knowledge base, you will not be able to make sound
management decisions about e-commerce within your firm.

You must be aware of the main areas where you will need to make decisions
such as:

(a) Skilled Individuals


In terms of organisational and human resources, you will have to form a
team of individuals who possess the skill needed to develop and manage a
successful e-commerce site. This team will make the key decisions about
technology, site design, as well as the social and information policies that
will be applied on your site. The entire development process must be
closely managed in order to avoid disasters.

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130 TOPIC 5 WIRELESS E-COMMERCE WEBSITE DEVELOPMENT

(b) WebsiteÊs Hardware, Software and Telecommunications Infrastructure


You will also need to make decisions about your websiteÊs hardware,
software, and telecommunications infrastructure. While you will have
technical advisors to help you to make these decisions, ultimately the
operation of the site is at your own responsibility.

(c) CustomerÊs Preference


The customerÊs demands should drive your choices of technology. Your
customers will look for technology that enables them to find what they
want easily. Usually, they prefer to purchase and receive the product in a
short period of time.

(d) Design of Website


You also have to consider your siteÊs design carefully. Once you have
identified the key decision areas, start planning for the project.

5.1.2 System Development Life Cycle


The second step in developing an e-commerce site will be creating a plan
document. One of the methodologies for developing an e-commerce site plan is
called as the systems development life cycle as explained below.

The System Development Life Cycle (SDLC) is a methodology for


understanding the business objectives of any system and designing an
appropriate solution. Adopting a life cycle methodology does not
guarantee success, but it is far better than having no plan at all. The
SDLC method helps in creating documents that communicate to senior
management the objectives of the site, important milestones, and the uses
of the e-commerce site.

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The steps involved in SDLC method are as shown in Figure 5.1.

Figure 5.1: The System Development Life Cycle (SDLC)

(a) System Analysis


The functional analysis step of the SDLC tries to answer the question,
„What do we want the e-commerce site to do?‰. We will assume here that
you have identified a business strategy and chosen a business model to
achieve your strategic objectives. But how do you translate your strategies,
business models, and ideas into a working e-commerce site?

One way to start is by identifying the specific business objectives for


your site, and then developing a list of system functionalities and
information requirements. There are nine basic business objectives that
an e-commerce site must deliver. These objectives must be translated
into a description of system functionalities and ultimately into a set of
precise information requirements.

Let us look at the definitions for the following three terms shown below.

Business objectives are simply a list of capabilities you want your site
to have.

System functionalities are a list of the types of information systems


capabilities you will need to achieve your business objectives.

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132 TOPIC 5 WIRELESS E-COMMERCE WEBSITE DEVELOPMENT

Information requirements are the information needed to support a


business or other activity.

You will need to provide the above lists to system developers and
programmers so that they know what you as the manager expect them to
do.

To a large extent, the business objectives of an e-commerce site are not


different from those of an ordinary retail store. The real difference lies in the
system functionalities and information requirements: In an e-commerce site,
the business objectives must be provided entirely in digital form without
buildings or salespeople, 24 hours a day, seven days a week.

(b) System Design


Once you have identified the business objectives and system functionalities,
and have developed a list of precise information requirements, you can
begin to consider just how all this functionality will be delivered. You must
come up with a system design specification, which is a description of the
main components in a system and their relationship to one another. The
system design itself can be broken down into two components a logical
design and physical design.

A logical design includes a data flow diagram that describes the flow of
information at your e-commerce site, the processing functions that
must be performed, and the databases that will be used. The logical design
also includes a description of the security and emergency backup
procedures that will be instituted, and the controls that will be used in the
system.

A physical design translates the logical design into physical components.


For instance, the physical design details the specific model of server to be
purchased, the software to be used, the size of the telecommunications link
that will be required, the way the system will be backed-up and protected
from outsiders and so on.

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SELF-CHECK 5.1

What are the differences between the logical design and physical
design?

(c) System Building


Now that you have a clear idea of both the logical and physical design for
your site, you can begin considering how to actually build the site. There
are many choices here. They range from outsourcing everything (including
the actual system analysis and design) to building everything in-house.

Let us look at the definition given for „outsourcing‰.

Outsourcing refers to the process of hiring an outside vendor to


provide the services involved in building the site that you cannot
perform with in-house personnel.

You also have a second decision to make: Will you host or operate the site
on your firmÊs own servers or will you outsource the hosting to a web host
provider? These decisions are independent of each other, but they are
usually considered at the same time. There are some vendors who will
design, build, and host your site, while others will only either:
(i) Build; or
(ii) Host.

Let us look in depth of the decisions made by the managers.

(i) Build your Own Versus Outsourcing


Let us take the building decision first. If you elect to build your own
site, you will need a multi-skilled staff of programmers, graphic
artists, web designers, and managers. You will also have to select and
purchase hardware and software tools. There are a broad variety of
tools available for building your own e-commerce site such as:

Tools that Help you Build Everything from Scratch


Tools like Dreamweaver and Front Page helps you to build your
site by scratch. The decision to build your own site entirely has a

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134 TOPIC 5 WIRELESS E-COMMERCE WEBSITE DEVELOPMENT

number of risks. Given the complexity of features such as


shopping carts, credit card authentication and processing,
inventory management, and order processing, the costs involved
are high, as are the risks of doing a poor job.

You will be reinventing what other specialised firms have already


built, and your staff may face a long, difficult learning curve,
delaying your entry to market. Your efforts could fail. On the
positive side, you may be better able to build a site that does
exactly what you want, and more importantly, develop the in-
house knowledge to allow you to change the site rapidly if
necessary due to a changing business environment.

Brick-and-mortar retailers in need of an e-commerce site generally


design the site themselves (because they already have the skilled
staff in place and have an extensive investment in IT capital such
as databases and telecommunications) but they use outside
vendors and consultants to build the sophisticated e-commerce
applications. Small start-ups may build their own sites from
scratch using the in-house technical people in an effort to keep
costs low.

Top of the Line Pre-packaged Site-building Tools


These tools can create sophisticated sites which are customised to
your needs. If you choose more expensive site-building packages,
you will be purchasing state of the art software that is well-tested.
You could get to market sooner.

However, in order to make a sound decision, you will have to


evaluate many different packages and this can take a long time.
You may have to modify the packages to fit your business needs
and perhaps hire additional outside vendors to modify the
package. Costs rise rapidly as modifications mount. Medium size
start-ups will often purchase a sophisticated package and then
modify it to suit their needs.

Pre-built Templates
Templates that merely require you to input text, graphics, and
other data. If you choose the template route, you will be limited to
the functionality already built into the templates, and you will not
be able to add to the functionality or change it. Very small mom-
and-pop firms seeking simple storefronts will use templates.

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ACTIVITY 5.1

You are planning to develop an e-commerce site for your business


organisation. Would you build your own or outsource to other
vendors? State your reasons.

(ii) Host your Own Versus Outsourcing


Now let us look at the hosting decision. Most businesses choose to
outsource hosting and to pay a company to host their website, which
means that the hosting company is responsible for ensuring the site is
„live‰, or accessible 24 hours a day. By agreeing to a monthly fee, the
business need not concern itself with many of the technical aspects of
setting up a web server and maintaining it, or with staffing needs.

You can also choose to co-locate. Let us look below in order to find
out what is meant by co-locate.

With a co-location agreement, your firm purchases or leases a


web server (and has total control over its operation), but locates
the server in a vendorÊs physical facility. The vendor maintains
the facility, communication lines, and the machinery.

The disadvantage of outsourcing hosting is that as the online business


grows, the company may need more power and services than the
hosting company can provide. That is why some corporations prefer
to do their own hosting. When you host your own site, you are in total
control of the operation. Keep in mind that your costs may be higher
than if you had used a large outsourcing firm. You will have to
purchase hardware and software, have a physical facility, lease
communications lines, hire a staff and build security and backup
capabilities.

SELF-CHECK 5.2

What are the advantages of outsourcing hosting? Discuss.

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136 TOPIC 5 WIRELESS E-COMMERCE WEBSITE DEVELOPMENT

(d) Testing
Once the system has been built and programmed, you will have to engage in
a testing process. Depending on the size of the system, this could be fairly
difficult and lengthy. Testing is required whether the system is outsourced or
built-in house. A complex e-commerce site can have thousands of pathways
through the site, each of which must be documented and then tested.

Let us look at the types of testing involved in the e-commerce website:

(i) Unit Testing


Unit testing involves testing the siteÊs programme modules one at a
time.

(ii) System Testing


System testing involves testing the site as a whole in a way the typical
user would when using the site. Because there is no truly „typical„
user, system testing requires that every conceivable path be tested.

(iii) Acceptance Testing


Finally, acceptance testing requires that the firmÊs key personnel and
managers in marketing, production, sales and general management
actually use the system as installed on a test Internet or intranet
server. This acceptance test verifies that the business objectives of the
system as originally conceived are in fact working. The process of
testing and rebuilding can cost as high as 50% of the total cost
involved in a software effort.

(e) Implementation and Maintenance


Most people unfamiliar with systems erroneously think that once an
information system is installed, the process is over. In fact, while the
beginning of the process is over, the operational life of a system is just
beginning. Systems break down for a variety of reasons and most of them
are unpredictable. Therefore, they need continual checking, testing and
repair.

Systems maintenance is vital, but sometimes not budgeted for. In general,


the annual system maintenance cost will roughly parallel the development
cost. A RM40,000 e-commerce site will likely require a RM40,000 annual
expenditure to maintain.

Why does it cost so much to maintain an e-commerce site? Unlike payroll


systems, e-commerce sites are always in a process of change, improvement
and correction.

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Studies of traditional systems maintenance have found the following patterns:


(i) About 20% of the time is devoted to de-bugging codes and responding to
emergency situations. For example, a new server was installed by your ISP,
and this made all your hypertext links lost and CGI scripts which disabled
the site is down!;
(ii) Another 20% of the time is concerned with changes in reports, data files,
and links to back-end databases; and
(iii) The remaining 60% of maintenance time is devoted to general administration
(making product and price changes in the catalogue) and making changes
and enhancements to the system.

The processes involved in e-commerce sites are never finished. They are always
in the process of being built and rebuilt. They are truly dynamic; much more so
than the payroll systems.

ACTIVITY 5.2
Most companies are not very keen to build an e-commerce site due to
high implementation and maintenance cost.

Do you agree with the above statement? Discuss with your course mates.

The long-term success of an e-commerce site will depend on a dedicated team of


employees (the Web team) whose sole job is to monitor and adapt the site to
changing market conditions. The Web team must be multi-skilled; it will
typically include programmers, designers and business managers drawn from
marketing, production and sales support.

Let us look at the tasks performed by the Web team:


(i) Listen to customersÊ feedback on the site and respond promptly to that
feedback as necessary;
(ii) Develop a systematic monitoring and testing plan to be followed weekly to
ensure all the links are operating, prices are correct, and pages are updated.
A large business may have thousands of web pages and many of them
interlinked that require systematic monitoring; and
(iii) Benchmarking (refer below for its definition) and keeping the site current
on pricing and promotions.

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138 TOPIC 5 WIRELESS E-COMMERCE WEBSITE DEVELOPMENT

Benchmarking is a process in which the site is compared with those of


competitors in terms of response speed, quality of layout and design.

To get more information about creating an e-commerce website, visit the


following websites:
http://ecommerce.snowseed.com/
http://www.ecommerce-digest.com/ecommerce-web-site-design-
portal.html
http://build-website.com/

ACTIVITY 5.3

Visit some of the online stores in the Choice Mall website


(www.choicemall.com). Answer the following questions:
1. What are some of the benefits of online malls to the participating
vendors and shoppers?
2. Do you think it is better for shoppers to use a mall or use a search
engine website, like Google, to locate stores providing product of
interests? State your reasons.

EXERCISE 5.1

1. Define the system development life cycle.


2. Describe the steps involved in creating an e-commerce site.

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5.2 CHOOSING SERVER SOFTWARE


As a business manager in charge of building the site, you will need to know some
basic information about e-commerce software. The more sophisticated the
software is and the more ways you can sell the goods and services, the more
effective your business will be. This section will describe the software needed to
operate a contemporary e-commerce site.

5.2.1 Simple versus Multi-tiered Website Architecture


Prior to the development of e-commerce, websites simply delivered web pages to
users who were making requests through their browsers for HTML pages.
Website software was appropriately quite simple. It consisted of a server
machine running basic web server software. We might call this arrangement of
software, machinery and tasks in an information system needed to achieve a
specific functionality as website architecture. It is much like a homeÊs architecture
which refers to the arrangement of building materials to achieve a particular
functionality.

However, the development of e-commerce required a great deal of functionality,


such as the following:
(a) Ability to respond to user input (name and address forms);
(b) Take customer orders for goods and services;
(c) Clear credit card transactions on the fly;
(d) Consult price and product databases; and
(e) Adjust advertising on the screen based on user characteristics.

This kind of extended functionality required the development of web application


servers (refer below) and multi-tiered system architecture to handle the
processing loads.

Web application servers are specialised software programmes that perform


a wide variety of transaction processing required by e-commerce.

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In addition to having specialised application servers, e-commerce sites must be


able to pull information from and add information to pre-existing corporate
databases. These older databases that predate the e-commerce era are called
back-end or legacy databases. Corporations have made massive investments in
these systems to store their information on customers, products, employees, and
vendors. These back-end systems constitute an additional layer in a multi-tiered
site.

Let us look at the different types of architecture tier existing in e-commerce:

(a) Simple or Two-tier Architecture


In two-tier architecture, also known as simple-tier architecture, a web
server responds to requests for web pages and a database server provides
back-end data storage.

(b) Multi-tier Architecture


In multi-tier architecture, in contrast, the Web server is linked to a middle-
tier layer that typically includes a series of application servers that perform
specific tasks, as well as to a back-end layer of existing corporate systems
containing product, customer, and pricing information. A multi-tiered site
typically employs several or more physical computers, each running some
of the software applications and sharing the workload across many
physical computers.

In the remainder of this section, we will describe basic web server software
functionality and the various types of web application servers.

5.2.2 Web Server Software


All e-commerce sites require basic web server software to answer request from
customers for HTML and XML pages. When you choose web server software,
you will also be choosing an operating system for your siteÊs computers. The
leading web server software, with over 50% of the market, is Apache HTTP,
which works only with the Unix operating system.

Unix is the original programming language of the Internet and the Web. Apache
is free and can be downloaded from many sites on the web, and comes
installed on most IBM Web servers. Literally, thousands of programmers have
worked on Apache over the years. Thus, it is extremely stable and there are
thousands of utility software programmes written for Apache that can
provide all the functionality required for a contemporary e-commerce site. In
order to use Apache, you will require staffs that are knowledgeable in the
operation of the Unix operating system or its PC variant, Linux.
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Microsoft Internet Information Server (IIS) is the second major web server
software available, with about 35% of the market. IIS is based on the Windows
operating system and is compatible with a wide selection of Microsoft utility and
support programmes. There are also at least 100 other smaller providers of web
server software, most of them are based on Unix or Sun Solaris operating system.

Note that the choice of web server has little effect on users on your system.
The pages they see will look the same regardless of the development
environment. There are many advantages to the Microsoft suite of development
tools; they are integrated, powerful, and easy to use. The Unix operating system,
on the other hand, is exceptionally reliable and stable. There is a worldwide open
software community that develops and tests Unix-based web server software.

Basic functionalities provided by all web servers are shown in Figure 5.2:

Figure 5.2: Basic functionalities provided by all web servers

(a) Processing of HTTP Request


This processing receives and responds to client requests for HTML pages.

(b) Security Services (Secure Socket Layer)


These services verify the username and password.

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(c) File Transfer Protocol


This protocol permits transfer of very large files from server to server.

(d) Search Engine


The search engine indexes the site content through its keyword-search
capability.

(e) Data Capture


The data log files of all visits, time, duration and referral source.

(f) E-mail
E-mail makes it possible to send, receive and store e-mail messages.

(g) Site Management Tools


These tools calculate and display key site statistics, such as unique visitors,
page requests and origin of requests; check links on pages.

Let us look at the different types of tools used in the management of a web
server:

(a) Site Management Tools


Site management tools are essential if you want to keep your site working,
and if you want to understand how well it is working. Site management
tools verify that links on pages are still valid and also identify orphan files,
or files on the site that are not linked to any pages. By surveying the links
on a website, a site management tool can quickly report on potential
problems and errors that users may encounter.

Links to URLs that have moved or been deleted are called as dead links and
these can cause error to messages for users trying to access that link.
Regularly checking that all links on a site are operational helps prevent
irritated users who may take their business elsewhere to a better-
functioning site.

Additional site management software and services, such as those provided


by Webtrends.com, can be purchased in order to more effectively monitor
customer purchases and marketing campaign effectiveness, as well as keep
track of standard hit counts and page visit information.

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(b) Dynamic Page Generation Tools


One of the most important innovations in website operation has been the
development of dynamic page generation tools. The content of successful
e-commerce sites is always changing, often day by day. There are new
products and promotions, changing prices, new events, and stories of
successful users.

E-commerce sites must intensively interact with users, who not only
request pages, but also request product, price, availability, and inventory
information. One of the most dynamic sites is eBay.com, in which the
content will be changing minute by minute. E-commerce sites are dynamic,
just like the real markets.

The dynamic and complex nature of e-commerce sites requires a number of


specialised software applications in addition to static HTML pages, such as
dynamic page generation software. With dynamic page generation, the
contents of a webpage are stored as objects in a database, rather than being
hard-coded in HTML.

When the user requests a webpage, the contents for that page are then
fetched from the database. The objects are retrieved from the database
using CGI (Common Gateway Interface), ASP (Active Server Pages), JSP
(Java Server Pages) or other server-side programmes. This technique is
much more efficient than working directly in HTML code. It is much easier
to change the contents of a database than it is to change the coding of an
HTML page.

A standard data access method called as Open Database Connectivity


(ODBC) makes it possible to access any data from any application,
regardless of which database is used. ODBC is supported by most of the
large database suppliers such as Oracle, Sybase, and IBM. ODBC makes it
possible for HTML pages to be linked to back-end corporate databases,
regardless of who manufactured the database.

Websites must be able to pull information from, and add information to


these databases. For example, when a customer clicks on a picture of a
digital camera, the site can access the product catalogue database stored in
a DB2 database, and access the inventory database stored in an Oracle
database to confirm that the camera are still in stock and report the current
price.

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Dynamic page generation gives e-commerce several significant capabilities


that generate cost and profitability advantages over traditional commerce.
Dynamic page generation lowers the menu costs (refer below).

Menu costs are the costs incurred by merchants for changing product
descriptions and prices.

Dynamic page generation also permits easy online market segmentation the
ability to sell the same product to different markets. The same capability
makes it possible for nearly cost-free price discrimination, which is the
ability to sell the same product to different customers at different prices.

For instance, you might want to sell the same product to corporations and
government agencies but use different marketing themes. Based on a cookie
you placed on client files, or in response to a question on your site that asks
visitors if they are from a government agency or a corporation, you would
be able to use different marketing and promotional materials for corporate
clients and government clients. You might want to reward loyal customers
with lower prices and charge full price to first-time buyers.

In summary, dynamic page generation allows you to approach different


customers with different messages and prices.

5.2.3 Application Servers


Do you know what is meant by the term application servers? Refer below in
order to find out its meaning.

Web application servers are software programmes that provide the specific
business functionality required for a website. The basic idea of
application servers is to isolate the business applications from the details
of displaying web pages to users on the front end and the details of
connecting the databases on the back-end. Application servers are a kind of
middleware software that provides the glue connecting traditional
corporate systems to the customer as well as providing all the
functionality needed to conduct e-commerce.

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In the early years, a number of software firms developed specific separate


programmes for each function, but increasingly these specific programmes are
being replaced by integrated software tools that combine all the needed
functionality for an e-commerce site into a single development environment, a
packaged software approach.

Some of the wide varieties of application servers available in the


marketplace are shown in Figure 5.3.

Figure 5.3: Types of application servers


(a) Catalogue display provides a database for product descriptions and prices;
(b) Transaction processing accepts order and clears payments;
(c) Proxy server monitors and controls access to main web server; implements
firewall protection;
(d) Mail server manages Internet e-mail;
(e) Databases server stores customer, product and price information; and
(f) Auction server provides a transaction environment for conducting online
auctions.

There are several thousand software vendors that provide application server
software. For Linux and Unix environments, many of these capabilities are
available free on the Internet from various sites. Most businesses faced with this
bewildering array of choices, choose to use integrated software tools called as
merchant server software.

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5.2.4 E-commerce Merchant Server Software


Functionality
E-commerce merchant server software provides the basic functionalities needed
for online sales, including an online catalogue (refer to Figure 5.4), order taking
via an online shopping cart and online credit card processing.

Figure 5.4: Online catalogue


Source: http://www.onlinecatalogs.com/

Let us look at Figure 5.5 which illustrates the three functionalities of e-commerce
merchant server software.

Figure 5.5: E-commerce merchant server software functionalities

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The three functionalities of e-commerce merchant server software is explained in


detail in Table 5.1.

Table 5.1: E-commerce Merchant Server Software Functionalities

Function Description
Online A company that wants to sell products on the web must have an online
Catalogue catalogue, which lists all of its products available on its website. Merchant
server software typically includes a database capability that will allow
construction of a customised online catalogue. The complexity and
sophistication of the catalogue will vary depending on the size of the
company and its product lines.

Small companies, or companies with small product lines, may post a


simple list with text descriptions and perhaps colour photos. A larger site
might decide to add sound, animations, or videos (useful for product
demonstrations) to the catalogue, or interactivity, such as customer
service representatives available via Instant Messaging (IM) to answer the
questions.
Shopping Online shopping carts are much like their real-world equivalent; both
Carts allow shoppers to set aside desired purchases in preparation for checkout.
The difference is that the online variety is part of a merchant server
software programme residing on the web server. Shopping cart data is
automatically stored by the merchant server software.

Online shopping carts allows consumers to do the following:


(i) Select merchandise;
(ii) Review what they have selected;
(iii) Edit their selections as necessary; and
(iv) Make the purchase by clicking a button.
Credit Card A siteÊs shopping cart typically works in conjunction with credit card
Processing processing software, which verifies the shopper Ês credit card and then
puts through the debit to the card and the credit to the companyÊs
account at checkout. Integrated e-commerce software suites typically
supply the software for this function. Otherwise, you will have to make
arrangements with a variety of credit card processing banks and
intermediaries.

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Let us look at the definition provided for the term "Merchant server software
package".

Merchant server software package, which is an e-commerce server suite, is


an integrated environment that provides most of the functionality and
capabilities needed to develop sophisticated customer centric-site.

E-commerce server suite is easier, faster and more cost-effective that a collection of
disparate software applications. Generally, there are three types of e-commerce
suite based on price and functionality and they are:

(a) Basic Suites


These suites are used for elementary e-commerce business applications and
are provided by Bizland, Hypermart and Yahoo! Merchant Solution.

(b) Midrange Suites


These suites are provided by IBMÊs Websphere Commerce Express Edition
and MicrosoftÊs Commerce Server.

(c) High-end Enterprise Suites


These suites are provided by IBMÊs Websphere Commerce Professional and
Enterprise Edition and Broad vision Commerce.

You can visit these websites to get more information about server software:
Shopping Cart Software http//www.make-a-store.com/
Web Server Software http://www.apache.org
Application Server Software http://wwws.sun.com/software/

ACTIVITY 5.4

1. Explain how promoting products on the Web is different from


using mass media promotion or personal contact.
2. Imagine that you wanted to create an e-commerce website, what
would you take into consideration in terms of the following
elements:
(i) Web server; and
(ii) Merchant server software.

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EXERCISE 5.2

1. What are the main differences between single-tier and multi-


tier website architecture?
2. Name five basic functionalities that a Web server should provide.
3. What is a dynamic server software?

The next section will discuss the hardware you will need to handle the demands
of the software.

5.3 CHOOSING THE HARDWARE FOR AN


E-COMMERCE WEBSITE
As the manager in charge of building an e-commerce site, you will be held
accountable for its performance. Whether you host your own site or outsource
the hosting and operation of your site, you will need to understand certain
aspects of the computing hardware platform.

Before we go in depth of the points of hardware platform, let us take a moment


to read the definition provided below for it.

The hardware platform refers to all the underlying computing equipment


that the system uses to achieve its e-commerce functionality.

Your objective is to have enough platform capacity to meet peak demand


(avoiding an overload condition). However, you need to make sure that there is
not so much platform, which will be a waste of money. Failing to meet peak
demand can mean your site is slow, or actually crashes. You need to bear in mind
that the website may be your only or principal source of cash flow.

To answer the following questions, you will need to understand the various
factors that affect the speed, capacity and scalability of an e-commerce site:

(a) How much computing and telecommunications capacity is enough to meet


peak demand?
(b) How many hits per day can your site sustain?

In the following sections, you will look at the demand and supply sides of the
hardware platform.

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5.3.1 Right-sizing The Hardware Platform: The


Demand Side
The most important factor affecting the speed of your site is the demand that
customers put on the site. In considering the demand, the following factors
should be taken into account:

(a) The Number of Simultaneous Web Visitors


In general, the load created by an individual customer on a server is
typically quite limited and short-lived. A web session initiated by the
typical user is stateless, meaning that the server does not have to
maintain an ongoing, dedicated interaction with the client. A web session
typically begins with a page request, then a server replies, and the session is
ended.

Nevertheless, system performance does degrade as more and more


simultaneous users request service. Fortunately, degradation (measured as
„transactions per second‰ and „latency‰ or delay in response) is fairly
graceful over a wide range, up until peak load is reached and service
quality becomes unacceptable.

In general, a robust single-processor web server (for example, with a


Pentium III or Xeon processor at 500 MHz), serving only static web pages,
can handle about 8,000 concurrent users. Serving up static web pages is I/O
intensive, which means it requires input/output operations rather than
heavy-duty processing power. As a result, website performance is
constrained primarily by the serverÊs input/output (I/O) limitations and
the telecommunications connection, rather than speed of the processor.
Below we discuss some of the steps you can take to ensure you stay within
an acceptable service quality. One step is to simply purchase a server with
faster CPU processors or more CPU processors, or larger hard disk drives.
However, the improvement that results is not linear and at some point
becomes cost ineffective.

(b) The User Profile


Let us look at the definition provided for the second factor to be considered
on the demand side.

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User profile refers to the nature of customer requests and customer


behaviour on your site. For example, how many pages customers request
and the kind of service they want to be delivered in the website.

An Intel study found that nearly 80% of visitors to the typical e-commerce site
simply browsed requesting static web pages. Web servers can be very efficient
at serving static web pages. However, as customers request more advanced
services, such as searches of site, registration, order-taking via shopping carts,
or downloads of large multimedia audio and video files, all of which require
more processing power, performance can deteriorate rapidly.

(c) The Nature of Your SiteÊs Content


If your site uses dynamic page generation, then the load on the processor rises
rapidly and performance will degrade. Dynamic page generation and business
logic (such as a shopping cart) are CPU-intensive operations that require a great
deal of processing power. Microsoft has estimated that its web server software
operating on a 200 MHz Pentium II can handle only about 400 concurrent users
of dynamic ASP pages (Microsoft, 1999). Any interaction with the user requiring
access to a database filling out forms, adding to carts, purchasing and
questionnaires puts a heavy processing load on the server.

(d) The Telecommunications Link


A final factor to consider is the telecommunications link that your site has
to the Web, and also the changing nature of the client connection to the
Web. The number of hits per second your site can handle depends on the
bandwidth connection between your server and the Web. The larger the
bandwidth available, the more customers can simultaneously hit your site.

For example, if your connection to the Web is a 150 Kbps, just like the DSL
line, the maximum number of visitors per second for 1 kilobyte files is
probably about ten. Most businesses host their sites at an ISP or other
providers that contractually is (or should be) obligated to provide enough
bandwidth for their site to meet the peak demands. However, there are no
guarantees and ISPs can blame web congestion for their own bandwidth
limitations. Check your ISPÊs bandwidth and your site performance daily.

While server bandwidth connections are less a constraint today with the wide
spread deployment of fibre optic cables, the connection to the client is
improving. This means they will be able to make far more frequent requests and
demand far richer content and experiences from your site. This demand will
translate quickly into dynamic content and the need for additional capacity.

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5.3.2 Right-sizing The Hardware Platform: The


Supply Side
Once you estimate the likely demand on your site, you will need to consider how
to scale up your site to meet the demand. Let us look at what is meant by the
term "scalability".

Scalability refers to the ability of a site to increase in size as demand


warrants.

There are three steps you can take to meet the demands for service at your site:
(a) Scale hardware vertically;
(b) Scale hardware horizontally; and
(c) Improve the processing architecture of the site.

We will look in detail of the above steps in the following points.

(a) Scale Hardware Vertically


Vertical scaling refers to increasing the processing power of individual
components. You can scale your site vertically by upgrading the servers
from a single processor to multiple processors.

For instance, you can change your hardware from a single processor
Pentium III, to a dual processor with two Pentium Ills or Xeon processor.
You can keep adding up to 20 processors to a machine and changing chip
speeds as well.

There are two drawbacks to vertical scaling and they are:


(i) It can become expensive to purchase new machines with every
growth cycle; and
(ii) Your entire site becomes dependent on a small number of very
powerful machines. Let us assume that you have two machines and if
one goes down, half of your site or perhaps your entire site may
become unavailable.

(b) Scale Hardware Horizontally


Horizontal scaling refers to employing multiple computers to share the
workload. Horizontal scaling involves adding multiple single processor
servers to your site and balancing the load among the servers. You can also
then partition the load so that some servers handle only requests for HTML

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or ASP pages, while others are dedicated to handling database applications.


You will need special load-balancing software, which are provided by a
variety of vendors such as Cisco, Microsoft and IBM, to direct incoming
requests to various servers.

There are many advantages to horizontal scaling and they are:

(i) It is inexpensive and often can be accomplished by using older


computers that otherwise would be disposed of.

(ii) Horizontal scaling also introduces redundancy. If one machine fails,


chances are that another machine can pick up the load dynamically.

However, when your site grows from a single machine to perhaps ten to
twenty machines, the size of the physical facility required increases and
there is added management complexity.

(c) Improve the Process Architecture of the Site


A third alternative improving the processing architecture is a combination
of vertical and horizontal scaling, combined with artful design decisions.

Most of these steps involve the following:

(i) Split or Separate the Workload


Splitting the workload into I/O-intensive activities (such as serving
web pages), and CPU-intensive activities (such as taking orders).

(ii) Fine-Tune the Servers


Once you have this work separated, you can fine-tune the servers for
each type of load. One of the least expensive fine-tuning steps is to
simply add RAM to a few servers and store all your HTML pages in
RAM. This reduces load on your hard drives and increases the speed
dramatically. RAM is thousands of times faster than hard disks and is
inexpensive.

(iii) Move the Activities


Then, move your CPU-intensive activities, such as order-taking, onto
a high-end, multiple processor server that is totally dedicated to
handling orders and accessing the necessary databases.

Taking these steps can permit you to reduce the number of servers
required to service 10,000 concurrent users from 100 down to 20,
according to one estimate.

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5.4 OTHER E-COMMERCE SITE TOOLS


Now that you understand the key factors that affect the speed, capacity and
scalability of your site, we will look at some other important requirements
needed for your website.

First of all, let us look at the elements which produce worst e-commerce sites:
(a) Make it difficult to find information about products;
(b) Complicate the process to make a purchase;
(c) Have missing pages and broken links;
(d) Have confusing navigation structures; and
(e) Have annoying graphics or sounds that you cannot turn off.

In order to create a successful e-commerce site design, which does not have the
elements mentioned earlier, the following important factors need to be taken into
consideration (refer to Figure 5.6):

Figure 5.6: Factors in successful e-commerce site design

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(a) Functionality
Functionality pages that work, load quickly, and point the customer toward
your product offerings.

(b) Informational
Informational links that customers can easily find to discover more about
you and your products.

(c) Ease of Use


Ease of use by simple fool-proof navigation.

(d) Redundant Navigation


Redundant navigation alternates navigation to the same content.

(e) Ease of Purchase


Ease of purchase of one or two clicks to purchase.

(f) Multi Browser Functionality


Multi browser functionality site works with the most popular browsers.

(g) Simple Graphics


Simple graphics avoid distracting, obnoxious graphics and sounds that the
user cannot control.

(h) Legible Text


Legible text avoids backgrounds that distort text or make it illegible.

Let us concentrate on the tools used in e-commerce and they are divided into the
following:
(a) Tools for interactivity and active content; and
(b) Personalisation tools.

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Let us look into the explanations and examples provided for each of the tools.

(a) Tools for Interactivity and Active Content


Simple interactions such as a customer submitting a name, along with
more complex interactions involving credit cards, userÊs preferences, and
userÊs responses to prompts, all require special programmes. Here is a
brief description of some commonly used software tools for achieving high
levels of site interactivity:

(i) Web 2.0 Design Elements


Web 2.0 combines the capabilities of two or more application in the
website design such as:

Widgets
Widgets, also called as gadgets or plug-ins or snippets, are small,
pre-built chunk of code that execute automatically in a HTML
webpage. They are mostly free and available for download on the
web such as Google Gadgets and Yahoo Widgets. Millions of
social network and blog pages use widgets to present users with
the content drawn for the web.

Mash-ups
Another application of Web 2.0 is mash-ups, which involve
pulling functionality and data from one programme and including
it in another. For example, the use of Google Map data and
combine it with other data. If you are running a budget
guesthouse website, you can download Google Map to your
website so visitor can get a sense of the neighbourhood. The
purpose of this application is to enhance userÊs interactivity with
your site.

(ii) Common Gateway Interface (CGI)


CGI is a set of standards for communication between a browser and a
programme running on a server that allows for interaction between
the user and the server. CGI permits an executable programme to
access all the information within incoming requests from clients.

The programme can then generate all the output required to make up
the return page (HTML, script code, text, etc) and send it back to the
client via the Web server. CGI programmes can be written in nearly
any programming languages as long as they conform to CGI
standards. Generally, CGI programmes are used with Unix servers.

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For instance, if the user clicks on the button „Display the Contents of
My Shopping Cart‰, the server receives this request and executes a
CGI programme. The CGI programme retrieves the contents of the
shopping cart from the database and returns it to the server. The
server sends a HTML page that display the contents of the shopping
cart on the userÊs screen.

(iii) Active Server Pages (ASP)


ASP is MicrosoftÊs version of server side programming for Windows.
ASP enables developers to easily create and open records from a
database and execute programmes within an HTML page, as well as
handle all the various forms of interactivity found on e-commerce
sites. Like CGI, ASP permits an interaction to take place between the
browser and the server.

(iv) Java, Java Server Pages (JSP) and JavaScript


Let us look at these three components separately in order to gain a
clearer concept:

Java
Java is a programming language that allows programmers to
create interactivity and active content on the client machine,
thereby saving considerable load on the server. Java programmes
(known as Java applets) could be downloaded to the client over
the Web and executed entirely on the clientÊs computer.

When the browser accesses a page with an applet, a request is sent


to the server to download and execute the programme and
allocate page space to display the results of the programme. Java
can be used to display interesting graphics, create interactive
environments and directly access the web server.

Java Server Pages


Java Server Pages (JSP), like CGI and ASP, is a webpage coding
standard that allows developers to use a combination of HTML,
JSP scripts, and Java to dynamically generate web pages in
response to the user requests. JSP uses Java „servlets‰, small Java
programmes that are specified in the webpage and run on the
Web server to modify the webpage before it is sent to the user
who requested it. JSP are supported by most of the popular
application servers on the market today.

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JavaScript
JavaScript is a programming language invented by Netscape that
is used to control the objects on a HTML page and handle
interactions with the browser. It is most commonly used to handle
verification and validation of user input, as well as to implement
business logic.

For instance, JavaScript can be used on customer registration forms to


confirm that a valid phone number, zip code, or even e-mail address
has been given. Before a user completes a form, the e-mail address
given can be tested for validity.

(v) ActiveX and VBScript


Microsoft invented the ActiveX programming language to compete
with Java and VBScript to compete with JavaScript. When the browser
receives a HTML page with an ActiveX control, the browser simply
executes the programme. Unlike Java, however, ActiveX has full
access to all the client's resources, printers, networks and hard drives.
VBScript performs in the same way as JavaScript. Of course, ActiveX
and VBScript work only if you are using Internet Explorer. Otherwise,
that part of the screen is blank.

(b) Personalisation Tools


The two elements of e-commerce that potentially can make it nearly as
powerful as the traditional market place and perhaps even more powerful
than direct mail or huge suburban shopping mall are personalisation and
customisation.

Let us look at the definitions provided for both of the elements mentioned
above.

Personalisation i s the ability to treat people base on their personal


qualities and prior history with your site.

Customisation is the ability to change the product to better fit the


needs of the customer.

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There are a number of methods for achieving personalisation and


customisation. The primary method is through the placement of cookie (refer
below) files on the userÊs client machine.

A cookie is a small text placed on the userÊs client machine that


can contain any kind of information about the customer, such as
customer ID, campaign ID, or purchases at the site.

The customerÊs prior history can be accessed from a database when the user
returns to the site, or goes further into the site. Information gathered on
prior visits then can be used to personalise the visit and customise the
products. For instance, when a user returns to a site, you can read the
cookie in order to find the customerÊs ID, look the ID up in a database of
names, and greet the customer, such as „Hello Mary! Glad to have you
return‰.

You can visit the following websites to get more information about
hardware and various tools for e-commerce website:

(a) Computer hardware:


www.tamingthebeast.net/training/ittraining.htm

(b) Desktop Utilities and Webmaster CGI Scripts:


http://www.applytools.com
http://webdeveloper.com/

SELF-CHECK 5.3

1. Outline the main differences between a desktop PC and a


computer that would be suitable as a web server for a small
website.
2. What are the additional tools used to improve the performance
of a website?

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EXERCISE 5.3

1. Define scalability.
2. Describe the various scaling methods.
3. What are the eight most important factors in website design?

The factors that must be considered when building an e-commerce site are:
Hardware architecture;
Software;
Telecommunication capacity;
Website design;
Human resource; and
Customers' preference.

The steps in the System Development Life Cycle (SDLC) are:


System analysis;
System design;
System building;
Testing; and
Implementation and maintenance.

There are many issues involved in the development of e-commerce website in


terms of the following element: the software and hardware of the website.

There are various additional tools that can improve the website performance
such as Common Gateway Interface, Active Server Pages, Java, Java Script
and ActiveX.

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Active server page Mash-ups


ActiveX Merchant server software
Benchmarking Multi-tiered architecture
Common gateway interface Outsourcing
Customisation Personalisation
Dynamic page tools Site management tools
Hardware platform System development life cycle
Horizontal scaling Vertical scaling
Java Web application servers
Java server pages Website architecture
JavaScript Widgets

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Topic E-commerce
6 Security

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the dimensions of e-commerce security;
2. Identify the security threats in e-commerce environment;
3. Examine how technology protects the security of messages sent over
the Internet;
4. Discuss the tools used to establish secure Internet communications
channels; and
5. Assess the tools used to protect networks, servers and clients.

INTRODUCTION
Doing business on the web is riskier than doing business with local customers.
Stolen credit cards, disputed charges, off-shore shipping destinations, the power
of credit card companies to force merchants to pay for fraud, and the lack of
international laws governing global e-commerce. These problems are just some of
the security problems which e-commerce merchants must take into
consideration.

For consumers, the risk in e-commerce is really no greater than in ordinary


commerce. Although there have been some spectacular losses of credit card
information involving a tiny percentage of companies, because of a variety of
laws, consumers are largely isolated from the impact of stolen credit cards and
credit card information.

In this topic, we will examine e-commerce security issues, identify the major risks
and describe the variety of solutions currently available.

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6.1 SECURITY FOR E-COMMERCE


Have you ever been in a situation where you wanted to buy products from the
Internet but you did not feel secure? Why?

For most law-abiding citizens, the Internet promises a global marketplace,


providing access to people and businesses worldwide. For criminals, the Internet
has created entirely new and lucrative ways to steal from more than one billion
Internet users in the world. From products and services to cash and also
information, it is all there for the taking on the Internet.

It is also less risky to steal online. The potential for anonymity on the Internet
cloaks many criminals in legitimate looking identities allowing them to place
fraudulent orders with online merchants, steal information by intercepting e-mail,
or simply to shut down e-commerce sites by using software viruses. In the end,
however, the actions of such cyber criminals are costly for businesses and
consumers, who are then subjected to higher prices and additional security
measures.

6.1.1 The Scope of E-commerce Crime


It is difficult to estimate the actual amount of e-commerce crime for a variety of
reasons. In many instances, e-commerce crimes are not reported because
companies fear losing the trust of legitimate customers. And even when crimes
are reported, it may be hard to quantify the losses incurred.

For instance, a recent survey conducted by Computer Crime and Security Survey
in 2007 on the response of 500 security practitioners in US corporations,
government agencies, financial institution, medical institutions and universities,
reported that 46% of the responding organisations experienced a computer
security incident within the last 12 months and incurred a total loss of $67
million. Insider abuse and virus are the most common attacks against computer
systems.

Not every cyber criminal is after money. In some cases, such criminals aim to just
deface, vandalise and/or disrupt a website, rather than actually steal goods or
services. The cost of such an attack includes not only the time and effort to make
repairs to the site but also damage done to the siteÊs reputation and image as well
as revenues lost as a result of the attack.

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While the overall size of cybercrime may be unclear, cybercrime against


e-commerce sites is significant, dynamic and changing all the time. Therefore,
the managers of e-commerce sites must prepare for an ever-changing variety
of criminal assaults and keep current in the latest security solutions.

6.1.2 What is Good E-commerce Security?


What is a secure commercial transaction? Any time you go into a marketplace,
you take the risk, including the loss of privacy (information about what you
purchased). The prime risk as a consumer is that you do not get what you paid
for. In fact, you might pay and get nothing! Worse, someone steals your money
while you are at the market! As a merchant in the market, your risk is that you do
not get paid for what you sell. Thieves take merchandise and then either walk off
without paying anything, or pay you with a fraudulent instrument, stolen credit
card or forged currency.

E-commerce merchants and consumers face many of the same risks as


participants in traditional commerce, albeit in a new digital environment. Theft is
theft, regardless of whether it is digital theft or traditional theft. Burglary,
embezzlement, trespass, malicious destruction and vandalism, all crimes in a
traditional commercial environment, are also present in e-commerce.

However, reducing risks in e-commerce is a complex process that involves new


technologies, organisational policies and procedures, and new laws and industry
standards that empower law enforcement officials to investigate and prosecute
the offenders.

To achieve the highest degree of security possible, new technologies are available
and should be used. But these technologies by themselves do not solve the
problem. Organisational policies and procedures are required to ensure the
technologies are not subverted. Finally, industry standards and government laws
are required to enforce payment mechanisms, as well as to investigate and
prosecute violators of laws designed to protect the transfer of property in
commercial transactions.

In conclusion, a good e-commerce security requires a set of laws, procedures,


policies and technologies that protect individuals and organisations from
unexpected breach of security in the e-commerce marketplace.

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6.1.3 Dimensions of E-commerce Security


There are six key dimensions of e-commerce security as shown in Figure 6.1.

Figure 6.1: Dimensions of e-commerce security

Table 6.1 gives the definitions for each dimension of e-commerce security. It also
summarises the perspectives of customer and merchant on the different
dimensions of e-commerce security.

Table 6.1: Customer and Merchant Perspectives on the Different Dimensions of


E-commerce Security

Dimensions Definitions CustomersÊ MerchantsÊ


Perspective Perspective
Integrity Integrity refers to the Has the Has data on the site
ability to ensure that information that I been altered without
information being transmitted or authorisation? Is the
displayed on a website, or received been data being received
transmitted or received altered? from customers
over the Internet, has not valid?
been altered in any way by
an unauthorised party.
Nonrepudiation Nonrepudiation refers to Can a party to an Can a customer
the ability to ensure that action with me deny ordering
e-commerce participants later deny taking products?
do not deny or repudiate the action?
their online actions.

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Authenticity Authenticity refers to the Who am I dealing What is the real


ability to identify the with? How can I identity of the
identity of a person or be assured that the customer?
entity with whom you are person or entity is
dealing on the Internet. who they claim to
be?
Confidentiality Confidentiality refers to Can someone Are messages or
the ability to ensure that other than the confidential data
messages and data are intended recipient accessible to anyone
available only to those who read my other than those
are authorised to view messages? authorised to view
them. them?
Privacy Piracy refers to the ability Can I control the What use, if any, can
to control the use of use of information be made of personal
information a customer about myself data collected as part
provides about himself or transmitted to an of an e-commerce
herself to an e-commerce e-commerce transaction?
merchant. merchant?
Availability Availability refers to the Can I get access to Is the site
ability to ensure that an the site? operational?
e-commerce site continues
to function as intended.

Source: Adapted from Laudon, K. C., & Traver, C. G. (2009). E-commerce business,
technology, society (5th ed.). Boston: Addison Wesley.

Let us look at the explanations provided for each dimension of e-commerce


security.

(a) Integrity
For example, if an unauthorised person intercepts and changes the contents of
an online communication, such as by redirecting a bank wire transfer into a
different account, the integrity of the message has been compromised because
the communication no longer represents what the original sender intended.

An e-commerce customer may question a messageÊs integrity if the contents


seem suspicious and out of character for the person who supposedly sent it.
And a system administrator must deal with the issue of integrity when
determining who should have the authorisation to change data on the
website; the more people with authority to change data, the greater the
threat of integrity violations from both inside and out.

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(b) Nonrepudiation
For instance, the availability of free e-mail accounts makes it easy for a
person to post comments or to send a message and perhaps later deny
doing so. Even when a customer uses a real name and an e-mail address, it
is easy for the customer to order merchandise online and then later deny
doing so. In most cases, because merchants typically do not obtain a
physical copy of a signature, the credit card issuer will side the customer
because the merchant has no legal, valid proof that the customer had
ordered the merchandise.

(c) Authenticity
How does the customer know that the Web site operator is who he claims
to be? How can the merchant be assured that the customer is really who he
says he is? Someone who claims to be someone they are not is „spoofing‰ or
misrepresenting themselves.

(d) Confidentiality
Confidentiality is sometimes confused with piracy as both are inter-related
(look at the definition provided for privacy).

(e) Privacy
E-commerce merchants have two concerns related to privacy:
(i) They must establish internal policies that govern their own use of
customer information; and
(ii) They must protect the information from illegitimate or unauthorised
use.
For example, if hackers break into an e-commerce site and gain access to
credit card or other information, this not only violates the confidentiality of
the data, but also the privacy of the individuals who supplied the
information.

(f) Availability
Customers may be wondering about the accessibility of the site while the
operator dwells over the operational aspect of the website.

E-commerce security is designed to protect these six dimensions. When any


one of them is compromised, it is a security issue.

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6.1.4 Security Threats in the E-commerce


Environment
The nine most common and most damaging forms of security threats to
e-commerce sites are as shown in Figure 6.2.

Figure 6.2: Security threats in the e-commerce environment

Let us examine each form of security threats in detail in the following points.

(a) Malicious Code


What is a malicious code? Let us refer below for its meaning.

Malicious code, which is referred as „malware‰ or „malicious


software‰, includes any kind of intrusion of any kind of programmes
or software which intends to get access into a computer without the
permission of the computer user.

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The following are a variety of threats for malicious code:


(i) Viruses;
(ii) Worms;
(iii) Trojan horses; and
(iv) Bot.

Does a malware named ‰Trojan horse„ have a similar shape to the one in
famous Greek mythology? The name given for the malware does not
correspond with the physical shape of the malware, but it corresponds to
the function of the malware.

(i) Virus
A virus is a computer programme that has the ability to replicate or
make copies of itself and spread to other files. In addition to the
ability to replicate, most computer viruses deliver a „payload‰.

What is a payload? If you do not know the meaning of the term, refer
below to find out its meaning.

The payload may be relatively light, such as the display of a message


or an image, or it maybe highly destructive such as destroying the
files, reformatting the computer hard drive, or causing programmes
to run improperly.

The major categories of computer viruses include the following:


Macro Virus
The most common type of virus is a macro virus (refer below for
its definition).

Macro viruses are an application-specific, meaning that the virus


affects only the application for which it was written, such as
MicrosoftÊs Word, Excel and PowerPoint.

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When a user opens an infected document in an appropriate


application, the micro virus copies itself to the templates in the
application, so that when new documents are created, they are
infected with the macro virus as well. Micro viruses can easily be
spread when sent in an email attachment.
File-Infecting Viruses
File-infecting viruses usually infect executable files, such as *.com,
*.exe, *.drv, and *.dll files. They may activate every time the
affected file is executed by copying themselves into other
executable files. File-infecting viruses are also easily spread
through e-mails and any file-transfer system.
Script Viruses
What is a script virus? If you do not know what is meant by the
term, refer below in order to learn more.

Script viruses are written in script-programming languages such as


VBScript (Visual Basic Script) and JavaScript.

The viruses are activated simply by double-clicking an infected


*.vbs or *.js file. The ILOVEYOU virus (also known as the Love
Bug), which overwrites *.jpg and *.mp3 files, is the most famous
example of a script virus.

(ii) Worm
Macro, file-infecting virus, and script viruses are often combined with
worm. Instead of just spreading from file to file, a worm is designed
to spread from computer to computer. A worm does not necessarily
need to be activated by user or a programme in order for it to replicate
itself.

For instance, the Slammer worm infected more than 90% of


vulnerable computer worldwide within 10 minutes of its release on
the Internet.

(iii) Trojan Horse


A Trojan horse appears to be not harmful, but it is one of the malware
that need to be taken into consideration. The Trojan horse is not itself
a virus because it does not replicate, but it is often a way for viruses or
other malicious codes such as ÂbotsÊ to be introduced into a computer
system.

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As explained earlier, a malwareÊs name is not directly referring to the


shape of the malware, instead it refers to the function of it. The malware
Trojan horse is based on the GreekÊs huge golden horse which contained
hundreds of soldiers (refer to Figure 6.3). The soldiers revealed themselves
and captured the city once the people of Troy let the massive horse within
their gates. In todayÊs world, a Trojan horse may masquerade as a game,
but actually hide a programme to steal your passwords and e-mail them to
another person.

Figure 6.3: An illustration on the trojan horse


Source: http://rollingroots.blogspot.com/

(iv) Bots
What is a Bot? Do you know the meaning of it? Lets us read on.

Bot is a type of malicious code that can be covertly installed on a


computer when attached to the Internet.

Once installed, the bot responds to external commands sent by the


attacker. We have studied the meaning of bot; now let us move on to
the term „botnets‰ which is another important term in relation of bots.

Botnets are collections of captured computers used for malicious


activities such as spamming, stealing information and participating in
a distributed denial of service attack (DDOS attack).

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Malicious code such as that described above is a threat for both the
client and the server level, although servers generally engage in much
more thorough anti-virus activities than do consumers. At the server
level, malicious code can bring down an entire website, preventing
millions of people from using the site. Such incidents are infrequent.
Much more frequent malicious code attacks occur at the client level,
but the amount of damage is limited to a single machine.

Malicious code is a threat to systemÊs integrity and continued


operation, often changing how a system functions or altering
documents created on the system. In some cases, the affected user is
unaware of the attack until it is underway, such as with the macros
that use email address books to send out copies of the virus to
everyone in the userÊs address book. Not only does this slow down
the computer, but it can create hundreds or thousands of bogus
messages that appear to be coming from the user, thereby spreading
the virus further each time it is opened and activated.

(b) Unwanted Programme


We have learned extensively on malicious code. Now, let us shift our
attention to unwanted programmes.

Unwanted programmes are those applications that install themselves on a


computer without the userÊs consent. Once they are installed, they are
usually difficult to be removed from the computer.

Examples of these kinds of programmes are the following:

(i) Adware
Adware is used to call for pop-up ads to display when user visits
certain site. For instance, adwares like ZongoSearch and PurityScan.

(ii) Browser Parasite


A browser parasite monitors and changes the settings of a userÊs
browser such as changing the homepage and sending information to
remote sites. For example, browser parasite like WebSearch.

(iii) Spyware
Spyware is used to obtain information of the users such as the userÊs
keystrokes, copies of email and instant messages, and screenshots.
For example, SpySherif, which disguises as a spyware removal
programme but is actually a malicious spyware.

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(c) Identity Theft and Phishing


Let us look below at the definition and examples given for identity theft.

Identity theft is a crime in which a criminal obtains key pieces of personal


information, such as identity cardÊs numbers or driver's license numbers, in
order to pose as someone else. The information can be used to obtain credit,
merchandise, and services using the victimsÊ name.

Identity theft can also provide a thief with false credentials for immigration
or other applications. One of the biggest problems with identity theft is that
very often the crimes committed by the identity theft expert are often
attributed to the victim.

(Source: http://www.identitytheftcreditfraud.com/)

Now, let us shift our attention to the definition of phishing.

Phishing is a deceptive online attempt by a third party to obtain


information of individual or organisation for financial gain. Phishing relies
on straightforward misrepresentation and fraud approach.

The most popular phishing attempt is the spear phishing e-mail scam as
described below.

Spear phishing describes any highly targeted phishing attack. The


operation mode of spear phishers is by sending e-mail to certain
individuals, groups or organisations. The message might look genuine and
could include requests for user names or passwords. However, bear in
mind that the e-mail sender information has been faked or "spoofed".

If you respond with a user name or password, or if you click links or open
attachments in a spear phishing e-mail, pop-up window, or website, you
might become a victim of identity theft and you might put your employer
or group at risk.

Source:
http://www.microsoft.com/hk/protect/yourself/phishing/spear.mspx

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For instance, someone from a rich country sends an email to you asking for
your bank account number. The purpose is mentioned as to stash millions
of dollars for a short period of time and in return you will receive certain
amount of money.

(d) Hacking and Cyber Vandalism


The terms hacker and cracker are used interchangeably in the public. Let us
look at the definitions for both terms.

A hacker is an individual who intends to gain unauthorised access to


a computer system.

A cracker is typically used to denote a hacker with criminal intent.

Hackers and crackers gain unauthorised access by finding weaknesses in


the security procedures of websites and computer systems, often taking
advantage of various features of the Internet that make it an easy to use
open system. Hackers and crackers are computer enthusiasts who are
excited by the challenge of breaking into corporate and government
websites.

Sometimes, they are satisfied merely by breaking into the files of an


e-commerce site. Others have more malicious intentions and commit cyber
vandalism, an act of intentionally disrupting, defacing or even destroying
the site.

Let us look at another three terms which are inter-related to the term
hacker.

Malicious insider is a hacker who is an employee in an organisation. They


obtain access to the computer systems or networks of the organisation and
conduct harmful activities which are purposely done to bring bad impact to
the organisation.

Cyber criminal deals with any criminal act related to Internet, computers
and networks.

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Cyber terrorist conducts unlawful attacks and threats of attack against


computers, networks, and the information stored in it. Cyber terrorist aims
to intimidate or forcefully persuade the government or its people for
political or social purposes.
- Dorothy Denning

Source: http://www.crime-research.org/library/Cyber-terrorism.htm

The hacker phenomenon has diversified over time. HackersÊ activities have
also broadened beyond mere system intrusion to include theft of goods and
information, as well as vandalism and system damage. Groups of hackers
called tiger teams (will be explained later) are used by corporate security
departments to test their own security measures. By hiring hackers to break
into the system from the outside, the company can identify weaknesses in
the computer systemÊs armour.

Hackers can be categorised into three categories as shown in Table 6.2.

Table 6.2: Categories of Hackers

Hackers Descriptions
White hats White hats hackers are known as „good hackers‰ because of their
role in helping organisations to locate and fix security flaws. White
hats do their work under contract, with agreement from clients that
they will not be prosecuted for their efforts to break-in.

Black hats In contrast, black hats are „bad hackers‰ who engage in the
same kinds of activities but without any pay or contract from the
targeted organisation. They have the intention of causing harm to
the organisation. They will break into websites and reveal the
confidential or proprietary information they find. These hackers
believe strongly that information should be free, so sharing
previously-secret information is part of their mission.
Grey hats Grey hats hackers are those who believe they are pursuing some greater
good by breaking in and revealing systemsÊ flaws. Grey hats discover
weaknesses in a systemsÊ security and then publish the weakness
without disrupting the site or attempting to profit from their finds.

Their only reward is the prestige of discovering the weakness.


However, grey hatsÊ actions are suspicious and sometimes harmful,
especially when the hackers reveal security flaws that make it
easier for other criminals to gain access to a system.

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(e) Credit Card Fraud


One of the most feared occurrences on the Internet is theft of credit card
data. Users avoid from making any online purchases due to the fear of
losing their credit card information through theft. Interestingly, this fear
appears to be largely unfounded. Incidences of stolen credit card
information are much lower than users think.

For instance, a study by ActivMedia research reports that 58% of consumers


reported fear of online credit card theft, when only 1.6% to 1.8% occurrence
was reported (CyberSource, 2008). It is unclear at this time if the realistic
threat to consumers for credit card fraud is greater in e-commerce than in
traditional commerce as shown below:

(i) Traditional Commerce


In traditional commerce, there is substantial credit card fraud, but the
consumer is largely insured against the losses by federal law. Credit
card fraud amounts to approximately $1 billion to $1.5 billion a year.
The most common cause of credit card fraud is as follows:
Lost or stolen card that is used by someone else;
Employee theft of customersÊ numbers; and
Stolen identities such as criminals applying for credit cards using
false identities.

The costs of credit card fraud are recouped by banks by charging


higher interest rates on unpaid balances, and by merchants who raise
prices to cover the losses.

(ii) E-commerce
The fraud in e-commerce is slightly different compared to the
traditional credit card fraud. In e-commerce, the greatest threat to
consumers is that the merchantÊs server with which the consumer is
transacting will „lose‰ the credit information or permit it to be
diverted for a criminalÊs use.

Credit card files are a major target of website hackers. Moreover,


e-commerce sites are wonderful sources of customerÊs personal
information such as name, address, and phone number. Armed
with this information, criminals can assume a new identity and
establish new credit for their own purposes.

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International orders have been particularly prone to repudiation. If an


international customer places an order and then later disputes it, online
merchants often have no way to verify that the package was actually
delivered and that the credit card holder is the person who placed the
order.

(f) Spoofing and Spam Websites


What is spoofing? Refer below in order to know to know more on this term.

Spoofing refers to the act of hackers who attempts to hide their true
identities by misrepresenting themselves through fake e-mail addresses or
masquerading as someone else.

Spoofing also involves the act of redirecting a web link to an address


different from the intended one, with the site masquerading as the intended
destination.

Links that are designed to lead to one site can be reset to send users to a
totally unrelated site, one that benefits the hacker. Although spoofing does
not directly damage files or network servers, it threatens the integrity of a
site.

For example, if hackers redirect customers to a fake website that looks


almost exactly like the true site, they can collect and process the orders,
effectively stealing business from the true site. Or, if the intent is to disrupt
rather than steal, hackers can alter orders inflating them or changing
products ordered and then send them on the true site for processing and
delivery.

Customers become dissatisfied with the improper order shipment and the
company may have huge inventory fluctuations that impact its operations.
In addition to threatening integrity, spoofing also threatens authenticity by
making it difficult to discern the true sender of a message. Clever hackers
can make it almost impossible to distinguish between a true and fake
identity or web address.

We have learned about spoofing; now let us shift our attention on spam
website as defined below.

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Spam website (also known as junk website) appears on search results which
cloak its identity by using domain name similar to legitimate firm name
and redirect traffic to known-spammer redirection domains.

For example, you enter the keywords of an established firm in order to


learn more on the firm. The search engine provides lists of websites having
the key words entered by you. Once you click on a website which has the
similar domain name of the firm you searched for, the website is quickly
redirected to other spammer-related websites.

(g) Denial of Service (DOS) and Distributed Denial of Service (DDOS) Attacks
Let us look at the definitions of both terms in order to be able to
differentiate it clearly.

In a Denial of Service (DOS) attack, hackers flood a website with useless


traffic to overwhelm the network.

A Distributed Denial of Service (DDOS) attack uses numerous computers to


attack the target network from numerous launch points.

DOS attacks may cause a network to shut down, making it impossible for
users to access the site. For busy e-commerce sites such as eBay.com and
Buy.com, these attacks are costly as while the site is shut down, the siteÊs
reputation is damaged profoundly.

Although such attacks do not destroy information or access-restricted areas


of the server, they are nuisances that interfere with a companyÊs operations
as shown in the example.

In February 2000, a series of hackersÊ attacks caused many websites to shut


down for several hours. eBay was down for five hours, Amazon for just
below four hours, CNN for more than three hours, and E-Trade for below
three hours. Yahoo, Buy.com, and ZDNet were also affected for three to
four hours.

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Now, let us focus on smurf. Smurf, which is a type of DOS attack, brings a
network down by sending out a request to many broadcast addresses with
an address that can communicate with up to 255 host computers to verify
that the address is working. When the 255 hosts on each broadcast address
reply to the verification request, the hacker spoofs the IP address reply to
the verification request, listing a particular companyÊs server as the
supposed reply address. Soon, the victim companyÊs server is quickly
overwhelmed with thousands of PING responses (refer below) that tie it
up.

Ping is a basic Internet programme that allows a user to verify that a


particular IP address exists and can accept requests.

DOS and DDOS attacks are threats to a systemÊs operation because they can
shut it down indefinitely. Major websites such as Yahoo! and even
Microsoft have recently experienced such attacks, making the companies
aware of their vulnerability and the need to introduce new measures to
prevent any future attacks.

(h) Sniffing
What is a sniffer? Read on to know more.

A sniffer is a type of eavesdropping programme that monitors information


traveling over a network.

When used legitimately, sniffers can help to identify potential network


trouble spots, but when used for criminal purposes, they can be damaging
and very difficult to detect. Sniffers enable hackers to steal proprietary
information from anywhere on a network, including e-mail messages,
company files and confidential reports.

Email wiretaps are a new variation on the sniffing threat.

An email wiretap is a hidden code in an e-mail message that allows


someone to monitor all succeeding messages forwarded with the original
message.

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For example, suppose an employee reports on a manufacturing flaw that


she has discovered to her supervisor, who then runs through the message
in an organisation. Someone using an e-mail wiretap will be privy to all of
the subsequent e-mails that are shared on the email sent by the supervisor.

When sensitive internal communication occurs, this type of eavesdropping


can be damaging and dangerous. The threat of sniffing is that confidential
or personal information will be made public. For both companies and
individuals, such an occurrence can be potentially harmful.

(i) Insider Jobs


We tend to think of security threats to a business as originating outside the
organisation. In fact, the largest financial threat to business institutions
comes not from robberies, but from the insiders itself.

The same is true for e-commerce sites: Some of the largest disruptions to
service, destruction to sites, and diversion of customer credit data and
personal information have come from insiders who are once trusted
employees. Employees have access to privileged information, and in the
presence of sloppy internal security procedures, they are often able to roam
throughout an organisationÊs system without leaving a trace.

To get more information on e-commerce or Internet security, you can visit


the following websites:
Center for Internet Security:
http//www.cisecurity.org/
E-commerce Security - Attacks and preventive strategies:
http://www.ibm.com/developerworks/websphere/library/techarticle
s/ 0504_mckegney/0504_mckegney.html

SELF-CHECK 6.1

List all the common and damaging forms of security threats to e-commerce
sites.

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ACTIVITY 6.1

You are planning to develop an e-commerce site for your business


organisation. Would you build your own or outsource to other
vendors? State your reasons.

EXERCISE 6.1

1. List six key dimensions of e-commerce security.


2. One of the most common forms of security threat to e-commerce
sites is malicious code. Explain what the malicious code is.

6.2 TECHNOLOGY SOLUTIONS


The first line of defence against the wide variety of security threats to an
e-commerce site is a set of tools that can make it difficult for outsiders to invade
or destroy a site.

In the coming sections, we will look into the following aspects:


(a) Encryption;
(b) Securing channels of communication; and
(c) Protecting the network, servers and clients.

6.2.1 Encryption
What is an encryption? Read the following for the definition of the term.

Encryption is the process of transforming plain text or data into ciphertext


that cannot be read by anyone outside of the sender and the receiver.

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The purpose of encryption is to secure:


(a) Stored information; and
(b) Information transmission.

This transformation of plain text to ciphertext is accomplished by using the key


or cipher (algorithm) method as illustrated in Figure 6.4.

Figure 6.4: Encryption


Source: http://securitycerts.org/review/symmetric-key-cryptography.htm

Encryption has been practiced since the earliest forms of writing and commercial
transaction. Ancient Egyptian and Phoenician commercial records were
encrypted using the following ciphers:

(a) Substitution Cipher


In a substitution cipher, every occurrence of a given letter is replaced
systematically by another letter.

For instance, if we used the cipher „letter plus two‰ meaning replace every
letter in a word with a new letter two places forward, then the word
„HELLO‰ in plain text would be transformed into the following ciphertext:
„JGNNQ‰.

(b) Transposition Cipher


In a transposition cipher, the ordering of the letters in each word is changed
in some systematic way. Leonardo da Vinci recorded his shop notes in
reverse order, making them readable only with a mirror. The word „Hello‰
can be written backwards as „OLLEH‰.

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A more complicated cipher would be to break all words into two words
and spell the first word with every other letter beginning with the first
letter, and then spell the second word with all the remaining letters. In this
cipher, „HELLO‰ would be written as „HLO EL‰.

In order to decipher the above messages, there are a number of deciphering tools
and they are:
(a) Symmetric Key Encryption;
(b) Public Key Cryptography;
(c) Public Key Encryption Using Hash Function and Digital Signature;
(d) Digital Envelope; and
(e) Digital Certificate and Public Key Infrastructure (PKI).

Lets us discuss further about the tools.

(a) Symmetric Key Encryption


So, what is a symmetric key encryption?

Symmetric key encryption, also called as secret key encryption, is used to


decode or decipher a message which is originally encrypted in a plain text.

In symmetric key encryption, both the sender and the receiver use the same key
to encrypt and decrypt the message as can be seen in Figure 6.5. You may
wonder how the sender and the receiver have the same key. They have to send
it over some communication media or exchange the key in person.

Figure 6.5: Symmetric key encryption


Source: http://www.devx.com/dbzone/Article/29232/0/page/3
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Symmetric key encryption was used extensively throughout World War II and
is still part of the Internet encryption. The Germans added a new wrinkle in the
1940s with the invention of the Enigma machine (see Figure 6.6). The Allies
(anti-German coalition) captured several Enigma machines, examined their
operation, understood the role of time in changing the codes, and eventually
were able to routinely decipher the GermanÊs military and diplomatic messages.

Figure 6.6: Enigma machine


Source: http://maestro-sec.com/blogs/2008/10/

How did the enigma machine operate? The Enigma machine would generate, in
an everyday-basis, a new secret cipher that used both substitution and
transposition ciphers based on the settings made by a mechanical device. As
long as all Enigma machines around the world were set to the same settings,
they could communicate securely, and every day the codes would change,
hindering code-breakers from breaking the codes in a timely-fashion.

The possibilities for simple substitution and transposition ciphers are


endless, but they all suffer from common flaws such as:

(i) Easy to be Broken Into


In the digital age, computers are so powerful and fast that these
ancient means of encryption can be broken quickly.

(ii) Key being Lost or Stolen


Symmetric key encryption requires that both parties share the same
key. In order to share the same key, they must send the key over a
presumably insecure medium, where it could be stolen and used to
decipher messages. If the secret key is lost or stolen, the entire
encryption system will fail.

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(iii) Impossible to be Implemented


In commercial use, where we are not all part of the same team or
army, you would need a secret key for each of the parties with whom
you transacted, that is, one key for the bank, another for the
department store, and another for the government.

However, in a large population of users, this could result in as many


as (n-1) keys. In a population of millions of Internet users, thousands
of millions of keys would be needed to accommodate all e-commerce
customers. It is estimated there are about 35 million purchasers in the
United States alone. Clearly, this situation would be too impossible to
work in practice.

Modern encryption systems are digital. The ciphers or keys used to


transform plain text into ciphertext are digital strings. Computers store text
and other data as binary strings composed of 0s and 1s.

For instance, the binary representation of the capital „A‰ in ASCII


computer code is accomplished with eight binary digits (bits): 01000001.
One way in which digital strings can be transformed into cipher text is by
multiplying each letter by another binary number, say, an eight-bit key
number 0101 0101. If we multiplied every digital character in our text
messages by this eight-bit key, sent the encrypted message to a friend along
the secret eight-bit key, the friend could decode the message easily.

The strength of modern security protection is measured in terms of the


length of the binary key used to encrypt the data. In the above example, the
eight-bit key is easily deciphered because there are only 28 or 256
possibilities. If the intruder knows you are using an eight-bit key, then he
or she could decode the message in a few seconds in a modern computer
just by using the Brute Force Algorithm Method of checking each of the 256
possible keys.

The brute force algorithm consists in checking, at all positions in the text
between 0 and n-m, whether an occurrence of the pattern starts there or not.
Then, after each attempt, it shifts the pattern by exactly one position to the
right.

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For this reason, modern digital encryption systems use keys with 56,128,
256, or 512 binary digits. With encryption keys of 512 digits, there are 2512
possibilities to check out. It is estimated that all the computers in the world
would need to work for ten years before stumbling upon the answer.

The most widely used symmetric key encryption on the Internet today is
the Data Encryption Standard (DES), which uses a 56-bit encryption key,
developed by the National Security Agency (NSA) and IBM in the 1950s.
To cope with much faster computers, it has been improved recently to
Triple DES, which essentially encrypts the message three times each with
separate key. There are many other symmetric key systems with keys up to
2048 bits. Like all symmetric key systems, DES requires the sender and the
receiver to exchange and share the same key, and requires a different set of
keys for each set of transactions.

(b) Public Key Cryptography


In 1976, an entirely new way of encrypting messages called as Public Key
Cryptography was invented by Whitfield Diffie and Martin Hellman.
Public key cryptography solves the problem of exchanging keys. In this
method, two mathematically related digital keys are used as illustrated in
Figure 6.7:

(i) A Public Key


The private key is kept secret by the owner, and the public key is
widely disseminated. Both keys can be used to encrypt and decrypt a
message. The mathematical algorithms used to produce the keys are
one-way functions.

A one-way reversible mathematical function is one which, once the


algorithm is applied, the input cannot be subsequently derived from
the output.

(ii) A Private Key


Public key cryptography is based on the idea of irreversible
mathematical functions. The keys are sufficiently long (128-bit, 256-
bit, and 512-bit keys) that it would take enormous computing power
to derive one key from the other using the largest and fastest
computers available.

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Figure 6.7: Public key cryptography


Source: http://www.aarontoponce.org/presents/gpg/

(c) Public Key Encryption Using Hash Function and Digital Signature
In public key encryption as shown in Figure 6.8, some elements of security
are missing. Although we can be quite sure the message was not
understood or read by a third party (message confidentiality), there is no
guarantee the sender really is the sender that is, there is no authentication
of the sender. This means the sender could deny ever sending the message
(repudiation). And there is no assurance the message was not altered
somehow in transmit.

For example, the message „Buy Sisco @ $25‰ could have been accidentally
or intentionally altered to read „Sell Sisco @ &25‰. This suggests a potential
lack of integrity in the system.

Figure 6.8: Public key encryption using hash function and digital signature
Source: http://www.microsoft.com/mspress/books/sampchap/6429.aspx

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Let us look at the two components used in public key encryption.

(i) Hash Function


A more sophisticated use of public key cryptography can achieve
authentication, nonrepudiation and integrity. To check the
confidentiality of a message and to ensure it has not been altered in
transit, a hash function is used first to create a digest of the message.

A hash function is an algorithm that produces a fixed-length number


called a hash or message digest. A hash function can be simple, and
count the number of digital „1s‰ in a message, or it can be more
complex, and produce a 128-bit number that reflects the number of 0s
and 1s, the number of 00s, 11s, and so on.

The results of applying the hash function are sent by the sender to
the recipient. Upon receipt, the recipient applies the hash function to
the received message and checks to verify the same result is
produced. If so, the message has not been altered. The sender then
encrypts both the original message using the recipientÊs public key,
producing a single block of ciphertext.

(ii) Digital Signature


One more step is required. To ensure the authenticity of the
message, and to ensure nonrepudiation, the sender encrypts the
entire block of ciphertext one more time using the senderÊs private
key. This produces a digital signature, also called as an e-signature
or „signed‰ ciphertext, that can be sent over the Internet.

A digital signature is a close parallel to a handwritten signature. Like a


handwritten signature, the digital signature is unique as only one person
presumably possesses the private key. When used with a hash function, the
digital signature is even more unique than a handwritten signature. In
addition to being unique to a particular individual, when used to sign a
hashed document, the digital signature is also unique to the document and
changes for every document.

The recipient of this signed ciphertext first uses the senderÊs public key to
authenticate the message. Once authenticated, the recipient uses his or her
private key to obtain the hash result and original message. As a final step,
the recipient applies the same hash function to the original text and
compares the result with the result sent by the sender. If the results are the

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same, the recipient now knows the message has not been changed during
transmission. The message has integrity.

(d) Digital Envelope


Public key encryption is computationally slow. If one used 128-bit or 256-
bit keys to encode large documents such as this topic or the entire module,
significant declines in transmission speeds and increases in processing time
would occur.

Symmetric key encryption is computationally faster but as we pointed out


above, it has a weakness, namely, the symmetric key must be sent to the
recipient over insecure transmission lines. One solution is to use the digital
envelope technique.

The digital envelope is applied by using more efficient symmetric


encryption and decryption for large documents, but public key encryption
is used instead to encrypt and send the symmetric key.

(e) Digital Certificate and Public Key Infrastructure (PKI)


There are still some deficiencies in the message security regime described
above. How do we know that people and institutions are who they claim to
be? Anyone can make up a private and public key combination and claim
to be the Defence Department or Santa Claus. Before you place an order
with an online merchant such as Amazon.com, you want to be sure that it
really is Amazon.com that you have on the screen and not a spoofer
masquerading as Amazon.

In the physical world, if someone asks who you are and you show a social
security number, they may well ask to see your identification cardÊs picture
or a second form of certifiable or acceptable identification. If they really
doubt who you are, they may ask references to other authorities and
actually interview those authorities. Similarly in the digital world, we need
a way to know who people and institutions really are.

There are two methods to solve this problem of digital identity and they
are:

(i) Digital Certificate


A digital certificate is a digital document issued by a trusted
certificate authority (CA). Refer below to know more on CA.

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Certificate authority is a „trusted third party‰ institution. In the United


States, private corporations such as VeriSign and government agencies
such as the U.S. Postal Service act as certificate authorities.

The digital certificate contains the following elements as can be seen


in Figure 6.9:
The name of the subject or company;
The subjectÊs public key;
A digital certificate serial number;
An expiration date;
An issuance date;
The digital signature of the certificate authority (the name of the
CA encrypted using the CAÊs private key); and
Other identifying information.

Figure 6.9: Digital certificate


Source: https://p10.secure.hostingprod.com/@spyblog.org.uk/ssl/wikileak/index.html

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(ii) Public Key Infrastructure


What is a Public key infrastructure? Refer below to find out its
meaning.

Public key infrastructure (PKI) refers to the certificate authorities and


digital certificate procedures that are accepted by all parties.

To create a digital certificate, the user generates a public/private key


pair and sends a request for certification to the CA along with the
userÊs public key. The CA verifies the information and then issues a
certificate containing the userÊs public key and other related
information. Finally, the CA creates a message digest from the
certificate itself (just like a hash digest) and signs it with the CAÊs
private key. This signed digest is called the signed certificate. We end
up with a totally unique ciphertext document that there can be only
one signed certificate like this in the world.
There are several ways the certificates are used in commerce. Before
initiating a transaction, the customer can request the signed digital
certificate of the merchant and decrypt it using the merchantÊs public
key to obtain both the message digest and the certificate as issued. If
the message digest matches the certificate, then the merchant and the
public key are authenticated. The merchant may in return request
certification of the user, in which case the user would send the
merchant his or her individual certificate. There are many types of
certificates: personal, institutional, web server, software publisher,
and CAs themselves.
You can easily obtain a public and private key at the Pretty Good
Privacy (PGP) site (www.pgpi.org.). PGP was invented in 1991, and
has become one of the most widely used e-mail public key encryption
software tools in the world. Using PGP software installed on your
computer, you can compress and encrypt your messages as well as
authenticate both yourself and the recipient.

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6.2.2 Limitations to Encryption Solutions


How is your private key to be protected? Most private keys will be stored on in
secure desktop or laptop machines.

Therefore, there are three limitations in using the encryption and they are:

(a) No Guarantee of Determining the User of the Computer


There is no guarantee the person using your computer and your private
key is really you. Under many digital signature laws (such as those in Utah
and Washington), you are responsible for whatever your private key does
even if you were not the person using the key. This is very different from
mail order or telephone order credit card rules, where you have a right to
dispute the credit card charge.

(b) No Guarantee to Verify the Computer is Secured


There is no guarantee to verify that the computer of the merchant is
secured.

(c) No Definite Policy in Revoking or Renewing the Certificates


The expected life of a digital certificate or private key is a function of the
frequency of use and the vulnerability of systems that use the certificate. Yet,
most CA has no policy or just an annual policy for reissuing certificates.

6.2.3 Securing Channels of Communication


The concepts of public key encryption are used routinely for securing channels of
communications.

In this section, we will look into the following:


(a) Secure Sockets Layer (SSL);
(b) Secure Hypertext Transfer Protocol (S-HTTP); and
(c) Virtual Private Networks (VPN).

Let us now further our discussion on the security channels listed above.
(a) Secure Sockets Layer (SSL)
The most common form of securing channels is through the secure sockets
layer (SSL) of TCP/IP. When you receive a message from a server on the web
that you will be communicating through a secure channel, this means that you
will be using SSL to establish a secure negotiated session (refer below).

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A secure negotiated session is a client-server session in which the URL of


the requested document, along with the contents, contents of forms, and
the cookies exchanged, are encrypted. You will also notice that the URL
changes from HTTP to HTTPS.

For instance, your credit card number that you entered into a form would be
encrypted. Through a series of handshakes and communications, the browser
and the server establish one anotherÊs identity by exchanging digital
certificates, decide on the strongest shared form of encryption and then
proceed to communicate using an agreed-upon session key.

A session key is a unique symmetric encryption key chosen just for this
single secure session. The key can be used only once.

In practice, most private individuals do not have a digital certificate. In this


case, the merchant server will not request a certificate, but the client
browser will request the merchant certificate once a secure session is called
for by the server.

The SSL protocol provides data encryption, server authentication, optional


client authentication, and message integrity for TCP/IP connections. SSL is
available in 40-bit and 128-bit levels, depending on what version of
browser you are using. The strongest shared encryption is always chosen.

SSL was designed to address the threat of authenticity by allowing users to


verify another userÊs identity, or the identity of a server. It also protects the
integrity of the messages exchanged. However, once the merchant receives
the encrypted credit and order information, that information is typically
stored in unencrypted format on the merchantÊs servers.

While the SSL protocol provides secure transactions between merchant and
consumer, it only guarantees server side authentication as client
authentication is optional. In addition, SSL cannot provide irrefutability
that consumers can order goods or download information products, and
then claim the transaction which never occurred. Other protocols for
protecting financial transactions such as Secure Electronic Transaction
Protocol ( SET) have emerged that require all parties of a transaction to use
digital certificates.

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(b) Secure Hypertext Transfer Protocol (S-HTTP)


A competing method is called as Secure Hypertext Transfer Protocol ( S-HTTP).
S-HTTP is a secure message-oriented communications protocol designed for use
in conjunction with HTTP. It is designed to co-exist with HTTP and to be easily
integrated with HTTP applications. Basically, S-HTTP attempts to make HTTP
more secure. Whereas SSL is designed to establish a secure connection between
two computers, S-HTTP is designed to send individual messages securely.

However, you need to bear in mind that not all browsers and not all
websites support S-HTTP. You know you are dealing with a supporting
site when the URL starts with „SHTTP‰. The use of this as part of an anchor
tag indicates that the target server is S-HTTP capable. A message which
uses S-HTTP maybe:
(i) Signed;
(ii) Authenticated;
(iii) Encrypted; and
(iv) In any combination of the mentioned ways.

(c) Virtual Private Networks (VPN)


Virtual Private Networks (VPN) allow remote users to securely access
internal networks via the Internet, using the Point-to-Point Tunneling
Protocol (PPTP). Refer below to find out its meaning.

Point-to-Point Tunneling Protocol is an encoding mechanism that allows


one local network to connect to another using the Internet as the conduit.

As shown in Figure 6.10, a remote user can dial into a local Internet Service
Provider (ISP), and PPTP makes the connection from the ISP to the
corporate network as if the user had dialled into the corporate network
directly. The process of connecting one protocol (PPTP) through another
Internet Protocol (IP) is called as tunneling because PPTP creates a private
connection by adding an invisible wrapper around a message to hide its
content. As the message travels through the Internet between the ISP and
the corporate network, it is shielded from prying eyes by PPTPÊs encrypted
wrapper.

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Figure 6.10: Virtual private networks

A virtual private network is „virtual‰ in the sense that it appears to users as


a dedicated secured line, when in fact it is a temporary secure line. The
primary use of VPNs is to establish secure communications among
business partners larger suppliers or customers. A dedicated connection to
a business partner can be very expensive. Using the Internet and PPTP as
the connection method significantly reduces the cost of secure
communications.

6.2.4 Protecting Network


Once you have protected communications as well as possible, the next sets of
tools to consider are those that can protect your networks, and the servers and
clients on those networks. The tools used for this purpose are:
(a) Firewalls; and
(b) Proxy servers.

Firewalls and proxy servers are intended to build a wall around your network,
and the attached servers and clients, just like physical world firewalls which
protect you from fires for a limited period of time. Firewalls and proxy servers
share some similar functions, but they are quite different as explained below:

(a) Firewalls
Firewalls are software applications that act as filters between a companyÊs
private network and the Internet as illustrated in Figure 6.11.

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Figure 6.11: Firewalls


Source: http://www.barbardata.com/2009/11/design-of-a-computer-system/

They prevent remote client machines from attaching to your internal


network. Firewalls monitor and validate all incoming and outgoing
communications. Every message that is to be sent or received from the
network is processed by the firewall software, which determines if the
message meets the security guidelines established by the business. If it
does, it is permitted to be distributed. However, if it does not, the message
is blocked.

There are two major methods firewalls use to validate traffic:

(i) Packet Filters


Packet filters examine data packets to determine whether they are
destined for a prohibited port, or originate from a prohibited IP address
(as specified by the security administrator). The filter specifically looks at
the source and destination information, as well as the port and packet
type, when determining whether the information may be transmitted.
One downside of the packet filtering method is that it is susceptible to
spoofing, since authentication is not one of its roles.

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(ii) Application Gateways


Application gateways are a type of firewall that filter communications
based on the application being requested, rather than the source or
destinations of the message. Such firewalls also process requests at the
application level, farther away from the client computer than packet
filters. By providing a central filtering point, application gateways provide
greater security than packet filters, but can compromise on the
performance of the system.

(b) Proxy Servers


What is a proxy server? Let us learn more on it by taking a look at the
explanation provided below.

Proxy servers (proxies) are software servers that handle all


communications originating from or being sent to the Internet, acting as a
spokesperson or bodyguard for the organisation.

Proxies act primarily to limit access of internal clients to external Internet


servers, although some proxy servers act as firewalls as well. Proxy servers
are sometimes called dual-home systems because they have two network
interfaces. To internal machines, a proxy server is known as the gateway,
while to external machines it is known as a mail server or numeric address.

How does a dual home systems of proxy servers work? Let us look at
Figure 6.12 which shows the processes involved in the system.

Figure 6.12: The dual-home systems of proxy servers

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By prohibiting users from communicating directly with the Internet,


companies can restrict access to certain types of sites, such as pornographic,
auction, or stock-trading sites. Proxy servers also improve Web
performance by the using the following ways:
(i) Storing frequently requested web pages locally;
(ii) Reducing upload times; and
(iii) Hiding the internal networkÊs address, thus making it more difficult
for hackers to monitor.

6.2.5 Protecting Servers and Clients


Servers and clients can be further protected from certain types of attacks by the
following ways:

(a) Operating System Controls


Computer operating systems typically have a built-in username and
password requirement that provides a level of authentication. Some
operating systems also have an access control function that automates user
access (or more commonly denies access by clients) to various areas of the
network.

For instance, operating systems security can manage access to selected


network paths so that only authorised personnel can obtain access to
payroll information. Application software including Microsoft office and all
server-side database packages containing extensive security management
features that can be used on networks and intranets to manage access to
data files.

(b) Anti-virus Software


The easiest and least expensive way to prevent threats to system integrity is
to install anti-virus software. Programmes by McAfee and Symantec
provide inexpensive tools to identify and eradicate the most common
types of viruses as they enter a computer, as well as destroy those already
lurking on a hard drive.

It is not enough, however, to simply install the software once. Since new
viruses are being developed daily, routine updates are needed in order to
prevent new threats from being loaded.

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(c) Intrusion Detection System


This system, which is more complex and expensive, work much more like
an anti- virus software in that they look for recognised hacker tools or
signature actions.

Designed to trigger an alarm when such an action is noted, these systems


must be monitored by staff members or intrusion-detection services in
order to work properly. Sensors set up on a computer network will trigger
hundreds of alarms, with only a very small percentage being a potential
security threat. Regular monitoring and analysis help weed out the
insignificant from the potentially harmful. Despite the extra work involved
in eliminating false alarms, intrusion detection systems also serve as a first
line of defensedefence against hacker attacks.

SELF-CHECK 6.2
1. How do anti-virus programmes detect and identify a virus?
2. What are the tools used to protect networks, servers and clients?

EXERCISE 6.2

1. What is encryption?
2. Give four different forms of encryption technology currently
in use.
3. Explain these two tools which are used to establish secure
Internet communication channels:
(a) SSL (Secure Sockets Layer)
(b) S-HTTP (Secure Hypertext Transfer Protocol)

You can visit the following websites to get more information on technology
solutions for e-commerce security:
(a) Encryption:
http://tools.devshed.com/c/a/How-To/What-Is-Encryption-
Technology/

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(b) Guide to intrusion detection and prevention systems:


http://csrc.ncsl.nist.gov/publications/nistpubs/800-94/SP800-94.pdf
(c) Articles on security topics:
www.windowsecurity.com/

6.3 POLICIES AND PROCEDURES


Most Chief Executive Officers (CEO) and Chief Information Officers (CIO) of
existing e-commerce operations believe that technology is not the key issue in
managing the risk of e-commerce. The technology provides a foundation, but in
the absence of intelligent management policies even the best technology can be
easily defeated. Public laws and active enforcement of cybercrime statutes are
also required to both raise the costs of illegal behaviour on the Internet and guard
against corporate abuse of information. Let us consider briefly the development
of management policy.

6.3.1 A Security Plan: Management Policies


In order to minimise security threats, e-commerce firms must develop a coherent
corporate policy as shown in Figure 6.13. This policy takes into account the
nature of the risks, the information assets that need protection, and the
procedures and technologies required to address the risk, as well as the
implementation and auditing mechanisms.

Figure 6.13: Management e-commerce security plans

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(a) Risk Assessment


A security plan begins with risk assessment, which is an assessment of the
risks and points of vulnerability. The first step in addressing the risk is to
inventory the information and knowledge assets of the e-commerce site
and company. What information is at risk? Is it the customer information,
proprietary designs, business activities, secret processes, or other internal
information such as price schedules, executive compensation, or payroll?
For each type of information asset, try to estimate the dollar value to the
firm if this information were compromised and then multiply that amount
by the probability of the occurring loss. Once you have done so, rank the
results. You now have a list of information assets prioritised by their value
to the firm.

(b) Develop Security Policy


Based on your quantified list of risks, you can start to develop a security
policy (refer below).

Security policy is a set of statements prioritising the information risks,


identifying acceptable risk targets, and identifying the mechanisms for
achieving these targets.

You will obviously want to start with the information assets that you
determined to be the highest priority in your risk assessment.
Below are the questions that might guide in developing the security policy:
(i) Who generates and controls this information in the firm?
(ii) What existing security policies are in place to protect the information?
(iii) What enhancements can you recommend to improve security of these
most valuable assets?
(iv) What level of risk are you willing to accept for each of these assets?
(v) Are you willing, for instance, to lose customer credit data once every
ten years?
(vi) Or will you pursue a hundred-year hurricane strategy by building a
security edifice for credit card data that can withstand the once in a
hundred-year disaster?
You will need to estimate how much it will cost to achieve this level of
acceptable risk. Remember, total and complete security may require
extraordinary financial resources.

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(c) Implementation Plan


An implementation plan is the action steps you will take to achieve the
security planÊs goals. Specifically, you must determine how you will
translate the levels of acceptable risk into a set of tools, technologies,
policies, and procedures. What new technologies will you deploy to
achieve the goals, and what new employee procedures will be needed?

To implement your plan, you will need a security organisational unit and a
security officer.

Let us look at the definitions provided for both of the terms.

Security officer is someone who is in charge of security on a daily basis. For


a small e-commerce site, the security officer will likely be the person in
charge of the Internet services or the site manager; whereas for larger
firms, there typically is a dedicated team with a supporting budget.

The security organisation educates and trains the users, keeps


management aware of security threats and breakdowns and maintains the
tools chosen to implement the security.

The security organisation typically administers the following:

(i) Access Controls


Access controls determine which outsiders and insiders can gain
legitimate access to your networks. Outsider access controls include
firewalls and proxy servers, while insider access controls typically
consist of login procedures (username, passwords and access codes).

(ii) Authentication Procedures


Authentication procedures include the use of digital signatures,
certificates of authority, and public key infrastructure. Now that
e-signatures have been given the same legal weight as an original
pen-and-ink version of signature, companies are in the process of
devising ways to test and confirm a signerÊs identity.

Attaching a digital thumbprint and showing a live video image of the


signer are two methods under consideration. Companies frequently have
signers to type their full name and click on a button indicating their
understanding that they have just signed a contract or document.

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Biometric devices, which measure the biological or physical


characteristics of an individual, are used along with digital
signatures. These devices verify individualÊs physical attributes such
as a fingerprint or retina (eye) scan or speech recognition system.

A company could require, for example, that an individual undergo a


fingerprint scan before being allowed access to a website, or before
being allowed to pay for merchandise with a credit card. Biometric
devices make it even more difficult for hackers to break into sites or
facilities, significantly reducing the opportunity for spoofing.

(iii) Authorisation Policies


Let us look below at the two terms related to authorisation.

Authorisation policies determine differing levels of access to


information assets for differing levels of users.

Authorisation management systems establish where and when a user


is permitted to access certain parts of a website. Their primary
function is to restrict access to private information within a
companyÊs Internet infrastructure.

Although there are several authorisation management products


currently available, most operate in the same way. The system
encrypts a user session to function like a passkey that follows the user
from page to page, allowing access only to those areas that user is
permitted to enter, based on information set at the management
system which knows who is permitted to go where at all times.

(d) Security Audit


The last step in developing an e-commerce security plan is performing
a security audit (refer below).

A security audit involves the routine reviews of access logs by identifying


how outsiders are using the site as well as how insiders are accessing the
siteÊs assets. A monthly report should be produced that establishes the
routine and non-routine accesses to the systems and identifies unusual
patterns of activities.

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Tiger teams are often used by large corporate sites to evaluate the strength
of existing security procedures.

Before we move further, what is a tiger team? Does the team have any similar
characteristic to the real black striped orange-reddish coloured animal?

A tiger team is a group whose sole job activity is attempting to break into a
site and stopping just short of actually making any unauthorised changes
to the site. Many small firms have sprung up in the last five years to
provide these services to large corporate sites.

6.3.2 CyberSecurity Malaysia


CyberSecurity Malaysia, which is established in 1997, is a national cyber security
body under the Ministry of Science, Technology and Innovation (MOSTI). It
includes various units and provides services for Internet users and organisations
in the field of cyber security. For example, Cyber999 Help Centre deals with the
detection, interpretation and response to computer security incidents. It also
provides safety tips, advisories and specialised services such as Digital Forensics
and wireless security. It also runs a training centre for professional certification.

ACTIVITY 6.2

Imagine you are the owner of an e-commerce website. What are some
of the signs that your site has been hacked?

EXERCISE 6.3

1. Identify and discuss the five steps in developing an e-commerce


security plan.
2. How do biometric devices help to improve the security?

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Visit the following websites for more information on organisations that promote
computer security:

(a) CyberSecurity Malaysia:


http://www.cybersecurity.my
(b) Computer Emergency Response Team:
http://www.cert.org
(c) SANS Institute:
http://www.sans.org/
(d) Center for Education and Research in Information Assurance and Security:
http://www.cerias.purdue.edu/

E-commerce is vulnerable to a wide range of security threat. Attacks against


e-commerce systems can disclose or manipulate proprietary information.

Communication channels, in general, and the Internet, in particular, are


especially vulnerable to attacks.

The key dimensions of e-commerce security are: integrity, non-repudiation,


authenticity, confidentiality, privacy and availability.

The seven most common and most damaging forms of security threat to
e-commerce sites include: malicious code, hacking and cyber-vandalism,
credit card fraud/theft, spoofing, denial of service attacks and sniffing.

The different forms of encryption technology help to protect the security of


messages sent over the Internet: symmetric key encryption, public key
cryptography, digital envelope, and digital certificates and public key
infrastructure.

In addition to encryption, there are several other tools that are used to secure
Internet channels of communication, including: SSL, S-HTTP, and VPN.

After communication channels are secured, tools to protect networks, server


and clients should be implemented include: Firewalls, Proxies, Operating
System Controls and Anti Virus Software.

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The technology itself is not the key issue in managing the risk of e-commerce,
public laws and active enforcement of cyber crime statues are also required to
both raise the costs of illegal behaviour on the Internet and guard against
corporate abuse of information.

Antivirus software Insider jobs


Ciphertext Intrusion detection system
Credit card fraud Malicious code
Cyber vandalism Operating system controls
Denial of service Phishing
Digital certificate Point-to-point tunnelling protocol
Digital envelope Proxy servers
Digital signature Secure hypertext transfer protocol
Distributed denial of service Secure sockets layer
Encryption Sniffing
Firewalls Spam websites
Hacking Spoofing
Hash function Unwanted programme
Identity theft Virtual private networks

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T op i c E-commerce
7 Payment
Systems
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the basic functions of payment cards system that are used
in e-commerce;
2. Discuss the advantages and disadvantages of payment cards;
3. Describe the functions of digital cash;
4. Discuss the advantages and disadvantages of digital cash;
5. Identify how digital wallets work;
6. Explain the use of stored-value cards in e-commerce;
7. Examine the use of digital accumulating balance payment system
and digital checking; and
8. Explain the functionality of electronic billing presentment and the
payment systems.

INTRODUCTION
An important function of e-commerce sites is the handling of payments over the
Internet. Most e-commerce involves the exchange of some form of money for goods or
services. Today, three basic ways to pay for online purchases are through credit cards,
PayPal and debit cards which collectively account for more than 90 percent of all
online payments in the US. A small but growing percentage of consumer payments
are made by electronic transfer. The most popular consumer electronic transfers are
automated payments of auto loans, insurance payments and mortgage payments
made from consumersÊ checking accounts.

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In this topic, we will discuss on six payments technologies and they are:
(a) Payment cards (i.e., credit card, debit card);
(b) Digital cash;
(c) Digital wallets;
(d) Online stored-value payment systems (i.e., PayPal, smart cards);
(e) Digital accumulating balance systems; and
(f) Digital checking systems.

Each of the payment technologies has their own unique properties, costs,
advantages and disadvantages. Some methods are already popular and widely
accepted, while others are just beginning to be accepted and thus, have an unclear
future. All of these electronic payment methods can work well for B2C e-commerce
sites. In the United States, credit card payment is the primary form of online
payment system, accounted for about 60% of online transactions in 2008.

Finally, this topic ends with a discussion on the payment system for B2B e-commerce
sites as well as the electronic billing and presentment systems.

7.1 PAYMENT CARDS


Business people often use the term „payment cards‰ as a general term to describe
all types of plastic cards that consumers (and some businesses) use to make
purchases. The main categories of payment cards are as shown in Figure 7.1.

Figure 7.1: Categories of payment cards

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Let us look at the detailed explanation provided for each payment card:

(a) Credit Cards


Credit cards are by far the most popular form of online payments for
consumers. A credit card, such as a Visa or a MasterCard, has a spending
limit based on the userÊs income level credit history; a user can pay off the
entire credit card balance or pay a minimum amount for each billing
period. For any unpaid balance, the credit card issuers will charge some
interest on the user. Many consumers already have credit cards, or are at
least familiar with how it works.

Credit cards are widely accepted by merchants around the world and
provide assurances for both the consumer and the merchant. A consumer is
protected by an automatic 30-day period in which he or she can dispute an
online credit card purchase. Paying for online purchases with a credit card
is just as easy as in a brick-and-mortar store.

Merchants that already accept credit cards in an offline store can accept
them immediately for online payment because they already have a
merchant credit card account. Online purchases require an extra degree of
security not required in offline purchases, because a card holder is not
present and cannot provide proof of identity as easily as he or she can
when standing at the cash register.

(b) Debit Cards


A debit card looks very much like a credit card, but it works quite
differently. Instead of charging purchases against a credit line, a debit card
deduces the amount of the sale from the cardholderÊs bank account and
transfers it to the sellerÊs bank account. Debit cards are issued by the
cardholderÊs bank and usually carry the name of a major credit card issuer,
such as Visa or MasterCard, by agreement between the issuing bank and
the credit card issuer.

(c) Charge Cards


A charge card, such as one from American Express or Diners Club, carries
no spending limit, and the entire amount charged to the card is due at the
end of the billing period. Charge cards do not involve lines of credit and do
not accumulate interest charges.

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210 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

7.1.1 Advantages and Disadvantages of Payment


Cards
Payment cards have several features that make them an attractive and popular
choice with both consumers and merchants in online and offline transactions. Let
us look at the advantages of using the payment cards as shown in Table 7.1.

Table 7.1: Advantages of Using Payment Cards

Advantages Description
Fraud protection For merchants, payment cards provide fraud protection. When
a merchant accepts payments cards for online payment or for
orders placed over the telephone, the merchant can verify and
authorise purchases using a payment card processing network.
Worldwide Payment cards can be used anywhere in the world, and the
acceptance currency conversion, if needed, is handled by the card issuer.
Easier form of In online transactions, when a consumer reaches the electronic
payment checkout, he or she enters the payment card number as well as
the shipping and billing information in the appropriate fields
to complete the transactions.
No installation The consumer does not need any special hardware or software
to complete the transactions.
Built-in security Payment cards provide built-in security for merchants because
merchants have a higher assurance that they will be paid
through the companies that issue payment cards than through
the sometimes slow-direct invoicing process.

We have looked at the advantages; now let us move on to the disadvantages of


using payment cards as shown in Table 7.2.

Table 7.2: Disadvantages of Using Payment Cards

Disadvantages Description
Transaction and Payment card service companies charge merchants per-
monthly processing transaction fees and monthly processing fees (about 1% - 4%).
fees These fees can add up, but merchants view them as a cost of
doing business. Any merchant who does not accept payment
cards for purchases, risks losing a significant portion of sales to
other merchants who do accept payment cards.

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High prices of goods The consumer pays no direct transaction-based fees for using
and services payment cards, but the prices of goods and services are slightly
higher than they would be in an environment free of payment
cards.
Annual fee Most consumers also pay an annual fee for credit cards and
charge cards. This annual fee is much less common on debit
cards.

7.1.2 Payment Acceptance and Processing


Most people are familiar with the use of payment cards: When a purchase is
made, the clerk runs the card through the online payment card terminal and the
card account is charged immediately. The process is slightly different on the
Internet, although the purchase and charge processes follow the same rules.

Payment card processing has been made easier over the past two decades
because Visa and MasterCard, along with MasterCardÊs European affiliate,
MasterCard Europe (formerly known as Europay), have implemented a single
standard for the handling of payment card transactions called as the EMV
standard (EMV is derived from the names of the companies: Europay,
MasterCard and Visa).

To process payment card transactions, a merchant must first set up a merchant


account. The series of steps in a payment card transaction is usually transparent to
the consumer. Several groups and individuals are involved in the transactions such
as:
(a) The merchant;
(b) The merchantÊs bank;
(c) The customer;
(d) The customerÊs bank; and
(e) The company that issued the customerÊs payment card.

All of these entities must work together for customer charges to be credited to
merchant accounts (and vice versa when a customer receives a payment card
credit for returned goods).

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Payment card transactions follow these general steps once the merchant receives
a consumerÊs payment card information, which is usually sent using SSL:
(a) The merchant authenticates the payment card to ensure it is valid and not
stolen;
(b) The merchant checks with the payment card issuer to ensure that credit or
funds are available and puts a hold on the credit line or the funds needed
to cover the charge; and
(c) Settlement occurs, usually a few days after the purchase, which means that
funds travel between banks through the automated clearinghouse system
(refer below) into the merchantÊs account.

The Automated Clearing House (ACH) system is a secure, private network


that connects banks to one another. This network enables electronic
payments, such as automatic payroll deposits and debit card purchases, to
be handled and processed.

Even though the ACH is privately configured, the Internet is making it


possible to apply ACH in e-commerce. As dealing with payments using
ACH is cheaper and faster than processing paper cheques, both B2B and
B2C e-commerce activities are becoming ever more dependent on the ACH
system.

Source:
http://www.computerworld.com/s/article/59309/Automated_Clearing_
House

Let us look at the explanation provided for payment card processing.

(a) Open Loop System


Open loop systems involve three or more parties. Suppose an Internet
shopper uses his or her Visa Card issued by the First Bank of Woodland to
purchase an item from Web Wonders, whose bank account is at the
Hackensack Commerce Bank. Whenever a third party, such as the
intermediary banks in this example, processes a transaction, the system is
called as an open loop system.

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Systems using Visa or MasterCard are the most visible examples of the
open loop systems. Many banks issue both cards. Unlike American Express
or Discover, neither Visa nor MasterCard issues cards directly to
customers. MembersÊ banks are responsible for establishing customer credit
limits.

(b) Closed Loop System


In some payment card systems, the card issuer pays the merchants who
accept the card directly and does not use an intermediary, such as a bank or
the automated clearinghouse system. These types of arrangements are
called as closed loop systems because no other institution is involved in the
transaction. American Express and Discover are examples of closed loop
systems.

(c) Merchant Account


In order to process payment cards for Internet transactions, an online
merchant must set up a merchant account. When the merchantÊs bank
(refer below) collects credit card receipts on behalf of the merchant from
the payment card issuer, it credits their value to the merchantÊs account.

A merchant bank (or acquiring bank) is a bank that does business with
sellers (both traditional commerce and e-commerce) who want to accept
payments cards.

The bank will assess the level of the risk in the business based on the
following criteria:

(i) Business Information


A merchant must provide business information before the bank
provides an account through which the merchant can process
payment card transactions. Typically, a new merchant must supply a
business plan, details about existing bank accounts, and a business
and personal credit history.

The merchant bank wants to have confidence that the merchant has a
good prospect of staying in business and wants to minimise its risk.
An online merchant that appears disorganised is attractive to a
merchant bank than a well-organised online merchant.

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(ii) Type of Business


The type of business also influences a bankÊs likelihood of granting
the account. In some industries, merchant banks will be reluctant to
offer a merchant account because of the type of business; some
businesses have a higher likelihood of customers repudiating the
payment card charges than others.

For example, let us look at a business that sells a guaranteed weight-


loss scheme. Many merchant banks will be unwilling to provide an
account to this type of business in which many customers might want
their money back.

Merchant banks must estimate what percentage of sales is likely to be


contested by cardholders. When a cardholder successfully contests a
charge, the merchant bank must retrieve the money it placed in the
merchant account in a process called as a chargeback. To ensure that
sufficient funds are available to cover a chargeback, a merchant bank
might require a company to maintain funds on deposit in the
merchant account.

(d) Processing Payment Cards Online


There are two ways involved in processing of payment cards:

(i) Merchants have Contract with a Third Party


There are several companies which provide payment processing
services such as InternetSecure. InternetSecure allows merchants to
concentrate on business while it provides secure payment card
services. The company provides risk management and fraud
detection and handles transactions from online merchants using
existing, bank-approved payment card processing infrastructure,
secure links and firewall technology to ensure complete security.

InternetSecure notifies the merchant of all approved orders and


supplies authorisation codes to customers who purchase soft goods
that are downloaded upon payment card approval. InternetSecure is
responsible for ensuring that all transactions that it processes for
payment card companies are credited to the merchantÊs account.

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(ii) Software Packaged with the Electronic Commerce Software


In terms of software, a provider of payment software for all types of
merchant is FirstData Payment Software (formerly known as
ICVERIFY). FirstData Payment Software is one of the most
comprehensive payment processing products available for retail and
mail/telephone order merchant. It processes all major credit cards,
debit/ATM cards, cheques, stored value cards, etc.

FirstData Payment Software also includes the customer database for


mail/telephone order merchants, recurring billing functions, the ability to
process Internet and e-mail transactions, and the ability to support
advanced configuration options including split-dual and Internet
transaction processing. FirstData Payment Software can be used as a stand-
alone software solution or integrated with another application to help users
handle their transactions quickly and efficiently, regardless of their origin.

To get more information on payment cards, you can visit these websites:

(a) Credit card:


http://www.visa-asia.com
http://www.mastercard.com/sea/gateway.html
https://personal.paypal.com/us/cgi-bin/?&cmd=_render-
content&content_ID=marketing_us/paypal_credit_card
http://www.citibank.com.my
(b) Debit card:
www.pirg.org/consumer/banks/debit/fact.htm
https://personal.paypal.com/us/cgi-bin/?cmd=_render-
content&content_ID=marketing_us/debit_card
(c) Charge card:
http://www.dinersclub.com.my/en/index.asp
http://www.americanexpress.com/malaysia/homepage.shtml
(d) Security:
http://www.cerias.purdue.edu/

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ACTIVITY 7.1

How does requiring a credit card for payments discriminate against


some consumers?

EXERCISE 7.1

1. How does debit card differ from credit card?


2. Briefly explain the disadvantages of credit cards as the
standard for online payments.

7.2 DIGITAL CASH


What is digital cash? Read the following in order to find out its meaning.

Digital cash (also called as electronic cash or e-cash) is an alternative


payment system developed for e-commerce. Payment using digital cash is
transmitted through the Internet in the form of unique, authenticated
tokens which represent cash value from consumers to merchants.

A significant difference between digital cash and credit cards is that digital cash
can be readily exchanged for physical cash on demand. Since digital cash is
issued by private entities, there is a need for common standards among all digital
cash issuers so that one issuerÊs digital cash can be accepted by another issuer.
This need has not been met yet due to the following reasons:

(a) Each issuer has its own standards; and

(b) Digital cash is not universally accepted unlike the government-issued


physical currency.

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As mentioned earlier, banks that issue credit cards make money by charging
merchants a processing fee on each transaction. This fee ranges from one percent
to four percent of the value of the transaction. Often, banks impose a minimum
fee of 20 cents or more per transaction. Many banks charge electronic commerce
sites more than similar brick-and-mortar stores of up to $1 more per credit card
transaction. The cost of an online transaction can be 50 percent higher than the
cost to process the same transaction for a brick-and mortar retailer.

Internet payments for items costing from a few cents to approximately a dollar
are called as micropayments. Micropayments champions see many applications
for such small transactions, such as paying five cents for an article reprint or 35
cents for a complicated literature search.

However, micropayments have not been implemented very well on the web yet.
The payments that are between $1 and $10 do not have a generally accepted
name; some industry observers use the term micropayment to describe any
payment of less than $10. However, in this module, the term small payments will
be used to include all payments of less than $10.

All electronic payment schemes have issues that must be resolved satisfactorily
to allay consumersÊ fears and give them confidence in the technology. Concerns
about electronic payment methods include:
(a) Privacy and security;
(b) Independence;
(c) Portability; and
(d) Convenience.

Privacy and security questions are probably the most important issues that have
to be addressed with any payment system to be used by consumers. Consumers
want to know whether transactions are vulnerable and whether the electronic
currency can be copied, reused or forged.

Digital cash brings with it some unique security problems. Digital cash have the
following two important characteristics; which is commonly found in physical
currency:

(a) Used once


It must be possible to spend digital cash online once, just as with traditional
currency.

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218 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

(b) Anonymous
Digital cash ought to be anonymous, just as hard currency is. That is,
security procedures should be in place to guarantee that the entire digital
cash transaction occurs only between two parties and that the recipient
knows that the electronic currency being received is not counterfeit or
being used in two different transactions. Ideally, consumers should be able
to use digital cash without revealing their identities as this prevents sellers
from collecting information about individual or group spending habits.

7.2.1 Advantages and Disadvantages of Digital Cash


Billing for goods and services that customers purchase is part of any business.
Traditional billing methods in the brick-and-mortar paradigm are costly and
involve many tedious tasks such as generating invoices, stuffing envelopes,
buying and affixing postage to the envelopes and sending the invoices to the
customers. Meanwhile, the accounting department must keep track of incoming
payments, post accounts in the database, and ensure that the customer data is
current.

Online stores have many of the same payment collection inefficiencies as their
brick-and-mortar cousins. Most online customers use credit cards to pay for their
purchases. Online auction customers also use conventional payment methods,
including cheques and money orders. Digital cash systems, though less popular
than other payment methods, provide advantages and disadvantages that are
unique to digital cash as shown in Table 7.3.

Table 7.3: Advantages of Digital Cash

Advantages Description
Efficiency Digital cash transactions are more efficient; which fosters more
businesses and lowers the prices for consumers.
Less costly Transferring digital cash on the Internet costs less than processing credit
card transactions. Conventional money exchange systems are expensive as
it requires banks, bank branches, clerks, automated teller machines, and an
electronic transaction system to manage, transfer and dispense cash.

Digital cash transfers occur on the Internet and through existing computer
systems. Thus, the additional costs that users of digital cash must incur are
nearly zero. Because the Internet spans the globe, the distance that an
electronic transaction must travel does not affect cost. When considering
moving physical cash and cheques, distance and cost are proportional. The
greater the distance of the currency, the more it costs to move it.

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Authorisation Digital cash does not require that one party obtain an authorisation,
as is required with credit card transactions.
Preferred Most of the worldÊs populations do not have credit cards. Many adults
choice by cannot obtain credit cards due to minimum income requirements or past
most debt problems. Children and teenagers (eager purchasers who represent a
significant percentage of online buyers) are ineligible, simply because they
are too young. For all of these people, digital cash provides the solution to
paying for online purchases.
Independent Digital cash is independent; it is unrelated to any network or storage
device. That is, digital cash is really not free-floating currency, if its
existence depends on a particular proprietary storage mechanism
that is specially designed to hold one type of digital cash. Digital
cash able to pass transparently across international borders and be
converted automatically to the recipient countryÊs currency.
Portability Digital cash i s freely transferable between any two parties. Credit
and debit cards do not possess this property of portability or
transferability between every combination of two parties. In a credit
card transaction, the credit card payment recipient must already have
a merchant account established with a bank; a condition that is not
required with digital cash.
Convenience Digital cash d o es n o t require any special hardware or software;
making it convenient for people to use it.

We have looked at the advantages of digital cash, now let us concentrate on the
disadvantages of digital cash as portrayed in Table 7.4.

Table 7.4: Disadvantages of Digital Cash

Disadvantages Description
Audit trail Digital cash is just like real cash as it cannot be easily traced.
Not widely Digital cash has been successful in some parts of the world, but it has
accepted not yet become a global commercial success. Making digital cash a
popular alternative payment system requires wide acceptance.
Multiple A solution need to be figured out to the problem of multiple digital
standards cash standards. Customers do not want to carry a dozen different
brands of digital cash to be able to purchase goods from a majority of
the merchants that accept digital cash.

Thus, a standard need to be developed for digital cash disbursement.


Individual vendors then need to implement this standard for their
individual digital cash systems. Digital cash from different vendors
must be easily interchangeable so that customers can exchange one
cash type for another when needed.

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220 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

As digital cash is not traceable, money laundering arises.

Money laundering is a technique used by criminals to convert money that


they have obtained illegally into cash that they can spend without having it
identified as the proceeds of an illegal activity. Money laundering can be
accomplished by purchasing goods or services with ill-gotten digital cash.
The goods are then sold for physical cash in the open market.

7.2.2 Digital Cash Systems


How does a digital cash system work? Figure 7.2 will show you the steps
involved in the system.

Figure 7.2: Digital cash system

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The customer can store the digital cash in a digital wallet (will be described in the
coming section) on his or her computer, or on a stored-value card (also will be
described later in this topic). In addition, the consumer can authorise the issuer to
make payments to third parties from the digital cash account. Since cash does not
work well for online transactions, digital cash fills an important need in countries
which conduct B2C e-commerce.

You can visit the following websites to get a clear view on digital cash:

(a) Companies that provide digital cash services:


http://www.paypal.com
http://myecash.com.my/myind.jsp
http://www.internetcash.com
(b) Micro payment systems:
http://www.amdocs.com

SELF-CHECK 7.1

What is a micro payment? When is micro payment likely to be used?

EXERCISE 7.2

1. Define digital cash.


2. Briefly explain the advantages of digital cash.

7.3 DIGITAL WALLETS


Do you realise that as consumers are becoming more enthusiastic about online
shopping, they are actually encountering a common issue in online purchasing?
They have begun to tire themselves out of repeatedly entering detailed shipping
and payment information each time that they make online purchases. Research
repeatedly has shown that filling out forms ranks high on online customersÊ lists
of gripes about online shipping.

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Thus, digital wallet (also called as electronic wallet or e-wallet) is created to solve
the above mentioned problem and to provide a secure storage place for credit
card data and digital cash. Serving a function similar to a physical wallet, digital
wallet holds credit card numbers, digital cash, owner identification, and owner
contact information (this information is provided at an electronic commerce siteÊs
checkout counter). Some digital wallets contain an address book as well.

Let us look at a portable digital wallet as illustrated in Figure 7.3.

Figure 7.3: A Portable digital wallet


Source: http://www.luminous-landscape.com/reviews/digital_wallet.shtml

Digital wallets make shopping more efficient. When consumers select items to
purchase, they can then click on their digital wallet to order the items quickly. In
the future, digital wallets could serve well their owners by tracking purchases
and maintaining receipts for those purchases. Maintaining records of a
consumerÊs purchasing habits is something that online giants such as
Amazon.com have mastered, but an enhanced digital wallet could reverse that
process and use a web robot to suggest where the consumer might find a lower
price on an item that he or she purchases regularly.

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Let us look at the two categories that digital wallets fall into based on where they
are stored:

(a) Server-side Digital Wallet


This wallet stores a customerÊs information on a remote server belonging to
a particular merchant or wallet publisher. The main weakness of server-
side digital wallets is that a security breach could reveal thousands of
usersÊ personal information (including credit card numbers) to
unauthorised parties. Typically, server-side digital wallets employ strong
security measures that minimise or eliminate the possibility of
unauthorised disclosure.

Server-side wallets remain on a server and require no download time or


installation on a userÊs computer. Before a consumer can use a server-side
wallet on a particular merchantÊs site, the merchant must enable that
specific wallet. Each wallet vendor must convince a large number of
merchants to enable its wallet before it will be accepted by the consumers.
Thus, only a few server-side wallet vendors will be able to succeed in the
market.

(b) Client-side Digital Wallet


This wallet stores a consumerÊs information on his or her own computer.
Storing a digital wallet on the userÊs computer shifts the responsibility for
maintaining the security to the user. As no user information is stored on a
central server, there is no chance that an attack on a digital wallet vendor
will yield consumer information such as credit card numbers.

Many of the early digital wallets were client-side wallets that required
users to download the wallet software. This need to download software
onto every computer used to be a main disadvantage of client-side wallets.
Another disadvantage of client-side wallets is that they are not portable.

For example, a client-side wallet is not available when a purchase is


madefrom a computer other that the computer on which the wallet resides.
For a wallet to be useful at many online sites, it should be able to populate
the data fields in any merchantÊs forms at any site that the consumer visits.
This accessibility means that the digital wallet manufacturer and merchants
from many sites must coordinate their efforts so that a wallet can recognise
what consumer information goes into each field of a given merchantÊs
forms.

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What does a digital wallet store? Digital wallets store shipping and billing
information, including a consumerÊs first and last names, street address, city,
state, country, and ZIP or postal code. Most digital wallets also can hold many
credit card names and numbers, affording the consumer a choice of credit cards
at the online checkout. Some digital wallets also hold digital cash from various
providers, such as eCash.

Digital wallets can save shoppersÊ time. When shoppers have filled their shopping
carts, they proceed to the electronic checkout counter to confirm their choices. At the
checkout counter, they are confronted with a form (or series of forms) in which they
must enter their name, address, credit card number, and other personal information.
All these information would be easily filled in by using the digital wallet.

Previously, a number of companies entered the digital wallet business, including


major firms such as MasterCard. However, most of these companies have
abandoned their efforts because current versions of all major browsers now
include a feature that remembers names, addresses and other commonly
requested information and provides an one-click completion of fields on web
forms that request the particular information.

7.3.1 Survivor in the Digital Wallet Arena


Do you know that earlier efforts by companies such as Microsoft have failed to
popularise the idea of digital wallet? Microsoft Passport and the MSN Wallet
have been abandoned as well in February 2005.

However, there are some companies who are brave enough to venture in this
area and finally succeeded in making an impact:

(a) Google Checkout


Google Checkout is designed to make online shopping more convenient and
easy. It communicates a shopperÊs credit card and personal information
necessary for a transaction to the merchant. The merchant, who received the
transaction, is guaranteed that the user has been authenticated by Google.
However, Google Checkout has yet to match PayPalÊs popularity.

(b) Yahoo! Wallet


Yahoo! Wallet is a digital wallet offered by Yahoo!, the commonly used web
portal site. Yahoo! Wallet functions in the same way as most other digital wallets
by completing order forms automatically by identifying information and credit
card payment information. Yahoo! Wallet lets users to store information about
Visa, MasterCard, Discover and American Express payment credit and charge
cards and Visa and MasterCard debit cards.
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Basically, Yahoo! Wallet is used for the following purposes:


(a) Shopping at more than 10,000 Yahoo! Store merchants (these are
merchants on the Yahoo! Shopping);
(b) Paying for airplane tickets and hotel reservations booked through the
Yahoo! Travel;
(c) Paying for premium services at Yahoo! such as extra mail storage or
web hosting fees on the Yahoo! GeoCities Plus or Website Services;
and
(d) Paying for auction fees on Yahoo! Auctions.
Yahoo! has the advantage of hosting a number of services and shops that it
can be certain to accommodate its own wallet. Thus, it is certain to have a
large number of merchants (including itself) that accept its wallet. Yahoo!
also offers a PayDirect service (similar to PayPal) that works with Yahoo!
Wallet.

You can visit the following websites to get a clearer view on digital wallets:

(a) Yahoo! Wallet:


http://www.wallet.yahoo.com
(b) Google Checkout:
http://checkout.google.com

ACTIVITY 7.2

Do you think that a digital wallet can save shoppers time? State your
reasons.

EXERCISE 7.3

1. How are client-side digital wallets and server-side digital


wallets different?
2. What are the major disadvantages of each category of digital
wallet?

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7.4 STORED VALUED PAYMENT SYSTEMS


Today, most people carry a number of plastic cards in the forms of credit cards,
debit cards, charge cards, driverÊs license, health insurance card, employee or
student identification card, and other cards. One solution that could reduce all
those cards is to own an online account which has stored value. An online stored
value payment system permits consumers to make instant, online payments to
merchants and other individuals. Common stored-value cards include prepaid
phone, photocopy, subway, and bus cards.

Let us look at the explanations provided for the following stored value cards in
the coming sections:
(a) PayPal;
(b) Magnetic strip cards; and
(c) Smart cards.

7.4.1 PayPal
How does PayPal operate in terms of the online stored value payment system? It
helps to make and receive payments for individuals and businesses with email
accounts. PayPal, which is available in many countries around the world, builds
on the existing financial infrastructure of the countries in which it operates. A
PayPal account is established by a user by specifying a credit, debit, or checking
account that want to be charged or paid during online transactions.

The procedures involved during an online transaction are:


(a) The userÊs payment will be e-mailed to the merchantsÊ PayPal account; and
(b) PayPal transfers the specified amount from the userÊs account to the
merchantÊs bank account.

Although no personal credit information were revealed among the users,


payments by PayPal involve high cost and lack of consumer protection.

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TOPIC 7 E-COMMERCE PAYMENT SYSTEMS 227

7.4.2 Magnetic Strip Cards


Let us find out the meaning of „magnetic strip card‰.

A stored-value magnetic strip card (refer to Figure 7.4) is a plastic card


with a magnetic strip that records the currency balance.

Most magnetic strip cards hold value that can be recharged by inserting them
into the appropriate machines, inserting currency into the machine, and
withdrawing the card; the cardÊs strip stores the increased cash value. Magnetic
strip cards are passive; they cannot send or receive information and increment or
decrement the value of cash stored on the card. The processing must be done on
a device into which the card is inserted.

Figure 7.4: An example of a magnetic strip card


Source: http://www.clfcard.com/

7.4.3 Smart Cards


Do you know the meaning of the term „smart card‰? If you do not, refer below to
find out its meaning.

A smart card is a stored-value plastic card with an embedded microchip


that can store information. A smart card can hold private user data such as
financial facts, encryption keys, account information, credit card numbers,
health insurance information, medical records and so on.

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228 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

There are many differences between a magnetic strip card and a smart card:
(a) A smart card can store larger amounts of information and includes a
processor chip on the card.
(b) Although both magnetic strip cards and smart cards can store digital cash,
a smart card is better suited for Internet payment transactions because it
has some processing capability.
(c) Credit, debit, and charge cards currently store limited information on a
magnetic strip. A smart card can store about 100 times the amount of
information that a magnetic strip plastic card can store.

Smart cards (refer to Figure 7.5) are safer than conventional credit cards
because the information stored on a smart card is encrypted. For example,
conventional credit cards show your account number on the face of the card and
your signature on the back. The card number and a forged signature are all that a
thief needs to purchase items and change them against your card.

However, with a smart card, credit theft is much more difficult because the key
to unlock the encrypted information is a PIN. There is no visible number on the
card that a thief can identify, nor is there a physical signature on the card that a
thief can see and use as an example for signature forgery.

Smart cards have been in use for more than a decade. Popular in Europe and
parts of Asia. Smart cards, so far have not been successful in the United States. In
Europe and Japan, smart cards are being used for telephone calls at public
phones and for television programmes delivered by cable to peopleÊs homes. The
cards are very popular in Hong Kong too; where many retail counters and
restaurant cash registers sport smart card readers. Hong KongÊs transportation
network, including subways, buses, railways, trams and ferries joined together
and created a smart card called the Octopus that lets the commuters to use one
card for all of their public transportation needs.

Visa recently introduced its smart card, the smart Visa Card. In late 2002, retailer
Target introduced its Target Visa smart card, one of the first promotions of the
new smart Visa Card, for use in TargetÊs website. The Target Visa includes digital
wallet and automated login information for the Target.com website, but it also
functions as a normal Visa Card at other merchants. American Express has also
released its smart card called Blue.

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TOPIC 7 E-COMMERCE PAYMENT SYSTEMS 229

Figure 7.5: Smart cards


Source: http://www.hasintech.com

Let us take a look at the detailed explanation given for the smart card called
Mondex.

Mondex is a smart card that holds and dispenses digital cash (refer to Figure
7.6). As it gains acceptance on the Internet and the general marketplace, the
Mondex smart card allows other applications to reside on its microchip.
Introduced in 1990, the card is now part of the MasterCard International.

MondexÊs Hong Kong pilot programme took place in 1996 and was the main
force behind the general acceptance of smart cards in Hong Kong. The Mondex
card gave people in Hong Kong, who traditionally used cash, a new and
appealing way to make payments on the Internet and in the physical world.
However, in the United States and Canada, Mondex smart cards are less
successful because consumers already have payment methods that work for
them, such as credit card, debit cards and paper cheques.

Mondex smart cards can accept digital cash directly from a userÊs bank
account. Cardholders can spend their digital cash with any merchant who
has a Mondex card reader. Two cardholders can even transfer cash
between their cards over a telephone line. A single Mondex card can work
in both worlds: the online world of the Internet and the offline world of
ordinary merchant stores. The Mondex card is less susceptible than credit
cards to threats of theft as the card provides anonymous digital cash.
Mondex digital cash also supports micropayments as small as three cents.

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230 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

Figure 7.6: The Mondex smart card

There are some disadvantages of using Mondex as shown in Table 7.5.

Table 7.5: Disadvantages of Mondex

Disadvantages Descriptions
Not able to carry huge The card carries real cash in digital form, and the risk of
amount of money theft of the card may deter users from loading it with a
huge amount of money.
Not able to defer the Mondex does not allow the deferred payment you can
payment obtain with a credit card. You can defer paying your charge
or credit card bill for almost a month without incurring any
interest charges.
Not provided with Transactions completed using a Mondex card do not
receipt provide receipts.

A Mondex transaction (from buyer to seller) has several steps that ensure the
transferred cash safely reaches the correct destination:
(a) The consumer inserts the Mondex card into a reader. The merchant and the
consumer are both validated to ensure that both of them are authorised to
make transactions.
(b) The merchantÊs terminal requests payment while simultaneously transmits
the merchantÊs digital signature.
(c) The consumerÊs card checks the merchantÊs digital signature. If the
signature is valid, then the transaction amount is deducted from the
consumerÂs card.

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TOPIC 7 E-COMMERCE PAYMENT SYSTEMS 231

(d) The merchantÊs terminal checks the consumerÊs digital signature for
authenticity. If the consumerÊs signature is validated, the merchantÊs
terminal acknowledges the consumer Ês signature by again sending the
merchantÊs signature back to the consumer Ês card.
(e) Once the digital cash is deducted from the consumerÊs card, the same
amount is transferred into the merchantÊs digital cash account.

Waiting until after the transaction amount is deducted from the cardholderÊs
card ensures that digital cash is neither created nor lost. Serialising the deduction
and crediting events before signifying a complete transaction eliminates the
creation or loss of cash if the system malfunctions in the middle of the process.

Visit the following websites to get more information on smart cards:


http://www.smartcard.co.uk/
http://www.smartcardalliance.org/

SELF-CHECK 7.2

What are the differences between magnetic strip cards, smart cards
and Mondex? Which among these is the most secure?

EXERCISE 7.4

1. Compare and contrast smart cards and traditional credit cards.


2. Briefly discuss; what is Mondex. Then, discuss on the
advantages and disadvantages of the Mondex smart card.

7.5 OTHER E-COMMERCE PAYMENT SYSTEMS


Beside those described above, there are other digital payment systems widely
used in the e-commerce arena.

Let us take a look at the following systems:


(a) Digital Accumulating Balance Payment Systems;

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232 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

(b) Digital Checking Payment Systems; and


(c) Electronic Billing Presentment and Payment.

7.5.1 Digital Accumulating Balance Payment Systems


Digital accumulating balance payment systems allow users to make micro-
payments and purchases on the web, accumulating a debit balance for which
they are billed at the end of the month. Like a utility or phone bill, consumers are
expected to pay the entire balance at the end of the month using a checking or
credit card account. Digital accumulating balance systems are ideal for
purchasing intellectual property on the web such as music tracks, chapters of
books, articles from a newspaper, ringtones or games.
For example, ValistaÊs PaymentsPlus, a digital accumulating balance payment
system for small transaction used by AOL, NTT DoCoMo, and Wanadoo.
Clickshare receives the greatest acceptance with online newspapers and
publishing industry such as Chicago Sun-Times, Asian Banker and Daily
Hampshire Gazette.

7.5.2 Digital Checking Payment Systems


We have looked at Digital Accumulating Balance payment systems; now, let us
shift our attention on Digital Checking payment systems. These systems seek to
extend the functionality of existing checking accounts for use as online shopping
payment tools. You can think of them as extensions to the existing checking and
banking infrastructure.

Some of the simpler systems are used to electronically pay individuals and to
settle accounts at online auction sites. More sophisticated systems are used by the
Treasury Department to transfer billions of dollars electronically. Two commonly
used digital checking payment systems in the US are PayByCheck and eBillme.

Digital checking payment systems have many advantages:


(a) They do not require consumers to reveal account information to other
individuals when settling an auction;
(b) They do not require consumers to continually send sensitive financial
information over the web;
(c) They are less expensive than credit cards for merchants; and
(d) They are much faster than paper-based traditional checking.

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TOPIC 7 E-COMMERCE PAYMENT SYSTEMS 233

Let us learn more on one of the most widely used digital checking payments
systems, eCheck.

In 1996, a consortium of banks, government agencies, and technology


companies began to develop a plan for electronic checking that would use
public key encryption and would not require a third party to move the
funds. The goal was to replace paper cheques altogether and to extend
electronic fund transfers that already exist among large institutions to all
businesses and even consumers.

This is how eCheck comes into existence. ECheck requires users to obtain a
hardware-based „electronic chequebook‰ from traditional banks. The
hardware could be a PCMCIA card, a standard PC card, or a specialised
smart card reader external to the consumerÊs computer.

The electronic chequebook contains the consumerÊs digital signature in the


form of a private key. The electronic chequebook also contains the issuing
bankÊs public key. Using software provided with the chequebook, the
consumer fills out an electronic cheques form and sends it to a merchant
over the Internet. The communication is encrypted and contains the
consumerÊs digital signature, public key and the issuing bankÊs digital
signature.

Upon receipt, the merchant authenticates the digital signatures of both the
sender and the issuing bank using their respective public keys and
deposits the cheque at its bank. A higher level certificate authority, such as
the Federal Reserve Bank, certifies the issuing bankÊs public key. EChecks
can also contain invoice, remittance and other information.

ECheck is interesting because the electronic chequebook is a physical


device. A physical device was chosen because it was thought to be more
secure than creating accounts over the Internet. The device is portable and
difficult to be reversed. Although intended to fit into the existing
infrastructure of the checking system developed by the Federal Reserve
and commercial banks, eCheck itself requires significant investment in
new infrastructure.

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234 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

Visit the following websites to get more ideas on how digital accumulating
balance payment systems and digital checking payment systems work:
http://www.paybycheck.com/demo.html
http://www.ebillme.com/about/

ACTIVITY 7.3

Visit NetBuilder at www.netbuilder.com.my. Identify the online


payment services offered by the company.

SELF-CHECK 7.3

What are the advantages of digital checking payment systems


compared to digital accumulating balance payment systems? Discuss.

EXERCISE 7.5

1. Define digital accumulating balance systems.


2. What are the advantages of digital checking payment
systems over traditional checking accounts?

7.5.3 Electronic Billing Presentment and Payment


For a number of years, banks and companies have made it possible for customers
to pay their bills online. However, the vast majority of all bills are still paid the
traditional way. On a regular basis, a billing company calculates, prints and mails
the customer a paper bill. In turn, the customer sends back a paper cheque that is
processed by the billing company in order to receive funds. It can take a week or
more to complete the whole process.

As consumers increasingly go online, it is reasonable to believe that customers


want to use the Internet as a means of efficiently paying their bills. In US, the
number of bill payments made online exceeded the number of physical cheques
written for the first time in 2007.

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TOPIC 7 E-COMMERCE PAYMENT SYSTEMS 235

What does EBPP stand for? Refer below to find the answer.

Electronic billing presentment and payment (EBPP) systems are new forms
of online payment systems for monthly bills. EBPP services allow
consumers to view bills electronically and pay them through electronic
funds transfer from bank or credit card accounts.

More and more companies are choosing to issue statements and bills
electronically, rather than mailing out paper versions. But even those businesses
that do mail paper bills are increasingly offering online bill payment as an option
to customers, allowing them to immediately transfer funds from a bank account
to pay a bill somewhere else.

Although more than 90% of all EBPP takes place in B2C relationships, such
payment systems are rapidly spreading to B2B commerce. The challenges
involved in requesting and receiving electronic payment from customers are
essentially the same for both consumers and businesses, except that business
transactions generally involve larger amounts.

One major reason for the surge in EBPP usage is that companies are starting to
realise how much money they can save through online billing. Not only there is
saving in postage and processing, but also payments can be received more
quickly, thereby improving the cash flow. Ferris Research estimates that
companies can save anywhere from 10 cents to $1.50 per invoice by sending it
using EBPP.

Growth in Internet usage, however, is the key driver, pushing many companies
to explore online billing and payments. The more the online users are, the larger
the market for EBPP is.

7.5.4 Types of EBPP Systems


Although the concept of online billing and payment is simple, there is a number
of competing business models in the market space:

(a) Biller-direct System


Biller-direct system is originally created by large utilities that send millions
of bills each month. Their purpose is to make it easier for their customers to
pay their utility, and increasingly, other bills routinely online. Telephone,
utility, and credit card companies often offer this service, as well as a
number of individual stores.
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236 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

Biller-direct systems often use a service bureau such as Billserv.com to


provide the infrastructure necessary to implement the system. The
examples for this model are TMOnline, TNB e-Services.

(b) Consolidator Model


The second major type of EBPP is the consolidator model. A consolidator is
the third party, such as bank and portal, who aggregates all bills for
consumers and ideally permits one-stop bill payment. Financial institutions
attract more customers to make online bill payment (98%) than portals
(2%). Infrastructure providers such as Harbour Payments and Online
Resources provide the software to create and support this model.

The examples for this model are as follows:


(i) Portals
Yahoo! Bill Pay, Bills.com, Rilek e-Services, MyEG.com.my
(ii) Banks
Maybank2u.com.my, CIMB Clicks.

Companies can use EBPP to present bills to individual customers


electronically, or contract with a service to handle all the billing and
payment collection. Customers can then choose to pay the bill directly, use
a bill consolidator to collect bills for them, or hire a payment service to
collect and pay bills as directed by the customer.

BlueGill Technologies is a direct billing company that allows customers to


visit their website to review and pay a bill. Fiserv (formerly CheckFree) is a
consolidator that will collect and present bills from multiple sources, so that
the customer only has to log into one site to pay several bills at once.

The bill payment process involves the customers, the bank and potentially a
third party processor. Customers can e-mail an e-cheque drawn on their
bank account, and the funds will be transferred via e-mail to the vendorÊs
bank account (this is similar to the e-checking systems). In the competition
for market dominance for the consumer in EBPP market, some institutions
are clearly gaining advantage. Utility companies, web portals and
traditional banks already have parts of the infrastructure required to build
powerful EBPP systems. The strong web portals players are AOLÊs Billing
and Yahoo! Bill Pay.

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TOPIC 7 E-COMMERCE PAYMENT SYSTEMS 237

Visit the following websites to get more ideas on how EBPP payment
system works:

http://www.tmonline.com.my
http://bills.yahoo.com/reg.html

SELF-CHECK 7.4

Discuss why EBPP systems are becoming increasingly popular?

EXERCISE 7.6

1. What are the two types of B2B payments systems?


2. Discuss the two types of EBPP systems.

Online stores can accept a variety of forms of payments. Credit cards, debit
cards, and charge cards (payment cards) are the most popular forms of
payment on the Internet. They are ubiquitous, convenient and easy to use.

Digital cash, one form of online payment, is very useful for making
micropayments because the cost of processing payment cards for small
transactions is greater than the profit on such transactions.

Digital cash shares several benefits with real cash as it is portable,


anonymous, and usable for international transactions. Digital cash can also be
stored online or offline.

Digital wallets provide convenience to online shoppers because they hold


payment card information, digital cash, and personal consumer
identification.

Digital wallet eliminates the need for consumers to re-enter payment card
and shipping information at a siteÊs electronic checkout counter. One problem
of digital wallets is the lack of an internationally accepted standard.

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238 TOPIC 7 E-COMMERCE PAYMENT SYSTEMS

Stored-value cards, including smart cards and magnetic strip cards, are
physical devices that hold information, including cash value, for the
cardholder.

While magnetic strip cards can contain only cash value, smart cards contain
data on an embedded microchip and are intended to replace the collection of
plastic cards people now carry, including identity card (IC), driverÂs license,
and insurance card. Unlike digital cash or payment cards, smart cards require
merchants to install new hardware that can read the smart cards.

Digital accumulating balance systems allow users to make purchase on the


Web, accumulating a debit balance for which they are billed at the end of the
month; consumers are then expected to pay the entire balance using a
checking or credit card account.

Digital checking payment systems on the other hand, are extensions to the
existing checking and banking infrastructure.

Electronic billing presentment and payment (EBPP) systems are a new form
of online payment systems for monthly bills. EBPP services allow consumers
to view bills electronically and pay them through electronic funds transfer
from bank or credit card accounts.

Biller-direct system Magnetic strip cards


Consolidator model Merchant account
Digital accumulating balance systems Payment cards
Digital cash PayPal
Digital checking systems Smart cards
Digital wallets

Copyright © Open University Malaysia (OUM)


T op i c E-commerce
8 Marketing
Concepts
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe basic marketing concepts needed to understand Internet
marketing;
2. Identify the different levels of products and services;
3. Explain the branding concept and the rationale of branding;
4. Discuss the main technologies that support internet marketing;
5. Examine basic e-commerce marketing and branding strategies;
6. Discuss different techniques to establish online customer relationship;
and
7. Explain how online market research is conducted.

INTRODUCTION
What is the key objective of e-commerce marketing? You can seek the answer for
this key question by reading the following explanation. The key objective of
Internet marketing is to use the web as well as traditional channels to develop a
positive, long-term relationship with customers (who may be online or offline).
Therefore create a competitive advantage for the firm by allowing it to charge a
higher price for products or services than its competitors.

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240 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

In this topic, you will learn the basic marketing concepts and evaluates e-commerce
marketing programmes. You will also learn about consumer behaviour on the web,
brands, unique features of electronic markets and special technologies that support the
new kinds of branding activities.

8.1 BASIC MARKETING CONCEPTS


Do you think Internet marketing is profitable? Let us find the answer by
exploring further.

Before we go in depth, let us look at the basic concepts of marketing:

(a) Marketing directly addresses the competitive situation of industries and


firms;

(b) Marketing seeks to create unique, highly differentiated products or services


that produced or supplied by one trusted firm or „little monopolies‰. There
are few, if any, substitutes for an effectively marketed product or service,
and new entrants have a difficult time matching the product or serviceÊs
feature set (refer below).

When successful, these little monopolies reduce the bargaining power of


consumers because they are the sole sources of supply. Enable the firms to
exercise significant power over their consumers.

(c) Marketing is designed to avoid mediocrity, competition and to create


markets where returns on investment are above average, competition is
limited, and consumers are willing to pay premium prices for products that
have no substitute because they are perceived as unique; and

(d) Marketing encourages customers to buy on the basis of non-market (i.e.,


non-price) qualities of a product. Firms use marketing to prevent their
products and services from becoming commodities.

A commodity is a good or service for which there are many dealers


supplying the same product and all products in the segment are essentially
identical. Price and delivery terms are the only basis for consumer choice.
Examples of commodities include wheat, corn and steel.

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TOPIC 8 E-COMMERCE MARKETING CONCEPTS 241

8.1.1 Feature Sets

Feature set is the bundle of capabilities and services offered by the product
or service.

A central task of marketing is to identify and then communicate to the customer


the unique, differentiated capabilities and services of a product or serviceÊs
feature set.

Let us look at the three levels of a product or service:

(a) Core Product


The core product is the core benefit the customer receives from the product.
It is at the centre of the feature set.

Let us say, for example, that the core product is a washing machine.
Marketers must identify the features of the washer that differentiate it from
other existing washing machines.

(b) Actual Product


The actual product is the set of characteristics designed to deliver the
productÊs core benefits.

In the case of a Panasonic washing machine, the actual product is a


washing machine carrying the Panasonic name, with certain features and
capabilities, such as durability and ease of use.

(c) Augmented Product


The augmented product is a product with additional benefits to customers
beyond the core benefits embodied in the actual product.

Referring to the above example, the augmented product is a Panasonic


washing machine with a five-year warranty, free delivery, factory-trained
support service and low-cost installation fees. The augmented product
forms the basis for building the Panasonic brand (a process known as
branding which will be described below).

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242 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

SELF-CHECK 8.1

What are the differences between the core product, the actual product
and the augmented product?

8.1.2 Products, Brands and the Branding Process


What makes a product truly unique and different to the consumer is the
productÊs brand. So, what is a brand? Let us look below to answer the earlier
question.

A brand is a set of expectations that a consumer has when consuming


or thinking about consuming a product or service from a specific company.

These expectations are derived based on the following criteria:


(a) Past experiences of the consumer who has actually used the product;
(b) Trusted experiences of others who have consumed the product; and
(c) Promises of marketers who extol the unique features of the product in a
variety of channels and media.

The most important expectations created by brands are quality, reliability,


consistency, trust, affection, loyalty and ultimately, reputation. Marketers create
promises such as the promise made by cosmetic manufacturers to consumers,
promising that they will become beautiful when use their cosmetics. These
promises engender consumer expectations as quoted by Kotler and Armstrong
(2001) below.

„In the factory we make cosmetics; in the store we sell hope‰.

- Charles Revson, RevlonÊs founder

Marketers identify the differentiating features of the actual and augmented


product. They engage in a variety of marketing communications activities to
transmit the feature sets to the consumer. Based on the consumersÊ experiences
and the promises made by marketers in their communications, consumers
develop expectations about a product Read the following for an example.

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TOPIC 8 E-COMMERCE MARKETING CONCEPTS 243

When a consumer purchases an Apple iPhone as shown in Figure 8.1, he


expects to receive a unique, high-quality, very easy-to-use cell phone.
Consumers are willing to pay a premium price in order to obtain these
qualities. If iPhone do not perform according to these expectations, the
brand would be weakened and consumers would be less willing to pay a
premium price.

Figure 8.1: AppleÊs iPhone


Source: http://www.itechnews.net/tag/apple-iphone/

In other words, a strong brand requires a strong product. But if iPhones do


perform according to these expectations, then, customers will feel loyal to
the products. They would purchase it again or recommend it to others.
They will trust and ascribe a good reputation to both: the product and the
company that makes it.

Ideally, marketers directly influence the design of products to ensure the


products have desirable features, high-quality, correct pricing, product support
and reliability. While ideal, it is more often the case, that marketers are hired to
„sell‰ a product that has already been designed. e-commerce offers some unique
opportunities to achieve closed loop marketing (refer the following).

Closed loop marketing happens when marketers are able to directly


influence the design of a core product based on market research and
feedback.

Marketers also devise and implement brand strategies. In developing new


e-commerce brands, the ability to devise and develop a brand strategy

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244 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

has been crucial in the success and failure of many companies, as described
throughout this module.

What is brand strategy?

A brand strategy is a set of plans for differentiating a product from


its competitors and communicating these differences effectively to the
marketplace.

What kinds of products can be branded? According to many marketing


specialists, there is no limit for products which can be branded. Every product
has the potential to be branded.

Nike sneakers that make you run like an athlete, high-specification Volvo car that
makes you feel safe on dark rainy nights, luxurious shirts from Polo that make
you appear as if you were on the way to a country club all these are examples of
products with extraordinary brand names for which consumers pay premium
prices.

How much is a brand worth? Brands which differ in their power and value in the
marketplace is called as brand equity.

According to Aaker (1995), brand equity is defined as:

A brand equity is a set of five categories of brand assets and liabilities linked
to a brand, its name and symbol that add to or subtract from the value
provided by a product or service to a firm or to that firmÊs customers or both.

According to InterbrandÊs 2009 WorldÊs Most Valuable Brands survey, the top
five brands and their estimated equity value are as follows:
(a) Coca-Cola ($68.7 billion);
(b) IBM ($60.2 billion);
(c) Microsoft ($56.6 billion);
(d) General Electric ($47.7 billion); and
(e) Nokia ($34 billion).

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TOPIC 8 E-COMMERCE MARKETING CONCEPTS 245

ACTIVITY 8.1

In your opinion, why are some consumers willing to pay premium


prices on branded products?

8.1.3 Segmenting and Positioning


Markets are not unitary, in fact they are composed of many different kinds of
customers with different needs. Firms seek to segment markets into distinct
groups of customers who differ from one another in terms of product needs.
Once the segments are established, the product is positioned and branded as a
unique, high-value product, especially suited to the needs of the segmented
customers.

By segmenting the markets, firms can differentiate their products to more closely
fit the needs of customers in each segment. Rather than charge one price for the
same product, firms can maximise revenues by creating several different
variations on the same product and charging different prices in each market
segment.

FirmsÊ branding process proceeds once the market is segmented by appealing to


the segmented members within each segment. For each market segment, they
offer a uniquely branded product.

For instance, automobile manufacturers segment their markets to many


dimensions:
(a) Demographics (age, sex, income and occupation);
(b) Geographic (region);
(c) Benefits (special performance features); and
(d) Psychographics (self-image and emotional needs).

ACTIVITY 8.2

Based on your understanding, how do the airline industries segment


their markets? Discuss.

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246 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

8.1.4 Are Brands Rational?


Coca-Cola is one of the most enduring, powerful brands in US commercial
history (refer to Figure 8.2). The core product is a coloured, flavoured and
carbonated sugar water. The augmented branded product is a delightful,
refreshing, reputable and unique-tasting drink available worldwide.

Figure 8.2: Coca-Cola


Source: http://www.guardian.co.uk/environment/blog/2009/apr/14/

The product is based on a secret formula that consumers willingly pay up to


twice as much, compared to an unbranded Cola. Coca-Cola is a micro-monopoly
marketing. There is only one Coke and only one supplier. Why would consumers
pay twice as much for Coke when compared to unbranded Cola drinks? Is this
rational?

The answer is a qualified „yes‰ based on these reasons:

(a) Market Efficiency


Brands introduce market efficiency by reducing the search costs and
decision-making costs of consumers.

(b) Reliable Products


Strong brands signal strong products that work.

(c) Information-carrier
Confronted with many different drinks, the choice of Coke can be made
quickly without much thought and with the assurance that you will have
the drinking experience that you expect based on prior information of the
product.

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(d) Risk Avoidance


Brands reduce consumer risk and uncertainty in a crowded marketplace.
Brands are like an insurance policy against nasty surprises in the
marketplace.

The ability of brands to become corporate asset and to attain brand equity
is based on future anticipated premiums paid by consumers. This also
provides an incentive for firms to build products that serve the customer
needs well, compared to other products. Therefore, although brands create
micro-monopolies, increase market costs, and led to above-average returns
on investment or „monopoly rents‰, they also introduce market efficiencies
for the customer.

For business firms, brands are a major source of revenue and are
obviously rational. Brands lower customer acquisition costs and increase
customer retention costs. The stronger the brand reputation, the easier it is
to attract new customers.

Let us look at the definitions given for the previously mentioned terms.

Customer acquisition costs refer to the overall costs of converting


a prospect into a consumer including all marketing and advertising costs.

Customer retention costs are those costs incurred in convincing an existing


customer to purchase again.

In general, it is much more expensive to acquire a new customer than to retain an


existing customer. In some instances, however, e-commerce companies have
gone out of business before they ever reached that point.

A successful brand can constitute a long-lasting, impenetrable unfair competitive


advantage. Let us look at both sides of the competitive advantage:

(a) Fair Competitive Advantage


Competitive advantage is considered as „fair‰ when it is based on innovation,
efficient production processes, or other factors that theoretically can be
imitated and/or purchased in the marketplace by the competitors.

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(b) Unfair Competitive Advantage


An „unfair competitive advantage‰ cannot be purchased in the marketplace
and includes such things as patents, copyrights, secret processes, skilled or
dedicated employees and managers and, of course, brand names. Brands
cannot be purchased, unless one buys the entire company.

You can visit these websites to get more ideas on basic marketing concepts:
Internet marketing centre: http:// www.marketingtips.com
Internet marketing tips: http://www.clickz.com
Branding strategy: www.allaboutbranding.com

SELF-CHECK 8.2

List some of the major advantages of having a strong brand. How does
a strong brand positively influence consumer purchasing?

EXERCISE 8.1

1. Differentiate core product, actual product and augmented


product in a feature set.
2. Define brand strategy.

8.2 INTERNET MARKETING TECHNOLOGIES


Internet marketing has many similarities to and differences from ordinary
marketing. The objective of Internet marketing as in all marketing is to build
customer relationships so that the firm can achieve above average returns (both
by offering superior products or services and by communicating the feature set
to the consumer).

However, Internet marketing is also very different from ordinary marketing


because the nature of the medium and its capabilities are so different from
anything that has come before. In order to understand just how different Internet
marketing can be and in what ways, you first need to become familiar with some
basic technologies of Internet marketing.

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ACTIVITY 8.3

How do you think Internet marketing differs from ordinary marketing?

8.2.1 The Revolution in Internet Marketing


Technologies
Marketing has changed as a result of the new technical capabilities as shown in
Table 8.1.
Table 8.1: The Dimension of E-commerce in Marketing

E-commerce Significance for Marketing


Technology Dimension
Ubiquity Marketing communications have been extended to home,
work, and mobile platforms; geographic limits on
marketing have been reduced. The marketplace has been
replaced by „market space‰ and is removed from temporal
and geographic location. Customer convenience has been
enhanced, and shopping costs have been reduced.
Global reach Worldwide customer service and marketing communications
have been enabled. Hundreds of millions of potential
consumers can be reached with marketing messages.
Universal standards The cost of delivering marketing messages and receiving
feedback from users is reduced because of shared, global
standards of the Internet.
Richness Video, audio, and text marketing messages can be
integrated into a single marketing message and
consuming experience.
Interactivity Consumers can be engaged in a dialogue, dynamically
adjusting the experience to the consumer, and making the
consumer a co-producer of the goods and services being
sold.
Information density Fine-grained, highly detailed information on consumersÊ
real-time behaviour can be gathered and analysed for the
first time. The „data mining‰ technology permits the
analysis of consumer data for marketing purposes.
Personalisation/ This feature enables product and service differentiation
Customisation down to the level of the individual, thus strengthening the
ability of marketers to create brands.

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Internet has had three very broad impacts in marketing:

(a) Broaden the Scope of Marketing Communications


The Internet, as communications medium, has broadened the scope of
marketing communications, in the sense of the number of people who can
be reached easily.

(b) Increased the Richness of Marketing Communications


The Internet has increased the richness of marketing communications by
combining text, video and audio content into rich messages. Arguably, the
web is richer as a medium than television or video because of these
reasons:
(i) Complexity of messages available;
(ii) The enormous content accessible on a wide range of subjects; and
(iii) The ability for users to interactively control their experience.

(c) Expanded the Information Intensity of Marketing Communications


The Internet has greatly expanded the information intensity of the
marketplace. It is done by providing marketers (and customers) with
unparalleled fine-grained, detailed real-time information about consumers
as they transact in the marketplace.

8.2.2 Web Transaction Logs


A primary source of consumer information on the web is through the transaction
log which is maintained by all web servers. Do you know what a transaction log
is? Let us look at the definition provided.

A transaction log records user activity at a website. The transaction log is


built into web server software.

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Table 8.2 lists the data elements contained in a web transaction log and how these
elements can be used in marketing.

Table 8.2: Data Elements Contained in a Web Transaction Log

Data Element Marketing Use


IP address of the visitor: Can be used to send return e-mails for marketing
64.212.28.3 purpose, when the visitor is using a dedicated
URL as opposed to a dial-in modem. Dial-in
modems use temporary IPs and cannot be used
for return e-mail.
Data and time stamp: Used to understand patterns in the time of day
[14/ May/2001:15:01:18 -0500] and year of customer activity.

Pages and objects requested and Used to understand what this specific consumer
visited („Get‰ statements): was interested in finding (the click stream). Can
GET/images/traininglibararya be used later to send „personalised‰ messages,
rt.gif „customised products,‰ or simply return e-mail
regarding related products.
Response of site server: Used to monitor for broken links, pages not
200 (usually „HTTP/1.1.‰ returned.
„HTTP/1.1‰ 304 is a code to
send users to a different source for
the page or object).
Size of pages sent (bytes of Used to understand capacity demands on servers
information): 1996. and communications links.
Name of page or site from which Used to understand how consumers come to a
the consumer came to this site: site and once there, their patterns of behaviour.
http://www.azimuthinteractive.c
om/ office97text.htm
Name and version of the browser Useful for understanding target browsers,
used: Mozilla/4.0 compatible; ensuring your site is compatible with browsers
MSIE 4.01 („Mozilla‰ is a being used.
Netscape standard. MSIE is
Microsoft Internet Explorer).

Name and version of the Useful for understanding the capabilities of


operating system, of the target client machines; more recent operating
consumerÊs client machine: systems indicate new machine or technically
Windows 95. savvy user.
History of all the pages and Used to establish personal profiles of individuals
objects visited during a session at analyse the site activity and understand the most
the site. popular pages and resources.

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WebTrends is a leading log file analysis tool. Transaction log data becomes even
more useful when combined with two other visitor-generated data trails:

(a) Registration Forms


Users are enticed through various means such as free gifts or special
services to fill out registration forms. Registration forms gather personal
data on name, address, phone, zip code, e-mail address (usually required)
and other optional self-confessed information on interests and tastes.

(b) Shopping Cart Database


When users make a purchase, they also enter additional information into the
shopping cart database, which captures all the item selection, purchase and
payment data. Other potential additional sources of information are information
users submit on product forms, contribution to chat groups, or send via e-mail
messages using the „Contact Us‰ option provided on most sites.

ACTIVITY 8.4

How can e-commerce sites have more information regarding


consumer behaviour compared to a normal department store?

Let us look at Figure 8.3 which illustrates an example of WebTrends Log


Analyser.

Figure 8.3: WebTrends Log Analyser

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For a website that has a million visitors per month, on average, a visitor makes 15
page requests per visit, there will be 15 million entries in the log each month.
These transaction logs, coupled with data from the registration forms and
shopping cart database, represent a treasure trove of marketing information for
both individual sites and the online industry as a whole. Nearly all the new
Internet marketing capabilities are based on these data-gathering tools.

For instance, here are just a few of the interesting marketing questions that can be
answered by examining a websiteÊs transaction logs, registration forms and
shopping cart database:
(a) What are the major patterns of interest and purchase for groups and
individuals?
(b) After the homepage, where do most users go first, and then second and
third?
(c) What are the interests of specific individuals?
(d) How can we make it easier for people to use our site?
(e) How can we change the design of the site to encourage visitors to purchase
our high-margin products?
(f) Where are visitors coming from (and how can we optimise our presence on
these referral sites)?
(g) How can we personalise our messages, offerings and products to
individual users?

Answering these questions requires some additional technologies. As noted by


Jupiter Media Matrix, businesses can choke on the massive quantity of
information found in a typical siteÊs log file.

ACTIVITY 8.5

Which source is very effective in getting consumerÊs information: a


transaction log or „Contact us‰? Why?

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8.2.3 Cookies and Web Bugs


While transaction logs create the foundation of online data collection, they are
supplemented by two other data collection techniques:
Cookies; and
Web Bugs.

Let us look the detailed explanation provided for both of these data collection
techniques:

(a) Cookies
If you are wondering what is meant by the term ‰cookie„, refer to the
following for a clearer explanation.

A cookie is a small text file that websites place on the hard disk of visitorsÊ
client computers every time they visit, and during the visit as specific
pages are visited. Cookies allow a website to store data on a userÊs machine
and then later retrieve it.

Typically, a website generates a unique ID number for each visitor and


stores that ID number on the userÊs machine using a cookie file. The cookie
may also (but is not required to) include the following:
(i) An expiration date;
(ii) A path that specifies the associated web pages that can access the
cookies;
(iii) A domain that specifies the associated web server/domains that can
access the cookie (which cannot, however, be the domain of anything
other than the server setting of the cookie); and
(iv) A security setting that provides it may only be transmitted by a
secure protocol.

For example, a typical Netscape cookie includes the following:


(i) Domain name of the server placing the cookie (Amazon.com);
(ii) A true or false statement followed by a forward slash, indicating if all
machines within a given domain can access the cookie, and the path
within the domain that the cookie is valid for;

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(iii) A true or false statement indicating whether the cookie is secure (if
False, the cookies does not require a secure protocol);
(iv) A 10-digital number indicating the time the cookie expires (date and
time expressed in the Unix programming language);
(v) The name of the cookie; and
(vi) An associated value such as an user ID number.

A cookie provides web marketers with a very quick means of identifying


the customer and understanding his prior behaviour at the site. Websites
use cookies for the following reasons:
(i) To determine how many people are visiting the site;
(ii) To identify whether they are new or repeat visitors; and
(iii) To count how often they have visited.

However, the data collected may be somewhat inaccurate because people


share computers; they often use more than one computer. For example,
cookie in a site keeps track of a user as he or she adds to the shopping cart.
Each item added to the shopping cart is stored in the siteÊs database along
with the visitorÊs unique ID value. However, if two people have been
sharing the visitorÊs ID, the data collected would be inaccurate.Where you
can spot a cookie in a computer? The following are the locations where you
might find a cookie:
(i) Cookie files on a computer using MicrosoftÊs Internet Explorer can
typically be found in a directory called c:\windows\cookies; and
(ii) Cookie files on a computer with the Netscape browser can be found
at c:\ProgramFiles\Netscape\Users\Default\cookies.
Both Internet Explorer and Netscape now offer users the option of being
notified when a website wants to send them a cookie and allow them to
accept or reject the cookie.

(b) Web Bugs


Cookies are site-specific as a website can only receive the data it has stored
on a client machine and cannot look at any other cookie. However, when
combined with web bugs, they can be used to create cross-site profiles.

Do you know what a web bug is? Are they similar in nature to the common
bugs found in our house? No, they are not as explained below.

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Web bugs are tiny (1 pixel) graphic files embedded in e-mail messages and
on websites. Web bugs are used to automatically transmit information
about the user and the page being viewed to a monitoring server.

For instance, when a recipient opens an e-mail in HTML format or opens a


webpage, a message is sent to a server calling for graphic information. This
tells the marketer that the e-mail has been opened; indicating at least that
the recipient was interested in the subjectÊs header.

Web bugs are often clear or white-coloured, so they are not visible to the
recipient. You may be able to determine if a webpage is using web bugs by
using the „View Source‰ option of your browser and examining the „IMG‰
(image) tags on the page. Web bugs are typically 1 pixel in size and contain
the URL of a server that differs from the one that served the page itself.

To get more information on cookies and web bugs, visit these websites:
http://www.cookiecentral.com/
http://w2.eff.org/Privacy/Marketing/web_bug.html

8.2.4 Databases, Data Warehouses and Data Mining


Database, data warehouses, data mining, and the variety of marketing decision-
making techniques loosely called profiling are at the heart of the revolution in
Internet marketing. Together these techniques attempt to identify precisely who
the online customers are and what they want, and then, to fulfil the customerÊs
criteria exactly.

These techniques are more powerful and far more precise and fine-grained than
the gross levels of demographic and market segmentation techniques used in
mass marketing media or by telemarketing.

In order to understand the data in transaction logs, registration forms, shopping


carts, cookies, web bugs and other sources, Internet marketers need massively
powerful and capacious database, database warehouses and data mining:

(a) Databases
The first step in interpreting huge transaction streams is to store the
information systematically. A database is a software application that stores
records and attributes. For example, a telephone book is a physical

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database that stores records of individuals and their attributes such as


names, addresses and phone numbers.

Let us look at the definitions given for these three important terms:

(i) Database Management System

A Database Management System (DBMS) is a software application


used by organisations to create, maintain, and access databases. The
most common DBMS are relational databases such as DB2 from IBM
and a variety of SQL databases from Oracle, Sybase and other
providers.

(ii) Relational Databases


Relational databases represent data as two-dimensional tables with
records organised in rows, and attributes in columns, much like
a spreadsheet. The tables and all the data in them can be flexibly
related to one another as long as the tables share a common data
element. Relational databases are extraordinarily flexible and allow
marketers and other managers to view and analyse data from
different perspectives very quickly.

(iii) Structured Query Language


Structured Query Language (SQL) is an industry-standard database
query and manipulation language used in relational databases.

(c) Data Warehouses


Let us look at the definition given for „data warehouse‰.

A data warehouse is a database that collects a firmÊs transactional and


customer data in a single location for offline analysis by marketers and site
managers.

The data originate in many core operational areas of the firm, such
as:
(i) Website transaction logs;
(ii) Shopping carts;
(iii) Point-of-sale terminals (product scanners) in stores;
(iv) Warehouse inventory levels;

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(v) Field sales reports;


(vi) External scanner data supplied by third parties; and
(vii) Financial payment data.

The purpose of a data warehouse is to gather all the firmÊs transaction and
customer data into one logical repository where it can be analysed and
modelled by managers without disrupting or taxing the firmÊs primary
transaction systems and databases. Data warehouses grow quickly into
storage repositories containing terabytes of data (trillions of bytes) on
consumer behaviour at a firmÊs stores and websites.
With a data warehouse, firms can answer questions such as:
(i) What products are the most profitable by region and city?
(ii) What regional marketing campaigns are working?
(iii) How effective is store promotion of the firmÊs website?
According to a Data Warehousing InstituteÊs survey of more than 1,600
companies, most found major benefits in the successful implementation of a
data warehouse, such as better segmentation and increased revenues
because business managers had a more complete awareness of customers
through data that could be accessed quickly.

(d) Data Mining


What is a data mining?

Data mining is a set of different analytical techniques that look for patterns
in the data of a database or data warehouse, or seek to model the behaviour
of customers. Website data can be „mined‰ to develop visitors and
customersÊ profiles.

Well, what is meant by customer profile?

A customer profile is simply a description of the typical behaviour of a


customer or a group of customers at a website. Customer profiles help to
identify the patterns in group and individual behaviour that occur online as
millions of visitors use a firmÊs website.

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There are three different types of data mining:

(a) Query-driven Data Mining


This is the simplest type of data mining and it is based on specific
queries. For instance, based on bunches of marketers who suspect
relationship in the database or who need to answer a specific
question, such as „What is the relationship between time of the day
and purchases of various products at the website?‰

Marketers can easily query the data warehouse and produce a


database table that rank in orders the top ten products sold at a
website by each hour of the day. Marketers can then change the
content of the website to simulate more sales by highlighting the
different products over time or by placing particular products on the
homepage at certain times of day or night.

(b) Model-driven Data Mining


Model-driven data mining involves the use of a model that analyses
the key variables of interest to decision-makers. For example,
marketers may want to reduce the inventory carried on the website by
removing unprofitable items that do not sell well. A financial model
can be built by showing the profitability of each product on the site so
that an informed decision can be made.

(c) Rule-based Data Mining


This type examines the demographic and transactional data of groups
and individuals at a website and attempts to derive general rules of
behaviour for visitors. There are factual and behavioural approaches
as well as different levels of granularity, from market segments down
to individuals.

SELF-CHECK 8.3

What are the differences of query-driven data mining and rule-based


data mining?

Let us look at the two approaches mentioned in the rule-based data mining:

(a) Factual Approach


This approach is used by companies such as Engage Technologies and
Personify. Factual demographic and transactional data (purchase price,

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products purchased) and material viewed at the site are analysed data
stored in a customerÊs profile table in order to segment the marketplace into
well-defined groups.

For instance, female customers who purchased items worth more than
RM50 in an average visit and who viewed travel articles might be shown a
vacation travel advertisement. The rules are specified by marketing
managers as a set of filters based on their expert opinions, as well as trial
and error, and are applied to aggregate groups of visitors or market
segments. There can be thousands of different types of visitors, and hence,
thousands of marketing decisions or filters that marketers have to make.

(b) Behavioural Approach


Behavioural approaches try to „let the data speak for itself‰ rather than
impose rules by expert marketers. A different behavioural approach to data
mining is collaborative filtering, which was first developed at the MIT
Media Lab and commercialised by an MIT Media Lab-backed start-up
company, Firefly.

Here, rather than have expert marketers make decisions based on their own
„rules of thumb,‰ experience, and corporate needs (a need to move old
inventory, for instance), site visitors collaboratively classify themselves
based on common selections. The idea is that people classify themselves
into „affinity groups‰ characterised by common interests.

A query to the database can isolate the individuals who purchased the
same products. Later, based on purchases by other members of the affinity
group, the system can recommend purchases based on what other people in
the group have bought recently.

For example, visitors who all purchased books on amateur flying could
pitch a video that illustrates small plane flying techniques. And then later, if
it was discovered that several members of this „amateur flying interest
group‰ were purchasing books on, say, parachuting, then all members
of the group would be pitched like those who were purchasing. This pitch
would be made regardless of the demographic background of the
individuals.

A more fine-grained behavioural approach that seeks to deal with


individuals as opposed to market segments or affinity groups derives rules
from individual consumer behaviour (along with some demographic
information) and seeks to deal specifically with individuals. Here, the pages
actually visited by specific users are stored as a set of conjunctive rules.

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For example, if an individual named as William Wilson visits a site and


typically („as a rule‰) moves from the homepage to the financial news
sections to the Asian report section, and then often purchases articles from
the „Recent Developments in Banking‰ section. Thus, this person, based on
purely past-behavioural patterns, might be shown an advertisement of a
book on Asian money markets. These rules can be constructed to follow an
individual across many different websites.

There are many drawbacks to all these techniques, not least of which is that
there may be millions of rules; many of them nonsensical, and many others
of short-term duration. Hence, the rules need extensive validation and
culling. Also, there can be millions of affinity groups and other patterns in
the data that are temporal or meaningless.

The difficulty is in isolating the valid, powerful (profitable) patterns in the


data and then acting on the observed pattern fast enough to make a sale
you would otherwise not have made. As we see later, there are practical
difficulties and trade-offs involved in achieving these granularity,
precision, and speed.

8.2.5 Advertising Networks


Specialised marketing firms, called as advertising networks, have helped e-commerce
sites to take advantage of the powerful tracking and marketing potential of the
Internet.

Advertising networks offer a number of services, from targeted e-mail campaigns


to brand awareness programmes. However, they are best known for their ability
to present users with banner advertisements based on a database of user
behavioural database capabilities, and illustrate just how different Internet
marketing is from traditional marketing.

Perhaps the best-known advertising network is DoubleClick as shown below.

DoubleClick released its first generation tracking system, DART, in 1996.


DoubleClick claims to „serve‰ 30 billion banner advertisements per month (in
round numbers, about 12,000 advertisements per second) and maintains over
100 million user profiles on individual web consumers. DoubleClick has even
invented a new service called Boomerang that trances the long-term
purchasing behaviour of all people who have ever been exposed to banner
advertisements.

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Specialised advertisement servers are used to store and send to users the
appropriate banner advertisements. All these systems rely on cookies, web bugs,
and massive back-end user profile databases to pitch banner advertisements to
users and record the results, including sales. This process allows feedback from
the market to be entered into the database.

Now, let us look at our own advertising network.

In Malaysia, as the first advertising network which focuses on blogs,


Nuffnang (refer to Figure 8.4) allows advertisers to serve graphic or video
based advertisements onto more than 100,000 blogs hosted on various
platforms.

Figure 8.4: Nuffnang


Source: http://amanz.my/2009/08/nuffnang

Nuffnang has been widely featured on mainstream newspapers like The Star,
Malaysia and The Sunday Times, Singapore, amongst other media. Nuffnang
advertisements are seen on 100,000 blogs by three million people daily.

Below are the advertising networks available in Malaysia:


(a) Nuffnang
(b) Advertets
(c) GrabMyAds
(d) Gokita
(e) Netizen Media

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Advertising networks have become controversial among privacy advocates


because of their ability to track individual consumers across the Internet. We will
discuss on privacy issues further in Topic 9.

8.2.6 Customer Relationship Management (CRM)


Systems
Customer Relationship Management (CRM) systems are another important
Internet marketing technology. Let us look at its definition.

A customer relationship management system is a repository of customer


information that records all of the contact that a customer has with a firm
(including websites) and generates a customer profile available to
everyone in the firm with a need to „know the customer.‰

CRM systems also supply the analytical software required to analyse and
use customer information. Customers come to the firms not just over the web but
also through these mediums:
(a) Telephone call centres;
(b) Customer service representatives;
(c) Sales representatives;
(d) Automated voice response systems;
(e) Automated Teller Machines (ATMs) and kiosks;
(f) In-store point-of-sale terminals; and
(g) Mobile devices or m-commerce

In the past, firms generally did not maintain a single repository of customer
information, but instead were organised along product lines; with each product
line maintaining a customer list (and often not sharing it with others in the same
firm). In general, firms did not know who their customers were, how profitable
they were or how they responded to marketing campaigns.

For instance, a bank customer might see a television advertisement for a low-cost
auto loan that included a toll-free-number to call. However, if the customer came
to the bankÊs website instead, rather than calling the toll-free-number, marketers
would have no idea how effective the television campaign was because the
customer contact data will go into a single system.

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CRMs, like the advertising network described above, are part of the firmsÊ
evolution towards a customer-centric and marketing-segment-based business,
and away from a product-line-centred business. Also, like advertising networks,
CRMs are essentially a database technology with extraordinary capabilities for
addressing the needs of each customer as a unique person. Customer profiles can
contain the following information:
(a) A map of the customerÊs relationship with the institution;
(b) Product and usage summary data;
(c) Demographic and psychographic data;
(d) Profitability measures;
(e) Contact history summarising the customerÊs contact with the institution
across most delivery; and
(f) Marketing and sales information containing programmes received by
the customer and the customer Ês responses.

Companies like Celcom and Maxis use these profiles from the CRM system for
the following reasons:
(a) To do personal communication such as greeting customers with their name
every time they call;
(b) Retaining customers by awarding rewards such as free SMS or airtime; and
(c) Sending personalised advertisements through SMS based on the package
subscribed by customers.

With these profiles, CRMs can be used for the following aspects:
(a) To sell additional products and services;
(b) Develop new products;
(c) Increase product utilisation;
(d) Marketing costs;
(e) Identify and retain profitable customers;
(f) Optimise services delivery costs;
(g) Retain high-lifetime value customers;
(h) Enable personal communications;
(i) Improve customer loyalty; and
(j) Increase product profitability.

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SELF-CHECK 8.4

Name some of the drawbacks to the three data mining techniques


used in Internet marketing.

EXERCISE 8.2

1. Identify the main technologies that support online marketing.


2. How is data mining different from databases and data
warehouses?

You can visit these websites to get more information on the technologies that
support online marketing:
Data warehouse - www.dwinfocenter.org
Data mining - www.data-mine.com
CRM systems - www.crm-daily.com

8.3 E-COMMERCE MARKETING AND


BRANDING STRATEGIES
The new marketing technologies described above have spawned a new
generation of marketing techniques and added power to some traditional
techniques (such as direct-mail campaigns with website addresses displayed).

In this section, we will discuss a variety of Internet marketing strategies for


market entry, customer acquisition, customer retention, pricing, and dealing with
channel conflict.

It is important to note that although B2C and B2B e-commerce do have


differentiating features (for instance in B2C e-commerce, marketing is aimed at
the individual consumer, whereas in B2B e-commerce, typically more than one
individual is involved with the purchase decision), the strategies discussed in
this section in most instances can be, and are, applied in both the B2C and B2B
arena.

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8.3.1 Market Entry Strategies


Both new firms and traditional existing firms have choice about how to enter the
market, and establish the objectives of their online presence.

Let us look at the market entry strategies for the following firms as illustrated in
Figure 8.5:
(a) New firms; and
(b) Existing firms.

Figure 8.5: Market entry strategies


Source:http://www.sci.brooklyn.cuny.edu/~yarmish/cis32/
E-commerce3e_ppt/Laudon_Traver_3E_Chapter7_Final.ppt

In the e-commerce I era, the typical entry strategy was pure clicks/first mover
advantage strategy (refer below).

Pure clicks/first mover advantage strategy is utilised by companies such as


Amazon, eBay and e-Trade. Indeed, this strategy was at the heart of the
billions of investment dollars flowed. The ideas are beguiling and simplistic:
Enter the market first and experience „first mover‰ advantages high-end
user awareness followed rapidly by successful consumer transactions and
experiences and grow brand strength.

According to leading consultants of this era, first movers would experience a


short-lived mini-monopoly. They would be the only providers for a few months,
and then other copycats or fast followers (also known as second mover) would
enter the market because entry costs were so low.

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To prevent new competitors from entering the market, growing audience size
very rapidly became the most important corporate goal rather than profits
and revenue. Firms following this strategy typically spent the majority of
their marketing budget on building brand (site) awareness by purchasing
high visibility advertising in traditional mass media such as television, radio,
newspapers, and magazine.

If the first mover gathered most of the customers in a particular category (pets,
wine, gardening supplies, and so forth), the belief was that new entrants would
not be able to enter because customers would not be willing to pay the switching
costs. Customers would be „locked in‰ to the first moverÊs interface. Moreover,
the strength of the brand would inhibit switching even though competitors were
just a click away.

In retrospect, it is now clear that pursuing first mover advantages as a marketing


strategy was not particularly successful for most firms. Although first movers
may have interesting advantages, they also have significant liabilities. The
history of first movers in most areas of business is that statistically, they are
losers for the most part because they lack the complementary assets and
resources required to compete over the long term.

Even though first movers are innovative, but they are usually lack of:
(a) Financial depth;
(b) Marketing and sales resources;
(c) Loyal customers;
(d) Strong brands; and
(e) Production or fulfilment facilities needed to meet the customer demands
once the product succeeds.

Research on Internet advertising conducted at the end of e-commerce I


discovered that while expensive campaigns may have increased brand
awareness, the other components of a brand such as trust, loyalty, and reputation
did not automatically follow, and more importantly, site visits did not
necessarily translate into purchases.

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Now, let us look at traditional firms.

Traditional firms face some similar choices but they have significant
amounts of cash flow and capital to fund their e-commerce ventures over a
long period of time. For example, Barnes & Noble, the worldÊs largest book
retailer, formed Barnesandnoble.com, which is a fast follower site, when
faced with the success of upstart Amazon.com. The website was established
as an independent firm, a web pure play, although obviously making use of
the Barnes & Noble brand name.

Another possibility for new firms is to pursue a mixed clicks and bricks strategy
in which online marketing is closely integrated with offline physical stores.
However, very few new firms can afford the „bricks‰ part of this strategy.
Therefore, firms following this entrance strategy often ally themselves with
established firms that have already developed brand names, production and
distribution facilities and the financial resources needed to launch a successful
Internet business.

The most common strategy for existing firms is to extend their businesses and
brands by using the mixed „clicks and bricks‰ brand extender strategy. These
„brand extension‰ strategies saw the web as an extension of their existing order
processing and fulfilment, marketing, and branding efforts.

Each of the market entry strategies discussed above has seen its share of
successes and failures. While the ultimate choice of strategy depends on a firmÊs
existing brands, management strengths, operational strengths and capital
resources, todayÊs most firms are opting for a mixed „clicks and bricks‰ strategy
in the hope that it will enable them to reach profitability more quickly.

8.3.2 Establishing Customer Relationship


Once a firm chooses a market entry strategy, the next task is establishing a
relationship with the customer. Traditional public relations and advertising
media (newsprint, direct mail, magazines, television, and even radio) remain
vital for establishing awareness of the firm. However, a number of unique
Internet marketing techniques have emerged that have proven to be very
powerful drivers of website traffic and purchases.

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Here, we will discuss of these five new techniques:


(a) Permission Marketing;
(b) Affiliate Marketing;
(c) Viral Marketing;
(d) Blog Marketing; and
(e) Leveraging Brands.

(a) Permission Marketing


What is a permission marketing?

Permission marketing is a strategy of obtaining permission from


consumers before sending them information or promotional messages. By
obtaining permission to send information to consumers up front,
companies are much more likely to be able to develop a customer
relationship.

When consumers agree to receive promotional messages, they are opting-


in; when they decide they do not want to receive such messages, they are
opting-out.

Most consumers need an incentive to spend time reading promotional


material, or to provide personal information that companies can use to
improve their own marketing. As illustrated in Figure 8.6, company such as
Iwon.com gives user the chance to win money each week for visiting the
site; each month the company offers special bonus prizes to users who are
willing to complete a more in-depth survey about their personal life. The
site gains useful personal information and the user earns the chance to win
a free prize.

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Figure 8.6: Iwon.com website


Source: http://rangit.com/internet/93

Do you know that a key component of permission marketing is e-mail? In


addition to being one of the most widely used Internet applications, e-mail
has become a very effective marketing tool. Companies request e-mail
addresses from customers and then send marketing messages of potential
interest; some marketers issue such messages regularly, even weekly, while
others do so only when something relevant comes up. Not only is it
inexpensive to send, but it is also targeted, measurable and effective.

(b) Affiliate Marketing


In the offline world, referrals are one of the best sources of qualified leads.
Affiliate marketing is the online application of this marketing method,
where one website agrees to pay another website a commission for new
business opportunities it refers to the site. The affiliate adds a link to the
companyÊs website on its own site and encourages its visitors to patronise
its marketing partner. Some affiliates are paid a commission based on any
sales that are generated, while others may be paid a fee based on a number
of click-through or new registrations, or a flat fee or some combination of
these.

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Let us look at some examples of affiliate marketing.

For instance, Amazon.com has a strong affiliate programme consisting of


more than 500,000 participant sites, called as Associates, which receive up
to 15% on sales their referrals generate. eBayÊs Affiliates Programme can
earn between $20 to $35 for each active user sent to eBay.

Amazon and eBay and other large e-commerce companies with affiliate
programmes typically administer such programmes themselves. Smaller
e-commerce firms who wish to use affiliate marketing often decide to join
an affiliate network (sometimes called an affiliate broker, which acts as an
intermediary).

The affiliate network does the following:


(i) Brings would-be affiliates and merchants seeking affiliates together;
(ii) Helps affiliates to set up the necessary links on their website;
(iii) Tracks all activity; and
(iv) Arranges all payments.

The key benefit of affiliate marketing is the fact that it typically operates on
a „pay for performance‰ basis. Affiliates provide qualified sales leads in
return for pre-agreed upon compensation. Another advantage, however, is
the existence of an established user base that a marketer can tap into
through an affiliate immediately. For affiliates, the appeal is a steady
income potentially large that can result from such relationships.

In addition, the presence of another companyÊs logo or brand name can


provide a measure of prestige and credibility. Affiliate marketing works
best when affiliates choose products and services that match and
supplement the content of their own website.

However, affiliate marketing can have some drawbacks if not managed


carefully such as:
(i) Too many links that are not relevant to a firmÊs primary focus can lead
to brand confusion.
(ii) Websites with affiliate links also risk „losing‰ those customers who
click on a link and then never return; unless the website takes action
to prevent this by having the link open in a new window that when
closed returns the customer to the original site.

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(c) Viral Marketing


Just as affiliate marketing involves using a trusted website to encourage
users to visit other sites, viral marketing (also called as customer referrals)
is the process of getting customers to pass along a companyÊs marketing
message to friends, family, and colleagues. It is the online version of the
word-of-mouth advertising and it spreads even faster than its real-world
counterpart.

In addition to increasing the size of a companyÊs customer base, customer


referrals also have other advantages:
(i) They are less expensive to acquire since existing customers do all the
acquisition work;
(ii) They tend to use online support services less, preferring to turn back
to the person who referred them for advice;
(iii) They cost so little to acquire and keep; and
(iv) Referred customers generate profits for a company much earlier than
customers acquired through other marketing methods.

Let us take a look at Half.comÊs Take Five! Programme, which is an


example of viral marketing.

Registered users at Half.com selling used-books, music, movies, and games


are given an incentive (coupons) to tell their friends about the site. When a
user submit a friendÊs name to Half.comÊs Take Five! page, Half.com sends
the friend a coupon valid for $5 of the friendÊs first order of $10 or more.
Because its business is growing by word of mouth, Half.comÊs customer
acquisition cost is less than $10 per customer, which is impressive since
online customer acquisition can cost 1.5 to 2.5 times what it costs in the
physical world.

The process of viral marketing can also involve users who do not know
each other. When a consumer decides to make a major purchase, such as a
new mountain bike, getting advice and opinions from people who own
such bikes is usually the first step. And with the Internet, it is fairly easy to
find and read reviews of various bike models written by knowledgeable
consumers.

Sites such as Epinions.com and ConsumerReports.org provide objective


product reviews by people who have bought and used a long list of
products and services. Armed with feedback and input from online

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TOPIC 8 E-COMMERCE MARKETING CONCEPTS 273

enthusiasts, consumers can then click on an e-commerce site and make a


purchase. Epinions.com has links to a number of affiliate e-tailers who pay
a fee back to the site for each purchase made there. CNET does the same
thing, providing high-tech product reviews and links to online retailers
who can immediately ship the desired item.

(d) Blog Marketing


Did you realise that blogs have become a part of mainstream online
culture? Around 97 million Americans read a blog at least once a month.
The number of blog readers is expected to grow to about 128 million, and
blog creators to 38 million by 2013. Blogs, like ordinary websites, can be
used to display both branding advertisements not geared towards sales, as
well as advertising aimed at making sales.

However, as blogs are usually created by private individuals wishing to


make a public statement, bloggers do not have the web marketing and
advertising resources of large corporations. In blogs, the number of eyeballs
viewing any one site is miniscule compared to portal websites such as
Yahoo!

To overcome this, a blog advertising network is established, where the


bloggers agree to display advertisements on their blogs, and then paying
them a fee for each visitor who clicks on their advertisements. Within the
last two years, two major players in the blogging industry, Technorati and
Six Apart, have launched blog advertising networks designed to connect
blog sites with advertisers. Nuffnang, MalaysiaÊs own creation also
provides a similar service.

Given the growth of this phenomenon which is over 50% a year in the past
few years and the novelty, blog marketing will likely show substantial
gains over the next several years. In 2009, blog advertising revenue is
estimated to be about $530 million, growing to about $746 million by 2012,
although this does not take into account the impact of recession (eMarketer,
2008f).

(e) Leveraging Brands


Perhaps, the most successful online customer acquisition strategy in the
e-commerce II period is brand leveraging.

Do you know what a brand leveraging is? If you do not, refer below to seek
the correct definition of the term.

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274 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

Brand leveraging refers to the process of using the power of an existing


brand to acquire new customers for a new product or service.

For instance, while Tab was the first to discover a huge market for diet cola drinks,
Coca-Cola ultimately succeeded in dominating the market by leveraging the Coke
brand to a new product called as Diet Coke.

In the online world, some researchers predicted that offline brands would not be
able to make the transition to the web because customers would soon learn who
was offering the products at the cheapest prices and brand premiums would
disappear (price transparency).

However, this has not occurred as can be seen in the following industries:

(i) Retail Industry


Kmart, Wal-Mart and JCPenney have leaped into the top ten online retail
firms in a very short period in large part because of the strength of their
offline brand. The offline brand gave them the ability to attract millions of
their offline customers to their websites.

(ii) Financial Service Industry


Wells-Fargo, Citibank, Fidelity and Merrill Lynch have all succeeded in
acquiring millions of online customers based on their large offline
customer bases and brands.

(iii) Content Provider Industry


Wall Street Journal and Consumer Reports have become among the most
successful subscription-based content providers.

(iv) Manufacturing and Retail Industry


Dell Computer has been very successful in leveraging its brand of custom-
built computers ordered by telephone into a made-to-order computer
ordered over the Internet.

A major advantage of brand leveraging when compared to a start-up venture


with no brand recognition is that it significantly reduces the costs of acquiring
the new customers. In addition to leveraging offline brands into the online world,
it is also possible to leverage established online brands to new products and
product lines. However, this strategy is not always a successful one.

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SELF-CHECK 8.5
Identify the market entry strategies.

EXERCISE 8.3

1. Describe clicks and bricks strategies for existing firms.


2. Identify the various techniques used for online marketing.

You can visit the following websites to get more information on online
marketing techniques:
Permission marketing http://www.marketingterms.com/dictionary/
permission_marketing/
Affiliate marketing www.affiliatemarketing.co.uk
Viral marketing
www.marketingterms.com/dictionary/viral_marketing

8.4 ONLINE MARKET RESEARCH


Market research involves gathering information that will help a firm identify the
potential products and customers. Let us look at the explanations given for the
two general types of market research:

(a) Primary Research

Primary research involves gathering first-hand information using


techniques such as surveys, personal interviews, and focus groups. This
type of research is typically used to gain feedback on brands, products, or
new marketing campaigns where no previous study has been done.

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276 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

(b) Secondary Research

Secondary research relies on existing, published information as the basis


for analysing the market. Both primary and secondary research can be
completed online more efficiently, less expensively and often more
accurately than offline.

In addition to the two different approaches to market research, there are two
types of data to be studied:

(a) Quantitative Data

Quantitative data is data that can be expressed as a number, such as a


percentage. Quantitative data can be analysed using statistical programmes
that identify relationship between certain variables, or factors that affect how
someone responds.

(b) Qualitative Data

Qualitative data is data that cannot easily be quantified, such as opinions.


Survey questions that yield qualitative responses are analysed by grouping
responses into similar sub- segments based on the answer given. One type
of analysis is content analysis, which tries to identify the major categories of
responses given.

8.4.1 Primary Research


Let us look at some of the primary research tools:

(a) Online Surveys


Surveys and questionnaires are the most popular and frequently used
market research tools. Using a survey instrument, which is a list of
questions, researchers can approach groups of people to ask their views on
virtually any imaginable topic.

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Online surveys as shown in Figure 8.7 typically can be administrated more


quickly and less expensively than traditional mail or telephone surveys.
E-commerce companies can either hire an outside market research firm to
conduct the survey or create and administer their own. For instance, survey
sites such as Zoomerang.com allow companies to use existing survey
templates or edit them for their own use and distribute them to
ZoomerangÊs built-in panel of consumers.

Figure 8.7: Online survey


Source: http://communication.howstuffworks.com/how-online-surveys-work4.htm

Online surveys also make it possible to track respondents and to follow up


with those who have not yet completed the survey, which helps to improve
the response rates.

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278 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

Response rates are the percentage of people who complete a survey. A


low response rate can damage the validity or believability of a surveyÊs
results.

Feedback forms, which ask users to provide input regarding a siteÊs


operations in a set format, are another type of online survey. Requesting
regular input from site visitors may provide more qualitative than
quantitative data, which is more difficult to analyse, but the resulting
information can assist in improving and enhancing site performance.

(b) Personal Interviews


Personal interview is generally guided by a set of questions very similar to
a survey instrument. Although it is more difficult to incorporate personal
interviews within websites, it is possible to conduct research online via live
chat or e-mail, with a trained researcher interacting with the study
participants. Personal interviews offer an opportunity to gather more in-
depth information on a topic.

In some cases, personal interviews are used as a second phase of a research


project, following initial information gathered by survey. In-depth
interviews with a target market segment can yield more specific answers to
issues and questions brought up in the survey research phase. However,
the amount of time required for gathering the information and the low
response rate are both disadvantages; it is more difficult to convince
someone to participate in an extended interview than in a short survey.

Focus groups as illustrated in Figure 8.8, like personal interviews, allow


researchers to gather more specific responses to questions and to probe
some issues more deeply. However, focus groups are less structured in
order to allow participants to voice their opinions and feelings. Focus
groups generally consist of six to 12 participants who are members of
a particular market segment or target market. A third party facilitator leads
the group in expressing opinions and stating preferences regarding
products, services, or other issues.

Online focus groups typically run for one hour and have participants log
into chat room, where opinions and ideas can be expressed within a group.
The advantage of focus groups is that many views and opinions can be
learned in a short period of time. However, extroverted individuals can
overshadow timid participants so that only a few opinions are heard. This
concern is less of an online issue because participants cannot see each other
and feel more confident expressing themselves through typing.
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(c) Observation
Observation involves simply watching consumers as they make a purchase,
or while they engage in some activity that is being studied. Online
customer tracking is the Internet equivalent to observation. It involves of
simply observing rather than interacting with consumers as they navigate a
website and consider various purchase options. Using cookies and other
session monitoring tools, website marketers can easily collect data on
consumer preferences, dislikes and challenges in order to improve future
experiences at the site.

8.4.2 Secondary Research


Secondary research involves gathering information using websites as the
information source. The key to being efficient and effective as a researcher is by
identifying the websites which most likely to provide answers to the questions
posed in the research. By establishing and agreeing on the key question to be
answered through market research, as well as why that information will be
useful, researchers can zero in on their information needs. Understanding how
the information will impact other decisions also helps to further refine
information collection.

Effective marketing begins with solid research which helps to define and target
the most lucrative market segments with a marketing message that encourages
customers to buy. However, research is not a one-time event, at least in
successful companies. Ongoing research assists in improving and refining
products, services, brand image, and marketing messages to continually improve
the sales results.

When it comes to reports about consumers and e-commerce, companies such as


Jupiter Media Metrix, Forrester Research, and Cyber Dialogue are frequently
cited in the press as the sources of the latest data on trends in Internet activity.
Jupiter Media Metrix and Forrester primarily rely on experienced analysts. Cyber
Dialogue, in contrast, uses online panels of consumers; Internet users who are
willing to participate in online focus groups and surveys.

Although online market research is a fairly new phenomenon, Cyber Dialogue


has been in businesses since 1993. In 2000, however, the company shifted away
form pure Internet research and toward the customer relationship management
(CRM) sector. Now, it is applying its online research expertise to assist
companies in identifying their best current customers, researching potentially
lucrative new markets, and solidifying long-term relationships with those groups
in order to yield bigger profit margins.

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280 TOPIC 8 E-COMMERCE MARKETING CONCEPTS

SELF-CHECK 8.6

How do online surveys differ from the traditional process of mailing


surveys?

EXERCISE 8.4

1. How is online market research conducted?


2. Compare between these two types of online primary research:
surveys and observation.

Visit the following websites for more information on some popular secondary
research tools:
Source for international articles: www.factiva.com
Free global database of sources: www.corporateinformation.com
Market research report: www.marketresearch.com

A product or service can be differentiable by three different levels which are


core, actual or augmented product.

„Competitive markets‰ are the one with a lot of substitute products, easy
entry, low differentiation among suppliers, and strong bargaining power of
customers and suppliers. It has been emphasised that product branding is
important in making products truly unique and differentiable in the minds of
consumers.

A brand is a set of expectations, such as quality, reliability, consistency, trust,


affection, and loyalty that consumers have when consuming, or thinking
about consuming, a product or service from a specific company.

Marketers devise and implement brand strategies as a set of plans for


differentiating a product from its competitors and communicating these
differences effectively to the marketplace.

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Segmenting the market, targeting different market segments with


differentiated products and positioning products to appeal to the needs of
segment customers are key parts of branding strategies.

The main technologies that support online marketing: web transaction logs,
transaction logs, cookies, web bugs, database, data-warehouse, data-mining,
advertising networks and CRM systems.

These marketing technologies have spawned a new generation of marketing


techniques and added power to some traditional technique. Internet
marketing strategies for market entry for new firms include pure clicks/first
mover and mixed „click and bricks‰/alliances; and for existing firms include
pure clicks/fast follower and mixed „click and bricks‰/brand extender.

Online marketing techniques for online customers include permission


marketing, affiliate marketing, viral marketing and brand leveraging.

Market research involves gathering information that will help a firm to


identify potential products and customers. There are two general types:
primary research involves gathering first-hand information, and secondary
research relies on existing, published information as the basis for analysing
the market.

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Actual product Database


Advertising networks Data mining
Affiliate marketing Data warehouses
Augmented product Market entry
Blog marketing Mixed clicks and bricks
Brand equity Observation
Brand leveraging Online surveys
Brand strategy Permission marketing
Competitive advantage Personal interviews
Cookies Pure clicks/fists mover
Core product Viral marketing
Customer acquisition costs Web bugs
Customer relationship management Web transaction log
Customer retention costs

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T op i c E-commerce

9 Marketing
Communications
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the major forms of e-commerce marketing communications;
2. Describe online advertising methods used on the web;
3. Explain direct e-mail marketing, online catalogues and social
marketing for advertising purpose; and
4. Discuss how a website is used as a marketing communications
tool.

INTRODUCTION
Have you come across any advertisement online? What makes you to buy a
product or service advertised in the advertisement?

In this topic, you will learn on brands as a set of expectations that consumers
have about products offered. It elaborates on marketing activities that companies
engage in order to create those expectations. This topic will focus on
understanding online marketing communications all the methods that online
firms use to communicate to the consumer and create strong brand expectations.

All these questions will be answered as we go through this topic.


(a) What are the best methods for attracting people to a site and converting
them into customers?
(b) How does the design of a website affect sales?

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284 TOPIC 9 E - C O M M E R C E MARKETING COMMUNICATIONS

9.1 E-COMMERCE MARKETING


COMMUNICATIONS
Have you ever heard of online marketing communications? If yes, name two
types of e-commerce marketing communications that you know.

Marketing communications have a dual purpose:

(a) Branding
One purpose of marketing communications is to develop and strengthen a
firmÊs brands by informing consumers about the differentiating features of
the firmÊs products and services.

(b) Sales
In addition, marketing communications are used to promote sales directly
by encouraging the consumer to buy the products.

The distinction between the branding and sales purposes of marketing


communications is subtle but important because both are different in terms of:

(a) Branding communications rarely encourage consumers to buy now, but


instead focus on extolling the differentiable benefits of consuming the
product or service.

(b) Promotional sales communications almost always suggest that the consumer
„buy now‰, and they make offers to encourage immediate purchase.

There are many different forms of online marketing communications, including


online advertising, e-mail marketing, and public relations. Even the website itself
can be viewed as a marketing communications tool. In the following sections, we
will look in detail into all these components.

9.1.1 Online Advertising


Advertising is the most common and familiar marketing communications tool. It is an
attempt to disseminate information in order to affect buyer-seller transactions. In
traditional marketing, advertising was impersonal, one-way mass communication that
was paid for by sponsors. Online advertising has grown over 200% in the past five
years as advertisers are increasing their online spending by reducing the amount spent
on the traditional advertising. Even though online advertising is growing rapidly, it
still remains a small part of total advertising spending. It is expected to reach only 15%
of total advertising in 2012 (source: e-Marketer 2008).

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Online advertising (defined as a paid message on a website, online service, or


other interactive medium such as instant messaging) has both advantages and
disadvantages when compared to advertising in traditional media, such as
television, radio, and print (magazines and newspapers).

The biggest advantages of online advertising are the ability to target


advertisements to narrow segments and track performance of advertisements in
real time. Online advertisements also provide greater opportunities for two-way
interactive communication between advertisers and the potential customer.

EXERCISE 9.1

Do you think online advertisement is cheaper and more effective


than general advertisement? Discuss.

Let us look at Table 9.1 which summarises on the other reasons of why online
advertising is growing rapidly.

Table 9.1: Rapid Growth in Online Advertising

Reason Description
Cost Online advertisements are sometimes cheaper than those in
other media. In addition, advertisements can be updated at any
time with minimal cost.
Richness of format Web advertisements can effectively use the convergence of text,
audio, graphics and animation. In addition, games,
entertainment and promotions can easily be combined in
online advertisements.
Timeliness Internet advertisements can be fresh and up-dated regularly.
Participation The web is a participatory tool. Many people can communicate
with each other in the context of an online community.
Location-basis Using wireless technology, web advertising can be location
based; Internet advertisements can be sent to consumers
wherever they are in a specific location.

The following are the disadvantages of online advertising:


(a) Its cost versus its benefits;
(b) No adequate measurement to view its results;

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(c) No clear standard or language of measurement; and


(d) Difficulty in measuring the size of market, therefore it is difficult to
estimate rating, share, or reach and frequency.

Currently, the heaviest online advertisers are computer hardware and


media companies, followed closely by financial services companies. The
InternetÊs ability to deliver information-rich messages lends itself well to high
consideration, information-intensive products (i.e., products that consumers
typically research before purchasing).

Packaged goods (which buyers typically purchase based on brand rather than
research) are expected to have smaller shares of online advertising until
significant broadband and alternative advertisement platforms are widespread
enough to allow rich media advertising.

There are a number of different forms of online advertisement:


(a) Display advertisements (Banners and pop-ups);
(b) Rich media / Video advertisements;
(c) Paid search engine inclusion and placement;
(d) Sponsorships; and
(e) Referrals (Affiliate relationships marketing).

Let us look at the explanation provided for each form of online advertisement.

(a) Display Advertisements (Banners and Pop-ups)


Display advertisements are the first Internet advertisements. A banner
advertisement, as shown in Figure 9.1, displays a promotional message in a
rectangular box at the top or bottom of a computer screen. A banner
advertisement is similar to a traditional advertisement in a printed
publication, but has some added advantages. If clicked on, it can bring a
potential customer directly to the advertiserÊs website. It also is much more
dynamic than a printed advertisement as it can present multiple images or
able to change its appearance.

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Figure 9.1: Banner advertisement


Source: http://www.rosetta.com/WhatWeDo/InteractiveMarketing/
AcquisitionMarketer/Pages/Display101.aspx

Banner advertisements typically feature Flash video, animations, or


animated Graphics Interchange Formats (GIF), which display different
images in relatively quick succession, creating an animated effect. The
Interactive Advertising Bureau (IAB), an industry organisation, has
established voluntary industry guidelines for banner advertisements. A full
banner, which is the most common, is 468 pixels wide by 60 pixels high
with a resolution of 72 dots per inch (dpi ) and a maximum file size of 13K.

The IABÊs original guidelines listed specifications for three types of buttons
(a button is essentially a permanent banner advertisement) and four types
of banner advertisements:
(i) Full;
(ii) Half;
(iii) Vertical; and
(iv) Micro bar.

In February 2001, the IAB added specifications for a variety of new types of
advertisements:
(i) Skyscrapers is a tall, narrow banner advertisement almost three times
the height of the traditional vertical banner advertisement;
(ii) Rectangles of various sizes; and
(iii) A square pop-up which opens in a separate window.

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Pop-up advertisements (refer to Figure 9.2) are those banners and buttons
that appear on the screen without user calling for them. One type of it is
the pop-under advertisement that opens underneath a userÊs active
browser window and does not appear until the user closes the active
window. The advertisement remains visible until the user takes action to
close it. Pop-ups can appear prior to display of the consumerÊs target page,
during, or after the display on leaving.

Figure 9.2: Various pop-up advertisements


Source: http://cbsfilings.com/site/Pop-up_ad.html

These new types of advertisement allow marketers to develop


advertisements featuring enhanced interactivity as well as expanded
creativity. These advertisements are designed to help advertisers to break
through the „noise‰ and clutter created by the growing number of banner
advertisement impressions that a typical user is exposed to within a given
day.

(b) Rich Media/Video Advertisements


While traditional banner advertisements will undoubtedly remain the
dominant form for some time to come, the use of rich media/video
advertisements (advertisements employing Flash, DHTML, and Java, and
streaming audio and/or video) is the fastest growing form of online
advertising, even though its current total revenue is only a fifth of that of
search engine advertising.

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Rich media/video advertisements are interactive, seeking to involve users


to interact with the advertisement in some fashion, i.e., clicking on the
object. Rich media/video advertisements tend to focus more on branding
rather than sales.

Interstitial advertisements are considered a type of rich media


advertisements. What is an interstitial advertisement? If you do not know
what it is, refer below to equip yourself with the definition provided for it.

An interstitial advertisement (interstitial means „in between‰) is a way of


placing a full-page message between the current destination pages of a
user. Interstitials are usually inserted within a single site, and
displayed as the user moves from one page to the next. The interstitial
typically moves automatically to the page the user requested, after
allowing enough time for the advertisement to be read. Interstitials can
also be deployed over an advertising network and appear as users move
among sites.

Since the web is such a busy place, people have to find ways to cope with
over-stimulation. One means of coping is known as sensory input filtering.
This means that people learn to filter out the vast majority of the messages
coming at them. Internet users quickly learn at some level to recognise
banner advertisements or anything that looks like a banner advertisement
and to filter out most of the advertisements that are not exceptionally
relevant.

Interstitial messages, just like TV commercials, attempt to make viewers


captive to the message. Typical interstitials last ten seconds or less and force
the user to look at the advertisement for that specific time period. To avoid
the users from becoming boring, interstitials typically use animated
graphics and music to entertain and inform them.

A good interstitial will also have a „skip through‰ or „stop‰ option for
users who have no interest in the message. One disadvantage of interstitials
is that users may not understand that the advertisement they see on their
screen while they are waiting for a page to load is using „dead time‰;
meaning the advertisement is not taking any extra time period. Instead,
they may think the interstitial is slowing the arrival of the page they have
requested and thus, become annoyed.

Well, we have learned on interstitials, now let us move on superstitial.

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A superstitial (also called as Viewpoint or Unicast Transitional with Flash)


is a rich media advertisement that can be any screen display size up to full
screen 900 x 500, and with a file size of up to 600 KB.

Superstitials, which were created by Unicast Communications, differ from


interstitials in that they are pre-loaded into a browserÊs cache and do not
play until fully-loaded. When the file has finished downloading, like an
interstitial, it waits until the user clicks to another page before popping up
in a separate window. However, video advertisements are slowly
displacing superstitials.

Regardless of the type of online advertising, most large advertisers have


intermediaries such as advertising networks (i.e., DoubleClick) or
advertising agencies who act as brokers between advertisers and
publishers, placing the advertisements and tracking all activity related to
the advertisement.

Other options include the following:


(i) Banner Swapping
Banner swapping is an arrangement among firms who allow each
firm to have its banners displayed on another affiliate site at no cost.
(ii) Advertising Exchange
While advertising exchanges arrange for banner swapping among
firms, usually small firms cannot afford expensive advertisement
networks. Thus, small firms have the alternative to place their banner
advertisements using Yahoo Advertising, Google Advertising and
MicrosoftÊs Digital Advertising Solution, which are inexpensive.

SELF-CHECK 9.1

What are the differences between an interstitial advertisement and a


superstitial advertisement? Which one is more effective?

(c) Paid Search Engine Inclusion and Placement


This form of marketing communication has been one of the fastest growing,
in which revenue generation has grown from 1% of total online advertising
spending in 2000 to over 40% in 2008. The audience for search engine sites
is huge, almost equal to that of email user population. Today, there are

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many search engines, but 95% of total searches are concentrated on the top
20 sites, with Google, Yahoo! and MSN being the top three search engines.

Search engine sites originally performed unbiased searches (called as


organic search) of the webÊs huge collection of web pages and derived
most of their revenue from the banner advertisements. Since 1998, search
engine sites have slowly been transforming themselves into digital yellow
pages, where firms pay for inclusion in the search engine index (which was
formerly free and based on „objective‰ criteria) and/or pay for specific
location-placement or rank in the results of searches.

There are three types of search engine marketing:

(i) Keyword Paid Inclusion or Rank


Most search engines include paid inclusion programmes which, for a
fee, guarantee a website inclusion in its search results, more frequent
visits and suggestions for improving the organic search results. Some
search engines do not have a paid inclusion programme but instead
charge for placing small text advertisements in sponsored link areas.
For instance, Google allows two to three sponsor links at the very top
of their search result pages as clearly illustrated in Figure 9.3.

Figure 9.3: GoogleÊs sponsored links


Source:http://www.small-biz-marketing-tips.com/advertising-
with-google-adwords.html

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(ii) Advertising Keywords


Keyword advertising (refer to Figure 9.4) is where merchant purchase
keywords through a bidding process at search sites. The merchantÊs
advertisement will show up somewhere on the page whenever a
consumer searches for the word. The more the merchant pays, the
higher the rank and the greater the visibility of the advertisement on
the page. For instance, the following keyword advertisings such as
GoogleÊs AdWords, Yahoo!Âs PrecisionMatch and MicrosoftÊs
asCenter.

Figure 9.4: Keyword advertising


Source: http://marketingestremo.com/Keyword-Advertising.php

(iii) Advertising Networks


Network keyword advertising (also called as context advertising) is
introduced by Google in 2002. It differs from ordinary keyword
advertising. It consists of network of publishers who accepts the
advertisements placed by Google on their websites and receives a fee
for any click-throughs from those advertisements. Google called this
advertising as AdSense. Both AdSense and AdWords generate about
the same amount of revenue of advertising for Google.

(d) Sponsorships
You may wonder what is meant by the term „sponsorship‰. Let us look
below to find out its meaning.

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A sponsorship is a paid effort to tie an advertiser Ês name to a particular


information, an event, or a venue in a way that reinforces its brand in a
positive, yet not overtly commercial manner. Sponsorships typically are
more about branding than immediate sales.

A common form of sponsorship is an advertorial (in which editorial content


is combined with an advertisement message to make the message more
valuable and attractive to its intended audience), such as CrayolaÊs
sponsorship of an arts and crafts column on a parenting site. According to
eMarketer, sponsorship accounted for about $535 million in online
advertising revenue in 2007.

(e) Referrals (Affiliate Relationship Marketing)


What is an affiliate relationship? Refer below to find out its meaning.

An affiliate relationship permits a firm to put its logo or banner


advertisement on another firmÊs website from which users of that site can
click through to the affiliateÊs site. Affiliate relationships are essentially
strategic partnerships in which the interests of both parties are advanced
and there is no direct exchange of money.

Such relationships are often called as tenancy deals because they allow a
firm to become a „tenant‰ on another site without charge. In 2008, referrals
generated about $2.1 million revenue in the US.

Several types of affiliate relationships are common. In some cases, the firms
share a single corporate parent or investor group that is seeking to optimise
the performance of all its sites by creating links among its „children‰ sites.
In other cases, two sites may sell complementary products and the firms
may strike an affiliate relationship to make it easier for their customers to
find the products they are looking for.

Perhaps the largest and best-known affiliate relationship involves Amazon


and Toys R Us as shown.

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Amazon, seeking to become a general merchandiser, recognised that it did


not have the expertise to purchase, warehouse, and fulfil orders for toys,
which is one of the fastest growing product categories on the web. While,
Toys"R"Us at that time was in a pitched battle with eToys.com and
recognised that it did not have the web presence to compete with eToys.

Thus, Amazon and Toys"R"Us struck an affiliate deal. The Toys"R"Us logo
and front-end ordering machinery is available as a button on the Amazon
site. Toys"R"Us accepts and fulfils orders for toys, and performs all the
back-end purchasing and warehousing. While, Amazon receives a
commission on sales. Both firms gain the benefits from their relationship,
as do their customers.

ACTIVITY 9.1

Among the five online advertising methods, which has been


discussed by marketing communication tool on the web? Why do
you say so?

ACTIVITY 9.2

E-mail advertisement is very popular. What are the benefits of using


e-mail to advertise?

9.1.2 Direct E-mail Marketing


E-mail marketing messages sent directly to interested users (direct e-mail
marketing) have proven to be one of the most effective forms of marketing
communications. The key to effective direct e-mail marketing is „interested
users‰. Direct e-mail marketing is not spam, which involves sending unsolicited
e-mail to a mass audience of Internet users who have expressed no interest in the
product. Instead, direct e-mail marketing messages are sent to an „opt in
audience‰ of Internet users who have expressed at one time or another, interest
in receiving messages from the advertiser.

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By sending e-mail to an opt-in audience, advertisers are targeting interested


consumers. E-mail messages may be combined with brief audio or video clips
promoting a product and with on-screen links that users can click on to make a
purchase. Response rates to e-mail campaigns range from 3% to 10%, depending
on the targeting. E-mail also is an interactive medium, and it can combine
advertising and customer service. Because of the comparatively high response
rates and low cost, direct e-mail marketing is the fastest growing form of online
marketing.

The primary cost of e-mail marketing is for the purchase of the list of names to
which the e-mail will be sent. Usually, sending the e-mail is virtually cost-free.
Due to the cost-savings possibility, the short time to market, and high response
rates, companies are expected to increasingly use e-mail to communicate directly
with consumers. The downside of this growth is that e-mail response rates are
expected to decline as competition for consumer attention becomes fiercer, and as
users become annoyed by their bulging in-boxes e-mail. Users can employ
software filter programmes to eliminate those unwanted e-mail messages.

ACTIVITY 9.3

Is spamming ethical? State your reasons.

9.1.3 Online Catalogues


Online catalogues are the equivalent of a paper-based catalogue. The basic
function of a catalogue is to display the merchantÊs wares. The electronic-version
catalogue typically contains a coloured image of each available product, a
description of the item, as well as its size, colour, material composition and
pricing information.

While simple catalogues are technically, hard-coded HTML pages and graphics
displaying wares, most sites with more than 15-20 products generate catalogue
pages from a product and price database that can be easily changed. Simply by
clicking on an order button at the site, customers can make a purchase
instantaneously. For more detail information, refer to online catalogues from
Amazon.com and ParksonOnline.com.

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ACTIVITY 9.4
Online catalogues are more dynamic than print catalogues. Do you
agree with this statement? Discuss.

9.1.4 Social Network Marketing


With the creation of Web 2.0 technology, user-generated content and the use of
the Internet for socialising and sharing have undergone tremendous growth.

According to eMarketer, 57.5% of Internet users, or 127 million people in the US


will visit a social networking site at least once a month in 2010. MicrosoftÊs
interest in Facebook and GoogleÊs purchase of YouTube indicate the potential of
social networking site as marketing communication tools for businesses and
advertisers. In 2009, all forms of social marketing were expected to generate $2.8
billion in revenues, and it is expected to reach $4 billion in 2012.

Social networking advertisements adopt many kinds of approach using the


Internet technologies to spread messages far, wide and quickly as compared to
the traditional viral marketing or word-of-mouth marketing.

There are three main types of social networking marketing:

(a) Blog Advertising


In 2009, blog advertising generated about $549 million of revenues and is
expected to grow to $746 million by 2012. Blogs are typically difficult to
produce revenue as very few blogs attract large audience and the central
theme of most blogs is highly personal. Nevertheless, blog creators and
audience are ideal targets of many products and services as they are more
educated, have higher income, and are opinionated individuals.

(b) Social Network Advertising


In 2009, social network advertising generated $2 billion in revenue although
it is still in its infancy stage. However, most of the advertising activities
focus on the leading sites such as MySpace ($850 million), Facebook ($305
million), and Youtube ($130 million). All these revenues accounted for 94%
of total social network advertising. Social networking sites offer advertisers
all sort of advertising format, including banner advertisements and
sponsorship. For instance, Adidas, Burger King, General Electric have
profile pages on MySpace.

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Let us look at the advertisement placed on Facebook, as shown in Figure


9.5.

Figure 9.5: Advertisement on Facebook


Source: http://mashable.com/2008/06/24/facebook-and-visa-team-
up-to-target-small-businesses/

Even though search engine sites have audience which is twice the size of
social networking site, it is expected that the audience size will equal
between the two types of site in the next five years. Therefore, advertisers
should not underestimate the potential of social networking sites as an
effective marketing communication tool.

(c) Game Advertising


In 2009, video in-game advertising generated $510 million in the US, and is
expected to reach $650 million in 2012. Most games are played in social
environments with multiple gamers in the same room or over the Internet.
Over 800 million games were downloaded in 2008. Coca-Cola, Burger King
and Taco Bell have used „adver-games‰ (a combination of advertisements
and games) to promote brands as shown in Figure 9.6.

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Figure 9.6: Games combined with advertisement


Source: http://jasonlog.supersized.org/plugin/tag/advertising

The limitations of game advertising are the game content which tend to be
attractive to younger generation by additional aspects such as violence, mayhem,
and war-like scenarios, or sexual content. The advertisers do not want to be
linked to such aspects which commonly appear in games.

9.1.5 Mixing Offline and Online Marketing


Communications
The most successful marketing communications campaigns have incorporated
both online and offline tactics, rather than relying too heavily on one or the other.
Thus, it managed to drive heavy traffic to a website. The objective is to draw the
attention of people who are already online and persuade them to visit a new site,
as well as to attract the attention of people who will be potentially going online in
the near future to visit the new site as well.

Several research studies have shown that the most effective online
advertisements were those that used consistent imagery with campaigns running
in other media at the same time. Offline mass media such as television and radio
have nearly 100% market penetration into the 140 million households in the
United States. More than 35 million adults read newspapers everyday. It would
be foolish not to use these more popular media to drive traffic to the online world
of commerce.

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In the early days of e-commerce, the Internet audience was quite different from
the general population, and perhaps was best reached by using online marketing
alone. This is no longer true as the Internet population becomes much more like
the general population. Many online ventures have used offline marketing
techniques to drive traffic to their websites, to increase awareness and to
build brand equity.

For instance, Martha Stewart includes advertisements in her magazine, Martha


Stewart Living (refer to Figure 9.7), directing readers to the Martha Stewart
website. A picture in the magazine may show a recently redesigned kitchen with
a listing of the manufacturers of the kitchenÊs appliances. For more detailed
information and web links to the manufacturers, readers are directed to
www.marthastewart.com. Such „tie-ins‰ between a print product and its website
have proven to be very successful in driving web traffic.

Figure 9.7: Martha Stewart Living Magazine


Source: http://designinspiration.typepad.com/design_inspiration_
planet/2008/08/martha-does-stencilling.html

Another example of the online/offline marketing connection is the use of print


catalogues by the online ventures. Some online ventures have created paper
catalogues and mailed them to their customers to improve their relationship with
that particular group. Amazon has one, and so does Unilever, a consumer
product company.

In 2000, Unilever took its database of customer addresses, which had been
collected online, and mailed a paper magazine filled with cooking and cleaning
tips to that list. Although an electronic magazine would have been less costly,

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Unilever believed a paper publication to be better suited for providing the


information.

ACTIVITY 9.5

What kinds of products are most suitable to be advertised online?

EXERCISE 9.2

1. Explain the differences between branding communication and


sales/promotional communications.
2. How is the interstitial advertisement different from the
superstitial advertisement?
3. Explain how e-mail is used for advertising.

You can visit the following websites to get more information on:
(a) Online advertising:
https://www.google.com/adsense
https://adwords.google.com
(b) Example of an interstitial advertisement:
http://marketingsolutions.com/interstitial.htm
(c) Tips for improving a siteÊs listing:
http://www.searchenginewatch.com

9.2 THE WEBSITE AS MARKETING


COMMUNICATIONS TOOL
One of the strongest online marketing communications tool is a functional
website that customers can easily find. In some ways, a website can be viewed as
an extended online advertisement. An appropriate domain name, search engine
optimisation, and proper website design are integral parts of a coordinated
marketing communications strategy and ultimately, necessary conditions for
e-commerce success.

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9.2.1 Appropriate Domain Names


One of the first communications an e-commerce site has with a prospective
customer is via its URL. Domain names play an important role in reinforcing an
existing brand and/or developing a new brand. There are a number of
considerations to take into account in choosing a domain name.

Ideally, a domain name should be short, memorable, not easily confused with
others, and difficult to misspell. If possible, the name should also reflect the
nature of the companyÊs business. Companies that choose a name unrelated to
their business must be willing to spend extra time, effort, and money to establish
the name as brand. Dot.com domain names are still considered the most
preferable, especially in the United States.

Today, however, it may be difficult to find a domain name that satisfies all of the
above criteria. Many of the „good‰ dot.com domain names have already been
taken.

9.2.2 Search Engine Optimisation


Despite the fact that major search engines are moving toward a „pay for
inclusion/ranking‰ model, it is still advisable to take the steps needed to
objectively improve a siteÊs visibility to search engine. The major search engines
still accept non-paying sites, and still send crawler programmes around the Web
to index and include pages in their databases free of charge.

There are hundreds of search engines in the world, most of which do not charge
for inclusion or placement. Also, given that 42% of shoppers find a vendor
entering the name of a product into a search engine, optimising the firmÊs
ranking in search engines becomes an important element in a website marketing
campaign.

Search engines produce lists of „hits‰, sometimes hundreds of them. Refer below
to find out the meaning of hit.

A hit is the result of a search engineÊs investigation of its database of


indexed web pages.

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Websites appearing at the top of these lists, especially on the first page, are more
likely to be visited than those further down the list because they are assumed to
be more relevant to the searcher. Consumers may never become aware of sites
that are listed later in a search engine report. Only 7% of consumers look any
further than the first three pages of results.

So, how to make your websites to appear in the first few pages rather than at the
last few pages? The following steps will help you in your quest to make sure
your websites gain the prominence of the search engine:

(a) Register with Many Search Engines


In order to improve a firmÊs search engine ranking, the firm should register
with as many search engines as possible, so that a user looking for similar
sites has a chance of coming across that particular site.

(b) Ensure your Keywords Match the Prospective Customers Keywords


Ensure the keywords used in the website description match with the
keywords likely to be used as search terms by the prospective customers.
Using a keyword of „lamps,‰ for example, will not help your search engine
ranking if most prospective customers are searching for „lights.‰ Search
engines differ, but most search engines read homepage title tags, metatags,
and other text on the homepage in order to understand and index the
content of the page.

Keywords are contained in a siteÊs metatag.

Metatag is an HTML tag containing a list of words describing the site.


Metatags are heavily used by search engines to determine the relevance of
sites to search terms used frequently by users. The title tag provides a brief
description of the siteÊs content. The words in both the metatags and the
title tags should match words on the homepage.

(c) Link the Website to Many other Websites


Link the website to as many other websites as possible. Some search
engines, such as Google.com, rank sites based on the number of links from
other websites. The Internet is a highly-interconnected series of sites,
surrounded by a set of isolated sites that are not well-connected. Search
engines such as Google are guessing that when you enter a query for a
product, chances are good that the product is located at one of the highly-
connected websites.

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The assumption is the more links there are to a site, the more useful the site
must be. How can a firm increase links to its site? Placing advertising is one
way: banner advertisements, buttons, interstitials, and superstitials are all
links to a firmÊs site. Entering into affiliate relationships with other sites is
another method.

While the three mentioned steps are a beginning, increasing a firmÊs


ranking is still a bit of an art form and usually requires a full-time
professional effort to tweak metatags, keywords, and network links before
solid results are obtained. The task often requires several months and is
complicated by the fact that each search engine uses slightly different
indexing methods. Search engines fail to find millions of web pages, and
are biased toward large firms that place advertising on other sites.

A recent survey by CyberAtlas Research found that over half of the firms
polled work on search engine optimisation monthly. Many commercial
sites rely on ranking specialists who, for a fee, will create metatags and
descriptions that will push a siteÊs ranking toward the top. Some specialists
even guarantee a top position, although how near the top is the key
question. Being in the top 100 is not as valuable as being in the top 10, or
even top 25.

9.2.3 Website Functionality


Attracting users to a companyÊs site is the objective of marketing, but once a
consumer is at a site, the sales process begins. This means that whatever brought
the individuals to the site becomes much less relevant, and what they find at the
site will ultimately determine whether they will make a purchase or return.

These seven basic design features, that were necessary from a business point of
view, help to attract and retain the customers:
(a) Make it as an informative site;
(b) Employ simple navigation (ease of use);
(c) Use redundant navigation;
(d) Make it easy for customers to purchase;
(e) Feature multi-browser functionality;
(f) Apply simple graphics; and
(g) Use legible text.

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Researchers have also found a number of other design factors that marketing
managers should be aware of:

(a) Compelling Experiences


Sites that offer a „compelling experience‰, in the sense of providing
entertainment with commerce or interactivity or human interest or that is
perceived as „fun‰ to use, are more successful in attracting and keeping the
visitors.

(b) Fast Download Times


Long download times frustrate consumers and lead to high rates of
abandonment, although this can be mitigated with online amusement to
distract the consumer.

(c) Easy Product List Navigation


The most important factor in predicting monthly sales is product list
navigation and choice features that save consumersÊ time.

(d) Few Clicks to Purchase


AmazonÊs „one click‰ purchase capability is a powerful tool for increasing
sales.

(e) Customer Choice Agents


Increasingly, sites are using interactive consumer decision aids to help the
consumer to make choices. Recommendation agents (also called as
configurators) help the consumer to make quick and correct choices. Dell
Computer uses an online configuration to help consumers to decide on
what computer to order.

Refer below to know more on recommendation agents.

Recommendation agents are programmes that can recommend a product


based on either a consumerÊs completed survey or a review of a
consumerÊs profile.

(f) Responsiveness
Responsiveness to consumer inquiries through automated customer
response systems has been found to affect return visits and purchases.

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No matter how successful the offline and online marketing campaign is, a
website that fails to deliver information and customer convenience spells
disaster. Attention given to site design features will also help to ensure success.

You can visit these websites to get more information on:


(a) Service personalisation:
http://www.ecommerceandmarketing.com
http://www.personalizationmall.com
(b) Promotion ideas for the web:
http://www.selfpromotion.com
(c) Enhancing the popularity of a websiteÊs link:
http://www.marketleap.com

ACTIVITY 9.6

In your own words, list and describe some website design features
that give an impact on online purchasing.

EXERCISE 9.3

1. Explain the ways in which a website can be used as a marketing


communications tool.
2. What are the key attributes of a good domain name?

Marketing communications include promotional sales communications that


encourage immediate purchases and branding communications that focus on
extolling the differentiable benefits of consuming a product or service.
There are many different forms of marketing communications:
Banners;
Rich media/video advertisements;
Interstitial advertisements;

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Paid search engine inclusion and placement;


Sponsorships;
Affiliate relationships;
Direct e-mail marketing;
Online catalogues;
Social network advertisements; and
Offline and online marketing communications.
A functional website that customers can find is one of the strongest online
communication tools.
The integral parts of a coordinated marketing communications strategy are:
Appropriate domain name;
Search engine optimisation; and
Website functionality.

Affiliate relationship Rich media/video


Banner Search engine
Blog Social network
Game Sponsorship
Interstitial Superstitial
Pop-up customer retention costs

Copyright © Open University Malaysia (OUM)


T op i c Legal, Ethical
10 and Societal
Impact of
E-commerce
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the differences between legal and ethical issues in
e-commerce;
2. Explain major legal issues in e-commerce;
3. Discuss the difficulties of protecting privacy in e-commerce;
4. Identify issues of intellectual property rights in e-commerce;
5. Discuss other legal issues in e-commerce;
6. Explain e-commerce fraud and the impact to society; and

INTRODUCTION
Do you know that all commerce involves a number of legal, ethical, and
regulatory issues? Copyright, trademark and patent infringement, freedom of
thought and speech, theft of property and fraud are not new issues in the world
of commerce. However, e-commerce adds to the scale of these issues. It also
raises a number of questions about what constitutes illegal behaviour versus
unethical, intrusive or undesirable behaviour.

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308 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

This topic examines some of the legal and ethical issues arising from e-commerce
and various legal and technical remedies and safeguards. This topic also examines
some social impacts of e-commerce and finally, assesses the future of e-commerce.

10.1 LEGAL AND ETHICAL CONCEPT


In theory, you should be able to distinguish between legal (also addresses as law)
issues and ethical issues as shown below.

Laws are enacted by government and developed through case precedents


(common laws).

Laws are strict legal rules governing the acts of all citizens within their
jurisdictions. If a person breaks the law, they have done something illegal and
can be held liable for punishment by the legal system.

Ethics is a branch of philosophy that deals with what is considered to be


right and wrong. Over the years, philosophers have proposed many ethical
guidelines, yet what is unethical is not necessarily illegal.

Ethics is supported by common agreement in a society as to what is right and


wrong. However, they are not subject to legal sanctions (except when they
overlap with activities that are also illegal).

E-commerce opens up a new spectrum of unregulated activity, where the


definitions of right and wrong are not always clear. Business people engaged in
e-commerce need guidelines as to what behaviours are reasonable under any
given set of circumstances as portrayed in the following scenarios:

A website collects information from potential customers and sells it to its


advertisers. Consequently, the customers receive numerous pieces of
inappropriate and intrusive e-mail. Should junk e-mail of this sort be
allowed?

A company allows its employees to use the web for limited personal use.
Unknown to the employees, the employer not only monitors the
employeesÊ messages, but also examines the content. If the monitors find
objectionable content, should the company be allowed to fire the offending
employees?

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Whether the above actions are considered unethical (or even illegal)
depends on the regulatory and value systems of the country in which they occur.
What is unethical in one culture may be perfectly acceptable in another. Many
Western countries, for example, have a much higher concern for individuals and
their rights for privacy than do some Asian countries. In Asia, more emphasis is
placed on the benefits to society rather than on the rights of individuals.

ACTIVITY 10.1

If an action is legal, it must also be ethical. Do you agree with this


statement? Give reasons for your answer.

10.2 LEGAL ISSUES VERSUS ETHICAL ISSUES


We have looked at the definitions given for both legal and ethical concepts and
are able to differentiate between the two concepts.

Now, let us look at the legal and ethical issues related to e-commerce which will
be discussed in the coming sections:

(a) Privacy
Internet users in many countries rate privacy as their first or second top
concern.

(b) Intellectual Property Rights


Rights to intellectual property are easy to violate on the Internet, resulting
in billions of dollars of losses to the owners of the patent rights.

(c) Free Speech versus Censorship


The issues of attempting to control offensive, illegal, and potentially
dangerous information on the Internet are controversial. This collides with
the rights of free speech.

(d) Other legal issues


Numerous other legal issues related to e-commerce and the internet.

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310 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

You can visit these websites to get more ideas on ethical issues in e-commerce:

(a) Legal issues, ethical issues, privacy and security:


www.webliminal.com/Lrn-web09.html

(b) Legal aspects of e-commerce:


www.inc.com/articles/2000/05/19706.html

ACTIVITY 10.2

Give an example of an e-commerce activity that is unethical but legal.

EXERCISE 10.1

1. Define ethics and distinguish it from laws.


2. List the major e-commerce ethical/legal issues presented in this
topic.

10.3 PRIVACY
Privacy has long been a legal, ethical, and social issue in many countries. What
do you understand about privacy and why is it important to protect your
privacy? As you may aware, privacy means different things to different people.
The definition of privacy can be interpreted quite broadly. Let us look at the
definition provided below for privacy.

Privacy is the right to be left alone and the right to be free of unreasonable
personal intrusions.

However, the following widely-used two rules will show you why it is difficult
to determine and enforce privacy regulations in certain situations:
(a) The right of privacy is not absolute. Privacy must be balanced against the
needs of society; and
(b) The publicÊs right to know is superior to the individualÊs right of privacy.

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TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE 311

Let us move on to look at the issues involved in online privacy; the influence of
e-commerce on privacy:
(a) Information collection;
(b) Privacy protection; and
(c) Technological solutions to privacy invasion.

10.3.1 Information Collection


In the past, the complexity of collecting, sorting, filing, and accessing
information manually from several different government agencies was, in many
cases, a built-in protection against misuse of private information. It was simply
too expensive, cumbersome, and complex to invade a personÊs privacy. The
Internet, in combination with large-scale databases, has created an entirely new
dimension of accessing and using data.

The inherent power in systems that can access vast amounts of data can be used
for the good of society. For example, by matching records with the aid of a
computer, it is possible to eliminate or reduce the following crimes:
(a) Fraud;
(b) Government mismanagement;
(c) Tax evasion;
(d) Welfare cheats; and
(e) Employment of illegal immigrants.

However, you must ask yourself of what price must every individual pay in
terms of loss of privacy so that the government can better apprehend these types
of crimes.

The Internet offers a number of opportunities to collect private information about


individuals. Here are some of the ways that the Internet can be used to find
information about an individual:
(a) By reading an individualÊs newsgroup postings;
(b) By looking up an individualÊs name and identity in an Internet directory;
(c) By reading an individualÊs e-mail;
(d) By conducting surveillance on employees;
(e) By wiretapping wire line and wireless communication lines and listening to
employees;
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312 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

(f) By asking an individual to complete a website registration; and


(g) By recording an individualÊs actions as they navigate the web with a
browser, usually by using cookies.

Let us focus on the two most common ways of gathering information on the
Internet:

(a) Website Registration


Virtually, all B2C and marketing websites ask visitors to fill out registration
forms. During the process, customers voluntarily provide their names,
addresses, phone numbers, e-mail addresses, and sometimes their hobbies
and likes or dislikes in return for information or some other item of
exchange.

There are few restraints on the ways in which the site can use this
information. The site might use it to improve customer service or its own
business. Or, the site could just as easily sell the information to another
company, which could use it in an inappropriate or intrusive manner.

(b) Cookies
Another way that a website can gather information about an individual is by
using cookies (refer below). Cookies enable sites to keep track of the usersÊ
identity, without having to constantly ask the users to identify themselves.

In Internet terminology, a cookie is a small piece of data that is passed back


and forth between a website and an end userÊs browser as the user
navigates the site.

Originally, cookies were designed to help with personalisation. However,


cookies also can be used to invade an individualÊs privacy. Cookies allow
websites to collect detailed information about a userÊs preferences, interests,
and surfing patterns. The personal profiles created by cookies are often
more accurate than self-registration because users have a tendency to falsify
information in a registration form.
Netscape and Microsoft introduced options which enable users to block the
use of cookies. Users can protect themselves against cookies by:

(i) Deleting the Cookies


The user can delete the cookies from their computers. However, the
user will be forced to keep re-entering information and in some
instances, may be blocked from viewing particular pages.

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(ii) Using Anti-Cookie Software


The user can use anti-cookie software such as Pretty Good PrivacyÊs
Cookie Cutter or LuckmanÊs Anonymous Cookie. Anti-cookie
software disables all cookies and allows the user to surf the web
anonymously. Nevertheless, disabling the cookies will present the
same problem encountered by those who delete the cookies; need to
re-enter information and blocked from viewing.

Let us look at the MicrosoftÊs product called as Passport which


resembles some of the cookiesÊ characteristics as shown below.

Passport is an Internet strategy that lets consumers to permanently enter a


profile of information along with a password and use this information and
password repeatedly to access services at multiple sites. Critics say that
Passport has the same opportunities as cookies to invade an individualÊs
privacy. Critics also feel that the product gives Microsoft an unfair
competitive advantage in e-commerce.

10.3.2 Privacy Protection


The ethical principles commonly used when it comes to the collection
and use of personal information also apply to information collected in
e-commerce. These principles are summarised in Table 10.1.

Table 10.1: Ethical Principles in E-commerce

Ethical Principles Description


Notice/ Awareness Sites must disclose their information practices before collecting
data such as identification of collector, uses of data, other
recipients of data, nature of collection, voluntary of required,
consequences of refusal, and steps taken to protect the
confidentiality, integrity and quality of the data.
Choice/ Consent There must be a choice regime in place allowing consumers to
choose how their information will be used for secondary
purposes other than supporting the transaction, including
internal use and transfer to third parties. The following models
must be available:
(i) Opt-in Model
This model requires an affirmative action by the
consumer to allow collection and use of information. For
instance, using opt-in, consumers would first be asked if

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314 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

they approved of the collection and use of information,


and directed to check a selection box if they agreed.
Otherwise, the default is not to approve the collection of
data.
(ii) Opt-out Model
In the opt-out model, the default is to collect information unless
the consumer takes an affirmative action to prevent the
collection of data by checking a box or by filling out a form.
Access/ Consumers should be able to review and contest the accuracy
Participation and completeness of data collected about them in a timely and
inexpensive process.
Security Data collectors must take reasonable steps to assure that
consumerÊs information is accurate and secured from
unauthorised used.
Enforcement A method of enforcement and remedy must be available.
Otherwise, there is no real deterrent or enforceability for
privacy issues. This can involve self-regulation, legislation
giving consumers legal remedies for violations, or federal
statutes and regulation.

In many countries, the debate continues about the rights of the individual versus
the rights of society. Some feel that the Internet Service Providers (ISP) should be
the regulators; others feel that self-regulation is the best alternative. However,
some empirical data suggest that self-regulation does not work.

Research found that most of the commercial websites have poor privacy
protection and very few sites provided end users with the following privacy
protections:
(a) Details about the siteÊs information-gathering and dissemination policies;
(b) Choice over how their personal information is used;
(c) Control over their personal information;
(d) Verification and oversight of claims made by the site; and
(e) Resource for resolving user complaints.

Fortunately, users can take steps to improve their online privacy.

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TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE 315

10.3.3 Technological Solutions to Privacy Invasion


Privacy-enhancing technologies for protecting user privacy during interactions with
websites are being developed. Most of these tools emphasise on the ability of
individuals to protect their communications and files from illegitimate individuals or
organisations.

The creation of private and public policies that enable consumers to control the
collection and use of information that is gathered in the course of market
transaction is also in the developmental stage.

Table 10.2 describes some ways in which technology can be used to protect
privacy.

Table 10.2: Technological Protection for Online Privacy

Technology Products Protection


Secure e-mail Ziplip.com; E-mail and document
SafeMessage.com encryption
Anonymous remailers WWW Anonymous Send e-mail without trace
Remailer

Anonymous surfing Anonymizer.com Surf without a trace

Cookie managers CookieCrusher Prevent client computer


from accepting cookies

Disk/file erasing FileWiper; Eraser Completely erases hard


programmes drive and floppy files

Policy generators OECD Privacy Policy Automates the development


Generator of an OECD privacy
compliance policy

Privacy Policy Reader P3P Software for automating the


communication of privacy
policies to users

Source: Adapted from Laudon, K. C., & Traver, C. G. (2009).

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316 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

Perhaps the most comprehensive technological privacy protection effort is the


Platform for Privacy Preferences Project (P3P) sponsored by the World Wide
Web Consortium (W3C), which is an international, non-profit, industry-
supported web standards group. Refer below in order to know more on P3P.

P3P is a standard designed to communicate to Internet users of a websiteÊs


privacy policy and to compare that policy to the userÊs own preferences, or to
other standards. P3P does not establish privacy standards and basically relies
on government and industry to develop them. P3P works through a userÊs
web browser. On the server side, P3P enables sites to translate their privacy
policies into standardised machine-readable XML format that can be read
either by the browser or by installed software plug-ins. On the user client side,
the browser automatically fetches a websiteÊs privacy policy and informs the
user.

You can visit these websites to get more ideas on:

(a) E-commerce/Internet privacy:


http://www.privacy.org/
http://http://www.privacyrights.org/online-privacy-and technology
(b) Information about cookies:
http://www.microsoft.com/info/cookies.mspx
(c) Guide to online privacy:
http://www.cdt.org/privacy/guide

EXERCISE 10.2

1. Define privacy.
2. What are cookies and what do they have to do with online
privacy
3. How is the „opt-in‰ model of informed consent different from
„opt-out?‰

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TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE 317

10.4 INTELLECTUAL PROPERTY RIGHTS


According to the World Intellectual Property Organisation (WIPO), intellectual
property refers to „creations of the mind such as inventions, literary and artistic
works, symbols, names, images and designs used in commerce.‰

Whereas a privacy protection is the major concern for individuals, intellectual


property protection is the major concern of those who own the property itself.
Intellectual property rights are one of the foundations of modern society.
Without these rights, the movie, music, software, publishing, pharmaceutical and
biotech industries would collapse.

In Malaysia, Intellectual Property Rights are administered by Intellectual


Property Corporation of Malaysia, an agency under the Ministry of Domestic
Trade, Co-operatives and Consumerism (go to www.myipo.gov.my for further
reference).

There are three main types of intellectual property in e-commerce as shown in


Figure 10.1.

Figure10.1: Types of intellectual property in e-commerce

Let us look at the detailed explanation for each type of intellectual property in
the coming sections.

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318 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

10.4.1 Copyrights
So, what is a copyright? Do you know the answer?

A copyright is an exclusive grant from the government that confers on its


owner an essentially exclusive right to:
(a) Reproduce a work in whole or in part; and
(b) Distribute, perform or display it to the public in any form or manner,
including in the Internet.

In general, the owner has an exclusive right to export the copyrighted work to
another country. Copyright does not protect ideas as it only protects their
expression in a tangible medium such as paper, cassette tape, or handwritten
notes.

Copyrights usually exist in the following works:


(a) Literary works (e.g., books and computer software);
(b) Musical works (e.g., compositions);
(c) Dramatic works (e.g., plays);
(d) Artistic works (e.g., drawings, paintings); and
(e) Sound recordings, films, broadcasts, cable programmes.
(f) WebsitesÊ images, photos, logos, texts, HTML, JavaScript and other
materials.

The greatest threat to intellectual property is wide-scale individual theft. Millions


of individuals are using the Internet to illegally download music, videos, games,
software and other digital products. However, the theft of even an obscure piece
of research in which only a few are interested is still considered as a theft.

Various international treaties provide global copyright protection. Of these, the


Berne Union for the Protection of Literary and Artistic Property (Berne
Convention), which dates back to 1886, is one of the most important.. It is
administrated by the WIPO and is supported by over 90 percent of the worldÊs
countries.

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TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE 319

In Malaysia, the Copyright Act 1987 confers the exclusive right to the owner of a
copyright for a specific period. The Copyright (Amendment) Act 1997 which
amended the Copyright Act 1987 came into force on 1999 to make unauthorised
transmission of copyright works over the Internet as a copyright infringement
(refer below).

Copyright infringement is the unauthorised use of copyrighted material in


a manner that violates the copyright owner's exclusive rights, such as the
right to reproduce or perform the copyrighted work.

(Source: http://www.copynot.com/)

A copyright owner may seek a court injunction to prevent or stop any


infringement and to claim damages. Certain kinds of copyright infringements
could incur criminal liabilities such as:
(a) Commercial production of infringed works;
(b) Selling or dealing in infringed works;
(c) Possessing infringed works for trade or business; and
(d) Manufacturing and selling technology for defeating copyright protection
systems.

In the United States, congressional legislation has proposed to make it unlawful


the act of manufacturing, importing, providing, or trafficking in any interactive
device that does not include and utilise certified security technology.

If this measure becomes law, the implication is that virtually any digital
device such as computer, laptop, MP3 player, digital camera and so on must
include government-approved copy protection that makes it impossible to
reproduce copyrighted material.

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320 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

It is possible to use software to produce digital content that cannot be copied.


Two approaches are used to design effective electronic copyright management
systems:

(a) Preventing copyright violations by using cryptography; and

Cryptography can be defined as the conversion of data into a scrambled code


that can be deciphered and sent across a public or private network.

(Source: http://www.barcodesinc.com/articles/cryptography2.htm)

(b) Tracking copyright violations.

Visit the following sites for more information on:


(a) Preventing copyright violations
http://domino.research.ibm.com/comm/wwwr_thinkresearch.nsf/
pages/packinginfo396.html
(b) Tracking copyright violations
http://www.fourmilab.ch/documents/digital-imprimatur/

Another successful method to protect the digital content is through digital


watermarks. Similar to watermarks on fine paper, which indicate the marker
of the paper, digital watermarks are unique identifiers that are imbedded in
the digital content. Although they do not prevent an individual from making
illegal copies, they do make it possible to identify the pirated works. If a pirated
copy is placed on the Internet, then sophisticated search programmes such a
DigimarcÊs MarSpider, can be used to locate the illegal copies and notify the
rightful owner.

10.4.2 Trademarks
Do you know what is meant by the term „trademarks‰? Refer below in order to
find out the meaning of the term.

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TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE 321

Trademarks are symbols (like logos and brand names) that distinguish
goods and services in the marketplace. If someone deliberately uses your
registered trade mark, without your knowledge or consent, they may be
guilty of the crime of counterfeiting (forgery).

(Source: http://www.copynot.com/)

The symbol can be composed of words, designs, letters, numbers, shapes, a


combination of colours, or other such identifiers. Trademarks need to be
registered in a country in order to be protected by the countryÊs law (for example,
MalaysiaÊs Trade Marks Act 1976). To be eligible for registration, a trademark
must be distinctive, original, and not deceptive. Once registered, a trademark
lasts forever, as long as a periodic registration fee is paid.

The owner of a registered trademark has the exclusive rights to:


(a) Use the trademark on goods and services for which the trademark is
registered; and
(b) Take legal action to prevent anyone else from using the trademark
without consent on goods and services (identical or similar) for which the
trademark is registered.

The rapid growth and commercialisation of the Internet have provided unusual
opportunities for existing firms with distinctive and famous trademarks to
extend their brands to the Internet.

These same developments have provided malicious individuals and firms the
opportunity to:
(a) Take advantage of Internet domains built upon famous trademarks; and
(b) Confuse consumers by lessening the value of famous or distinctive
trademarks (including your name or a movie starÊs name).

The conflict between legitimate trademark owners and malicious firms was
allowed to grow because Network Solution Incorporation (NSI), which is the
InternetÊs sole agency for domain name registration, for many years, had a policy
of „first come, first served.‰ This meant anyone could register any domain name
that had not already been registered, regardless of the trademark status of the
domain name.

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322 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

In response to a growing number of complaints from owners of famous


trademarks who found their trademark names being appropriated by web
entrepreneurs, Congress passed the Anti-Cybersquatting Consumer Protection
Act (ACPA) in November 1999 as explained below.

The ACPA creates civil liabilities for anyone who attempts in bad faith to profit
from an existing famous or distinctive trademark by registering an Internet
domain name that is identical or confusingly similar to that particular trademark.

The ACPA does not establish criminal sanctions but proscribes the
following acts:
(a) Using „bad faith‰ domain names to extort money from the owners of
the (cybersquatting); or
(b) Using the existing trademarkÊs domain name to divert web traffic to
the bad faith domain (cyberpiracy) that could create the following:
(i) Harm the good-will represented by the trademark;
(ii) Create market confusion; and
(iii) Tarnish or disparage the trademark.
(c) Using of a domain name that consists of the name of a living person,
or a name confusingly similar to an existing personÊs name without
the personÊs consent, if the registrant is registering the name with the
intent to profit by selling the domain name to that person.

In Malaysia, domain name disputes are solved through arbitration. Kuala


Lumpur National Centre for Arbitration (KLRCA) has been appointed as the .my
domain name dispute resolution service provider by the Malaysian Network
Information Centre (MYNIC), which administers the .my domain. All domain
name disputes are governed and administered in accordance with MYNICÊs:
(a) Domain Name Dispute Resolution Policy (MYDRP);
(b) Rules of the MYDRP; and
(c) KLRCA Supplemental Rules.

To get more information on the domain name dispute resolution, visit this website:
www.rcakl.org.my (Kuala Lumpur National Centre for Arbitration)

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Trademark abuse can take in the following two ways on the web:

(a) Cybersquatting
Cybersquatting refers to the practice of registering domain names in order
to sell them later at a higher price. The Consumer Protection Act of 1999 is
aimed at cybersquatters who register Internet domain names of famous
companies or people and hold them hostage for ransom or payments from
the person or company. Companies such as Christian Dior, Nike, Deutsche
Bank, and even Microsoft had to fight or pay to get the domain name that
corresponds to their companyÊs name.

For example, the original owner of a domain name called as tom.com


received about $8 million for the name from a large media company in
Hong Kong that changed its name to Tom.com to correspond to the URL
created by the original ownerÊs domain name. In this case, the sale was
judged as both ethical and legal. However, in other cases, cyber-squatting
can be either illegal, or at least unethical.

(b) Cyberpiracy
Cyberpiracy involves the same behaviour as cybersquatting, but with the
intent of diverting traffic from the legitimate site to an infringing site.

Let us look at the following two examples of cyberpiracy cases:

(i) Ford Motor Co. vs. Lapertosa


Lapertosa had registered and used a website called www.fordrecalls.com as
an adult entertainment website. The court ruled that www.fordrecalls.com
was in violation of the ACPA in that it was an attempt in bad faith to divert
traffic to the Lapertosa site and as a result, diluted FordÊs wholesome
trademark.

(ii) Paine Webber Inc. vs. Fortuny


Fortuny was ordered by the court from using the domain name
„wwwpainewebber.com‰, which is a site that specialised in pornographic
materials, because it diluted and tarnished Paine WebberÊs trademark
and diverted web traffic from Paine Webber Ês legitimate site
www.painewebber.com.

SELF-CHECK 10.1

What are the differences between cybersquatting and cyberpiracy?

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10.4.3 Patents
What is a patent? Read on in order to seek the meaning of the term.

A patent is a document that grants the holder with the exclusive rights on
an invention for a fixed number of years.

Patents serve to protect tangible technological inventions, especially in


traditional industrial areas. They are not designed to protect artistic or literary
creativity. Patents confer monopoly rights to an idea or an invention (refer
below), regardless of how it may be expressed.

An invention may be in the form of a physical device, method or process


for making a physical device.

The Patents Act 1983, which came into force on the 1st of October 1986, provides
of a system for registration of patents and utility innovations in Malaysia. A
patent is valid for 20 years from the date of application.

Thousands of IT-related patents have been granted over the years. Examples of
European Union (EU) patents given to:
(a) Open Market Corp are Internet Server Access Control and Monitoring
(patent 5708780), Network Sales Systems (patent 5715314), and Digital
Active Advertising (patent 5724424).
(b) Juno Online Services received an interactive advertising patent (patent
5809242).
(c) IBM has many patents including a system for ordering from electronic
catalogues (patent 5870717) and a system for using intelligent agents to
perform online commerce (patent 5926798).

In order to be granted a patent, the applicant must show that the invention is
new, original, novel, non-obvious, and not evident in prior art and practice.

As with copyrights, the granting of patents has moved far beyond the original
intent of CongressÊs first patent statute that sought to protect industrial design
and machines. Patent protection has been extended to articles of manufacture
(1842), plants (1930), surgical and medical procedure (1950) and software (1981).

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Certain patents granted in the United States deviate from established practices in
Europe as exemplified by the following two patent-related cases:

(a) Amazon.com vs. Barnes and Noble


Amazon.com has successfully obtained a US patent on its One-Click
ordering procedure. By using this patent, Amazon.com sued Barnes &
Noble in 1999 and in 2000, alleging that its rival had copied its patented
technology. Barnes & Noble were enjoined by the courts from using the
ordering procedure.

(b) Priceline.com vs. Expedia.com


In 1999, Priceline.com filed a suit against Expedia.com alleging that Expedia
was using PricelineÊs patented reverse auction business model. The suit was
settled on January 9, 2001, when Expedia.com agreed to pay the royalties to
Priceline.com for using the model.

However, in Europe, many Asian, African and South American countries, it


is almost impossible to obtain patents on business methods or computer
processes.

10.4.4 Fan and Hate Websites


Let us look at another aspect that is related to intellectual property: fan and hate
websites.

Fan and hate websites are part of the InternetÊs self-publishing phenomena that
include blogging. Fan sites may interfere with intellectual property. For example,
some people get advanced copies of new movies or TV programmes and create
sites that compete with the formal sites of the movie or TV producer. Although
the producers can get a court order to close such sites, new sites can appear the
following day. Although the intention of the fans may be good, they may cause
damage to the creators of the intellectual property.

Hate websites can cause problems for corporations as well. Many hate sites are
directed against large corporations (e.g., Microsoft and Nike). Associated with hate
sites is the idea of cyberbashing which is the registration of a domain name that
criticises an organisation or person. As long as the sites contain only legitimate gripes
that are not libellous, defaming, or threatening, they are allowed to operate.

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You can visit the following websites to get more ideas on:
Intellectual property right : www.cybercrime.gov/ip.htm
Information on domain names: http://www.verisign.com
Example of cyberbashing: http://www.chasebanksucks.com

EXERCISE 10.3

1. List three types of intellectual property.


2. What is the purpose of a digital watermark?
3. Define patents.

10.5 FREE SPEECH VERSUS CENSORSHIP


Several surveys indicate that censorship (refer below) is one of the most
important issues to web surfers.

In the Internet, censorship refers to a governmentÊs attempt to control, in


one way or another, material that is broadcasted.

For example, take the question, „How much access should children have to
websites, newsgroups, and chat rooms containing ÂinappropriateÊ or ÂoffensiveÊ
materials and who should control this access?‰

This is one of the most hotly-debated issues between the advocates of censorship
and the proponents of free speech:
(a) The proponents of free speech contend that there should be no government
restrictions on Internet content and that parents should be responsible for
monitoring and controlling their childrenÊs adventure on the web; and
(b) The advocates of censorship feel that government legislation is required to
protect children from offensive material.

In addition to concern for children, there are also concerns on hate sites,
defamation of character, and other offensive material. In a landmark case in 2002,
AustraliaÊs highest court gave a businessman the right to sue in Australia for
defamation over an article published in the United States and posted on the
Internet. This reasoning basically equates the Internet to any other published

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material. The publisher, Dow Jones & Co., said that it will defend those sued in a
jurisdiction (Australia) that is far removed from the country in which the article
was prepared (the United States).

The advocates from the censorship also believe that it is the responsibility of ISPs
to control the content of the data and information that flow across their networks
and computers. The difficulty is that ISPs have no easy way of monitoring the
content or determining the age of the person viewing the content. The only way
to control offensive content is to block it from children and adults alike such as
controlling spam or the act of spamming (refer below).

Spamming refers to the practice of indiscriminately broadcasting messages


over the Internet (e.g., junk mail and pop-up screens).

One major piece of US legislation addressing marketing practices in e-commerce


is the Electronic Mailbox Protection Act, passed in 1997. The primary thrust of
this law is that commercial speech is subject to government regulation, and
secondly, that spamming, which can cause significant harm, expense, and
annoyance, should be controlled.

At some of the largest ISPs, spam now comprises 25 to 50 percent of all e-mail
and results in profound impacts such as:
(a) Impairing an already-limited bandwidth;
(b) Slowing down the Internet in general; and
(c) Shutting down ISPs completely.

The Electronic Mailbox Protection Act requires those sending spam to identify it
as advertising, to indicate the name of the sender prominently, and to include
valid routing information. Recipients may waive the right to receive such
information. Also, ISPs are required to offer spam-blocking software, and
recipients of the spam have the right to request termination of future spam from
the same sender and to bring civil action if necessary.

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10.6 OTHER LEGAL ISSUES


Privacy, intellectual property, and censorship receive a great deal of publicity
because consumers easily understand them. However, there are numerous other
legal issues related to e-commerce and the Internet. These usually arise as new
situations come up, and they must be worked out in courts of law and in
legislatures, which is a time-consuming process. One such issue, for example, is
whether a company can link into a website without permission.

Some of these e-commerce legal issues will be discussed in detail in the following
sections.

10.6.1 Electronic Contracts


A legally binding contract requires a few basic elements: offer, acceptance, and
consideration. However, these requirements are difficult to establish when the
human element in the processing of the transaction is removed and the
contracting is performed electronically. For example, website development
agreements can be very complex.

The Uniform Electronic Transactions Act of 1999 seeks to extend existing


provisions for contact law to cyberlaw by establishing uniform and consistent
definitions for electronic records, digital signatures, and other electronic
communications. This Act is a procedural one that provides the means to effect
transactions accomplished through an electronic medium. The language
purposefully refrains from addressing questions of substantive law, leaving this
to the scope of the Uniform Commercial Code (UCC), which is explained below.

The UCC is a comprehensive body of law regarding business


conduct. An amendment to the UCC is Article 2B, which is designed to
build upon existing law by providing a government code that supports
existing and future electronic technologies in the exchange of goods or
services. This law was approved in 1999 and enacted in 2000. It is one of
the more significant e-commerce legal developments.

Let us look at the explanations of the following electronic-related contracts:


(a) Shrink-wrap agreements; and
(b) Click-wrap contracts.

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Shrink-wrap agreements or box-top licenses appear in or on a package that


contains software. The user is bound to the license by opening the package,
even though the user has not yet used the product or even read the
agreement. This has been a point of contention for some time.

Click-wrap contracts are an extension of this ruling. These are contracts


derived entirely over the Internet. The software vendor offers to sell or
license the use of the software according to the terms accompanying the
software. The buyer agrees to be bound by the terms based on certain
conduct; usually that conduct is retaining the product for a sufficient time
to review the terms and return of the software if unacceptable.

In fall 2000, the Electronic Signatures in Global and National Commerce Act was
approved. This federal law gives contracts signed online the same legal status as
a contract signed with pen on paper. Similar laws have been enacted in several
European and Asian countries.

10.6.2 Electronic Agents


Article 2B of the Uniform Computer Information Transactions Act passed in
October 2000, makes clear that contracts can be formed even when no
human involvement is present. It states that a contract is formed if the interaction
of electronic agents results in operations that confirm the existence of a contract
or indicate agreement.

Further, such a contract can be made by interaction between an individual and


an electronic agent, or even between two electronic agents, even if no individual
was aware of or reviewed the actions. The Act recognises that counter offers are
ineffectual against electronic agents (which is one limitation of e-commerce).
Thus, the Act provides that a contract is formed if an individual takes action that
causes an electronic agent to perform or promise benefits to the individual. The
basic idea is that an individual is responsible for the outcome.

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10.6.3 Electronic Gambling


Methods of wagering can be found all over the Internet. For example, the World
Sports Exchange (wsex.com) advertises, „if you can use a mouse, you can place a
wager.‰ Probably located in Antigua, which is an island nearby the Caribbean
Sea and where gambling is legal, not only has this site shown the ease of
wagering, it has made it as their ultimate slogan.

At the site, an account can be established by wiring or electronically transferring


the funds; even sending a cheque will establish an electronic gambling account.
This account is used to fund a variety of available wagers on all types of sporting
events that can be viewed and transacted online. Anyone that travels physically
to Antigua can play there legally. But what about those who travel from places
where gambling is illegal?

The ease and risk of online wagering is evidenced by many recent cases of
individuals losing their life savings without understanding the implications of
what they are doing in their home sitting before their computer.

Online casinos have all of the inherent dangers of physical gambling houses,
with the added risk of accessibility by minors or individuals of diminished
capacity who may financially injure themselves without the constraints
otherwise found in a physical environment. As is the case with most issues in
cyberspace, self-regulation may be the best policy.

However, given the sometimes addictive nature of gambling, legal steps


have also been taken. The Internet Gambling Prohibition Act of 1999 was
established to make online wagering illegal except for minimal amounts. The Act
provides criminal and civil remedies against individuals making online bets or
wagers and those in the business of offering online betting or wagering venues.

The impact of this legislation is to make ISPs as „somewhat‰ liable for illegal
currency movements and for reportable transactions requiring documentation by
the carriers.

According to the Australian Internet Industry Association (AIIA), the


Communication Ministry is looking favourably on imposing a total ban on
interactive gambling in Australia through the use of Internet filtering technology.
The attempt is to block Australian Internet users from accessing gambling sites.

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In 2003, there is a moratorium or suspension on new interactive gaming only.


Although the AIIA campaigns against the ban, many politicians support it. Civil
liberties groups in Australia, as in many other countries, oppose any Internet
filtering.

Visit the following websites to get more information on techniques to control


spam, and online gambling:
www.mailwasher.net
www.gamcare.org.uk/site.builder/onlinehelp.html
www.gambling-hall-online.com/ beginners/pros_and_cons.htm

ACTIVITY 10.3

Why it is difficult to control online gambling?

EXERCISE 10.4

1. What is spamming?
2. Describe the Electronic Mailbox Protection Act.

10.7 E-COMMERCE FRAUD AND SOCIETAL


ISSUES
When buyers and sellers cannot see each other and may even be in different
countries, chances are high that dishonest people might commit all types of fraud
and other crimes over the Internet. During the first few years of e-commerce,
many types of crime came to light, ranging from manipulation of stocks on the
Internet to the creation of a virtual bank that disappeared together with the
investorsÊ deposits.

We will look into these aspects in the following sections:


(a) Internet fraud;
(b) Consumer protection; and
(c) Societal issues.

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10.7.1 Internet Fraud


Internet fraud and its sophistication have grown even faster than the Internet
itself. The following examples demonstrate the scope of the problem:

(a) Online Auction Fraud


Internet auction fraud accounts for 87 percent of all incidents of online
crime, according to eMarketer.

(b) Internet Stock Fraud


In fall 1998, the US Securities and Exchange Commission (SEC) brought
charges against 44 companies and individuals who illegally promoted
stocks on computer bulletin boards, online newsletters, and investment
websites.

In most cases, stock promoters spread false positive rumours about the
prospects of the companies they touted. In other cases, the information
provided might have been true, but the promoters did not disclose that
they were paid to talk up the companies. Stock promoters specifically target
small investors who are lured by the promise of fast profit. Cases like this,
as well as ones involving non-registered securities, are likely to increase
because of the popularity of the Internet.

(c) Other Financial Fraud


Stocks are only one of many areas swindlers are active. Other areas include
the sale of bogus investments, phantom business opportunities, and other
schemes. With the use of the Internet, financial criminals now have access
to far more people, mainly due to the availability of e-mail. In addition,
foreign currency trading scams are increasing on the Internet because most
online currency exchange shops are not licensed.

(d) Other Fraud in E-commerce


Many non-financial types of fraud also exist on the Internet. For example,
customers may receive poor-quality products and services, may not get
products in time, may be asked to pay for things they assume will be paid
for by sellers, and much more. Buyers can protect against e-commerce
fraud in several ways. The major methods are described in the next section:
customer protection.

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10.7.2 Consumer Protection


Buyer protection is critical to the success of any commerce, especially
electronic, where buyers do not see the sellers. Tips for safe electronic shopping
include the following:
(a) Users should make sure that they enter the real website of well-known
companies such as Wal-Mart Online, Disney Online, and Amazon.com by
going directly to the site, rather than through a link and shop for reliable
brand names at those sites;
(b) In any unfamiliar site, search for an address and telephone and fax
numbers. Call and quiz a person about the seller;
(c) Check out the seller with the local chamber of commerce, for example,
Better Business Bureau (bbbonline.org);
(d) Investigate how secure the seller Ês site is and how well it is organised;
(e) Examine the money-back guarantees, warranties, and service agreements
before making a purchase;
(f) Compare prices online to those in regular stores as low prices may be too
good to be true;
(g) Ask friends what they know. Find testimonials and endorsements;
(h) Find out what remedy is available in case of a dispute;
(i) Consult the National Fraud Information Centre; and
(j) Check the resources available at consumerworld.org.

10.7.3 Societal Issues


Despite the factors and trends that contribute to future e-commerce growth, since the
inception of technology in general and the Internet and e-commerce in particular,
we have witnessed a gap between those who have and those who do not have
the ability to use the technology. This gap is referred to as the digital divide.

In 2000, about nine out of 10 of all Internet hosts were located in highly-
developed countries, where only less than a fifth of the worldÊs population
resides. In 2001, the city of New York, for example, had more Internet hosts than
the whole continent of Africa.

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The gap exists both within and between countries. The U.S. federal and state
governments are attempting to close this gap within the country by encouraging
training and supporting education and infrastructure. The gap among countries,
however, may be widening rather than narrowing.

Many government and international organisations are trying to close the digital
divide. The government of Malaysia implemented a project called „A National
Strategic Framework for Bridging the Digital Divide‰, under the Eight Malaysian
Plan in order to narrow the gaps of digital divide. This project was parked under
the United Nations Development Programme and was completed in December
2008.

Apart from digital divide, many other societal issues can be related to e-commerce.
The following three aspects generally derived a positive impact from e-commerce:

(a) Education
E-commerce has had major impact on education and learning. Virtual
universities are helping to reduce the digital divide. Companies can use the
Internet to retrain employees much more easily, enabling them to defer
retirement if they so choose. Home-bound individuals can get degrees from
good institutions, and many vocational professions can be learned from
home.

(b) Public Safety and Criminal Justice


With increased concerns about public safety after September 11, many
organisations and individuals have started to look at technologies that will
help to deter, prevent, or detect early criminal activities of various types.
Various e-commerce tools can help increase our safety at home and in
public:
(i) The e-911 system;
(ii) Collaborative commerce (for collaboration among national and
international law enforcement units);
(iii) E-procurement (of unique equipment to fight crime);
(iv) E-government efforts at coordinating;
(v) Information sharing;
(vi) Expediting legal work and cases;
(vii) Intelligent homes, office, public buildings; and
(viii) E-training of law enforcement officers.

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(c) Health Aspects


Is e-commerce a health risk? Generally speaking, it is probably safer nd
healthier to shop from home than to shop in a physical store.

However, some believe that exposure to cellular mobile communication radiation


may cause health problems. It may take years before the truth of this claim is
known.

Even if communication radiation does cause health problems, the damage could
be insignificant due to the small amount of time most people spend on wireless
shopping and other wireless activities. However, given the concern of some
about this issue, protective devices may soon be available that will solve this
problem.

E-commerce technologies such as collaborative commerce can help to improve


health care. For example:
(i) By using the Internet, the approval process of new drugs has been
shortened, saving lives and reducing suffering;
(ii) Pervasive computing helps in the delivery of health care;
(iii) Intelligent systems facilitate medical diagnoses;
(iv) Health-care advice can be provided from a distance; and
(v) Intelligent hospitals, doctors and other health-care facilities have been
offering improved services by using some of the tools of e-commerce.

The application of Telehealth under the seven flagships of Multimedia Super


Corridor (MSC) extends specialist care to healthcare facilities where there are
lacks of specialists. This is done by providing Teleconsultation links between
healthcare facilities which improve equity of access to quality care especially to
under-served areas and realise the goal of care closer to the home.

Visit the following websites to get more information on techniques to control


spam, and online gambling:
www.securecomputing.com
www.mailwasher.net
www.gamcare.org.uk
www.gambling-hall-online.com/beginners/pros_and_cons.htm

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336 TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE

SELF-CHECK 10.2
Describe how e-commerce can improve education.

EXERCISE 10.5

1. What types of fraud are most common?


2. Define the digital divide.
3. Describe how e-commerce can improve safety and security.

Privacy is described as the implementation of e-commerce which


requires considerable customer information, some of which can be acquired
by tracking the customerÊs activities on the Internet. Intellectual property
rights make it extremely easy and inexpensive to illegally copy intellectual
work. (e.g., music, knowledge) and resell it or sell it on the Internet without
paying royalties to the owners.
According to free speech versus censorship, it is easy to distribute indecent
material on the Internet, but it is very difficult to control it. Who will protect
surfers, especially children, from indecent or offending material is still debatable.
We also looked at consumer and merchant protection against fraud.
Protection is needed because there is no face-to-face contact, because there is
a great possibility for conducting fraud, because there are no sufficient legal
constraints, and because new issues and scams appear constantly.
Several organisations, private and public, attempt to provide protection that
is needed to build the trust, which is essential for the success of widespread
e-commerce.

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TOPIC 10 LEGAL, ETHICAL AND SOCIETAL IMPACT OF E-COMMERCE 337

Censorship Free speech


Copyright Legal
Cyberbashing Internet fraud
Cyberpiracy Intellectual property
Cybersquatting Patents
Digital divide Privacy
Digital watermarks Societal issues
Electronic agents Spamming
Electronic contracts Trademarks
Electronic gambling
Ethics

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338 ANSWERS

Answers
TOPIC 1: INTRODUCTION TO E-COMMERCE

Exercise 1.1
1. E-commerce can be formally defined as technology-mediated exchanges between
parties (individuals, organisations, or both) as well as the electronically based intra
or inter-organisational activities that facilitate exchanges.

2. The following attributes make an e-commerce business unique and different from a
traditional commerce: core strategic decisions are technology-based, a real-time
competitive responsiveness, the store is always open, a technology-based customer
interface, the customer controls the interaction, online firms have an increased
knowledge of customer behaviour, and players benefit from non-traditional
evaluation metrics and an emergent valuation model would apply.

Exercise 1.2
1. A B2C business model allows sellers to maximise benefits by eliminating the
middleman. With disintermediation, businesses sell products directly to
consumers without using traditional retail channels. This enables some B2C
companies to sell products at a lower cost and with faster service than
comparable bricks-and-mortar businesses.

2. Business-to-business (B-to-B or B2B) e-commerce consists of the sale and


exchange of products and services between businesses.

Exercise 1.3
1. Considered a success:
E-commerce has been a technological success, with the digital
infrastructure created during the period solid enough to sustain
significant growth in e-commerce during the next decade.
E-commerce has been a mixed business success, with significant
revenue growth and customer usage, but low profit margins.

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ANSWERS 339

Considered a failure:
E-commerce has not fulfilled economistÊs visions for perfect friction-free
commerce.
E-commerce has not fulfilled the visions of entrepreneurs and venture
capitalists for first mover advantage, low customer acquisition and
retention costs, and low costs of doing business.

2. Factors that will define e-commerce over the next five years:
E-commerce technology will continue to propagate through all
commercial activity, with overall revenues from e-commerce, the
number of products and services sold over the web, and the amount of
web traffic rising.
E-commerce prices will rise to cover the real costs of doing business on
the web
E-commerce margins and profits will rise to levels more typical of all
retailers.
Traditional well endowed and experienced companies will play
growing and more dominant role
The number of successful pure online companies will continue to
decline and most successful e-commerce firms will adopt a mixed „click
and bricks‰ strategy.

Exercise 1.4
E-commerce involves three broad interrelated themes:
Technology including Internet and WWW and a host of complementary
technologies personal computers, client server computing, packet-switched
communication, protocol and relational databases.
Business the potential for extraordinary returns on investment that create
the interest and excitement in e-commerce.
Society the primary societal issues are intellectual property, individual
privacy and public policy.

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340 ANSWERS

TOPIC 2: E-COMMERCE BUSINESS MODELS

Exercise 2.1
1. A business model is a set of planned activities (business processes)
designed to result in profit in the marketplace.
2. The eight key components are: value proposition, revenue model, market
opportunity, competitive environment, competitive advantage, market
strategy, organisational development, and management team.
3. Five primary revenue models:
Advertising revenue model;
Subscription revenue model;
Transaction fee revenue model;
Sales revenue model; and
Affiliate revenue model.

Exercise 2.2
1. A Portal or Web Portal is a site that people use as a launching point to enter
the Web. A portal almost always includes a Web directory and search
engine. Some examples of portal sites: Yahoo!, MSN, AOL, Google, and
Netscape.
2. Service providers offer services online. Some charge a fee, while other
generates revenue from other sources, such as advertising and by collecting
personal information that is useful in direct marketing. Community
providers are sites that create a digital online environment where people
with similar interests can transact (buy and sell goods), communicate with
like-minded people, receive interest-related information, and even play out
fantasies by adopting online personalities.

Exercise 2.3
1. B2B hub, E-distribution, B2B Service Provider, Matchmaker and
Infomediary.
2. An application service provider (ASP) is a company that sells access to
Internet-based software applications to other companies.

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ANSWERS 341

Exercise 2.4
P2P ventures link users, enabling them to share files and computer resources
without a common server. E.g. kazaa.com

TOPIC 3: INTERNET AND WORLD WIDE WEB

Exercise 3.1
1. The Internet is an interconnected network of thousands of networks and
millions of computers linking business, educational institutions,
government agencies, and individuals together.
2. ISP is a business that has a permanent Internet connection and offers
temporary connections to individuals and companies free or for a fee.

Exercise 3.2
1. Packet switching is a method of slicing digital messages into parcels called
„packets,‰ sending the packets along different communication paths as they
become available, and then reassembling the packets once they arrive at
their destination.
2. Internet addresses, known as IP address, are 32-bit numbers that appear as a
series of four separate numbers marked off by periods. Domain names are
sets of words that are assigned to specific IP addresses.
3. An intranet is a TCP/IP network located within a single organisation for
purposes of communications and information processing. An extranet is an
intranet that has been extended to include specific entities outside the
boundaries of the organisation, such as business partners, customers, or
suppliers.

Exercise 3.3
1. A search engine identifies web pages that appear to match keyword, also
called queries, typed by the user and provides a list of the best matches. A
query can be a question, series of words, or a single word for the search
engine to look for. Intelligent agents or software robots (bots for short) are
software programs that gather and/or filter information on a specific topic,
and then provide a list of results for the user.

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342 ANSWERS

2. Cookies are a tool used by websites to store information about a user. When
a visitor enters a website, the site sends a small text file (the cookie) to the
userÊs computer so that information from the site can be loaded more
quickly on future visits.

TOPIC 5: WIRELESS E-COMMERCE WEBSITE


DEVELOPMENT

Exercise 5.1
1. The systems development life cycle (SDLC) is a methodology for
understanding the business objectives of any system and designing an
appropriate solution.
2. The steps involved in creating an e-commerce web site:
Identify the specific business objectives for the site and then develop a
list of functionalities and information requirements.
Develop a system design specification (both logical and physical
design).
Build the site, either by in-house personnel or by outsourcing all or part
of the responsibility to outside contractors.
Test the system (unit testing, system testing and acceptance testing)
Implement and maintain the site.

Exercise 5.2
1. Early websites use single-tier system architecture and consisted of a single-
server computer that delivered static web pages to users making requests
through their browsers. Multi-tiered systems architecture, utilises a variety
of specialised web servers, as well as links to pre-existing „back-end‰ or
„legacy‰ corporate databases.
2. Basic functionality web servers should provide:
Processing of HTTP request receive and respond to client requests for
HTML pages.
Security services (Secure Socket Layer) verify username and password.
File Transfer Protocol permit transfer of very large files from server to
server.

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ANSWERS 343

Search engine indexing of site content; keyword search capability.


Data capture log file of all visits, time, duration and referral source.
E-mail ability to send, receive and store e-mail messages.
Site management tools calculate and display key site statistics, such as
unique visitors, page requests and origin of requests. Check links on
pages.

3. Dynamic server software allows sites to deliver dynamic content, rather


than static and unchanging information.

Exercise 5.3
1. Scalability refers to the ability of a site to increase in size as demand
warrants.
2. The three scaling methods are:
Scale hardware vertically upgrading the servers from a single
processor to multiple processors.
Scale hardware horizontally adding multiple single-processor servers
to your site and balancing the load among the servers.
Improve the process architecture of the site a combination of vertical
and horizontal scaling, combined with artful design decisions.
3. The eight most important factors impacting website design:
Functionality ages that work, load quickly, and point the customer
toward your product offerings.
Informational links that customers can easily find to discover more
about you and your products.
Ease of use simple fool-proof navigation.
Redundant navigation alternative navigation to the same content.
Ease of purchase one or two clicks to purchase.
Multi browser functionality site works with the most popular
browsers.
Simple graphics avoid distracting, obnoxious graphics and sounds
that the user cannot control.
Legible text avoid backgrounds that distort text or make it illegible.

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344 ANSWERS

TOPIC 6: E-COMMERCE SECURITY

Exercise 6.1
1. The six key dimensions to e-commerce security:
Integrity
Nonrepudiation
Authenticity
Confidentiality
Privacy
Availability
2. Malicious Code viruses, worms, Trojan horses and „bad applets‰ are a
threat to a systemÊs integrity and continued operation, often changing how
a system functions or altering documents created on the system

Exercise 6.2
1. Encryption is the process of transforming plain text or data into ciphertext
that cannot be read by anyone other than sender and the receiver
2. Four different forms of encryption technology currently in use are:
Symmetric key encryption
Public key cryptography
Digital envelope
Digital certificates and public key infrastructure
3. (a) SSL (Secure Sockets Layer) The SSL protocol provides data
encryption, server authentication, client authentication, and message
integrity for TCP/IP connections.
(b) S-HTTP (Secure Hypertext Transfer Protocol) secures only Web
protocols and cannot be used to secure non-HTTP messages.

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ANSWERS 345

Exercise 6.3
1. The key steps in developing a security plan are:
Perform a risk assessment
Develop a security policy
Create an implementation plan
Create a security team
Perform periodic security audits
2. Biometric devices are used along with digital signatures to verify physical
attributes associated with an individual, such as a fingerprint or retina scan.
A company could require that an individual undergo a fingerprint scan
before being allowed access to a website, or before being allowed to pay for
merchandise with a credit card. Biometric devices make it even more
difficult for hackers to break into sites or facilities, significantly reducing
the opportunity for spoofing.

TOPIC 7: E-COMMERCE PAYMENT SYSTEMS

Exercise 7.1
1. A debit card removes the amount of the sale from the cardholderÊs bank
account and transfers it to the sellerÊs bank account. When the cardholders
use a debit card at Automatic Teller Machines or in stores to make
purchases, money is immediately withdrawn from their account. A card
holder cannot withdraw more money than he has in the account.

2. A credit card has a spending limit based on the userÊs credit history; a user
can pay off the entire credit card balance or pay a minimum amount each
billing period. Credit cards issuers charge interest on any unpaid balance.
Credit cards are widely accepted by merchants around the world and
provide assurances for both the consumer and the merchant.

Security neither the merchant nor the consumer is authenticated. The


merchant could be a criminal organisation designed to collect credit card
numbers and the consumer could be using stolen or fraudulent cards. Cost
for merchants is roughly 3.5% of the purchase plus transaction fee of 20 to
30 cents per transaction. Social equity not everyone has access to credit
cards.

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346 ANSWERS

Exercise 7.2
1. Digital cash is one form of online payment, especially useful for making
micro payments.
2. Digital cash is independent, unrelated to any network or storage device.
Portable and freely transferable between any two parties. More efficient
than other methods, costs less than processing credit card transactions, and
usable for international transactions.

Exercise 7.3
1. A server-side digital wallet stores a customerÊs information on a remote
server belonging to a particular merchant or wallet publisher. A client-side
digital wallet stores a consumerÊs information on his or her own computer.
2. The disadvantages of server side digital wallet a security breach could
reveal thousands of usersÊ personal information. The disadvantage of
client-side wallets is that they are not portable a client-side wallet is not
available when a purchase is made from a computer other that the
computer on which the wallet resides.

Exercise 7.4
1. A smart card is a stored-value card that is a plastic card with an embedded
microchip that can store information. Credit cards currently store limited
information on a magnetic strip. A smart card can store about 100 times the
amount of information that a magnetic strip plastic card can store. A smart
card can hold private user data such as financial facts, encryption keys,
account information, credit card numbers, health insurance information,
medical records and so on. Smart cards are safer than conventional credit
cards because the information stored on a smart card is encrypted.
2. Mondex is a smart card that holds and dispenses electronic cash. The
Mondex smart card will allow other applications to reside on its microchip.
Mondex smart cards can accept digital cash directly from a userÊs bank
account. The advantages of Mondex smart card is cardholders can spend
their electronic cash with any merchant who has a Mondex card reader and
two cardholders can even transfer cash between their cards over a telephone
line, another advantage of Mondex is that the cardholder always has the
correct change for vending machines of various types. Mondex electronic
cash supports micropayments as small as 3 cents.

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ANSWERS 347

The disadvantages of Mondex: The card carries real cash in digital form, and
the risk of theft of the card may deter users from loading it with a lot of
money. Mondex does not allow the deferred payment you can obtain with a
credit card you can defer paying your charge or credit card bill for almost a
month without incurring any interest charges. Mondex cards dispense their
cash immediately. Transactions completed using a Mondex card do not
provide receipts.

Exercise 7.5
1. Digital accumulating balance payment systems allow users to make micro-
payments and purchases on the Web, accumulating a debit balance for
which they are billed at the end of the month. Like a utility or phone bill,
consumers are expected to pay the entire balance at the end of the month
using a checking or credit card account.
2. Digital checking payment systems have many advantages: (1) they do not
require consumers to reveal account information to other individuals when
settling an auction, (2) they do not require consumers to continually send
sensitive financial information over the web, (3) they are less expensive than
credit cards for merchants, and (4) they are much faster than paper-based
traditional checking.

Exercise 7.6
1. Systems that replace the functionality traditionally provided by banks.
Existing banking systems extending to the B2B marketplace.
2. Biller-direct systems which were originally created by large utilities to
facilitate routine payment of utility bills, but which are increasingly
being used by other billers.
Consolidators which attempt to aggregate all bills for consumers in one
place and ideally permit one-stop bill payment.
Portals which are similar to consolidators, but which also typically
offer a variety of other financial management services as well.

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348 ANSWERS

TOPIC 8: E-COMMERCE MARKETING CONCEPTS

Exercise 8.1
1. The core product is the core benefit the customer receives from the product.
Let us say, for example, that the core product is a washing machine. The
actual product is the set of characteristics designed to deliver the productÊs
core benefits. The augmented product is a product with additional benefits
to customers beyond the core benefits embodied in the actual product.
2. A brand strategy is a set of plans for differentiating a product from its
competitor, and communicating these differences effectively to the
marketplace.

Exercise 8.2
1. Web transaction logs, transaction logs, cookies, web bugs, databases, data
warehouse and data mining, advertising networks, CRM systems.
2. A database is a software application that stores records and attributes. A
data warehouse is a database that collects a firmÊs transactional and
customer data in a single location for offline analysis by marketers and site
managers. While data mining is a set of different analytical techniques that
look for patterns in the data of a database or data warehouse, or seek to
model the behaviour of customers. Web site data can be „mined‰ to
develop profiles of visitors and customers.

Exercise 8.3
1. „Clicks and bricks‰ strategy online marketing is closely integrated with
offline physical stores. The Web as an extension of their existing order
processing and fulfilment, marketing and branding efforts.
2. Permission marketing, affiliate marketing, viral marketing and leveraging
marketing.

Exercise 8.4
1. Two types: primary research and secondary research. Primary research
involves gathering first-hand information using techniques such as surveys,
personal interviews, and focus groups. Secondary research relies on
existing, published information as the basis for analysing the market.

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ANSWERS 349

2. Using a survey instrument, which is a list of questions, researchers can


approach groups of people to ask their views on virtually any imaginable
topic. Observation involves simply watching consumers as they make a
purchase, or while they engage in some activity that is being studied.
Online customer tracking is the Internet equivalent to observation.

TOPIC 9: E-COMMERCE MARKETING COMMUNICATIONS

Exercise 9.1
1. The distinction between the branding and sales purposes of marketing
communications is branding communications differ from promotional
communications. Promotional sales communications almost always suggest
that the consumer „buy now,‰ and they make offers to encourage an
immediate purchase. Branding communications rarely encourage
consumers to buy now, but instead focus on extolling the differentiable
benefits of consuming the product or service.
2. Interstitials are usually inserted within a single site, and displayed as the
user moves from one page to the next. The interstitial typically moves
automatically to the page the user requested after allowing enough time for
the ad to be read. Superstitials are pre-loaded into a browserÊs cache and do
not play until fully loaded. When the file is finished downloading, it waits
until the user clicks to another page before popping up in a separate
window.
3. E-mail marketing messages are sent to an „opt in‰ audience of Internet
users who have expressed at one time or another an interest in receiving
messages from the advertiser. E-mail messages may be combined with brief
audio or video clips promoting a product and with on-screen links that
users can click on to make a purchase.

Exercise 9.2
1. A functional Web site that customers can find is one of the strongest online
communications tools. The integral parts of a coordinated marketing
communications strategy: appropriate domain name, search engine
optimisation and Web site functionality.
2. Companies should choose a domain name that is short, memorable, hard to
confuse or misspell, and indicative of a firmÊs business functions and that
preferably uses dot.com as its top level domain.

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350 ANSWERS

TOPIC 10: LEGAL, ETHICAL AND SOCIETAL IMPACT OF


E-COMMERCE

Exercise 10.1
1. Laws are strict legal rules governing the acts of all citizens within their
jurisdictions. If a person breaks the law, they have done something illegal
and can be held liable for punishment by the legal system. Ethics is a branch
of philosophy that deals with what is considered to be right and wrong.
2. Privacy.
Intellectual property rights.
Free speech versus censorship.
Consumer and merchant protection against fraud.

Exercise 10.2
1. Privacy is the right to be left alone and the right to be free of unreasonable
personal intrusions.
2. A cookie is a small piece of data that is passed back and forth between a
Web site and an end userÊs browser as the user navigates the site. Cookies
enable sites to keep track of users without having to constantly ask the users
to identify themselves.
3. The opt-in model requires an affirmative action by the consumer to allow
collection and use of information. In the opt-out model, the default is to
collect information unless the consumer takes an affirmative action to
prevent the collection of data by checking a box, or by filling out a form.

Exercise 10.3
1. Copyrights, trademarks/domain names and patents.
2. Digital watermarks are unique identifiers that are imbedded in the digital
content. Although they do not prevent an individual from making illegal
copies, they do make it possible to identify pirated works.
3. A patent is a document that grants the holder exclusive rights on an
invention for a fixed number of years. Patents serve to protect tangible
technological inventions, especially in traditional industrial areas.

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ANSWERS 351

Exercise 10.4
1. Spamming refers to the practice of indiscriminately broadcasting messages
over the Internet (e.g., junk mail and pop-up screens).
2. The primary thrust of this law is that commercial speech is subject to
government regulation, and secondly, that spamming, which can cause
significant harm, expense, and annoyance, should be controlled.

Exercise 10.5
1. Online auction fraud and Internet stock fraud.
2. A gap between those who have and those who do not have the ability to
use the technology.
3. The use of an e-911 system; collaborative commerce (for collaboration
among national and international law enforcement units); e-procurement
(of unique equipment to fight crime); e-government efforts at coordinating,
information sharing, and expediting legal work and cases; intelligent
homes, office, and public buildings; and e-training of law enforcement
officers.

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MODULE FEEDBACK
MAKLUM BALAS MODUL

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1. E-mail your comment or feedback to modulefeedback@oum.edu.my

OR

2. Fill in the Print Module online evaluation form available on myINSPIRE.

Thank you.

Centre for Instructional Design and Technology


(Pusat Reka Bentuk Pengajaran dan Teknologi )
Tel No.: 03-27732578
Fax No.: 03-26978702

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