E-Commerce 2023 Business, Technology, Society, 17th edition Kenneth C Laudon Solution Manual

Type:

Solution Manual

Resource:

E-Commerce 2023 Business, Technology, Society

Edition:

17th Edition

Author(s):

Kenneth C. Laudon Carol Guercio Traver

1 Instructor’s Manual and Video Cases: Chapter 1 The Revolution Is Just Beginning Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases in eText Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 4 4 4 4 5 8 9 16 18

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2 Learning Objectives After reading this chapter, your students should be able to: • Understand why it is important to study e-commerce.

• Define e-commerce, understand how e-commerce differs from e-business, identify the primary technological building blocks underlying ecommerce, and recognize major current themes in e-commerce.

• Identify and describe the unique features of e-commerce technology and discuss their business significance.

• Describe the major types of e-commerce.

• Understand the evolution of e-commerce from its early years to today.

• Describe the major themes underlying the study of e-commerce.

Chapter Outline Opening Case: TikTok: Creators and the Creator Economy 1.1 The First Five Minutes: Why You Should Study E-commerce 1.2

Introduction to E-commerce What Is E-commerce?

The Difference between E-commerce and E-business Technological Building Blocks Underlying E-commerce: The Internet, Web, and Mobile Platform Insight on Technology: Will Apps Make the Web Irrelevant?

Major Trends in E-commerce

1.3

Unique Features of E-commerce Technology Ubiquity Global Reach Universal Standards Richness Interactivity Information Density Personalization and Customization Social Technology: User-Generated Content (UCG), Creators, and Social Networks

1.4

Types of E-commerce Business-to-Consumer (B2C) E-commerce Business-to-Business (B2B) E-commerce Consumer-to-Consumer (C2C) E-commerce Mobile E-commerce (M-commerce) Social E-commerce Local E-commerce

1.5

E-commerce: A Brief History E-commerce 1995–2000: Invention .

3 E-commerce 2001–2006: Consolidation E-commerce 2007–Present: Reinvention Insight on Business: Y Combinator’s Startup Boot Camp Assessing E-commerce: Successes, Surprises, and Failures 1.6

Understanding E-commerce: Organizing Themes Technology: Infrastructure Business: Basic Concepts Society: Taming the Juggernaut Insight on Society: Facebook and the Age of Privacy

1.7

Careers in E-commerce The Company Position: Category Specialist in the E-commerce Retail Program Qualifications/Skills Preparing for the Interview Possible First Interview Questions

1.8

Case Study: Uber: Everything on Demand

1.9

Review Key Concepts Questions Projects References

List of Key Terms business-to-business (B2B) e-commerce, p. 22 business-to-consumer (B2C) e-commerce, p. 21 consumer-to-consumer (C2C) e-commerce, p. 24 customization, p. 19 disintermediation, p. 29 e-business, p. 8 e-commerce, p. 8 first mover, p. 29 friction-free commerce, p. 29 information asymmetry, p. 16 information density, p. 19 interactivity, p. 18 Internet, p. 9 local e-commerce, p. 25 marketplace, p. 17 marketspace, p. 17 mobile e-commerce (m-commerce), p. 24 mobile platform, p. 11 network effect, p. 29 .

4 personalization, p. 19 reach, p. 17 richness, p. 18 social e-commerce, p. 24 ubiquity, p. 17 universal standards, p. 18 Web 2.0, p. 31 World Wide Web (the Web), p.10 List of Figures Figure 1.1 The Difference between E-commerce and E-business, p. 9 Figure 1.2 The Deep Web, p. 10 Figure 1.3 Internet Access in the United States, 2022, p. 11 Figure 1.4 Eight Unique Features of E-commerce Technology, p. 16 Figure 1.5 The Growth of B2C E-commerce in the United States, p. 22 Figure 1.6 Room to Grow, p. 23 Figure 1.7 The Growth of B2B E-commerce in the United States, p. 23 Figure 1.8 The Growth of M-commerce in the United States, p. 25 Figure 1.9 The Relative Size of Different Types of E-commerce in 2022, p. 26 Figure 1.10 Periods in the Development of E-commerce, p. 28 (Figure video in eText) List of Tables Table 1.1 Major Trends in E-commerce 2022–2023, p. 15 Table 1.2 Business Significance of the Eight Unique Features of E-commerce Technology, p. 21 Table 1.3 Major Types of E-commerce, p. 26 Table 1.4 Evolution of E-commerce, p. 34 List of Video Cases in eText Video Case 1.1: Shopify and the Future of E-commerce Video Case 1.2: YouTube and the Creator Economy Overview One of the biggest challenges that instructors face in teaching a course on e-commerce is helping students make sense of a very complex phenomenon that involves considerations of markets, firms, consumer behavior, technology, and social and legal impacts, among others. As the text’s subtitle (“business. technology. society) suggests, we believe it is useful to think about e-commerce as involving these three broad, interrelated themes, and that doing so provides students with a strong and coherent conceptual framework for understanding e-commerce. Within each chapter, there are three “Insight on” cases (Insight on Business, Insight on Technology, and Insight on Society), designed to highlight the connection between the chapter’s content and these themes. Each chapter begins with an opening case, focusing on a company or issue that students will hopefully find relevant and interesting, that introduces the topic of the chapter. Each chapter concludes with a more extensive end-of-chapter cases that ties together the themes and topics included in the chapter. Class discussion questions for each "Insight on” case and .

5 the opening case are included in the Teaching Suggestions: Key Points section of this Instructor’s Manual as well as in the PowerPoint files for the chapter.

E-commerce is continually evolving and has become a thriving marketplace not only for products but also for services and content, such as social networks, user-generated content (video, photos, and blogs), and, of course, entertainment such as movies, TV, video, music, and games.

Today’s e-commerce is predominantly social, mobile, and increasingly, local. We weave these topics throughout the text into all chapters, because they are increasingly impacting all aspects of e-commerce. We also discuss the impact of the Covid-19 pandemic on e-commerce throughout the text.

Teaching Suggestions: Key Points The opening case, TikTok: Creators and the Creator Economy (new for this edition) highlights user-generated content, creators, and the creator economy, with a specific focus on TikTok, which has become one of the fastest-growing and most popular social networks. As you discuss the case with your students, you can also pose the following questions: • Why is TikTok so popular?

• Do you use TikTok? If so, in what manner—do you just view content or also post content?

• Do you consider yourself a creator? Have you ever received payments for content you have created?

• What are some of the negative consequences associated with being a creator?

Section 1.1 addresses an important student concern: why they should study e-commerce.

E-commerce remains the fastest growing retail, service, and entertainment channel. Ecommerce revenues have been growing at double-digit rates since 2010, outpacing traditional retail by a factor of two or three, and are expected to continue growing at more than 10% per year through 2026. Even with recent economic conditions that have led to a slowing of hiring in the tech sector, there continue to be thousands of job opportunities that require skills in e-commerce. As noted in the text, eventually all commerce will be “e-commerce”. You should let students know that while e-commerce has now been around for about 25 years, the e-commerce revolution is still, relatively speaking, in the beginning phase. The very early tumultuous years are over, but there are many powerful, commercial, and technological forces that will push e-commerce along in the next decades. To emphasize this, you can highlight the bullet points noted in Table 1.1. Video Case 1.1, Shopify and the Future of E-commerce, appears at the top of page 14 of the eText, in the “Major Trends in E-commerce” section. See pages 18 to 20 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Much of the first chapter is aimed at getting some basic definitions straight. The ecommerce field is filled with language that some students might find confusing. In Section 1.2, we distinguish between e-commerce and e-business to set the focus clearly .

6 on commercial transactions over the Internet. We also briefly introduce the Internet, the Web, and the mobile platform as the technological building blocks of e-commerce. We examine each of these topics in much more depth in Chapter 3. Figure 1.3 highlights the growing use of mobile devices to access the Internet, with about 93% of Americans using a mobile device to do so at least some of the time.

The Insight on Technology case, Will Apps Make the Web Irrelevant? (updated for this edition), looks at the rise in importance of apps as compared to the Web in the ecommerce landscape. Class discussion questions for this case might include: • What are the advantages and disadvantages of apps, compared with websites, for mobile users?

• What are the benefits of apps for content owners and creators?

• What are progressive web apps (PWAs) and how do they differ from native apps?

• Will apps eventually make the Web irrelevant? Why or why not?

In Section 1.3, we examine the unique features of e-commerce technology. We use a variation of Table 1.2 throughout the text in various contexts, so it’s a good idea to familiarize students with it. Ask students if they think some dimension is missing from the table, or to compare these features with, say, television. Video Case 1.2, YouTube and the Creator Economy, appears at the bottom of page 20 of the eText, at the end of the “Social Technology: User-generated Content (UCG), Creators, and Social Networks” section. See pages 18 to 20 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

It’s also important for students to understand the differences between the various types of e-commerce, such as B2C and B2B. A short preview of this topic is covered in Section 1.4. Figure 1.5 illustrates the growth of B2C e-commerce, from its inception in 1995 through 2026, when it is projected to reach $2 trillion. Figure 1.6 focuses solely on the online retail component of B2C e-commerce. The tall tree representing total retail revenues compared to the smaller sapling depicting online retail should help to drive home to students the fact that online retail still comprises a relatively small part of total retail and thus has much room to grow. This is a good time to further discuss the impact of the Covid-19 pandemic, which accelerated this growth. Figure 1.9 graphically illustrates the relative size of different types of e-commerce, to help emphasizethe point that although B2C, and social-mobile-local e-commerce may be the types students are most familiar with, or hear about the most, they are all dwarfed by B2B. An important distinction in Chapter 1 is the contrast between the early years of ecommerce and e-commerce today. We discuss e-commerce in the context of three stages: an early period of invention, a period of consolidation, and then today’s e-commerce, which we refer to as a period of “reinvention.” Figure 1.10 places these periods along a timeline, while Table 1.4 describes the key dimensions of each of these periods. An engaging animated video created by the authors and narrated by Ken Laudon, available in

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7 the eText, provides additional context and background with respect to Figure 1.10 and this topic.

The discussion of the early years of e-commerce and its initial promise in Section 1.5 allows you to introduce some key terms such as disintermediation, friction-free commerce, first mover (versus fast follower), and network effect. These terms appear again and again in later chapters.

The Insight on Business case, Y Combinator’s Startup Boot Camp (updated for this edition), provides an interesting look at Y Combinator (YC), a startup incubator, including changes to its process required by the Covid-19 pandemic. Students might be inspired by some of the companies that have participated in YC’s boot camp and are now significant successes, such as digital payment service provider Stripe, on-demand room rental service Airbnb, on-demand grocery delivery service Instacart, on-demand restaurant delivery service DoorDash, cloud-based file storage service Dropbox, and video game streaming network Twitch, among others. Class discussion questions for this case might include: • Why do you think investors today are still interested in investing in startups?

• What are the benefits of investing in a company that is a graduate of a YC boot camp?

• Is an incubator the best solution for startups to find funding? Why or why not?

Section 1.6 lays out the organizing themes that we use to understand e-commerce throughout the book: business, technology, and society.

The Insight on Society case, Facebook and the Age of Privacy (updated for this edition), in this section touches on Facebook’s business model and the technology of social networks, but focuses primarily on some of the societal themes that recur throughout the book. Do consumers in a public marketplace have a legitimate expectation of privacy? Is there anything consumers can do to protect their privacy? Can the Web be designed to better protect privacy? You might point out to students that government and business surveillance of their online behavior is commonplace. Although some students might say, “So what,” you might take this opportunity to ask students if there is any personal information about themselves that they would not like to be shared on the Internet. Other class discussion questions might include the following: • Why are social networks interested in collecting user information?

• What types of privacy invasion are described in the case? Which is the most privacy-invading, and why?

• Was the FTC’s $5 billion fine and its placement of restrictions on Facebook’s business operations sufficient in light of Facebook’s history with respect to privacy violations?

• How do you protect your privacy on the Web?

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8 Section 1.7 focuses on careers in e-commerce. We conclude each chapter of the book with a section that examines a job posting by an Internet/e-commerce company for an entry-level position, giving a brief overview of the company, some details about the position, a list of the qualifications and skills that are typically required, some tips for students about how to prepare for an interview, as well as some possible interview questions and answers. We’ve designed this section to help your students understand how the concepts they’ve learned in the chapter can help them find and get a job, as well as provide a good opportunity for a class discussion about possible careers.

The chapter-ending case study, Uber: Everything on Demand, captures some of the recent changes in the foundations of e-commerce. Uber is at the forefront of the ondemand services business model that is being used in many different arenas, from transportation, to lodging, to personal services. The case illustrates many of the trends that have impacted, and will continue to impact, e-commerce, including the use of smartphones and tablets for purchasing goods and services, the growth of contract employment, and the disruption of traditional business models. You can also use the case as an introduction to some of the social, legal, and ethical issues facing e-commerce companies, such as the question of whether people who work for a technology platform like Uber are really employees; whether local governments should regulate on-demand service providers to ensure public safety; and the implications of the on-demand business model spreading throughout the economy and labor force.

Case Study Questions and Answers 1.

How does an on-demand services business model such as Uber’s differ from a retail e-commerce business model?

An on-demand services business model such as Uber’s differs from a retail ecommerce business model in that Uber does not sell goods, like retail e-commerce firms do. Instead, Uber created a smartphone app/Internet cloud-based platform that enables people who want a service (in this case, taxi service) to find a provider with resources, such as a personal automobile and a driver with available time, to fill the demand.

2.

What ethical and social issues are raised by Uber and its business model?

Uber and its business model raise a number of ethical and social issues. It classifies its drivers as independent contractors rather than employees, which deprives them of a number of legal protections. Uber has been the target of numerous lawsuits filed on behalf of its drivers, accusing the company of mistreatment, lack of due process, underpayment, and violation of state employment laws. Governments have found Uber to be a disruptive threat, and do not want to give up regulatory control over passenger safety, driver training, or revenue generated by charging taxi firms for a taxi license and sales taxes. Uber has been accused of violation public transportation laws and regulations throughout the world, abusing personal information it has collected on users of the service; seeking to use personal information to intimidate journalists; failing

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9 to protect public safety by refusing to do adequate criminal, medical, and financial background checks on its drivers; taking clandestine actions against its chief U.S.based competitor, Lyft, in order to disrupt its business; and being tone-deaf to the complaints of its own drivers against the firm’s efforts to reduce driver fees.

Critics also fear the long-term impact of on-demand service firms because of their potential for creating a society of part-time, low-paid, temp work displacing traditionally full-time, secure jobs—the so-called “uberization” of work. Uber has also been charged with corporate mismanagement and misconduct (including using a secret program known as Greyball to track and evade regulators and other law enforcement officials), workplace discrimination and sexual harassment, and violation of the privacy of its customers by using its mobile app to track the location of those customers at all times, even when the app was not in use. In December 2021, its former chief security officer was charged with wire fraud in addition to a previous obstruction of justice charge related to his role in an alleged cover-up of a data breach at Uber that exposed approximately 57 million user and driver records.

3.

What unique features of e-commerce technology does Uber’s business model rely on?

Uber’s business model relies on a number of unique features of e-commerce technology, including ubiquity (its service does not require the consumer to travel to a particular physical location; instead it is available in many different locations and at all times); global reach(versions of its service are available throughout the world); universal standards (its service is enabled by the universal standards of the Internet, upon which it business model relies); richness (the app provides complex and content-rich information, such as real-time location information); detailed interactivity (the app enables the consumer seeking its service to interact with the provider of the service); information density (the app increases the amount and quality of information available to market participants, enabling consumers to choose a less expensive service than a traditional taxi service; personalization and customization (the app enables the service to respond to the individual customer seeking a service at a particular location and time, and social technology (the rating feature of the app).

End-of-Chapter Questions and Answers 1.

What is e-commerce? How does it differ from e-business? Where does it intersect with e-business?

E-commerce, in the popular sense, can be defined as: The use of the Internet and the Web to conduct business transactions. A more technical definition would be: E-commerce involves digitally enabled commercial transactions between and among organizations and individuals. E-commerce differs from e-business in that no commercial transaction (an exchange of value across organizational or individual boundaries) takes place in e-business. E-business is the digital enablement of transactions and processes within a firm and, therefore, does not

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10 include any exchange in value. E-commerce and e-business intersect at the business firm boundary at the point where internal business systems link up with suppliers. For instance, e-business turns into e-commerce when an exchange of value occurs across firm boundaries.

2.

What is information asymmetry?

Information asymmetry refers to any disparity in relevant market information among the parties involved in a transaction. It generally applies to information about price, cost, and hidden fees.

3.

What are some of the unique features of e-commerce technology?

4.

The unique features of e-commerce technology include: • Ubiquity: It is available just about everywhere and always.

• Global reach: The potential market size is roughly equal to the size of the online population of the world.

• Universal standards: The technical standards of the Internet and, therefore, of conducting e-commerce are shared by all nations in the world.

• Richness: Information that is complex and content-rich can be delivered without sacrificing reach.

• Interactivity: E-commerce technologies allow two-way communication between the merchant and the consumer.

• Information density: The total amount and quality of information available to all market participants is vastly increased and is cheaper to deliver.

• Personalization/Customization: E-commerce technologies enable merchants to target their marketing messages to a person’s name, interests, and past purchases. They allow a merchant to change the product or service to suit the purchasing behavior and preferences of a consumer.

• Social technology: Enables user content generation and distribution and supports development of social networks. .

What is a marketspace?

A marketspace is a marketplace that is extended beyond traditional boundaries because it is removed from the restrictions of geography and time. The ubiquity of e-commerce technologies liberates the market from these limitations.

5.

What are three benefits of universal standards?

• • •

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Reduced search costs for consumers Simpler, faster, and more accurate price discovery Lower market entry costs for merchants

Compare online and traditional transactions in terms of richness.

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11 Traditional transactions can provide more richness in terms of face-to-face service including visual and aural cues. However, traditional transactions are limited in terms of how many people can be reached at a single time. Online transactions, which can be global in reach, can provide content that is both complex and rich, overcoming the traditional trade-off between reach and richness.

7.

Name three of the business consequences that can result from growth in information density.

Growth in information density can result in: • Greater price transparency: Consumers can easily find out the variety of prices in a market.

• Greater cost transparency: Consumers can discover the actual costs merchants pay for products.

• Greater opportunities for marketers to practice price discrimination: Because marketers can gather much more information about their customers, they can segment the market into groups based on willingness to pay different prices for the same or nearly the same goods.

8.

What is Web 2.0? Give examples of Web 2.0 websites or apps and explain why you included them in your list.

Web 2.0 is a set of applications and technologies that enable user-generated content, such as online social networks, blogs, video and photo sharing sites, and wikis. Students may list Facebook, Instagram, TikTok, Twitter, Pinterest, YouTube, Wikipedia, Tumblr, and WordPress, among others, as examples.

9.

Give examples, besides those listed in the chapter materials, of B2C, B2B, C2C, and social, mobile, and local e-commerce.

The answers to this question will vary. Possible examples include: • B2C: E-tailers: Bluefly Uncommon Goods • B2C: Service Providers: E*Trade Travelzoo • B2C: Portals: Yahoo MSN • B2C: Content Providers: Wall Street Journal Consumer Reports • B2B: Grainger Ariba .

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C2C:

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Facebook Marketplace Locanto Social e-commerce: Shoppable ads and posts on Facebook and Instagram Pinterest Product Tagging in Pins

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Amazon Business

Mobile e-commerce: Mobile retail websites and apps Mobile banking websites and apps Mobile travel services websites and apps Mobile advertising Mobile content Mobile payment services Local e-commerce: LivingSocial Locally

How are e-commerce technologies similar to or different from other technologies that have changed commerce in the past?

E-commerce technologies are similar to other technologies that have changed commerce in the past in that each new technological innovation spawns explosive growth characterized by thousands of start-up companies. Many of these fail in the period of retrenchment and consolidation that follows. As with other technological revolutions, eventually it is the large, already established firms who have the resources to exploit the new technology. The growth of the Internet, when compared to other technologies such as radio and television, has been much more rapid: The Internet and Web achieved a 53% share of U.S. households in only 10 years. In comparison, it took 38 years for radio and 17 years for television to achieve a 30% share.

11.

Describe the three different stages in the evolution of e-commerce.

The three stages in the evolution of e-commerce are invention, consolidation, and reinvention. Invention took place from 1995–2000 and was characterized by excitement and idealistic visions of markets in which quality information was equally available to both buyers and merchants. E-commerce did not fulfill these visions during its early years, however. After 2000, e-commerce entered its second stage of development—consolidation. In this stage, more traditional firms began to use the Web to enhance their existing businesses. Less emphasis was placed on creating new brands. In 2007, though, e-commerce entered its current stage—reinvention—as social network and Web 2.0 applications reinvigorated ecommerce and encouraged the development of new business models.

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13 12.

Define disintermediation and explain the benefits to Internet users of such a phenomenon. How does disintermediation impact friction-free commerce?

Disintermediation means the removal of the market middlemen—the distributors, wholesalers, and other intermediaries—between producers and consumers. The predicted benefits to Internet users include the decline of prices for products and services as manufacturers and content originators develop a direct relationship with their customers, and the elimination of payments to these middlemen.

Disintermediation of markets would create intense competition. This, along with lowered transaction costs, would eliminate product brands, eventually resulting in the elimination of unfair competitive advantages and extraordinary returns on capital—the vision of friction-free commerce.

13.

What are some of the major advantages and disadvantages of being a first mover?

The major advantages of being a first mover are the ability to build a brand name early on and establish a large customer base before followers enter the market, and the ability to build switching costs into the technology or services offered so that customers will find it discomfiting to change to a late entering competitor.

The major disadvantage is that historically, many first movers have not succeeded and are instead replaced by the fast follower, larger firms with the financial, marketing, legal, and production assets necessary to develop mature markets.

Generally, only a handful of first-mover firms become successful long-term businesses as the start-up costs and time it takes to build a profitable business are often underestimated.

14.

What is a network effect, and why is it valuable?

A network effect occurs where all participants receive value from the fact that everyone else uses the same tool or product (for example, a common operating system, telephone system, or software application such as a proprietary instant messaging standard or an operating system such as Windows), all of which increase in value as more people adopt them. The network effect is quantified by Metcalfe’s Law, which argues that the value of a network grows by the square of the number of participants.

15.

Discuss the ways in which the early years of e-commerce can be considered both a success and a failure.

The early years of e-commerce can be considered a success because of the technological success that occurred as web-enabled transactions grew from thousands to billions. The digital infrastructure proved to be a solid foundation on which to build a viable marketing channel. From a business perspective, the early years of e-commerce were of mixed success with just a tiny percentage of dotcom companies surviving. However, the survivors have benefited from the

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14 continued growth in B2C revenues. The early years of e-commerce can also be considered a success in that the transfer of information has been a huge accomplishment as consumers learned to use the Web to procure information about products they wanted to purchase (Internet-influenced commerce).

16.

What are five of the major differences between the early years of e-commerce and today’s e-commerce?

The major differences between the early years of e-commerce (the Invention stage), the period between 2001 and 2006 (the Consolidation stage), and today’s e-commerce (the Reinvention stage) are as follows: • During the Invention stage, e-commerce was primarily technology-driven.

During the Consolidation stage, it was primarily business-driven. Today’s e-commerce, although still business-driven, is also audience-, customer-, and community-driven.

• During the Invention stage, firms placed an emphasis on revenue growth, quickly achieving high market visibility/market share. During the Consolidation stage, the emphasis was on building profitable firms.

Today, audience and social network growth are being emphasized.

• Start-ups during the Invention stage were financed by venture capitalists, while those in the Consolidation stage were primarily financed by traditional methods. Today, start-ups are once again being financed by venture capitalists, albeit with smaller investments. In addition, many large online firms are now entering the market, and acquiring early-stage firms via buyouts.

• During the Invention phase, e-commerce was, for the most part, ungoverned. In the Consolidation stage, there was a rise in the amount of regulation and governmental controls by governments worldwide. Today, there is extensive government regulation and surveillance.

• The Invention stage of e-commerce was characterized by the young entrepreneurial spirit. During the Consolidation stage, e-commerce was primarily dominated by the retail giants. Today, large purely Web-based firms are playing a key role.

• The Invention phase was characterized by an emphasis on deconstructing traditional distribution channels and disintermediating existing channels.

During the Consolidation stage, intermediaries strengthened. Today, there is a proliferation of small online intermediaries that are renting the business processes of larger firms.

• “Perfect markets” in which direct market relationships with consumers, the decline of intermediaries, and lower transaction costs resulted in intense competition and the elimination of brands, are being replaced by imperfect markets. Imperfect markets are characterized by a strengthening of brand name importance, increasing information asymmetries, price discrimination, and network effects.

• The early years of e-commerce saw an infusion of pure online businesses that thought they could achieve unassailable first-mover advantages. .

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During the Consolidation period, successful firms used a mixed “bricksand-clicks” strategy, combining traditional sales channels such as physical stores and printed catalogs with online efforts. Today, there is a return of pure online strategies in new markets, as well as continuing extension of the “bricks-and-clicks” strategy in traditional retail markets.

The early years of e-commerce were dominated by the first movers. In the Consolidation stage, e-commerce was dominated by the well-endowed and experienced Fortune 500 and other traditional firms. Today, first-mover advantages are returning in new markets as traditional Web players catch up. Facebook is an excellent example of not-quite-a-first mover, but close enough to build a huge online audience.

During the Invention stage, e-commerce primarily involved the sale of low-complexity retail products. In the Consolidation phase, e-commerce broadened to also encompass high-complexity retail products and services.

Today, e-commerce involves not only the sale of retail products and services, but also content.

What are some of the privacy issues that Facebook has created?

Privacy advocates, politicians, and commentators point to the following practices as threats to the privacy of Facebook users: • Facebook’s business model is based on building a database of billions of users who are encouraged, or perhaps even deceived, into relinquishing control over personal information, which is then sold to advertisers and other third-party developers.

• Many of Facebook’s features and services are enabled by default and are difficult to opt-out of.

• Facebook has made it difficult for users to find out how their personal information is being used, or with whom it is being shared.

• Facebook makes it difficult for users to change privacy settings.

• Facebook makes it very difficult to understand its information use policy.

18.

Discuss the impacts of the Covid-19 pandemic on retail e-commerce and mcommerce.

Retail e-commerce grew by more than 35% in 2020 in part due to the Covid-19 pandemic. The pandemic has resulted in an increased, and what is expected to be a lasting, shift to e-commerce. Mobile digital travel sales experienced a significant decline in 2020 because of the pandemic but rebounded in 2021,

19.

What platform do the majority of Internet users in the United States use to access the Internet?

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16 More than 73% of all Internet users in the United States (about 220 million people) use both desktop/laptop computers and mobile devices to access the Internet.

20.

What is the metaverse?

The metaverse is an immersive, 3D Internet experience using augmented and virtual reality technologies.

Projects and Answers 1.

Choose an e-commerce company and assess it in terms of the eight unique features of e-commerce technology described in Table 1.2. Which of the features does the company implement well, and which features poorly, in your opinion?

Prepare a short memo to the president of the company you have chosen, detailing your findings and any suggestions for improvement you may have.

The purpose of this exercise is for students to begin looking at the websites they visit from a critical perspective and to begin analyzing the information they can find at those sites. Presentations/reports submitted for this project will differ depending on the example selected by students.

In assessing a website in terms of the eight unique features of e-commerce technology, a student might focus on the following: • Ubiquity: What kinds of mobile applications, if any, does the site offer?

(Such applications increase ubiquity by making e-commerce available from a wider range of devices.)

• Global reach: Does the website try to reach consumers outside of its host country? If so, how well is this implemented?

• Universal standards: There should not be much variance between websites with respect to this feature of e-commerce technology.

• Richness: Does the website use animated graphics, online video, or streaming media to deliver marketing messages? If so, how effective does the student find these features? Do they aid the consumer’s experience, or hinder it?

• Interactivity: In what ways is the website interactive?

• Information density: Students should note what, if any, information (via registration or through other means) a website overtly collects from visitors or users.

• Personalization/Customization: In what ways does the website personalize its marketing messages? For instance, is the user greeted by name? Can products and services be customized?

• Social technology: Does the website offer ways for consumers to share opinions and preferences? Is there any capacity for content generated by users?

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17 2.

Search online for an example of each of the major types of e-commerce described in Section 1.4 and listed in Table 1.3. Create a presentation or written report describing each company (take a screenshot of each, if possible), and explain why it fits into the category of e-commerce to which you have assigned it.

The purpose of this project is for students to begin looking at the websites they visit from a critical perspective and begin analyzing the information they can find at those sites. Presentations/reports submitted for this project will differ depending on the examples selected by students. Examples might include the following: • B2C: Any one of a number of B2C companies such as online retailers, service providers, portals, content providers, and community providers might be selected.

• B2B: Any one of a number of B2B companies such as Elemica (consortia), Grainger (e-distributor), and Inventory Locator Service (ILS) (exchange) could be selected.

• C2C: Leading examples of C2C e-commerce companies include eBay, Craigslist, Etsy, and others that act as an intermediary between consumers seeking to make transactions.

• M-commerce: Almost all large e-commerce companies now have significant mobile commerce capabilities. Some possibilities students may choose include Amazon, eBay, Orbitz, or any one of a number of others.

• Social e-commerce: Facebook, Instagram, and Pinterest are at the center of social e-commerce.

• Local e-commerce: Companies that are involved with local e-commerce include Groupon, LivingSocial, Uber, Airbnb, and a host of others.

For each example chosen, the student should describe the features of the company that indicate which category of e-commerce it falls into. For example, if Barnes & Noble is chosen as a representative of B2C e-commerce, the student might describe the features he/she sees available on the home page. They should note that Barnesandnoble.com focuses primarily on the sale of books, music, software, magazines, prints, posters, and related products to individual consumers.

3.

Given the development and history of e-commerce in the years 1995–2022, what do you predict we will see during the next five years of e-commerce? Describe some of the technological, business, and societal shifts that may occur as the Internet continues to grow and expand. Prepare a brief presentation or written report to explain your vision of what e-commerce will look like in 2030.

Although each student’s answer may differ depending on their personal perspective on e-commerce, here are some possible predictions: • Technological shifts: The Internet will continue to grow, but at a slower pace. Internet usage, however, will become more focused, targeted, and intense. New client platforms will continue to emerge. Mobile devices such as smartphones and tablets will become even more predominant. .

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Business shifts: Larger traditional firms will continue to dominate ecommerce. There will be an even greater emphasis on profitability for online ventures. Alternatively, as the costs of creating and running an ecommerce presence decline, more innovative small firms will enter the marketplace and challenge the leaders in e-commerce.

Societal shifts: There will be a greater emphasis on regulation and control over the Internet and e-commerce in areas such as content.

Prepare a brief report or presentation on how companies are using Instagram or another company of your choosing as a social e-commerce platform.

Student answers will vary depending on the company they choose as the subject of their report or presentation. For example, if a student chooses Instagram, they might note that in 2022, Instagram removed the Shop tab from its in-app navigation bar. However, despite removing the Shop shortcut, its users are still encouraged to set up and run shops on the app. It also still provides the following shopping features: • Instagram Shops: Enables users to browse products and explore collections (products curated into themes). Product detail pages provide relevant information in items in the Shop’s product catalog, such as pricing and descriptions. They also pull in content where the product is tagged on Instagram and drive users to a website to complete a transaction. Checkout on Instagram also lets people make purchases directly in-app and is currently available to eligible U.S. business and creator accounts.

• Product Tags highlight items from a shop’s product catalog directly in images and videos, including in Feed, Reels, Stories, and product mentions in the profile bio or Feed copy.

• Ads with Product Tags increase the reach of shopping posts.

• Product launches: Businesses with Checkout on Instagram can announce an upcoming product launch, so users can preview details and set remainders to buy as soon as the product is available.

5.

Follow up on events at Uber since July 2022(when the end-of-chapter case study was prepared). Prepare a short report on your findings.

Given the substantial number of press reports on Uber, students should be able to find a plethora of information by using the Web to search for articles.

Video Cases The Chapter 1 eText features two embedded video cases. Video Case 1.1, Shopify and the Future of E-commerce, appears at the top of page 14 of the eText, in the “Major Trends in E-commerce” section. Shopify is a Canadian multinational e-commerce company that provides a proprietary e-commerce platform for online and physical stores. Shopify also provides a variety of services, including website design and creation, payments, marketing, and logistics. As of early 2023, Shopify powers millions of businesses, .

19 ranging from Fortune 500 companies to small and medium-sized businesses, in more than 175 countries. It’s likely that at least some of your students will have made purchases from merchants that use the platform. In the video, released in June 2022, Shopify’s president, Harley Finkelstein, discusses what he describes as a new era of e-commerce that Shopify is labeling “Connect to Consumer.” Questions that you can use for class discussion or as a student assignment include the following: • How does Finkelstein distinguish “Connect to Consumer” from “Direct to Consumer”?

Answer: Finkelstein characterizes “Direct to Consumer” as very transactional. In contrast, “Connect to Consumer” will enable brands to remove barriers between the brand and consumers, nurture loyal communities, and meet consumers online/offline, and wherever they spend time, thereby creating an emotional connection between the consumer and the brand.

• How does Finkelstein distinguish what Shopify offers businesses that use its platform compared to what Amazon offers them?

Answer: In response to a statement by Andy Jassy, Amazon CEO, that sellers on Amazon primarily benefit from access to the hundreds of millions of Amazon customers, Finkelstein noted that he believes the future of retail will be based on a direct connection between brands and consumers. Third-party merchants on Amazon are basically “renting” customers from Amazon, rather than building their own business. Shopify, in contrast, enables consumers to have a direct relationship with brands. He cites major brands such as Mattel, Crayola, Herman Miller, Procter and Gamble, as using Shopify for this reason.

• Question: In what way does Shopify reflect the trend toward omnichannel retailing?

Answer: Finkelstein notes that post-pandemic, it had 80% growth in point-of-sale gross merchandise value, and that thousands of stores around the world use Shopify to power their stores, using a variety of features that Shopify offers for physical retailers.

Video Case 1.2, YouTube and the Creator Economy, appears at the bottom of page 20 of the eText, at the end of the “Social Technology: User-generated Content (UCG), Creators, and Social Networks” section. Students are likely to be well-acquainted with YouTube, but perhaps may not be as familiar with the role that creators play on the platform, and how creators can earn revenue from their content. In the Bloomberg video, released in September 2022, YouTube creators Colin Rosenblum and Samir Chaudry discuss YouTube’s announcement of various programs for monetizing creator content on YouTube, such as expanding access to its YouTube Partner Program and introducing a revenue sharing model for YouTube Shorts (short-form vertical videos that are 60 seconds long or less, designed to compete with TikTok), as well as offering observations on the creator economy. Questions that you can use for class discussion or as a student assignment include the following: • What does Samir Chaudry identify as the fundamental difference between TikTok and YouTube?

Answer: Chaudry notes that the relationship of creators and YouTube has always felt more like a partnership: i.e., when creators make money, YouTube makes .

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money, and vice versa. However, to Chaudry, the relationship with TikTok has not felt like a partnership, and that it is unclear how creators can build a career on TikTok, particularly in terms of platform payments to creators. He also notes that many TikTok users go to users for the “For You” page, rather than for specific creators. Ultimately, he characterizes YouTube as being much more creator focused, which also comes across in the way YouTube pays creators.

What trends does Colin Rosenblum identify with respect to the evolution of the creator economy?

Answer: Rosenblum notes that for the majority of creators, the primary revenue model currently is based on advertising, whether in the form of payments from a platform such as YouTube or brand sponsorships. Going forward, however, he anticipates that direct-to-consumer will play an increasing role.

What does Chaudry say about the similarity between creators and startups?

Answer: Chaudry notes that many young creators can be considered first-time entrepreneurs, with many of the same questions and concerns as any new startup, such as pricing, legal issues, taxes, and so on, He characterizes the creator economy as being a form of entrepreneurship, specifically “media-first” entrepreneurship. The problems facing the creator economy are therefore very similar to the problems faced by young startups and entrepreneurs.

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1 Instructor’s Manual and Video Cases: Chapter 2 E-commerce Business Models and Concepts Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases in eText Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 5 5 5 5 5 8 9 16 19

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2 Learning Objectives After reading this chapter, your students should be able to: ● Identify the key components of e-commerce business models. ● Describe the major B2C business models. ● Describe the major B2B business models. ● Understand key business concepts and strategies applicable to ecommerce.

Chapter Outline Connected Cars: The Next Big E-commerce Platform?

2.1 E-commerce Business Models Introduction Eight Key Elements of a Business Model Value Proposition Revenue Model Insight on Society: Foursquare’s Evolving Business Model: Leveraging Your Location Market Opportunity Competitive Environment Competitive Advantage Market Strategy Organizational Development Management Team Raising Capital Insight on Business: Startups Turn to Crowdfunding Categorizing E-commerce Business Models: Some Difficulties 2.2

Major Business-to-Consumer (B2C) Business Models Online Retailer (E-tailer) Community Provider Content Provider Portal Transaction Broker Market Creator Insight on Technology: Behind the Scenes at Etsy Service Provider

2.3

Major Business-to-Business (B2B) Business Models E-distributor E-procurement Exchanges Industry Consortia Private B2B Networks

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2.4

How E-commerce Changes Business: Strategy, Structure, and Process Industry Structure Industry Value Chains Firm Value Chains Firm Value Webs Business Strategy E-commerce Technology and Business Model Disruption

2.5

Careers in E-commerce The Company Position: Assistant Manager of E-business Qualifications/Skills Preparing for the Interview Possible First Interview Questions

2.6

Case Study:

2.7

Review Key Concepts Questions Projects References

Weathering the Storm: Twitter’s Uncertain Future

List of Key Terms advertising revenue model, p. 58 affiliate revenue model, p. 59 angel investors, p. 67 asymmetry, p. 63 barriers to entry, p. 73 business model, p. 56 business plan, p. 56 business strategy, p. 88 commoditization, p. 89 community provider, p. 73 competitive advantage, p. 63 competitive environment, p. 63 complementary resources, p. 64 content provider, p. 74 crowdfunding, p. 67 customer intimacy, p. 91 differentiation, p. 89 digital disruption, p. 92 disruptive technologies, p. 92

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4 disruptors, p. 92 e-commerce business model, p. 56 e-distributor, p. 79 elevator pitch, p. 66 e-procurement company, p. 80 exchange, p. 81 firm value chain, p. 86 first-mover advantage, p. 64 focus/market niche strategy, p. 90 freemium strategy, p. 58 incubators, p. 66 industry consortia, p. 81 industry structural analysis, p. 83 industry structure, p. 82 leverage, p. 64 management team, p. 65 market creator, p. 76 market opportunity, p. 59 market strategy, p. 64 marketspace, p. 59 online retailer (e-tailer), p. 71 organizational development, p. 65 perfect market, p. 64 portal, p. 75 private B2B network, p. 82 profit, p. 88 revenue model, p. 58 sales revenue model, p. 58 scale economies, p. 81 scope strategy, p. 90 seed capital, p. 66 service provider, p. 79 strategy of cost competition, p. 90 subscription revenue model, p. 58 sustaining technologies, p. 92 transaction broker, p. 75 transaction fee revenue model, p. 58 unfair competitive advantage, p. 64 value chain, p. 85 value proposition, p. 56 value web, p. 87 venture capital investors, p. 67

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5 List of Figures Figure 2.1 The Eight Key Elements of a Business Model, p. 57 Figure 2.2 Marketspace and Market Opportunity in the Software Training Market, p. 62 Figure 2.3 How E-commerce Influences Industry Structure, p. 84 (Figure video in eText) Figure 2.4 E-commerce and Industry Value Chains, p. 86 Figure 2.5 E-commerce and Firm Value Chains, p. 87 Figure 2.6 Internet-enabled Value Web, p. 88 List of Tables Table 2.1 Examples of Subscription Services, p. 59 Table 2.2 Five Primary Revenue Models, p. 62 Table 2.3 Key Elements of a Business Model, p. 66 Table 2.4 Key Elements of an Elevator Pitch, p. 66 Table 2.5 E-commerce Enablers, p. 71 Table 2.6 B2C Business Models, p. 72 Table 2.7 B2B Business Models, p. 80 Table 2.8 Eight Unique Features of E-commerce Technology, p. 83 Table 2.9 Business Strategies, p. 91 List of Video Cases in eText Video Case 2.1: NFT Startup Magic Eden Video Case 2.2: Venture Capital Firm Nero Overview This chapter attempts to briefly summarize the variety of ways that the Internet, Web, and mobile platform can be used to build new businesses that generate revenue and hopefully a profit. The challenge in this chapter is to focus on some simple, unchanging realities of the business world that have nothing to do with the Internet, and then to understand how the Internet can be used within this framework to develop new businesses. What some commentators say about the Internet is, “The Internet changed everything, except the rules of business.”

Teaching Suggestions: Key Points The chapter starts out with a new opening case, Connected Cars: The Next Big Ecommerce Platform? The case examines how changes in Internet technology, such as the Internet of Things, are driving the emergence of new business models. Class discussion questions for this case might include the following: ● How are new connected car technologies creating new business models? ● What is the potential impact on different forms of e-commerce, such as the content industry? ● Why are tech companies so interested in the connected car platform? ● Are there any issues with respect to “connected” cars?

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Business Models. One of the most common phrases in the e-commerce lexicon is “business model.” Put simply, a business model is a plan for making money. Like all models, a business model has several components that we describe in Section 2.1: value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team. Students need to have a good understanding of each of these elements. Figure 2.1 provides a visually striking illustration of these elements in the form of puzzle pieces that fit together as a whole. Table 2.3 revisits the key elements of a business model in the form of the key questions that must be asked and answered with respect to each element. Video Case 2.1, NFT Startup Magic Eden, appears at the bottom of page 65, at the end of the Management Team section. See pages 19 to 20 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

We discuss both business and social issues in the Insight on Society case, Foursquare’s Evolving Business Model: Leveraging Your Location (updated for this edition), which focuses on Foursquare’s location-based services business. Location-based services, which involve the merger of geo-positioning technology (GPS) and the Internet, promise to deliver advertising and useful content to users based on their location. However, this same technology results in the ability for a company to track a user’s whereabouts and pose significant privacy issues that users should consider. Class discussion questions include the following: ● Why has the shift in Foursquare’s business model been the key to success for Foursquare? ● What is your opinion of Foursquare’s characterization of itself as one of the “good guys” in the location data industry? ● How is Foursquare attempting to cope with a more privacy-conscious business environment?

Raising Capital. This section provides an overview of the primary ways that e-commerce startups raise capital, including seed capital, incubators, angel investors, venture capital investors, and crowdfunding. Students are likely to be familiar with GoFundMe, a wellknown example of donor-based crowdfunding, and perhaps Kickstarter and Indiegogo, which are examples of rewards-based crowdfunding. They are less likely to know about equity crowdfunding, which is enabled by the Jumpstart Our Business Startups (JOBS) Act. Video Case 2.2, Venture Capital Firm Neo, appears in the middle of page 67 of the eText, in the “Raising Capital” section. See page 20 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

The Insight on Business case, Startups Turn to Crowdfunding (updated for this edition), provides a further look at the crowdfunding phenomenon. Some of the class discussion questions you might want to pose to your students include the following:

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Would you feel comfortable investing in a startup that raises capital using equity crowdfunding? Why or why not?

Why is it important to democratize access to capital?

What obstacles are presented in the use of crowdfunding as a method of funding startups?

E-commerce Business Models. There is a vast variety of e-commerce business models.

Many firms pursue multiple business models at once. Nevertheless, there clearly are dominant patterns to all this variety. We describe seven different and typical e-commerce B2C business models in Section 2.2: online retailers (e-tailers), community providers (including social networks), content providers, portals, transaction brokers, market creators, and service providers. Students should be able to describe how each of these models typically expects to generate revenue and earn profit.

The Insight on Technology case, Behind the Scenes at Etsy (new for this edition), , takes a deep dive into how Etsy evolved from a barebones website into an e-commerce marketplace powerhouse.. Some questions that might help drive class discussion of this case include the following: ● What are the technologies that Etsy uses to create an online platform for sellers and buyers? ● What issues did Etsy face creating its platform? ● Have you ever used Etsy as either a seller or buyer? What was your experience with the platform? ● What challenges does Etsy face in the future?

B2B Models. B2B e-commerce is several orders of magnitude larger than B2C ecommerce. In Section 2.3, we describe the major generic types of B2B e-commerce: edistributors, e-procurement companies, exchanges, industry consortia, and private B2B networks. Each of these models has a distinct revenue model, described further in Table 2.7.

How E-commerce Changes Business. In Section 2.4, we look at how e-commerce can change business in four major areas: ● Industry structure ● Industry value chains ● Firm value chains ● Firm Value Webs E-commerce can change industry structure by introducing substitute products, increasing the bargaining power of suppliers or of consumers and buyers, and by changing existing barriers to entry. Figure 2.3 provides a graphic illustration of these concepts. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 2.3 and this topic. The Internet can change industry value chains insofar as suppliers, manufacturers,

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8 distributors, retailers, and customers can interact in new and different ways. You can use Figure 2.4 to review this concept. Firm value chains (see Figure 2.5) can be directly affected by e-commerce through its potential impact on how the business performs various business processes such as warehousing, manufacturing, sales, and customer support. For instance, Amazon uses the Internet to provide consumers with access to a much larger inventory of books than traditional retailers and to accomplish order entry, provide post-sales support, and offer ordering from its suppliers. Internet-enabled firm value webs (see Figure 2.6) allows a firm to coordinate with its strategic partners, suppliers, and customers more easily.

Finally, e-commerce and the Internet can change business strategies by allowing the firm to develop new ways of differentiating its products in the marketplace, lowering costs, or changing the scope of its operations. For instance, Dell uses e-commerce as a way of achieving lower costs in the desktop/laptop computer business and created an entirely new way of organizing large-scale desktop/laptop computer production—build to order.

Table 2.9 summarizes the basic business strategies with which your students should be familiar.

Students will likely have heard or seen reference to the terms “disruptive technologies” and “digital disruption.” A section on business model disruption examines how ecommerce technology has radically changed entire industries, driving incumbent firms out of business, spawning new firms, and in some cases, radically changing the entire industry.

In Section 2.5, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as an assistant manager of e-business.

The chapter ends with a chapter-ending case study on Twitter’s business model, Weathering the Storm: Twitter’s Uncertain Future (updated for this edition),which focuses on Twitter’s continued efforts to find a workable business model in the midst of the chaos that ensued around Elon Musk’s offer to purchase, and ultimate acquisition of, the company. At the time the case was written (October 2022), Musk had just agreed to proceed with the acquisition, which was completed on October 27, 2022. You can ask students to investigate what has happened at Twitter subsequent to that date, and about Twitter’s current future prospects in light of those events.

Case Study Questions and Answers 1.

What are Twitter’s most important assets?

Twitter has a number of important assets, such as user attention, significant audience size (unique visitors), and its searchable database of tweets, which contain the real-time comments, observations, and opinions of its audience.

Twitter has become a significant media platform for the distribution of news.

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How has Twitter’s business model evolved since it was founded?

Twitter’s basic idea was to marry short text messaging on cell phones with the Web and its ability to create social groups. Twitter then expanded beyond simple text messages to article previews, photographs, videos, and animated images.

Twitter derives the lion’s share of its revenue from a variety of different types of advertising displayed on the platform, although it also derives some revenue from licensing its user data to companies seeking to improve their understanding of customer sentiment. At one point, Twitter also hoped that it would become a hub of social e-commerce and rolled out a Buy Now button in 2014 that allowed users to add products to their Amazon shopping cart. However, in 2016, development on the service halted due to users’ lukewarm response, and it was then phased out.

Other services that failed to take off, such as Twitter’s #Music app, have also been shelved and even popular features like its Vine app for short-form video were discontinued. Instead, Twitter has made changes to bolster its ability to deliver the news, including increasing the character limit for tweets from 140 characters to 280 characters and showing more promoted news content in user timelines. Twitter redesigned the Explore tab within its app to improve ease of use, added breaking news alerts, and launched dedicated content hubs for significant events that allow users to follow events the way they might follow a person. Twitter has also focused on improving its streaming video capability, including livestreaming, highlight video clips, and video-on-demand agreements across a number of verticals including sports, news, gaming, and entertainment.

However, it is not possible to predict how Twitter’s business model may continue to evolve under the ownership of Elon Musk, i.

3.

Why is machine learning an important initiative for Twitter?

Developing machine learning capabilities has been an important initiative for Twitter. It established an internal research group called Cortex that focuses on improving Twitter by enabling advanced artificial technologies. Twitter purchased several artificial intelligence startups, such as Magic Pony, Aiden, and Fabular AI to bolster this effort. Using AI techniques has enabled Twitter to adjust the way it ranks tweets in users’ feeds, emphasizing relevance to individual users instead of simple chronological order. Machine learning algorithms now decide what types of push notifications to deliver to users.

4.

What steps did Twitter take to increase revenue in 2021?

In 2020, the Covid-19 pandemic had a severe impact on Twitter. Although total revenue increased by 7%, it recorded a net loss of $1.4 billion for the year. In 2021, Twitter tried to regroup. It introduced several new products, such as Twitter Spaces, a new way to have live audio conversations on Twitter, and Communities,

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10 a new way to easily find and connect with people who have similar interests.

Twitter also jumped on the creator bandwagon and introduced Ticketed Spaces, Super Follows, and Tips, which give people the ability to pay creators using a variety of payment methods. Twitter also introduced Twitter Blue, its first-ever consumer subscription offering. Twitter also returned to social e-commerce efforts it had previously abandoned, launching a pilot program of a shopping feature called Shop Module that allows business to showcase their products at the top of their profiles and allows users to purchase items without having to leave Twitter.

5.

Why is Twitter’s future currently uncertain?

Twitter’s future is currently uncertain due to its purchase by Elon Musk. The chaos that accompanied Musk’s acquisition resulted in an unexpected drop in advertising revenue, and although Musk completed the acquisition in October 2022, the chaos has continued. As a result, Twitter remains in turmoil, with its future uncertain.

End-of-Chapter Questions and Answers 1.

What is a business model? How does it differ from a business plan?

A business model is a set of planned activities (business processes) that are designed to result in a profit in the marketplace. A business plan, on the other hand, is a document that outlines the details of a business model.

2.

What are the eight key components of an effective business model?

The eight key components of an effective business model are: ● Value proposition ● Revenue model ● Market opportunity for the firm (the marketspace and how big it is) ● Competitive environment for the firm (who the competitors are in the marketspace) ● Competitive advantage the firm brings to the marketspace (the unique qualities that set the firm apart from others in the marketspace) ● Market strategy the firm will use to promote its products and services ● Organizational development of the firm that will enable it to carry out its business plan ● Capabilities of the management team to guide the firm in its endeavors

3.

What are Amazon’s primary customer value propositions?

Amazon’s primary customer value propositions are unparalleled selection and convenience.

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4.

Describe the five primary revenue models used by e-commerce firms.

The five primary revenue models used by e-commerce firms are: ● Advertising revenue model ● Subscription revenue model ● Transaction fee revenue model ● Sales revenue model ● Affiliate revenue model The advertising model derives its profit by displaying paid advertisements on a website or mobile app. The goal is to convince advertisers that the website or app has a sizeable user base, or a user base that meets a marketing niche sought by the advertiser. Firms that use the subscription model offer users access to some or all their content or services for a subscription fee. Firms that use the transaction fee model derive profit from enabling or executing transactions. For instance, transaction fees are paid to eBay when a seller is successful in auctioning off a product. E*Trade receives a transaction fee when it executes a stock transaction for a customer. In the sales revenue model, companies draw profit directly from the sale of goods, information, or services to consumers. In the affiliate model, sites receive referral fees or a percentage of the revenue from any sales that result from steering business to the affiliate.

5.

Why is targeting a market niche generally smarter for a community provider than targeting a large market segment?

Targeting a market niche is generally a smarter strategy for a community provider than targeting a large market segment because targeting large market segments will only pit a company against bigger and more established competitors. Small sub-segments of larger markets have a greater potential for growth without the intense competitive pressure. Communities that place a strong emphasis on the advertising revenue model will find marketers more interested in placing ads on a site that targets a specific niche.

6.

Would you say that Amazon and eBay are direct or indirect competitors? (You may have to visit the websites or apps to answer.)

Amazon and eBay are direct competitors because they sell products and services that are very similar, and they sell to the same market segment. They both sell books, music, computers and software, games and toys, electronics, tools, movies and DVDs, and camping equipment. The two compete for essentially the same market segment of consumers. eBay may attract the bargain hunter variety of shopper who would not stop at Amazon first, but it is still essentially the same market segment.

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7.

What are some of the specific ways that a company can obtain a competitive advantage?

Some specific ways a company can obtain a competitive advantage are by developing a global market while its competitors only have a national or regional market; by obtaining favorable terms from shippers, suppliers, or labor sources that its competitors do not have; by developing a more experienced, knowledgeable, and loyal employee base than its competitors; by obtaining a patent on a product that its competitors will not be able to imitate; by having an inside track to investors willing to put up capital; by establishing a powerful brand name or a popular image that will be difficult for competitors to duplicate; and by any type of asymmetry that will give it more resources than its competitors in any area such as financial backing, knowledge, information, and/or power.

8.

Besides advertising and product sampling, what are some other market strategies a company might pursue?

One market strategy is to form strategic alliances with business partners who will help you to attract new customers and extend your market reach. Another market strategy is to use product name, packaging, and advertising to create a distinct mood or feeling about each of your product lines, and carefully target each line to a specific audience. Some firms may choose to pursue a marketing strategy that positions them as a “one-stop shop,” which carries a broad-based line of products, saving the customer search time. Others may choose to position themselves as category experts who have an in-depth and “personal” knowledge of their customers. Such firms will offer extensive customer support networks to assist their customers in their purchasing decisions and will advertise themselves accordingly. One critical factor is that a company needs to find a way to differentiate itself from the competition.

9.

How do venture capitalists differ from angel investors?

Angel investors are typically wealthy individuals (or a group of individuals) who invest their own money in exchange for an equity share in the stock in the business. In general, angel investors make smaller investments (typically $1 million or less) than venture capital firms, are interested in helping a company grow and succeed, and invest on relatively favorable terms compared to later stage investors. Venture capital investors typically become more interested in a start-up company once it has begun generating some revenue, even if it is not profitable. Venture capital investors invest funds they manage for other investors such as investment banks, pension funds, insurance companies, or other businesses, and usually want to obtain a larger stake in the business and exercise more control over the operation of the business. Venture capital investors also

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13 typically want a well-defined “exit strategy,” such as a plan for an initial public offering or acquisition of the company by a more established business within a relatively short time (typically 3 to 7 years), that will enable them to obtain an adequate return on their investment.

10.

Why is it difficult to categorize e-commerce business models?

It is difficult to categorize e-commerce business models because the number of models is limited only by the human imagination, and new business models are being invented daily. Even within the broad-based generic types there are overlaps, and fundamentally similar business models may appear in more than one. The type of e-commerce technology used can also affect the classification of a business model. Also, some companies may employ multiple business models.

For example, Amazon is an e-tailer, content provider, market provider, ecommerce infrastructure provider, and more.

11.

Besides the examples given in the chapter, what are some other examples of vertical and horizontal portals in existence today?

Some other examples of vertical portals (vortals) include ESPN.com (sports), Bloomberg.com (business), NFL.com (sports), WebMD (medical issues), Gamers.com (games), and Away.com (travel) (Note that many of these can be considered content providers as well). It is more difficult today to find examples of horizontal or general portals, other than Yahoo, MSN, and AOL, especially in the United States. Outside of the United States, Baidu, which is the largest online search engine in China, can be considered a portal similar to Google,

12.

What are the major differences between an online retailer such as Wayfair, and an omnichannel retailer such as Walmart? What are the advantages and disadvantages of each?

The major difference between online retailers and omnichannel retailers is that online retailers do not have any ties to a physical location. The major advantages of online retailers is that they have low barriers to entry into the online e-tailer market and that they do not bear the costs associated with building and maintaining physical stores. The disadvantages are that they must quickly build a brand name from scratch and become profitable with no prior brand name or experience, which can be very difficult. The major advantages of omnichannel retailers are that they have an already established brand name, an established customer base, an established sales force, and the resources to operate on the very thin margins associated with the retail industry. It is also much less expensive for them to acquire new customers than it is for online retailers. The major disadvantages of omnichannel retailers are that they face new competition in an extremely competitive environment from new firms who may have more expertise

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14 at building credible websites, and who can focus exclusively on building rapid response order systems.

13.

What type of business and revenue model do creators typically use?

Creators typically use a content provider business model, The revenue model of creators typically involves a combination of advertising, subscription fees, and sales of digital goods.

14.

What is the difference between a disruptive technology and a sustaining technology?

Disruptive technologies are new technologies that are at the core of a change in the way business is done. Sustaining technologies are those that are used to sustain a company’s current business model, industry structure, processes, and strategies. However, sustaining technologies can sometimes be used by innovative entrepreneurs to disrupt or destroy existing business models.

15.

How does an e-procurement company differ from an exchange?

An e-procurement company helps business automate their procurement processes.

An exchange is an independent digital marketplace that connects hundreds to potentially thousands of suppliers and buyers in a dynamic, real-time environment.

16.

How have the unique features of e-commerce technology changed industry structure in the travel business?

Prior to e-commerce, the travel industry was dominated by industry participants, such as airline and hotel companies, with travel agents acting as intermediaries.

Today, online intermediaries have replaced travel agents, and play an important role, and airlines and hotel company firms conduct much of their business online.

Specifically, the ubiquity of e-commerce has created new marketing channels for both traditional travel industry firms and new entrants and has expanded the size of the overall travel industry market. The global reach of e-commerce has changed industry structure by lowering barriers to entry and enabling new entrants, such as Expedia, Travelocity, and other intermediaries, but at the same time expanding the market. The costs of industry and firm operations have decreased, enabling global competition. The universal standards of e-commerce have also lowered barriers to entry and intensified competition. However, firms have cheaper costs for computing and communication enabling broad-scope business strategies.

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15 The richness of e-commerce reduces the strength of distribution channels, decreases a firm’s reliance on traditional sales forces, and helps a firm develop better post-sales support strategies. Firms can use the interactive properties of ecommerce to develop differentiation strategies and customization techniques to reduce the threat from substitutes. Interactivity, personalization, and customization techniques also decrease a firm’s reliance on traditional sales forces, helping them to reduce operational costs. Using these techniques, some travel industry firms, such as Priceline, have been successful in differentiating themselves from the competition, thereby raising barriers to entry for potential competitors. The information density of e-commerce weakens powerful sales channels, shifting some bargaining power to consumers. It also lowers the operational costs for firms associated with obtaining, processing, and distributing information about suppliers and consumers.

17.

Who are the major players in an industry value chain and how are they impacted by e-commerce technology?

The major players in an industry value chain are the suppliers, manufacturers, distributors, transporters, retailers, and customers. E-commerce technology has helped manufacturers to reduce the costs they pay for goods using web-based B2B exchanges. Some manufacturers have also developed direct relationships with their customers online, thereby eliminating the distributors and the retailers from the value chain. Distributors can develop highly efficient inventory management systems to reduce their costs and retailers can develop highly efficient customer relationship management systems to strengthen their services to customers. Customers can search online for the best quality, delivery, and prices, thereby lowering their overall transaction costs and reducing the final price they pay for goods.

18.

What are five generic business strategies for achieving a profitable business?

Generic business strategies for achieving a profitable business include differentiation, cost, scope, focus, and customer intimacy. Differentiation involves setting your firm or product apart from the competition by establishing some unique property or consumption experience that your competitors do not have. A firm that adopts a cost strategy must have a unique set of business processes, a unique resource, or a low-cost supplier. It is essential that other firms in the marketplace do not have access to, or cannot duplicate, this because it will allow them to charge a lower price while still making a profit. A scope strategy sets out to compete in all markets around the globe, rather than just locally or regionally.

A focus strategy, on the other hand, is a plan to compete within a narrow market segment or product segment. Specialization strategists seek to become the premier provider in a small market segment or niche. A customer intimacy strategy focuses on developing strong ties with customers to increase their switching costs.

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19.

What is the difference between a market opportunity and a marketspace?

Marketspace is the area of actual or potential commercial value in which a company intends to operate. Market opportunity refers to the overall potential financial opportunities available to the firm in that marketspace.

20.

What is crowdfunding and how does it help e-commerce companies raise capital?

Crowdfunding involves using the Internet to enable individuals to collectively contribute money to support a project. There are several different types of crowdfunding. Donor-based crowdfunding is epitomized by sites such as GoFundMe, where people make contributions to others with no expectation of any return. Rewards-based crowdfunding was popularized by Kickstarter and Indiegogo. These sites, and others like them, involve a creator looking to raise money to support a project. Backers often receive some type of reward, often corresponding to the size of their contribution to the project. The sites take a small commission, usually about 5%, on completed projects. Crowdfunding of this sort has become a mainstay in the development of movies, video games, art installations, and many other types of projects. Initially, this sort of crowdfunding was not able to be used for equity investments in for-profit companies because of U.S. securities laws and regulations. However, the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012 and the issuance of regulations by the Securities and Exchange Commission ushered in equity crowdfunding (sometimes also referred to as regulation crowdfunding), which enables companies to use the Internet to solicit investors to invest in small and early-stage startups in exchange for stock. At first, only wealthy, accredited investors were allowed to invest, but subsequent regulations (Regulation A + /Title IV and Regulation CF/Title III) now enable a broader group of potential investors with lower net worth and income to also participate. Currently, a company can crowdfund up to $5 million over a 12-month period.

Projects and Answers 1.

Select an e-commerce company. Visit its website or mobile app and describe its business model based on the information you find there. Identify its customer value proposition, its revenue model, the marketspace it operates in, who its main competitors are, any comparative advantages you believe the company possesses, and what its market strategy appears to be. Also try to locate information about the company’s management team and organizational structure. (Check for a page labeled “The Company,” “About Us,” or something similar.)

Instructors may want to provide some parameters for students in choosing a company (i.e., sector [B2C, B2B, etc.]; industry [retail, services, etc.]) to limit

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17 student search time. Students can be asked to provide either a written report or an oral report accompanied by a slide presentation.

A student choosing a company such as PetSmart might provide the following information: PetSmart is a B2C online retailer. Its main customer value proposition is that it offers the broadest assortment of pet supplies at the lowest prices. PetSmart uses a sales revenue model; it operates in the specialty retail marketspace and focuses on the pet supplies niche. PetSmart is a leading pet supply company; many of its original online competitors, such as Pets.com and Petstore.com, have gone out of business. Its main competitors appear to be local pet stores and pet supply catalogs and PetSmart’s main comparative advantage is its brand name. PetSmart uses an omnichannel market strategy; it started as a traditional pet supplies retailer with hundreds of physical “superstores” and leveraged its brand to the online environment. Its marketing strategies include: pricing (low prices); providing interesting content and community on its website for its target market; affiliate marketing; and e-mail marketing through free e-mail newsletters. Information about PetSmart’s management team is available if the student follows the “More > Management Team” link from its “About” page. A Google search at the beginning of 2023 reveals that Petsmart is currently a private company owned by a private equity firm, which has announced its intention to split Petsmart off from Chewy.com, which it had acquired in 2017.

2.

Examine the experience of shopping online versus shopping in a traditional environment. Imagine that you have decided to purchase an air fryer (or any other item of your choosing). First, shop for the camera in a traditional manner.

Describe how you would do so (for example, how you would gather the necessary information you would need to choose a particular item, what stores you would visit, how long it would take, prices, etc.). Next, shop for the item on the Web or via a mobile app. Compare and contrast your experiences. What were the advantages and disadvantages of each? Which did you prefer and why?

The purpose of this assignment is to help students understand how e-commerce differs from traditional commerce. In reporting on this project, students should identify the product they shopped for and detail how they traditionally shopped for the product. For example, they might have gathered information about the product from newspapers and magazine articles, advertisements, called or visited one or more stores, or perhaps shopped for the product via mail-order catalog.

They should note what stores, if any, they visited or catalogs they looked at; how long it took them to find the product they were seeking; the level of service; the stores’ policies (e.g., on returns); and how long it took them to find and purchase the product.

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18 For their online shopping experience, students should prepare a comparable analysis. They should explain their strategy for finding information on the product (e.g., identify the search engines, if any used, the searches performed, and links followed), and then describe the shopping experience at the company from which they have decided to “purchase” the product.

They should report which shopping experience was quicker, easier, more convenient; which offered better prices; and any other specific advantages or disadvantages of each type noted. They should explain which experience they preferred and why.

3.

During the early days of e-commerce, first-mover advantage was touted as one way to success. On the other hand, some suggest that being a market follower can yield rewards as well. Which approach has proven to be more successful—first mover or follower? Choose two e-commerce companies that prove your point and prepare a brief presentation to explain your analysis and position.

For students that argue for first-mover advantage as a way to success, examples might include Amazon, Yahoo, Travelocity, eBay, Priceline, E*Trade, and PayPal. Although each of these has encountered competition, their early arrival and commitment to becoming the predominant player in their respective marketspace have helped to assure their continuing success.

Those who argue for market followers can point to the demise of many of ecommerce’s first movers. Examples might include Pets.com, Garden.com, Webvan, eToys.com, Kozmo.com, and theGlobe.com. They might point instead to companies who were not among the first on the Web, but today are successful such as Walmart, PetSmart, Target, Fidelity, and Blue Nile.

4.

Select an e-commerce company that has participated in an incubator program such as Y Combinator, TechStars, DreamIt, Capital Factory, or another of your choosing, and write a short report on its business model and the amount and sources of capital it has raised thus far. Include your views on the company’s future prospects for success. Then create an elevator pitch for the company.

Student answers will vary depending on the company chosen. The pitch should include all key elements listed in Table 2.4 (introduction, background, industry size/market opportunity, revenue model/numbers/growth metrics, funding, and exit strategy).

5.

Select a B2C e-commerce retail industry segment such as pet products, sporting goods, or toys, and analyze its value chain and industry value chain. Prepare a short presentation that identifies the major industry participants in that business and illustrates the move from raw materials to finished product.

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19 Instructors may want to suggest industries to limit student research time and provide an example that shows the type of information that should be included in a presentation. A sample presentation on the industry for gourmet gift baskets would include some of the top industry participants: iGourmet, Harry & David, GiftTree, as well as mention many independent, small gourmet gift-basket companies. The firm value chain of a small gourmet gift basket would involve primary activities of designing the gift baskets (identifying which gift baskets to produce and the items in each basket), ordering wholesale items to include in gift baskets, repackaging items into separate gift baskets and wrapping gift baskets, selling gift baskets, and mailing or delivering finished gift baskets. For the industry value chain, the value chains of suppliers and manufacturers of gourmet food items, such as chocolate and cheese, would be included, along with the third parties involved in sales and retail (Internet service providers), and distribution (such as USPS, UPS, and FedEx).

Video Cases The Chapter 2 eText features two embedded video cases. Video Case 2.1, NFT Startup Magic Eden, appears at the bottom of page 65, at the end of the Management Team section. Magic Eden, which launched in the Fall of 2021, characterizes itself as “community-centric” NFT (non-fungible token) marketplace. If possible, provide students with some brief background on NFTs and blockchain technology on which NTFs are based, as some may not be familiar with them. The video, released in June 2022, features Magic Eden CEO Zhuoxun Yin discussing how Magic Eden managed to raise $130 million in venture capital at a valuation of $1.6 billion in June 2022 despite a slowdown in venture capital investing, and how it plans to use the venture capital funds that it raised. One important point that Yin makes in connection with Magic Eden’s success in raising capital is that investors are increasingly focusing on the quality of a startup’s management team and the clarity of the vision underlying the firm’s business plan. Questions that you can use for class discussion or as a student assignment include the following: • How is Magic Eden different from its competitors, according to Yin? Answer: According to Yin, Magic Eden is different from its competitors because it is a community-centric and creator-focused marketplace. As an example, he points to a tool called Launchpad, which helps creators launch NFT collections, as well as other end-to-end creator services. He also notes that it is important to consider a marketplace as more than just as a point-of-sale. As a result, Magic Eden also provides creators with analytics and research, as well as sales.

• What does Yin say about criticism from Bill Gates about the value of NFTs? Answer: Yin first notes that it is very early in terms of the development of NFTs. Although certain types of NFTs may not seem interesting or exciting to some people, they nonetheless have become very popular because they are fun and social.

• How does Magic Eden intend to use the funds that it has raised?

Answer: Yin says that part of the funds will be used to create a gaming “vertical”, which he identifies as an adjacent market, where participants already engage in many

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20 of the same transactions, such as purchasing items and “skins,” just not in an NFTformat.

Video Case 2.2, Venture Capital Firm Neo, appears in the middle of page 67 of the eText, in the “Raising Capital” section. Neo characterizes itself as a diverse mentorship community, startup accelerator (similar to Y Combinator, discussed in the Chapter 1 Insight on Business case) and venture capital firm. In the video, released in December 2021, Neo CEO Ali Partovi talks about raising $150 million for its second venture capital fund, which will be used to invest in startups, as well as its mentorship network for promising computer science students, helping them either start startups or join startups.

Questions that you can use for class discussion or as a student assignment include the following: • What steps is Neo taking to try to encourage diversity in technology companies.

Answer: Neo’s mentorship network looks to identify computer science outside of the traditional institutions of higher education such as Harvard, MIT, and Stanford, but also Georgia Tech, UT-Austin, and dozens of other schools. It has put a lot of thought into the interview process in order to enable each person to put their best foot forward, which also help from a diversity standpoint. In addition, at NEO, 45% of the startup funding that it has done so far has gone to women and people of color. Partovi states that it is difficult and that diversity in tech is a problem that needs to start being addressed at the elementary school level. He notes that being conscious of diversity is part of everything Neo does, and that the majority of its staff is female, including people of color, and that its alumni (“veteran”) community is about 45% female, and 15% Black and Latino.

• What lessons does Partovi share about his own experiences being a founder?

Answer: Partovi recounts a situation involving Steve Jobs, involving the distinction between a statement Partovi made that Partovi considered to be a form of negotiation, versus how Jobs characterized it (as a lie), This made Partovi realize that he needed to be more careful about what he said in such situations.

• What does Patrovi think are the biggest mistakes that founders are making today?

Answer: Patrovi thinks Silicon Valley (as of December 2021) is exuding too much “hubris” (i.e., arrogance), acting as if it is smarter than everyone else and pretending that they are perfect, rather than being honest about their mistakes. Showing that you can make mistakes and still succeed helps give others courage and helps make them more comfortable receiving advice.

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1 Instructor’s Manual and Video Cases: Chapter 3 E-commerce Infrastructure: The Internet, the Web, and the Mobile Platform Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases in eText Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 6 6 6 6 7 10 11 17 18

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2 Learning Objectives After reading this chapter, your students should be able to: ● Discuss the origins of, and the key technology concepts behind, the Internet. ● Explain the current structure of the Internet. ● Understand how the Web works. ● Describe how Internet and web features and services support e-commerce. ● Understand the impact of mobile applications.

Chapter Outline The Internet Survives the Covid-19 Pandemic: Why It Didn’t Break 3.1 The Internet: Technology Background The Evolution of the Internet: 1961—The Present The Internet: Key Technology Concepts Packet Switching IP Addresses Domain Names, DNS, and URLs Client/Server Computing The Mobile Platform The Internet “Cloud Computing” Model: Hardware and Software as a Service Other Internet Protocols 3.2

Internet Infrastructure and Access The Internet Backbone Internet Exchange Points Tier 3 Internet Service Providers Insight on Technology: The Internet Space Race Mobile Internet Access Telephone-based versus Computer Network-based Wireless Internet Access The Internet of Things Who Governs the Internet?

Insight on Society: Government Regulation and Surveillance of the Internet

3.3

The Web Hypertext Markup Languages Hypertext Markup Language (HTML) eXtensible Markup Language (XML) Web Servers and Clients Web Browsers

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3

3.4

The Internet and the Web: Features and Services Communication Tools E-mail Messaging Applications Online Message Boards Internet Telephony Videoconferencing, Video Chatting, and Telepresence Insight on Business: Zoom Continues to Zoom Search Engines Downloadable and Streaming Media Web 2.0 Applications and Services Online Social Networks Blogs Wikis Web3 Virtual Reality, Augmented Reality, and the Metaverse Intelligent Digital Assistants

3.5

Mobile Apps Platforms for Mobile Application Development App Marketplaces

3.6

Careers in E-commerce The Company Position: E-commerce Specialist Qualifications/Skills Preparing for the Interview Possible First Interview Questions

3.7 Case Study: Akamai Technologies: Sharpening Internet Content Delivery with Edge Computing 3.8

Review Key Concepts Questions Projects References

List of Key Terms 5G, p. 135 ad server software, p. 150 Application Layer, p. 117 Applications layer, p. 126

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4 attachment, p. 151 augmented reality (AR), p. 161 backbone, p. 127 bandwidth, p. 128 blog (weblog), p. 159 Bluetooth, p. 138 Border Gateway Protocol, p. 117 broadband, p. 131 cable Internet, p. 132 Cascading Style Sheets (CSS), 146 client, p. 120 client/server computing, p. 120 cloud computing, p. 121 database server, p. 150 Digital Subscriber Line (DSL), p. 131 domain name, p. 119 Domain Name System (DNS), p. 119 download, p. 158 edge computing, 124 electronic mail (e-mail), p. 151 eXtensible Markup Language (XML), p. 148 fiber-optic cable, p. 127 File Transfer Protocol (FTP), p. 126 FiOS (fiber-optic service), p. 131 HTML5, 146 hybrid cloud, 124 hypertext, p. 145 HyperText Markup Language (HTML), p. 146 HyperText Transfer Protocol (HTTP), p. 125 instant messaging (IM), p. 151 Internet, p. 110 Internet Exchange Point (IXP), p. 129 Internet Explorer, p. 145 Internet Layer, p. 117 Internet Message Access Protocol (IMAP), p. 125 Internet of Things (IoT), p. 139 IP, p. 117 IP telephony, p. 152 IPv4 Internet address, p. 117 IPv6 Internet address, p. 118 mail server software, p. 150 media server software, p. 150 metaverse, p. 161 Middleware Services layer, p. 126

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5 mixed reality (MR), p. 161 Mosaic, p. 144 narrowband, p. 129 Netscape Navigator, p. 145 Network Interface Layer, p. 117 Network Technology Substrate layer, p. 126 online message board, p. 152 packet switching, p. 115 packets, p. 115 podcast, p. 158 Post Office Protocol 3 (POP3), p. 125 private cloud, p. 124 protocols, p.116 public cloud, p. 122 QUIC, 117 Really Simple Syndication (RSS), p. 148 redundancy, p. 129 router, p. 116 routing algorithm, p. 116 satellite Internet, p. 132 search engine, p. 153 Secure Sockets Layer (SSL), p. 126 server, p. 120 Simple Mail Transfer Protocol (SMTP), p. 125 streaming media, p. 158 T1, p. 132 T3, p. 132 TCP, p. 116 Tier 1 Internet Service Providers (Tier 1 ISPs), p. 128 Tier 3 Internet Service Provider (Tier 3 ISP), p. 129 Transmission Control Protocol/Internet Protocol (TCP/IP), p. 116 Transport Layer, p. 117 Transport Layer Security (TLS), p. 126 Transport Services and Representation Standards layer, p. 126 UDP, 117 Uniform Resource Locator (URL), p. 119 universal computing, p. 144 virtual reality (VR), p. 161 Voice over Internet Protocol (VoIP), p. 152 Web, p. 110 web browser, p. 150 web client, p. 150 web server software, p. 149 Web3, p. 160

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6 Wi-Fi, p. 136 wiki, p. 160 List of Figures Figure 3.1 Stages in the Development of the Internet, p. 112 Figure 3.2 Resolution of the Federal Networking Council, p. 115 Figure 3.3 Packet Switching, p. 116 Figure 3.4 The TCP/IP Architecture and Protocol Suite, p. 118 Figure 3.5 Routing Internet Messages: TCP/IP and Packet Switching, p. 118 Figure 3.6 The Hierarchical Domain Name System, p. 119 Figure 3.7 The Client/Server Computing Model, p. 120 Figure 3.8 The Cloud Computing Model, p. 121 (Figure video in eText) Figure 3.9 The Hourglass Model of the Internet, p. 127 Figure 3.10 Internet Network Architecture, p. 128 Figure 3.11 Some Major U.S. Internet Exchange Points (IXPs), p. 130 Figure 3.12 Wi-Fi Networks, p. 138 Figure 3.13 Example HTML Code (A) and Web Page (B), p. 147 Figure 3.14 A Simple XML Document, p. 148 Figure 3.15 Sample XML Code for a Company Directory, p. 149 Figure 3.16 How Google Works, p. 157 List of Tables Table 3.1 Trends in E-commerce Infrastructure 2022–2023, p. 111 Table 3.2 Development of the Internet Timeline, pp. 113–114 Table 3.3 Pieces of the Internet Puzzle: Names and Addresses, p. 119 Table 3.4 Amazon Web Services, pp. 127 Table 3.5 Cloud Computing Models Compared, p. 124 Table 3.6 Major U.S. Tier 1 (Transit) Internet Service Providers, p. 128 Table 3.7 Internet Access Service Levels and Bandwidth Choices, p. 131 Table 3.8 Time to Download a 10-Megabyte File by Type of Internet Service, p. 132 Table 3.9 Wireless Internet Access Telephone Technologies, p. 136 Table 3.10 Wireless Network Internet Access Technologies, p. 137 Table 3.11 Basic Functionality Provided by Web Server Software, p. 150 List of Video Cases in eText Video Case 3.1: Meter’s Internet Infrastructure Vision Video Case 3.2: Informatica and the Evolution of Cloud Technology Overview This chapter provides a description of the Internet, the Web (including Web 2.0 applications and services), Web3, virtual reality, augmented reality, and the metaverse, intelligent digital assistants, and mobile apps. This is a long chapter, so consider breaking it into two or more parts. One of the key takeaways from this chapter is that the Internet has never been a static technology. Instead, it has evolved over a period of more than 60

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7 years into an unparalleled communication medium that combines elements of text, television, and radio. The challenge in this chapter is to understand the technical elements of the Internet (without becoming too technical) and understand their business implications while not becoming overwhelmed by the details.

Teaching Suggestions: Key Points The opening case study, The Internet Survives the Covid-19 Pandemic: Why It Didn’t Break (updated for this edition), describes the impact of the Covid-19 pandemic on Internet usage, and discusses a common question raised early on during the pandemic: “will the Internet break” under the strain of significantly increased usage. (The short answer, thankfully, was No!) Class discussion questions for this case might include: ● How has your usage of the Internet changed as a result of the pandemic? ● Why were fears that the Internet would break misguided? ● How has the pandemic highlighted the issues raised by the “digital divide”?

Section 3.1 covers the evolution of the Internet and the key technology underlying the Internet, including the development of the mobile platform and cloud computing, and various Internet protocols and utility programs. Video Case 3.1, Meter’s Internet Infrastructure Vision, appears in the middle of page 110 of the eText, in the “Section 3.1: Internet Technology: Background” section. The video helps emphasize the importance of Internet infrastructure for all kinds of companies. See pages 18 to 19 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Evolution of the Internet. The Internet has evolved over three stages: Innovation (1961 to 1974), Institutionalization (1975 to 1995), and Commercialization (1995 to the present).

Figure 3.1 offers a visual representation of the stages. You may want to point out to students the length of time required to build the Internet as we know it today and the irony of the phrase “Internet time.” You may also want to describe how long it took radio and television to develop into their current national and international networks. Table 3.2 provides a timeline of significant events with respect to the development of the Internet, separated into the three phases.

Internet Foundation Technologies. The Internet relies on three foundation technologies: packet switching, TCP/IP, and client/server technology. Figure 3.3 illustrates how packet switching works and Figure 3.5 illustrates how Internet messages are routed using TCP/IP and packet switching. You may also want to review with students how Internet addresses work and the basics of client/server computing. The types of devices that can be clients has evolved through the years, and now include tablet computers, smartphones, and a wide variety of sensor-enabled devices--basically any type of device that can request access to services or resources in a network (this is a good time to refer to the discussion of the Internet of Things on pages 139-140) .

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8 Another important development to discuss with students is the growing importance of “cloud computing,” which refers to a model of computing in which firms and individuals obtain computing power and software applications over the Internet, rather than purchasing the hardware and software, and installing it on their own computers. Cloud computing is the fastest growing form of computing right now, and radically reduces the cost of building and operating websites because the necessary hardware infrastructure and software can be licensed as a service from Internet providers at a fraction of the cost of purchasing these services as products. Figure 3.8 illustrates the cloud computing model. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 3.8 and this topic. Also note the differences between public, private, and hybrid clouds (Table 3.5 provides a summary), because students need to understand to what these terms refer. Discuss the concept of edge computing as a method of optimizing cloud computing. Video Case 3.2, Informatica and the Evolution of Cloud Technology, appears at the end of page 121 of the eText, in “The Internet “Cloud Computing” Model: Hardware and Software as a Service” section. See page 19 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Internet Protocols. The Internet relies on a variety of protocols such as HTTP, as well as various e-mail, security, and file transfer protocols. As noted in the text, many of the Internet’s original protocols have been supplanted by newer, more secure versions or tools, which you can point out to your students.

Internet Infrastructure and Access. Section 3.2 reviews the Internet’s current architecture.

Figure 3.10, the Hourglass Model of the Internet, is very useful for illustrating how Internet hardware and software relate to one another. You can use Figure 3.11 to illustrate how a message moves, from the client on the left of the figure to the client on the right.

The remainder of this section examines some of the primary features of the Internet’s infrastructure: the backbone and Tier 1 Internet Service Providers (Tier 1 ISPs); Internet Exchange Points (IXPs); Tier 3 Internet Service Providers (Tier 3 ISPs), which provide the last mile of service to the home or office via DSL, FiOS, cable Internet or satellite (both traditional satellite and the newer low earth orbit [LEO] satellite) Internet, and the mobile platform, including various types of cellular services and Wi-Fi. Students are likely to have seen advertisements by telecommunications providers trumpeting the benefits promised by 5G services, as well as Wi-Fi 6, so you can spend some time discussing what those services currently offer. The Insight on Technology case, The Internet Space Race (new for this edition) examines the technology behind, and the issues associated with the race to create LEO satellite networks and how they may impact Internet access. Class discussion questions for this case include the following: • Have you ever used traditional satellite Internet, such as that offered by Dish, HughesNet, or Viasat? If so, what was the experience like? How did it differ from other types of Internet access?

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9 • •

Have you used LEO satellite Internet, such as Starlink? If so, what was the experience like? How did it differ from other types of Internet access?

Do you think LEO satellite Internet will help reduce the “digital divide”? Why or why not?

Before leaving this section, take time to discuss the material on who governs the Internet and the\ Insight on Society case, Government Regulation and Surveillance of the Internet (updated for this edition). Students might be surprised at the extent to which governments surveil the Internet. Class discussion questions might include the following: ● How is it possible for any government to “control” or censor the Web? ● Does the Chinese government or the U.S. government have the right to censor content on the Web? ● How should U.S. companies deal with governments that want to censor content? ● What would happen to e-commerce if the existing Web split into a different Web for each country?

How the Web Works. Section 3.3 covers the Web. Key concepts for understanding the Web are hypertext, URLs, HTML (including CSS and HTML5), XML, web servers, and web clients and web browsers (see pages 144 to 151). You may wish to show the HTML code behind a popular web page such as Amazon.

The Internet and the Web: Features and Services. Without the Web and the Internet, ecommerce would be a fraction of its current size. The Web has enabled e-commerce to explode rapidly because of its ability to store and display product information (enabling order entry), receive payments, allow consumers to search for products, and support a wide range of commercial communication. Section 3.4 begins with an overview of the various communication tools that the Internet and Web provide: e-mail; messaging applications; online message boards; Internet telephony; and videoconferencing, video chatting, and telepresence. The Insight on Business case, Zoom Continues to Zoom (updated for this edition), looks at how Internet videoconferencing services such as those offered by Zoom have become critical infrastructure for businesses and schools that are operating remotely, as well as a lifeline for the socially isolated. Questions for class discussion include: • What has your experience using Zoom and other videoconferencing services been like?

• What challenges does Zoom face?

• How has Zoom responded to those challenges?

Next, the section looks at search engines, providing a brief review of the history of search engines, including Google, and explaining how they work. Students may be particularly

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10 interested in Figure 3.16, How Google Works, given the importance that Google’s search engine plays in everyday life. This is a new, enhanced infographic that should help students better understand what goes on behind the scenes when they type a search query into Google. The section also briefly covers various types of downloadable and streaming media, as well as Web 2.0 applications and technologies that have had a significant impact on e-commerce, most importantly online social networks. A new section on Web3 provides a brief introduction to the concepts behind a new kind of Internet service conceived as being built using blockchain. This and the following section on the metaverse, focus on new innovations whose ultimate impact are yet to be determined.

The section concludes with a review of intelligent digital assistants. At the time the text was written, ChatGPT had not yet been introduced, so it will be useful to supplement the material in the text with additional articles discussing the impact of ChatGPT on ecommerce. You can refer to the following link for updated information: https://www.artificialintelligence-news.com/.

Mobile Apps. Section 3.5 focuses on mobile apps and their use as entertainment media and shopping tools. The section also briefly reviews the various mobile app development platforms and app marketplaces available.

In Section 3.6, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as an e-commerce specialist.

The chapter-ending case study on Akamai (updated for this edition) in Section 3.7 focuses on a company that may be largely unknown to your students, but which is instrumental in providing the infrastructure for the delivery of online content.

Case Study Questions and Answers 1.

Why does Akamai need to geographically disperse its servers to deliver its customers’ web content?

The Internet was originally developed to carry text-based e-mail messages among a relatively small group of researchers, not bandwidth-hogging graphics, sound, and video files to tens of millions of people all at once. Also, every 1,500-byte packet of information sent over the Internet must be verified by the receiving server and an acknowledgment sent to the sending server. Each packet can go through many different servers on its way to its final destination, multiplying by several orders of magnitude the number of acknowledgments required to move a packet from New York to San Francisco. This means that the Internet today spends much of its time and capacity verifying packets, causing “latency.” One of the founders of Akamai, Daniel Lewin, came up with the idea to store copies of web content such as pictures and video clips at many different locations around the Internet. This is so that a client can always retrieve a nearby copy, making

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11 web pages load faster. Akamai’s main product does just that—it allows customers to move their web content closer to end users, which increases the speed at which the content can be served.

2.

How has Akamai evolved since it first began?

When Akamai began it focused primarily on expediting the delivery of content over the Internet. Since then, cloud computing, the mobile platform, and the popularity of streaming video all have provided Akamai with growth opportunities, as well as created new challenges. In 2022, Akamai acquired Linode, an infrastructure as a service (IaaS) provider, which will enable Akamai to provide businesses with a developer-friendly platform to build, run, and secure cloud applications. Akamai has also developed a number of other services since its early days. Chief among them is its security offerings, which now comprise an equally important part of its business as its content delivery and edge technology services.

3.

Why does Akamai believe that edge computing will become even more important than it is today?

Akamai anticipates that in the future, customers will have a growing need for a continuum of computing services from the cloud to the edge in order to be closer to where billions of end users and tens of billions of connected devices will be, especially as the use of technologies such as 5G and IoT expand. Research firm Gartner estimates that by 2025, 75% of enterprise-generated data will be created and processed at the edge.

End-of-Chapter Questions and Answers 1.

What are the three basic building blocks of the Internet?

The three basic building blocks are packet switching, the Transmission Control Protocol/Internet Protocol (TCP/IP) communications protocol, and client/server computing. Packet switching is a method of splitting messages up into parcels, routing them along available communications paths, and reassembling them at the destination point. The TCP protocol is the set of rules that specifies how these messages should be formatted, ordered, compressed, and error-checked. The IP protocol provides the addressing scheme for the Internet. Client/server computing refers to networks of powerful client computers that are connected to one or more server computers. The clients are powerful enough to display, process, and store very large files including graphics and sound files. The servers are dedicated to common functions that all clients need, including file storage, and they also house many software applications and utility programs that the clients frequently use.

2.

What is an IPv6 address? Why are IPv6 addresses necessary?

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12

IPv6 addresses are the latest evolution of Internet addresses, supporting many more addresses than their predecessors, IPv4 addresses. IPv6 addresses are 128 bits, a large increase from the 32 bits of IPv4. These addresses have become necessary as the Internet has expanded beyond the scope that IPv4 can handle.

3.

Explain how packet switching works.

In packet-switched networks, messages are broken up into fragments (packets) and a digital code with the source address attached. Sequencing and error-control instructions are also added. Instead of being sent directly to their destination, the packets travel between router computers that interconnect the thousands of networks that make up the Internet. The routers use programs called routing algorithms to ensure that each packet takes the best available communication path toward its destination. If some lines are disabled or busy, the packets can be sent along any available line. At the destination point, the packets are reassembled and delivered. This method enables nearly full use of all available communication lines and capacity.

4.

How is the TCP/IP protocol related to information transfer on the Internet?

The TCP/IP protocol determines how messages are formatted, compressed, errorchecked, and how they are addressed, so that they reach the correct destination in the correct order and format. TCP establishes the connections between sending and receiving computers, and it handles the assembly of packets at the point of transmission and their reassembly at the receiving end. IP provides the Internet’s addressing scheme and is responsible for the actual delivery of the packets.

5.

What technological innovation made client/server computing possible?

The technological innovation that made client/server computing possible is the personal computer. Without the invention of the PC and local area networks, we would not have the Internet and the Web. In client/server computing, capacity can be expanded constantly by adding servers and clients to the network. A client/server network is much less vulnerable than the centralized computing architecture that preceded it because if one server malfunctions, backup servers can take over. If a client is down, the rest of the system continues to operate without a hitch. The processing load can be balanced over many powerful, smaller machines rather than being concentrated in a single huge mainframe computer, and both the software and the hardware can be more economically built.

6.

What is cloud computing, and how has it impacted the Internet?

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13 Cloud computing refers to a model of computing in which firms and individuals obtain computing power and software applications over the Internet, rather than purchasing the hardware and software and installing it on their own computers.

Cloud computing is the fastest growing form of computing. Cloud computing has impacted the Internet by radically reducing the cost of building and operating websites because the necessary hardware infrastructure and software can be licensed as a service from Internet providers at a fraction of the cost of purchasing these services as products. For individuals, cloud computing means individuals no longer need a powerful laptop or desktop computer to engage in e-commerce or other activities.

7.

Why are smartphones a disruptive technology?

Smartphones such as Apple’s iPhone , which uses Apple’s iOS operating system, and Samsung’s Galaxy line, which uses Google’s Android operating system, are a disruptive technology because they have radically altered the e-commerce landscape. The mobile platform also has profound implications for e-commerce because it influences how, where, and when consumers are able to shop and buy.

8.

What role does a Tier 1 ISP play in Internet infrastructure?

Tier 1 ISPs own the long-haul fiber-optic networks that comprise the Internet backbone. Tier 1 ISPs have “peering” arrangements with other Tier 1 ISPs to allow Internet traffic to flow through each other’s cables and equipment without charge. Tier 1 ISPs deal only with other Tier 1 or regional Tier 2 ISPs, and not with end consumers.

9.

What function do the IXPs serve?

Internet Exchange Points (IXPs) use high-speed switching computers to connect the Internet backbone to regional and local networks. They function as the hubs, or interconnect points, where the backbone intersects with these regional and local networks; it is where the backbone owners connect with one another.

10.

What is 5G? 5G is a cellular standard for enabling high-bandwidth mobile broadband with speeds reaching 10 Gbps or more and providing support for up to 100,000 connections per square kilometer (known as massive machine-to-machine (M2M) connections), and ultra-low-latency (less than 10 millisecond communications).

5G utilizes a new part of the wireless spectrum (shorter millimeter waves in the 30 GHz to 300 GHz range) and requires the development of a transmission infrastructure involving tens of thousands of small-cell and distributed antenna systems installed on utility poles, as well as additional investments in fiber-optic

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14 networks. U.S. telecommunications companies initially began to launch 5G networks in 2019, and by the summer of 2022, the major U.S. carriers (AT&T, Verizon, and T-Mobile) were advertising nationwide service. However, full deployment is expected to take a number of years.

11.

What are the differences between a public, a private, and a hybrid cloud?

A public cloud is maintained by a cloud service provider such as Amazon, Google, Microsoft, or IBM. Organizations using these clouds do not own the infrastructure of the cloud. Many tenants and companies can use the same public cloud; thousands of companies use Amazon Web Services, for example. A private cloud is operated solely for one tenant. Many companies own their own private cloud infrastructure. Hybrid clouds consist of a mixture of both public and private cloud services.

12.

How does UDP differ from TPC? UDP (User Data Protocol) is a key component of the Internet protocol suite and provides an alternative to TCP when the error-checking functionality of TCP is not necessary.

13.

What are some of the challenges of policing the Internet? Who has the final say when it comes to content?

One challenge of policing the Internet is that there are multiple organizations that influence the system and monitor its operations. It is hard to make the Internet conform to the laws of the sovereign nation states in which it operates, and it is difficult to enforce the various and often contradictory laws of all these nations.

Many countries want to put far stricter restrictions on freedom of expression than the United States does. Different cultures have different social morals, and what is acceptable in some countries is decidedly not in others. The issue of who has the final say is also quite controversial and varies from country to country. For instance, in China, the Chinese government has “the final say” about what content is available to viewers who access the Internet from within China. Other countries also regulate the availability of certain types of content. Critics complain that attempting to create “legal harmony” will result in major content restrictions on the Internet with only content that is legally acceptable worldwide being made accessible.

14.

Compare and contrast the capabilities of Wi-Fi and cellular wireless networks.

There are two basic types of wireless Internet connectivity: telephone-based systems and computer network-based systems. Wi-Fi is an example of a computer

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15 network-based wireless access system, and 3G/4G/5G wireless networks are telephone-based wireless access systems.

Telephone-based wireless Internet systems, such as 3G/4G/5G systems, connect the user to a telephone system and use a packet-switched technology that is more efficient and faster than traditional circuit-switched networks. These networks are wide area networks of nearly unlimited range, and are the basis for smartphones, hybrid cellular wireless devices that combine the functionality of a computer with that of a cell phone, and require a cellular phone company service connection.

They enable consumers to have voice conversations, send and receive text messages or e-mail, and enable Web use. 5G provides for high-bandwidth mobile broadband with speeds reaching 10 Gbps or more, support for up to 100,000 connections per square kilometer (known as massive machine-to-machine (M2M) connections), and ultra-low-latency (less than 10 milliseconds) communications.

Computer network-based wireless Internet systems have a completely different history that is based on corporate local area networks. Here, the task is to connect stationary client computers to server computers within local areas of a few hundred meters. Wi-Fi was the first commercially viable standard for wireless local area networks. In a Wi-Fi network, a wireless access point connects to the Internet directly via a broadband connection (cable or DSL telephone or T1 line), and then transmits radio signals to other transmitters/receivers usually installed in laptop computers. Wi-Fi offers high bandwidth capacity (up to 11 Mbps), suitable for Web surfing and other corporate uses, but a much more limited range (300 feet).

15.

What are the basic capabilities of a web server?

Web server software refers to the software that enables a computer to deliver web pages written in HTML to client computers on a network that request this service by sending an HTTP request. Aside from responding to requests for web pages, all web servers provide some additional basic capabilities such as security services, FTP, search engine modules that enable indexing of a site’s web pages and content, and data capture tools. The term web server can also be used to refer to the physical computer that runs web server software.

16.

What role does CSS play in the creation of web pages?

Cascading Style Sheets (CSS) tells web browsers how to display HTML elements on the screen. If HTML provides the structure, CSS provides the style of a web page.

17.

Why was the development of the browser so significant for the growth of the Web?

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16 The development of the browser was an extremely significant breakthrough that enabled rapid growth of the Web. Once it progressed from a simple line interface device to a graphical user interface (GUI), it became possible to view documents with colored backgrounds, images, and animations. Besides the natural interest stimulated by viewing such documents, the graphical web browser also created the possibility of universal computing: the sharing of files including graphics, sound, video, and all sorts of different information by all computer users in the world, no matter what platform or operating system they are using. A browser could be made for each operating system, and web pages created for one system could be displayed either exactly or nearly the same on a computer using a different operating system.

18.

What advances and features does HTML5 offer?

HTML5 provides features such as video playback and drag-and-drop that in the past were provided by plug-ins like Adobe Flash. It uses the newest version of Cascading Style Sheets (CSS3) and JavaScript, and another tool, HTML5 Canvas, that can be used to render simple animations, which reduces page-load time.

HTML5 also provides device independence for mobile applications and can more easily access the built-in functionality of mobile devices, including GPS and swiping. HTML5 mobile apps work just like web pages.

19.

Name and describe five services currently available through the Web. There are a variety of services currently available through the Web, including: ● Communication tools such as e-mail; messaging apps; online forums; Internet telephony; and videoconferencing, video chatting, and telepresence. E-mail is the most widely used application on the Internet and allows messages and file attachments to be transferred from one Internet user to another. Messaging apps include both instant messaging, which allows typed text to be displayed on a recipient’s computer almost instantaneously, making real-time conversations between two people possible on the Web, and mobile messaging apps. Online message boards are web applications that enable Internet users to communicate with each other via a message board, bulletin board, or discussion group. IP telephony is a general term for technologies that use Voice over Internet Protocol (VoIP) and the Internet to send voice, fax, and other forms of audio communication over the Internet. Internet videoconferencing is now accessible to anyone with a broadband Internet connection and a web camera and has become a lifeline during the Covid-19 pandemic, for both businesses and social life. Video chatting is a more limited form of videoconferencing, available via apps such as Skype and Apple’s FaceTime. Telepresence takes videoconferencing up several notches with higher broadcast quality and the sensation of “being there.”

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17 ● ●

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20.

Search engines, which enable users to locate information by matching keywords that the user provides to a list of documents containing those words or the closest matches.

Web 2.0 applications and services, including online social networks, which are services that support communication within networks of friends and colleagues; blogs (personal web pages created by an individual or corporation to communicate with readers); and wikis (web applications that allow a user to easily add and edit content on a web page).

Virtual reality, which enables users to be immersed within a virtual world; augmented reality, which involves overlaying virtual objects over the real world; mixed reality, which is an enhanced version of augmented reality; and the metaverse, which is an immersive, visual, 3-D virtual reality in which users can connect, socialize, collaborate, and transact.

Intelligent digital assistants, such as Apple’s Siri, Amazon Alexa, and Google’s Google Assistant, have natural language, conversational interface, and situational awareness and can carry out many tasks based on verbal commands by delegating requests to a variety of different web services.

What has been the impact of the development of mobile apps?

The use of mobile Internet access devices and mobile apps has truly exploded. In 2021, 230 billion apps were downloaded, and consumers spent $170 billion on apps, subscriptions, and other forms of in-app spending worldwide. The mobile app phenomenon has spawned a digital ecosystem: tens of thousands of developers, a wildly popular hardware platform, and millions of consumers using mobile devices to replace their clunky desktop/laptop computer and act as a digital media center as well. Mobile apps have even usurped TV as the most popular entertainment medium, and are increasingly being used for shopping as well, with m-commerce in the form of purchases of retail and travel products and services via a mobile device expected to generate more than $500 billion in 2022 in the United States.

Projects: Questions and Answers 1.

Review the Insight on Technology case on low earth orbit (LEO) satellites. What developments have occurred since the date this case was written in June 2022?

Students should conduct an online search using Google or another search engine on low earth orbit (LEO) satellite technology. Answers will vary depending on when the search is conducted.

2.

Call or visit the websites of a cable provider, a DSL provider, and a satellite provider to obtain information on their Internet services. Prepare a brief report summarizing the features, benefits, and costs of each. Which is the fastest? What,

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18 if any, are the downsides of selecting any of the three for Internet service (such as additional equipment purchases)?

Student reports should include the name of the companies they called to request information, statistics on upload and download speeds, price, and availability.

Students should discuss at least some of these issues in summarizing the features, benefits, and downsides of the three providers.

3.

Select two countries (excluding the United States) and prepare a short report describing their basic Internet infrastructure. Are they public or commercial?

How and where do they connect to backbones within the United States?

The purpose of this project is for students to understand the global Internet infrastructure and the significant jump the United States still has on the rest of the world. To prepare this report, students should consult online reference sources.

Answers will vary depending on the countries selected.

4.

Investigate the Internet of Things. Select one example and describe what it is and how it works.

Student answers will vary depending on the example they choose. RFID chips are one example of the Internet of Things. RFID chips use radio waves to send information to RFID readers that can be connected to the Internet. RFID chips are commonly used for automated payment systems and in manufacturing and retailing to track the location of goods. Sensors in smartphones and embedded in devices are another example of the Internet of Things.

Video Cases The Chapter 3 eText features two new embedded video cases. Video Case 3.1, Meter’s Internet Infrastructure Vision, appears in the middle of page 110 of the eText, in the “Section 3.1: Internet Technology: Background” section. The video, released in May 2022, features Anil Varanasi, CEO and co-founder of Meter, a company founded in 2015 that builds Internet infrastructure for businesses. Meter’s approach is to combine hardware, software, and operations so that any company can seamlessly run on a reliable and modern network. In the video, Varanasi discusses Meter’s vision of making Internet service, specifically Wi-Fi, a utility like electricity and telephone service. Questions that you can use for class discussion or as a student assignment include the following: • What contrast does Varanasi make between Internet service “outside of spaces” (meaning Tier 1 and 2 Internet service) and “inside of spaces” (by which he means, service within a particular office space).

Answer: Varanasi says that “outside of spaces,” Internet service already is like a utility. However, he contrasts that to what occurs “inside of spaces,” such as in office, warehouse, retail space, or laboratory research facility. He notes that what

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19

•

•

happens inside, in terms of setting up a Wi-Fi network infrastructure, can take months, and require a company to deal with many different vendors. In some instances, the company may need to take on the complexity of dealing with old (“legacy”) systems that may already be in place. Meter aims to be a solution to this problem, allowing customers to focus on building their own business.

Why did Varanasi choose to focus Meter’s business on Internet infrastructure?

Answer: Initially, the problem of Internet infrastructure was a problem that Meter needed to solve for itself as a company, and that it noticed that this was an issue that many other companies were spending time and capital on. But in addition, Varanasi notes the Internet infrastructure is the underlying foundation for so many companies. He notes that “everything runs on the Internet” and that these days, there probably isn’t a company or a product that doesn’t require Internet, networking, and Wi-Fi. What does Varanasi say about the market size of Meter’s marketspace?

Answer: Although he refuses to provide a specific dollar amount in terms of market size, Varanasi says he believes Internet infrastructure is one of the largest markets in the technology marketspace. He also notes that their potential customers include almost every type of space one would see while walking down a street, and almost any type of company that one might work with or be a customer of.

Video Case 3.2, Informatica and the Evolution of Cloud Technology, appears at the end of page 121 of the eText, in “The Internet “Cloud Computing” Model: Hardware and Software as a Service” section. In the video, released in May 2022, Jitesh Ghai, Chief Product Officer of Informatica, discusses the evolution of cloud technology. Informatica is an US-based software development company that focuses on enterprise data management and analytics and data integration, both “on-premises” as well as in the cloud. Informatica currently has more than 5,000 active customers and processes more than 53 trillion cloud transactions per month.

• What does Ghai say about the evolution of cloud technology?

Answer: Ghai notes that the cloud first started with “infrastructure as a service” (IaaS) in which companies put their own applications on cloud servers. From there, “software as a service” (SaaS), in which applications developed by third parties were made available to companies, who did not even have to worry about installing them.

• What does Ghai identify as benefits of cloud technology?

Answer: Ghai notes that cloud technology drives agility and makes it easier for organizations to get the benefits of technology without having to actually install it themselves. It also enables organizations to obtain the latest most innovative technology.

• What are the four “journeys” that Informatica empowers for its customers?

Answer: Ghai identifies the four journeys as digital transformation journeys around analytics and AI; application integration and intelligent automation of

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20 business processes; supply chain, customer experiences, and e-commerce experiences; and data governance and privacy.

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Instructor’s Manual and Video Cases: Chapter 4 Building an E-commerce Presence: Websites, Mobile Sites, and Apps Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases in eText Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 4 5 5 6 6 6 9 10 18 21

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2 Learning Objectives After reading this chapter, your students should be able to: ● Understand the questions you must ask and answer, and the steps you should take, in developing an e-commerce presence. ● Explain the process that should be followed in building an e-commerce presence. ● Identify and understand the major considerations involved in choosing web server and e-commerce merchant server software. ● Understand the issues involved in choosing the most appropriate hardware for an e-commerce site. ● Identify additional tools that can improve website performance. ● Understand the important considerations involved in developing a mobile website and building mobile applications.

Chapter Outline Walmart’s Omnichannel Strategy: From Supercenter to Super App 4.1 Imagine Your E-commerce Presence What’s the Idea? (The Visioning Process) Where’s the Money: Business and Revenue Model Who and Where Is the Target Audience?

What Is the Ballpark? Characterize the Marketplace Where’s the Content Coming From?

Know Yourself: Conduct a SWOT Analysis Develop an E-commerce Presence Map Develop a Timeline: Milestones How Much Will This Cost?

4.2

Building an E-commerce Presence: A Systematic Approach The Systems Development Life Cycle Systems Analysis/Planning: Identify Business Objectives, System Functionality, and Information Requirements System Design: Hardware and Software Platforms Building the System: In-house versus Outsourcing Insight on Business: Wix Makes Creating Websites Easy Testing the System Implementation, Maintenance, and Optimization Alternative Web Development Methodologies

4.3

Choosing Software Simple versus Multi-tiered Website Architecture Web Server Software Site Management Tools Dynamic Page Generation Tools Application Servers

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3 E-commerce Merchant Server Software (E-commerce Software Platforms) Choosing an E-commerce Software Platform 4.4

Choosing Hardware Right-sizing Your Hardware Platform: The Demand Side Right-sizing Your Hardware Platform: The Supply Side

4.5

Other E-commerce Site Tools Website Design: Basic Business Considerations Tools for Search Engine Optimization Tools for Interactivity and Active Content Java, Java Server Pages (JSP), and JavaScript Active Server Pages (ASP) and ASP.NET ColdFusion PHP, Ruby on Rails (RoR), and Django Other Design Elements Personalization/Customization Tools The Information Policy Set Insight on Society: Designing for Accessibility

4.6

Developing a Mobile Website and Building Mobile Applications Planning and Building a Mobile Presence Mobile Presence: Design Considerations Cross-Platform Mobile App Development Tools Mobile Presence: Performance and Cost Considerations Insight on Technology: Duolingo’s Mobile App Powers Language Learning

4.7

Careers in E-commerce The Company Position: UX Designer Qualifications/Skills Preparing for the Interview Possible First Interview Questions

4.8

Case Study: Dick’s Sporting Goods: Pivoting Pays Off

4.9

Review Key Concepts Questions Projects References

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4 List of Key Terms A/B testing (split testing), p. 197 acceptance testing, p. 197 accessibility rules, p. 218 Active Server Pages (ASP), p. 216 adaptive web design (AWD), p. 224 agile development, p. 199 ASP.NET, p. 216 benchmarking, p. 198 business objectives, p. 189 ColdFusion, p. 216 co-location, p. 193 Common Gateway Interface (CGI), p. 214 component-based development, p. 199 DevOps, p. 199 Django, p. 217 Dynamic HTML (DHTML), p. 203 dynamic page generation, p. 203 e-commerce merchant server software (e-commerce software platform), p. 205 hardware platform, p. 207 horizontal scaling, p. 209 hybrid app, p. 221 I/O intensive, p. 209 information requirements, p. 189 Java, p. 215 Java Server Pages (JSP), p. 215 JavaScript, p. 215 logical design, p. 190 microservices, 200 mobile first design, p. 223 mobile web app, p. 221 mobile website, p. 221 multi-tier architecture, p. 201 multivariate testing, p. 197 native app, p. 221 online catalog, p. 205 open-source software, p. 206 outsourcing, p. 190 PHP, p. 217 physical design, p. 190 privacy policy, p. 218 prototyping, p. 199 responsive web design (RWD), p. 224 Ruby on Rails (Ruby, RoR/Rails), p. 217

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5 scalability, p. 209 Scrum, p. 199 service-oriented architecture, 200 shopping cart, p. 205 site management tools, p. 203 stateless, p. 209 SWOT analysis, p. 183 system architecture, p. 200 system design specification, p. 190 system functionalities, p. 189 system testing, p. 196 systems development life cycle (SDLC), p. 188 two-tier architecture, p. 201 unit testing, p. 196 vertical scaling, p. 209 web application server, p. 204 web content management system (WCMS), p. 204 web services, p. 200 widget, p. 217 List of Figures Figure 4.1 SWOT Analysis, p. 183 Figure 4.2 E-commerce Presence Map, p. 184 (Figure video in eText) Figure 4.3 Components of a Website Budget, p. 186 Figure 4.4 Factors to Consider in Developing an E-commerce Presence, p. 187 Figure 4.5 Systems Development Life Cycle, p. 188 Figure 4.6 A Logical and Physical Design for a Simple Website, p. 191 Figure 4.7 Choices in Building and Hosting, p. 192 Figure 4.8 The Spectrum of Tools for Building Your Own E-commerce Site, p. 193 Figure 4.9 Figure 4.10 Figure 4.11

Factors in Website Optimization, p. 198 Two-tier and Multi-tier E-commerce Site Architectures, p. 202 Degradation in Performance as Number of Users Increases, p. 210

List of Tables Table 4.1 E-commerce Presence Timeline, p. 186 Table 4.2 System Analysis: Business Objectives, System Functionalities, and Information Requirements for a Typical E-commerce Site, p. 189 Table 4.3 Key Players: Hosting/Co-Location/Cloud Services, p. 196 Table 4.4 Open-Source Software Options, p. 206 Table 4.5 Factors in Right-Sizing an E-commerce Platform, p. 208 Table 4.6 Vertical and Horizontal Scaling Techniques, p. 211 Table 4.7 Improving the Processing Architecture of Your Site, p. 211 Table 4.8 E-commerce Website Features That Annoy Customers, p. 213

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6 Table 4.9 Table 4.10 Table 4.11

The Eight Most Important Factors in Successful E-commerce Site Design, p. 213 Systems Analysis for Building a Mobile Presence, p. 222 Unique Features That Must Be Taken into Account When Designing a Mobile Presence, p. 223

List of Video Cases in eText Video Case 4.1: Bolt: One-Click Checkout for Small and Medium-Sized Businesses Video Case 4.2: Figma: A Collaborative Web Application for UI Design Overview This chapter walks students through the general process of building an e-commerce presence. It lays out a methodology for approaching the problem. It also considers the key issues in building an e-commerce presence and identifies some of the tools available that can help entrepreneurs and business managers. The chapter is based on the realworld experiences of the authors.

The key point for students to take away from this chapter is that building an e-commerce presence is a complex undertaking akin to building an entirely new information system.

Major physical and human resources are required, and many firms find it cost-effective to outsource a part or all the effort to specialized firms. On the other hand, building an ecommerce presence has never been easier or cheaper. This should be encouraging to any budding entrepreneurs in your class.

Teaching Suggestions: Key Points The opening case, Walmart’s Omnichannel Strategy: From Supercenter to Super App (updated for this edition), examines Walmart’s redesign of its website and mobile apps as part of Walmart’s strategy to become an omnichannel retailer. Here are some questions you can pose to the class to spark discussion about the case: ● Why is Walmart considered an underdog in the e-commerce arena? ● What advantages does Walmart have in pursuing its goal to become an omnichannel retailer? ● What role did redesigning its website, developing mobile apps, and creating a new design for its physical stores play in Walmart’s omnichannel strategy? ● Is Walmart’s strategy working?

Imagining Your E-commerce Presence. Section 4.1 of the chapter walks the student through the process of creating an e-commerce presence, by developing an idea, understanding how the idea can potentially make money, defining the target audience and the marketplace, and determining what the content looks like. An important part of this effort involves performing a SWOT analysis (see Figure 4.1), developing an e-commerce presence map (see Figure 4.2), and creating a timeline (see Table 4.1). An engaging animated video created by the authors and narrated by Ken Laudon, available in the

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7 eText, provides additional context and background with respect to Figure 4.2 and this topic.

A Method for Building E-commerce Sites. In the early years of e-commerce, websites were often built one page at a time, with little advance planning. Many disasters resulted.

Section 4.2 of the text borrows the systems analysis and design framework from largescale systems and applies it to building an e-commerce website (which in reality is a large-scale system). Figure 4.4 graphically presents the factors to consider in developing an e-commerce presence as puzzle pieces that need to fit together. Figure 4.5 illustrates the systems development life cycle. Table 4.2 helps you walk students through business objectives, the level of system functionality needed, and information requirements. This plants the idea that systems, information, and business objectives are intimately connected.

This is also a good time to introduce the issue of outsourcing options and tool options.

Figure 4.7 covers most of the outsourcing options, and Figure 4.8 illustrates the range of tool options. You can ask students to investigate options such as Wix, WordPress, Squarespace, and Weebly, which enable the relatively quick and inexpensive development of an e-commerce presence. Perhaps this will spark an entrepreneurial spirit in some!

Wix is the focus of the Insight on Business case, Wix Makes Creating Websites Easy (updated for this edition). Wix focuses on enabling small businesses to create websites easily and inexpensively. Some discussion questions for this case might include the following: ● What value does Wix offer to small businesses? ● Are there any drawbacks to using Wix to create an e-commerce presence? ● How are service providers like Wix changing the nature of e-commerce?

Video Case 4.1, Bolt: One-Click Checkout for Small and Medium-Sized Businesses, appears in the middle of page 193 of the eText, in the “Build Your Own versus Outsourcing” section. See pages 21 to 22 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Figure 4.9 provides a summary of factors to consider when optimizing the performance of a website. A number of emerging alternative web development methodologies are also introduced, including prototyping, agile development, Scrum, DevOps, component-based development, web services, and new material on service-oriented architecture and microservices. Video Case 4.2, Figma: A Collaborative Web Application for UI Design, appears on page 199 of the eText in the "Alternative Web Development Methodologies” section. See page 22 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

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8

Choosing the Right Software. Students are curious about the software needed to operate a website. They often confuse web server hardware with web server software, confusion made possible by the widespread use of the generic “web server” phrase. Section 4.3 addresses these concepts. Four figures and tables capture the essence of the section.

Figure 4.10 is a good place to start with a description of both a simple and a complex architecture for a website, from both a software and hardware perspective. Table 4.4 lists some open-source software options for students who are interested in “doing it themselves” and “building their own.” You may want to walk students through each of these figures and tables.

Choosing the Right Hardware. We cover the hardware aspects of developing a website in Section 4.4. Students often want to know what hardware is required to run a website and how much is needed. Websites can be very simple. You can run a website in your basement with a single server connected to residential Internet access service, but it would not be able to serve many users very effectively. You may wish to start students with Figure 4.11, which shows what happens to processors as load increases. You will want to emphasize the impact of user profile and web page content on performance—the more interactive the content the more processor power is needed.

Site Development Tools. Although the details of website design are beyond the scope of the text, Section 4.5 begins with a brief look at website design basics, and the factors about e-commerce sites that annoy customers (Table 4.8) and conversely, are important in successful e-commerce site design (Table4.9) The section then provides a review of the various tools that site developers can use to build and manage an e-commerce site. Java, JSP, JavaScript/Node.js, tools based on JavaScript (such as React, Vue, AngularJS, D3.js, jQuery, and TypeScript), ASP/ASP.NET, ColdFusion, PHP, Ruby on Rails, and Django are all tools used to add and handle interactive elements on web pages. Design elements such as widgets and mashups enhance user interest and involvement. Personalization and customization tools also are important in developing user engagement and for marketing purposes.

Information Policy Set. Many site developers do not understand that a commercial website needs to have a set of information policies established by management that govern how information gathered at the site will be used. We touch briefly on this topic here and develop it further in Chapter 8.

The Insight on Society case, Designing for Accessibility (updated for this edition), asks students to think about how a site can be designed to serve the needs of disabled users, including the visually challenged and hearing impaired. There has been increased focus on this topic as a result of several significant legal decisions mentioned in the case.

Questions for class discussion might include the following:

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9 ● ● ● ●

Why might some merchants be reluctant to make their websites accessible to disabled users?

How can websites be made more accessible?

Should all websites be required by law to provide “equivalent alternatives” for visual and sound content?

What additional accessibility problems do mobile devices pose?

Developing a Mobile Website and Building Mobile Applications. Section 4.6 introduces students to some issues surrounding developing a mobile website and building mobile applications. If possible, spend some time talking about the differences between mobile websites that are optimized for the mobile platform versus regular websites that are not, and what impact that might have on the m-commerce opportunities for the site. Although students are undoubtedly very familiar with different apps, they may not understand the distinction between a mobile web app, a native app, and a hybrid app. Table 4.10 applies the systems analysis and design framework first introduced in Section 4.1 and Table 4.1 to developing a mobile presence, and Table 4.11 highlights some unique features that students should be aware of that need to be taken into consideration when designing for the mobile platform. The section on mobile presence design considerations also covers several important trends in this area, including mobile first design philosophy, responsive web design (RWD) and adaptive web design (AWD). A section on cross-platform mobile app development tools highlights some of the various tools now available, such as Flutter and React Native, that make creating cross-platform mobile apps relatively easy and inexpensive. The Insight on Technology case, Duolingo’s Mobile App Powers Language Learning (updated for this edition), discusses the development of the Duolingo language learning app. Questions for class discussion might include the following: ● Why do you think Duolingo’s mobile app has been such a major factor in its success? ● What business model does Duolingo use? ● Why is A/B testing an important part of Duolingo’s process?

Section 4.7 offers students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as a UX (user experience) designer.

The chapter-ending case study in Section 4.8, Dick’s Sporting Goods: Pivoting Pays Off (updated for this edition) provides a rich discussion of both the business and technology considerations that shaped the decisions by Dick’s Sporting Goods to take over its own ecommerce operations after having outsourced them to external vendors (first GSI and then eBay, after it acquired GSI) for a number of years. An unanticipated side benefit is that these decisions, made for a different reason, was that they helped Dick’s Sporting Goods to cope with the challenges facing it as a result of the pandemic.

Case Study Questions and Answers 1.

Why did Dick’s decide to take over its own e-commerce operations?

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10 The cost of working with external vendors was growing rapidly as Dick’s became more successful in online sales. The fees charged rose a percentage of sales even though it cost eBay no more to fulfill an expensive order than an inexpensive order. Dick’s also wanted to customize its web operations to the needs of its customers, in particular to develop an omnichannel business.

2.

What is Dick’s omnichannel strategy?

Dick’s plans to use its physical stores as mini-distribution centers, fulfilling the online orders of local and regional customers from physical stores located nearby.

The stores can also act as showrooms for its goods, and customers could pick up online orders in nearby stores the same day.

3.

How did Dick’s Sporting Goods’ previous decisions help it when the Covid-19 pandemic struck?

When Covid-19 first appeared in the United States, some companies were caught flat-footed. However, the time and work Dick’s had already invested in developing its e-commerce platform, responsive website, and mobile app created an easy path for new services. Dick’s was able to launch curbside, contactless pickup functionality on its mobile app in less than 48 hours. It embraced the lean approach with a user-centered design that it had learned from its experience partnering with Pivotal Labs to create a product that, while not perfect, was functional. It then took an iterative approach, revising the app in response to customer feedback and business needs. For instance, one challenge was enabling customers to return items. While many retailers stopped taking returns, Dick’s believed it was critical to ensure customer satisfaction. A two-engineer team was able to get a version of curbside return functionality added to the app within a few days, which they then continued to improve, based on feedback.

End-of-Chapter Questions and Answers 1.

What are the main factors to consider when developing an e-commerce presence?

The main factors to consider when developing an e-commerce presence are the organizational capabilities and human resources needed to build and manage the site, the hardware, the software, the telecommunications infrastructure to meet the demands of your customers, and the site design to implement your business objectives.

2.

Define the systems development life cycle and discuss the various steps involved in creating an e-commerce site.

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11 The systems development life cycle is a methodology for understanding the business objectives of any system so that an appropriate solution can be designed.

The five major steps in the SDLC for an e-commerce site are: systems analysis, systems design, building the system, testing the system, and implementation. In the systems analysis step, the business objectives for the site are identified. The list of the necessary capabilities for the site is translated into lists of the types of information systems and the elements of information that will be needed to achieve them. Next, the main components in the system and their relationships to one another must be identified. The system design includes a data flow diagram and the physical components that will need to be purchased. After the system has been built and programmed, the program modules must be tested one at a time and then the site must be tested as a whole, examining every conceivable path a user might try to utilize while on the site. Implementation of an e-commerce site includes the continuing maintenance that will be needed over the life of the site to keep it functional, including correcting mistakes and continuing to improve, update, and modify links and other site features.

3.

Discuss the differences between a simple logical and a simple physical website design.

A simple logical design for a website describes the flow of information at the site, including the processing functions that must be performed and the databases that will provide information. It also includes a description of the security and emergency backup procedures and the controls that will be used in the system. A simple physical design, on the other hand, translates the logical design into the physical components that will be needed such as the servers, software, size of the telecommunications link, backup servers, and security system.

4.

Why is system testing important? Name the types of testing and their relation to each other.

System testing is important because there can be up to thousands of different pathways within a typical e-commerce site and you must make sure that customers can find what they want easily and quickly and, most importantly, that they can complete a purchase without a hitch. The types of testing that must be completed are unit testing, which involves checking each program module; system testing, which includes testing the site as a whole in the way a “typical” user might navigate and make requests for functionality; and acceptance testing, which requires the firm’s key personnel and managers to use the system to verify that the business objectives as originally conceived are being met.

5.

Compare the costs for system development and system maintenance. Which is more expensive, and why?

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12 The costs for system maintenance for an e-commerce site can run anywhere from 50% to 100% per year of the original systems development costs. For small sites, the annual maintenance cost can parallel the development costs, with larger sites achieving some economies of scale. Maintenance is more expensive because ecommerce sites are always in a process of change, improvement, and correction.

E-commerce sites are, in fact, never finished. They are always in the process of being built and rebuilt.

6.

Why is a website so costly to maintain? Discuss the main factors that impact cost.

Websites are so costly to maintain because code must be debugged; hyperlinks must be tested and repaired continually; emergencies must be handled; and reports, data files, and links to backend databases must be maintained and updated as necessary. General administrative tasks of the site require attention including updating the products and prices. Changes and enhancements to the system are also continually being made so that the site is always adapting to changing market conditions. All of this requires a web team that includes programmers, designers, and business managers from the marketing, sales support, and production departments. This will ensure timely response to customer feedback and that the site is adequately monitored for correct prices and links with updated page display.

7.

What are the main differences between single-tier and multi-tier site architecture?

Single-tier site architecture simply consists of a server machine running the basic web server software. Multi-tier site architecture, on the other hand, provides much more functionality by linking a web server layer that can include multiple web servers to a middle tier that includes many web application servers, which provide a wide variety of transaction processing tasks. This middle layer is also linked to a backend layer that includes existing databases, human resources systems, corporate applications, financial data, and enterprise systems. A multi-tiered site typically employs several or more physical computers each running some of the software applications and sharing the workload across many computers.

8.

Name the basic functionalities that web server software should provide.

The basic functionalities a web server should provide include processing requests from customers for HTML and XMP pages, security services, file transfer, search services, data capture, e-mail, and site management tools.

9.

What are the main factors to consider when choosing the best hardware platform for your website?

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13 In choosing the best platform to use for your website, the main factors to consider are the anticipated number of simultaneous users who will likely visit your site, the customer user profile with their expected requests and behavior while at the site, and the nature of the content on your site. The more visitors you have, the greater the demand will be on your system. If the users will be viewing dynamic pages and large multimedia files, far more capacity will be required.

10.

What is DevOps and how does it relate to agile development?

Agile development breaks down a large project into a series of smaller subprojects that are completed in short periods of time using iteration and continuous feedback. Improvement or addition of new functionality takes place within the next iteration as developers clarify requirements. This helps to minimize the overall risk and allows the project to adapt to changes more quickly.

Agile methods emphasize face-to-face communication over written documents, encouraging people to collaborate and make decisions quickly and effectively.

DevOps builds on agile development principles as an organizational strategy to create a culture and environment that further promote rapid and agile development practices. DevOps stands for “development and operations” and emphasizes close collaboration between the developers who create applications and the operational staff who run and maintain the applications. DevOps aims to promote better and more frequent communication and collaboration between systems development and operations groups and a fast and stable workflow throughout the entire development life cycle. With this type of organizational change along with agile techniques, standardized processes, and more powerful automated software creation and testing tools, it is possible to release more reliable applications more rapidly and more frequently.

11.

Compare and contrast the various scaling methods. Explain why scalability is a key business issue for websites.

To meet the demands for service at your site, you can scale your hardware vertically, scale your hardware horizontally, or improve the processing architecture at your site. You scale vertically by increasing the processing power of individual components, for example by upgrading the servers from a single processor to multiple processors. You can add up to 20 processors to a machine and also increase chip speeds. The drawbacks to this method are that it can become expensive to purchase new machines with every growth cycle, and that your entire site becomes dependent on just a small number of very powerful computers.

If you horizontally scale your site instead, you add multiple computers to share the workload and increase the “footprint” of the instance, for example adding multiple single processor servers to the site and balancing the load among many

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14 servers. You can also create dedicated servers that only handle certain tasks such as HTTP requests, while others handle just database applications. This method requires the use of special load-balancing software to direct the incoming requests to the appropriate server. This is a less expensive method because you can often use older PCs that otherwise might be discarded. Furthermore, if one machine fails, there is a good probability that another one of the many other machines can pick up the load.

The third alternative, improving the processing architecture, is a combination of both vertical and horizontal scaling and system design changes. Scalability is a key business issue for websites because firms must be able to increase the size of their sites as demand loads increase, and they must be able to do so efficiently and cost effectively.

12.

What are the eight most important factors impacting website design, and how do they affect a site’s operation?

The most important factors impacting website design are: ● Functionality: The site must have pages that load quickly, perform correctly, and send the user to the requested information about the product offerings. ● Informational: The site must have links that the customer can find easily to obtain information about the company and the products it offers. ● Ease of use: The site must have a simple foolproof navigation scheme. ● Redundant navigation: The site must have alternative paths to reach the same content. ● Ease of purchase: There should be no more than one or two clicks required for the purchasing procedure. ● Multi-browser functionality: The site should work with popular browsers. ● Simple graphics: The site should not use distracting graphics and/or sounds that the user cannot control. ● Legible text: The site should avoid the use of backgrounds that distort text or make it difficult to read.

Failure to pay attention to these factors will adversely affect the operation of a site because users will find the site frustrating to navigate and view, they will have difficulty obtaining information about the products, and they will determine that making a purchase is far too complicated.

13.

What are Java and JavaScript? What role do they play in website design?

Java is a programming language that allows programmers to create interactivity and active content on the client machine, thereby alleviating load on the server because the Java programs or “applets” could be downloaded to the client and

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15 executed on the client’s computer. A Java Virtual Machine (VM) was included in browsers that would send a request to the server to download and execute the program and allocate page space to display the results. Today, Java remains one of the most popular programming languages, with many critical technologies, such as the Google Android mobile platform (although not Apple’s iOS), leveraging aspects of the language. However, Java does face some challenges. In recent years, it has been plagued by security flaws, which Oracle has been attempting to address with the frequent release of new versions and security patches. Due to security concerns, Oracle has phased out Java applets and the current versions of most browsers no longer support them. Developers of Javabased web apps now bundle Java within the app, so that applets are not necessary.

Conversely, JavaScript is a programming language that is used to control the objects on an HTML page and handle interactions with the browser. It is commonly used to control verification and validation of user input, such as confirming that a valid phone number or e-mail address has been entered. It is much more acceptable to corporations and other environments because it is more stable and is restricted to the operation of requested HTML pages.

14.

Name and describe three methods used to treat customers individually. Why are they significant to e-commerce?

There are a number of methods for achieving personalization (the ability to treat people based on their personal qualities and prior history with your site) and customization (the ability to change the product to better fit the needs of the customer). One basic method involves the placement of cookie files on the user’s client computer. A cookie is a small text file placed on the user’s client computer that can contain any kind of information about the customer, such as customer ID, campaign ID, or purchases at the site. When the user returns to the site, or indeed goes further into the site, the customer’s prior history can be accessed from a database. Information gathered on prior visits can then be used to personalize the visit and customize the product. There are also a number of other more sophisticated tools available that offer intelligent customer segmentation, personalization, and individualized product recommendations. Examples include Kibo, Montetate, and Barilliance. Most e-commerce suites, such as Salesforce Commerce Cloud, include similar functionality. At the other end of the spectrum, Google Optimize is a free tool that can customize a website based on visitor location, browser device, and digital behavior. Personalization and customization are significant to e-commerce because they can potentially make it nearly as powerful as a traditional marketplace and perhaps even more powerful than direct mail or shopping at an anonymous suburban shopping mall. Speaking directly to a customer and tailoring a product to that customer are potentially powerful marketing tools that could help to increase sales and revenues.

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16 15.

What are some of the policies e-commerce businesses must develop before launching a site and why must they be developed?

Some of the policies that an e-commerce business site must develop prior to launching are a privacy policy and accessibility rules. The privacy policy is a public statement detailing to customers how the personal information that is gathered at the site will be treated. Accessibility rules are a set of design objectives that ensure disabled users can effectively access a site.

16.

What are the advantages and disadvantages of mobile first design?

Mobile first design has several advantages. Instead of creating a full-featured design for a desktop website that then needs to be scaled back, mobile first design focuses on creating the best possible experience given mobile platform constraints and then adding back elements for the desktop platform, progressively enhancing the functionality of the site. Proponents of mobile first design argue that it forces designers to focus on what is most important, and this helps create a lean and efficient mobile design that functions much better than a design that begins with a traditional platform that must be stripped down to work on mobile. Mobile first design is not without its challenges, however. It can be more difficult for designers who are more comfortable with the more traditional process.

17.

What is the difference between a mobile web app and a native app?

A mobile web app is an application built to run on the mobile web browser built into a smartphone or tablet computer. In the case of Apple, the native browser is Safari. Generally, it is built to mimic the qualities of a native app using HTML5 and Java. Mobile web apps are specifically designed for the mobile platform in terms of screen size, finger navigation, and graphical simplicity. Mobile web apps can support complex interactions used in games and rich media, perform realtime, on-the-fly calculations, and can be geo-sensitive using the smartphone’s built-in global positioning system (GPS) function. Mobile web apps typically operate faster than mobile websites but not as fast as native apps.

A native app is an application designed specifically to operate using the mobile device’s hardware and operating system. These stand-alone programs can connect to the Internet to download and upload data and can operate on this data even when not connected to the Internet. Download a book to an app reader, disconnect from the Internet, and read your book. Because the various types of smartphones have different hardware and operating systems, apps are not “one size fits all” and, therefore, need to be developed for different mobile platforms. An Apple app that runs on an iPhone cannot operate on Android phones. As you learned in Chapter 3, native apps are built using different programming languages depending on the device for which they are intended, which is then compiled into binary

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17 code, and which executes extremely fast on mobile devices, much faster than HTML or Java-based mobile web apps. For this reason, native apps are ideal for games, complex interactions, on-the-fly calculations, graphic manipulations, and rich media advertising.

18.

In what ways does a hybrid mobile app combine the functionality of a mobile web app and a native app?

A hybrid app has many of the features of both a native app and a mobile web app.

Like a native app, it runs inside a native container on the mobile device and has access to the device’s APIs, enabling it to take advantage of many of the device’s features, such as a gyroscope, that are normally not accessible by a mobile web app. It can also be packaged as an app for distribution from an App store. Like a mobile web app, it is based on HTML5, CSS3, and JavaScript, but uses the device’s browser engine to render the HTML5 and process the JavaScript locally.

19.

What is PHP and how is it used in web development?

PHP is an open source, general-purpose scripting language that is most frequently used in server-side web applications to generate dynamic web page content, although it can also be used for client-side graphical user interface applications.

PHP is also a part of many web application development frameworks, such as CakePHP, CodeIgniter, and others, and is also part of the LAMP (Linux, Apache, MySQL, and PHP) open-source web development model for building dynamic websites and web applications. According to W3Techs, PHP is, far and away, the most commonly used server-side scripting language (used by more than 75% of the websites whose server-side programming language it was able to identify).

20.

How does responsive web design differ from adaptive web design?

Responsive web design (RWD) tools and design techniques make it possible to design a website that automatically adjusts its layout and display according to the screen resolution of the device on which it is being viewed, whether a desktop, tablet, or smartphone. RWD uses the same HTML code and design for each device but uses CSS (which determines the layout of the web page) to adjust the layout and display to the screen’s form factor. One problem with RWD, particularly if not coupled with mobile first design, is that the responsive website still has the size and complexity of a traditional desktop site, sometimes making it slow to load and perform on a mobile device. Adaptive web design was developed to deal with this issue. With adaptive web design (AWD), sometimes also referred to as adaptive delivery or responsive web design with server-side components (RESS), the server hosting the website detects the attributes of the device making the request and, using predefined templates based on device screen size along with CSS and JavaScript, loads a version of the site that is optimized for the

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18 device. AWD has many advantages compared to RWD, including faster load times, the ability to enhance or remove functionality on the fly, and typically a better user experience, particularly for businesses where user intent differs depending on the platform being used.

Projects: Questions and Answers 1.

Go to the website of Wix, Weebly, or another provider of your choosing that allows you to create a simple e-tailer website for a free trial period. Create a website. The site should feature at least four pages, including a home page, product page, shopping cart, and contact page. Extra credit will be given for additional complexity and creativity. Come to class prepared to present your etailer concept and website.

Students should be able to build a basic website using the tools provided on these sites. Note that it may not be possible for students to build at least four pages (depending on the free functionality provided by these two sites at the time this project is assigned), so credit should not be deducted if that is, in fact, the case.

2.

Visit several e-commerce sites, not including those mentioned in this chapter, and evaluate the effectiveness of the sites according to the eight basic criteria/functionalities listed in Table 4.8. Choose one site you feel does an excellent job on all the aspects of an effective site and create a PowerPoint or similar presentation, including screen shots, to support your choice.

The purpose of this project is to extend the critical thinking skills of students as they examine websites. For each factor listed in Table 4.8, the students should evaluate the website for effectiveness of design. For example, the students should evaluate how clearly the digital catalog conveys the essence of each product using graphics, or other methods such as streaming video, and how effectively products are portrayed in textual descriptions. Students can choose sites at which they are shopping, or they can simply browse, but they should go through the steps of executing a transaction so that they can evaluate the shopping cart/payment system and ease of purchase. They should also navigate to multiple pages at each site so that they can evaluate the ease of use and redundancy of navigation. The presentation might include screen shots of product graphics, navigation bars, and pages from the site displayed in multiple browsers.

3.

Imagine that you are in charge of developing a fast-growing startup’s ecommerce presence. Consider your options for building the company’s ecommerce presence in-house with existing staff, or outsourcing the entire operation. Decide which strategy you believe is in your company’s best interest and create a brief presentation outlining your position. Why choose that approach? And what are the estimated associated costs, compared with the

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19 alternative? (You’ll need to make some educated guesses here—don’t worry about being exact).

The purpose of this project is to get students to begin to consider the managerial decision-making process. If they choose to build in-house, they might mention such factors as an in-place staff of professionals who are trained for this task including graphic artists, web designers, programmers, and project managers.

They may also posit that they are prepared to purchase a top-of-the-line prepackaged site-building tool that will be scalable as the firm expands its customer base. They may also argue that their firm sells a highly specialized product so that the need for a customized website is high or that their staff, which is already highly trained, will be able to build a site that does exactly what the company needs. Moreover, they may believe that the staff who will participate in the building of the site will be able to change the site more rapidly to adapt to any changes in the business environment.

Students who opt for outsourcing might mention such factors as the risks involved in building such complex features as shopping carts, credit card authentication and processing systems, inventory management systems, and order processing systems. They may also argue that the risk of ending up with a poorly functioning site is just too great, and that staff will face a long, difficult learning curve. Costs for building in-house might include the salaries of any additional professionals who will have to be hired, the cost of a prepackaged site-building tool, or the costs of additional software or technology that will have to be purchased to build credit card authentication systems. Costs for outsourcing may include an expensive site-building package and costs for hiring an outside vendor to modify the package.

4.

Choose two e-commerce software packages and prepare an evaluation chart that rates the packages on the key factors discussed in the section “Choosing an Ecommerce Software Platform.” Which package would you choose if you were developing a website of the type described in this chapter, and why?

The best way for students to approach this project is to choose two of the ecommerce suites and conduct an online research study to find articles in the popular and technical press that evaluate the products based upon the key factors listed in the chapter. Reading articles and comparisons of the suites will give students insight into just how difficult the process of choosing an e-commerce suite can be for a manager. Answers, of course, will vary according to the suites chosen and the opinions of the authors of the articles collected. One possible comparison based upon product evaluations from various sources is: (Table is based on a scale of 1–10) Sitecore

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HCL Commerce

20 Experience Commerce Functionality Support for different business models Business process modeling tools Visual site management tools Performance and scalability Connectivity to existing business systems Compliance with standards Global and multicultural capability Local sales tax and shipping rules

8.5 7.5 9.2 9.0 7.5 7.5 9.0 8.0 8.0

7.8 8.0 7.5 8.0 8.2 9.0 8.0 9.0 8.0

HCL Commerce (formerly IBM WebSphere Commerce) provides a powerful customer interaction platform for omni-channel commerce. It provides easy-touse tools for business users to centrally manage a cross-channel strategy. Business users can create and manage precision marketing campaigns, promotions, catalog, and merchandising across all sales channels, or use integrated AI-enabled content management capabilities. HCL Commerce is a single, unified platform that offers the ability to do business directly with consumers (B2C) and directly with businesses (B2B). HCL Commerce is a customizable, scalable, and high availability solution that is built to use open standards. It uses cloud friendly technology to make deployment and operation easy and efficient including Linux and Windows.

Sitecore Experience Commerce includes built-in support for omnichannel storefronts, multisites, and multilingual platforms. Capabilities include live edit, templates, and publishing workflows enabling the design of unique digital storefronts. It provides support for A/B and multivariate testing, enabling the optimization of messaging, offers, and promotions. Sitecore also includes Sitecore Experience Accelerator (SXA) and provides a working reference storefront that supports a complete end-to-end B2C shopping experience. The accelerator includes 100+ content and commerce-specific components that can be dragged and dropped onto a web page without requiring IT resources, speeding the development and deployment of storefronts.

5. Choose one of the open-source web content management systems such as WordPress, Joomla, or Drupal, or another of your own choosing and prepare an evaluation chart similar to that required by Project 4. Which system would you choose and why?

The first task students must perform to complete this project is to choose an opensource web content management system. Once they have done so, the next step,

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21 as with Project 4, will be to conduct an online research study to find articles in the popular and technical press that evaluate the product. Answers will vary according to the system chosen and the opinions of the authors of the articles collected. Student evaluation charts should cover the following areas and explain whether they would purchase the system and why or why not: ● Community features ● Shopping cart ● Search engine ● Forum creation ● Ability to create blogs ● Multimedia capability ● Templates/themes ● Document management features ● Content management features ● Documentation for system ● Ease of use/learning curve required ● SSL/TLS security ● Internationalization capabilities Video Cases The Chapter 4 eText features two embedded video cases. Video Case 4.1, Bolt: OneClick Checkout for Small and Medium-Sized Businesses, appears in the middle of page 193 of the eText, in the “Build Your Own versus Outsourcing” section. In the video, released in March 2022, Bolt CEO Maju Kurvilla talks about how Bolt can help small and medium-sized businesses power their e-commerce efforts with Bolt software that enables one-click checkout. Questions that you can use for class discussion or as a student assignment include the following: • What problem was Bolt created to solve?

Answer: Kurvilla notes that conversion at checkout (the rate that shoppers who place items into a shopping cart actually complete checkout) is a major problem for retailers. He notes that 75% of shoppers fail to complete checkout on a desktop, and 85% on a mobile device.’

• How does Bolt help small and medium-sized businesses?

Answer: Previously, if a small business wanted to offer their customers the convenience of one-click checkout, they would have to go to an ecosystem such as Amazon’s. Bolt offers such businesses a software tool that enables them to replicate that convenience, providing them with a shared shopper accounts network across all of the merchants that use Bolt.

• Why is Bolt worth $14 billion, according to Kurvalla?

Answer: Kurvalla points to partnerships with a number of e-commerce platforms, such as BigCommerce, Magento, PrestaShop, and Adobe, that are now offering Bolt functionality to their own customers. He also notes that bigger retailers such as Fanatics, Forever21, Badgley Mischka are also using Bolt. Bolt is also expanding into social e-commerce, and recently acquired Tipster, which will

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22 enable it to advance its efforts in terms of providing merchant solutions for social e-commerce. He also notes advances in the ease of use of Bolt solutions (the Bolt solution is easily integrated into a merchant’s existing platform, taking under two minutes to implement).

Video Case 4.2, Figma: A Collaborative Web Application for UI Design, appears on page 199 of the eText in the "Alternative Web Development Methodologies” section. In this video, released in September 2022, Figma Co-Founder and CEO Dylan Field and Adobe President of Digital Media Business David Wadhwan discuss Adobe’s proposed $20 billion acquisition of Figma, which has created a collaborative web application for user interface design. Many users are using Figma not just for design but also for actual web development, with about one-third of its users identifying themselves as developers.

Using Figma enables developers to more easily collaborate with designers and enables developers to create new iterations of designs themselves. One fact not noted in the video is that the U.S. Department of Justice is reportedly preparing an antitrust lawsuit seeking to block the acquisition on the grounds that it will is will be anti-competitive. Questions that you can use for class discussion or as a student assignment include the following: • What are the advantages that Field identifies in combining Figma with Adobe?

Answer: Field mentions Figjam (an online whiteboard for design teams that makes it easy to illustrate ideas) and how its efforts with that product can be accelerated through Adobe Acrobat, which has a very large installed user base; the ability to bring capabilities from Adobe, such as imaging, vector illustration, video, and 3D, into the Figma design platform; as well as thinking about markets that Figma is not currently serving, and how it might bring the capabilities of Adobe onto the Figma platform to serve those markets.

• Why did Figma choose to be acquired by Adobe rather than go public on its own?

Answer: According to Field, being acquired by Adobe will accelerate the impact that it can have, and also broaden its impact, by leveraging and utilizing the expertise of Adobe, and the capabilities and technology that Adobe has already built. Doing so will enable Figma to move into new areas.

• According to Field, what is Figma’s core market, compared to Adobe. Does Figma really compete with Adobe currently, as alleged by the U.S. Department of Justice?

Answer: Field states that while initially Figma viewed Adobe as a competitor, the more it learned about Adobe, the less they characterized as a competitor. Field notes that Figma is focused on product design and product and software creation, while Adobe has primarily been focused on marketing.

Copyright © 2022 Pearson Education, Inc.

1 Instructor’s Manual and Video Cases: Chapter 5 E-commerce Security and Payment Systems Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases in eText Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 4 6 6 6 6 7 8 9 16 21

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2 Learning Objectives After reading this chapter, your students should be able to: ● Understand the scope of e-commerce crime and security problems, the key dimensions of e-commerce security, and the tension between security and other values. ● Identify the key security threats in the e-commerce environment. ● Describe how technology helps secure Internet communications channels and protect networks, servers, and clients. ● Appreciate the importance of policies, procedures, and laws in creating security. ● Identify the major e-commerce payment systems in use today.

Chapter Outline SolarWinds: Shining a Light on Software Supply Chain Attacks 5.1 The E-commerce Security Environment The Scope of the Problem What Is Good E-commerce Security?

Dimensions of E-commerce Security The Tension between Security and Other Values 5.2

Security Threats in the E-commerce Environment Malicious Code Insight on Society: Ransomware Everywhere Potentially Unwanted Programs (PUPs) Phishing Hacking, Cybervandalism, and Hacktivism Data Breaches Credit Card Fraud/Theft Identity Fraud Spoofing, Pharming, and Spam (Junk) Websites Sniffing and Man-in-the-Middle Attacks Denial of Service (DoS) and Distributed Denial of Service (DDoS) Attacks Insider Attacks Poorly Designed Software Insight on Technology: Race Against Time: The Scramble to Fix the Log4Shell Vulnerability Social Network Security Issues Mobile Platform Security Issues Cloud Security Issues Internet of Things Security Issues Metaverse Security Issues

5.3

Technology Solutions Protecting Internet Communications Encryption .

3 Symmetric Key Cryptography Public Key Cryptography Public Key Cryptography Using Digital Signatures and Hash Digests Digital Certificates and Public Key Infrastructure (PKI) Securing Channels of Communication Transport Layer Security (TLS) and HTTPS Virtual Private Networks (VPNs) Wireless (Wi-Fi) Networks Protecting Networks Firewalls Proxy Servers Intrusion Detection and Prevention Systems Protecting Servers and Clients Operating System and Application Software Security Enhancements Anti-Virus Software 5.4

Management Policies, Business Procedures, and Public Laws A Security Plan: Management Policies Insight on Business: Are Biometrics the Solution for E-commerce Security The Role of Laws and Public Policy Private and Private-Public Cooperation Efforts

5.5

E-commerce Payment Systems Online Credit Card Transactions Credit Card E-commerce Enablers PCI-DSS Compliance Limitations of Online Credit Card Payment Systems Alternative Online Payment Systems Mobile Payment Systems: Your Smartphone Wallet Blockchain and Cryptocurrencies

5.6

Careers in E-commerce The Company The Position: Cybersecurity Threat Management Team Trainee Qualifications/Skills Preparing for the Interview Possible First Interview Questions

5.8

Case Study: Mobile Payments: Fintech versus the Bank Giants

5.9

Review Key Concepts Questions Projects .

4 References List of Key Terms access controls, p. 282 Advanced Encryption Standard (AES), p. 269 adware, p. 253 authentication procedures, p. 282 authenticity, p. 246 authorization management system, p. 283 authorization policies, p. 283 availability, p. 246 backdoor, p. 252 BEC (business e-mail compromise) phishing, p. 254 biometrics, p. 283 Bitcoin, p. 296 blockchain, p. 294 blockchain system, p. 295 bot, p. 252 botnet, p. 252 branded store proximity mobile wallets, p. 292 browser parasite, p. 253 Buy Now Pay Later (BNPL) services, 292 CERT Coordination Center, p. 288 certification authority (CA), p. 273 cipher text, p. 267 confidentiality, p. 246 cracker, p. 255 credential stuffing, p. 256 cryptocurrency, p. 296 cryptojacking, p. 253 cybervandalism, p. 255 data breach, p. 256 Data Encryption Standard (DES), p. 269 Denial of Service (DoS) attack, p. 259 digital certificate, p. 273 digital signature (e-signature), p. 271 Distributed Denial of Service (DDoS) attack, p. 259 drive-by download, p. 246 encryption, p. 267 exploit kit, p. 246 firewall, p. 278 hacker, p. 255 hacktivism, p. 255 hash function, p. 270 .

5 HTTPS, p. 277 identity fraud, p. 257 implementation plan, p. 282 integrity, p. 245 intrusion detection system (IDS), p. 279 intrusion prevention system (IPS), p. 280 key (cipher), p. 268 malicious code (malware), p. 248 malvertising, p. 246 man-in-the-middle (MitM) attack, p. 259 merchant account, p. 289 multi-factor authentication (MFA) tools, p. 282 near field communication (NFC), p. 294 nonrepudiation, p. 246 online stored value payment system, p. 291 P2P mobile payment apps, p. 293 PCI-DSS (Payment Card Industry-Data Security Standards), p. 291 pharming, p. 258 phishing, p. 254 potentially unwanted program (PUP), p. 252 privacy, p. 246 proxy server (proxy), p. 279 public key cryptography, p. 270 public key infrastructure (PKI), p. 273 Quick Response (QR) code technology, p. 294 ransomware, p. 249 risk assessment, p. 281 secure negotiated session, p. 275 security audit, p. 283 security organization, p. 282 security policy, p. 282 security token, p. 283 session key, p. 276 sniffer, p. 258 social engineering, p. 254 software supply chain attack, p. 280 spam (junk) websites, p. 258 spoofing, p. 258 spyware, p. 253 SQL injection (SQLi) attack, p. 260 substitution cipher, p. 268 symmetric key cryptography (secret key cryptography), p. 269 transposition cipher, p. 268 Trojan horse, p. 252 .

6 two-factor authentication (2FA), p. 282 United States Computer Emergency Readiness Team (US-CERT), p. 286 universal proximity mobile wallets, p. 292 virtual private network (VPN), p. 277 virus, p. 246 worm, p. 246 WPA2, p. 277 WPA3, p. 277 zero-day vulnerability, p. 261 List of Figures Figure 5.1 The E-commerce Security Environment, p. 245 (Figure video in eText) Figure 5.2 Vulnerable Points in an E-commerce Transaction, p. 248 Figure 5.3 Tools Available to Achieve E-commerce Security, p. 268 Figure 5.4 Public Key Cryptography–A Simple Case, p. 271 Figure 5.5 Public Key Cryptography with Digital Signatures, p. 272 Figure 5.6 Digital Certificates and Certification Authorities, p. 274 Figure 5.7 Secure Negotiated Sessions Using TLS, p. 276 Figure 5.8 Firewalls and Proxy Servers, p. 279 Figure 5.9 Developing an E-commerce Security Plan, p. 281 Figure 5.10 How an Online Credit Card Transaction Works, p. 290 Figure 5.11 Mobile Wallet App Adoption, p. 293 Figure 5.12 How Blockchain Works, p. 295 List of Tables Table 5.1 What’s New in E-commerce Security 2022–2023, p. 242 Table 5.2 Customer and Merchant Perspectives on the Different Dimensions of Ecommerce Security, p. 247 Table 5.3 Notable Examples of Malicious Code, p. 253 Table 5.4 Internet of Things Security Challenges, p. 266 Table 5.5 E-commerce Security Legislation and Regulation, p. 287 Table 5.6 Major Trends in E-commerce Payments 2022–2023, p. 288 List of Video Cases in eText Video Case 5.1: Crowdstrike and Cybersecurity Video Case 5.2: Klarna and Buy Now Pay Later (BNPL) Overview This chapter first summarizes the security threats and solutions of which managers of ecommerce businesses need to be aware, and then reviews the various online payment systems available. The key concept students should take away from this chapter, with respect to security, is that security is a complex, multi-layered phenomenon that involves a diverse set of risks and a balanced approach. With respect to payment systems, the key concept for students is that, for the most part, existing payment mechanisms have been .

7 adapted to the online environment, and that in the United States, the primary form of online payment is still the existing credit and debit card system, as well as the traditional banking system. New “front ends” such as PayPal and various mobile payment systems leverage those existing systems. However, cryptocurrencies, which are also covered in this section, are an exception, and represent a completely new currency and method of payment.

Teaching Suggestions: Key Points The opening case, Solar Winds: Shining a Light on Software Supply Chain Attacks (new for this edition), highlights the vulnerability of systems that rely on the Internet to largescale attacks, increasingly led by organized gangs of criminal hackers, and in many instances, as is suspected in the attack on Solar Winds, sanctioned and funded by nations such as Russia and China.

Questions for class discussion might include the following: ● Have you ever heard about software supply chain attacks before reading this case? ● What makes software supply chain attacks so menacing? ● What techniques do hackers user to carry out software supply chain attacks? ● How can organizations protect themselves against software supply chain attacks?

Video Case 5.1, Crowdstrike and Cybersecurity, appears on page 242 of the eText, in the “Introduction” section. See pages 21 to 22 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Section 5.1 addresses the e-commerce security environment, including the scope of the problem, the underground economy marketplace, defining good security, the key dimensions of e-commerce security, and the tension between security and other values.

The Scope of the Problem. This section is likely to be of interest to students. Ask students to discuss whether they or anyone they know has ever been a victim of cybercrime. Do they think cybercrime is being overplayed or underplayed in the popular press, given the statistics available and discussed in this section?

Defining Good Security. Good security requires three main elements: special technology, organizational policies and procedures, and laws and industry standards. Figure 5.1 illustrates the interaction and supportive nature of these three elements. No single “magic bullet” solution exists for Internet security any more than for general societal security. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 5.1 and this topic. Table 5.3 lists the six key ingredients required for e-commerce sites and how the key stakeholders (consumers and merchants) view the issue. You may want to walk .

8 students through this table, so they understand the nature of the problem as well as the different perspectives.

E-commerce Security Threats. Section 5.2 addresses the panoply of security threats in the e-commerce environment with current examples of each type. The e-commerce environment holds threats for both consumers and merchants. Figures 5.2 provides an illustration of vulnerable points in the transaction process. Malicious code includes exploit kits, malvertising, drive-by downloads, viruses, worms, ransomware (which is increasingly being focused on small and medium-sized businesses and municipal governments), Trojan horses such as Emotet and Trickbot, and bots.

The Insight on Society case, Ransomware Everywhere (new for this edition), discusses the issues surrounding two high-profile ransomware attacks targeting providers of critical infrastructure (the fuel pipeline system and the meat and poultry supply system) in the United States. Questions for class discussion might include the following: ● What organizational and technological failures led to the success of the ransomware attacks at Colonial Pipeline and JBS? ● Should firms who are targeted by ransomware pay the “ransom”? Why or why not? ● What solutions are available to combat ransomware? ● Have you or anyone you know experienced a ransomware attack?

Other security threats include potentially unwanted programs (PUPs) such as adware, browser parasites (including cryptojacking), and spyware; phishing schemes such as Nigerian e-mail attacks and BEC phishing; and hacking, cybervandalism, (including Zoombombing) and hacktivism. Students are likely to have heard a lot about data breaches (including the increasingly used technique of credential stuffing), credit card fraud/theft, and identity fraud. Credit card fraud/theft, although it appears frequently in the news, does not impact consumers as much as students might think because of federal laws that limit liability to $50 for the consumer. However, this leaves the merchant open to much higher losses. Ask students whether they have any personal experience with any of these security threats.

Other types of security issues may not be as familiar as some of those mentioned above.

However, spoofing/pharming, sniffing, and man-in-the-middle attacks, as well as DoS/DDoS attacks, are all significant threats to e-commerce security.

Many students may not realize that insider attacks are a leading cause of security issues.

They also may not recognize the relationship between poorly designed software and security issues, so this is something worth pointing out. The Insight on Society case, Race Against Time: The Scramble to Fix the Log4Shell Vulnerability (new for this edition), should be a compelling example of the potential security ramifications of software flaws and poorly designed software. Questions for class discussion might include the following: ● Why was it so difficult to combat the Log4Shell vulnerability? ● What security issues are associated with the use of open-source software? .

9 ●

Do you think open-source software is less secure than commercial software? Why or why not?

The section concludes with a review of security issues specifically related to the use of specific platforms or technologies, such as social networks, mobile devices, cloud computing, and the Internet of Things (IoT). IoT security challenges are detailed in Table 5.5.

Technology Solutions. Some types of security threats can be ameliorated through technological means, but not all. Section 5.3 focuses on technology solutions for ecommerce security. Figure 5.3 graphically depicts the various tools in the form of a web.

We separate the section into four major parts: encryption, securing channels of communications, securing networks, and operating system and application software security.

The first part of the section focuses on a variety of encryption techniques, in particular public key encryption, that are useful for protecting Internet communications; these techniques address issues of integrity, authenticity, and confidentiality of messages. It is beneficial to walk students slowly and carefully through Figures 5.4 and 5.5 to illustrate public key encryption and digital signatures. Figure 5.6 is useful for discussing the elements of public key infrastructure. It’s important to remind students that there are limitations to technical security measures, and they often presume a secure organizational environment before they can work. Encryption of any kind is susceptible to disloyal or disgruntled employees and poor client-side security (such as keeping your passwords on an insecure computer directory). Encryption also slows processors and the entire transaction process: the better the security, the worse the performance.

The second part of Section 5.3 focuses on securing channels of communication, and covers TLS, HTTPS, VPNs, and versions of the Wi-Fi Protected Access (WPA) standard, used to secure wireless communications. Figure 5.7 shows how TLS (the successor to SSL) works. TLS is the most common method used in e-commerce transactions.

The third part of Section 5.3 focuses on methods of protecting networks, including firewalls and proxy servers (illustrated by Figure 5.8), and intrusion detection and prevention systems. The final part of Section 5.3 focuses on operating system and application software security enhancements.

Policies, Procedures, and Laws. Even the best technical security is insufficient to protect e-commerce sites. Solid organizational policies and procedures are also required, and laws, covered in Section 5.4, are needed to deter future crime by punishing e-commerce criminal behavior. Figure 5.9 illustrates the steps managers need to follow to develop a security plan. Access controls (such as the zero trust cybersecurity framework), authentication procedures, and authorization policies are an important part of the toolbox.

Students are likely to be at least somewhat familiar with various multi-factor

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10 authentication (MFA) tools, as they have become much more commonly used to secure access to various online services and content.

The Insight on Business case, Are Biometrics the Solution for E-commerce Security? (updated for this edition), describes the effort to improve e-commerce security by identifying individuals by their physiological characteristics, including face, fingerprints, voice, and more (biometrics). Questions for discussion might include: ● What are biometrics? ● How could the use of biometrics make e-commerce more secure? ● What are some of the potential dangers in using biometrics?

Laws and public policy also play a very important role in e-commerce security. Tables 5.5 illustrates how the U.S. government has used laws and regulations to impose security Section 5.5 and the end-of-chapter case study focus on e-commerce payment systems.

Before delving into the different types of online payment methods, you should spend a few minutes giving students a quick overview of payment systems and stakeholders.

Online Credit Card Transactions. Payment by credit card is the most common form of ecommerce payment. Figure 5.10 illustrates how a typical online credit card transaction works. These transactions carry risks for merchants in particular. Moreover, credit cards are not equally distributed. Millions of U.S. citizens do not have a credit card, making it difficult for them to shop online.

Alternative Online Payment Systems. The limitations of the online credit card system have opened the way for the development of a number of alternative online payment systems, such as PayPal, Amazon Pay, Facebook Pay, Visa Checkout, PayPal Credit, and Buy Now Pay Later (BNPL) services such as Afterpay and Klarna. Video Case 5.2, Klarna and Buy Now Pay Later (BNPL), appears on page 292 of the eText, at the end of the “Alternative Online Payment Systems” section. See pages 22 to 23 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Mobile Payment Systems. Mobile payment systems are the fastest growing type of alternative payment systems and are covered in this section and the chapter-ending case study. Make sure students understand the differences between the three primary types of mobile wallet apps (universal proximity, branded store proximity, and P2P). Figure 5.11 identifies the top universal proximity and P2P mobile payment apps.

Blockchain and Cryptocurrencies. Cryptocurrencies such as Bitcoin and their underlying blockchain technology have burst onto the scene in the past few years. Figure 5.12 illustrates how blockchain technology works. Although Bitcoin was created with an aim towards secure, anonymous transactions, it has nevertheless been vulnerable to theft and its value has proven to be extremely valuable. Since the text was written, a number of .

11 firms involved with cryptocurrencies, such FTX, have failed, shaking confidence in cryptocurrencies as a valid and reliable form of currency.

In Section 5.7, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as a Cybersecurity Threat Management Team trainee.

The chapter-ending case study, Mobile Payments: Fintech versus the Bank Giants, in Section 5.8 (updated for this edition), provides further detail on mobile payment systems.

Case Study Questions and Answers 1.

What are the three types of mobile payments, and how do they differ?

The three types of mobile payment systems are proximity payment systems (such as Apple Pay and Google Pay), branded proximity payment systems (such as Walmart Pay), and P2P payment systems for payments among individuals (such as Venmo and Zelle).

2.

Which age groups are the most likely to adopt mobile payment apps? Why? The age groups that are most likely to adopt mobile payment apps are Millennials and Gen Z-ers. who have significantly decreased their use of checks, and who, unlike their parents, are comfortable handling their financial transactions using a smartphone. For instance, more than 70% of Millennial smartphone users use P2_y mobile payments in 2022, compared to just 38% of “Baby Boomer” mobile phone users.

3.

Why have fintech startups had a hard time competing with the tech giants?

Fintech startups have had a tough time competing with the tech giants in the mobile payment market, as evidenced by Venmo’s acquisition by PayPal. Apple, Google, and Samsung own the hardware and software platform of the ubiquitous smartphone, making their devices and services more useful to consumers, while PayPal and Square operate large-scale online payment processing platforms and apps that can be used on all smartphones.

4.

What is Zelle and why has it grown so fast in the last few years?

Zelle is a P2P service allowing instant payments between users and other financial services without the need to use local banks. Zelle has grown so quickly because it is free to use and transfers are nearly instantaneous.

End-of-Chapter Questions and Answers

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12 1.

Why is it less risky to steal online? Explain some of the ways criminals deceive consumers and merchants.

The potential for anonymity on the Internet can allow criminals to assume identities that look legitimate and at the same time shield them from law enforcement agencies. Using these assumed identities, criminals can place fraudulent orders with online merchants, intercept e-mail, steal customer information, and shut down e-commerce sites using software viruses.

2.

Explain why an e-commerce site might not want to report being the target of cybercriminals.

E-commerce sites are often hesitant to report that they have been the targets of cybercriminals because companies fear losing the trust of consumers. The actual amount of crime is difficult to estimate because of these fears. Companies fear that if they reveal the full extent of the theft of proprietary information and financial fraud, legitimate customers will lose confidence in the e-marketing channel and will take their business offline.

3.

Give an example of security breaches as they relate to each of the six dimensions of e-commerce security. For instance, what would be a privacy incident? ●

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Integrity: This is the ability to ensure that information being displayed on a website or being transmitted/received over the Internet has not been altered in any way by an unauthorized party. One type of integrity security breach would be an unauthorized person intercepting and redirecting a bank wire transfer into a different account.

Nonrepudiation: The ability to ensure that e-commerce participants do not deny their online actions. An example of a repudiation incident would be a customer ordering merchandise online and later denying that he or she had done so. The credit card issuer will usually side with the customer because the merchant has no legally valid proof that the customer ordered the merchandise.

Authenticity: Authenticity is the ability to identify the identity of a person or entity you are transacting with on the Internet. One instance of an authenticity security breach is “spoofing,” in which someone uses a fake e-mail address, or poses as someone else. This can also involve redirecting a web link to a different address.

Confidentiality: The ability to ensure that messages and data are available only to authorized viewers. One type of confidentiality security breach is “sniffing,” in which a program is used to steal proprietary information on a network including e-mail messages, company files, or confidential reports.

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4.

Privacy: The ability to control the use of personal or financial information a customer provides to an e-commerce merchant. An example of a privacy security breach is a hacker breaking into an e-commerce site and gaining access to credit card or other customer information. This violates the confidentiality of the data and also the privacy of the people who supplied the data.

Availability: This is the ability to ensure that an e-commerce site continues to function as intended. One availability security breach is a DoS (Denial of Service) attack in which hackers flood a website with useless traffic that causes it to shut down, making it impossible for users to access the site.

How would you protect your firm against a DoS or DDoS attack?

One way to protect against DoS and DDoS attacks would be to increase the redundancy of your network’s servers. Firewalls and proxy servers that filter communications directed at servers should also be used.

5.

Name the major points of vulnerability in a typical online transaction.

The major points of vulnerability are at the client level, at the server level, and over the Internet communications channels.

6.

How does spoofing threaten a website’s operations?

Spoofing can redirect customers to a knock-off website where the customers are fooled into completing an online order with a fraudulent or different company from the one with whom they intended to do business. In this way, business can be stolen away from a site. Spoof hackers can also alter orders by inflating them or changing the products ordered. The orders can then be sent on to the original site for processing and delivery. Customers will become irate at the poor customer service and will take their business elsewhere. Huge inventory fluctuations caused by these actions can also significantly harm operations.

7.

Why is adware considered to be a security threat?

Adware can be considered a security threat because it is covertly placed on users’ computers, where it then can collect and distribute private personal information.

8.

What are some of the steps a company can take to curtail cybercriminal activity from within a business?

One measure a company can take is to implement access controls to determine which insiders can gain access to the firm’s networks. Insider access controls .

14 typically consist of login procedures using usernames, passwords, and access codes. Authorization management systems regulate where and when a user is permitted to access certain parts of a website. Entry rules are established up front for each user, and the authorization management system “knows” who is permitted to go where at all times. The authorization management system encrypts a user session and functions like a passkey following a user from page to page and only allowing access to areas where the user has been granted permission based on data that has been entered in the system database.

9.

Explain some of the modern-day flaws associated with encryption. Why is encryption not as secure today as it was earlier in the century?

Public key encryption is computationally slow—if 128- or 256-bit keys were used to encode large documents, transmission speeds would slow and significant increases in processing times would occur. Symmetric key encryption is computationally faster but requires that the sender and the receiver share the same key, which must be sent over insecure transmission lines. Encryption is also not as secure today as it was earlier in the century because computers are so much more powerful and faster that ancient means of encryption can be easily broken.

Furthermore, to effectively use symmetric key encryption for commercial use today, you would need a secret key for each of the parties in a transaction: one for the bank, one for the merchant, and one for the government. Thousands of millions of keys would be needed to accommodate all e-commerce users.

10.

Briefly explain how public key cryptography works.

Public key cryptography solves the problem of exchanging keys by creating a mathematically related public key and private key. The private key is kept secret by the owner, while the public key is widely disseminated. The main concept behind this method is that a one-way, irreversible mathematical function is used to produce the keys. Both keys can be used to encrypt and decrypt a message, but after it is encrypted, the same key cannot be used to decrypt a message. Only a person with possession of the recipient’s private key can decrypt a message. The addition of a digital signature ensures the authenticity of the message and guarantees nonrepudiation. The sender uses his or her own private key to encrypt the message along with a hash function, which has been added to create a unique digest of the message. When used with the hash function, the digital signature is even more unique than a handwritten signature. This irreversible process creates a cipher text that can be read only by the recipient using his/her private key.

11.

Compare and contrast firewalls and proxy servers and their security functions.

Firewalls and proxy servers are used to build a wall around private networks as well as the attached servers and clients. Firewalls refer to either hardware or .

15 software that filter communication packets and prevent packets from entering the network based on a security policy. Proxy servers are software servers that handle all communications originating from or being sent to the Internet. Their primary function is to limit the access of internal clients to external Internet servers; user HTTP requests are routed to a proxy server. The user and the nature of the request must be validated before the request is sent on to the Internet. Pages sent by external Internet servers must pass through the proxy server and be deemed acceptable before they can enter the internal network and be routed to the client machine. Proxy servers also improve web performance by storing frequently used pages locally, reducing upload times, and hiding the internal network’s address so that hackers will have a difficult time monitoring the network.

12.

Is a computer with anti-virus software protected from viruses? Why or why not?

Anti-virus software will protect a computer from many, but not all, of the most common types of viruses. The software will also destroy any viruses already present on the hard drive. However, new viruses are being developed daily, so routine updates of the software are needed to prevent new viruses from causing damage.

13.

Identify and discuss the five steps in developing an e-commerce security plan.

The five steps in developing an e-commerce security plan are: ● Perform a risk assessment: First, an inventory of the information and knowledge assets of a company is taken, and a dollar value amount is placed on each asset. Then, this amount is multiplied by the estimated probability that the information could be compromised. This computation is used to produce a ranked list of the information assets of the firm prioritized by their value. ● Develop a security policy: A set of statements should be developed that prioritizes the information risks, identifies acceptable risk targets, and sets out the goals for achieving these targets. Included in the security policy should be a list of the personnel who are or will be entrusted with the information assets. It should also include a description of the security policies that presently exist for these assets and suggestions for improvements. Finally, it should outline the level of risk the firm is willing to accept for each asset, and the estimated cost to achieve this level of acceptable risk. ● Develop an implementation plan: The actions to achieve the security plan goals must be set out. The tools, technologies, policies, and procedures needed to achieve the acceptable levels of risk must be developed. ● Create a security organization: A security organization must be established that will train users and keep management apprised of the security threats and breakdowns. The access controls that will determine who can gain .

16

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14.

legitimate access to the firm’s networks and the authentication procedures that will be used to protect data from intruders must be determined.

Authorization policies must also be established for the differing levels of access to information assets for different users.

Perform a security audit: A security audit must be conducted to identify how outsiders are using the site and how insiders are accessing the site’s assets. A monthly report should be generated that will establish the routine and non-routine accesses to the system and identify any unusual patterns.

How do biometric devices help improve security? What particular type of security breach do they reduce?

Biometric devices help improve security by working in conjunction with digital signatures to ensure the authenticity of messages. They guarantee nonrepudiation by verifying the physical attributes of an individual. Biometric devices are often part of a multi-factor authentication (MFA) system. Fingerprints, retina scans, or speech recognition systems can be used to identify individuals before they are allowed to access a website or pay for merchandise with a credit card. Biometric devices also make a spoofing security breach less likely by making it more difficult for hackers to break into a site.

15.

Briefly discuss the disadvantages of credit cards as the standard for online payments. How does requiring a credit card for payment discriminate against some consumers?

A disadvantage to credit cards is that merchants must pay a significant transaction fee of around 3% of the sale, plus an additional transaction fee of $0.20 to $0.30 per transaction as well as other set-up fees. The high transaction costs make selling small items such as articles and music tracks that are paid for by credit card undesirable. Furthermore, the risks of the transaction are largely borne by the merchant. Online merchants never see the actual card being used, no card impression is taken, and no signature is available. This enables consumers to later dispute charges. The merchant faces the risk that the transaction will be refuted and reversed even though the merchandise has already been shipped, or the digital product has already been downloaded. Existing credit card payment systems also offer poor security because neither the merchant nor the consumer can be fully authenticated. Requiring a credit card for payment also discriminates against some consumers because millions of young adults and almost 100 million Americans who cannot afford credit cards or who are considered poor risks because of their low incomes do not have credit cards, making access to online shopping more difficult.

16.

Describe the major steps involved in an online credit card transaction.

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17 The major steps involved in an online transaction are: ● The purchase ● The delivery of the order to the merchant using an SSL/TLS secure connection ● The transfer of the order to the clearinghouse over a secure line ● The verification with the consumer’s issuing bank of the availability of a balance sufficient to make the purchase ● The issuing bank crediting the merchant’s account ● A monthly statement including the charge being sent to the consumer When a consumer wants to make a purchase, he/she first adds items to a shopping cart. Next, a secure tunnel to the Internet is created so that the consumer can send the credit card information to the merchant. Then, the merchant contacts the clearinghouse to authenticate the credit card and verify the account balance. Once the sale is approved, the issuing bank credits the merchant’s account at the merchant’s bank and finally, the debit to the consumer’s account is transmitted to the consumer in a monthly statement.

17.

Why is Bitcoin so controversial?

Bitcoin is controversial because it is a currency that cannot be easily controlled by governments or banks. They can be used with nearly complete anonymity, and often are used for criminal or illegal purposes, which law enforcement agencies find troubling. Economists are also skeptical about Bitcoins. Users face substantial risks, including the risk that they will not attain widespread acceptance, that governments might halt their production, as well as volatility in terms of their valuation, and the potential that they may be stolen.

18.

What is NFC and how does it work? How does it differ from QR code technology?

Near field communication (NFC) is a set of short-range wireless technologies used to share information among devices within about two inches of each other (50 mm). NFC devices are either powered or passive. A connection requires one powered unit (the initiator, such as a smartphone) and one target device, such as a merchant NFC reader, that can respond to requests from the initiator. NFC targets can be very simple forms such as tags, stickers, key fobs, or readers. NFC peer-topeer communication is possible where both devices are powered. An NFCequipped smartphone, for instance, can be swiped by a merchant’s reader to record a payment wirelessly and without contact. NFC is the primary enabling technology for universal proximity mobile wallets such as Apple Pay and Google Pay while Quick Response (QR) code technology is typically used for branded store proximity mobile wallets. QR code technology uses a mobile app to generate a two-dimensional bar code (the QR code) in which information is encoded. The merchant then scans the QR code and the payment amount is .

18 deducted from the customer’s mobile wallet, which is linked to a credit card or debit card. Walmart Pay, Starbucks Pay, Target Pay, Dunkin Donuts, and many other retailers all use QR-based technologies.

19.

How does an online stored value payment system differ from a BNPL service?

An online stored value payment system permits consumers to make online payments to merchants and other individuals using their bank account or credit/debit card. Buy Now Pay Later (BNPL) services, in contrast, are platforms that allow consumers to purchase a product and pay for it in installments.

20.

What are some of the security risks associated with the metaverse?

Malware is likely to be targeted at the metaverse as the metaverse develops further. The hardware needed for virtual reality and augmented reality platforms will create new endpoints that hackers will seek to exploit. Attackers could potentially manipulate platforms to create physical dangers. Participants in the metaverse may also be subject to various forms of harassment by malicious actors. Identities can be stolen, as can digital currencies that are used to pay for goods and services. All of the security issues currently being experienced with today’s Internet are likely to continue to persist in the metaverse. The privacy of participants and the security of their personal information are also concerns.

These issues are particularly acute because metaverse companies may track and retain user biometric data, as well as data about users’ actual actions, and ultimately may be able to learn how users uniquely think and act.

Projects: Questions and Answers 1.

Imagine you are the owner of an e-commerce website. What are some of the signs that your site has been hacked? Discuss the major types of attacks you could expect to experience and the resulting damage to your site. Prepare a brief summary presentation.

To do this project, students should supplement what they have learned in the chapter with online research to explain the clues an e-commerce owner might see to know that their site has been hacked into. Research should also supplement the student’s discussion of what types of attacks site owners should expect to experience, and the damage to the site that might result. The summary presentation should include examples of recent viruses, worms, and Trojan horses. They should provide an explanation in each instance of the damage these types of malicious code cause to the websites they infect.

2.

Given the shift toward m-commerce, do a search on m-commerce crime. Identify and discuss the security threats this type of technology creates. Prepare a .

19 presentation outlining your vision of the new opportunities for cybercrime that mcommerce may provide.

The purpose of this project is for students to begin to appreciate security challenges presented by wireless technology, particularly as it is increasingly being used by employees and customers to access critical enterprise data and systems. Students should consult online research sources to identify and discuss specific threats. For instance, one could integrate wireless safeguards with security processes and technologies that are already in place to protect e-business, such as enforcing passwords and selectively defining user access levels.

Some security threats the students might discuss include the fact that PC-based applications can be secured using strong authentication and encryption while developers must work with somewhat limited memory capabilities of wireless devices. This makes the use of strong authentication and encryption difficult.

Another important point students might discuss is that because wireless devices such as cell phones are small and highly mobile, they are easily and frequently stolen. This means user authentication is critical for secure m-commerce.

Unfortunately, experts say many current wireless protocols come up short on authentication.

3.

Find three certification authorities and compare the features of each company’s digital certificates. Provide a brief description of each company as well, including number of clients. Prepare a brief presentation of your findings.

Students should start by conducting an online search for the names of certification authorities. Certification authorities that students might locate include, but are not limited to: IdenTrust (part of HID Global), DigiCert (GeoTrust, DigiCert, and Thawte brands), Sectigo, GoDaddy, and Entrust.

Students should gather information about each company and the features of each company’s digital certificates. They should visit the company website and read the product descriptions, “About Us,” or comparable web pages. This information should be supplemented with online research in the popular business and technical press. Similar information should be garnered from two other CAs and a comparison among the three constructed.

4.

Research the challenges associated with payments across international borders and prepare a brief presentation of your findings. Do most e-commerce companies conduct business internationally? How do they protect themselves from repudiation? How do exchange rates impact online purchases? What about shipping charges? Summarize by describing the differences between a U.S. customer and an international customer who each make a purchase from a U.S. e-commerce merchant. .

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Students should begin by using a search engine to find information about the challenges of conducting e-commerce globally. Although the text has repeatedly emphasized the global nature of e-commerce and its potential for easily crossing international boundaries, there are a number of obstacles, and much inter-firm coordination must take place for e-commerce firms to truly take advantage of the global marketplace.

The first challenge to international e-business is language. Companies who have taken the plunge into international e-commerce have found that simple steps such as adding a native language customer service phone number can make sales in that country double. What holds many companies back is the price of developing a multilingual presence online. Web pages must be translated, and several different sites must be maintained, one for each country or language. It is also difficult to coordinate content and branding between the sites, and there is a myriad of business systems that must be either built or purchased. Producing a website in another language can cost from $50,000 on up and large projects can run as much as $2 million per language, but the upside is that it can quickly turn foreign browsers into buyers.

Language differences aren’t the only challenges—companies must be able to exchange financial information in a variety of currencies and account for currency fluctuations. Countries also use different formats for weights, measures, dates, telephone numbers, addresses, and other common information. Because of this an international customer might find a standard U.S. order form confusing.

Another big problem area for e-business is global trade management. Global ecommerce firms must be able to comply with a variety of complex regulations to engage in global trade. Analysts estimate that a very high percentage of international orders to U.S. e-commerce sites aren’t fulfilled because companies can’t handle the necessary procedures. Shipping goods across borders requires logistics software, yet many international shippers don’t yet have it. Furthermore, many e-businesses don’t have e-procurement software that can analyze the total “landed cost.” (“Landed cost” refers to all costs of sourcing and shipping a product internationally, including customs management, tariffs, transportation, and cost of goods.) The cost of these systems may be too steep for most small etailers’ budgets.

Many countries don’t rely on credit cards, which creates even more difficulty for international e-commerce. For instance, Europeans often use debit cards, some of which can’t be used for online transactions because their use requires a manual swipe. Few U.S. merchants offer debit/invoice payment alternatives, whereas the majority of European merchants do.

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21 Fraud is also an issue for merchants going global. As noted in the text, unlike the offline world where banks often take on the cost of fraudulent credit card transactions, online merchants are typically responsible for fraudulent charges.

Higher shipping and tax costs and the lack of address verification systems add considerable risk to any global venture. Third-party payment gateways are incorporating fraud-protection systems, but these services may increase already high per-transaction pricing without really providing the necessary protections.

Address verification services work only for cardholders living within the United States, leaving foreign transactions unchecked and at risk. As fraud has increased in sophistication in the last several years, many online firms have shut down their international transaction operations.

As far as exchange rates are concerned, most online e-commerce websites do not offer any type of currency conversion from the native sales price. This makes it extremely difficult for international customers to assess the “true” purchase price of the item. Many times, they will not know until their credit card statement arrives how much the item actually costs. For many customers, purchasing blindly in a foreign currency is a risk they won’t undertake. Very few merchants have a default currency selection system that will display the sales prices in multiple currencies. Many countries also levy import fees on goods purchased from beyond their borders. The customer can only get an idea of the initial sales price of goods, and computing the additional tariffs requires extra steps, often done manually, that can substantially affect the final purchase cost and the buyer’s decision on whether to complete the transaction.

Video Cases The Chapter 5 eText features two embedded video cases. Video Case 5.1, Crowdstrike and Cybersecurity, appears on page 242 of the eText, in the “Introduction” section.

Crowdstrike is a leading cybersecurity provider that provides cloud and endpoint security, threat intelligence, and cyberattack response services, among other services. In this video, released in August 2022, Crowdstrike CEO discusses cybersecurity trends and issues. Questions that you can use for class discussion or as a student assignment include the following: • Why does Kurtz believe it would be difficult for companies to pull back on cybersecurity spending?

Answer: Kurtz things it will be difficult for companies to pull back on cybersecurity spending because cybersecurity is the number one risk that most companies’ Boards of Directors are concerned about. This, coupled with regulatory pressures from the Securities and Exchange Commission with respect to disclosure of breaches and ransom payments have moved spending on cybersecurity from a “nice-to-have” to a “must-have” for companies.

• What does Kurtz say about the cybersecurity threats posed by China? .

22

•

•

Answer: Kurtz notes that cyberattacks by China and other nation-states are of increasing concerning, and that China has been prolific in its attacks, has great capabilities, and continues to be active in many different areas.

What does Kurtz say about attacks on the supply chain, particularly in terms of semiconductor chip factories?

Answer: Kurtz believes that supply chain attacks are of grave concern, not only on the software supply chain (as discussed in the opening case), but also on software that goes into the code within the chips themselves. He notes that this is something that companies and governments need to be very vigilant about.

What are some of the issues that Kurtz identifies in cybersecurity regulation?

Answer: Kurtz notes that with respect to breach disclosures, timing is often an issue, and that it is important that disclosure not compromise an investigation.

Another issue is determining what is material (what should be disclosed) and how should it be disclosed. He notes that there is a lot of complexity around these issues.

Video Case 5.2, Klarna and Buy Now Pay Later (BNPL) appears on page 292 of the eText, at the end of the “Alternative Online Payment Systems” section. As discussed in the text, Klarna is one of the most popular providers of BNPL services, which enable consumers to purchase a product and pay for it in installments. In this video, released in October 2022, Klarna CEO Sebastian Siemiatkowski discusses the launch of Klarna’s latest tools, competition, and the impact of the economic environment on Klarna.

Questions that you can use for class discussion or as a student assignment include the following: • What is Klarna Spotlight and why did Klarna introduce it first in Europe, rather than the United States?

Answer: Klarna Spotlight is a new tool that enables comparison shopping in terms of finding products and prices. Siemiatkowski notes that due to the dominance of Amazon (who he does not name but characterizes as “one of the biggest retailers in the world”), there has not been much emphasis on the development of great services on the shopping side. Since Amazon is not as dominant in Europe, Klarna launched the tool there, where it has been a great success. Siemiatkowski claims that in the countries where Spotlight has already been introduced, that it is the starting point for many people’s shopping experience.

• How does Siemiatkowski plan to compete with Meta, which already has some of Klarna’s features built into their own apps?

Answer: Siemiatkowski notes that Klarna is much more focused on shopping, compared, for instance, to Instagram, where users are typically focused on a variety of things. But he also states that he thinks that people will use multiple channels, which he does not perceive as being a major disadvantage.

• How economic conditions as of September 2022 when the video was released impacting Klarna?

Answer: Siemiatkowski notes that rising interest rates were actually increasing the demand for Klarna’s services, as the ability to pay for products on a short-term .

23 installment basis has enabled U.S. consumers to save over $100 million in interest fees and late fees. He also notes that Klarna has tightened its underwriting guidelines and has also set limits on individual purchasing power so that people don’t overspend. ●

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1 Instructor’s Manual and Video Cases: Chapter 6 E-commerce Marketing and Advertising Concepts Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases in eText Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 6 6 6 6 7 9 10 17 21

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2 Learning Objectives After reading this chapter, your students should be able to: • Understand the key features of the online audience, the basic concepts of consumer behavior and purchasing, and how consumers behave online.

• Identify and describe the basic digital commerce marketing and advertising strategies and tools.

• Identify and describe the main technologies that support online marketing.

• Understand the costs and benefits of online marketing communications.

Chapter Outline Video Ads: Shoot, Click, Buy 6.1 Consumers Online: The Online Audience and Consumer Behavior The Online Consumer Profile Intensity and Scope of Usage Demographics and Access Type of Internet Connection: Broadband and Mobile Impacts Community Effects: Social Contagion in Social Networks Consumer Behavior Models The Online Purchasing Decision Shoppers: Browsers and Buyers Intentional Acts: How Shoppers Find Vendors Online Why Some People Don’t Shop Online: Trust, Utility, and Opportunism in Online Markets 6.2

Digital Commerce Marketing and Advertising Strategies and Tools Strategic Issues and Questions The Website as a Marketing Platform: Establishing the Customer Relationship Traditional Online Marketing and Advertising Tools Search Engine Marketing and Advertising Display Ad Marketing E-mail Marketing Affiliate Marketing Lead Generation Marketing Social, Mobile, and Local Marketing and Advertising Multi-Channel Marketing: Integrating Online and Offline Marketing Insight on Business: Are the Very Rich Different from You and Me? Other Online Marketing Strategies Customer Retention Strategies Pricing Strategies Long Tail Marketing Insight on Technology: The Long Tail: Big Hits and Big Misses

6.3

Online Marketing Technologies The Revolution in Online Marketing Technologies

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3 Web Transaction Logs Supplementing the Logs: Cookies and Other Tracking Files Insight on Society: Going from Third to First Databases, Data Warehouses, Data Mining, and Big Data Databases Data Warehouses and Data Mining The Challenge of Big Data Marketing Automation and Customer Relationship Management (CRM) Systems 6.4

Understanding the Costs and Benefits of Online Marketing Communications Online Marketing Metrics: Lexicon How Well Does Online Advertising Work?

The Costs of Online Advertising Marketing Analytics: Software for Measuring Online Marketing Results

6.5

Careers in E-commerce The Company The Position: Digital Marketing Assistant Qualifications/Skills Preparing for the Interview Possible First Interview Questions

6.6

Case Study: Programmatic Advertising: Real-Time Marketing

6.7

Review Key Concepts Questions Projects References

List of Key Terms abandonment rate, p. 369 acquisition rate, p. 369 ad exchanges, p. 338 ad fraud, p. 339 AdSense, 333 ad targeting, p. 331 advertising networks, p. 337 affiliate marketing, p. 341 attrition rate, p. 369 automated response system, p. 349 banner ad, p. 335 behavioral targeting (interest-based advertising), p. 345 big data, p. 363 bounce-back rate, p. 370 browse-to-buy ratio, p. 369

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4 bundling, p. 353 cart conversion rate, p. 369 checkout conversion rate, p. 369 click fraud, p. 334 clickstream behavior, p. 323 click-through rate (CTR), p. 367 click-through rate (e-mail), p. 370 completion rate, p. 369 consumer behavior, p. 321 content farms, p. 334 content marketing, p. 337 contextual advertising, p. 348 conversion rate, p. 369 cookie, p. 359 cost per action (CPA), p. 372 cost per click (CPC), p. 372 cost per thousand (CPM), p. 372 cross-platform attribution, p. 371 customer co-production, p. 348 customer experience, p. 329 customer profile, p. 363 customer relationship management (CRM) system, p. 365 customer touch points, p. 365 customization, p. 348 data lake, p. 363 data mart, p. 363 data mining, p. 363 data warehouse, p. 363 database, p. 360 database management system (DBMS), p. 360 delivery rate, p. 370 demand curve, p. 350 direct e-mail marketing, p. 340 display ads, 334 dynamic pricing, p. 353 effective cost-per-thousand (eCPM), p. 373 first-party cookie, p. 359 frequently asked questions (FAQs), p. 349 Hadoop, p. 363 hits, p. 367 impressions, p. 367 keyword advertising, p. 332 Law of One Price, p. 350 lead generation marketing, p. 342 link farms, p. 334 long tail effect, p. 354

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5 loyalty, p. 367 marketing analytics software, p. 373 marketing automation systems, p. 365 native advertising, p. 336 one-to-one marketing (personalization), p. 345 online advertising, p. 330 open rate, p. 370 organic search, p. 332 nonrelational (noSQL) database, p. 360 page views, p. 367 pay-per-click (PPC) search ad, p. 332 price discrimination, p. 351 pricing, p. 350 profiling, p. 360 programmatic advertising, p. 338 reach, p. 369 real-time bidding (RTB) process, p. 338 real-time customer service chat systems, p. 349 recency, p. 369 registration forms, p. 358 relational databases, p. 360 retargeting (remarketing), p. 348 retention rate, p. 369 rich media ad, p. 335 search engine advertising, p. 332 search engine marketing (SEM), p. 332 search engine optimization (SEO), p. 333 shopping cart database, p. 358 spam, p. 341 sponsorship, p. 336 stickiness (duration), p. 369 structured query language (SQL), p. 360 third-party cookie, p. 359 transaction log, p. 358 unique visitors, p. 367 web beacon, p. 359 versioning, p. 352 video ad, p. 335 view time, p. 369 viewability rate, p. 367 view-through rate (VTR), p. 367 view-to-cart ratio, p. 369 visual search, p. 333 voice search, p. 333

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6 List of Figures Figure 6.1 A General Model of Consumer Behavior, p. 322 Figure 6.2 The Consumer Decision Process and Supporting Communications, p. 323 Figure 6.3 A Model of Online Consumer Behavior, p. 324 Figure 6.4 Online Shoppers and Buyers, p. 325 Figure 6.5 Online Advertising Spending, p. 330 Figure 6.6 How an Advertising Network Works, p. 338 Figure 6.7 Average Time Spent Per Day with Major Media, p. 344 Figure 6.8 A Demand Curve, p. 351 Figure 6.9 A Customer Relationship Management System, p. 366 Figure 6.10 An Online Consumer Purchasing Model, p. 370 (Figure video in eText) Figure 6.11 Marketing Analytics and the Online Purchasing Process, p. 374 List of Tables Table 6.1 What’s New in Online Marketing and Advertising 2022–2023, p. 318 Table 6.2 The Digital Marketing Roadmap, p. 328 Table 6.3 Online Advertising Spending for Selected Formats (in billions), p. 331 Table 6.4 Types of Video Ads, p. 335 Table 6.5 Impact of Unique Features of E-commerce Technology on Marketing, p.

357 Table 6.6 Marketing Metrics Lexicon, p. 368 Table 6.7 Online Marketing Communications: Typical Click-Through Rates, p. 372 List of Video Cases in eText Video Case 6.1: Google and the Digital Ad Market Video Case 6.2: Mutiny Uses AI and No-Code to Improve AdTech Overview Chapter 6 introduces the student to e-commerce marketing and advertising concepts. The chapter covers online consumer behavior, digital commerce marketing and advertising strategies and tools, online marketing technologies, and understanding the costs and benefits of online marketing communications.

The fundamental principles of marketing remain intact online. Building online brands is a major source of financial and strategic strength for firms; it is a major avenue for avoiding pure price competition and financial ruin. Nevertheless, the Internet provides consumers with a whole new environment for interacting with firms because online behavior is different from offline behavior. The Internet provides consumers a powerful new soapbox from which to either support or dismiss products, and to have these opinions propagate across the country very rapidly. E-commerce presents marketers with risks as well as opportunities. Moreover, the tools and technologies for online marketing are very different from those for offline marketing.

Teaching Suggestions: Key Points The opening case, Video Ads: Shoot, Click, Buy (updated for this edition), focuses on video advertising, particularly on YouTube. Many firms have YouTube channels that .

7 they use as a marketing and advertising branding platform and YouTube is also a preeminent platform for online video ads. Ask your students if they mind watching television-quality ads online, and whether they are preferable to other types of online advertisements, such as display ads. Other questions for class discussion might include the following: • What advantages do video ads have over traditional display ads?

• Where do sites such as YouTube fit into a marketing strategy featuring video ads?

• What are some of the challenges and risks of placing video ads online?

Video Case 6.1, Google and the Digital Ad Market, appears on page 319 of the eText, following Table 6.1. See page 21 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Online Consumer Behavior. Section 6.1 provides basic information about the online audience and traffic patterns (online consumer profile) as well as online consumer behavior and purchasing decisions. Most students are unaware of the basic behavioral realities with respect to online consumers. A basic ingredient of the old dictum, “know thy customer”—who is online, what they do when there, what they buy and look at—is a very important prerequisite for successful marketing campaigns. Figures 6.1 and 6.3 provide summary models of the complex process of consumer purchasing.

Some key points to make in this section are: • Online shopping includes both purchasers and browsers.

• Online shopping strongly influences offline purchases.

• Online shopping is largely intentional.

Digital Commerce Marketing Platform Strategies and Tools: Section 6.2 reviews various strategies and tools in digital commerce marketing. E-commerce has now been around long enough that there are tools that can be considered “traditional,” such as search engine marketing, display ad marketing (banner ads, rich media ads, video ads, sponsorships, native advertising and content marketing, as well as the use of advertising networks that employ programmatic advertising, ad exchanges, and real-time bidding), email and permission marketing, affiliate marketing, and lead generation marketing.

Advertising networks and programmatic advertising are important topics that are covered in the chapter and also in the chapter-ending case study. Figure 6.6 illustrates how advertising networks work. Newer forms of digital commerce marketing, including social marketing, mobile marketing, and local marketing, are reviewed very briefly, and covered in much more depth in Chapter 7. Spend some time on Table 6.2, which illustrates the five main elements of a comprehensive digital marketing program, including website, traditional online marketing, social marketing, mobile marketing, and offline marketing. In today’s environment, multi-channel marketing is becoming increasingly important.

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8 Video Case 6.2, Mutiny Uses AI and No-Code to Improve Adtech, appears on page 329 of the eText, at the end of “The Website as a Marketing Platform: Establishing the Customer Relationship” section. See page 21 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

The Insight on Business case, Are the Very Rich Different from You and Me? (updated for this edition), examines how luxury goods providers are using online marketing in conjunction with their offline marketing efforts. Class discussion questions for this case might include the following: • What distinguishes luxury marketing from ordinary retail marketing?

• What challenges do luxury retailers have in translating their brands and the look and feel of luxury shops into websites?

• How has social media affected luxury marketing?

• Visit the Net-a-Porter website. What do you find there?

The chapter then examines some further online marketing strategies such as customer retention strategies like one-to-one marketing (personalization), interest-based advertising (behavioral targeting), customization and customer co-production, customer service, pricing strategies, and Long Tail marketing.

The Insight on Technology case, The Long Tail: Big Hits and Big Misses (updated for this edition), contains a description of collaborative filtering coupled with the use of recommender systems. This provides a good introduction to data mining. Questions for class discussion might include the following: • What are recommender systems? Give an example of one you have used.

• What is the Long Tail and how do recommender systems support sales of items in the Long Tail?

• How can human editors, including consumers, make recommender systems more helpful?

Online Marketing Technologies. The Internet and the Web provide marketers with a set of exciting marketing technologies. Section 6.3 covers web transaction logs, tracking files, databases, data warehouses, data mining, big data, and marketing automation and customer relationship management systems. You will want to spend some time on each of these technologies, noting that many of them come with a social cost, namely, the loss of privacy.

A good place to end the discussion is the Insight on Society case, Going from Third to First (new for this edition), which describes the privacy implications of tracking files.

You could ask students what kinds of controls might allow marketers to use web tracking, but also protect individual privacy. Other class discussion questions might include the following: • Do you mind being tracked by third-party cookies?

• Why has Google been so slow to eliminate third-party tracking compared to Apple?

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9 • •

What do you think of Google’s current Privacy Sandbox alternatives: FLEDGE and Topics?

What is a data clean room and how does it help preserve user privacy?

The Costs and Benefits of Online Marketing Communications. Section 6.4 introduces the vocabulary of online marketing. A good way to begin is to review Table 6.6, which describes the different metrics used in online advertising. Most research has demonstrated that display ads are effective for producing both brand recognition and immediate sales, and that this effect is positive even when consumers do not click. Table 6.8 reviews the different pricing models for online advertisements. The online consumer purchasing model in Figure 6.10 gives the students a quantitative idea of the connection between exposure to a banner ad and a subsequent sale. Some may find it surprising that 100,000 untargeted impressions may only lead to a tiny level of purchases (50). This can be improved dramatically by targeting the advertisement or using e-mail or pay for inclusion communications. Indeed, e-mail response rates are considerably higher than direct mail, banner ads, or even traditional media ads. In general, online advertising is more costeffective than traditional advertising via offline media such as television, radio, and newspapers. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 6.10 and this topic. The section concludes with a quick look at marketing analytics software packages, which can be used to measure online marketing results.

Figure 6.11 provides a conceptual overview of how the various types of data that can be collected and analyzed using such software relates to each of the stages in the online purchasing process. T In Section 6.5, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as a digital marketing assistant.

The updated chapter-ending case study, Programmatic Advertising: Real-Time Marketing, in Section 6.6, examines the increasing ability of advertising networks and exchanges to deliver behaviorally tracked display ads directly to users in real time, as well as some of the issues raised by this practice.

Case Study Questions and Answers 1.

Pay a visit to your favorite portal and count the total ads on the opening page.

Count how many of these ads are (a) immediately of interest and relevant to you, (b) sort of interesting or relevant but not now, and (c) not interesting or relevant.

Do this 10 times and calculate the percentage of the three kinds of situations.

Describe what you find and explain the results using this case.

The results should be interesting! You might want to ask students whether they have cookies turned off, use an ad blocker, or software to prevent tracking.

Ordinarily, students do not take these steps. In general, it is likely that students will report that only a small percentage (at best 20%) of the ads are appropriate in any way for them. This means the online advertising at these sites is not very

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10 efficient. In part this is the case, because the advertisers know very little about the individuals per se. This is not the case at product or service sites where context advertising can be quite effective. If you go to an auto site like Edmunds.com, or a fashion site like Elle.com, you will receive ads appropriate for these contexts.

2.

Advertisers use different kinds of “profiles” in the decision to display ads to customers. Identify the different kinds of profiles described in this case and explain why they are relevant to online display advertising.

Profiles are built by recording the behavior of people online, and inferring their interests, age, gender, location, preferences, political views, and social attitudes.

The list of possible profiles is very large and dependent upon the relevance to advertisers or others who purchase the profiling service. For instance, the U.S. Army recruiting group may want to target 18-21-year-olds with a preference for online games and war movies. For online display advertisers, profiling is a way to approach the effectiveness of search engine advertising by displaying banner ads that are of interest to the consumer.

3.

How can display ads achieve search-engine-like results?

Search ads work so well because they capture the intentions of people at every instance of searching and can display ads relevant to those searches instantly.

Display ads can achieve a similar result if they are based on behavioral profiles (constructed from information such as what sites users have visited and what products and services users have observed on various sites).

4.

Do you think instant display ads based on your immediately prior clickstream will be as effective as search engine marketing techniques? Why or why not?

Yes and no. For instance, just because you visit a news site, and then a sports site, this does not offer many clues to advertisers. Clickstream behavior that previously happened, even if immediately prior, may not be such a good indicator of current interests. Long-term online behavior can establish patterns that could be more useful. On the other hand, yes, if a person visited a car site such as Ford, stayed a few minutes, then at the next site he/she visits it might be useful to display an ad for Ford cars, and even follow that person around the Web showing Ford cars wherever he/she goes. These techniques are so new that there is little empirical data on which to make a judgment.

End-of-Chapter Questions and Answers 1.

Is growth of the Internet, in terms of users, expected to continue indefinitely?

What, if anything, will cause it to slow?

In the United States, the growth in the number of Internet has slowed to about 1% a year, in part because those most likely to use the Internet already have access.

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11 2.

How does the model of online consumer behavior differ from the traditional model of consumer behavior?

The traditional general model of consumer behavior takes into account a wide range of factors that influence a consumer’s marketplace decisions, such as cultural, social, and psychological factors (independent demographic variables), intervening variables such as brand, marketing communications stimuli, and firm capabilities) and dependent variables such as in-store behavior. Online consumer behavior parallels that of offline consumer behavior with some obvious differences. The stages of the consumer decision process are basically the same whether the consumer is offline or online. On the other hand, the general model of consumer behavior requires modification to take into account the unique features of e-commerce that allow different opportunities to interact with the consumer online. In the online model, the decision to purchase is shared by background demographic factors similar to the traditional general model, and a number of intervening factors that expand to include such factors as website and mobile platform features, consumer skills, product characteristics, attitudes toward online purchasing, perceptions about control over the online environment, and social networks, and finally is influenced greatly by clickstream behavior very near to the precise moment of purchase..

3.

What marketing functions do websites serve?

A firm’s website is a major tool for establishing the initial relationship with the customer. The website performs four important functions; establishing brand identify and consumer expectations, informing and educating the customer experience, and anchoring the brand in an ocean of marketing messages coming from different sources.

4.

Research has shown that many consumers use the Internet to investigate purchases before actually buying, which is often done in a physical storefront.

What implication does this have for online merchants?

The fact that many consumers use the Internet to research products before making actual purchases has many implications for online merchants because it suggests that e-commerce is a major conduit and generator of offline commerce. This could mean that e-commerce and traditional commerce should integrate to alleviate the concern. It is very important for online merchants to build the information content on their sites to attract browsers, put less attention on selling, per se, and offer products in offline settings where users feel more comfortable and secure.

5.

What are some of the issues with search engine advertising?

Although search engines have provided significant benefits to merchants and customers, they also present risks and costs. For instance, search engines have the

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12 power to crush a small business by placing its ads on the back pages of search results. Merchants are at the mercy of search engines for access to the online marketplace, and this access is dominated by a single firm, Google. How Google decides to rank one company over another in search results is not known. No one really knows how to improve in its rankings (although there are hundreds of firms who claim otherwise). Google editors intervene in unknown ways to punish certain websites and reward others. Using paid sponsored listings, as opposed to relying on organic search results, eliminates some, but not all, of this uncertainty.

Other practices that degrade the results and usefulness of search engine results include click fraud (when a competitor clicks on search engine results and ads, facing the advertiser to pay for the click even though the click is not legitimate); content farms (companies that generate large volumes of textual content for multiple websites designed to attract viewers and search engines), and link farms (groups of websites that link to one another, thereby boosting their ranking in search engines that use a page ranking algorithm to judge the usefulness of a website.

6.

Why have advertising networks become controversial? What, if anything, can be done to overcome any resistance to this technique?

Advertising networks have become controversial because their ability to track individual consumers across the Internet is alarming to privacy advocates.

Legislation or regulation that would curtail the use of web beacons and other tracking devices without consumer notification could help to overcome resistance to this technique. Giving consumers the option to opt in or opt out and making web beacons visible as an icon on the screen could ease consumers’ concerns.

Finally, privacy advocates believe that if a user clicks the icon, a disclosure statement should indicate any or all of the following: what data is being collected, how the data will be used, what other companies will receive the data, what other data it will be combined with, and if a cookie is associated with the web beacon.

Consumers should be able to opt out of any data collection done by the web beacon, and it should never be used to collect sensitive data such as medical, financial, job-related, or sexual matters.

7.

What is a marketing automation system and how is it used?

Marketing automation systems are software tools that marketers use to track all the steps in the lead generation part of the marketing process. The marketing process begins with making the potential customer aware of the firm and product and recognizing the need for the product. This is the beginning of a lead— someone who might buy. From there, consumers need to find you as they search for products; they will compare your products with your competitors’ offerings and at some point, choose to purchase. Software can help in each of these stages

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13 of the marketing process. A number of firms sell software packages that can visualize most of the online marketing.

8.

List the differences among databases, data warehouses, data marts, data lakes, and data mining.

A database stores records and attributes organized into tables. Databases are maintained for e-commerce transactions, shopping carts, point-of-sale terminals, warehouse inventory levels, field sales reports, and many other types of records.

A data warehouse gathers all the database information from customer and transaction databases and stores it in one logical repository where it can be analyzed and modeled by managers without disrupting or taxing the systems of a firm’s primary transactional systems and databases. Using the data warehouse, managers can query multiple databases to determine the answers to many marketing and financial questions, enhancing their strategic decision-making capabilities. A data mart is a subset of a data warehouse in which a summarized or highly focused portion of the organization’s data is placed in a separate database for a specific population of users. A data lake is a repository of raw, unstructured data or structured data that for the most part has not yet been analyzed.

Data mining is a set of analytical techniques that look for patterns in the data in a database or data warehouse or that seek to model the behavior of visitors and customers. Website data can be mined to develop customer profiles that identify patterns in group or individual behaviors on the site.

9.

What is big data, and why are marketers interested in it?

The term big data refers to the avalanche of digital data from web traffic, e-mail messages, social media content (tweets, status messages), even music playlists, as well as machine-generated data from sensors, that creates huge data sets in the petabyte, exabyte, and even terabyte range. Marketers are interested in big data because it allows them to link huge amounts of data from a variety of different sources, which in the past they were unable to do, and to mine it for patterns of consumer behavior, with the potential to provide new insights into customer behavior, financial market activity, or other phenomena.

10.

What pricing strategy turned out to be deadly for many e-commerce ventures during the early days of e-commerce? Why? Pricing of e-commerce goods has proved very difficult for both entrepreneurs and investors to understand. In the e early years of e-commerce, sellers were pricing products far below marginal costs (the incremental price of producing the next unit) and sometimes even offering “free” pricing. They were able to do this because a large number of entrepreneurs and their venture capital backers thought this was a worthwhile activity, at least in the short term. The idea was to attract

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14 users with free goods and services to amass a large, committed audience. It was supposed to achieve profitability through advertising and charging a small number of willing customers subscription fees for value-added services. Unfortunately, many early e-commerce businesses were unable to convert users who were attracted by free pricing into paying customers, and the strategy of piggybacking on a small number of users who would be willing to pay for premium services was not a great success.

11.

Is price discrimination different from versioning? If so, how?

Price discrimination is different from versioning because price discrimination is strictly the selling of products to different people or groups based upon their willingness to pay. Versioning involves creating multiple versions of a good or service and offering them at different prices. In versioning, reduced value versions that have less functionality can be offered for free or at reduced prices, whereas premium versions are sold at much higher prices. In this situation, consumers are aware that they are “getting what they pay for.” With price discrimination, it is the exact same product that is offered to different groups at different prices, concealing from each group the amount the other groups are paying.

12.

What are some of the reasons that freebies, such as free Internet service and giveaways, don’t work to generate sales at a website?

Freebies such as free Internet service and giveaways often did not cause the stimulus to sales that firms believed they would. This is because many so-called “freeloaders” never had the intention of paying for the product or additional products. They would simply switch to another free service if the one they were using began to charge fees or stop usage altogether if alternatives no longer existed.

13.

Explain how versioning works. How is this different from dynamic pricing?

Versioning works by having a set of slightly different products that can be sold successfully to different market segments. Low-priced or free versions can be less convenient, less comprehensive, slower, less powerful, and offer less support than higher-priced models. Versioning differs from dynamic pricing because each version is sold at a fixed, predetermined price, and there are slight differences in functionality between versions.

In dynamic pricing, auctions can be used to establish an instant market price based upon the price the market will bear. Yield management systems can be used to set prices for different markets and appeal to different segments to sell excess capacity. Auctions work for pricing unusual as well as commonplace goods; the differing price an article will bring in the marketplace is not based upon the version of the good or service, but rather upon the market dynamics at that

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15 particular moment in time. Yield management systems are generally profitable for perishable goods or where there are seasonal variations in demand or rapidly changing market conditions. Again, the product itself is no more or less functional than its higher or lower yielding counterparts despite the varying prices preset by managers.

14.

Why do companies that bundle products and services have an advantage over those that don’t or can’t offer this option?

Although consumers are apt to have very diverse ideas about the value of a single product, there is much more agreement on the value of a bundle of products. This often results in a price per product people are willing to pay for a bundle that is higher than the price they would be willing to pay for each product sold separately. Bundling reduces the variance in the market demand for goods, meaning that more people are willing to pay the same price for the bundle of goods. Bundler firms can pay higher prices to their suppliers for content, and they can charge higher prices to their customers for their bundles than can single good firms.

15.

What are some reasons why online advertising now constitutes more than 70% of the total advertising market?

Online advertising now constitutes more than 70% of the total advertising market for a variety of reasons. The primary reason is that the Internet is where the audience has moved, especially the very desirable 18–34 age group. A second reason is that online advertising enables advertisers to target ads to individuals and small groups and to track the performance of advertisements in almost real time. Online advertisements also provide greater opportunities for interactivity— two-way communication between advertisers and potential customers.

16.

What are some of the advantages of direct e-mail marketing?

The major advantage of direct e-mail marketing is that because e-mails are sent to interested users who have elected to “opt in,” they have proven to be one of the most effective forms of marketing communication. These consumers have at one time or another expressed an interest in receiving messages from advertisers.

Therefore, the response rates are much greater than other forms of online marketing communications. Another advantage is that the cost is negligible. The primary cost is for the purchase of a list of names, which can be from $0.05 to $0.20 per name, depending on how targeted the list is. Sending the e-mails is virtually cost-free. Furthermore, marketers can rapidly get a targeted direct e-mail advertising campaign off the ground whereas a banner ad or search engine campaign takes more time.

17.

Why is offline advertising still important?

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16 Offline advertising is still important because, so far, the marketing communications campaigns that have been the most successful at driving traffic to a website have combined both offline and online tactics. Research studies have shown that the most effective online advertisements were those that incorporated consistent imagery with ads that were running simultaneously in print media and on television. Furthermore, since offline media such as television and radio have nearly 100% market penetration and millions of adults read a newspaper every day, it would be foolish to ignore these more popular media devices for driving traffic to a website. Meeting the objectives of drawing the attention of people who are already online and attracting the attention of those who will be going online in the near future can best be accomplished with a combined offline/online strategy.

18.

What is the difference between hits and page views? Why are these not the best measurements of web traffic? Which is the preferred metric for traffic counts?

Hits are the number of http requests received by a server, whereas page views are the number of pages requested by visitors. Hits can be a misleading measure of site activity because one page view can include many hits if the page contains multiple images or graphics. Page views are also an inaccurate measure of site activity because of the increased usage of web pages that use frames to divide the page into separate sections. This will cause one page to generate multiple hits: one for each frame on the page. The preferred metric for traffic counts is unique visitors, which counts the number of new visitors to a site, regardless of how many pages they view.

19.

Define CTR, CPM, CPC, CPA, and VTR. CTR (click-through rate) refers to the percentage of people exposed to an online advertisement who click it to visit the site. CPM refers to the cost per thousand impressions. Advertisers originally purchased online ads in lots of 1,000 units.

CPC (cost per click) is a later pricing model in which the advertiser pays a prenegotiated fee for each click an ad receives. CPA (cost per action) refers to a cost structure where advertisers pay a pre-negotiated amount only when a user performs a specific action such as a site registration or purchase. VTR (viewthrough rate) refers to the 30-day response rate to an ad, which may be useful for ads that do not lead to an immediate click but may lead to one in the near future.

20.

What are marketing analytics and how are they used?

Marketing analytics (also called web analytics) are software packages that collect, store, analyze, and graphically present data on each of the stages in the conversion of shopper to customer process on e-commerce sites. Analytics packages can tell business managers how people become aware of their site, and where they come from (e.g., search, self-entered URL, e-mail, social campaigns, or off-line traditional print and TV ads), along with demographic, behavioral, and

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17 geographic information. This information can help managers decide the best ways to drive traffic to their sites, the so-called “in-bound” links to a site.

Once on the website, analytics packages can record how engaged visitors are with the site’s content, measured in terms of pages viewed and duration on site. This information can allow managers to change the design of their sites or change the content viewers are seeing. In a social network marketing world, where consumers’ opinions and behavior can be harvested and broadcast to their friends, an important intermediate step in the consumer conversion process is to encourage visitors to interact with content and share their experiences, opinions, preferences, and behaviors with their friends, as well as other visitors to the site.

Analytics packages can track visitor interaction and help managers decide what content leads to higher levels of visitor interaction with friends and other visitors.

The purchase activity on the shopping cart page is a major focus of analytics tools not just because this is where the revenue is generated, but also because this is where the customer frequently exits the entire site and the firm loses a potential sale. Finally, marketing analytics can help managers discover customer loyalty and post-purchase behavior. In an increasingly social marketing environment, marketing managers need to know how their products and services are being talked about on other sites.

The end objective of analytics packages is to help business managers optimize the return on investment on their websites and social marketing efforts, and to do this by building a detailed understanding of how consumers behave when visiting their websites. Analytics also allow managers to measure the impact of specific marketing campaigns involving, say, discounts, loyalty points, and special offers, as well as regional or demographic-based campaigns. Aside from its role in enhancing management decision making, and optimizing the effectiveness of building an e-commerce presence, analytics packages also enable a near real-time marketing capability where managers are able to change the content of a website, respond to customer complaints and comments, and align campaigns with trending topics or news developments.

Projects: Questions and Answers 1.

Go to www.strategicbusinessinsights.com/vals/surveynew.shtml. Take the survey to determine which lifestyle category you fit into. Then write a two-page paper describing how your lifestyle and values impact your use of e-commerce. How is your online consumer behavior affected by your lifestyle?

Student answers will vary depending on the VALS segment profile into which they fall.

For example, an “actualizer/achiever,” according to the profile, is supposed to be interested in possessions and recreation that reflect a cultivated taste for the finer things in life. They prefer established, prestige products and services that

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18 demonstrate success to their peers. Such a consumer might use the Web to buy tickets to concerts, opera, and the ballet. They might frequent eBay or other auction sites in search of fine art or antiques. Actualizers and achievers might also be interested in product advertisements from such sites as Tiffany or Bloomingdale’s.

An “experiencer” on the other hand, is supposed to be inclined toward exercise, sports, outdoor recreation, and social activities. This group of individuals is supposedly comprised of avid consumers who spend much of their income on clothing, fast food, music, movies, and videos. Students who fall into this segment profile might express an online purchasing penchant for such sites as REI, Amazon, iTunes, and Hulu.

2.

Choose an e-commerce site for a small or medium-sized business that you are familiar with and create an online marketing plan for it that includes each of the following: one-to-one marketing, affiliate marketing, mobile marketing, and social network marketing. Describe how each plays a role in growing the business and create a slide presentation of your marketing plan.

To complete this project, all students need is the information in the chapter, a visit to the website of a small or medium-sized business with which they are familiar, and a marketer’s instincts. Creativity should be rewarded. The students might suggest a campaign noting specific products on the site selected that includes the following: • One-to-one marketing: The information from the market research study must be recorded in one or more customer databases. Database mining can then be used to compile individual profiles. These should be analyzed to identify new market opportunities to specific customers, both current and new. Combine this data with the historical purchasing data of the site’s customers and create a recommendation tool for the website. Aggregate the purchasing psychological profile data to send buyers a personalized email message suggesting new products they might be interested in buying.

As a general rule, a company can expect that 80% of revenue will be contributed by 20% of their customers. Sustaining existing customers is also much less costly than developing new ones. Needs, specific “hotbutton” messages, and offers can be tailored both in e-mail messages and can be displayed on the website to different groups or individuals.

• Affiliate marketing: Set up an affiliate program with other like sites. They might also set up affiliates with sites that are not direct competitors.

• Mobile marketing: Ensure that the business’s website is “Google Mobilefriendly”. Make sure the business has obtained a Google Business Profile and a Google Places account. .

• Social network marketing: Create videos featuring products to post on YouTube and other video-sharing sites, encourage social shopping by providing discounts or other incentives, and set up product pages for specific products on Facebook and similar sites.

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19

3.

Use the Online Consumer Purchasing Model (Figure 6.10) to assess the effectiveness of an e-mail campaign at a small website devoted to the sales of apparel to the ages 18–26 young adult market in the United States. Assume a marketing campaign of 100,000 e-mails (at 25 cents per e-mail address). The expected click-through rate is 5%, the customer conversion rate is 10%, and the loyal customer retention rate is 25%. The average sale is $60, and the profit margin is 50% (the cost of the goods is $30). Does the campaign produce a profit? What would you advise doing to increase the number of purchases and loyal customers? What web design factors? What communications messages?

If 100,000 e-mails are sent out at a cost of $0.25 per e-mail address, the cost of the marketing campaign is $25,000. A click-through rate of 5% will result in 5,000 people clicking through to the site. Of those, 10% will be converted to customers, so 500 people will make a purchase as a direct result of the e-mail.

With an average sale of $60, this would produce gross revenues of approximately $30,000. The profit margin is 50% ($15,000), so the gross profit is $15,000.

Subtract the $25,000 cost of the advertising campaign and the net loss on the initial campaign is $10,000 (not including additional operating costs). If the loyal customer retention rate is 25%, then 125 customers can be expected to make at least one additional purchase of $60 within the year for an additional $7,500 in gross revenue. The campaign still produces an overall net loss of $2,500 over one year’s time. To increase the number of purchases and the retention rate, students can come up with any number of ideas. This is a chance for the marketing students in the class to let the ideas flow. Some possible ideas for website design and communication messages that might keep customers coming back to the site are: • Give the customers recruited from this e-mail campaign regular updates.

When new product lines or products arrive, or perhaps as new apparel arrives for each season, send updates so that they will be more likely to revisit the site.

• Add fashion magazine content to the site that discusses the latest fashion trends of your target audience.

• Keep your customers informed about what is happening in your company by sending them e-mail newsletters detailing new product information, special offers, etc.

• Offer an e-mail-based fashion advice service for your customers.

• Add free fashion articles and reports to the site. You can keep customers interested by putting relevant articles on your site for them to download.

This will also help to establish you as a fashion authority.

• Set up an online forum or blog on your site. This can often help to get your customers to stay longer on the site.

4.

Surf the Web for at least 15 minutes. Visit at least two different e-commerce sites.

Make a list describing in detail all the different marketing communication tools you see being used. Which do you believe is the most effective and why?

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20

Students are likely to see all or most of the display ads described in the chapter in 15 minutes of surfing. Reports should include what each advertised, what the method of delivery was, how effective they thought each ad was, and why it was or was not effective. Some ads may appear to be targeted and specifically placed on the sites visited whereas others may appear to have been randomly placed.

Students will likely find the targeted ads more effective. The effectiveness of other ads may depend on the demographic groups to which the student belongs and the delivery method.

5.

Do a search for a product of your choice on two search engines. Examine the results page carefully. Can you discern which results, if any, are a result of a paid placement? If so, how did you determine this? What other marketing communications related to your search appear on the page?

A search for a product such as a bicycle helmet (in quotation marks) on Google returns approximately 3.68 million results. (Note that student results may vary, depending on when the search is conducted) At the top of the search page, there is a heading labeled “Sponsored: Shop “bicycle helmet.” Below this is a horizontal scrolling gallery of ads (with photos and links) for different bicycle helmets.

Below this, links to a variety of companies that sell bicycle helmets such as a link to Amazon, as well as “organic links” to articles about bicycle helmets appear.

Ads and organic links continue to be interspersed throughout the rest of the page.

Students should do a similar search on Microsoft’s Bing and compare it to what they found on Google.

6.

Examine the use of rich media and video in advertising. Find and describe at least two examples of advertising using streaming video, sound, or other rich media technologies. (Hint: Check the sites of online advertising agencies for case studies or examples of their work.) What are the advantages and/or disadvantages of this kind of advertising? Prepare a 3- to 5-page report on your findings.

The best resource for this question is the Google Rich Media Gallery (Richmediagallery.com), which provides a rich media showcase highlighting innovative ads from top advertisers.

Advantages of rich media/video advertising include the tendency to be more effective (generate higher click-through rates) because it entertains and engages viewers through sound, video, and interactivity, as well as allows users some level of control (i.e., users can typically stop/close the ad).

Disadvantages of rich media/video advertising include its likeliness to cost more to develop and launch than simple display ads. They may also annoy users if they are deemed overly intrusive, and unresponsive to user control. As they become

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21 more commonly used, users may be more likely to “tune them out,” diminishing their effectiveness.

7.

Visit Facebook and examine the ads shown in the right margin and in your Feed.

What is being advertised and how do you believe it is relevant to your interests or online behavior? You could also search on a retail product and related products, on Google several times, and then visit Yahoo or another popular site to see if your past behavior is helping advertisers track you.

Facebook’s targeted ad functionality is very sophisticated. Students will likely report that the ads they see on Facebook are quite relevant, although some may still seem random. In general, the more you search on a class of items, or a specific item, the greater the likelihood that an ad network will pick up on your behavior and start showing you related ads in visits to other sites. This works for the most popular sites, most of which are members of a variety of ad networks.

This also assumes that you allow both primary and third-party cookies. If you do not allow any cookies, tracking becomes more difficult, but not impossible. Web bugs and beacons often cannot be eliminated by your browser.

Video Cases Chapter 6 in the eText features two new embedded videos. Video Case 6.1, Google and the Digital Ad Market, appears on page 319 of the eText, following Table 6.1 In this video (released in August 2022), Bloomberg News report Leah Nylen discusses Google’s dominant position in the digital advertising market, and examines why the U.S. Justice Department is preparing to sue Google, as a result. Questions that you can use for class discussion or as a student assignment include the following: • What role does Google play in the digital advertising market?

Answer: Google has a dominant position in all aspects of the digital ad market, including tools that help advertisers buy online advertisements on publisher websites, such as news or sports websites; it also helps websites sell ads to online advertisers; and it also owns the largest ad auction platform.

• Why is the U.S. Justice Department suing Google?

Answer: The U.S. Justice Department has concerns about just how much Google dominates the digital ad market, as it is estimated to control as much as 80% to 80% of various parts of the market.

• How does this lawsuit differ from a previous U.S. Justice Department lawsuit against Google in October 2020?

Answer: The previous lawsuit focused on Google’s role in the search advertising market. That lawsuit focuses on contracts that Google has with smartphone makers such as Apple, as well as web browsers, that require Google to be the default search engine. The Justice Department believes that this stifles competition, because it gives Google an advantage over other search engines, and as such, is a violation of antitrust law.

Video Case 6.2, Mutiny Uses AI and No-Code to Improve AdTech, appears on page 329 of the eText, at the end of “The Website as a Marketing Platform: Establishing the Customer Relationship” section. In this video, released in April 2022, Mutiny co-founder

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22 and CEO Jaleh Rezai discusses how Mutiny is using artificial intelligence and a “nocode” software platform to enable companies to improve their websites as a marketing platform. Questions that you can use for class discussion or as a student assignment include the following: • In what ways does Mutiny help websites become a more effective platform for building a relationship with its customers?

Answer: Mutiny uses customer data and artificial intelligence to create customized websites for different buyers, so that when a user sees an ad and clicks through to the website, the user is taken to a website that shows them content that is much more personalized to that user specifically, rather than a generic website. This helps websites convert those customers into sales more easily. For example, Rezaei provides the example of one of its customers, Notion, that has increased its conversion by 60% by using Mutiny.

• What are some of the companies identified in the video as currently using Mutiny?

Answer: Companies identified in the video as currently using Mutiny include Notion, Snowflake, Qualtrics, Dropbox, Carta, and Brex.

• What are Mutiny’s plans with respect to expansion?

Answer: Mutiny hopes to use $50 million which it has recently raised to expand beyond just personalizing websites to all of the different customer touchpoints

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1 Instructor’s Manual and Video Cases: Chapter 7 Social, Mobile, and Local Marketing Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 4 4 4 5 5 10 11 15 17

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2 Learning Objectives After reading this chapter, your students should be able to: ● Understand the difference between traditional online marketing and socialmobile-local marketing platforms and the relationships among social, mobile, and local marketing. ● Understand the social marketing process from fan acquisition to sales and the marketing capabilities of social marketing platforms such as Facebook, Instagram, TikTok, Twitter, and Pinterest. ● Identify the key elements of a mobile marketing campaign. ● Understand the capabilities of location-based local marketing.

Chapter Outline #Marketing: #BookTok, #WeddingTok, and #CrumblReviews 7.1 Introduction to Social, Mobile, and Local Marketing From Eyeballs to Conversations From the Desktop to the Smartphone and Tablet The Social, Mobile, Local Nexus 7.2

7.3

Social Marketing Social Marketing Players The Social Marketing Process Measuring Social Marketing Results Insight on Technology: Optimizing Social Marketing with Sprout Social Facebook Marketing Facebook Marketing Tools Starting a Facebook Marketing Campaign Instagram Marketing Instagram Marketing Tools Starting an Instagram Marketing Campaign TikTok Marketing TikTok Marketing Tools Starting a TikTok Marketing Campaign Twitter Marketing Twitter Marketing Tools Starting a Twitter Marketing Campaign Pinterest Marketing Pinterest Marketing Tools Starting a Pinterest Marketing Campaign Marketing on Other Social Networks: Snapchat and LinkedIn The Downside of Social Marketing Insight on Society: Marketing to Children in the Age of Social, Mobile, Local Mobile Marketing .

3 Overview: M-commerce Today How People Actually Use Mobile Devices In-App Experiences and In-App Ads How the Multi-Screen Environment Changes the Marketing Funnel Overview: Mobile Marketing The Technology: Basic Mobile Device Features Mobile Marketing Tools: Ad Formats Insight on Business: Mobile Marketing Revs Up with 3-D and Augmented Reality Starting a Mobile Marketing Campaign Mobile Marketing Analytics 7.4

Local and Location-Based Mobile Marketing The Growth of Local Marketing The Growth of Location-Based (Local) Mobile Marketing Location-Based Marketing Platforms Location-Based Mobile Marketing: The Technologies Why Is Location-Based Mobile Marketing Attractive to Marketers?

Location-Based Marketing Tools Location-Based Digital Marketing Features Proximity Marketing with Beacons Starting a Location-Based Marketing Campaign Measuring Location-Based Marketing Results

7.5

Careers in E-commerce The Company The Position: Social Media Marketing Associate Qualifications/Skills Preparing for the Interview Possible First Interview Questions

7.6

Case Study: ExchangeHunterJumper.com: Building a Brand with Social Marketing

7.7

Review Key Concepts Questions Projects References

List of Key Terms amplification, p. 399 community, p. 400 dark social, p. 398 engagement, p. 399 .

4 fan acquisition, p. 398 geo-aware, p. 440 influencer marketing, 399 influencers, 399 location-based marketing, p. 438 location-based services, p. 438 proximity marketing, p. 440 Reactions button, p. 406 social density, p. 405 List of Figures Figure 7.1 The Rapidly Changing Trajectory of Online Ad Spending, p. 395 Figure 7.2 Social, Mobile, and Local Marketing 2019–2023, p. 396 Figure 7.3 Online Marketing Platforms, p. 397 Figure 7.4 The Social Marketing Process, p. 399 (Figure video in eText) Figure 7.5 The Growth of M-commerce, p. 426 Figure 7.6 Retail M-commerce Sales: Smartphones versus Tablets, p. 427 Figure 7.7 Mobile versus Desktop Marketing Expenditures, p. 430 Figure 7.8 The Top U.S. Mobile Marketing Firms by U.S. Revenue, p. 430 Figure 7.9 U.S. Mobile Ad Spending by Format, p. 432 Figure 7.10 Measuring the Effectiveness of a Mobile and Social Marketing Branding Campaign, p. 437 Figure 7.11 Location-Based Mobile Marketing in Perspective, p. 439 List of Tables Table 7.1 Measuring Social Marketing Results, p. 401 Table 7.2 Basic Facebook Features Used in Marketing, p. 405 Table 7.3 Selected Facebook Marketing Campaigns, p. 409 Table 7.4 Table 7.5 Table 7.6 Table 7.7 Table 7.8 Table 7.9 Table 7.10 Table 7.11 Table 7.12 Table 7.13 Table 7.14 Table 7.15 Table 7.16

Basic Instagram Features Used in Marketing, p. 410 Selected Instagram Marketing Campaigns, p. 412 Basic TikTok Features Used in Marketing, p. 413 Selected TikTok Marketing Campaigns, p. 414 Basic Twitter Features Used in Marketing, p. 415 Selected Twitter Marketing Campaigns, p. 418 Basic Pinterest Features Used in Marketing, p. 419 Selected Pinterest Marketing Campaigns, p. 420 Features of Mobile Devices, p. 431 Selected Mobile Marketing Campaigns, p. 433 Major Locating Technologies, p. 441 Location-Based Marketing Tools and Campaigns, p. 433 Mobile Location-Based Marketing Effectiveness, p. 446

List of Video Cases .

5 Video Case 7.1: Snap and Augmented Reality Marketing Video Case 7.2: AppLovin’s Mobile Marketing Platform Overview Chapter 7 focuses on the social, mobile, and local online marketing platforms. There is a major shift in thinking involved in these marketing platforms. The traditional web marketing emphasis on “eyeballs” and spraying large populations with messages has changed to place a greater emphasis on engaging the customer in conversations. In addition, the primary technology platform has shifted from desktop to mobile devices. This is more than just a technology change. It’s also a behavioral change because customers are much “closer” to their mobile devices than desktops, and hence offer marketers many more opportunities to send messages, and to, in a sense, surround the consumer with the same message on multiple platforms. Social, mobile, and local marketing platforms are connected and self-reinforcing. The mobile audience is a major user of social networks like Facebook, Instagram, and Twitter and local marketing often involves social geo-targeting. Mobile devices are also a major channel for local advertisers who can touch customers as they pass their stores.

Teaching Suggestions: Key Points A good way to introduce the discussion of social, mobile, and local marketing is to review the opening case in Chapter 7, #Marketing: #BookTok, #WeddingTok, and #CrumblReviews (new for this edition). Many students are likely to be TikTok users, or at least familiar with the platform, but they may not be as aware about how it is increasingly being used for marketing.

Class discussion questions might include the following: ● Have you used TikTok? Do you follow any particular influencers or hashtags on TikTok? ● Have you ever purchased anything recommended by a social media influencer?

Why or why not? ● What are some of the issues with respect to influencer marketing on TikTok or other social networks?

Social, Mobile, and Local Marketing. Section 7.1 provides an overview of social, mobile, and local marketing, which today are the fastest growing forms of online marketing. In 2022, the amount spent on mobile marketing exceeded online advertising spending on desktop/laptops (Figure 7.1) as well as the amount spent on social and local online marketing. It is important for students to understand that although spending on mobile marketing dominates, much of the spending is also social and/or local, and that social, mobile, and local marketing are very connected to one another. For instance, about 95% of Facebook’s and Twitter’s respective advertising revenues are generated by its mobile audience. Local and mobile marketing are also highly related. Figure 7.3 provides a snapshot view of social-mobile-local marketing in 2022 in context.

Social Marketing. Section 7.2 focuses on social marketing and social marketing platforms like Facebook, TikTok, Instagram, Twitter, and Pinterest. Although Facebook remains the dominant .

6 social network in terms of number of users, there is significant competition in this market, and differentiation. Figure 7.4 illustrates the social marketing process as a series of five steps or stages: fan acquisition, engagement, amplification, community, and finally brand strength or sales. This is a very important concept for understanding the chapter, so take a few minutes to walk students through this diagram and the underlying concepts. An engaging Figure video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 7.4 and this topic. Tying into the opening case, take some time to discuss the important role that influencers and influencer marketing have come to play as methods of generating engagement in social marketing.

A new overview section on measuring social marketing results has been added before the text delves more deeply into the specifics of marketing on individual platforms. Table 7.1 describes some of the basic metrics to use when evaluating a social marketing campaign and relating them to the five steps of the social marketing process illustrated in Figure 7.4, The section touches on the difficulty of measuring social marketing results and references the industry’s first set of guidelines to help measure influencer marketing, as well as various social media analytics tools.

The updated Insight on Technology case, Optimizing Social Marketing with Sprout Social provides interesting real-world examples of the Atlanta Hawks’ and Allegiant Air’s use of social media, and the challenges and rewards of developing an integrated social media campaign that crosses many ad platforms, from Facebook to Twitter to Pinterest. Questions for class discussion might include: ● How do social media analytics help companies identify and attract customers? ● What are the challenges in measuring the effectiveness of social marketing campaigns? ● What advantages did the Atlanta Hawks and Allegiant Air find in using Sprout Social’s analytics and tools?

The text next takes a deeper dive into social marketing on specific platforms, with separate sections on Facebook, Instagram, TikTok, Twitter, and Pinterest. Each of these sections provides an overview of marketing on the specific platform, a table containing a description of basic features of the platform that can be used for marketing, a description of the platform’s various marketing tools, advice about how to start a marketing campaign on the platform, and a table providing some concrete examples of specific marketing campaigns. So, for example, before you delve in depth into Facebook marketing, take five minutes to review the basic Facebook features that can be used for marketing with students (Table 7.2). They probably know all these features already but be sure to illustrate how Facebook develops features to maximize the amount of social interaction on its site by connecting users to one another whether they want to be connected or not. Explain how concept of “social density”, introduced in Section 7.2, relates to marketing opportunities on Facebook and other social networks. To make the conversation more concrete, review Table 7.3, which describes some recent Facebook marketing campaigns. You can ask students to identify the different Facebook marketing tools used in those campaigns.

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7 When you turn to marketing using Instagram, TikTok, Twitter, and Pinterest, you can follow the same basic structure as above. Also spend some time discussing the differences between the different platforms and how those differences impact marketing on those platforms. .

Snapchat and LinkedIn are also briefly covered. Again, students are likely to be familiar with these social networks, but may not be as well acquainted with how they can be used for marketing. Snapchat, a mobile messaging app/social network, has a number of features that provide advertising opportunities, such as Snapchat Stories, Live Stories, and Discover, and a variety of ad types, including Snap Aps, Sponsored GeoFilters, and Sponsored Lenses. LinkedIn charges businesses for brand pages and access to its user database, and charges users for premium subscriptions.

Finally, ask students to discuss some of the downsides of social marketing. Obviously, firms do not have total control over the marketing messages if users of their products are able to freely opine on the quality of their products. So, there is a risk for firms that their shortcomings will be widely broadcast.

Because young people (ages 12 to 18) are heavily involved in social networks, and often reveal details of their identity, marketers need to take care how they exploit personal information in their social marketing campaigns. A good way to introduce these issues is to review the updated Insight on Society case, Marketing to Children in the Age of Social, Mobile, Local. This case offers a discussion of the social implications of marketing to children and the special care that managers must exercise in this situation. You might ask students with children or younger siblings what kinds of online and offline ads they find objectionable for their loved ones. Other questions for class discussion might include the following: ● Why is online marketing to children a controversial practice? ● What is the Children’s Online Privacy Protection Act (COPPA) and how does it protect the privacy of children? ● What actions must YouTube take as a result of its settlement with the Federal Trade Commission? ● Should COPPA be revised? If so, how?

Mobile Marketing. Section 7.3 introduces and reviews mobile marketing—the use of mobile devices to deliver consumer marketing messages—and provides an overview of m-commerce, which is obviously intertwined with mobile marketing. M-commerce is growing rapidly, and mobile marketing even faster. Review Figure 7.5, which illustrates the growth in commercecommerce. However, also note that while commerce-commerce is growing fast, people are still using their desktop/laptop computers to make purchases. Make sure students understand the difference between shopping and purchasing. Because most people carry their smartphones with them everywhere, they make for an ideal marketing tool because marketers can contact consumers just about anytime and anyplace.

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8 Mobile devices have created a multi-screen world for consumers: people watch TV, use their desktop/laptop computer at work (often to shop), and use their smartphones and tablets to watch videos and text with friends. Ask students how many of these screens they use. What are the implications for marketers? The answer: marketers need coordinated campaigns to be on all these platforms.

Figure 7.7 illustrates how fast mobile marketing is growing, almost doubling from about $90 billion in 2019 to an estimated $170 billion in 2022. This is a result of all you have discussed to this point in the class, namely, mobile devices are almost always on (unlike a TV or desktop computer), and they can deliver very relevant ads often tied to local deals. The big players in mobile ads are familiar (Figure 7.8): Meta (Facebook and Instagram) and Google dominate, followed by Amazon (which may be a surprise to students) Twitter, LinkedIn, and Snapchat.

Although just about all students have a mobile device and will be generally familiar with their basic features, take a few moments to review Table 7.12.

Mobile marketing formats mimic closely desktop formats—search, display video, and text.

Figure 7.9 illustrates U.S. mobile ad spending by type in the form of a pie chart and shows students how much search dominates.

Table 7.13 describes some recent mobile marketing campaigns. Starting a mobile campaign involves considering how your product fits into a mobile marketing platform, the demographics you are looking for, and an analysis of what your competitors are doing. Mobile campaigns should start out simple—translate your web page to a mobile website, develop social network brand pages, and use Google or Apple mobile ad services because they have excellent analytics tools for tracking results.

Video Case 7.1, Snap and Augmented Reality Marketing, appears on page 433 in the eText, following Table 7.13. This Video Case complements the Insight on Business case, Mobile Marketing Revs Up with 3D, AR, VR, and the Metaverse, which follows it. See pages 17 to 18 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

The Insight on Business case, Mobile Marketing Revs Up with 3D, AR, VR and the Metaverse (updated for this edition), illustrates the evolution of mobile marketing into new areas.

Questions for class discussion might include the following: ● Why do mobile devices represent such a promising opportunity for marketers? ● What are the benefits and the appeal of 3-D, AR, and the metaverse for mobile advertising? ● Have you ever engaged with 3-D, AR, or metaverse-based mobile ads? ● What types of products are best suited for 3-D, AR, or metaverse-based ads?

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9 Walk students through Figure 7.10 to illustrate how the effectiveness of a mobile branding campaign can be evaluated. As you can see, there are many parts of a mobile branding campaign that require attention.

Video Case 7.2, AppLovin’s Mobile Marketing Platform, appears on page 437 of the eText, in the Mobile Marketing Analytics section. See page 18 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Local and Location-Based Marketing. Section 7.4 describes local and location-based marketing.

It’s important for students to understand the difference between the various types of local marketing. Most local marketing involves traditional newspaper and television ads, but online local marketing is rapidly catching up to traditional channels. Location-based marketing targets messages to consumers based on their actual physical location. This is inherently a mobile device situation because mobile phones and tablets can be precisely located by latitude and longitude. The same is not true of a desktop computer. Go over the list of location-based services so students get a clear sense of the matter. Review Figure 7.11 with students to put location-based mobile marketing into the overall context of web marketing.

Location-based marketing is dominated by Google, which also dominates the mobile marketing field. Point out to students the importance of Google Maps: it’s not just to help people find their way. Google Maps is an important advertising tool for local businesses. Ask students why they think location-based ads might be more effective than other ads on mobile devices. Answer: when people search for something locally (a pizza, shoes, clothing, etc.), they are close to a purchasing decision. Local search is immediate.

Be sure to briefly review the technologies that make location-based marketing possible. Most students will know about GPS, but that alone is not enough to precisely locate people. Other techniques involve Wi-Fi, geo-search, cell tower, and sign in/registration. Table 7.14 summarizes these technologies.

There are two kinds of location-based marketing capabilities based on these technologies: geoaware and geo-fencing techniques. Geo-aware techniques identify the location of a user’s device and then target marketing to the device, recommending actions near that location, which also requires the marketer to know where relevant things like stores are located. For instance, a marketer may target smartphones within several square city blocks to alert them to available offers from participating merchants. Proximity marketing techniques identify a perimeter around a physical location, and then target ads to users within that perimeter, recommending actions possible within the fenced-in area. Proximity marketing can permit marketing to consumers as they walk by the store or walk through a store. Apple’s iBeacon technology enables stores to automatically contact customers with special offers on their iPhones as they walk into a store, using purchase histories to generate offers that are most relevant to each customer.

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10 Table 7.15 summarizes some of the unique location-based marketing tools and campaigns. Go over each type in class to ensure students understand all the technical possibilities for marketing based on user location. In general, location-based ads use the same ad formats as desktop advertising—search, display, and video are the top three.

Starting a location-based campaign begins with an assessment of whether your products or services have a local component. Are there local stores or entertainment sites where users can purchase the service? Location-based ads will be most successful with younger, affluent, and more educated consumers. You should also be aware of how your competitors are using location-based marketing, if at all. Measurements of the results of location-based marketing follow a familiar path of measuring fan acquisition, engagement, amplification, community, and brand strength (sales) (Table 7.16).

In Section 7.5, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as a social media marketing associate.

The chapter-ending case study, ExchangeHunterJumper.com: Building a Brand with Social Marketing (updated for this edition), in Section 7.6, provides an interesting example of how a small business in a highly specific market built a brand name for itself on the Internet.

Case Study Questions and Answers 1.

Find a site on the Web that offers classified ads for horses. Compare this site to ExchangeHunterJumper.com in terms of the services offered (the customer value proposition). What does The Exchange offer that other sites do not?

Bigeq.com is one popular site that also offers classified ads for horses and is probably ExchangeHunterJumper.com’s strongest competitor. One service that The Exchange offers that this site does not is that The Exchange professionally screens horses that are listed, whereas Bigeq.com allows anyone to post sales ads. Therefore, the horses on The Exchange are more likely to be appropriately described and have a better track record than those on Bigeq.com. However, this does mean that Bigeq.com typically has more horses listed than The Exchange does. Another service that The Exchange provides is that all the horses listed have high-quality videos and photos embedded within the site that the customer can view, whereas not all the horses on Bigeq.com have videos or photos, and those that do are linked to YouTube, some of which are not very good quality. The Exchange continually updates information on the horses available, whereas the ads on Bigeq.com are static once they have been submitted by the seller.

2.

In what ways were social media effective in promoting The Exchange brand? Which media led to the highest increase in sales and inquiries? Why?

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11 ExchangeHunterJumper.com uses the following social media: Facebook (currently via Aslin’s personal Facebook page as well as Facebook Groups), Instagram, and Twitter,.

Facebook has had the largest impact on sales and inquiries, although Instagram, where the Exchange has more than 9,000 followers, has also been useful. Facebook and Instagram have probably worked so well because of their recommending features and the ease with which word can be spread.

3.

Make a list of all the ways The Exchange attempts to personalize its services to both buyers and sellers. ● ● ● ● ● ●

Works with individual sellers and trainers to create effective ads, including photos and videos Develops a personal strategy for each horse (horses have personalities too!)

Asks buyers to fill out forms and expected budgets Provides personal e-mail responses to buyer queries Screens horses that are listed Makes recommendations

End-of-Chapter Questions and Answers 1.

Describe the two factors that make social, local, and mobile marketing different from traditional online marketing.

One change is the transition from unique visitors and ad impressions towards an emphasis on consumer conversations and consumer engagement. A second change is the rapid growth of mobile devices, which provides many more new opportunities to send marketing messages than what is true of the desktop platform.

2.

Why are social, mobile, and local marketing efforts interconnected?

Visits to social networks increasingly originate from mobile devices. Mobile devices are increasingly being used as a platform for location-based and local marketing.

3

Why is the connection between social, mobile, and local marketing important to marketers?

When marketers design a social marketing campaign, they must also consider that their customers will be accessing the campaign using mobile devices, and often they will also be looking for local content. Social-mobile-local must be seen in an integrated management framework.

4.

What are the objectives of social marketing?

In social marketing, the objective is to encourage potential customers to become fans of your company’s products and services, to engage with your business by entering into a .

12 conversation with it, to encourage your business’s fans to share their enthusiasm with their friends and create a community of fans online. The end objective is to strengthen the brand and drive sales, and to do this by increasing your “share of online conversation.”

5.

What are the major social networks?

The major social networks are Facebook, Instagram, TikTok, Twitter, Pinterest, Snapchat, and LinkedIn.

6.

What are the five elements of the social marketing process?

The five elements of the social marketing process are: fan acquisition, engagement, amplification, community, and building brand strength and ultimately sales.

7.

Why is LinkedIn attractive to advertisers?

LinkedIn is attractive to advertisers because it attracts a highly educated, professional, and managerial audience. Advertisers tend to use LinkedIn for branding purposes.

8.

List and briefly describe the basic Facebook marketing tools.

Basic Facebook marketing tools are as follows: ● Reactions buttons: a Facebook plug-in that websites and Facebook pages use to enable user feedback and support. ● Brand pages: used to cultivate fans of a brand by providing users with opportunities to interact with the brand. ● Facebook Groups: gives brands a platform and tools to build an engaged community among existing and potential customers. ● Facebook Ads: enables businesses to choose from a variety of different marketing objectives with a variety of different formats (such as text, photo, or video ads), placed in a variety of different locations, such as a user’s Feed, in the right-hand column sidebar of Facebook pages, and in Facebook Stories or Reels, and on Messenger. ● Facebook Live: video streaming service within Facebook. ● Facebook Watch: on-demand video streaming that includes pre-roll and mid-roll video ads. ● Mobile ads: ads placed on the Facebook mobile app and Facebook mobile pages accessed via a mobile web browswer, including app install ads and in-app ads. ● Messenger: offers a variety of marketing options, including sponsored messages/broadcasts to customers who have previously engaged with the advertiser via Messenger chatbot, or in the case of small and medium-sized businesses, directly from the company; in-box video and display ads

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13 9.

How can you measure the results of a social marketing campaign?

You can measure the results of a social marketing campaign using the social process marketing model: fan acquisition, engagement, amplification, community, and building brand strength and ultimately sales.

10.

List and briefly describe Twitter marketing tools.

Basic Twitter marketing tools include the following: ● Promoted Ads: available in a variety of formats, including Text Ads, Carousel Ads, Moment Ads, Image Ads, and Video Ads ● Twitter Takeover: advertisers pay to move their hashtags to the top of a user’s Timeline or Trends list. ● Follower Ads: advertisers pay to have their branded account suggested to users on the “Who to follow” list. ● Branded Notifications: enables advertisers to have one-to-one conversations via the delivery of time-triggered automated @mention tweets that are directed to users who have opted to receive them. ● Amplify: allows marketers to show video ads that run prior to or during primary video content ● Twitter Cards: marketers can embed a “card” into business tweeters’ standard Twitter messages. ● Mobile Ads: All the above formats are also available on mobile devices, as well as mobile app install and app engagement ads.

11.

List and briefly describe Instagram marketing tools.

Instagram marketing tools include the following: ● Brand profiles ● Ads of various types (Carousel ads, video ads, etc) in users’ Feeds, including shoppable Feed posts ● Stories: can be used as a paid advertising product ● Reels provide a platform for creators and brands; ads can be placed as a banner or sticker, while video ads can be placed between ReelsHashtags can be used to build community, expand audience, and get more reach ● Filters enable brands to create different looks and feels for their photos ● Instagram Direct enables brands to privately exchange text, photos, posts, and Stories with one or more people.

12.

List and briefly describe TikTok marketing tools.

TikTok marketing tools include the following:

13.

List and briefly describe Pinterest marketing tools. .

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Pinterest marketing tools include the following: ● Business accounts with additional resources for brands ● Brand pages (boards) for business brands ● Pins of various types, such as Standard Pins, Video Pins, Rich Pins (Product, Article, and Recipe), and Idea Pins ● Paid ad formats of various types, including Standard, Carousel, Video, Shopping, and Collection ● Search advertising, including keyword campaigns and shopping campaigns, as well as using Pinterest’s visual search engine (Pinterest Lens) for advertising purposes ● 14.

Why is mobile marketing different from desktop marketing?

Mobile devices are always with consumers and play a central role in their lives. They are more multi-functional than desktop/laptop computers by combining a telephone with media functionality.

15.

What is the fastest growing m-commerce platform and why?

Initial expectations were that tablets would provide the primary m-commerce platform, but that has not proven to be the case. As the size of smartphone screens has grown and their resolution improved, coupled with better mobile search, better location- and context-based discovery, and better mobile payment systems, the smartphone buying experience has improved, resulting in rapidly growing smartphone m-commerce sales.

16.

Why are in-app ads so important to marketers?

In-app ads are important to marketers because mobile users spend over 80% of their mobile minutes using apps.

17.

What is the multi-screen environment and how does it change marketing?

The multi-screen environment refers to the fact that consumers use TVs, desktop PCs, and mobile devices throughout their daily lives. Marketers need to design their messages for all three platforms and develop an integrated approach.

18.

What kinds of ad formats are found on mobile devices?

The major marketing opportunities in mobile marketing are search ads, display ads, videos and rich media, messaging (SMS/MMS/PPS), as well as other familiar formats like e-mail, classifieds, and lead generation.

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15 19.

Why is location-based marketing so attractive to marketers?

Location-based marketing is attractive to marketers because consumers who search for local products and services are more apt to purchase something than desktop users.

20.

List and describe some basic location-based marketing tools.

Basic location-based marketing tools include the following: ● Geo-aware marketing tools: identifying the location of a user’s device and then targeting marketing to the device, recommending actions within reach, such as location-based products and services ● Geo-social-based services: sharing locations with friends ● Proximity marketing: identifying a perimeter around a physical location and then sending marketing messages to consumers within that perimeter ● In-store messaging: targeting consumers who are in a store

Projects: Questions and Answers 1.

Choose two different online companies and for each, try to identify the social, mobile, and local marketing efforts the company has implemented. Do they use social plug-ins on their websites? Do they have a Facebook page? If so, visit those pages to see how they are using them. How is the Facebook page different from the company’s website?

Can you identify how the firms use mobile marketing? Use your smartphone or tablet to access their apps, if they have one, and websites. Are their websites designed specifically for each platform? In conclusion, compare and critically contrast these firms, and make recommendations for how you, as a marketing manager, would improve their effectiveness.

Student answers will vary depending on the companies they choose to examine, but the answers should include the following considerations: ● A list for each site of the social, mobile, and local features of the websites. ● An assessment of how effective the web presence of each firm is, as well as how effective the Facebook, Twitter, and/or Pinterest campaigns are. ● Students should be expected to find sites that have social, mobile, and local efforts (although identifying the local efforts may require some extra work). ● Student analysis should use the social marketing process figure in the chapter to organize their assessment and their recommendations for improvement.

2.

Visit your Facebook profile page and examine the ads shown in the right margin. What is being advertised and how do you believe it is relevant to your interests or online behavior? Make a list of ads appearing in your News Feed. Are these ads appropriately targeted to you in terms of your demographics, interests, and past purchases? Surf the web, visiting at least two retail websites. In the next 24 hours, do you see advertising on Facebook related to your surfing behavior? .

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Student answers will vary depending on the companies they choose to examine, but the answers should include the following considerations: Students should provide a list of right-hand column ads on their page and then assess why they are being shown these ads. Are the ads related to their personal demographics (Profile), to their friends’ recommendations, prior interests, and visits to other websites?

They should perform the same analysis for their News Feed Page Post Ads. If they have a smartphone or tablet, they should visit their pages using these mobile devices and assess how the limitations of a smartphone screen are being managed by Facebook.

3.

Visit two websites of your choice and apply the social marketing process model to both.

Critically compare and contrast the effectiveness of these sites in terms of the dimensions of the social marketing process. How well do these sites acquire fans, generate engagement, amplify responses, create a community, and strengthen their brands? What recommendations can you make for these sites to improve their effectiveness?

Student answers will vary depending on the companies they choose to examine, but the answers should include the following considerations: Students should apply the social marketing process model to each site, and then, for each element of the model, critically compare and contrast the effectiveness of each site. For instance, one site may be much better on fan acquisition than it is engagement. Many sites are strong on acquisition and engagement, but weak on community building.

Students should assess each site on each dimension. Finally, students should present a list of recommendations for improvement with a brief explanation on how it would help these firms.

4.

Identify two Pinterest brand pages. Identify how they use Pinterest marketing tools described in this chapter. Are there some tools they are not using? What recommendations can you make for these companies to improve their Pinterest marketing campaigns?

Student answers will vary depending on the companies they choose to examine, but the answers should include the following considerations: Students should first examine the basics of these firms’ photography because the heart of Pinterest marketing is high-quality photography, including how consumers are using or wearing the products. Second, they should examine how the firms organize their boards. Are the boards a sensible introduction to the firms’ products? Third, students should assess how well each firm supports consumer engagement and community building. Does one firm seem to have a “stronger” brand (in the sense of a larger, more

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17 lively community and a wide variety of posts indicating engagement and conversation)?

Finally, students should present a list of management improvements.

Video Cases The Chapter 7 eText features two embedded video cases. Video Case 7.1, Snap and Augmented Reality Marketing, appears on page 433 in the eText, following Table 7.13. This Video Case complements the Insight on Business case, Mobile Marketing Revs Up with 3D, AR, VR, and the Metaverse, that follows it. Snap is the parent company of Snapchat, a mobile messaging app/social network that allows users to chat and send images and videos (snaps) that disappear after a relatively short period of time after they have been viewed. As discussed in the Insight on Business case, Mobile Marketing Revs Up with 3D, AR, VR, and the Metaverse, that follows this Video Case, Snap has been a pioneer in the use of augmented reality (AR) in mobile marketing, In the video, released in February 2022, Snap’s Chief Business Officer Jeremi Gorman talks about Snap believes the use of AR is transforming digital marketing and ecommerce. As noted in the video, more than 200 million people engage with AR on Snapchat every day, and there are more than 6 billion AR interactions each day on average. Questions that you can use for class discussion or as a student assignment include the following: • How does Gorman see using AR for shopping changing consumer habits?

Answer: AR applications are changing consumers in terms of enabling them to virtually “try on” various items, such as lipstick, glasses, or clothing. This coupled with the fact that in the previous 2 years, many people could not physically shop in stores due to the pandemic, has accelerated the growth of e-commerce.

• What is Snap doing to engage with consumers in the Gen X and older Millennial population?

Answer: Gorman notes that as people in older demographics become even more comfortable communicating with photos, they are likely to become more comfortable using apps such as Snapchat. In addition, Gorman points to content that appears in its Discover section (Snapchat’s hand-curated news environment), such as Sportscenter, content from NBC, are appealing to a broader audience.

• How does Snap’s vision of the future differ from Meta’s vision?

Answer: Gorman notes that it is important to distinguish between virtual reality and augmented reality. She characterizes virtual reality as a “separate space” with a headset that takes you into a different world. AR, in contrast, involves computing overlaid on the real world. Snap believes that people will prefer to stay focused on the real world rather than a virtual world.

• What does Gorman believe is the impact of TikTok as a competitor to Snap?

Answer: Gorman says that Snap has always operated in a highly competitive environment. She notes that since so much advertising spending and so much time spent is moving toward mobile online video that there is plenty of space for all of them. She also distinguishes Snapchat from TikTok in that Snapchat is firmly rooted in the camera and communications, whereas she characterizes TikTok as being more of a form of “lean back” entertainment,

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18 Video Case 7.2, AppLovin’s Mobile Marketing Platform, appears on page 437 of the eText, in the Mobile Marketing Analytics section. AppLovin provides a marketing and monetization platform that enables mobile app developers to increase the reach of their apps. In this video, released in February 2022, AppLovin’s CEO, Adam Foroughi, and Bloomberg reporter Nico Grant, discuss the overall app store and digital marketing ecosystem, as well as the impact of Google’s and Apple’s recent privacy initiatives. Questions that you can use for class discussion or as a student assignment include the following: How do Google and Apple’s privacy initiatives relate to mobile marketing?

Bloomberg reporter Nico Grant states that Google is hoping to find a middle ground or compromise between what it sees as the needs of app makers who are dependent on the digital ad industry and consumers who are increasingly concerned about the privacy of their personal information. Under its new privacy initiative, Google is going to prevent app makers from sharing consumer data from tracking across multiple apps with third parties. Apple has previously implemented a similar policy with respect to apps on its platform.

How does AppLovin’s gaming platform relate to its digital marketing platform?

Answer: AppLovin’s gaming platform provides it with access to “first-party” data from more than 200 million monthly active users, that it can then use for its advertising platform. In effect, this enables AppLovin to trade its gaming content for its users' data. Foroughi notes that this is likely to be the wave of the future and that he believes Google’s new policies will not have as much impact on AppLovin because of its access to its own first-party data.

What distinguishes Google’s approach to its new privacy initiatives from Apple’s approach?

Answer: Grant notes that Google’s approach is much more gradual than Apple’s was because Google has a vested interest in making sure digital ad ecosystem stays robust, since so much of Google’s revenue depends on it. Apple, on the other hand, implemented its initiative much more rapidly.

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1 Instructor’s Manual and Video Cases: Chapter 8 Ethical, Social, and Political Issues in E-commerce Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 4 4 5 5 6 10 11 20 23

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2 Learning Objectives After reading this chapter, your students should be able to: ● Understand why e-commerce raises ethical, social, and political issues. ● Understand basic concepts related to privacy and information rights, the practices of e-commerce companies that threaten privacy, and the different methods that can be used to protect online privacy. ● Understand the various forms of intellectual property and the challenges involved in protecting it. ● Understand how the Internet is governed and why taxation of e-commerce raises governance and jurisdiction issues. ● Identify major public safety and welfare issues raised by e-commerce.

Chapter Outline The Right to be Forgotten: Europe Leads the United States on Internet Privacy 8.1 Understanding Ethical, Social, and Political Issues in E-commerce A Model for Organizing the Issues Basic Ethical Concepts: Responsibility, Accountability, Liability, and Due Process Analyzing Ethical Dilemmas Ethical Principles 8.2

Privacy and Information Rights What Is Privacy?

Privacy in the Public Sector: Privacy Rights of Citizens Privacy in the Private Sector: Privacy Rights of Consumers Information Collected by E-commerce Companies Marketing: Profiling, Behavioral Targeting, and Retargeting Mobile Devices: Privacy Issues Social Networks: Privacy and Self Revelation Insight on Technology: Apps that Track: A Double-Edged Sword Consumer Privacy Regulation and Enforcement: The Federal Trade Commission Privacy and Terms of Use Policies Privacy Protection in Europe: The General Data Protection Regulation (GDPR) Industry Self-Regulation Technological Solutions Property Rights in Personal Data Limitations on the Right to Privacy: Law Enforcement and Surveillance

8.3

Intellectual Property Rights Types of Intellectual Property Protection .

3 Copyright Fair Use Doctrine The Digital Millennium Copyright Act Copyright Protection in the European Union Patents Trademarks Trademarks and the Internet Trade Secrets

8.4

Governance Can the Internet Be Controlled?

Taxation Insight on Business: Internet Sales Tax Battle Net Neutrality Antitrust, Monopoly, and Market Competition in the Internet Era

8.5

Public Safety and Welfare Protecting Children Insight on Society: Immersed in the Metaverse: Will It Be Safe Cigarettes, Gambling, and Drugs: Is the Web Really Borderless?

Cigarettes Drugs Gambling

8.6

Careers in E-commerce The Company The Position: E-commerce Privacy Research Associate Qualifications/Skills Preparing for the Interview Possible First Interview Questions

8.7

Case Study: Are Big Tech Firms Getting “Too Big”?

8.8

Review Key Concepts Questions Projects References

List of Key Terms accountability, p. 467 anonymous information, p. 474 .

4 anonymous profiles, p. 475 Anticybersquatting Consumer Protection Act (ACPA), p. 503 copyright law, p. 494 cross-device graph, p. 478 cross-device tracking, p. 487 cross-site tracking, p. 487 cyberpiracy, p. 503 cybersquatting, p. 503 data image, p. 475 device fingerprinting, p. 487 differential privacy software, p. 489 Digital Millennium Copyright Act (DMCA), p. 496 dilemma, p. 468 dilution, p. 503 doctrine of fair use, p. 494 due process, p. 468 ethics, p. 467 General Data Protection Regulation (GDPR), p. 485 governance, p. 506 information privacy, p. 470 informed consent, p. 481 Intelligent Tracking Prevention (ITP), p. 488 liability, p. 468 net neutrality, p. 510 opt-in model, p. 481 opt-out model, p. 481 patent, p. 500 persistent location tracking, p. 478 personal profiles, p. 477 personally identifiable information (PII), p. 474 privacy, p. 470 privacy default browsers, p. 489 privacy shield agreements, p. 486 profiling, p. 475 responsibility, p. 467 right to be forgotten, p. 470 safe harbor agreements, p. 486 trade secret, p. 505 trademark, p. 502 List of Figures Figure 8.1 The Moral Dimensions of an Internet Society, p. 466 (Figure video in eText)

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5 List of Tables Table 8.1 Unique Features of E-commerce Technology and Their Potential Ethical, Social, and/or Political Implications, p. 465 Table 8.2 The FTC’s Fair Information Practice Principles, p. 471 Table 8.3 Federal Privacy Laws Applicable to the U.S. Government, p. 472 Table 8.4 Privacy Laws Affecting Private Institutions, p. 473 Table 8.5 Personal Information Collected by E-commerce Sites, p. 475 Table 8.6 The Internet’s Major Information-Gathering Tools and Their Impact on Privacy, p. 476 Table 8.7 The FTC’s Current Privacy Framework, p. 483 Table 8.8 Criteria to Use When Examining Privacy Policies, p. 485 Table 8.9 Technological Protections for Online Privacy, p. 488 Table 8.10 Fair Use Considerations to Copyright Protections, p. 495 Table 8.11 The Digital Millennium Copyright Act, p. 497 Table 8.12 Selected E-commerce Patents, p. 502

List of Video Cases Video Case 8.1: Is TikTok a Surveillance Tool?

Video Case 8.2: 2 NFT and Trademarks: Hermès Sues Over Birkin Bag NTFs Overview This chapter summarizes the various ways that e-commerce and Internet technologies have raised serious social issues. More importantly, the chapter helps students learn about ethical, social, and political issues. Students should understand that successful business people take these issues to heart, and do so because good ethics is usually good business in the long term. On the other hand, it can sometimes be expensive to be good, or to do the right thing in the short term. Conversely, the costs of doing the wrong thing can be enormous. The consequences of potential litigation are potentially very negative for the business. In other cases, wise people seek out the ethical solutions to business problems simply because they personally have strong ethical convictions. Although each chapter contains information on social issues, this chapter aims to take a systematic look at relevant ethical principles, ethical analysis, and selected contemporary ethical issues raised by e-commerce.

Perhaps the greatest challenge in this chapter is to encourage students to think systematically in terms of ethical principles, laws, and acceptable behavior, rather than simply express their personal point of view. For example, many students may rationalize their downloading of copyrighted material as something they feel good about because “ethics is all relative,” and “everyone has their own sense of right or wrong.” They may also rationalize their behavior on the grounds that the people they steal from (variously, the record companies, the artists, and the promoters) are all rich. This personalized view of ethics fails to take into account the perceptions of customers, regulators, suppliers, employees, and business partners, as well as the long-term interests of shareholders. .

6 Other students may say, “As long as my business stays within the law, we are OK.” Once again, this view fails to recognize that trust and the perception, let alone the reality, of fairness demand a higher standard than the law. Customers often expect a higher standard of treatment than the minimal treatment required by law.

A second challenge is to convince students that ethical, social, and political awareness is an important part of business life. You should emphasize to your students that most employers do not want to hire employees who have no ethical convictions or who believe that business is a jungle where it is “every person for themselves.” Many job interviewers will seek to identify the ethical sensibility of potential recruits. Students should prepare for these questions. Ask your students if they, as an employer, would like to hire a person whom they felt had few moral or ethical scruples. Is a potential recruit who glorifies downloading “free” music from the Web more—or less—likely to download and use your firm’s intellectual property for his or her personal gain?

Teaching Suggestions: Key Points The opening case, The Right to Be Forgotten: Europe Leads the United States on Internet Privacy (updated for this edition), looks at the thorny question of privacy versus free speech on the Internet. There are many conflicting values involved. Questions for class discussion on this case might include the following: ● Is Google responsible for the accuracy of information stored by other organizations to which it provides links? Why or why not? ● Why do European and American views on privacy protection differ so dramatically? ● How can the different perspectives on privacy be managed in a global environment like the Internet?

Understanding the Ethical, Social, and Political Issues in E-commerce. Section 8.1 provides an overview of ethical, social, and political issues in e-commerce. A good place to start is Table 8.1, which illustrates how the unique features of e-commerce technology can also become ethical liabilities. Figure 8.1 succinctly identifies the key issues discussed in the chapter and attempts to illustrate the idea that the discussion will proceed on three levels: individual (ethical dilemmas), society (social choices), and policy (laws and regulation). Students should keep in mind that there is a connection among these levels: Laws reflect social choices, which in turn are based on fundamental ethical principles strongly held by individuals. Put another way, political debates reflect ethical debates. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 8.1 and this topic. The key terms to emphasize in this section are responsibility, accountability, liability, and due process. These are the bedrock concepts of all ethics.

One way to teach this section is to take a contemporary e-commerce story from the newspaper and analyze the ethical dilemmas. For instance, you might consider a story about file sharing networks encouraging the sharing of copyrighted content, such as .

7 movies or music. Have the students use the model proposed in this section to analyze the story. You might also ask them to consider alternative forms of delivery that are legal, and satisfy demand, such as Netflix, Apple’s iTunes Store, Spotify, or Pandora’s service.

Finally, you might ask them to apply the eight ethical principles suggested in this section to any of the existing or potential future music delivery systems.

Privacy and Information Rights. Section 8.2 begins with a definition of privacy and information privacy, as well as the European “right to be forgotten,” which is discussed in further detail in the opening case. Table 8.2 describes the FTC’s Fair Information Practice (FIP) principles, which have been integral to the development of privacy protection in the United States.

The section then distinguishes between privacy issues as they relate to the public sector versus privacy issues in the private sector. Table 8.3 provides a list of privacy laws applicable to the U.S. government, whereas Table 8.4 lists privacy laws affecting private institutions. Ask students why it seems as if the states, particularly California, are leading the way in terms of privacy legislation, rather than the federal government.

Most of the remainder of the section focuses on the privacy rights of consumers. Table 8.5 provides a glimpse of what e-commerce sites collect directly from consumers. Key concepts are personally identifiable information (PII), anonymous information, and profiling. Table 8.6 identifies the ways various devices, applications, and tools can be used to gather user information and potentially violate privacy. The section then looks at some specific privacy issues posed by mobile devices and social networks The Insight on Technology case, Apps That Track: A Double-Edged Sword (new for this edition), discusses the issues that have arisen in connection with using mobile devices to track a person’s location. Class discussion questions might include the following: ● What challenges does location tracking pose to privacy? ● What ethical dilemmas does the use of location tracking pose for an organization considering using this technology? ● Do you take steps to protect your privacy when using a mobile app? Do you read mobile app privacy policies? If so, do you feel like you understand the ways your personal information can be used by the apps and any third parties?

Video Case 8.1, Is TikTok a Surveillance Tool, appears on page 481 of the eText, at the end of the “Social Networks: Privacy and Self-Revelation” section. See pages 23 to 24 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

One interesting assignment is to ask students to analyze the privacy policy of a website that they use, using the criteria set forth in Table 8.8. They may be surprised by what they find! .

8

Students also usually find it interesting that Europeans in the EU (European Union) have a much stronger set of privacy laws than the United States. Be sure to spend some time explaining the EU approach to privacy protection, as embodied by the General Data Protection Regulation (GDPR), which took full effect in 2018. Make sure that students understand that the GDPR doesn’t just impact European companies. Discuss its implications for U.S. companies as well.

It is also useful to explore with students the question of whether the industry can regulate itself, as it claims, using voluntary, industry-supported, and privacy seal programs, and various technological approaches to privacy protection.

Intellectual Property Rights. Section 8.3 defines intellectual property and describes the main ways society has chosen to protect intellectual property: copyright, patent, trademark, and trade secrets law.

In terms of copyright, the main distinction to get across to students is the difference between an idea and its expression. Copyright protects the expression, not the idea. Ideas and expression can merge so that some ideas can only have one expression; take Microsoft’s windows and Apple’s version of windows, for instance. The most important recent development in copyright is the Digital Millennium Copyright Act (DMCA). Two significant provisions in this act are the provision against breaking encryption codes that protect intellectual property and the “safe harbor” provided to ISPs and search engines that take down infringing content. Table 8.11 summarizes the important provisions of the DMCA. The DMCA and its safe harbor provisions are a source of continuing litigation and recent decisions have begun to chip away at the protections it provides.

Patents protect ideas for limited periods of time. The danger of patents is that they may stifle competition. Table 8.12 provides a list of selected e-commerce patents.

Trademarks help identify and distinguish goods in the marketplace; they play an important role in branding. E-commerce has created some novel opportunities for different forms of trademark violations.

Video Case 8.2, NFT and Trademarks: Hermès Sues Over Birkin Bag NTFs, appears on page 505 of the eText, at the end of the “Trademarks and the Internet” section. See pages 24 to 25 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Trade secrets law protects a kind of intellectual property that has to do with business procedures, formulas, and methods of manufacture and service delivery from which a firm derives value and does not want to share with others in the form of a patent or

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9 copyright application. Trade secrets are protected by state, and now, with the enactment of the Defend Trade Secrets Act (DTSA), federal law.

One way to conclude this discussion, after students understand the basic concepts of intellectual property, is to debate whether society would be better off without intellectual property law. Intellectual property laws restrict the flow of ideas, music, and other forms of expression. On the other hand, these same laws incentivize people to create new expression.

Governance Issues. Section 8.4 examines various governance issues raised by ecommerce. During the early years of e-commerce, it was customary to think about the Internet as far too powerful, yet amorphous, for any government to control. We now know that the Internet—or at least the key players such as ISPs, e-commerce sites, and telecommunication carriers—can be controlled just as in other forms of media. Efforts to control online content have become increasingly controversial. The Insight on Business case, Section 230: Should the Law That “Created” Today’s Internet Be Repealed or Revised” (new for this edition), takes a closer look at this issue. Questions for class discussion might include the following: ● What are the ethical, social, and political issues that Internet platforms face with respect to user content? ● Do you think Section 230 should be repealed or revised? Why or why not? ● In what ways does the controversy over Section 230 illustrate the difficulties of creating laws governing the use of new digital technologies?

Another interesting governance issue is taxation of online purchases. Although initially sales via the Internet were not taxed, states and localities eventually began to push hard for a slice of the e-commerce business pie. In 2018, the Supreme Court finally ruled in the South Dakota v. Wayfair case that states could indeed collect sales taxes on online sales even if the company does not have a physical location within the state.

Net neutrality is another issue that continues to be in the news. The FCC ruled in 2015 that Internet broadband service providers should be viewed as public utilities similar to telephone companies, and, therefore, regulated by the FCC to ensure fair access to all, deployment of acceptable broadband service levels, and competition among providers.

However, under the Trump administration, net neutrality regulations were repealed, but federal courts have ruled that that the FCC does not have the power to prohibit states from enacting their own laws and regulations. To date, California and a number of additional states have either done so or have legislation pending. This is a topic on which you should be prepared to provide an update.

The section concludes with a brief introduction to the topic of antitrust, monopoly, and market competition in the Internet era, a topic which is covered in much further detail in the end-of-chapter case study.

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10 Public Safety and Welfare. How could e-commerce affect public safety and welfare?

Section 8.5 may, at first, puzzle most students. You can start by having students read and discuss the Insight on Society case, Immersed in the Metaverse: Will It Be Safe? (new for this edition). You can use the following questions to spark class discussion: ● What are some of the issues that the metaverse poses for health and safety? ● What ethical dilemmas do companies who want to create the metaverse face? ● Do you think industry self-regulation will be an effective method for safeguarding the metaverse? Why or why not?

Drugs (both legitimate and illegitimate types), gambling, pornography, and cigarette sales are just a few areas where e-commerce raises public safety and welfare issues.

In Section 8.6, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as an e-commerce privacy research associate.

The updated chapter-ending case study, Are Big Tech Firms Getting “Too Big?” in Section 8.7, discusses the rise of Meta, Google, Amazon, and other tech titans into companies so multifaceted and huge that they cannot be properly regulated. Each company has been accused of abusing its dominance in particular areas to promote other areas of their businesses. These companies have benefited greatly from network effects and are de facto monopolies in the core areas of their businesses (social networking, search, and online retail, respectively). This is a topic that has been much in the and will likely continue to be, with the U.S. Justice Department, state attorneys general, and regulators in Europe taking legal action against Google, Facebook, and Amazon, so this is another topic you will want to be prepared to provide an update on.

Case Study Questions and Answers 1.

How does the first era of antitrust thinking (1890-1950s) differ from the second era?

The first era of antitrust thinking held that any behavior that resulted in the restraint of free trade would lower product quantity and reduce innovation, and that monopolies should be avoided on this basis. Legislation from this period sought to disperse economic and political power. In the 1960s, concentration in economic power in the form of monopolies came to be seen as the most efficient and cheapest option for consumers. In the name of efficiency, companies were permitted to consolidate their standing within various market segments.

2.

What is a “natural monopoly” and how has the United States dealt with natural monopolies?

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11 A natural monopoly is a monopoly achieved in an industry with entry costs so prohibitive that very few companies are willing to invest enough money to enter that market. In cases such as AT&T, the United States has encouraged natural monopolies to improve efficiency, but when telecommunications technology became cheaper, courts broke up AT&T into seven smaller companies.

3.

What are three possible solutions to the market dominance and anti-competitive behavior of Meta, Google, and Amazon?

One solution to these tech titans’ dominance in their respective markets would be to simply view them as non-traditional companies and arbitrarily decide how much market share is appropriate for them. A second solution would be to break these companies up into smaller units; for example, Amazon’s retail business could be a separate entity from Amazon Web Services. A third solution is to carefully regulate these companies and penalize them with fines for anticompetitive behavior, such as Google pushing its own products higher in its search results.

4.

How does the European model of antitrust differ from the American model?

The European model of antitrust is broader in scope than the American model.

The American model has relied primarily on consumer prices and operational efficiency to define anticompetitive behavior. The European model focuses on whether new innovative firms can impact the market and whether many competitors exist in a given area, indicating the overall health of the market.

End-of-Chapter Questions and Answers 1.

What basic assumptions does the study of ethics make about individuals?

The study of ethics makes the basic assumption that individuals are free moral agents who are in a position to make choices.

2.

What are the basic principles of ethics?

The basic principles of ethics are responsibility, accountability, liability, and due process. As free moral agents, individuals, organizations, and societies are responsible for the actions they take and should be held accountable to others for the consequences of those actions. Liability is a characteristic of political systems in which a body of law is in place so that accountability can be enforced. It permits individuals to recover damages for the actions of other individuals, systems, or organizations that cause them damage. Due process is a feature of law-governed societies and refers to a process in which laws are known and

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12 understood and there is an ability to appeal to higher authorities to ensure that the laws have been applied correctly.

3.

What are the basic steps to follow in analyzing an ethical dilemma?

The basic steps in analyzing an ethical dilemma are as follows: 1. Identify and clearly describe the facts. Find out who did what to whom and where, when, and how. In many instances, you will be surprised at the errors in the initially reported facts, and often you will find that simply getting the facts straight helps define the solution. It also helps to get the opposing parties involved in an ethical dilemma to agree on the facts.

2. Define the conflict or dilemma and identify the higher-order values involved.

Ethical, social, and political issues always reference higher values. The parties to a dispute all typically claim to be pursuing higher values (e.g., freedom, privacy, protection of property, and the free enterprise system).

3. Identify the stakeholders. Every ethical, social, and political issue has stakeholders: participants who have an interest in the outcome, have invested in the situation, and usually have vocal opinions. Find out the identity of these groups and what they want. This knowledge will be useful later when designing a solution.

4. Identify the options that you can reasonably take. You may find that none of the options satisfies all the interests involved but that some options do a better job than others. Sometimes, arriving at a “good” or ethical solution may not always be a balancing of consequences to stakeholders.

5. Identify the potential consequences of your options. Some options may be ethically correct but disastrous from other points of view. Other options may work in this one instance but not in other, similar instances. Always ask yourself, “What if I choose this option consistently over time?”

4.

Define universalism, slippery slope, the New York Times test, and the social contract rule as they apply to ethics.

Universalism implies that if a solution is not correct for all situations, then it is not right for any specific situation. In simple terms, Immanuel Kant’s categorical imperative asks: If the rule were to be adopted in every case, would the organization or society survive?

The slippery slope rule states that if an action cannot be undertaken repeatedly, then it should not be taken at all. The solution might appear to work in one instance, but if the solution were repeated, negative outcomes might begin to occur, and in fact continue occurring at a pace that could not be stopped.

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13 The New York Times test, or Perfect Information Rule, states that you must assume that the results of your decision on a matter will be the subject of the lead article in the New York Times the next day. In other words, if you would not want to see the reactions of your friends, family, and neighbors when they read about the results of your decision on the front page of the newspaper, then it is probably not the correct decision. Most criminals and other unethical actors operate under the assumption of imperfect information, meaning that they never expect to be exposed. When faced with an ethical dilemma, it is best to assume that perfect information will be available to all.

The social contract rule asks the decision maker to consider whether they would like to live in a society where the principle they are advocating was the organizing principle of the entire society.

5.

Explain why someone with a serious medical condition might be concerned about researching his or her condition online, through medical search engines or pharmaceutical sites, for example. What is one technology that could prevent one’s identity from being revealed?

An individual with a serious medical condition might be concerned because in the United States there is no federal agency charged with enforcing privacy law.

Private organizations and businesses can still use personally identifiable information gathered in commercial transactions for other business purposes. If a person with a serious medical condition were to purchase pharmaceuticals online for that illness, he/she would have cookies placed on his/her computer that would identify the person as a potential customer for other drugs for that illness. Because many companies do not even follow their own stated privacy policies, and opt-out procedures are usually difficult to find on a site, personal information or personal profiles might be sold or transferred to other companies, potentially even insurance companies. Advertising networks, or “profiling companies,” that have ads on the search engine site or pharmaceutical site may likely, without the person’s permission, place tags or identifiers on the person’s computer that will be used to track his/her movements as the person surfs the Web. In addition to collected behavioral information, a profile may contain inferential or psychographic data, information that the company infers about that person based on the sites they have visited.

The transition from fee-for-service health care to managed care has led to a demand for an unprecedented depth and breadth of personal information by a growing number of players, including health insurance companies. At the same time, the environment for information is moving rapidly from paper forms and files to electronic media, giving organizations a greater ability to tie formerly distinct information together, including data collected from the Web. The possibility of being dropped by an insurance company, not being able to transfer .

14 to a new insurance company along with new employment, or not being able to obtain health insurance at all, or of an employer finding out about a medical condition through the transfer of this data might be daunting. Therefore, as people become more aware that their movements on the Web are being tracked, they might become far less likely to explore sensitive topics such as personal medical conditions.

Some technologies that could prevent one’s identity from being revealed include anonymous surfing products and anonymous remailers.

6.

How does the history of privacy in the public sector differ from that in the private sector?.

The concept and practice of privacy, and its legal foundation, are very different in the public sector versus the private sector. In the public sector, concepts of privacy have a long history that has evolved over two centuries of court rulings, laws, and regulations in the United States and Europe. In the private sector, concepts of privacy are much more recent and, in the age of the Internet, are in a state of flux, debate, and argument.

7.

Describe how the strength of a privacy policy can be measured.

Transaction logs are anonymous information whereas online forms are personally identifiable information (PII). The transaction log records an entry for each page a visitor views and each object they request. Online forms can be used to collect a variety of personal information about site visitors such as their name, address, email address, and phone number. Online forms potentially provide a more complete consumer profile because this PII can be combined with the visitorgenerated, click-stream behavior and other behavioral data to create a comprehensive personal profile.

8.

How is the opt-in model of informed consent different from opt-out? In which type of model does the consumer retain more control?

In the opt-in model, the default behavior on the part of the website operator is not to approve the collection of data. In the opt-out model, the default is to automatically collect and use information unless otherwise notified. With the optin model, the consumer or site visitor must give consent before information about them can be collected and used. In the opt-out model, the consumer/site visitor must take an action to prevent the collection of data. The consumer retains more control in the opt-in model because no action to collect data will be undertaken unless they first agree to it. Only sites the consumer specifically requests to receive offers and promotions from will be allowed to collect data.

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15 9.

What are the two core principles of the FTC’s Fair Information Practice principles?

The two core principles of the FTC’s Fair Information Practice principles are notice/awareness and choice/consent. The FTC guidelines, which are not yet codified in law, recommend for the notice/awareness principle that sites disclose their information practices before collecting data. This includes identifying the data collector; all uses of the data; whether the data collection will be active or inactive, voluntary or required; the consequences of refusing to allow data to be collected; and the steps that will be taken to protect the confidentiality, integrity, and quality of the data. The choice/consent principle recommends that there be a choice system in place that allows consumers to choose how their information will be used for secondary purposes, other than supporting transactions. This includes internal uses by the collecting firm and transfer to third parties, and that opt-in/opt-out choices be made available.

10.

What is the GDPR? In 2018, the European Commission implemented the EU General Data Protection Regulation (GDPR), an updated framework governing data protection in EU member countries that replaces the EU’s previous Data Protection Directive. The GDPR is arguably the most important privacy legislation since the promulgation of the FTC’s FIP principles. The GDPR applies to all firms and organizations that collect, store, or process the personal information of EU citizens, and its protections apply worldwide, regardless of where the processing of the information takes place.

The main objective of the GDPR is to strengthen the rights of citizens to their own personal information and to increase oversight of firms to ensure they implement these individual rights. A second thrust is to harmonize conflicting data protection standards among the European nations that are members of the EU and create a single EU agency to implement and enforce the regulation. The third goal is the ability to enforce the framework worldwide, applying it to all organizations that operate in the EU or process data pertaining to EU citizens, regardless of where the organization is located.

The GDPR strengthens individual privacy rights by requiring organizations to allow consumers to access all their personal information without charge within one month and by providing users with the right to require that an organization delete their personal data (the right of erasure, also sometimes referred to as the right to be forgotten). The GDPR also ensures that consumers are not locked into a particular service (data portability) and gives consumers the right to sue providers for damages or abuse of PII, including class action lawsuits.. The responsibilities of organizations with respect to privacy have also been strengthened. Organizations must now have a data protection officer who reports .

16 to senior management. Explicit consent must be obtained from users before the organization can collect data (positive opt-in), eliminating default opt-in processes. Organizations must publish the rationale for data collection as well as the length of time that they retain data, and they must report any breaches and hacks within 72 hours. Organizations must also build privacy protections into all new systems (privacy by design) and limit targeting and retargeting of individuals to audience-level, anonymized data (rather than. Abuse of PII is subject to fines of up to $20 million or 4% of the organization’s global revenue, whichever is greater. Finally, the EU has the ability to enforce the GDPR’s requirements with non-EU countries like the United States via the use of inter-governmental privacy shield agreements, which are designed to ensure that EU data processed in nonEU nations meets GDPR standards.

11.

List and describe five technological protections for online privacy.

Students may list and describe any five of the technological protections for online privacy set forth in Table 8.9:

TECHNOLOGY

PRODUCTS

PROTECTION

Apple Intelligent Tracking Prevention (ITP)

Apple Safari web browser

Monitors and disables crosssite tracking cookies and blocks trackers’ ability to identify users by IP address

Google Privacy Sandbox

FLEDGE API; Topics API

Tools now being tested by Google to replace cookiebased, targeted advertising in the Google Chrome web browser

Apple App Tracking Transparency (ATT)

Apple iOS

Requires any app that wants to track user activity and share it with other apps or websites to ask user for permission

Differential privacy software

Apple

Reduces the ability to merge different files and deanonymize consumer data

Privacy default browsers

Epic, Brave, DuckDuckGo

Eliminates tracking cookies and prevents IP tracking

Message encryption

Signal, Gdata Secure Chat,

Apps that encrypt text and

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17 Telegram, Ceerus

other data that is transferred using smartphones

Spyware blockers

Bitdefender, Avast One, Spybot

Detects and removes spyware, adware, keyloggers, and other malware

Ad blockers

Most browsers; add-on programs: Adblock Plus

Prevents calls to ad servers; restricts downloading of images at user request

Secure e-mail

Hushmail, ProtonMail

E-mail and document encryption

Anonymous remailers

W3 Anonymous Remailer

Enhanced privacy protection for e-mail

Anonymous surfing

Most browsers (i.e., Chrome Imcognito; Safari Private Browing), Tor Browser

Enhanced privacy protection for web browsing

Cookie blockers and managers

Most browsers

Blocks third-party cookies

Public key encryption

Symantec Encryption Desktop

Program that encrypts your mail and documents

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12.

What is a patent and how does it differ from a copyright?

A patent grants the owner an exclusive monopoly on the ideas behind an invention for a certain period of time, typically 20 years. The intent behind patent law was to ensure that inventors of new machines, devices, or industrial methods would receive the full financial and other rewards of their labor and still make widespread use of the invention possible by providing detailed diagrams for those wishing to use the idea under license from the patent’s owner. Patents are very different from copyrights because patents protect the ideas themselves and not merely the expression of those ideas.

13.

How could the Internet potentially change protection given to intellectual property? What capabilities make it more difficult to enforce intellectual property law? .

18 The Internet could potentially change the protection given to intellectual property because once a work becomes digital, it becomes much more difficult to control its access, use, distribution, and copying. Because digital media is so easy to replicate, transmit, and alter, unique challenges are presented. Theft is made much simpler in the digital world, and it becomes more and more difficult to establish the uniqueness of a work. It also becomes harder to enforce intellectual property law because the technology now exists to create perfect digital copies of various files including books, music, plays, poems, journal articles, and films. It is also simple to distribute these copies quickly, easily, and incredibly cheaply.

14.

What does the Digital Millennium Copyright Act (DMCA) attempt to do? Why was it enacted? What types of violations does it try to prevent?

The Digital Millennium Copyright Act attempts to adjust copyright laws for the digital age. It was enacted when a confrontation erupted between the major copyright holders (the publishing, sheet music, record label, and commercial film industries), the providers of Internet content, users of copyrighted materials (libraries, universities), and the general consumer population. The act tries to prevent violations by imposing fines and possible imprisonment on hackers who attempt to break encryption schemes and distribute copyrighted materials worldwide. It also attempts to control the behavior of Internet Service Providers who often host infringing websites, or who provide Internet service to routine infringers. The ISPs do not believe that they should be held accountable, or specifically, that they should have to put their users under surveillance or invade their privacy because they are merely the message carriers.

The Digital Millennium Copyright Act makes it illegal to make, distribute, or use devices that circumvent the technology-based protections of copyrighted materials, and it also holds the ISPs responsible for infringers once they have been notified of these infringements. ISPs must immediately take down violating sites or be subject to prosecution themselves. Copyright owners can subpoena in federal court to obtain the personal identities of suspected violators from the ISP. ISPs must also inform all their subscribers of their copyright management policies. All provisions of the DMCA are designed to prevent the widespread online violation of copyright.

15.

Define cybersquatting. How is it different from cyberpiracy? What type of intellectual property violation does cybersquatting entail?

Cybersquatting means registering, trafficking in, or using a domain name with the bad-faith intent to profit from a trademark belonging to someone else. It refers to the practice of buying domain names that reflect the names or trademarks of existing businesses intending to extort payments from the businesses.

Cybersquatting is different from cyberpiracy because although cyberpiracy .

19 involves the same behavior, the intent is to divert traffic away from legitimate sites to infringing sites. It is a bad faith attempt to divert traffic that dilutes the value of the legitimate trademark. Cybersquatting is considered an intellectual property violation because the creator of the trademark or company name owns it according to the general principles of intellectual property law, which state that any tangible or intangible product of the human mind is protected from infringement.

16.

What is web scraping, and why is it a copyright issue?

Web scraping involves using an application to extract data from a website. A recent federal court case, hiQ Labs Inc. v. LinkedIn Corp. (2022), ruled that hiQ’s scraping of publicly accessible data from LinkedIn profiles was not a crime under the Computer Fraud and Abuse Act. However, the court noted that copyright infringement remains a valid claim when a scraper is taking and repurposing copyrighted information. For instance, in a previous case, Associated Press v.

Meltwater U.S. Holdings, Inc. (2013), a federal district court in New York ruled that scraping copyrighted news articles and repurposing them in a subscription newsletter did not constitute fair use and was instead copyright infringement.

17.

What are some of the tactics businesses that are illegal in the United States use to operate outside the law on the Internet?

The main tactic that businesses that are illegal in the United States use to operate outside of the law on the Internet is operating from offshore sites, for example, in Antigua or Costa Rica, so as to operate beyond the jurisdiction of state and federal prosecutors.

18.

Why can’t pornographic sites simply be banned in the United States? Why has the Supreme Court struck down legislation intended to protect children from pornography?

Courts have ruled that banning pornographic sites violates the First Amendment protections of freedom of speech, and second, defining pornography is difficult.

Proscribing pornography may result in some legitimate works of art being banned.

19.

What is the “right to be forgotten”? What are some of the risks and benefits of establishing this right?

The right to be forgotten is a claim that individuals should be able to access, edit, and change or delete personal information about themselves that has been collected by any website. There are limits on this right having to do with the public’s interest in criminal records, and the records of public figures. The benefit is that ordinary people can have inaccurate, old, or irrelevant information .

20 removed from their Internet record. The risk is that criminals will be able to hide their past and pose a risk to the public.

20.

What is the doctrine of “fair use”? Why did the courts decide that Google’s scanning of copyrighted books was a “fair use”?

The doctrine of fair use allows copyrighted material to be used without permission of the copyright holder under certain circumstances. These are: character of use, nature of the work, amount of work used, market effect of use, and context of the use. Courts have concluded that Google’s scanning of copyright books was a fair use because the project had a broad public purpose of making it easier for students, researchers, teachers, and the general public to find books, while also preserving consideration for author and publisher rights. The Google project was “transformative” in the court’s view, giving books a new character and purpose, making it easier to discover old books, and leading to increased sales.

Projects: Questions and Answers 1.

Do a search on Google to find personal information about yourself. List the general types of information that you are able to find. Is there information that you were surprised to see or that you would like to be deleted? Review the various tools that Google provides that enable you to request the removal of certain information. Write a short report on what you discover.

Student answers will obviously vary with respect to the general types of information that they are able to find about themselves. Google does provide a number of tools that enables users to request to removal of certain types of information, as detailed in the following URL: https://support.google.com/websearch/troubleshooter/3111061?hl=en, including: 2.

Develop a list of privacy protection features that should be present if a website is serious about protecting privacy. Then, visit at least four well-known websites and examine their privacy policies. Write a report that rates each of the websites on the criteria you have developed.

Student lists of privacy protection features may vary somewhat but will likely follow the FTC’s FIP (Fair Information Practice) principles as well as their profiling recommendations: ● Consumers must receive notice of network advertisers’ profiling activities on host websites and have the ability to choose not to participate in profiling. ● Clear notification of data collection must be given before it begins for personally identifiable information. Consumers must opt-in before data collection can begin. .

21 ● ● ● ● ● ● ● ●

3.

Clear and conspicuous notice must be given when non-personally identifiable information (or “clickstream” data) is collected for profiling.

Consumers can opt out of data collection.

Once informed about the network advertiser’s information collection practices, consumers must be able to decide whether to participate in profiling.

Reasonable access must be granted to personally identifiable information and other information that is associated with it to allow for inspection and correction.

Sites are required to make reasonable efforts to protect the data they collect for profiling purposes from loss, misuse, alteration, destruction, or improper access.

Enforcement must be done by third parties such as seal programs and accounting firms.

No collection of sensitive data is permitted at all. This includes sensitive financial, medical, sexual behavior or orientation information, and Social Security numbers.

Selling or renting of data to third parties is prohibited.

Customers’ credit card data can only be transferred over secured connections.

Review the provisions of the Digital Millennium Copyright Act of 1998. Examine each of the major sections of the legislation and make a list of the protections afforded property owners and users of copyrighted material. Do you believe this legislation balances the interests of owners and users appropriately? Do you have suggestions for strengthening “fair use” provisions in this legislation?

Title I and Title II of the DMCA are the two most relevant sections in terms of protections afforded property owners and users of copyrighted material. Title I of the DMCA protects the rights of property owners by creating two new prohibitions: one on the circumvention of technological measures used by copyright owners to protect their works, and the other on tampering with copyright management information.

Section 1201 of Title I divides technological measures into two categories: measures that prevent unauthorized access to a copyright work and measures that prevent unauthorized copying of a copyrighted work.

Circumventing measures put into place to prevent unauthorized access is prohibited. However, Section 1201 includes a number of exceptions to this rule.

For instance, non-profit library, archival, and educational institutions are not prohibited from circumventing solely for making a good faith determination as to whether they wish to obtain authorized access to the work. There are also exceptions for reverse engineering for the purpose of identifying and analyzing .

22 elements of a computer program necessary to achieve interoperability with other programs, for encryption research, for protection of minors (allows a court applying the prohibition to a component or part to consider the necessity of its incorporation in technology that prevents access of minors to material on the Internet), for privacy protection (when the technological measure or the work it protects is capable of collection or disseminating personally identifying information about the online activities of a person), and for security testing.

Circumventing measures that prevent unauthorized copying is not prohibited, to assure that the public will have the continued ability to make fair use of copyrighted works. Making or selling devices that are used to circumvent either category is prohibited, however.

Section 1202 of Title I addresses the integrity of copyright management information (CMI), which is defined as: identifying information about the work, the author, the copyright owner, etc. This section protects copyright owners by prohibiting the knowing provision or distribution of false CMI, if done with the intent to induce, enable, facilitate, or conceal infringement. It bars the intentional removal or alteration of CMI without proper authority, as well as the dissemination of CMI or copies of works. Liability under subsection (b) requires that the act be done with knowledge or for civil remedies with reasonable grounds to know that it will induce, enable, facilitate, or conceal an infringement.

Section 1203 of Title I provides for civil remedies payable to injured parties, while Section 1204 provides criminal penalties of up to a $500,000 fine or 5 years imprisonment for a first offense, and up to a $1,000,000 fine or up to 10 years imprisonment for a subsequent offense.

Title II of the DMCA adds a new section to the Copyright Act to create four new limitations on liability for copyright infringement by online service providers. The limitations are for: ● Transitory communications: This is where the service provider merely acts as a data conduit, transmitting digital information from one point on a network to another at someone else’s request. ● System caching: This is the practice of retaining copies, for a limited time, of material that has been made available online by a person other than the provider, and then transmitted to a subscriber at his or her direction. ● Infringing material on websites or other information repositories hosted on service providers’ systems: To be eligible for this limitation, the provider must not have knowledge of the infringing activity, it must not receive a financial benefit directly attributable to the infringing activity, and upon receiving notification of claimed infringement it must expeditiously take down or block access to the material. (The service provider must promptly

.

23 notify the subscriber that it has removed or disabled access to the material and provide the subscriber with the opportunity to object.)

The service provider must also have filed with the Copyright Office a designation of an agent to receive notification of claimed infringement. To be eligible for any of the limitations, a service provider must: ● Adopt and reasonably implement a policy of termination in appropriate circumstances the accounts of subscribers who are repeat infringers. ● Accommodate and not interfere with “standard technical measures.”

The fourth limitation relates to hyperlinks, online directories, search engines, and the like. It limits liability for the acts of referring or linking users to a site that contains infringing material by using such information location tools, with the same eligibility requirements as for the third limitation. Although these provisions appear to offer more protection to the service providers than copyright owners, they are actually a strong tool for copyright owners because they provide a mechanism by which copyright owners can force service providers to block access to or remove infringing material.

Students can be expected to take varying positions as to whether the DMCA appropriately balances the interests of owners and copyright users. Some might note that the provisions of the DMCA can be used in such a way as to chill free speech. Others might argue that the DMCA does not go far enough and provides so many exceptions that it is not as strong a deterrent as it might be.

In terms of strengthening the “fair use” provisions, in some cases, encryption schemes work to prevent “fair use” that would otherwise be legal. One possible suggestion would be to require copyright owners who choose to protect their works through technological measures, to provide a means by which fair use can occur.

4.

Review the section on net neutrality and search for two articles that take a position on the topic. Summarize each article and then write an essay describing your own position on net neutrality.

There is a plethora of articles available on the topic of net neutrality, so students should not have difficulty finding two that take a position on the topicStudents should be prepared to identify possible biases in the articles they cite and also to explain their own position.

Video Cases Video Case 8.1, Is TikTok a Surveillance Tool, appears on page 481 of the eText, at the end of the “Social Networks: Privacy and Self-Revelation” section. The video, released in July 2022, features Brendan Carr, a commissioner on the Federal Communications .

24 Commission, discussing privacy and surveillance issues with respect to TikTok, which is owned by Chinese company ByteDance. As of March 2023, this issue remains a very contentious one, with the Biden administration calling for TikTok to be banned in the United States unless it is sold by ByteDance. U.S. Senate hearings on the issue, at which TikTok CEO Zhou Zi Chew testified, took place on March 23, 2023. As of that date, the fate of TikTok in the United States remains uncertain. No matter the outcome, the video should provide for an interesting discussion. Questions that you can use for class discussion or as a student assignment include the following: • Why does the Biden administration want TikTok to be removed from app stores in the United States?

Answer: According to Carr, TikTok is not what it appears to be on the surface.

Instead, he characterizes it as a sophisticated surveillance tool that is pulling all sorts of information, from web browsing to biometrics, to location information, and in some circumstances, drafts of messages, all of which are of a national security concern.

• On what grounds does Carr say that app stores such as Google and Apple be entitled to remove TikTok from their app stores?

Answer: Carr notes that both Google and Apple app stores have policies that address the flow of data from apps, and based on revelations that there has been more data flowing back to the Chinese government than had been reported under those policies, giving Google and Apple the right to remove the apps based on those violations. Carr reports that internal communications between ByteDance and TikTok official report that “everything” can be seen in China, as well as a letter from TikTok to the U.S. Senate that indicates this as well.

• How has TikTok responded to these allegations?

TikTok has stated that China-based employees can access US user data, but only subject to a series of robust cybersecurity controls and authorization approval protocols overseen by a U.S.-based security team.

• Do you think TikTok should be banned in the United States? Why or why not?

Answer: Student answers to this question will vary.

Video Case 8.2, 2 NFT and Trademarks: Hermès Sues Over Birkin Bag NTFs, appears on page 505 of the eText, at the end of the “Trademarks and the Internet” section. The video, released in January 2022, features Bloomberg reporters Samantha Handler and Caroline Hyde discussing whether the creation by Mason Rothschild of “MetaBirkins,” non-fungible tokens representing Birken Bags (which are made by Hermes), without Hermes’ permission, infringes on Hermes’ Berkin Bag trademarks by diluting it.

Questions that you can use for class discussion or as a student assignment include the following: • How does Rothschild defend against Hermer’s claim that he has violated their trademark?

Answer: Rothschild says that the First Amendment right to freedom of expression applies and compares the matter to Andy Warhol’s painting of Campbell Soup cans. .

25 •

•

What does Handler say about how courts have dealt with similar matters in the past.

Answer: According to Handler, courts have said that these types of cases should be decided in favor of the brand if the trademark has no artistic relevance to the work or the artist is explicitly misleading consumers on the source of the work.

According to Handler, why might Hermes be successful in this case?

Answer: According to Handler, attorneys feel that Hermes might have a greater chance of success with this case because consumers might be confused about whether or not Hermes is associated with the creation of these NFTs, especially since other brands, such as Adidas and Louis Vuitton have created NFTs.

In an update on this case, in February 2023, Hermes prevailed in its lawsuit against Rothschild when a jury agreed that his “MetaBirkin” NTFs infringed on Hermes’ Birkn Bag trademarks. However, the case is not likely to end the debate over intellectual property rights and NFTs.

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1 Instructor’s Manual and Video Cases: Chapter 9 Online Retail and Services Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 4 4 4 4 5 8 9 16 19

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2 Learning Objectives After reading this chapter, your students should be able to: • Explain how to analyze the economic viability of an online firm.

• Understand the environment in which the online retail sector operates today.

• Identify the primary types of online retailers and understand the different challenges each type faces.

• Describe the major features of the offline and online service sector.

• Discuss the trends taking place in the online financial services industry today.

• Describe the major trends in the online travel services industry today.

• Identify current trends in the online job recruitment and career services industry.

• Understand the business models of on-demand service companies.

Chapter Outline Lemonade: Stirring Up the Insurance Industry 9.1 Analyzing the Viability of Online Firms Strategic Analysis Financial Analysis 9.2 The Retail Sector: Offline and Online

9.2

Online Retailing Online Retailing: The Vision The Online Retail Sector Today Insight on Technology: Stitch Fix Builds a Business on Big Data and Artificial Intelligence E-commerce in Action: Online Retail Business Models Virtual Merchants E-commerce in Action: Amazon Omnichannel Merchants: Bricks-and-Clicks Manufacturer-Direct Catalog Merchants

9.4

The Service Sector: Offline and Online

9.5

Online Financial Services Fintech Online Banking Online Brokerage Online Mortgage and Lending Services Online Insurance Services Online Real Estate Services .

3

9.6

Online Travel Services Why Are Online Travel Services So Popular?

The Online Travel Market Online Travel Industry Dynamics Insight on Society: Phony Reviews

9.7

Online Job Recruitment and Career Services Online Job Recruitment and Career Services Industry Trends

9.8

On-Demand Service Companies Insight on Business: Food on Demand: Instacart and Grubhub

9.9

Careers in E-commerce The Company Position: Associate, E-commerce Initiatives Qualifications/Skills Preparing for the Interview Possible First Interview Questions

9.10

Case Study: Blue Nile Sparkles for Your Cleopatra

9.11

Review Key Concepts Questions Projects References

List of Key Terms assets, p. 545 balance sheet, p. 545 catalog merchants, p. 569 channel conflict, p. 568 corporate online booking solutions (COBS), p. 578 current assets, p. 545 current liabilities, p. 545 demand-pull model, p. 568 digital native D2C verticals, p. 567 economic viability, p. 543 financial portals, p. 638 gross margin, p. 544 liabilities, p. 545 long-term debt, p. 545 manufacturer-direct (direct-to-consumer (DTC/D2C), p. 567 net margin, p. 544 .

4 omnichannel, p. 549 omnichannel merchants (bricks-and-clicks), p. 565 operating margin, p. 544 supply-push model, p. 568 transaction brokering, p. 570 virtual merchants, p. 557 working capital, p. 545 List of Figures Figure 9.1 Composition of the U.S. Retail Industry, p. 546 Figure 9.2 Online Retail Revenues by Category, 2021, p. 550 Figure 9.3 The Growth of Online Retail in the United States, p. 551 Figure 9.4 Share of Online Retail Sales by Type of Company, p. 557 (Figure video in eText) Figure 9.5 U.S. Online Travel Services Revenues, p. 577 List of Tables Table 9.1 What’s New in Online Retail 2022–2023, p. 547 Table 9.2 Online Retail: Advantages and Challenges, p. 552 Table 9.3 Retail E-commerce: Omni-channel Integration Methods, p. 553 Table 9.4 Amazon’s Consolidated Statements of Operations and Summary Balance Sheet Data, 2019–2021, p. 561 Table 9.5 Major Online Travel Companies, p. 579 Table 9.6 Popular Online Recruitment and Career Services Platforms, p. 583 Table 9.7 Examples of On-demand Service Firms, p. 586 List of Video Cases Video Case 9.1: DoorDash Partners with BJ’s Wholesale Video Case 9.2: SoFi and Fintech Overview This chapter is the first in the series of “applied e-commerce” chapters in Part 4. This part, entitled “E-commerce in Action,” focuses on understanding the realistic operating environment for e-commerce in four different sectors: (1) online retail and services, (2) online content and media, (3) social networks, auctions, and portals, and (4) B2B ecommerce. A sector-by-sector approach helps students to understand the complexity of ecommerce.

One point that students should take away from this chapter is that although the original vision of e-commerce did not work out for most online retailers, the online retail marketplace is nevertheless one of the fastest growing channels in retail commerce.

Today, fast (or slow) followers replace first movers to exploit the extraordinary innovations developed during the early years of e-commerce. This means that established retailers with powerful national brands and international scope of operations increasingly dominate the online retail landscape. .

5

Obviously, one of the major discussion points for this chapter is the impact of the Covid19 pandemic, which provided both dramatic challenges and also opportunities for online retail and service providers. The pandemic has had disparate effects on various sectors, for instance increasing online retail, but decreasing online travel services. As you review these topics, take some time to ask students how the pandemic has impacted their own consumer behavior with respect to online retail and services.

Teaching Suggestions: Key Points The opening case, Lemonade: Stirring Up the Insurance Industry, examines how fintech company Lemonade is attempting to disrupt a traditional financial services industry: insurance, using big data, artificial intelligence, and other innovative information technologies. Questions for class discussion might include the following: • How has Lemonade used information technology to innovate?

• What issues are raised by Lemonade’s use of artificial intelligence?

• What distinguishes the “insurtech” services described in the case from those offered by traditional insurers?

• What factors would you consider in deciding whether or not to use an “insurtech” service such as Lemonade’s?

Analyzing the Viability of Online Firms. The chapter begins with a section focused on how to perform a strategic and financial analysis of an online firm. We are interested in characterizing the viability of online firms over an intermediate horizon of a three-year period. To do this, we look at a firm’s strategic situation and its operating results over the previous three years. In the strategic analysis, we look at both industry level and firm level factors. The financial analyses are based on a firm’s most recent annual reports on Form 10-K, filed with the Securities and Exchange Commission, with updates in the text to the most recent quarter, if available. The most recent results can be obtained at SEC.gov. Look for Form 10-Q filings for the latest quarter. Consider taking some extra time to walk students through Section 9.1 so they understand the factors to examine when considering the viability of e-commerce firms.

Generally, we look at a firm’s net margins over time to understand how well the firm is performing, and whether the firm is scaling. We would like to see net margins improve over time (positively) as firms achieve size and scales of economy in their operations.

Firms that fail this test are in serious difficulty even if revenues are growing rapidly. On the balance sheet, we look first at whether the firm’s current assets exceed current liabilities and by how much. Obviously, if a firm cannot pay current liabilities, it is a candidate for bankruptcy. Second, we look at the long-term debt and growth. In some cases, long-term debt can become a significant liability for a firm as interest payments consume operating profits. You may wish to augment the case analyses by having students update the operating results to the current quarter, or by asking students to develop any of a number of financial ratios based on the data presented.

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6 The Retail Sector: Offline and Online. Section 9.2 summarizes e-commerce in the retail sector and attempts to provide students with some perspective on the variety and size of retail enterprises in the U.S. economy. The retail sector is huge: Personal consumption of goods accounted for about $5.5 trillion of the United States’ gross domestic product (GDP). It is very helpful to just walk through Figure 9.1 to explain the variety found in the retail sector.

Online Retailing. Video Case 9.1, DoorDash Partners with BJ’s Wholesale, appears on page 546 of the eText, following Table 9.1 in the "Online Retailing” section. See page 19 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Section 9.2 continues with a contrast of the predictions advanced during the early years of e-commerce with the reality of e-commerce today. You may wish to construct a table with two columns: one with predictions and one column with reality. Briefly, analysts and others during the early years of e-commerce predicted the following: • Price transparency and brutal price competition • Low entry costs • Lower operational costs for online firms • Lower customer acquisition costs • First-mover advantages; disintermediation • Channel disruption and conflict As it turned out, these predictions were mostly wrong. Despite the erroneous forecasts by consultants, professionals, journalists, industry market researchers, and Wall Street analysts, online retail has become a robust and viable business. Price competition has increased, but price dispersion has not disappeared. Customers appear to be willing to pay extra for trusted brands, and there are many opportunities for branding on the Web. Social and local commerce and the mobile platform are creating even more new opportunities. Figure 9.3 provides an overview of the growth of online retail in the United States from 2016 through 2026. Section 9.2 concludes with a look at some of the advantages and challenges of online retail (Table 9.2). In general, established retailers with substantial existing infrastructure have an advantage. However, they also face problems of integrating their online and offline operations, coordinating channels and avoiding channel conflict, and achieving profitable online operations without subsidies from the offline operations. Obviously, Amazon and a few others offer exceptions to the overall trend. Another important trend, as noted above, is the growth of social, local, and mobile commerce.

The Insight on Technology case, Stitch Fix Builds a Business on Big Data and Artificial Intelligence (updated for this edition), discusses uses by retailers of big data in their marketing efforts. Questions for class discussion might include the following: • How does big data and artificial intelligence enable predictive marketing?

• Are there any drawbacks to the increasing use of predictive marketing?

• Have you experienced predictive marketing in your own shopping? If so, what was the experience like? Were suggestions accurate and helpful? .

7 •

How has the Covid-19 pandemic impacted Stitch Fix?

E-commerce in Action: Online Retail Business Models. In Section 9.3, we examine four different types of e-commerce retail business models: virtual merchants, omni-channel merchants, manufacturer-direct, and catalog merchantes. The challenge is to have students understand how each of these different types of business models offers different opportunities as well as risks. One way to teach this section is to assign a team to each of the four types of business models, have the team choose a company that uses that business model, and perform a strategic and financial analysis of the company, similar to the E-commerce in Action case on Amazon in this section. Figure 9.4 illustrates the share of online retail sales by each type. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 9.4 and this topic.

The Service Sector: Offline and Online. Section 9.4 provides an overview of the service sector. We live in a service economy. Understanding the prospects for e-commerce in the service sector requires that students understand some of the dynamics that operate in various service industries. The challenge here is to quickly introduce students to the unique features of each service industry, and then to show them how, given the industry dynamics, e-commerce is likely to work out.

Some transaction brokering service industries (such as stock brokerage and travel services) are uniquely suited to e-commerce because they create value from exchanging information—something the Web is good at. Services that have a “hands on” component are not as well suited to pure online solutions. However, these hands-on services can benefit from online sites as an adjunct to their physical brick-and-mortar presence.

Service industries in general are information intense and personalized, making them good candidates for e-commerce.

Online Financial Services. The service sector is dominated by financial services. This is an e-commerce success story that has changed the way millions of Americans obtain financial services. Section 9.5 begins with a brief overview of online financial consumer behavior and then examines fintech, online banking and brokerage, mortgages and lending, insurance, and real estate in a bit more depth. Online banking is a tremendous success and further surged as a result of the Covid-19 pandemic. In contrast, the impact of e-commerce on mortgages and lending, insurance, and real estate (the other major financial service industries) has been somewhat different. In general, these online services have attracted millions of “shoppers” but not as many “buyers.” Most online visitors are looking for prices and terms or other information (such as pictures of houses for sale), and then conducting their actual transactions offline, although this is beginning to change. Nevertheless, the presence of alternative online suppliers has dropped prices for insurance and loans and created a more competitive environment. Video Case 9.2, .

8 SoFi and Fintech, appears on page 574 of the eText, in the “Online Mortgage and Lending Services” section. See page 20 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Online Travel Services. Prior to the Covid-19 pandemic, online travel services, covered in Section 9.6, had been one of the most successful B2C e-commerce business models.

However, as previously noted, the travel industry has been one of the most severely impacted by the Covid-19 pandemic. Figure 9.5 depicts the size and future growth in this market between 2019 and 2026. The dramatic decrease in online travel services revenues in 2020 due to the pandemic is readily visible, as is the rresurgence of those revenues in 2021 and in the years following. The industry dynamics are also highly volatile with suppliers (airlines, rental companies, hotels) seeking to eliminate intermediaries such as travel agents and global distributors. E-commerce would seem to tilt the competition toward suppliers who can build direct relationships with customers on the Internet. Yet, online intermediaries (like Travelocity and Expedia) have done an excellent job in aggregating online audiences.

The Insight on Society case, Phony Reviews (updated for this edition), looks at some of the issues surrounding the increased reliance consumers are placing on social media, such as user-generated reviews, in making decisions about travel services. Ask students if they have ever written a review or used reviews to make decisions about travel services. Do they trust all the reviews they read, and if not, what factors do they use to distinguish those which they do trust from those which they do not? Other questions for class discussion might include the following: • Should there be repercussions to individuals and/or businesses for posting false reviews of products or services?

• Is it possible for phony reviews to be recognized and moderated?

• Do you rely more on certain types of reviews or comments on websites and blogs over others?

Online Career Services. Section 9.7 covers online job recruitment and career services.

Ask your students if they have ever posted a resumè on LinkedIn, Monster, or another online job site, or looked for a job on such a site, or just shopped these sites to look at pay rates. Chances are good that at least half your class will raise their hands. Table 9.6 describes some popular online recruitment and career services platformss. One point to discuss with your students is that although online job recruitment and career services platforms have grown in size and visits, there are many competing ways to find a job, many of which are more successful than online postings. Most jobs are local, and personal networks, remain a common way people find jobs. Students need to understand that online job recruitment services have their limitations. I On-demand Service Companies. Section 9.8 focuses on the emergence of on-demand service companies such as Uber and Airbnb, and makes the point that these companies are big business and involve collection of fees from both buyers and sellers, rather than a free sharing of resources. Table 9.7 lists some additional examples. The Insight on .

9 Business case, Food on Demand: Instacart and Grubhub (updated for this edition), examines two of the most prominent start-ups in the on-demand food services marketplace. Questions for class discussion include the following: • What features or practices have made Instacart successful?

• What challenges do grocery and meal delivery services face?

• Have you used any grocery or meal delivery services? If so, what was your experience?

• Why have both Instacart and Grubhub been the subject of controversy throughout their histories?

In Section 9.9, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an associate with an ecommerce initiatives team.

The chapter-ending case study on Blue Nile in Section 9.10 (new as chapter-ending case study for this edition) examines the evolution of Blue Nile, one of the early pioneers in the sales of fine jewelry online. “ Case Study Questions and Answers 1.

How has Blue Nile reduced consumer anxiety about purchasing diamonds online?

Blue Nile has attempted to reduce consumer anxiety about purchasing diamonds online by creating a trust- and knowledge-based environment. For example. Blue Nile’s website and app contain educational guides to diamonds and diamondgrading systems, and each diamond receives an independent quality rating from a nonprofit industry association. There’s a price-match guarantee as well as a 30day, money-back, no-questions-asked return policy; a lifetime warranty; and a buy-back program that allows customers to receive full value for diamond jewelry previously purchased when exchanged for a more expensive diamond. In addition, Blue Nile’s physical showroom give Blue Nile’s customers an opportunity to interact with its personnel and products firsthand, providing customers with the chance to consult face-to-face with jewelry experts who can explain options and how diamonds are priced. The showrooms, coupled with Blue Nile’s website and mobile app, provide multi-touch integration in a low-pressure learning environment. The showrooms also provide customers with a place to go for jewelry repairs and cleaning.

2.

How and why has Blue Nile evolved from being an online-only retailer?

Originally, Blue Nile was a virtual merchant that did not have any physical presence. However, in 2013, Blue Nile entered into a partnership with Nordstrom that allowed prospective Blue Nile customers to see rings before they bought them online. Rings in the Nordstrom outlets were for display only, but Nordstrom jewelry experts used iPads to help customers purchase rings that appealed to them from the Blue Nile site while in the Nordstrom store. The response was very .

10 positive. Buoyed by this success, Blue Nile opened its first physical showroom in 2015. The showroom allows customers to see and try on products before purchasing them online. Most of the showrooms are relatively small and do not provide for in-store sales, so customers still need to make any actual purchases online. This allows Blue Nile to offer many of the services that bricks-and-mortar jewelers can provide without forcing Blue Nile to raise its prices to account for inventory management and a large sales force. After experiencing significant upticks in online sales in the region around its first showroom, Blue Nile has since added 18 more.

3.

Why did Signet Jewelers purchase Blue Nile?

Signet Jewelers purchased Ble Nile because it hoped that doing so would enable Signet to grow its diamond business by increasing its appear to the younger, socially conscious, more affluent, and ethnically diverse consumers that make up the majority of Blue Nile’s customer base.

End-of-Chapter Questions and Answers 1.

Why were so many entrepreneurs drawn to start businesses in the online retail sector initially?

Many entrepreneurs were drawn to start businesses in the online retail sector initially because it was one of the largest market opportunities in the U.S. economy. Many believed that the Internet would revolutionize the retail industry because: • Search costs and transaction costs would both be dramatically reduced.

• Market entry costs would be comparatively low.

• Traditional offline physical stores would be forced out of business by falling prices on the Internet.

• Many industries would be disintermediated, destroying the middleman and the associated markups, establishing the Web as the single dominant marketing channel.

2.

What frequently makes the difference between profitable and unprofitable online businesses today?

Today, the difference between profitable and unprofitable online businesses is, for the most part, dependent upon a strong brand name. Multi-channel firms with a strong brand name have leveraged their supportive infrastructures and financial resources to exploit the new marketing channel.

3.

What is BOPIS? How has it impacted local e-commerce?

BOPIS stands for “buy online, pick-up in store.” BOPIS functionality is increasingly being offered by omnichannel retailers, as well as Amazon’s Local .

11 Selling Initiative, which enables BOPIS for third-party sellers on Amazon’s marketplace platform. BOPIS is fueling gorwith of localt e-commerce.

4.

What are some of the advantages that online retailers have?

• • • • • • • • • • •

5.

Online retailers have a number of advantages, such as: Lower supply chain costs by aggregating demand at a single company and increasing purchasing power Lower cost of distribution using websites rather than physical stores Ability to reach and search a much larger, geographically distributed group of customers Ability to reach quickly to customer taste and demand Ability to change prices nearly instantly Ability to rapidly change visual presentation of goods Avoidance of direct marketing costs of catalogs and physical mail Increased opportunities for personalization and customization Ability to greatly improve information and knowledge delivered to customer Ability to lower consumers’ overall market transaction costs

Name two assumptions e-commerce analysts made early on about consumers and their buying behavior that turned out to be false.

Two assumptions that e-commerce analysts made early on about consumers and their buying behavior that turned out to be false were that they would be rational and cost-driven. Instead, consumers are attracted to stable, well-known retail brands and have demonstrated that other factors such as reliability, trust, fulfillment, and customer service are equally important. This does not mean consumers are non-rational, but simply that they are willing to pay extra for branded goods and services.

6.

Explain the distinction between disintermediation and hypermediation as it relates to online retailing.

Disintermediation in online retailing occurs when manufacturers or their distributors build a direct relationship with the consumer, and the traditional retail intermediaries or middlemen are eliminated. Hypermediation, on the other hand, occurs when virtual firms outsource all their warehousing and order fulfillment functions, creating a number of new intermediaries who are necessary for these firms to function.

7.

Compare and contrast virtual merchants and omnichannel (bricks-and-clicks) firms.

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12 Virtual merchants are single-channel firms that generate almost all their revenue from online sales. Omnichannel (bricks-and-clicks) firms, on the other hand, have a network of physical stores as their primary retail channel, but have also introduced online offerings. They are often multi-channel firms with catalog or other retail channels already established. Virtual merchants do not have to bear the costs associated with building and maintaining physical stores, but they face large costs in building and maintaining websites and in building a brand name presence. Omnichannel firms have the high costs of maintaining physical buildings and large sales staffs, but they have an already established brand name, a national customer base, warehouses, large scale, an already trained staff, and consequently, much lower customer acquisition costs. Virtual merchants, like all retail firms, face very low margins (the difference between the retail price for goods and the cost of the goods to the retailer); therefore, they must achieve highly efficient operations to make a profit. Omnichannel firms are already used to operating in these thin margins and have already invested in the purchasing and inventory control systems that enable them to control costs. Omnichannel firms must figure out how to leverage their strengths and assets online. They face the costs of building and maintaining a credible website, hiring new skilled staff, and building rapid response order entry and fulfillment systems, but so do virtual merchants.

8.

What is the difference between a supply-push and a demand-pull sales model?

Why do most manufacturer-direct firms have difficulty switching from the former to the latter?

A supply-push sales model refers to a business model in which products are manufactured prior to orders for them being received, based upon calculations of what the estimated demand for the product will be. Demand-pull, on the other hand, refers to a business model in which products are not manufactured until orders are received.

Manufacturers attempting to successfully pursue a demand-pull sales model must have the supporting supply chain management capabilities, an efficient order center, and the manufacturing capabilities to support it. Many manufacturer-direct firms have difficulty switching to the demand-pull model because they lack these necessary ingredients. They have difficulty in using either sales model when they develop an online strategy of selling directly to consumers because they face channel conflict with the physical retailers of their products. The risk is that the traditional retailers of the manufacturer’s goods will become disadvantaged from a price standpoint as they must compete directly with the manufacturer. They may also be disadvantaged in their ability to maintain inventory that is as current as the manufacturer. The result can be that these traditional marketing channels are cannibalized by the manufacturer’s efforts to establish a direct relationship with its customers. Unless manufacturers can be assured that the elimination of this marketing channel will not negatively impact sales and revenue, they must proceed with caution in pursuing the manufacturer-direct business model, or they .

13 must take the necessary steps to assure the continued existence of their retailing business partners.

9.

What are five strategic issues specifically related to a firm’s capabilities? How are they different from industry-related strategic issues?

The five strategic issues that are specifically related to a firm’s capabilities are an evaluation of the firm’s value chain, its core competencies, its available synergies, and the social and legal challenges. In analyzing the economic viability of a firm, one must understand whether the firm has adopted business systems that will enable it to operate at peak efficiency and whether there are looming technological changes that might force it to change its processes or methods; this is the firm’s value chain. It is also necessary to assess whether the firm has any unique skills that cannot be easily duplicated by its competitors and whether technological changes might invalidate these core competencies. Furthermore, one must examine whether there are competencies or assets available to the firm from related establishments that it owns or with which it has established strategic partnerships. Finally, the social and legal horizon must be considered to determine if the firm may be vulnerable to legal challenges or if it has taken into account consumer trust and privacy issues that could cause it to lose business or cause public relations problems.

These strategic issues are different from those used to assess the industry as a whole because they focus on the particular issues and capabilities of an individual firm. The industry strategic factors concentrate on the competitive forces within the industry such as: • The facility with which competitors can enter the market.

• The existence of substitute products.

• The basis of the competition within the industry.

• The power of the suppliers and customers in the industry.

• The structure and possible changes in the industry production and distribution chains.

10.

Which is a better measure of a firm’s financial health: revenues, gross margin, or net margin? Why? The best measure of a firm’s financial health is net margin, which sums up in one number how successful a company has been at making a profit on each dollar of sales. A negative net margin means that a company is losing money on each sale.

11.

What are some of the difficulties in providing services in an online environment?

What factors differentiate the services sector from the retail sector, for example?

Some of the difficulties involved in providing services online are that many are hands-on type industries such as the legal, medical, and accounting professions.

These professionals need to interact directly with their clients to provide their .

14 service, but the Internet can be used to assist these services by providing consumers with information, knowledge, and communication. The factors that differentiate the services sector from the retail sector are that instead of an actual physical product that has value, the value for services is based mainly on the collecting, storing, and exchanging of information.

12.

Compare and contrast the two major types of online services industries. What two major features differentiate services from other industries?

The two major types of service industries are transaction brokering and hands-on services. Transaction brokers act as intermediaries to facilitate a transaction. For example, stockbrokers facilitate a stock transfer between a buyer and a seller; online mortgage companies refer customers to the actual issuing mortgage company. In contrast, the hands-on services use the Internet by and large to impart information and to communicate with their customers.

The two major features that differentiate the service industry from other industries are that they are for the most part knowledge and information intense, and that just about all services entail some amount of personalization and customization.

Except for the providers of physical services such as cleaning and gardening, service industries generally process a lot of information and employ a highly skilled, educated workforce. Many services, such as the legal, medical, and accounting services, require extensive personalization. Others, such as financial services, benefit from customization by allowing clients to choose from a menu of options that are of interest to them.

13.

What is the biggest deterrent to growth of the online insurance industry nationally?

The biggest deterrent to online insurance industry growth is that insurance products are complex with many different types of coverage in each insurance group (e.g., non-automotive property and casualty, workers’ compensation, marine, accident, liability, fire, homeowners, commercial, etc.). Furthermore, writing a policy can be very information intense, requiring a personal inspection of property or considerable actuarial experience and data. Complicating this situation is the fact that there is no federal regulation of the industry. Instead, each state has its own set of regulations overseen by the 50 different state insurance commissions. Websites must obtain licenses to enter the insurance business in every state where they intend to provide quotes or sell insurance.

14.

Define channel conflict and explain how it applies to the retail industry.

Manufacturer-direct firms, also sometimes referred to as DTC (direct-toconsumer) firms, are either single or multi-channel manufacturers that sell directly online to consumers without the intervention of retailers. Multi-channel manufacturer-direct firms sometimes face channel conflict challenges. Channel .

15 conflict occurs when retailers of products must compete on price and currency of inventory directly against the manufacturer, who does not face the cost of maintaining inventory, physical stores, or sales staffs.

15.

What is the most common use of real estate websites? What do most consumers do when they go to them?

The most common use of real estate websites is conducting research, which influences offline decisions. Users visit real estate sites to view the properties that are available for purchase and to research appraisal reports, neighborhood sales histories, school district data, crime reports, as well as social and historical information on neighborhoods. They can also link to mortgage lenders, credit reporting agencies, house inspectors, or surveyors, and use other features such as loan mortgage calculators.

16.

How have travel services suppliers benefited from consumer use of travel websites?

Travel services suppliers have benefited from consumer use of travel websites because the Internet is becoming the most common channel used by consumers to research travel options, search for prices, and book reservations for airline tickets, rental cars, hotel rooms, cruises, and tours. For the suppliers: the owners of the hotels, rental cars, and airlines, this means that millions of consumers are aggregated into a singular focused customer pool that can be efficiently reached with advertising and promotions. Furthermore, the suppliers of travel services often have excess capacity that they are always looking to fill, and this aggregation of customers makes it easy for them to do so.

17.

Name and describe five traditional recruitment tools companies have used to identify and attract employees. What are the disadvantages of such tools compared to online career sites?

The five traditional recruitment tools that companies have used to identify and attract employees are: classified and print advertising, career expos, on-campus recruiting, private employment agencies, and internal referral programs. The disadvantages of these tools considering the new online sites are: First, print advertising usually includes a per-word charge that limits the amount of detail employers will provide about a job opening and the amount of time an ad will run.

Second, career expos do not allow for a pre-screening process to weed out unsuitable candidates, and they are limited by the amount of time a recruiter can spend with each candidate. Third, staffing firms charge high fees and they have a limited, usually local, pool of candidates. Fourth, on-campus recruiting firms are also limited in the amount of time that can be spent per candidate as well as in how many candidates can be seen each visit, necessitating multiple visits to some campuses. Fifth, internal referral programs can sometimes encourage employees

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16 to propose unqualified candidates so that they will qualify for the rewards and incentives offered.

18.

In addition to matching job applicants with available positions, what larger function do online job recruitment companies fill? Explain how such companies can affect salaries and going rates.

In addition to matching job applicants with available positions, online job recruitment and career services companies also serve the larger function of automating this information-intense business process, reducing search times and costs for all parties. These platforms can also affect salaries and going rates by establishing market prices and terms. Online job recruitment and career services companies identify salary levels for both employers and job hunters and lay out the skill sets required to achieve those salary levels. They serve as online national marketplaces to establish the terms of trade in the labor market, thus their existence should lead to a rationalization of wages, greater labor mobility, and higher efficiency in recruitment and operations as employers are able to fill positions more quickly.

19.

Describe the business model of on-demand service companies.

On-demand service companies provide a platform that enables the on-demand delivery of numerous services, by connecting providers (“sellers”) who wish to exploit their “spare resources,” such as cars, rooms with beds, and the ability to perform various services via their personal labor, with consumers (“buyers”), who would like to utilize those resources and services. On-demand service companies collect a fee from both sellers and buyers for using their platforms.

20.

Why are on-demand service companies viewed as being disruptive and controversial?

On-demand service companies can significantly lower the cost of various services like urban transportation and lodging, by creating an online platform that uses an online reputation system to establish a trusted relationship between sellers and consumers, enabling owners of underutilized resources to sell access to those resources to consumers who prefer not to, or are unable to, buy those resources themselves. As such they can be very disruptive to existing firms and business models. However, they can also be controversial, for a variety of reasons. For instance, with Airbnb, property renters do not have the regulatory or tax burdens that hotel owners have; the same goes for Uber drivers compared to traditionally licensed taxicab drivers. It is possible that the success of Airbnb could greatly reduce the demand for regulated hotels. The possibility of negative outcomes from transactions on these sharing economy sites (e.g., a driver robs or harms a passenger, or an apartment is destroyed by renters), is leading both firms to require liability insurance, or to offer such insurance for free. It is unlikely that sharing economy firms will escape regulation altogether. .

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Projects: Questions and Answers 1.

Access the EDGAR archives at SEC.gov, where you can review 10-K filings for all public companies. Search for the 10-K report for the most recent completed fiscal year for two online retail or online service companies of your choice (preferably ones operating in the same industry, such as Expedia and Booking Holdings, etc.). Prepare a presentation that compares the financial stability and prospects of the two businesses, focusing specifically on the performance of their respective e-commerce operations.

Students who choose to investigate Expedia and Booking Holdings will find their most recent Form 10-Ks (annual report) and 10-Qs (quarterly report) in the EDGAR archives. (Students should supplement the information they can extract from the SEC filings with further research on the Internet sales channel performance of these two companies. This is done by searching industry websites and other information available online.

2.

Find an example not mentioned in the text of each of the four types of online retailing business models. Prepare a short report describing each firm and why it is an example of the particular business model.

Students may find, for example: • Omnichannel merchant (bricks-and-clicks): Target is a successful omnichannel merchant, with both physical department stores around the country, as well as a thriving e-commerce presence.

• Virtual merchant: Bluefly is an online outlet store with no physical outlets.

It provides brands found in upscale department stores at discounts by buying wholesale from resellers (rather than the designers). It passes the savings on to the customer. However, it must buy what is available at a deep discount, so not all sizes of a particular item will always be in stock.

Bluefly.com is a public company (ticker symbol BFLY).

• Manufacturer-direct: Fortin Ironworks has always been a manufacturerdirect merchant of ornamental ironworks. This metal fabrication company based in Columbus, Ohio and founded in 1946, employs skilled craftsmen, artisans, estimators, salesmen, and installers. It sells ornamental iron products such as driveway gates, walkway gates, fences, handrails, curtain rods, production components, and also several lines of outdoor and indoor furniture with accessories. It also carries a line of sporting equipment including complete basketball units, soccer goals, and lacrosse goals. Most products can now be purchased online, including fencing, gates, planters, and accessories such as pot rings, brackets, trellises, lamps, and tables.

• Catalog merchant: Fingerhut was already a successful catalog business and has now leveraged that success to an online presence. It offers a broad range of products in a variety of categories.

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18 3.

Drawing on material in the chapter and your own research, prepare a short paper describing your views on the major social and legal issues facing online retailers.

Some issues students might discuss in their research paper include: • What will organizations have to do to protect their intellectual property rights?

• What measures will have to be taken regarding privacy issues? How will they address consumer concern over the lack of control they feel they have over personally identifiable information?

• Are online retailers going to be prepared to answer inquiries from customers regarding the content of their data? Will management-level positions be needed for procedures like the deletion and updating of consumer information? If there are mistakes in those data, could it result in legal trouble for companies?

• How will they address consumer privacy concerns, convincing consumers that purchasing goods online is a confidential transaction between the consumer and the merchant?

• What will online retailers have to do to be prepared for any changes in the tax law?

4.

Choose a services industry not discussed in the chapter (such as legal services, medical services, accounting services, or another of your choosing). Prepare a 3to 5-page report discussing recent trends affecting online provision of these services.

Students may find, for example, legal service firms that provide legal self-help, forms, and occasionally advice; two such sites are RocketLawyer.com and Nolo.com. Nolo’s mission is to make the legal system work for everyone—not just lawyers. Nolo tries to help people handle their own everyday legal matters or learn enough about them to make working with a lawyer a more satisfying experience. It offers “plain-English” books, software, and forms. Nolo’s value proposition is, of course, convenience and 24-hour access to legal help.

5.

Together with a teammate, investigate the use of mobile apps in the online retail or financial services industries. Prepare a short joint presentation on your findings.

Students will likely discover that in the highly competitive financial services industries in which the value proposition for customers is convenience, banks and financial institutions have some of the most advanced apps. Smartphones have increased the demand for mobile financial services. Analysts and industry experts believe this is so because mobile apps are a natural fit for the financial services industries, which are high-demand and high-value and must be conducted in realtime. Students might also include in their papers a discussion of the security issues involved with the use of mobile apps in the financial services industries, .

19 how wireless safeguards will be integrated with security processes, technologies that are already in place, and what new security threats exist. Students might discuss the limitations facing developers due to the relatively limited screen size of smartphones, how strong authentication and encryption will play a part, and whether security concerns might put a damper on the market for mobile financial services.

Fidelity Investments offers a variety of mobile services and apps that lets users access their accounts whenever and wherever they want. Fidelity offers e-apps for iOS (iPhone and iPad) and Android devices, and mobile browsing via a mobile website. The apps allow users to track their portfolio, pay bills, trade, review details of their Fidelity brokerage account, deposit checks remotely, get news and research, and more.

Video Cases Video Case 9.1, DoorDash Partners with BJ’s Wholesale, appears on page 546 of the eText, following Table 9.1 in the "Online Retailing” section. DoorDash is an on-demand services company that provides online food ordering and delivery, primarily from restaurants, where it competes with Grubhub, Uber Eats, and a number of other services .

The video, released in March 2022, features DoorDash president Christopher Payne discussing DoorDash’s partnership with BJ’s Wholesale, a membership-only warehouse club located primarily on the East Coast of the United States, that has evolved into a successful omnichannel merchant. DoorDash’s partnership with BJ’s represents the first wholesale club on its platform, and a continued expansion for DoorDash into grocery delivery, where it competes with Instacart. Questions that you can use for class discussion or as a student assignment include the following: • How is grocery delivery different from restaurant delivery?

Answer: With grocery delivery, DoorDash is also responsible for picking and packing the items, as well as delivering them, compared to restaurant delivery, where it is only responsible for delivery. This adds to the cost for DoorDash.

Payne notes that these deliveries also tend to be larger than a typical meal delivery.

• What does Payne say about his view of consumer expectations and how DoorDash is evolving to meet those expectations?

Answer: Payne believes that consumer expectations with respect to online delivery are rising, with consumers expecting more and more different types of items to be delivered, and also much more quickly than in the past. He notes that while DoorDash has 55% of the restaurant market, it is going beyond restaurants to groceries and retail such as JCPenny and Office Depot. He also notes that DoorDash now offers DashPass, a subscription offering that covers restaurant and grocery deliveries. He characterizes DoorDash’s market as not just restaurant consumers, but “bring it to me now” consumers. To respond to this, DoorDash has launched a new 15-minute delivery option in New York City.

• What are some of the experiments that DoorDash has launched to solve consumer problems?

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20 One experiment has been a new 15-minute delivery option in New York City to address the desire of consumers for “quick commerce” and ultra-fast delivery.

Another experiment is having DoorDash handle customer retail package returns.

Payne notes that DoorDash is still at the beginning of efforts to empower local commerce, but that with the development of “last mile” capabilities such as DoorDash, “the sky is the limit”.

Video Case 9.2, SoFi and Fintech, appears on page 574 of the eText, in the “Online Mortgage and Lending Services” section. SoFi is a fintech company that provides student and auto loan refinancing, mortgages, personal loans, credit card, investing, and banking.

In the video, released in August 2022, SoFi chief executive officer Anthony Noto, discusses SoFi’s positive financial releases as of when the video was released. Questions that you can use for class discussion or as a student assignment include the following: • To what factors does Noto attribute SoFi’s recent success?

Answer: Noto notes that the increase in deposits that SoFi recently recorded is due to the fact that SoFi now has a national bank, which allows it to offer interest rates on checking and savings that SoFi determines, as opposed to a rate decided upon by one of its bank sponsors. Having a national bank, where customers can make direct deposits, also enables SoFi to have a primary relationship with its members for all of their customers’ the major financial decisions.

How did the Covid-19 pandemic impact SoFi’s business, and how was SoFi able to deal with that impact?

Answer: An important part of SoFi’s business prior to the pandemic involved the refinancing of federal student loans. As part of the CARES Act, students were able to defer payment on those loans. As a result, Noto notes that SoFi went from generating $2.1 billion in originations in the first quarter of 2020, to only $400 million in the current quarter. This was SoFi’s largest and most profitable business. SoFi was able to successfully deal with the impact by focusing on other parts of its business model. SoFi aims to be a “one-stop shop” for all of a consumers’ financial needs. It has businesses operating in other areas that can help it overcome challenges in one particular area. For example, SoFi provides a technology platform business to other fintechs that has shown an acceleration of revenue growth. It has also seen strong demand for personal loans, checking and savings, and credit cards, among others.

• How does Noto differentiate SoFi from competitors such as Apple, Amazon, Stripe, and others?

Answer: Noto states that he does not see such companies as competitors. He characterizes SoFi as a consumer-facing financial services provider using modern-day technology to deliver those services (i.e,, it is a “fintech”). He notes that there are significant barriers to entry to some aspects of its business model, such as the lending business, requiring both an intensive amount of capital as well as credit and risk and marketing capabilities. He also notes that SoFi has spent a lot of money to build its “brand” and consumer trust in the reliability of its products and services. This is also difficult to replicate.

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1 Instructor’s Manual and Video Cases: Chapter 10 Online Content and Media Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 3 4 4 4 5 7 8 14 17

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2 Learning Objectives After reading this chapter, your students should be able to: • Understand the major trends in the consumption of media and online content, the major revenue models for digital content delivery, digital rights management, and the concept of media convergence.

• Understand the key factors affecting the online publishing industry.

• Understand the key factors affecting the online entertainment industry.

• Understand how creators are attempting to monetize user-generated content.

Chapter Outline Streaming Wars: Who Will Win? 10.1 Online Content Content Audience: Entertainment and Media Industry Revenues Insight on Society: Is Gen-Z Really All That Different?

Online Content: Consumption, Revenue Models, and Revenue Digital Rights Management (DRM) and Walled Gardens Media Industry Structure Media Convergence: Technology, Content, and Industry Structure 10.2

The Online Publishing Industry Online Newspapers From Print-Centric to Digital First: The Evolution of Newspaper Online Business Models Online Newspaper Industry: Strengths and Challenges Insight on Business: Vox: Native Digital News Magazines Rebound on the Digital Platform E-books and Online Book Publishing Amazon and Apple: The Digital Media Ecosystem E-book Business Models

10.3

The Online Entertainment Industry Home Entertainment: Television and Movies Audio Entertainment: Music and Podcasts Music Podcasts Games Insight on Technology: Game On: Twitch

10.4

Creators and User-Generated Content

10.5

Careers in E-commerce The Company Position: Digital Audience Development Specialist Qualifications/Skills .

3 Preparing for the Interview Possible First Interview Questions 10.6

Case Study: Netflix: How Does This Movie End?

10.7

Review Key Concepts Questions Projects References

List of Key Terms agency model, 632 content convergence, p. 615 digital rights management (DRM), p. 614 Electronic Sell-Through (EST), p. 638 industry convergence, p. 617 Internet Video on Demand (iVOD), p 638 magazine aggregator, p. 629 metered subscription, p. 624 over-the-top (OTT) services, p. 636 paywall, p. 624 release window, p. 639 Subscription Video on Demand (SVOD), p. 638 technological convergence, p. 615 walled garden, p. 614 wholesale model, 632

List of Figures Figure 10.1 Annual Media Consumption in the United States, p. 608 Figure 10.2 U.S. Media Revenues by Channel, p. 609 Figure 10.3 Online Content Consumption in the United States, p. 612 Figure 10.4 Growth of U.S. Online Entertainment Content Revenues, p. 613 Figure 10.5 Convergence and the Transformation of Content: Books, p. 616 (Figure video in eText) Figure 10.6 U.S. Newspaper Revenues, p. 618 Figure 10.7 Online Newspaper Models, p. 620 Figure 10.8 Unique Monthly Visitors at U.S. Online Newspapers, p. 623 Figure 10.9 Unique Monthly Visitors at Native Digital News Sites, p. 626 Figure 10.10 The Major Players in the U.S. Entertainment Industry by Revenue Share, p. 633 Figure 10.11 U.S. Home Entertainment Revenue by Format, p. 638 Figure 10.12 U.S. Music Revenues: Digital versus Physical, p. 641 Figure 10.13 U.S. Digital Music Revenues by Format, p. 642 Figure 10.14 Pokemon Go, p. 645 .

4 Figure 10.15 U.S. Online Gaming Audience, 2022, p. 717 List of Tables Table 10.1 What’s New in Online Content and Media 2022–2023, p. 607 Table 10.2 Native Digital News Sites, p. 625 Table 10.3 Digital Media Devices, p. 635 Table 10.4 Major Over-the-Top (OTT) Services, p. 637 List of Video Cases Video Case 10.1: Substack: An Alternative News Delivery Platform Video Case 10.2: Roblox and Online Gaming Overview This chapter summarizes the various businesses that are based on the delivery of online content. Table 10.1 provides an overview of the major trends for 2022–2023. Obviously, the Covid-19 pandemic had a major impact: although it resulted in increased time spent with media and engagement, it also significantly reduced advertising revenues on which most online content and media business models rely. The chapter then begins with a review of the overall size, growth, and structure of the media industries in the United States, and then focuses on publishing (newspapers, magazines, and e-books) entertainment (movies, television, music and podcasting, and games), concluding with a new section on user-generated content.

The content industries have been severely challenged by the Internet. The Internet has disrupted media industries like music and newspapers, cutting revenues and employment in half over the course of a decade. For other media industries, such as book publishing and entertainment (movies, television, and games), thus far, the Internet has proved challenging but not devastating to revenues, and in some cases, has added to revenues by making it more convenient for consumers to consume more content. Even for these content industries, however, the Internet has had a significant impact and has created entirely new business models. The overall pattern is that physical products have been largely replaced by digital versions. Even as consumers reduce consumption of traditional physical content products, they maintain and often increase their exposure to content on digital platforms. What’s changing is how people consume media.

The key point students should take away from this chapter is that one of the primary challenges facing online content companies is how to achieve profitability when so much online content is free, especially when many consumers still have an expectation that content should be free. To achieve profitability, content providers need to create highperceived value products that can be uniquely delivered online. Content companies need to develop new types of content products, encourage new delivery technologies, and agree on industry platform standards. This process of change is still ongoing. Fortunately for the media industry, Apple’s iTunes Store platform succeeded while charging for music, videos, and books. Other platform owners such as Google and Amazon followed suit. Firms like Netflix, Hulu, and YouTube generate significant new revenues for

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5 television and movie producers. The concept of paying for online content has become acceptable.

Teaching Suggestions: Key Points The opening case, Streaming Wars: Who Will Win? (new for this edition), is a good way to begin the discussion about the issues raised in this chapter. The case illustrates the blurring of lines between traditional television and movie distribution and online content distribution, and the impact of changing viewership habits on traditional business models.

Some questions you might pose include: • Do you subscribe to any online video streaming services? If so, which ones? Is there a limit to how many services you would be willing to subscribe to, or a monthly cap on what you would be willing to pay?

• What services have given you the best overall viewing or entertainment experience, and why?

• Are you willing to pay a higher price in order to watch streaming video without ads?

• Who do you think will win the “streaming wars” and why?

Section 10.1 provides an overview of the audience for online content and the online content industries in the United States. In 2022, the average American consumed various media for more than 4,800 hours. The focus of many advertisers today is the demographic known as “Gen-Z,” or the generation of people born between 1997 and 2012. The Insight on Society case, Is Gen-Z Really All That Different? (new for this edition), takes a closer look at Gen-Zers and their importance to the online media landscape. Questions for discussion might include the following: • What are some of the defining socioeconomic and behavioral patterns of Gen Z? • How does Gen-Z differ from previous generations?

• In what ways does evidence contradict stereotypes about Gen-Z’s behavior patterns?

• Why are Millennials so sought after by advertisers?

• Do students self-identify as a member of Gen Z? Why or why not?

Figure 10.2 provides an illustration of the revenues generated by various sectors of the U.S. media industry in the form of a pie chart. The various entertainment industries generate more than 78% of U.S. media revenues and are still dominated by broadcast/pay TV. Today, there are three primary revenue models for delivering content: subscription, a la carte, and advertising-supported (both free and freemium). Media convergence, is a key factor in achieving profitable online content businesses. Figure 10.5 illustrates the concept of convergence as it applies to the transformation of books. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to Figure 10.5 and this topic. .

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Online Publishing. Section 10.2 covers the online publishing industries. The publishing industry is an industry that has an opportunity to move toward a new generation of online newspapers, books, and magazines. However, achieving profitability has proved difficult.

The newspaper industry faces four primary challenges. Increasingly, consumers use mobile devices to view news and ads, which detracts from newspaper print ad and subscription revenues. Alternative online sources and portals of news that challenge the exclusive content of newspapers have emerged. Newspaper management has failed to adjust to these changes in a timely manner. The growth of social media has meant that consumers discover news via social media, not by browsing newspapers. Newspapers have become increasingly dependent on social media platforms to direct consumers to news articles, bypassing the front pages of newspapers, and reducing advertising revenue for newspapers. Newspapers continue to struggle to develop a digital-centric model of the newspaper. Figure 10.7 illustrates the development of various online newspapers models over the time period 1995-2020.

The Insight on Business case, Vox: Native Digital News (updated for this edition), provides a closer look at these efforts. Questions for class discussion on this case might include the following: • How do you read the news online? Which sites do you prefer, and why?

Have you visited any Vox sites?

• How are native digital news sites changing journalism?

• Is Vox Media the future of digital news publishing? Why or why not?

Video Case 10.1, Substack: An Alternative News Delivery Platform, appears on page 629 of the eText, following the Insight on Business case. See page 17 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Magazines, which had been written off as basically dead, have received new life with the advent of the tablet computer and magazine aggregator apps, such as Apple News+.

The book publishing industry’s experience with the Internet has been very different from that of the newspaper and magazine industries. E-books and various e-reader devices such as the Kindle, iPhone and iPad, and Nook have become commonplace. Amazon dominates the e-book market.

Online Entertainment. Section 10.3 takes an in-depth look at the major entertainment industry groups: television, movies, music, and games. Students should have little trouble relating to these topics, given how much time they typically spend consuming online entertainment! The section begins with an overview of these entertainment industries and then looks at audience size and growth. We next drill down into each of the industry groups, starting with television and movies. Figure 10.11 illustrates U.S. home entertainment revenues by format, both digital and physical, in the form of a pie chart.

Not surprisingly, digital revenues dominate, and within digital, subscription stream .

7 (SVOD) services. You can ask students about their own television and video viewing habits, and how they have changed over their lifetime. Are they cord-cutters or cordshavers? How many tweet or engage in other social media experiences while viewing television? How many watch TV shows on mobile devices? Which online distributors have they had experience with, besides YouTube?

The section next turns to a review of the audio entertainment industry, which includes both the music industry and podcasting, and the gaming industry, which is also experiencing explosive growth. Figure 10.18 illustrates the different components of the U.S. online gaming audience in the form of a bubble chart. The Insight on Technology case, Game On: Twitch (updated for this edition), takes a look at Twitch, now owned by Amazon, which provides a popular live-streaming game platform. Case discussion questions for the class might include the following: • Have you ever viewed a live-streamed game or other content on Twitch? How about other live-streaming platforms?

• Who are Twitch’s primary competitors?

• What are some of the major issues facing Twitch?

Section 10.4 provides a new section on creators and user-generated content, focusing on the different methods that creators can use to monetize the content they create and also the platforms that are available to them, such as YouTube, Patreon, and Roblox, which although primarily known as a online gaming platform, has also become a major platform for creators. Video Case 10.2, Roblox and Online Gaming, appears on page 651 of the eText, at the end of the “Creators and User-Generated Content” section. See page 18 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

In Section 10.5, we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as a digital audience development specialist.

The chapter-ending case study on Netflix in Section 10.6 provides further information about the online video industry.

Case Study Questions and Answers 1.

What are three challenges that Netflix faces?

Netflix faces a number of challenges. The cost of content is very high and growing faster than revenues. The risk of creating new original content is also high. Competition is a third challenge. Although Netflix stands out as a powerful Internet brand today, it has many powerful competitors. Netflix does not have unique technology. In fact, streaming technology is widespread. The success of Netflix’s streaming model has attracted tech companies such as Amazon, Apple, and Google, content producers such as Disney and HBO, as well as network broadcast companies. Some of these firms have their own competitive advantages, such as very large Internet audiences, strong brand names, and a good .

8 understanding of what their millions of online customers want. Many of these competitors have very deep pockets. This means Netflix also has competitors for talent and the production of new content, and perhaps, price pressure as well.

2.

What are the key elements of Netflix’s strategy today?

Key elements of Netflix’s strategy include price increases, implementing an advertising-based revenue model in addition to its subscription model, and selecting Microsoft as its ad technology partner, in part because it does not compete with Microsoft. Netflix is also trying to reign in its spending on ad content.

3.

Why is Netflix in competition with Apple, Amazon, HBO, and Google, and what strengths does Netflix bring to the market?

Apple, Amazon, HBO, and Google (via YouTube) all provide substitute products and services by providing Internet consumers access to movies and TV shows.

The strengths of Netflix are its differentiating factors like brand recognition, algorithms to help consumers find movies and TV shows, and production studios supplying it with original content (although its competitors also employ these strategies as well, although in some instances not as effectively as Netflix).

End-of-Chapter Questions and Answers 1.

What are the three dimensions in which the term “convergence” has been applied?

What does each of these areas of convergence entail?

The three dimensions where the term convergence has been applied are technology platform, content, and industry structure.

Technology platform convergence involves the development of hybrid devices that enable the delivery of various types of media, such as books, newspapers, television, movies, audio, and games, via a single device.

Content convergence includes three dimensions: design, production, and distribution. Content design convergence occurs when the design becomes measurably different due to the new skills that have been learned from fully exploiting the new technological capabilities. Content production convergence drives content design convergence as new tools are developed for economically producing content for delivery to multiple platforms. Content distribution convergence occurs when the distributors and consumers have the new devices needed to receive, store, and experience the product.

Industry structure convergence is the merger of various enterprises into powerful synergistic combinations that can cross-market content on many different platforms and create works that use multiple platforms.

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9 2.

What are the basic revenue models for online content, and what is their major challenge?

There are three basic revenue models for delivering content on the Internet. The two “pay” models are subscriptions (usually “all you can eat”) and a la carte (pay for what you use). The third model uses advertising revenue to provide content for free, usually with a “freemium” (higher price) option. The major challenge is that consumers still expect much content to be available for free and are not necessarily willing to pay for online content.

3.

What are the two primary e-book business models?

The two primary e-book business models are the wholesale model, in which prices are determined by the retailer, and the agency model, in which the retailer is an agent and prices are set by the manufacturer.

4.

What effect is the growth of tablet computing having on online entertainment and content?

Tablet computers, along with smartphones and e-readers, have together created a rich mobile entertainment environment, as well as new revenue streams for entertainment and media firms. Today, millions of Internet users are more than willing to pay for high-quality, unique content delivered on a convenient device such as a tablet computer, as well as a smartphone or e-reader and using services like those offered by Netflix, Apple TV, or Amazon Fire TV The number of gamers who play games on a tablet computer is also increasing, reaching 90 million in 2022.

5.

What techniques do music subscription services use to enforce DRM? Although music tracks in the iTunes Store were originally protected by DRM, Apple eventually abandoned the practice because of user objections and because Amazon had opened an online music store without any DRM protections, with the support of music industry firms, who had come to realize that DRM was preventing the music industry from exploiting the opportunities of the Internet and perhaps even encouraging an illegal market. Streaming content services, such as streaming music, are inherently difficult to copy and re-distribute.

6.

What type of convergence does the Apple iPad represent?

The Apple iPad represents technological convergence.

7.

What are the three different business models that newspapers have used to try to adapt to the Internet?

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10 The three business models are: Print-centric (1995–2000), Integrated Print/Web (2000–2010), and the most current model, Digital First (2010–present).

8.

What are the different revenue models that newspapers have used to try to adapt to the Internet?

Newspapers have used a number of different revenue models to try to adapt to the Internet. In 1995, when the first newspaper websites appeared, newspapers offered their content for free, with registration. The hope was that advertising would support the website’s operation and provide a new revenue stream for the print edition content. But new ad revenue from digital publication did not cover the cost of digital production and was completely unable to replace the drastic fall in print ad revenues that occurred beginning in 2000.

Charging for general newspaper content was an obvious answer, but publications that tried this during the 1995–2005 period were punished by an Internet culture that expected online content such as music and news to be free. However, the introduction of the iTunes Store and the iPhone in 2007 changed the public perception of paid content. Newspapers and online magazines have benefited from this change in popular culture. A survey of 236 U.S. newspapers found that 77% had some sort of charge for online access. Of these, 72% used a metered subscription model (which provides access to a limited number of articles for free, but requires payment of a subscription fee once that limit is exceeded), 20% provide most content for free, but charge a subscription fee to access premium content, and only the Wall Street Journal used a hard paywall (no access without a paid subscription) model.

9.

What advantages do purely digital news sites have over print newspapers? What advantages do traditional newspapers have over such sites?

Purely digital news sites have a number of advantages over print newspapers.

They don’t have the cost of printing papers; they can create new work flows and business processes that are more efficient and timelier; they have a lower cost structure, often relying on user-generated content and minimal payments to reporters and bloggers, with lower pension costs; and they can take advantage of newer technologies for producing the news. Although the quality of journalism on these purely digital sites initially was not as good as traditional print newspapers, this situation is changing rapidly as the digital-only sites hire talented journalists and editors from print newspapers that are experiencing financial difficulties.

However, traditional newspapers have an advantage over pure;y digital sites when it comes to credibility and trust. Without trust and quality, online news sites are simply distractions filled with celebrity photos, and there is significant competition for this kind of content.

10.

How has the book publishing industry’s experience with the Internet differed from the newspaper and magazine industries’ experience? .

11

The book publishing industry’s experience with the Internet is very different from the newspaper and magazine industries. E-book editions of fiction and non-fiction books (so-called trade books) have been very successful, yet printed book sales have not collapsed and have remained about the same over time Book publishing revenues have been relatively stable over the last five years.

11.

How has the Internet changed the packaging, distribution, marketing, and sale of traditional music tracks?

For most of its history, the music industry depended on a variety of physical media to distribute music—acetate records, vinyl recordings, cassette tapes, and finally CDs. At the core of its revenue was a physical product. The Internet changed all that when, in 2000, a music service called Napster begin distributing pirated music tracks over the Internet to consumers who used their PCs as record players. Despite the collapse of Napster because of legal challenges, hundreds of other illegal sites showed up, resulting in music industry revenues falling from $14 billion in 1999 to around $6.7 billion in 2015. Beginning in 2001, the appearance of powerful mobile media players that could be connected to the Internet—like Apple’s iPod and, later, the iPhone and iPad and then the stunning growth of music streaming sites—further eroded sales of CD albums. Streaming has fundamentally altered the sale of physical music formats as well as digital downloads because it is no longer necessary for consumers to “own” a physical or digital unit in order to hear the music they want. The music industry initially resisted the development of legal digital channels of distribution but ultimately and reluctantly struck deals with Apple’s new iTunes Store in 2003, as well as with several small subscription music services, for online distribution. By the time streaming music services appeared on the scene in 2006, the music industry had dropped its opposition to digital formats and quickly reached agreements with Pandora Spotify, and others to stream music on their subscription and “free” adsupported services in return for fees. Today, it’s a different industry from what it was, no longer dependent on highly profitable physical products, less able to sell bundled music as albums, but with stable demand for high-quality, popular products from a variety of Internet distributors who are competing with one another to distribute musical content. The explosive growth in smartphones and tablets has further driven demand for cloud-based streaming music access.

12.

How has streaming technology impacted the television industry?

Streaming television shows over the Internet has created a significant threat to the broadcast and cable TV industry, which in the past were the sole sources of television shows and sports events.

13.

Why is the growth of cloud storage services important to the growth of mobile content delivery?

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12 Mobile content delivery is only possible if the content is stored on cloud servers simply because smartphones do not have the storage capacity for movies and TV shows. The only exception to this is e-books. Smartphones can store thousands of e-books. But even here cloud storage is important because users may switch among their various devices and have a need for a copy stored on a cloud server that they can access from anywhere on any device.

14.

Has the average consumer become more receptive to advertising-supported Internet content? What developments support this?

In general, yes. Consumers are used to television advertising, and Internet advertising is often seen as no worse, or not as annoying, as television ads, which are often raised several decibels from the background television shows. Yet Internet advertising is a source of annoyance insofar as users perceive it as something they cannot control—for instance, video ads that cannot be skipped or animated graphics that cannot be turned off. Internet advertising also generates popular resentment when users believe the ads being shown to them are targeted, and in some sense, a violation of their privacy.

15.

What factors are needed to support successfully charging the consumer for online content?

Millions of Internet users are more than willing to pay for high-quality, unique content delivered on a convenient device such as a smartphone, tablet computer, or e-reader and using services like those offered by Netflix, Apple TV, or Amazon Fire TV. In the newspaper industry, the challenge for newspapers is to create value by focusing on differentiated, timely, and exclusive content that is available nowhere else; to transform its culture of journalism to provide a continuous news stream of content just as its digital-only competitors do; and to make this content available anywhere, anytime, anyplace, and on any device..

16.

Why are apps helping the newspaper and magazine industries where websites failed to help them?

News and magazine apps provide users much faster access to content, and a wider variety of effects that improve the user experience such as smartphone features of zooming, list scrolling, and sliding screens. Content publishers like apps because users cannot be distracted by ads or other websites when using an app.

17.

What alternatives do magazine publishers have for online distribution channels?

Magazine publishers can create their own digital edition and offer it for free or on an a la carte or subscription basis. Magazine publishers also rely on magazine aggregators like Apple News+, Zinio, Magzter, and Flipboard, which make it possible for customers to find their favorite magazines using a single app or

.

13 website. A magazine aggregator is a website or app that offers users online subscriptions and sales of many digital magazines.

18.

Why did the Justice Department sue major publishing firms and Apple?

In the e-book marketplace, the major publishers started out using a wholesale model of distribution and pricing, in which the retail store pays a wholesale price for the book and then decides at what price to sell it to the consumer. In the past, the wholesale price was 50% of the retail price. With e-books, publishers discovered that some online retailers like Amazon and Apple began to sell books below their cost in order to encourage customers to purchase their e-book reader devices or to sell them other goods. The real value in e-books for Amazon and Apple is selling digital devices. Amazon not only sold millions of Kindles but also sold 90% of all e-book titles on the Web in 2011. Amazon had a de facto monopoly on e-books.

In response, the top five publishers, along with Apple, introduced an agency model of distribution in which the distributor is an agent of the publisher and can be directed to sell e-books at a price determined by the publisher, around $14.99 and higher for certain titles. In return for a 30% commission, Apple agreed to support this model, as did Google, neither of whom were comfortable watching as Amazon dominated one of the hottest areas of web content sales. Amazon’s prices rose to this level, and its market share fell to 60%.

As a result, however, the Justice Department sued the five publishers and Apple for price fixing in violation of antitrust laws. The case was settled and Apple paid a fine of $450 million. Today, each publisher (and not an industry consortium) makes an agreement with Amazon about the price of their books (agency model), but the book publishers pay a “listing fee” to Amazon. Today, e-book prices from major publishers are variable, but generally sell for around $15.

19.

How will the Music Modernization Act impact the streaming music industry?

The Music Modernization Act enables songwriters and artists to receive royalties on older songs recorded before 1972, creates a legal process for music professionals to obtain unclaimed royalties due to them (previously these were held onto by the streaming services), and creates a licensing database paid for by the streaming services but overseen by music publishers and songwriters that should streamline how songwriters are paid, all of which should help ensure that artists are paid more and have an easier time collecting royalties owed to them.

20.

How are mobile devices transforming the gaming industry?

The rapid growth in the number of people playing mobile games based on tablets and smartphones is a sea change for the gaming industry that was previously dominated by closed-platform console games and hardware firms like Microsoft, .

14 Nintendo, and Sony, and software firms like Activision and Electronic Arts. The growth of smartphones, tablets, and mobile games has catapulted Apple’s App Store and the Google Play store into the leading merchants of digital games, which, of course, use Apple and Google Android hardware and software. Apple and Google take 30% of game sales and also benefit from the sales of the hardware and software needed to play the games.

Mobile games appeal to a younger demographic, offer lower prices, and initially are often free. You can play mobile games anywhere you can use a phone, which is nearly everywhere. In contrast, console games take much longer to develop, have very large budgets, and are expensive to purchase. The mobile platform is a more open platform that allows thousands of developers to create entertaining games on much smaller budgets, as well as new and innovative games on a faster schedule. Although console, PC, and online social games will continue to grow their audience size slowly, the fastest audience growth in the future will be in mobile games that can be played anywhere and anytime.

Projects: Questions and Answers 1.

Research the issue of media convergence in the newspaper industry. Do you believe that convergence will be good for the practice of journalism? Develop a reasoned argument on either side of the issue and write a 3- to 5-page report on the topic. Include in your discussion the barriers to convergence and whether these restrictions should be eased.

Students who believe that convergence will be good for journalism may present arguments that the ability to deliver news across many platforms will lead to a better-informed public. They may believe that reporters working more closely together will lead to more objectivity in stories than was previously the case.

Furthermore, stories that are presented in one medium may drive readers to another medium to find out more information. These viewers/readers will not be satisfied with simply a rehash of the same story but rather will want in-depth coverage of particular stories that interest them.

If, indeed, as some convergence advocates are claiming, increased advertising will result from higher ratings and increased website traffic, students may argue that additional resources will be available for developing news stories more fully.

More visibility for a story may increase interest and consequently result in an increase in more in-depth reporting. Students may believe that they can do more together than they could as separate units (i.e., that the sum will be greater than the two parts alone). They may even go so far as to posit that convergence is the economic foundation upon which a resurgence in journalistic standards can be built. On the other side, students who argue that convergence is bad for journalism might posit that less objectivity, less aggressive reporting methods, and less editorial integrity will result with industry convergence into the hands of a few big oligopolies.

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15 Overriding corporate issues can easily dampen journalistic zeal. Students may argue that if the goal of convergence is to cut costs and produce news more cheaply, the quality of news stories can’t help but be harmed. Instead, a dumbingdown of journalism will occur as “print” journalism takes on the entertainment values and aspects of television journalism. Furthermore, a homogenization of journalism might occur as fewer voices are heard, and less variety of opinion is expressed. News stories might increasingly be used to promote large corporate partners either in their endeavors or their viewpoints. These students will likely believe that the foundation upon which a resurgence of journalistic standards can be built is competition, and that trends toward industry and media convergence are going to decrease competition and damage the likelihood that controversial stories will be covered. Another possible problem students might discuss is protections for unnamed sources when multiple parties are working on a story and it is being shared across platforms.

In the past, there have been substantial barriers to cross platform ownership and concentration in television and other media that are enforced by the Federal Communications Commission (FCC). However, in 2017, the FCC voted to eliminate the newspaper/broadcast and radio/television cross-ownership rules and in 2021, the Supreme Court upheld that decision in the FCC v. Prometheus Radio Project case.

2.

Go to Amazon and explore the different digital media products that are available.

For each kind of digital media product, describe how Amazon’s presence has altered the industry that creates, produces, and distributes this content. Prepare a presentation to convey your findings to the class.

Amazon sells several types of digital media, including e-books, music, and video.

It sells e-books only for its proprietary Kindle platform. In music and video, it has both a la carte purchase of physical products (CDs and DVDs), a la carte downloads of music and video, and also streaming of music and videos.

Amazon’s e-books business has had a significant impact on the publishing industry and book distribution market, with the Kindle platform unleashing a torrent of self-published works. Amazon’s physical products business played a role in the demise of physical record stores. Its streaming video service involves movie titles and television shows that it licenses as well as original content. Titles that it licenses from movie and television networks support revenue to the movie and television industry, whereas its original content poses a threat to those revenues.

3.

Identify three online sources of content that exemplify one of the three digital content revenue models (subscription, a la carte, and advertising-supported) discussed in the chapter. Describe how each site works, and how it generates revenue. Describe how each site provides value to the consumer. Which type of revenue model do you prefer, and why? .

16

Student answers will vary. An example is as follows: Three online sources of content that exemplify the three digital content revenue models are Netflix (subscription), the iTunes Store (a la carte), and Pandora (advertising-supported).

Netflix is a video streaming service. The value to the consumer is access to older movies and TV shows, and some very popular original movies TV shows, on demand for a monthly fee. The iTunes store provides access to content on an a la carte basis via individual downloads All sales are through an Apple account with a customer credit card. Pandora, which provides curated radio programs reflecting customer choice of singers and musicians, provides an ad-supported option as well as a subscription offering. Student opinions will vary as to their own preferences for a revenue model, but they should explain why they prefer one model compared to another.

4.

Identify a popular online magazine that also has an offline subscription or newsstand edition. What advantages (and disadvantages) does the online edition have when compared to the offline physical edition? Has technology platform, content design, or industry structure convergence occurred in the online magazine industry? Prepare a short report discussing this issue.

Perhaps the best place for students to start is to identify newsstand magazines first, and then find their online counterparts. Many online magazines have a free first month offer. The online editions will likely have video, music, and interactive elements that users find captivating and entertaining. The online photography is also excellent but perhaps not quite up to the level of physical print magazines. There are few advantages for the newsstand versions of magazines, except for the physical look and feel of turning pages. With respect to convergence, until recently, there had been very little convergence in the online magazine industry. This is changing, especially in the fashion industry as fashion websites take on many of the features of slick fashion magazines (such as Vogue.com). Content convergence in the areas of creation, production, and distribution has begun to occur. Online editions of national news magazines increasingly use streaming video, social network links, and user comments (For example, Time.com). Many magazines now have e-reader editions or apps that enable magazines to be read on smartphones and tablet computers such as the iPad. In some instances, the print versions of magazines have disappeared entirely, and now only a web-based version is available. The Web and e-readers have created the opportunity to leverage print content to the different distribution channels. Industry structure convergence has not occurred.

5.

In 2014, as discussed in the Insight on Technology case, Amazon purchased Twitch, which lets users stream their video game sessions, for almost $1 billion.

Why would Amazon spend so much money on Twitch? Create a short presentation either defending the purchase or explaining why you think it was a bad idea.

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17 Student answers may vary, but some rationales for defending the purchase might include the following: • The acquisition bought Amazon a significant audience (young, male, technophiles, wealthy) for a decent price. At the time of its acquisition, Twitch had an online audience of about 55 million. Amazon paid about $18 per viewer. Twitch has developed a large user base, which could be valuable to Amazon.

• The acquisition helps Amazon’s push into online video. Amazon is trying to develop video content delivery infrastructure, and Twitch has this.

• The acquisition was a defensive move to prevent Google from buying Twitch.

Rationales for criticizing the purchase might include the following: • Because Twitch was a private company, it is unclear if it was profitable or not at the time of its acquisition or will be thereafter.

• The acquisition might detract from Amazon’s main line of business, which is online retailing. Amazon has little management experience as a creator or broadcaster of video content.

• It is unlikely that Twitch will ever generate enough revenue to make a difference for a company the size of Amazon. Twitch, in the best case, will be a rounding error in the financial statements of Amazon.

Video Cases Video Case 10.1, Substack: An Alternative News Delivery Platform, appears on page 629 of the eText, following the Insight on Business case. Substack is a different kind of new purely digital news platform. In the video, released in January 2021, Substack founder and chief executive officer Chris Best, why he believes the newsletter platform is a trustworthy alternative to other online news platforms. Questions that you can use for class discussion or as a student assignment include the following: • How does Best describe Substack?

Answer: Substack is a subscription publishing platform for independent writers.

Readers subscribe directly to writers and pay them directly.

• What resources does Substack provide?

Answer: Substack provides an “all-in-one software tool that enables independent writers to publish their content to the web and also distribute an e-mail newsletter to subscribers. It formats the content. It also provides subscription functionality. It also provides additional services, such as legal advice. However, it does not provide editorial services or content moderation.

• What is Best’s view about how the traditional newspaper business model leads to an increase in polarization?

Answer: Best believes that the advertising-supported business model is one of the root causes of disinformation, because it incentivizes content that attracts the maximum attention, maximizing engagement and outrage, which is often content that is controversial and polarizing. Best thinks that the Substack model helps avoid this because writers on Substack do not have an incentive to be deliberately polarizing. .

18

Video Case 10.2, Roblox and Online Gaming, appears on page 651 of the eText, at the end of the “Creators and User-Generated Content” section. As previously noted, Roblox, although primarily known as an online gaming platform, has also become a major platform for creators. In the video, released in August 2022, Roblox chief executive officer David Baszucki, discusses the current state of affairs for Roblox. Questions that you can use for class discussion or as a student assignment include the following: • How does Baszucki describe Roblox?

Answer: Baszucki describes Roblox as not just a game, or even game platform, but instead is an “immersive human experience plaform” where people come together to play, but also come together to learn and experience things, and that ultimately, the type of technology Roblox is working on is almost more of a utility that people can use in their daily lives.

• What does the interviewer find surprising about Roblox’s demographics, and how does Baszucki explain this?

Answer: The interviewer finds it surprising that Roblox’s fastest growing demographic in the United States and Canada is the 18-to-24-years old age group, outpacing younger children. Baszucki says the reason for this is that Roblox has always had the vision of Roblox as a “civil” platform that brings people of all ages together and allows them to do things together. Baszucki states that the growth of this age group demographic is driven by three things: content (noting that almost half of all the content on Roblox is now played more by players over the age of 13 than players under the age of 13); the core virality of the platform, and by constant technical innovation.

• According to Baszucki, why is it important for Roblox to be very efficient and deliberate about spending?

Answer: Baszucki notes that this is very important because everything that Roblox spends is money that does not go back to its developer community (the content creators on its platform). So as much as possible, Roblox is trying to be as efficient as possible with its spending so that developers receive a bigger “piece of the pie.”

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1 Instructor’s Manual and Video Cases: Chapter 11 Social Networks, Auctions, and Portals Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

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2 2 3 3 3 3 4 4 7 8 14 16

2 Learning Objectives After reading this chapter, your students should be able to: • Describe the different types of social networks and online communities and their business models.

• Describe the major types of auctions, their benefits and costs, how they operate, when to use them and the potential for auction abuse and fraud.

• Describe the major types of Internet portals and their business models.

Chapter Outline LinkedIn: A Different Kind of Social Network 11.1 Social Networks and Online Communities What Is an Online Social Network?

The Growth of Social Networks and Online Communities Turning Social Networks into Businesses Insight on Society: The Dark Side of Social Networks Types of Social Networks and Their Business Models Social Network Technologies and Features Insight on Technology: Are Facebook’s Algorithms Dangerous?

11.2

Online Auctions Benefits and Costs of Auctions Benefits of Auctions Risks and Costs of Auctions Auctions as an E-commerce Business Model Types and Examples of Auctions When to Use Auctions (and for What) Auction Prices: Are They the Lowest?

Consumer Trust in Auctions When Auction Markets Fail: Fraud and Abuse in Auctions

11.3

E-commerce Portals The Growth and Evolution of Portals Types of Portals: General-Purpose and Vertical Market Portal Business Models Insight on Business: Yahoo and AOL Get Yet Another New Owner

11.4

Careers in E-commerce The Company Position: Social Marketing Specialist Qualifications/Skills Preparing for the Interview Possible First Interview Questions

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3 11.5

Case Study: eBay: Refocusing on Its Roots and Embracing Recommerce

11.6

Review Key Concepts Questions Projects References

List of Key Terms affinity communities, p. 676 affinity groups, p. 677 algorithms, p. 676 computer algorithms, p. 676 consumer-to-consumer (C2C) auctions, p. 681 English auction, p. 684 general communities, p. 676 general-purpose portals, p. 690 herd behavior, p. 687 interest-based social networks, p. 676 loser’s lament, p. 687 online social network, p. 668 penny (bidding fee) auction, p. 685 practice networks, p. 676 reverse auction, p. 684 seller’s lament, p. 687 social network, p. 668 sponsored communities, p. 676 vertical market portals, p. 690 winner’s regret, p. 687 List of Figures Figure 11.1 Top Social Networks 2022, p. 669 Figure 11.2 U.S. Ad Spending on Top Social Networks, 2021, p. 671 (Figure video in eText) Figure 11.3 Facebook’s Algorithm for Generating Personalized Stories, p. 749 Figure 11.4 Two General Types of Portals: General-Purpose and Vertical Market Portals, p. 691 List of Tables Table 11.1 Other Social Networks, p. 670 Table 11.2 Time Spent on Top Social Networks, 2022, p. 671 Table 11.3 Types of Social Networks and Online Communities, p. 673 Table 11.4 Social Network Features, p. 681 Table 11.5 Leading Online Auctions, p. 682

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4 Table 11.6 Table 11.7

Factors to Consider When Choosing Auctions, p. 685 Typical Portal Revenue Sources, p. 691

List of Video Cases Video Case 11.1: Nextdoor and Local Social Networks Video Case 11.2: Zigazoo: A Social Network for Kids Overview This chapter introduces students to social networks, auctions, and portals. The thread relating these three topics is that each in its own way involves communities on the Internet.

Teaching Suggestions: Key Points Social Networks and Online Communities. The opening case, LinkedIn: A Different Kind of Social Network (new for this edition) is a good way to introduce the chapter. Social networks and online communities are places where people who share common ties, gather and communicate. People tend to think of social networks as merely involving people 18 years and under. But, in fact, social networks have expanded far beyond that limited demographic and now encompass a broad swath of professionals and businesspeople. Some questions you could pose to your class on this case include the following: • How does LinkedIn differ from other types of social networks, such as Facebook, Twitter, Instagram, and TikTok? • Why do you think users trust LinkedIn more than other social networks?

• Do you have a LinkedIn profile? If so, what LinkedIn features do you use most frequently?

• Section 11.1 covers social networks and online communities. Figure 11.1 illustrates the reach of the top social networks, worldwide and in the United STates. TikTok is a new entrant to the list and is further discussed in the text. You can ask students to visit a social network and make a list of ten features or functions available. You can also ask students to talk about their use of social networks and how social networks have changed their lives. Table 11.1 lists some less well-known social networks.

Video Case 11.1, Nextdoor and Local Social Networks, appears on page 670 of the eText, immediately following Table 11.1. See page 16 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Table 11.2 illustrates the different levels of engagement on top social networks, based on the amount of time users spend each month. You can ask students which social networks they spend the most time on, how much time they estimate they spend, and how the Covid-19 pandemic impacted their own use of social networks.

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5 Previous generations of online community networks fell much more into the traditional model of a broadcast cable network focused on a single group. Today’s social networks are much different, with a strong user-generated content base, and more many-to-many communications channels. They are enablers of social interaction. The rapid adoption and intense use of mobile devices has also contributed to the continued growth of social networks.

Now it’s time to talk about the business side of social networks, both from the social network’s perspective, and from the perspective of businesses that would like to use social networks for marketing, advertising, and social e-commerce. Figure 11.2 illustrates U.S. ad spending on top social networks. Not surprisingly, Meta, which owns Facebook and Instagram dominates. Meta’s ad revenues are derived almost equally from both Facebook and Instagram. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to this topic.

It’s important for students to realize that the use of social networks by businesses is not risk-free. The Insight on Society case, Businesses Beware: The Dark Side of Social Networks (updated for this edition), examines some of these risks and highlights some recent social network “fails.” Class discussion questions might include the following: • How can businesses accurately judge whether negative comments are trolling, or whether they have merit and warrant a response?

• Have you ever left a negative comment about a product or business? Have others’ negative comments influenced a purchase?

• Should a business have any say in how an employee uses social networks outside of the office?

Table 11.3 discusses the variety of generic types of social networks and gives examples of each type. Video Case 11.2: Zigazoo: A Social Network for Kids, appears on page 675 of the eText, immediately following Table 11.3. See pages 16 to 17 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

The section concludes with a look at various technologies used by, and features of, social networks. Software algorithms used to deliver personalized content have become a fundamental technology for social networks and also a very controversial one. Figure 11.3 illustrates Facebook’s algorithm for generating personalized stories. Th Insight on Technology case, Are Facebook’s Algorithm’s Dangerous Bubble? (new for this edition), further focuses on this topic. Questions for class discussion might include the following: • How did Facebook’s News Feed (Feed) algorithm work?

• What problems does using algorithms solve for Facebook?

• Should Facebook be held responsible for presenting an equal number of both liberal and conservative opinions?

• Do you think Facebook’s algorithm is dangerous? Why or why not? .

6 Online Auctions. Section 11.2 covers online auctions. In the early days of e-commerce, online auctions were a popular method for the purchase and sale of goods, and eBay leveraged the online auction model to become one of the most successful online retail companies. Students may think of online auctions as producing the lowest prices for consumers, but in fact there are many situations where auctions induce consumers to pay higher prices than offered by traditional liquidators. You might want to spend some extra time in class walking students through the figures and tables describing auctions.

Auctions are dynamically priced markets. Consider reviewing with students the definition of dynamic pricing (introduced in Chapter 6), and the various types of dynamic pricing, and contrasting these to fixed pricing. You might ask students to think about the costs and benefits of fixed pricing. Why do merchants want to charge fixed prices?

Walk through the benefits and risks section. Most students think auctions are all benefit and no costs. For many students, the risks and costs of auctions will be a new topic so spend extra time on this section. The business of auctions, the market-maker business, also should be explained. Ask students why the auction model was very profitable, particularly in the early years of e-commerce, and discuss why it has become less popular in recent years.

There are many different types of auctions. Here is where your students may get confused. The text focuses on three primary types of auctions: English auctions (eBay), reverse auctions (a format made popular in the C2C area by Priceline, with its Name Your Own Price auctions), and penny (bidding fee) auctions.

Table 11.6 provides a list of factors that managers should take into account when considering auctions for various products from the type of product, to product life cycle, to closed versus open bidding.

Consumer behavior at auctions is very interesting because at times, it is non-rational.

Consumers behave at auctions in ways contrary to neo-classical, profit maximizing decision makers. Prices are influenced by the number of units, length of the auction, the arrival rate of bidders, and herd behavior (where bidders follow other bidders and bid the price higher). Students, who are also consumers, should be aware of these factors to protect themselves, and they should also be aware of the numerous opportunities for fraud on popular auction sites.

E-commerce Portals. Section 11.3 covers portals. Portals originally acted as search engine gateways to the Web. Today they seek to operate as destination sites, like television networks attracting huge audiences to their proprietary offerings of news, products, entertainment, and content. While typically attracting among the the largest online audiences, portals face a difficult challenge in producing profits. The portal market is characterized by network effects, which has led inevitably to the dominance of a few portals. Figure 11.4 illustrates the different types of portals: general-purpose and vertical market portals. To motivate this discussion, you could visit one of each type in class.

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7 The portal business is quite complex. Table 11.7 depicts the major revenue sources for portals. In general, deep vertical content pitched to a targeted audience produces the highest revenues per customer. The survival strategy for general-purpose portals is, therefore, to attract a general audience and then offer deep channels of specialized interest where consumers can be exposed to highly targeted advertising.

The Insight on Business case, Yahoo and AOL Get Yet Another New Owner (updated for this edition), focuses the current difficulties of the portal business model, including Verizon’s failed efforts to make its acquisitions of Yahoo and AOL work. The following are some possible class discussion questions for this case: • What prompted Verizon to purchase Yahoo and AOL? • What steps did Verizon initially take to accomplish its goal?

• After Verizon’s initial business strategy failed, what steps did it take?

• Why did Apollo Global Management decide to buy Yahoo and AOL from Verizon?

• Do you think Apollo will be more successful than Verizon with this purchase? Why or why not?

In Section 11.4 we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as a social marketing specialist.

The updated chapter-ending case study in Section 11.5 discusses eBay’s transformation from millions of small individual and mom-and-pop auction sellers into a major name brand location for the heavy hitters who sell millions of dollars of goods at fixed prices every year and large corporations looking for new retail outlets, as well as its current efforts to refocus on its roots.

Case Study Questions and Answers 1.

Contrast eBay’s original business model with its current business model. eBay began business under the name AuctionWeb in 1995 as an offbeat, quirky place for consumers to buy and sell almost anything to one another via online auctions. In 1998, eBay went public, with founder Pierre Omidyar and company officials crediting the Beanie Babies craze of the late 1990s for introducing people to the platform. But, after rapid growth, the auction model began to struggle. For many buyers, the novelty of online auctions had worn off, and they began to prefer the simplicity of buying goods from Amazon and other fixed-price retailers. Search engines and comparison-shopping sites were also taking away some of eBay’s auction business by making items easier to find online. Former CEO John Donahoe instituted a revival plan that moved eBay away from its origins as an online flea market and partnered with retail chains to serve as another channel for current merchandise. The small sellers who had driven eBay’s early growth were encouraged to shift away from the auction format and move toward the fixed-price sales model. eBay adjusted its fees and revamped its search engine to incentivize fixed-price sales. Rather than displaying auctions that were .

8 close to finishing at the top of search results, eBay tweaked its search tool to account for price and seller reputation so that highly rated merchants appeared first and received more exposure. T e auctions that once powered eBay’s results have now taken a back seat to fixed price, “Buy It Now” listings. Also, from its beginning, eBay also invested in what it considered to be related lines of business, such as PayPal, Craigslist, Skype, StubHub, GSI Commerce, Magento, and others. Today, eBay eBay no longer owns or operates any of those businesses: It has divested itself of them at various times through the years, sometimes for a profit and sometimes not. The eBay of today has decided instead to refocus on its roots: running a marketplace featuring unique selections and great values, with renewed attention on collectibles such as trading cards, watches, and sneakers that attract enthusiast buyers. Chief Executive Officer Jamie Iannone, who took the helm in 2020, has said that his plan is to center on eBay’s “core” and on its individual sellers and enthusiast buyers. eBay is also returning to its roots in embracing the recommerce and circular economy movement. .

2.

What are the problems that eBay is currently facing? How is eBay trying to solve these problems? eBay faces both challenges and potential opportunities. The amount of GMV it generated in 2021 ($87_billion) was flat compared to the GMV it generated in 2020, and the number of active buyers declined from 185_million at the end of 2020 to 147_million at the end of 2021. The number of sellers also declined, from 19_million_to_17_million. For the first quarter of 2022, GMV and the number of active buyers declined for a fourth consecutive quarter, and eBay recorded a $1.3_billion loss compared to a $641_million profit in the first quarter of 2021.

But Iannone remains confident in eBay’s long-term strategy. He attributes the decline in eBay’s results to what he categorized as “near-term headwinds,” such as consumers returning to stores after the Covid-19 pandemic and rising inflation.

And although auctions are not likely to ever have as preeminent a place in eBay’s business model as they once did, it’s possible that as eBay continues to focus on recommerce and collectible items, auctions may also experience a resurgence, as the auction format is uniquely suited for those types of goods.

3.

Investigate eBay’s current performance. Has eBay’s new strategy worked? Why or why not?

Answers this question will vary depending on eBay’s current performance at the time this question is assignee.

End-of-Chapter Questions and Answers 1.

What do social networks, auctions, and portals have in common?

Social networks, auctions, and portals are all based on feelings of shared interest and self-identification—in short, a sense of community. Social networks and

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9 online communities explicitly attract people with shared affinities, such as ethnicity, gender, religion, and political views, or shared interests, such as hobbies, sports, and vacations. The auction site eBay started as a community of people interested in trading unwanted but functional items for which there was no ready commercial market. That community turned out to be huge—much larger than anyone expected. Portals also contain strong elements of community by providing access to community-fostering technologies such as e-mail, chat groups, bulletin boards, and discussion forums.

2.

What are the four defining elements of a social network—online or offline?

Social networks involve (a) a group of people, (b) shared social interaction, (c) common ties among members, and (d) people who share an area for some period.

3.

Why is Pinterest considered a social network, and how does it differ from Facebook?

Pinterest is a visually oriented site that allows users to curate their tastes and preferences, expressed in visual arts. Pinterest is similar to a visual blog.

Facebook, on the other hand, focuses on sharing of news and comments among “friends.”

4.

What are three mobile social networks?

Today, almost all social networks can be considered “mobile social networks,” given that users predominantly access them using mobile devices. Students should be given credit for mentioning any three of the following: Facebook, Twitter, Instagram, Pinterest, Snapchat, Twitter, LinkedIn, WhatsApp, or TikTok.

5.

Why are mobile social networks growing so quickly?

Mobile social networks are growing so quickly due to the rapid adoption and intense use of mobile devices.

6.

What are two measures that can be used to understand the importance of social networks and to compare them to other Internet experiences?

Two measures that can be used to understand the importance of social networks and to compare them to other Internet experiences are monthly unique visitors and time on site (engagement).

7.

What is an affinity community, and what is its business model?

An affinity community is one in which members can participate in focused discussions with others who share the same affinity, or group identification, such as religion, ethnicity, gender, sexual orientation, or political beliefs. The business

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10 model is a mixture of subscription revenue from premium content and services, advertising, tenancy/sponsorships, and distribution agreements.

8.

List and describe three different types of auctions. [ERRATA] The English auction is the easiest to understand and the most common form of auction on eBay. Typically, there is a single item up for sale from a single seller.

There is a time limit when the auction ends, a reserve price below which the seller will not sell (usually secret), and a minimum incremental bid set. Multiple buyers bid against one another until the auction time limit is reached. The highest bidder wins the item (if the reserve price of the seller has been met or exceeded). English auctions are considered to be seller-biased because multiple buyers compete against one another—usually anonymously.

In the B2C area, the use of the reverse auction format was pioneered by Priceline, who used it to sell airline tickets, hotel rooms, and vacation packages under the name “Name Your Own Price.” In a reverse auction, users specify what they are willing to pay for goods or services, and multiple providers bid for their business.

Prices do not descend and are fixed: The initial offer is a commitment to purchase at that price. Priceline successfully offered Name Your Own Price auctions for many years but eventually discontinued the format in 2020. Today, reverse auctions are primarily found in the B2B arena .

To participate in a penny auction (also known as a bidding fee auction), you typically must pay the penny auction site for bids ahead of time, typically 50 cents to $1 dollar, usually in packs costing $25–$50. Once you have purchased the bids, you can use them to bid on items listed by the penny auction site (unlike traditional auctions, items are owned by the site, not third parties). Items typically start at or near $0 and each bid raises the price by a fixed amount, usually just a penny. Auctions are timed, and when the time runs out, the last and highest bidder wins the item. Although the price of the item itself may not be that high, the successful bidder will typically have spent much more than that. Unlike a traditional auction, it costs money to bid and that money is gone even if the bidder does not win the auction. The bidder’s cumulative cost of bidding must be added to the final price of a successful bid to determine the true cost of the item.

9.

What is the difference between a C2C and a B2B auction?

The most widely known auctions are consumer-to-consumer (C2C) auctions, in which the auction house is simply an intermediary market maker, providing a forum where consumers—buyers and sellers—can discover prices and trade.

Business-to-business (B2B) auctions, where a business uses the auction model as a part of B2B e-commerce with other businesses, constitute a significant part of B2B e-commerce.

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11 10.

How does a reverse auction work?

In a reverse auction, users specify what they are willing to pay for goods or services, and multiple providers bid for their business. Prices do not descend and are fixed: the initial consumer offer is a commitment to purchase at that price.

11.

List and briefly explain three of the benefits of auction markets.

The benefits of auction markets are: • Liquidity: Sellers and buyers are connected in a global marketplace.

• Price discovery: Even difficult to price items can be competitively priced based on supply and demand.

• Price transparency: Everyone in the world can see the asking and bidding prices for items, although prices can vary from auction site to auction site.

• Market efficiency: Consumers are offered access to a selection of goods that would be impossible to access physically, and consumer welfare is often increased due to reduced prices.

• Lower transaction costs: Merchants and consumers alike are benefited by the reduced costs of selling and purchasing goods compared to the physical marketplace.

• Consumer aggregation: A large number of consumers who are motivated to buy are amassed in one marketplace—a great convenience to the seller.

• Network effects: The larger an auction site becomes, in both the numbers of users and products, the greater all the above benefits become and, therefore, the more valuable a marketplace it becomes.

• Market maker benefits: Auction sites have no inventory carrying costs or shipping costs, making them perhaps the ideal online business in that their main function is the transfer of information.

12.

What are the four major costs to consumers of participating in an auction?

The major costs to consumers of participating in an auction are: • Delayed consumption costs: Auctions can go on for days and the product must then be shipped to the buyer. Buyers will typically want to pay less for an item they cannot immediately obtain.

• Monitoring costs: Buyers must spend time monitoring the bidding.

• Equipment costs: Buyers must purchase, or have already purchased, computer systems and Internet service, and learned how to operate these systems.

• Trust risks: Consumers face an increased risk of experiencing a loss as online auctions are the largest source of Internet fraud.

• Fulfillment costs: Buyers must pay for packing, shipping, and insurance, and will factor this cost into their bid price.

13.

What are some of the risks of penny (bidding fee) auctions?

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12 To participate in a penny auction (also known as a bidding fee auction), you typically must pay the penny auction site for bids ahead of time. Once you have purchased the bids, you can use them to bid on items listed by the penny auction site. Items typically start at or near $0 and each bid raises the price by a fixed amount, usually just a penny. Auctions are timed, and when the time runs out, the last and highest bidder wins the item. Although the price of the item itself may not be that high, the successful bidder will typically have spent much more than that.

Unlike a traditional auction, it costs money to bid and that money is gone even if the bidder does not win the auction. The bidder’s cumulative cost of bidding must be added to the final price of a successful bid to determine the true cost of the item.

14.

What is herd behavior and how does it impact auctions?

Herd behavior is the tendency to gravitate toward, and bid for, auction listings with one or more existing bids, by making multiple bids on some auctions (coveted comparables) and making no bids at auctions for comparable items (overlooked comparables). Herd behavior results in consumers paying higher prices than necessary for reasons having no foundation in economic reality.

15.

Name and describe five types of possible abuses and frauds that may occur with auctions.

Some of the possible abuses and frauds include: • Bid rigging: Agreeing offline to limit bids or using shills to submit false bids that drive prices up.

• Price matching: Agreeing informally or formally to set floor prices on auction items below which sellers will not sell in open markets.

• Shill feedback, defensive: Using secondary IDs or other auction members to inflate seller ratings.

• Shill feedback, offensive: Using secondary IDs or other auction members to deflate ratings for another user (feedback bombs).

• Feedback extortion: Threatening negative feedback in return for a benefit.

• Transaction interference: E-mailing buyers to warn them away from a seller.

• Bid manipulation: Using the retraction option to make high bids, discovering the maximum bid of the current high bidder, and then retracting the bid.

• Non-payment after winning: Blocking legitimate buyers by bidding high, then not paying.

• Shill bidding: Using secondary user IDs or other auction members to artificially raise the price of an item.

• Transaction non-performance: Accepting payment and failing to deliver.

• Non-selling seller: Refusing payment or failing to deliver after a successful auction.

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13 •

16.

Bid siphoning: E-mailing another seller’s bidders and offering the same product for less.

What types of products are well-suited for an auction market? At what points in the product life cycle can auction markets prove beneficial for marketers?

The types of products that are well-suited for an auction market include rare and unique products where prices are difficult to discover and where there may have been no market for the goods. These include perishable items such as airline tickets, hotel rooms, car rentals, or tickets to plays, concerts, and sporting events.

Traditionally, auctions have been used by businesses to generate a higher profit on items at the end of their life cycle than they would receive from product liquidation sales. However, they are now more frequently being used at the beginning of a product’s life cycle to generate premium prices from highly motivated early adopters, for example: early releases of music, books, DVDs, video games, and digital appliances.

17.

What three characteristics define a portal today?

The three characteristics that define a portal today are navigation of the Web, providing content, and serving as the starting point for pursuing commerce.

Portals are gateways to billions of web pages available on the Internet. Originally, their primary purpose was to help users find information on the Web, but they have evolved into destination sites that provide a myriad of content from news to entertainment.

18.

What are the two main types of vertical market portals, and how are they distinguished from one another?

The two main types of vertical market portals are affinity group portals and focused-content portals. Affinity group portals seek to attract statistical aggregates of people who identify themselves by their attitudes, values, beliefs, and behavior.

They exist to serve such broad constituencies, such as ethnic, minority and large special interest groups, as well as much more focused constituencies like union members, religious groups, and even home-schooling families. Focused-content portals contain in-depth information on a particular topic in which all members are interested. They can provide content on such broad topics as sports, news, weather, entertainment, finance, and business. Or they can appeal to a more focused interest group such as boat, horse, or video game enthusiasts.

19.

List and briefly explain the main revenue sources for the portal business model.

The main revenue sources for the portal business model are: • Providing ISP services such as online access and e-mail services for a monthly fee.

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14 • •

• •

20.

General advertising such as charging for the number of banner ad impressions delivered.

Tenancy deals whereby companies that value having access to their audience will lock in long-term multiple-year deals in which they are guaranteed a certain number of impressions with premium placement on home pages and through exclusive marketing deals, for example, subscription fees.

Charging for premium content.

Garnering commissions on sales that are generated from consumers originating from the portal site.

Why have online auctions declined in popularity compared to the early years of ecommerce?

Over the years, the popularity of online auctions has significantly declined, with most listings on eBay, for example, using posted prices rather than auction pricing. Research indicates that this change has been driven, at least in part, by changes in consumer preferences for convenience and also because of increased retail competition.

Projects: Questions and Answers 1.

Find two examples of an affinity portal and two examples of a focused-content portal. Prepare a presentation explaining why each of your examples should be categorized as an affinity portal or a focused-content portal. For each example, surf the portal and describe the services each provides. Try to determine what revenue model each of your examples is using and, if possible, how many members or registered visitors the portal has attracted.

One example of an affinity portal is the Gifted Homeschoolers Forum (GHF, at ghflearners.org). The group is a nonprofit, all-volunteer organization that works to educate and advocate for homeschooling families with gifted children. The website includes resources and articles from parents and experts, an online community for support and advice, sponsorship of events with nationally known speakers, and a schedule of conferences, lectures, and other opportunities. The group also has a Twitter feed.

One focused-content portal is Fantasysp.com, which offers a central location for fantasy sports news and data. The site’s revenue model appears to be a mix of advertising, freemium, and subscription services. It also sells content (depth charts for various sports). This is a focused-content portal providing in-depth information on all aspects of fantasy sports in which its members have a keen interest.

Information such as that presented above should be included for all four examples chosen by the students in their presentation. Presentations might also include any

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15 current information the students can find on the status of these companies, and whether their niche strategies are, in fact, working.

2.

Examine the use of auctions by businesses. Go to any online auction of your choosing and look for outlet auctions or auctions directly from merchants.

Research at least three products for sale. What stage in the product life cycle do these products fall into? Are there quantity purchasing requirements? What was the opening bid price? What are the bid increments? What is the auction duration? Analyze why these firms have used the auction channel to sell these goods and prepare a short report on your findings.

Students can find a variety of auctions used by businesses at Liquidation.com.

Other sites offering auctions by businesses include Walmart Liquidation Auctions and B-Stock, There are also auctions that focus on a particular industry, such as Techliquidations, and RestaurantEquipment.bid. Student answers sill vary depending on the auctions chosen

3.

Visit one for-profit and one nonprofit sponsored social network. Create a presentation to describe and demonstrate the offering at each social network.

What organizational objectives is each pursuing? How is the for-profit company using community-building technologies as a customer relations management tool?

Campbell Soup Company’s website offers articles on nutrition basics, fitness and exercise, simple steps to eating smart, lifestyle changes, and making them work.

Campbell’s objective is to promote the inclusion of Campbell’s soups in a healthy diet. A menu plan has been set up to give users recipes for all three meals of the day, including snacks that meet the daily recommended guidelines for fat, saturated fat, protein, carbohydrates, and sodium. The obvious goals are to extend brand influence and loyalty and to increase offline product sales. In addition to being able to sign up for a newsletter, other community building technologies that are being used as customer relations management tools on the site are relating company news and product information including a complete listing and product information on all Campbell’s brands (Pepperidge Farms, V8, Pace, Prego, etc.).

Students might also visit one of any number of Facebook Groups (some of which are private and require acceptance by an administrator) that various brands have created in recent years and perform a similar analysis.

At a nonprofit sponsored community network such as LiveBaltimore.com, offerings include information on communities; home buying, including home buying incentive programs; renting; calendars of community events; lists of schools; and lists of books written about and movies filmed in the area. Objectives of this network include relaying community information and events to current residents; helping newcomers to settle in the area; and most of all, to promote Baltimore and its many communities as vibrant and active communities in which to live. Relocation products and services are a major offering. Preferred real estate

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16 agents are recommended, houses are listed for sale or rent, and listings are offered for attractions, events, bars, restaurants, entertainment, employers, and local media. This site currently does not have any interactive community building technologies in use, mainly concentrating on the distribution of information.

4.

Visit one of the social networks listed in Table 11.1 and compare it to Facebook.

In what ways is it similar to Facebook, and in what ways is it different? Which do you prefer, and why?

Student answers will vary depending on the social network chosen.

Video Cases Video Case 11.1, Nextdoor and Local Social Networks, appears on page 670 of the eText, immediately following Table 11.1. Nextdoor is “hyperlocal” social network that focuses on people who are “real life neighbors” who live in geographic proximity to one another.

This Newsy video, released in May 2022, provides a brief overview of Nextdoor.

Questions that you can use for class discussion or as a student assignment include the following: • What was the impact of the Covid-19 pandemic on Nextdoor?

Answer: The Covid-19 pandemic and subsequent lock-downs played a role in attracting more users and in increasing user engagement in Nextdoor, as it provided a space for users to get updates on local information, such as school and business closures.

• What are some of the statistics that reflect the growth of Nextdoor?

Answer: In 2019, Nextdoor had 48 million verified users, which grew to 58 million in 2020, and then 69 million as of midway through 2021. Weekly active users grew from 27 million in the last quarter of 2020 to 36 million in 2021. As of the end of 2021, Nextdoor was in nearly one in three households across the United States.

• What other local social networks compete with Nextdoor?

Answer: Amazon Ring has a Neighbors feature that allows users to create posts that notify their neighbors of crime or safety events within a certain distance of their home. The alerts appear on a map and in a timeline, so users can know where information is coming from. Ring users can also post about things like lost pets, and the app has a feature that enables users to highlight good neighborly deeds. The video notes that Facebook also has a Nextdoor competitor, named Neighborhoods, that is designed to allow neighbors to connect and share local news. Although not mentioned in the video, Facebook discontinued this feature subsequent to the release of the video. Some students may also note that Facebook Groups focused on a particular geographic community also serve a similar function.

Video Case 11.2: Zigazoo: A Social Network for Kids, appears on page 675 of the eText, immediately following Table 11.3. Zigazoo is a TikTok-style video-sharing social network app aimed at children. The video, released in June 2022, features Zigazoo founder and chief executive officer Zak Ringelstein, who discusses Zigazoo’s plans .

17 following receiving $17 million in venture capital financing. Questions that you can use for class discussion or as a student assignment include the following: • What was the problem that Zigazoo was created to solve?

Answer: Ringlestein says that he started Zigazoo out of his own home, when during the pandemic, he was looking for things for his children to do that involved more than just playing a game or passively watching digital media. He wanted to focus on things that would engage children’s creativity. They landed on the idea of using project-based learning to give challenges. Examples illustrated in the video in the Arts & Music category include “Can you draw this Candy Corn?”; in the Health category: “Can you do 10 pushups.” Children can then create short-form videos of them responding to the challenge and upload them to the app.

• Why is Zigazoo getting into NFTs (non-fungible tokens)?

Answer: Ringelstein thinks Web3 and “crypto” are the future of the Internet, and introducing children to NFTs will provide kids with opportunities to interact with this technology. Zigazoo wants to provide kids with an introduction to technologies that will enable them to think of themselves less as consumers and more as creators.

• What evidence does Ringelstein present to assure parents that Zigazoo is a safe environment for children?

Answser: Ringelstein notes that Zigazoo has the highest rating from Common Sense Media, and has qualified as safe harbor from the FTC, “COPPA-certified” as kid safe. He notes that unlike Instagram for instance, Zigazoo has been built from the ground up for kids, and that every single decision is made with kids in mind. He also notes that there is no commenting and no negativity on the platform.

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1 Instructor’s Manual and Video Cases: Chapter 12 B2B E-commerce: Supply Chain Management and Collaborative Commerce Instructor’s Manual Table of Contents Learning Objectives Chapter Outline List of Key Terms List of Figures List of Tables List of Video Cases Overview Teaching Suggestions: Key Points Case Study Questions and Answers End-of-Chapter Questions and Answers Projects: Questions and Answers Video Cases

2 2 3 4 5 5 5 5 8 9 15 17

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2 Learning Objectives After reading this chapter, your students should be able to: • Discuss the evolution and growth of B2B e-commerce, as well as its potential benefits and challenges.

• Understand how procurement and supply chains relate to B2B ecommerce.

• Identify major trends in supply chain management and collaborative commerce.

• Understand the different characteristics and types of B2B e-commerce marketplaces.

• Understand the objectives of private B2B networks, their role in supporting collaborative commerce, and the barriers to their implementation.

Chapter Outline Amazon Business: Amazon Takes on B2B 12.1 An Overview of B2B E-commerce Some Basic Definitions The Evolution of B2B E-commerce The Growth of B2B E-commerce Potential Benefits and Challenges of B2B E-commerce Insight on Society: Supply Chains Hit the Headlines 12.2

The Procurement Process and Supply Chains Steps in the Procurement Process Types of Procurement Multi-tier Supply Chains Visibility and Other Concepts in Supply Chain Management The Role of Existing Legacy Computer Systems and Enterprise Systems in Supply Chains

12.3

Trends in Supply Chain Management and Collaborative Commerce Supply Chain Simplification and Just-in-Time and Lean Production Supply Chain Black Swans: Adaptive Supply Chains Accountable Supply Chains: Labor Standards Sustainable Supply Chains Mobile B2B B2B in the Cloud Supply Chain Management Systems Blockchain, the Internet of Things, and Supply Chain Management Insight on Technology: Blockchain Takes on the Diamond Supply Chain Collaborative Commerce Collaboration 2.0: Web, Cloud, and Mobile

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3 Social Networks and B2B: The Extended Social Enterprise B2B Marketing 12.4

B2B E-commerce Marketplaces: The Selling Side of B2B Characteristics of B2B E-commerce Marketplaces Types of B2B E-commerce Marketplaces E-distributors E-procurement Exchanges Industry Consortia

12.5

Private B2B Networks Objectives of Private B2B Networks Private B2B Networks and Collaborative Commerce Insight on Business: Walmart’s Private B2B Network Supports Omnichannel Growth Implementation Barriers

12.6

Careers in E-commerce The Company Position: Junior Supply Chain Analyst Qualifications/Skills How to Prepare for the Interview Possible First Interview Questions

12.7

Case Study: Elemica: Cooperation, Collaboration, and Community

12.8

Review Key Concepts Questions Projects References

List of Key Terms accountable supply chain, p. 726 adaptive supply chain, p. 726 automated order entry systems, p. 713 B2B commerce, p. 713 B2B e-commerce (B2B digital commerce), p. 713 B2B e-commerce marketplaces (Net marketplaces), p. 715 B2B e-commerce website, p. 715 Bring Your Own Device (BYOD) policy, p. 727 buyer-side solutions, p. 714 circular economy, p. 727 cloud-based B2B system, p. 728 collaborative commerce, p. 733

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4 collaborative resource planning, forecasting, and replenishment (CPFR), p. 749 contract purchasing, p. 720 direct goods, p. 720 e-distributor, p. 740 electronic data interchange (EDI), p. 714 enterprise systems, p. 723 e-procurement company, p. 742 exchange, p. 743 horizontal markets, p. 714 indirect goods, p. 720 industry consortium, p. 745 just-in-time production, p. 724 lean production, p. 724 legacy computer systems, p. 723 liquidity, p. 744 MRO goods, p. 720 multi-tier supply chain, p. 721 private B2B networks (private industrial networks) p. 715 procurement process, p. 717 seller-side solutions, p. 713 spot purchasing, p. 721 supply chain, 713 supply chain competition, p. 711 supply chain management (SCM), p. 724 supply chain management (SCM) systems, p. 730 supply chain simplification, p. 724 supply chain visibility, p. 722 sustainable supply chain, p. 727 tight coupling, p. 724 value chain management (VCM) services, p. 742 vertical market, p. 714 List of Figures Figure 12.1 The Evolution of the Use of Technology Platforms in B2B E-commerce, p. 714 (Figure video in eText) Figure 12.2 The Growth of B2B E-commerce in the United States, p. 716 Figure 12.3 B2B Commerce 2021, p. 716 Figure 12.4 The Procurement Process, p. 720 Figure 12.5 The Multi-tier Supply Chain, p. 722 Figure 12.6 Cloud-based B2B Platforms, p. 729 Figure 12.7 Supply Chain Management Systems, p. 730 Figure 12.8 Elements of a Collaborative Commerce System, p. 736 Figure 12.9 Pure Types of B2B E-commerce Marketplaces, p. 740 Figure 12.10 E-distributors, p. 741 Figure 12.11 E-procurement Marketplaces, p. 742 Figure 12.12 Exchanges, p. 743

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5 Figure 12.13 Industry Consortia, p. 746 Figure 12.14 Procter & Gamble’s Private B2B Network, p. 747 Figure 12.15 Pieces of the Collaborative Commerce Puzzle, p. 750 List of Tables Table 12.1 Major Trends in B2B E-commerce, 2022–2023, p. 712 Table 12.2 Concepts and Challenges in Supply Chain Management, p. 723 Table 12.3 Characteristics of B2B E-commerce Marketplaces: A B2B Vocabulary, p.

739 Table 12.4 Examples of Independent Exchanges, p. 745

List of Video Cases Video Case 12.1: Apple and Supply Chain Disruption Video Case 12.2: Ramp Helps Businesses with Procurement Processes Overview This chapter discusses B2B e-commerce, supply chain management, and collaborative commerce. Many students will be completely unfamiliar with business-to-business commerce, as well as supply chain management (although they may have become much more aware of supply chains due to the very visible impacts of the Covid-19 pandemic, resulting in major supply chain disruptions), and collaborative commerce. Therefore, it is worthwhile to spend some time introducing these topics before going into depth on the various types of B2B digital commerce relationships.

The challenge in this chapter is to make some sense out of very confusing literature and portray to students the basic ideas without getting them lost in the details. B2B e-commerce is much less visible to students than B2C e-commerce, but it is having a profound impact on how businesses operate.

Teaching Suggestions: Key Points The updated opening case, Amazon Business: Amazon Takes on B2B, highlights the growing interest in B2B, particularly from a sell-side marketplace perspective. Some class discussion questions for this case might include the following: • Why do you think Amazon decided to transition Amazon Business from being simply a distributor of supplies to a B2B marketplace?

• What benefits over other B2B marketplaces does Amazon Business offer buyers?

• What benefits do suppliers have in using Amazon Business?

• Does Amazon Business pose any disadvantages for buyers or sellers?

Overview of B2B E-commerce. Section 12.1 provides an introduction to, and overview of, B2B e-commerce. B2B trade among business firms is huge, about $16 trillion in the United States. Define B2B commerce as all types of computer-enabled inter-firm trade; it has evolved over a 50-year period. You can help anchor students in this evolution by discussing Figure 12.1, which traces the evolutionary path of B2B. This allows students to put the Internet-enabled variant of B2B commerce into perspective as an evolutionary

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6 migration. An engaging animated video created by the authors and narrated by Ken Laudon, available in the eText, provides additional context and background with respect to this topic. Figure 12.2 describes the current and estimated future size of B2B ecommerce. Figure 12.3 illustrates the components of B2B e-commerce and compares it to traditional B2B commerce. The promise of B2B e-commerce is to reduce the transaction costs involved in this inter-business trade. The estimated benefit to the U.S. economy of such a change is in the trillions, money that could be put to more productive uses.

One way you can motivate students to understand B2B is by discussing the potential benefits. It is important for students to understand that there are also some risks created by the increasing globalization and consolidation enabled by B2B e-commerce and supply chains, as was vividly demonstrated by widespread shortages of various types of goods during the Covid-19 pandemic.

Video Case 12.1, Apple and Supply Chain Disruption, appears on page 717 of the eText, just prior to the Insight on Society case. See pages 17 to 18 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

The Insight on Society case, Supply Chains Hit the Headlines (new for this edition) , also focuses on this issue. Class discussion questions for this case might include the following: • What weaknesses did the Covid-19 pandemic reveal with respect to the supply chain management practices of many companies?

• Why does concentrating production on fewer suppliers and locations also concentrate risk?

• What types of tools are available, and what procedures could be implemented to reduce risk?

The Procurement Process and Supply Chains. Section 12.2 covers the procurement process and supply chains. Figures 12.4 and 12.5 are a good way to introduce students to the procurement process and the supply chain. Figure 12.4 describes the procurement business process, and Figure 12.5 describes the multi-tiered nature of the supply chain.

Be sure students understand the different types of procurement: direct versus indirect goods and spot versus contract purchasing. MRO goods should also be explained.

Video Case 12.2, Ramp Helps Businesses with Procurement Processes, appears on page 720 of the eText at the end of the “Steps in the Procurement Process” section. See page 18 of this Instructor’s Manual for more information about this Video Case, as well as questions that you can use for class discussion or as a student assignment.

Trends in Supply Chain Management and Collaborative Commerce. Section 12.3 covers trends in supply chain management and collaborative commerce. The first step is to make sure your students understand what supply chain management entails. Then review the major trends detailed in this section, including supply chain simplification, just-in-time and lean production, adaptive supply chains, accountable supply chains, sustainable

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7 supply chains, mobile B2B, and cloud-based B2B systems. The holy grail of supply chain managers is to produce only enough goods to meet immediate demand and, therefore, to eliminate buffers and inventory in all tiers of the supply chain. Material on mobile B2B and cloud-based B2B software platforms highlights the increasing use of both technologies and their impact on B2B e-commerce. Figure 12.6 illustrates a cloud-based B2B platform.

Blockchain is one of the newer technologies that is beginning to have an impact on supply chain management. For example, Walmart is using it in its Food Traceability Initiative. The text covers the basics of how blockchain works in Chapter 5, and it may be a good idea to review those concepts again. The updated Insight on Technology case, Blockchain Takes on the Diamond Supply Chain, examines how famed diamond merchant De Beers is using blockchain technology to deal with issues in the diamond supply chain. Questions for class discussion might include the following: • What challenges are De Beers hoping to deal with by implementing a blockchain system?

• How does De Beer’s blockchain system work?

• If you were purchasing a diamond, would you want to know its provenance? Would you be willing to pay more for this information? If so, how much more?

The section concludes with a discussion of collaborative commerce, and the impact of social networks on B2B. Figure 12.7 provides an illustration of a contemporary supply chain management system, and Figure 12.8 provides an illustration of a collaborative commerce system.

B2B E-commerce Marketplaces. Section 12.4 goes into greater detail on B2B ecommerce marketplaces. Table 12.3 provides a summary of the different characteristics of B2B e-commerce marketplaces and what each means. It is important that students understand the various biases built into B2B E-commerce marketplaces. Market bias has been one reason that B2B e-commerce marketplaces did not initially flourished as expected; suppliers did not want to compete with one another for large contracts.

There are four “pure” types of B2B e-commerce marketplaces. Figure 12.9 graphically categorizes these four types into a matrix, with example companies for each type (Note that SAP, which purchased Ariba, has recently changed the name of Ariba Network, referenced in Figure 12.9 and also on page 743, to SAP Business Network). The chapter next provides descriptions and examples of each of the four primary types: e-distributors, e-procurement companies, independent exchanges, and industry consortia.

Private B2B Networks. Section 12.5 covers private B2B networks. Private B2B networks are extensions of earlier EDI technology to an Internet but support a much wider variety of communications and file types including e-mail, chat, CAD diagrams, and graphics formats. Figure 12.14 illustrates a private B2B network developed by Procter & Gamble.

Figure 12.15 describes the key elements of collaborative commerce. This figure is presented as a user-controlled animation in the eText for further emphasis. The ultimate

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8 objective is to closely coordinate the requirements of large manufacturers and distributors with a limited set of suppliers and transportation firms.

The updated Insight on Business case, Walmart’s Private B2B Network Supports Omnichannel Growth, describes Walmart’s efforts to build a private industrial network, based first on EDI, then expanding it into a system named Retail Link, and then adding another system called the Global Replenishment System (GRS). Class discussion questions for this case might include the following: • What is Walmart’s Retail Link system, and how has it changed since the early 1990s?

• What functionality does Walmart’s GRS provide?

• Why did Walmart have an inventory problem and what steps did it take to solve that problem?

• How did Covid-19 test Walmart’s supply chain?

In Section 12.6 we offer students information and tips about how the concepts they’ve learned in this chapter can help them prepare for an interview for an entry-level position as a junior supply chain analyst.

The chapter-ending case study, Elemica: Cooperation, Collaboration, and Community, in Section 12.7 (updated for this edition), is a good wrap-up to the chapter. Elemica began as an industry consortium and although now it is privately owned, remains a wonderful example of a B2B cloud-based, digital supply chain platform that aims not to just foster cooperation and collaboration on a one-to-one or even multi-firm basis, but rather an entire industry.

Case Study Questions and Answers 1.

If you were a small chemical company, what concerns would you have about joining Elemica?

Although small and medium firms do not need to have an ERP system to connect to Elemica, they do require some level of technological sophistication even to use the online portal. Elemica offers an online portal for those companies not as technically sophisticated as the larger global chemical companies. For all firms, Elemica reduces the burden on IT staff. In fact, one of the missions of Elemica is to help companies do more with fewer resources—including IT staff. As a small firm, you would be concerned that you would be able to respond to requests for large quantities of commodities that might be requested by partners.

2.

Elemica provides a community for participants where they can transact, coordinate, and cooperate to produce products for less. Yet these firms also compete with one another when they sell chemicals to end-user firms in the automobile, airline, and manufacturing industries. How is this possible?

This is a difficult question. The chemical industry is very interrelated with a long history of firms buying/selling from each other. All firms in the industry at one

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9 point or another end up with spare inventory they would like to sell, or come up short on specific chemicals preventing order execution. The Elemica hub is perceived as a neutral trading platform where all can benefit from lower-cost-toserve, greater efficiencies, and overall more efficient operations that can serve customers better. By keeping bids and quotations anonymous, and the community fairly large and open, members can get a sense of “market price” and available quantities quite easily without revealing their names.

3.

How did the purchase of Elemica by Thoma Bravo and then Eurazero change how Elemica fits into the B2B framework illustrated in Figure 12.9?

With the purchase by first Thoma Bravo, a private equity firm, and then Eurazero, Elemica can no longer technically be considered an industry consortium, as it was originally, although it still retains most of the attributes associated with being one.

End-of-Chapter Questions and Answers 1.

Explain the differences between total B2B commerce and B2B e-commerce.

Total B2B commerce describes all types of computer-assisted, inter-firm trade. whereas B2B e-commerce relates to that portion that uses the Internet to assist firms in buying and selling a variety of goods to each other.

2.

What are the key attributes of a B2B e-commerce website? What early technology are they descended from?

The two key attributes that distinguish a B2B e-commerce website are: • They use the Internet as the communication media instead of private networks.

• They tend to serve horizontal markets, that is, they carry products that serve a wide variety of industries.

Automated order entry systems preceded B2B e-commerce websites.

3.

List at least five potential benefits of B2B e-commerce.

B2B e-commerce promises many strategic benefits for participating firms, both the buyers and the sellers, including: • Lower administrative costs.

• Lower search costs for buyers.

• Reduced inventory costs due to increased competition among the suppliers (which increases price transparency) and reducing inventory to a bare minimum.

• Lower transaction costs due to the elimination of paperwork and the partial automation of the procurement process.

• Increased production flexibility by ensuring delivery of parts “just-intime.”

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10 • • • • 4.

Improved quality of products due to increased cooperation among buyers and sellers, reducing quality issues.

Decreased product cycle time due to the sharing of designs and production schedules with suppliers.

Increased opportunities for collaborating with suppliers and distributors.

Increased price transparency.

Name and define the two distinct types of procurements firms make. Explain the difference between the two.

The two types of procurements that firms make are for direct goods and indirect goods. Direct goods are directly involved in the production process such as the sheet steel used to produce an automobile body. Indirect goods are all other goods that are needed to carry out the production process but are not directly involved in creating the end product. They include office supplies and maintenance products, which are sometimes also called MRO (maintenance, repair, and operations) goods.

5.

Name and define the two methods of purchasing goods.

The two methods of purchasing goods are contract purchases and spot purchases.

Contract purchases are long-term agreements to buy a specified amount of a product. There are pre-specified quality requirements and pre-specified terms.

Spot purchases are for goods that meet the immediate needs of a firm. Indirect purchases are most often made on a spot purchase basis in a large marketplace that includes many suppliers.

6.

Define the term supply chain and explain what SCM systems attempt to do. What does supply chain simplification entail?

The supply chain refers to the series of transactions that links sets of firms that do business with each other. It includes not only the firms themselves, but also the relationships between them and the processes that connect them. SCM (supply chain management) systems attempt to coordinate and link the activities of suppliers, shippers, and order entry systems to automate the order entry process from start to finish. This includes the purchase, production, and moving of a product from a supplier to a purchasing firm. Supply chain simplification refers to the reduction of the size of a firm’s supply chain. Firms today generally prefer to work closely with a strategic group of suppliers to reduce both product costs and administrative costs. Long-term contract purchases containing pre-specified product quality requirements and pre-specified timing goals have been proven to improve end product quality and ensure uninterrupted production.

7.

Explain the difference between a horizontal market and a vertical market.

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11 Horizontal markets serve a myriad of different industries. An electronic storefront is an example of a horizontal market in that it tends to carry a wide variety of products that are useful to any number of different industries. Vertical markets, on the other hand, provide expertise and products targeted to a specific industry. EDI (electronic data interchange) systems usually serve vertical markets.

8.

How do the value chain management services provided by e-procurement companies benefit buyers? What services do they provide to suppliers?

The value chain management services benefit buyers by automating a firm’s entire procurement process including purchase orders, requisitions, sourcing, business rules enforcement, invoicing, and payment. For the suppliers, they provide automation of the entire selling business process including catalog creation and content management, order management, fulfillment, invoicing, shipment, and settlement.

9.

What are the three dimensions that characterize an e-procurement market based on its business functionality? Name two other market characteristics of an eprocurement marketplace.

The three dimensions that characterize an e-procurement market based on its business functionality are that (1) they are horizontal marketplaces (2) in which long-term contractual purchasing agreements are used (3) to buy indirect goods.

Other market characteristics of e-procurement marketplaces are that they are independently owned, that they are many-to-many markets, and that they use fixed price catalogs.

E-procurement companies serve as intermediaries connecting hundreds of online suppliers offering millions of MRO goods to business firms who pay a fee to join the market, thus it is a public marketplace. They are mediated by an independent third party that purports to represent both buyers and sellers; however, they are likely to have a bias in favor of the buyer because they include the catalogs of competing suppliers and competing e-distributors.

10.

Identify and briefly explain the anticompetitive possibilities inherent in B2B ecommerce marketplaces.

The anti-competitive possibilities inherent in B2B e-commerce marketplaces include: • The possibility that they may provide some firms with an ideal platform to collude on pricing, market sharing, and market access. For example, in a B2B e-commerce marketplace owned by large industry players, ownermembers could collude with one another on the prices they are willing to pay for inputs.

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12 •

• •

11.

The sharing of information to reach market-sharing agreements in which they divide the market up into segments and agree to produce only enough for their allocated segment.

The coordination of a reduction in purchases, forcing the suppliers to sell their inputs below market prices.

The restriction of market access if large industry players exclude smaller rivals, thus forcing them to pay higher prices for their inputs.

List three of the objectives of a private B2B network.

The objectives of a private B2B network may include to: • Develop efficient industry-wide purchase and selling business processes.

• Develop industry-wide resource planning to supplement enterprise-wide resource planning.

• Create increasing supply chain visibility so that the inventory levels of buyers and suppliers will be known to the participants.

• Achieve closer buyer-supplier relationships, including demand forecasting, communications, and conflict resolution.

• Foster operations on a global scale.

• Reduce industry risk by preventing imbalances in supply and demand, including developing financial derivatives, insurance, and future markets.

12.

What is the main reason why many of the independent exchanges developed in the early days of e-commerce failed?

The main reason is that they failed to attract enough players to achieve liquidity.

That is, the number of buyers and sellers in the market, the transaction volume, and the size of the transactions were insufficient to sustain a profit.

13.

Explain the difference between an industry consortium and a private B2B network.

Private B2B networks, which presently dominate B2B commerce, are webenabled networks for coordinating trans-organizational business processes (collaborative commerce). These networks range in scope from a single firm to an entire industry. Although the central purpose of a private network is to provide industry-wide global solutions to achieve the highest levels of efficiency, they generally start with a single sponsoring company that “owns” the network. This differentiates private markets from industry consortia, which are usually owned collectively by major firms through equity participation.

14.

What is CPFR, and what benefits could it achieve for the members of a private industrial network?

CPFR (collaborative resource planning, forecasting, and replenishment) involves working with network members to forecast demand, develop production plans,

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13 and coordinate shipping, warehousing, and stocking activities. The goal is to ensure that retail and wholesale shelf space is precisely maintained. The benefits it could achieve for private industrial network members are that hundreds of millions of dollars of excess inventory and capacity could be wrung out of an industry.

15.

What are the barriers to the complete implementation of private B2B networks?

One barrier is that participating firms are required to share sensitive data with their business partners up and down the supply chain. This is a huge corporate mindset change as what was previously considered proprietary and secret must now be shared. Furthermore, in the digital environment, it can be difficult to control the limits of this information sharing. Information that a firm willingly gives to its largest customer may wind up being shared with its closest competitor.

Other barriers include difficulties in integrating private B2B networks into existing ERP (enterprise resource planning) systems and EDI (electronic data interchange) networks. Most ERP systems were not designed initially to work with extranets or even to be particularly Internet compliant; they were based on business models that use entirely internal business processes. Furthermore, changes in corporate culture and attitudes organization-wide and among all employees are essential so that a shifting of allegiances occurs from the firm to the wider trans-organizational enterprise. This is difficult to achieve. Employees must recognize that the firm’s fate is intertwined with that of their suppliers and distributors. Suppliers, in turn, must change how they manage and allocate resources because their own production is closely aligned with the demands of the private industrial network partners. A loss of independence among all participants in the supply and distribution chains occurs and this requires huge behavioral changes in individual organizations for their participation to reap the benefits of participation.

16.

What is EDI and why is it important?

Electronic Data Interchange (EDI) is a broadly defined communications protocol that enables firms to more easily share business documents such as invoices, purchase orders, shipping bills, product stocking numbers (SKUs), and settlement information. EDI is based on technical standards developed by the American National Standards Institute (ANSI X12 standards) and international bodies such as the United Nations (EDIFACT standards). Virtually all large firms have EDI systems, and most industry groups have industry standards for defining documents in that industry. EDI systems are owned by the buyers; hence they are buyer-side solutions and buyer-biased because they aim to reduce the procurement costs of supplies for the buyer. EDI systems also benefit the sellers through customer cost reduction. EDI systems generally serve vertical markets.

EDI continues to play an important role today as a general enabling technology that provides for the exchange of critical business information among computer

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14 applications supporting a wide variety of business processes. EDI is an important private B2B network technology, suited to supporting communications among a small set of strategic partners in direct, long-term trading relationships.

17.

Describe six major trends in supply chain management and collaboration.

Major trends in supply chain management and collaboration include: • Just-in-time production, which is a method of inventory cost management that aims to keep excess inventory at a bare minimum.

• Lean production, which is a set of production methods and tools that focuses on elimination of waste throughout the customer value chain, not just inventory.

• Supply chain simplification, which involves working with a strategic group of suppliers to reduce product and administrative costs and improve quality.

• Adaptive supply chains, which seek to reduce the risks caused by relying on single suppliers who are subject to local instability by creating regional- or product-based supply chains.

• Accountable supply chains, which involve efforts to make global supply chains more accountable in terms of labor conditions.

• Sustainable supply chains, which take social and ecological interests into account and seek to use the most efficient environment for production, distribution, and logistics.

18.

Describe the challenges inherent to B2B e-commerce.

Although there are many potential benefits to B2B e-commerce, there are also considerable risks and challenges. Often real-world supply chains fail to provide visibility into the supply chain because they lack real-time demand, production, and logistics data, and have inadequate financial data on suppliers. The result is unexpected supplier failure and disruption to the supply chain. Builders of B2B supply chains often had little concern for the environmental impacts of supply chains, the sensitivity of supply chains to natural events, fluctuating fuel and labor costs, or the impact of public values involving labor and environmental policies.

The result is that many Fortune 1000 supply chains are risky, vulnerable, and socially and environmentally unsustainable.

19.

What is a multi-tier supply chain and why does it pose a challenge for B2B ecommerce?

A multi-tier supply chain is the chain of primary, secondary, and tertiary suppliers that together constitute the supply chain for a firm. For a large company, the number of suppliers can be in the thousands. The sheer number of companies involved makes it difficult to manage the supply chain and to obtain supply chain visibility.

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15 20.

What is a cloud-based B2B platform and what advantages does it offer?

In cloud-based B2B systems, much of the expense of B2B systems is shifted from the firm to a B2B network provider, sometimes called a data hub or B2B platform. The cloud platform owner provides the computing and telecommunications capability, establishes connections with the firm’s partners, provides software on-demand (software-as-a-service or SaaS) to connect the firm’s systems to its partners’ systems, performs data coordination and cleaning, and manages data quality for all members. Network effects apply here: the cost of these tasks and capabilities is spread over all members, reducing costs for all.

B2B network providers also provide communication environments and file storage services that allow partners to work together more closely, and to collaborate on improving the flow of goods and transactions. B2B network providers charge customers on a demand basis, rather than on a percentage of their transactions’ value, depending on their utilization of the network. Another advantage of cloud-based B2B systems is that, unlike traditional firm-based B2B systems, cloud-based B2B data networks can be implemented in short periods of time to respond to corporate mergers and rapidly changing markets.

21.

Describe the differences and similarities between B2C and B2B marketing.

B2B e-commerce is in some respects very different from B2C e-commerce, and as a result, there are substantial differences between B2B and B2C marketing.

Long-term sourcing typically involves large purchases with commercial relationships that can last several years or longer. The sellers and buyers may have known about each other for years; the capabilities and financial situations of the firms are known. Both parties share an understanding of the price and quality of what is being exchanged in the market. In these situations, B2C retail marketing tactics are not appropriate. Instead, interpersonal relationships, networking, brand, and informative content marketing using white papers, videos, podcasts, webinars, blogs, e-books, conferences, and professional associations are the primary and most effective marketing tools. However, in spot purchase markets for MRO or other commodity products, B2B marketing uses many of the same marketing tactics and tools found in B2C marketing: display ads, search engine marketing, websites, social network channels, videos, and mobile ads.

Projects: Questions and Answers 1.

Choose an industry and a B2B vertical market maker that interests you.

Investigate the site and prepare a report that describes the size of the industry served, the type of B2B e-commerce marketplace provided, the benefits promised by the site for both suppliers and purchasers, and the history of the company. You might also investigate the bias (buyer versus seller), ownership (suppliers, buyers, independents), pricing mechanism(s), scope and focus, and access (public versus private) of the B2B e-commerce marketplace.

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16 Students should use Google to do research on B2B vertical marketplaces. They should be able to find a number of resources that provide lists of B2B ecommerce marketplaces. The next step is for the student to select a company. The directory provides further information on the company. Finally, to perform the analysis required by the project, the student should visit the website of the company chosen and also use Google or other search engines to find relevant information in trade, industry, popular journals, and newspapers.

2.

Examine the website of one of the e-distributors listed in Figure 12.9 and compare and contrast it to one of the websites listed for e-procurement marketplaces. If you were a business manager of a medium-sized firm, how would you decide where to purchase your indirect inputs—from an e-distributor or an eprocurement marketplace? Write a short report detailing your analysis.

A student choosing to compare Grainger (e-distributor) versus Ariba Network (now known as SAP Business Network) (e-procurement) might provide the following analysis: • E-distributors are the most common type of electronic marketplace; they sell products on an “as needed” basis. Grainger efficiently organizes goods from more than one source for potential buyers. E-distributors such as Grainger offer a reasonable compromise between price and service and provide the convenience of one-stop shopping for a wide range of products from processed materials to finished goods. This is especially valuable to customers in the MRO or office supplies market. Buyers like placing one order, tracking one order, and having only one invoice to pay.

• E-procurement companies are typically used for long-term contractual purchasing of indirect goods. They expand on the business model of edistributors by including the online catalogs of their suppliers and value chain management services. SAP Business Network (formerly Ariba Network) (https://www.sap.com/products/business-network.html) encourages new levels of communication and collaboration between buyers and suppliers. An e-procurement system automates and streamlines the purchasing process by eliminating managers and multiple orders while reducing the cost of processing an order. For a medium-sized company, the advantages of an e-procurement system allow the company to control expenses on indirect goods as well as direct goods. This gives companies more control over the bottom line. However, if a company does not want to make an expensive investment into an e-procurement system or get locked into one e-procurement system, then e-distributors are another way companies can make their indirect purchases less expensive and more streamlined.

3.

Assume you are a procurement officer for an office furniture manufacturer of steel office equipment. You have a single factory located in the Midwest with 2,000 employees. You sell about 40% of your office furniture to retail-oriented catalog outlets such as Quill in response to specific customer orders, and the

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17 remainder of your output is sold to resellers under long-term contracts. You have a choice of purchasing raw steel inputs—mostly cold-rolled sheet steel—from an exchange and/or from an industry consortium. Which alternative would you choose and why? Prepare a presentation for management supporting your position.

An e-procurement officer’s goal is to find the best product at the best prices.

Exchanges and consortia offer both. The benefits of exchanges are reduced search costs for parts, spare capacity, and lower prices due to a global marketplace fueled by competition among suppliers. Suppliers are often reluctant to join exchanges due to the fierce competition and price wars that can make profit margins miniscule, so the exchange might not have all the suppliers with which a company might wish to do business. Exchanges also usually don’t provide value-added services.

An industry consortium helps to develop long-term, stable relationships between buyers and sellers. Consortia are mainly developed by established Fortune 1000 companies. Both supplier and buyer benefit in a consortium. The buyer benefits because buyers control access to market channels. Suppliers benefit by having access to large procurement systems and large order sizes. This, in turn, leads to long-term purchasing relationships.

The best alternative is to join the industry consortia to secure long-term, low prices on the firm’s basic inputs. This does not mean that the e-procurement officer should ignore prices and goods available from an exchange: these should be purchased when good deals become available, but they should not be relied upon as the major source of sheet steel.

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You are involved in logistics management for your company, a national retailer of office furniture. In the last year the company has experienced a number of disruptions in its supply chain as vendors failed to deliver products on time, and the business has lost customers as a result. Your firm only has a limited IT department, and you would like to propose a cloud-based solution. Research various supply chain management products, and write a report to senior management on why you believe that a cloud-based B2B solution is best for your firm.

Although student answers will vary, they should all reference the ability to decrease costs, gain visibility into the firm’s extended supply chain, and improve speed to market, among other benefits.

Video Cases Video Case 12.1, Apple and Supply Chain Disruption, appears on page 717 of the eText, just prior to the Insight on Society case. The video, released in September 2022, focuses on supply chains challenges facing Apple prior to the 2022 holiday season. Questions that you can use for class discussion or as a student assignment include the following:

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What are some of the tactics that Apple has employed in order to be able to better navigate supply chain constraints?

Answer: Investment research analyst Angelo Zino notes that Apple’s new iPhones are scheduled to begin shipping on September 16, 2022, about one week earlier than anticipated. But not all versions of the devices will be available at that time.

Apple is prioritizing shipments of its Apple iPhone Pro line, which have higher prices and better margins.

According to Zino, why isn’t Apple having as many supply chain issues at this time compared to others?

Answer: Zino notes that Apple is the largest purchaser of various semiconductor components), and as a result, they are typically first in line to get their orders fulfilled.

How is global tension with China, with whom Apple’s supply chain is currently very interconnected, impact Apple?

Answer: In the longer term, Apple intends to further diversify its supply chain to reduce its reliance on Chinese suppliers, with its emphasis shifting to India, where there is also likely to be rising demand for its products over the next 10 to 20 years. In the shorter term, Zino considers Apple to still be well positioned within China and does not anticipate Apple to shut down production there in the near future.

Video Case 12.2, Ramp Helps Businesses with Procurement Processes, appears on page 720 of the eText at the end of the “Steps in the Procurement Process” section. Ramp is fintech company focusing on the procurement process. The video, released in March 2022, features Ramp chief executive officer Eric Glyman discussing Ramp’s business model and future plans. Questions that you can use for class discussion or as a student assignment include the following: • How does Glyman describe Ramp?

Answer: Glyman describes Ramp as being a finance automation platform that features a corporate credit card with build-in expense management, bill payments, and accounting automation. Glyman claims that Ramp helps the average company spend 3.3% less each year and close their accounting books eight times faster.

• How does Glyman differentiate Ramp from competitors such as American Express?

Answer: Glyman states Ramp has been designed with the intent of help business owners spend less money and less time, while competitors such as American Express have programs that are designed to incentivize companies to spend more than they intended to create more revenue for themselves.

• How does Ramp intend to spend the venture capital that it has recently raised?

Answer: Glyman states that the funds will be primarily spend on hiring in research and development, engineering product and design, trying to develop software that identifies where companies are wasting time, such as on manual expense reports, and helping to fully automate that task, and wasting money, helping to identify where certain companies are getting charged more for certain things and helping to combat price discrimination. He notes that integrated travel

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