261446 Information Systems
Week 10
E-Commerce: Digital Products, Digital Goods
Week 10 Topics
• E-Commerce & The Internet
• E-Commerce: Business & Technology
Case Studies
• Case Study #1) Groupon’s Business Model: Social and Local
• Case Study #2) To Pay or Not to Pay: Zagat’s Dilemma
What is “E”-Commerce?
• What does the “E” mean?
• E-Business?
• E-Learning?
• E-Governance?
• E-Mail?
• E-…
E-Commerce
• “Digitally enabled commercial transactions between and among
organisations and individuals”
• Many of which occur over the Internet and the Web
• Commercial transactions?
• Exchange of value
• Money, products, services…
E-Commerce
• Massive growth since 1995
• 1995 – Netscape accepted first ads, creating the idea that the Web would be a new
medium for advertising & sales.
E-Commerce
• Fastest growing form of Commerce (compared to physical retail stores, services &
entertainment
• Social & Mobile commerce fastest growing forms
• Wave 1 transformed the books, music & air travel markets; Wave 2 transforms marketing &
advertising, telecoms, movies, TV, jewelry, real estate, online travel, bill payments, software.
• Online demographic has broadened to match ordinary shoppers
• Small businesses and entrepreneurs are flowing the marketplace, using the infrastructure of
E-commerce giants, such as Amazon / Google.
• Mobile take advantage of location-based services
E-Commerce
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Wireless / Ubiquitous devices & connections take off
Broadband becomes standard
Social Networking offer new platform for e-commerce
New Internet models of computing emerge
• Apps, Cloud computing, SaaS, Web 2.0
Why is E-Commerce Different?
• Unique Nature of environment
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Ubiquity
Global Reach
Universal Standards
Richness
Interactivity
Information Density
Personalisation / Customisation
Social Technology
Ubiquity
• Technology available everywhere
• Home, Work, using desktop and mobile devices.
• The marketplace is extended beyond traditional boundaries, removed from temporal or
geographic location.
• Marketplace is anytime, anywhere
• Customer convenience is enhanced, shopping costs reduced.
Global Reach
• Technology breaches national boundaries
• Across cultural and national boundaries, seamlessly and without modification
• Potentially billions of consumers and millions of businesses
Universal Standards
• One set of technology standards
• IP
• Disparate computer systems can easily communicate with each other
Richness
• Video, audio, text messages
• New media is easily integrated into a single marketing message & consumer
experience
Interactivity
• Technology works by interacting with the user
• Customers are engaged in a dialog, dynamically adjusting experiences to the individual.
• The consumer is a co-participant in the process
Information Density
• Information costs are reduced, while quality raised
• Information processing, storage and communication costs have dramatically dropped.
• Currency, accuracy and timeliness improve.
• Information is plentiful, cheap and more accurate
Personalisation / Customisation
• Personalised messages can be delivered to individuals and groups
• Advertising messages based on an individual’s characteristics
Social Technology
• Content Generation and Social Networking
• User generated content, alongside distribution.
E-Commerce
• The Internet reduces Information Asymmetry
• Where one party in a transaction has more information, relevant to the transaction,
than another party.
• This information influences relative bargaining power
• How much do you know about how much products really cost?
E-Commerce
• Digital Markets afford Dynamic Pricing
• The price of a product can vary depending on demand characteristics, or the supply
situation
• Online retailers like Amazon can change prices based on time of the day, demand for the
product, supply, the user’s prior visits to the site.
Disintermediation
• Digital Markets afford suppliers to directly connect with their end-users.
• This may eliminate an intermediary
Travel Agents?
• Traditionally an intermediary facing disintermediation?
• The internet offers a new distribution channel, but…
• Customer fears regarding security
• Lack of social interaction
Evolution of the Tourism Supply Chain
• As well as having an impact on individual firms, ICT’s have had an impact on
the tourism industry as a whole
• The supply chain has changed
• Strategy of major players
• Selective introduction of technology
Tourism Supply
Chain
Material
Suppliers
Service
Providers
GDS/CRS
Distributors
Supplier
Reservation
Supplier
Centers
Websites
& Ticket
Offices
Internet
Travel
Agents
Customer
Consolidators
Brick &
Mortar
Travel
Agents
Computerised Reservation Systems (CRS)
• Introduced by the Airline industry in the 1970’s
• Simple database system managing seats on flights, shared between partners
• Terminals added to high volume agencies.
• Easy to manage inventory, and facilitate distribution channel
• Later hotels and tour operators also used similar CRS
Global Distribution System (GDS)
• With the networked economy the CRS could be distributed more easily.
• Applications with more sophisticated features were developed
• Sabre, Galileo International, Amadeus, Worldspan
• Originally intended as B2B, but with the internet has turned to B2C too
Porter’s 5 Forces
• Framework for analysing industries & developing business strategy
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Threat of Substitutes
Threat of New Entrants
Bargaining Power of Customers
Bargaining Power of Suppliers
Competitive Rivalry
• Lets take a look at some of the forces having an impact on the tourism
supply chain.
Threat of Substitutes
• This concerns whether a substitute product or service exists which
customers could be tempted to use as an alternative. For instance,
when a traveler could travel by train rather than airplane. The strength
of this threat depends on how well the current product is
differentiated, and how well the substitute product matches the needs
of the customer, as well as switching costs involved.
Threat of new entrants
• This concerns how feasible it is for more competitors to enter the marketplace. Various
things can affect the likelihood of new entrants emerging, for instance the capital
requirements for set up costs, any learning curve advantages, government policy or
access to distribution channels.
• If we consider traditional brick and mortar travel agents, the capital requirements are
high, and access to distribution channels limited, compared to online travel agents where
start up costs are minimal and access to distribution channels universal.
Bargaining Power of Customers / Suppliers
• This covers the balance of power in a supplier/customer relationship.
• For airlines operating in a natural monopoly, the customer switching
costs could be substantial, leading to powerful airlines
• The role of the GDS within the tourism industry became increasingly
more powerful as utilizing an alternative distribution channel became
increasingly more expensive
Bargaining Power of Customers / Suppliers
• Another important factor in this power relationship comes from the potential to
forward or backward integrate.
• Travel agents are generally unable to backward integrate to their suppliers (i.e. a Travel
Agent is not able to start offering flights or rooms in their own hotel).
• On the other hand, airlines and hotel chains, particularly with the affordances of the
Internet, are able to forward integrate and develop their own distribution channels as
alternatives to using a travel agent.
• This supports the idea that the balance of power lies in the producers favour.
Competitive Rivalry
• This concerns the intensity of competition within the market, often
influenced by the number and diversity of competitors. In a saturated
market, many players will lose power, unless they can differentiate their
product offering from their competitors. One popular means of
differentiation is through the integration of ICT’s, which could be as
simple as adding a new online distribution channel, or by setting up an
electronic booking system.
Travel Agents
• If organizations, or certain business models, can establish a means to
radically affect their strength relative to organizations around them,
then the supply chain can be revolutionized.
• With the introduction of ICT’s, and the ability for airlines and hotels to directly
target their customers through the Internet, the tourism supply chain was
drastically altered.
• And the role of the Travel Agent has changed
The future of Intermediaries?
• Modern ICT infrastructure allows the creation of extended global
enterprises, where companies such as airlines have the ability to vertically
integrate and directly target their end customers.
Alternatively…
• ICTs have afforded complex interconnections between the firms
operating within a supply chain, and thus the creation of virtual
corporations or networked organizations.
• Here each organization focuses on their core competencies, be it
operating planes and flight schedules or distributing the product.
Intermediaries
• Add a significant cost to the value chain
• Leading to higher final prices
• Pressure to bypass intermediaries and internalise their value added functions
• This happened when airlines were under particular pressure to reduce costs,
due to rising oil prices
Disintermediation
• The role of travel agents includes:
• Transaction processing
• Information provision
• Other industries (e.g. Banking) have shown these functions are most readily
replaced by technology
• And that technology can be managed by the supplier
Disintermediation
• Airlines capped / reduced transaction commissions
• And made more efforts towards direct sales
• E-tickets remove the need for physically based transactions
• Some travel agents reacted by recommending preferred suppliers,
based on commissions available
• This compromises the perceived independence of the Travel Agent.
Re-intermediation
• It’s not all bad news!
• E-Ticketing has reduced the importance of the ticket, and increased the importance of
personalised service
• ICT’s can capture, store and process information, but they can’t analyse the semantics
of that information
• Human intermediaries are needed to assess the quality and reliability of online
information
The role of intermediaries
• Lets extend the role of intermediaries;
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Search and Evaluation
Needs Assessment and Product Matching
Customer Risk Management
Product Distribution
Product Information Dissemination
Purchase Influence
Provision of Customer Information
Producer Risk Management
Transaction Economies of Scale
Integration of Consumer and Producer Needs
The role of intermediaries
• Part of that role can be taken over by ICTs
• Some can’t
• Needs assessment
• Product Matching
• Travel agents provide a neutral aggregation service to reduce customer’s risks
Reinventing the Travel Agent?
• Before the internet
• TAs had exclusive access to information
• All the information to make intelligent travel decisions
• TAs were among the first small businesses to install computer terminals
• Airlines allowed access to CRS / GDS
• Wide range of tourism products
Reinventing the Travel Agent?
• With the reduction / elimination of airline commissions
• TAs have to cut costs (particularly Brick and Mortar TAs)
• The internet affords this
• Physical limitations removed
• Expanded potential market
Reinventing the Travel Agent?
• Inventories of accurate travel information in databases
• Databases of customers, complete with personal preferences, used
within CRMs
• Diverse supplier’s products combined to make innovative packages
• Golf + Hotel + Flight = Golfing Holiday
• The travel agent becomes a trusted counsel for the prospective traveler
Reinventing the Travel Agent?
• 4 key roles
• An information broker, passing information between guests and suppliers
• Processing transactions by booking rooms or flights and then transferring
money
• Provide advice to customers, specific to their requirements
• Providing value added services by integrating a wider variety of travel products
Intermediary?
• Or reinvented as an Infomediary?
• But the infomediary product is easily copied and redistributed…
• …so new new ways to add value are needed.
• Previously TAs were agents for the product/service providers
• i.e. the airlines & the hotels
• Now they are agents for the people
• i.e. the customers
Digital Goods?
• Marginal Costs of producing another unit is about zero
• It costs nothing to copy a music file
• Cost of producing 1st unit is relatively high
• nearly the total cost of the product, as inventory & distribution is negligible
• Cost of delivery very low
• What is the effect?
Types of E-Commerce
• B2C
• Business to Consumer
• Retailing products to individual shoppers
• B2B
• Business to Business
• Sales of goods & services among businesses
• C2C
• Consumer to Consumer
• Enabling consumers to sell goods to other consumers
E-Commerce Business Models
• There are various business models operating in E-Commerce
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Portals
E-tailers
Content Providers
Transaction Brokers
Market Creators
Service Providers
Community Providers
Portals
• Gateways to the web
• Gain income through attracting large audiences, advertising, referral fees
• Include Horizontal, Vertical & Affinity Portals
E-tailer
• Online Retail Stores
• From Amazon to small enterprises
• Some are “Bricks & Clicks” Retailers
• Others are pure virtual organisations
Content Providers
• Providers, not necessarily the creators, of content.
• Content
• Any kind of Intellectual Property
• Text, video, music, photos, artwork…
Transaction Brokers
• Online transaction brokers take commissions for facilitating online
transactions
• Such as in the travel or financial services markets
• Fees are often less than the traditional versions
Market Creators
• Provide a platform, or digital environment, upon which buyers and sellers
can meet, interact, display products, search for products, establish prices.
• E-Bay, Amazon, Priceline
Service Providers
• Hosting service providers
• For websites, or for photos on social media for example
• SaaS
Community Providers
• Platforms that create digital online environments where people can transact;
share interests, phots, videos; communicate; receive information; play out
fantasies
• Essentially social networking sites
E-Commerce Revenue Models
• So, how does the firm earn revenues, generate profits and produce returns on
investments?
• Advertising Revenue Model
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• Eyeballs!
Sales Revenue Model
Subscription Revenue Model
Freemium Revenue Model
Transaction Fee Revenue Model
Affiliate Revenue Model