Given the assistance of customers, product evolution in Internet software is extremely rapid. The leading personal computer software company, Microsoft, only saw the potential and danger of the Internet in late 1993, though after that it moved very quickly to exploit the new opportunity to overtake the leader, Netscape. Microsoft s strategy was to rapidly improve its Internet browser and include it in the Windows 95 software package. By the end of 1997, Microsoft was rapidly taking market share from Netscape.
The Internet economic space opened quickly and continues to provide many possibly transformative opportunities. Leadership roles in previously stable and even immobile activities such as book selling, travel agency, and telephone ticketing are in a state of flux. For the airlines, the Internet made it feasible to create online reservation systems that they could control and use to reduce the power of travel agents. There were also significant savings, because the cost of issuing an eticket is only one dollar, whereas a telephone ticket costs eight dollars spurring changes for the highly competitive airline industry because of these compelling economics.
The Internet could also impact the local newspaper as a materialized source of information delivery. The initial approach to simply place the newspaper on a web site has failed. What may evolve is that various web sites will replace different components of the newspaper. Already there are entertainment oriented “lifestyle guides,” such as Microsoft s Sidewalk sites. There are many sports and business-oriented web sites that might replace or, alternatively, complement the sports and business sections. Like the Wall Street Journal, these sites offer a level of interactively accessible information that would be bulky in printed form. The most important impact on newspapers might come from Internet-based classifieds since they are a key source of revenue for newspapers. Inexpensive local classified ad sites are already available on the Internet. It is likely that the classifieds will eventually become interactive, allowing direct responses to ads through email, or even more interactively through a chat program. The variables that will determine the fate of newspapers hinge upon the issue of whether readers appreciate the variety, including national and local news, sports, business, weather, and advertising etc. in hardcopy.
It is still quite early in the development of the Internet and related data communications, so the possibilities of the new medium are only beginning to be explored. Old activities such as making phone calls, sending mail, and ordering goods and services are already migrating to this nearly instantaneous environment. And, as important, for this paper, many formerly relatively sedate industries are finding parts of their value chain absorbed and accelerated to computer and Internet time. As a result, some local businesses can go global and experience dramatic growth, while other local businesses will be outflanked by competitors from anywhere on earth and experience decline.
Customer Service Functions
Customer service functions have always been a time-consuming person-to-person activity, however much of this is highly routinized. An important recent step in automating customer service was telephone call processing, but this was a slow system with very low bandwidth. In other words, an excessively long menu of choices leads to consumer disconnection and difficulties in creating user-friendly branching systems. More sophisticated non-human intermediated customer service would have to wait until the consumer had a device able to handle greater amounts of information, i.e., the PC and a computer modem. When the installed base grew and the technology was sufficiently mature it became possible to place information on a server open to customers. This redefined customer service by increasing the level of provision while decreasing the cost. This was possible because most interactions are entirely standard. For example, many customer questions are for routine information such as store hours and directions. Answers to such questions can be codified, indexed, and stored on a server to be accessed online and downloaded. For simple questions such as directions the Internet can download a map, whereas on the telephone error-prone verbal instructions are necessary. Essentially, customers can access the information they need to find and create value for themselves from the provider s web site at practically no-cost except the initial startup costs.
In addition to seeking routine information, customers are also attracted to sites that provide detailed information about products or services. A potential customer can browse several competitors’ sites, as well as third party sites, which discuss the product in question, compare prices and features, gather general information about a particular product or type of product, taking as much time as desired before making a purchase. A recent study at the Fuqua School of Business at Duke University found that consumers were more likely to buy products from sites that provided comprehensive information than from sites that had slightly lower prices but little in the way of useful information. The point is that the user can select the desired amount of information, removing the need for the information provider to make decisions based on an “average” consumer.
The types of customer service provided online depend upon the firm s product or service. For example, software companies make available various software patches, add-ons to current products, and/or demos. Increasingly, software programs such as Microsoft Windows or Netscape Communicator have the ability, upon a prompt from the user, to automatically check for updates and then download and install them. Delivery through the Internet is essentially without cost and has the added benefit of developing a connection with the customer. In other cases, service bulletins or product-related information are placed on company web sites for informational purposes. These relatively straightforward applications replace or augment previous product upgrading or information dissemination techniques.
Global logistics firms, such as DHL, UPS, and Federal Express, have taken the potential for customer service much further. Federal Express, one of the aggressive first-movers, has opened the tracking portion of its computer system to Internet users. Federal Express initial effort on the Internet was a one-way information provision service customers could use to receive information about the location of the shipment and its arrival time. The success of this initial effort spurred Federal Express to consider other ways to use the Internet. Based on its experience with the tracking service, a web site was developed to permit customers to use the Internet for all their shipping functions. The features now available include scheduling pick-ups, detailed maps of all drop-off locations, rate charts, and other information regarding international customs regulations. Moreover, the site offers free downloadable software that speeds the processing of shipments, allows the user to store addresses in an address book, maintains a shipping history in a log, and creates and prints labels. Many shipping office functions have been transferred onto software and into data communications networks. Human intermediaries and physical documents were replaced by software. Not only is it less expensive than previous methods, but it also provides the mechanism for creating whole new ways for firms and their customers to interact. Most critical, the information provided through the server gives the customer the resources to create value from the site.
Ecommerce
The reasons consumers purchase retail items are complicated and, at times, non-rational. Of course, one reason is plainly utilitarian, but, of course, there are other more emotive motivations. Today, the Internet is establishing an entirely new retailing channel that is already affecting traditional retail industry. As we shall see, building successful Internet retail web sites is significantly more complex than simply moving a catalog online. A web site must create a feeling that it is the place to go to buy something.
The use of Internet retailing will transfer an increment from traditional channels to online. Fred Smith, the founder and CEO of Federal Express has an threatening vision. “The Internet is going to make it very difficult for anybody in a middleman position to stay in business the same type of effect that Wal-Mart had in the retailing sector that s what the Internet is going to do to every business.” No previous communications technology has allowed the customer to personally search databases of, for example, books, autos, software, airline schedules, and then complete the purchase without face-to-face interaction. In traditional commercial locations deployed a service worker (or intermediary) that communicated with a customer while interfacing with a computer and performing search and booking procedures. With Internet browser technology it is possible to remove the service worker as a translator between the analog customer and the digital database. This makes it possible to reconceptualize activities that formerly required human service workers and directly connect customers to firms computers. With credit card payment the entire process is electronic with the exception of delivery for some goods, such as insurance, stock certificates, and financial instruments, there is nothing but an accounting notation in a computer.
There are remarkable benefits for a retailer that can transfer sales activities to the Internet, though they vary by product or service. For many services in which there is no physical component at all it may be quite easy to move the entire process online. A general benefit is that an Internet retailer can hold far less inventory than a conventional retailer who must have the items in inventory thereby tying up capital. The difference can be striking. For example, Amazon.com, the online bookseller, turned its inventory over 42 times in 1997, whereas its largest competitor, retail store-based Barnes & Noble turned inventory only 2.1 times. Moreover, a significant portion of Amazon’s inventory is held by distributors who ship the items directly to the customer although this is changing as Amazon attempts to develop a system of buying directly from. Book retailing could experience even further radical changes as new electronic book devices arrive in the marketplace. For example, devices enabling books in digital form to be downloaded by phone or potentially over the Internet. An early example of this is the four hundred page book Emerging Digital Commerce published by the U.S. Department of Commerce (1998) using Adobe Acrobat and can be printed in a book-like format. In another inventory-sensitive market, one of the several automobile retailing web sites, Auto-By-Tel, had an annual rate $6 billion in sales at the end of 1997, up from $1.8 billion the previous year.
Complicated sets of purchasing decisions such as booking travel and hotels can be undertaken on-line without human intervention. For example, air travel, car rental, and accommodations can be booked at an online travel site. The on-line travel agent can go far beyond a telephonic travel agent by providing much broader and more detailed information including textual descriptions, images, and even reviews of the various destinations. In effect, huge databases of information can be made available to the customer in such a way as to allow users to “customize” their travel agenda. In essence, the customer produces a uniquely customized product from an entirely standardized set of choices.
The convenience and availability of information are important advantages. However, online travel agencies have yet another advantage, namely, they can post comments from previous travelers, thereby creating interaction and information exchange. This multiplies, simplifies, and makes interactive the “letters to the editor” columns found in newspaper travel sections. The interactive possibilities permit online discussions regarding specific types of travel. This virtual community adds value to the site and is a mechanism for retaining customers who can change sites at the click of a button. Moreover, the knowledge generated through these discussions could permit the discovery of new market needs, thus giving rise to new products. The community and its interactions add value that the travel agency does not need to compensate.
Compare the economics of an online travel agency with that of a conventional agency. At the conventional agency a person deals directly with the customer in a situation in which the time spent with a customer on a booking is a direct cost. In essence, each interaction with the customer is a cost. As mentioned earlier, it costs an airline one dollar to book a flight on the Internet and eight dollars through an airline customer agent. In addition, travel agents can make mistakes, however on the Internet the customer bears full responsibility for the reservation. In the case of the conventional travel agency, return business is dependent upon building an interpersonal relationship with the customer. The online travel agency uses the online customer community to develop relationships between the customers and with its site in the hopes of encouraging repeat business.
The travel agent s experience combined with a personal relationship with the traveler can be seen as knowledge base that enabled them to make recommendations to improve the traveling experience. The travel agent was a form of expert knowledge. Customers not utilizing the travel agent s knowledge base, in effect subsidized those using the knowledge. However information on travel habits, previous travel, and other characteristics allows the computer to search its database and match it with similar profiles to be used to offer “personalized” services to a customer.
The success of online travel agencies is apparent. For example, Microsoft s Expedia site launched in 1996 had more than $12 million in monthly sales in January 1998 and was growing quickly. As important, the U.S. travel industry is being reorganized, not only with new entrants such as Microsoft, but also as the airlines are reducing the fees they pay to travel agents and encouraging customers to buy tickets directly through their web sites. In the process these web sites are being built into virtual places. For those desiring human contact, the offline travel agent will remain available, but increasingly they will be paid for directly by the user, witness the increasing use of service charges by the offline travel agencies (a tactic that will accelerate the movement of customers to the online agencies).
The technical capacity for online retailing can be understood by seeing the two tendencies that were integrated by the Internet. First, the decreasing cost of long distance telephone service meant many customer transactions had already been centralized into call processing centers especially for the purchase of products such as tickets, software, computers etc. Second, the development of sophisticated database management software and the use of corporate Intranets serviced by large-scale computer servers meant that the purchasing process had been largely computerized. The service worker using a networked computer to take an order was merely an intermediary between the customer and the corporate database. On the demand side, the increased usage of email, the development of expensive, user-friendly browser, personal computers with faster modems, and more persons attached to high-speed local area networks created a large installed base of potential consumers. The final step was to habituate customers to purchase items through cyberspace. As more and more consumers are online, old retail methods will be eclipsed since consumers have vastly more information at their disposal, not only about the products available, but about their prices as well. Premium list pricing will be more difficult to maintain as consumers can nearly effortlessly find the lowest priced vendor, or go to a site that aggregates the price information of several vendors.
Conclusion
I have shown that in economic terms the Internet is more than just another technological tool. By enabling certain types of activities, the Internet will impact consumer behavior, firm behavior, and industrial organization. The final configuration caused by the Internet is difficult to predict. This is because the basic impacts of the Internet interact in problematic and contradictory ways. The most problematic question related to the economic impacts of the Internet regards market niche and firm formation. Will the Internet encourage the development of a vast collection of business types, marketing strategies, and market niches? Or will it lead to a small collection of mega marketers, each dominating a particular product or service? There are arguments to be made in favor of both possibilities.