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B2C e-business with intangible web goods

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After the great, e-business hype in the year 2000 things changed dramatically. Dot-com companies vanished as rapidly as they had come into being. Here it is argued that many company bankruptcies can be explained on a strategic level.

Business strategies – if existing at, all – did not often take into account the environmental specificities of the e-age and internal characteristics of competing products and services.

Though economics as such did not change in the new environment, its predictions have to be taken into account with regard to the specific Internet environment as well as to the specificities of the goods sold via the Internet.

Firms can use gained knowledge about influencing factors from their macro- and micro-environments to find ways either to change them or to adapt to them by developing and implementing appropriate positioning options and strategies in order to realize competitive advantages with their offered intangible web goods.

The environmental changes that accompany e-business have an impact on different relevant levels of firms and their economic environment.

These levels are addressed, to come to a holistic understanding of intangible web-good provision.

Analysis ranges from a general macro-level, to analysis of the different possible kinds of intangible web goods.
Environmental analysis of intangible web-good provision
Even though the business segment environment seems to be more relevant with regard to strategy formulation, the macro-environment should not be ignored.

For instance, technological forces from the microenvironment are highly relevant for strategy formulation of intangible web-good provides because their business activity is deeply rooted in technological possibilities.

Macro-environment level analysis of intangible web good provision
The macro-environment indirectly influences the performance of intangible web-good providers by influencing the competitive environment, which in turn influences the possible value-creating positioning options and strategies to be realized on the basis of these goods.

The objective here is to outline the relevant, political, legal, economic, socio-economic and technological aspects that can impact on realizing competitive advantages in the area of intangible web goods.

It is not the objective here to paint a complete image of all possible influencing factors, but rather to show possible determinants that must be considered by intangible web-good providing in firms when selecting optimal positions in their environment.

With regard to the influence of political and legal forces, certain aspects such as regulation issues are of special relevance for firms doing business on the Internet.

For instance, legal consequences of business with customers from many different countries with different jurisdictions can cause difficulties.

Thinking about electronic markets as oriental bazaars where sellers of similar goods are located in proximity to each other.

In respect of new regulation necessities, a relevant area is the development of copyright protection standards.

This issue has high relevance because the Internet makes wide distribution of high-quality intangible web-good copies for free easily possible in many areas.

State copyright laws such as the Digital Millennium Copyright Act try to protect US intangible web good providers.

However, if these laws do not apply in, say, Russia, problems with regard to value creation for US firms will result.

It is relevant for intangible web-good providers to think systematically about copyright protection systems on the Internet and their adaptation to the specificities of intangible web goods.

European copyright legislation has a major difference compared to US laws; it is not possible to acquire copyrights completely; only limited using rights.

Further, European legislation to date is not harmonized; there are still major differences in European countries, causing even more complexity for online sellers of digital goods.

Different legal environments therefore lead to different market development with regard to online selling of digital goods in different countries.

Further, impacts of taxation laws on intangible web-good provision have to be investigated.

Intangible web-good provision is not constrained by physical borders. Direct taxation usually happens in the country where the income is earned.

However, for this principle to work it is essential to identify exactly which parts of the income occur where.

Indirect taxes are about the taxation of consumption of a good at the place of consumption.

From a strategic perspective, firms have to create an optimal taxation scheme considering the impacts on the customers.

For instance, a seller of online insurance may, for tax minimization purposes, change its location to the Bahamas, but many customers might not buy the offered insurance because the court of jurisdiction would be located in the Bahamas.

Numerous problems accompany possible taxation of the Internet medium as such, sometimes called a “bit-tax.”

It is very difficult to measure the relevant streams of bits and attach them to the particular user and a particular country.

Technological innovations of the Internet might be slowed down by such taxation. At the moment firms have to adjust to uncertainty with regard to various taxation issues.

This is complicated by the fact that in most of the EU member countries different value added tax rates do apply.

In July 2003, value added tax (VAT) for B2C online selling of digital goods came into effect in the European Union.

This led to market entry constraints for non-EU firms in the online selling of intangible web goods, making EU online business less attractive for smaller competitors in particular (Jensen, 2004: 5).

The impact of e-business on labor markets has yet to be determined, but there should be significant changes in how firms procure labor, and how workers pursue jobs (Kauffman and Walden, 2001: 70).

One implication of the technological possibilities of the Internet is that the structure of the division of labor inside the firm as well as externally (e.g. outsourcing opportunities grow) changes.”

Employers can reach staff with skills such as programming software, database administration, or networking, by the Internet (Kauffman and Walden, 2001: 6) on a global base.

The technical possibilities of the Internet in combination with workplace reorganization and new products and services have led to significant skill-based changes that have already affected US labor demand.

Firms that use the Internet and such technology heavily tend to use more skilled labor (Bresnahan et a1., 2002).

Economic forces determine the macro-environment of intangible web good provision. E-business implies an economic transformation in various areas, leading to challenges for firms.

Experts predict the Internet to reach one billion users by 2005 (Angus Reid, 2000). Sales in the B2C area have not so far taken off.

In 2002, the share of Internet users actually buying over the web and the transactions volume were still quite low.

There is a wide variance across countries. The major source of a sales to consumers, after computer products and clothing, are intangible web goods such as digitized music, e-books and software (OECD, 2002a:8).

Information and communications technologies (ITCs) gain more and more relevance, not only but especially for firms engaging in e-business.

Even though still in its infancy, e-business is seen as a growing sector that “has the potential to alter economic activity and the special environment” (OECD, 2002a:7).

Even though e-business transactions are rising fast, they still play a small role in the overall context.

To date, only a few countries measure the value of electronic sales via the Internet. It is still seen as difficult to translate Internet activities into economic value (Greenstein, 2000).

The proportion of business with ten or more employees using the Internet for purchasing and selling varies widely between different countries.

It becomes obvious that even though major opportunities go along with selling intangible web goods, there are still many constraints to be considered.

Statistics further show that sales via the web are mainly domestic or regional, and this is a further constraint to be taken into account when developing value-creating positioning options and strategies for intangible web-good providers.

European firms have a high tendency to sell over the Internet to European locations (OECD, 2002a: 8).

Thus, even though e-business makes borderless trade possible, online sales mostly take place within the consumer’s home country or region.”

Intangible web-good providers do not physically distribute their goods, and are therefore able to engage in international e-business activities from the start.

Never before has a firm’s first digital storefront, as well as its (digital) goods, been accessible by customers on a global basis on its first day of operation.

Intangible web-good providers have to handle the fact that they are “born-globals. However, as outlined above, customers often prefer to buy goods from a firm in their home country (perhaps because of trust reasons with regard to payment modalities), even though only electronic interactions take place.

Households do consist of various segments, which are a function of demographics, lifestyles and income.

E-business is accompanying not only rapid technological but also enormous social change.

Even though the Internet is a global net, there are socio-economic differences in opportunities for use with regard to varying lifestyles and levels of education in different countries.

Different countries may implement various cultural, religious or philosophical barriers against the Internet and thus B2C activities with intangible web goods.

The levels of consumerism vary in different countries. The so called “digital divide” between developed and emerging markets is growing rather than decreasing.

Economic activities based on information and communication technology occur, in the main, in the industrialized world (AP) Kearney Inc. 2001).

Because of measuring problems and differences it is hard to compare the statistics of different entities.

At least all studies agree on the fact that there is a growth of economic activities on the web.

Relevant demographic forces, such as population size, age structure, geographic distribution and income distribution play a crucial role with regard to intangible web-good provision.

Selling intangible web goods via the Internet would not be possible without the enormous technological progress in this area in recent years.

Thus, it seems obvious that technological forces play a major role and have to be taken into account when analyzing the macro-environment of intangible web-good providers.
Here, only some issues of general importance can be highlighted.

The definition of electronic business standards plays an important role with regard to various intangible web goods, such as music and video file formats.

Destabilization of the marketplace combined with the near irrelevance of former market leaders is easily possible when standards are uncertain and competitors are closely matched.

Two areas of special interest with regard to such standards are

(1) The development of a better understanding of the role of the XML standard for data sharing in e-business; and

(2) The better understanding of the impacts of a broader set of technology standards (Kauffman and Walden, 2001).

E-business goes along with many technological innovations. On the hardware side, the network infrastructure is crucial.

Telephone, television and power cables carry electronically encoded information. On the basis of these physical assets, diverse software standards like TCP/IP, HTML or encryption (SSL) and compression technologies (JPEG, MPEG) have been developed.

To a great extent these technological innovations are the basis for Internet success stories as such.

Technological standards play an important role for providers of intangible web goods. New technologies came into existence with e-business.

If firms use these new technologies appropriately, they have the potential to streamline business processes.

As a consequence, operating costs are lowered while sales revenues are increased and channel coordination is improved.

At the same time the technological innovations can influence overall cost, for instance by the creation of a presence in the marketplace without requiring the physical infrastructure of a selling organization.

Business activities here can be based solely on a virtual infrastructure. It also becomes possible in this situation to improve the firm’s immediacy and responsiveness and at the same time broaden its coverage in the marketplace (Kauffman and Walden, 2001).

Selling digital goods online also requires sufficient bandwidth and speed on the customers’ side.

Apple’s success story with its iTimes Music Store, for example, is only possible because of the improved technical properties of customers’ Internet access.

Probably the best-developed economic research in the context of technological determinants of e-business investigates network characteristics (Shapiro and Varian, 1999).

Networks can be divided into real and virtual networks. A network combines users of particular goods or compatible technologies.

In real networks users of a product are connected physically, whereas in virtual networks a logical connection exists.

The Internet can be seen as an example of a real network, because all users are directly connected.

Operating software is an example of a virtual network good. The more users there are, the more companies will produce complementary goods such as software applications.

Network effects are characterized by a situation where the value of a good rises with the total number of users (Katz and Shapiro, 1985).

The other side of the coin is that the average willingness of users to pay for such goods increases with the increasing number of other users.

Only if a sufficient number of users, in terms of a critical mass, exist can a network good be successful in the market.

Network effects are a necessary but not sufficient condition for positive feedback effects, i.e. a combination of demand and supply side economies of scale.

On the demand side, network effects lead to economies of scale because the willingness of each network member to pay increases with the size of the network.

In addition, supply side economies of scale lead to a decreasing cost per unit with an increasing number of goods produced.

The reason for this lies in the usually very high fixed costs in combination with (very) low marginal costs.

For example, the development of specific software can cost millions of euros, whereas the production of ‘a single unit of the software only costs a couple of euro cents.

Search costs and tools play a relevant role with regard to the success of intangible web-good provision.

On the one hand search functionalities become more and more sophisticated, so that consumers should be better able to find the goods they are looking for on the Internet.

On the other hand, the information overflow is growing as well. Lawrence and Giles (1999), in a recent study, found that in 1999 about 800 million unique indexable web pages existed in the Internet.

Search engines indexed only about one-third of all possible pages. Maximizing the efficiency of such search is both a problem of technology (in terms of what is feasible to build) and a problem of economics (in terms of what is efficient to do with the technology)” (Kauffman and Walden, 2001).

Examples of the specific tools relevant for intangible web-good providers are tools that simplify user interfaces, such as hypertext structure (HTML), browsers with plug-ins (e.g. to present audio or video sequences) and the general platform programming language Java.

Important features that have been focused in this context since the late 1990s are so-called intelligence agents in e-business.

These can be defined as systems that are responsive to environmental influences (e.g. Jennings and Woohidge, 1998).

They are proactive in that they exhibit goal oriented behavior. Intelligent agents improve the consumers’ ability to search for, select, negotiate and transact intangible web goods in the e-marketplace.

In the context of technological factors it is further relevant to analyze technical possibilities to personalize/customize intangible web goods.

Technological possibilities to be mentioned in this context are cookie file technologies as well as specific server functionalities.

Firms have great opportunities to collect and analyze customer information by using cookies and collaborative filtering.

These technologies enable firms to personalize interaction with customers and thus create added value (e.g. Dewan et al., 2000; Warkentin et al., 2002 or Wisotzky, 2001).

Another technical area of interest from the macro-environment of special relevance for intangible web-good providers lies in the field of payment and security.

If customers are willing to pay via the Internet and see the Internet as a secure business area, intangible web-good providers can earn revenue.

Accepted methods of payment have to be developed in this context. Electronic money and payments as well as fraud and security issues are still seen as one major barrier to successful business operations on the Internet (e.g. Beck and Prinz, 1999).

Digital money is made possible through encryption technologies. Current obstacles to electronic money involve adoption inertia and the characteristics it must have to be a relevant substitute for traditional money (Kauffman and Walden, 2001).

Providers of traditional products via the Internet have physically to distribute the product to the customer, and this transaction step can be used to charge the customer for the delivered product.

This possibility does not exist for intangible web goods. Electronic payment possibilities are essential for value creation.

Credit card payment via the web may still be a problem. Here also differences can be observed between different countries.

While the use of credit cards for Internet purchases in the US is quite common, in many European countries customers still hesitate to buy online if credit card payment is necessary.

Security issues and lack of trust in the new medium prevent some customers from buying intangible web goods at all.

Other customers are willing to pay higher amounts by credit card but are not willing to pay a couple of cents for a downloadable article by credit card, whether because they do not want to risk such a transaction for such a small amount or because they do not want to invest the time entering all the required data (name, credit card number, etc.) for such a small transaction.

The possibility of paying for intangible web goods via the telephone bill is still in its infancy and is accompanied by lack of trust on the customers’ side.

Intangible web-good providers have to take into account possible payment modalities or other means of revenue generation when thinking about appropriate positioning options and value-creating strategies in their business.

Trust issues play a crucial role with regard to doing business on the Internet. In this context, technological means of increasing customers must in intangible web good providers are important to do business with intangible web goods in an Internet environment.

It is important for firms to have sufficient knowledge about technological possibilities with regard to issues such as electronic payment or digital signatures.


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