Da Marketing on the Internet: 1

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1Marketing on the Internet:New Medium, New Channel,or New Creation?

LEARNING OBJECTIVES

By the time you complete this chapter you will be able to:

1. Briefly describe how the Internet originated and what makes it unique as acommunications medium.

2. Explain the advantages of the Internet for consumers and for organizations, bothbusiness and nonprofit.

3. Understand the strategic marketing objectives that form the generic basis for Internetmarketing strategies of enterprises of all types.

4. Describe the basic technical infrastructure of the Internet.

5. Name the strategic drivers of the Internet.

Wireless access, banner ads, pop-up surveys, streaming media, bandwidth, HTML!These are only a few of the Internet-related terms that have entered the marketingvocabulary in recent years. They suggest, while only scratching the surface, howcomplex the marketing job has become in the Internet age.

Marketers are caught up in revolutionary change that is fundamentally altering theoperations of businesses around the globe. It is important that we understand thedeep-seated changes in business processes and strategy before we attempt to specifymarketing’s roles and responsibilities in dealing with the new milieu. In order to dothat, it will be helpful to understand how the technology got us to where we are today.

The origins of the Internet date back to 1957 when Russia launched the Sputniksatellite and thereby the space race. In the Cold War era, the fact that Russia ledin this race was cause for great concern. In order to close the gap, President

The Evolution of the Internet1

1

1Material in this section was taken from “Timeline: PBS Life on the Internet,” www.pbs.org, nd; MichaelHauben, “History of ARPANET,” www.dei.isep.ipp.pt/docs/arpa.html, nd; PBS Home Video, “A BriefHistory of the Internet, Vol. One, Networking the Nerds,” 1998; Jeffrey Veen, “The History of HTML,”http://hotwired.lycos.com/webmonkey.

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Eisenhower created ARPA, soon DARPA (Defense Advanced Research ProjectsAgency), to fund scientific research under the direction of the Department ofDefense. The research program soon involved university and corporate scientistsin various disciplines all over the United States. The research projects all had onething in common, a need for substantial computing power. In the early 1960s com-puters were large, slow, and very expensive. Not even leading scientists had easyaccess to sufficient computer power to run their complex applications. Even morecompelling to the decision makers, the United States lacked a communicationsinfrastructure that could survive an atomic attack with sufficient capacity to keepthe government operational. The planners at ARPA believed they could use theresearch mandate to develop an attack-proof communications structure for nationaldefense purposes.

Two computer science breakthroughs were necessary to support the system theyvisualized. First came time-sharing, the ability to run programs of multiple users atthe same time on the same computer, using the scarce computing resource to itsfullest capacity. The user was not aware that multiple programs were executing atthe same time because the computer moved back and forth between jobs withoutuser intervention. The second breakthrough was the linking of computers atparticipating institutions into the ARPANet.

Much of the inspiration for the ARPANet came from Dr. J.C.R. Licklider, who envi-sioned an “intergalactic network” of interconnecting communities of scientistswho could share computer resources, exchange ideas, and cooperate on scientificprojects. The ARPANet enabled human communication in a time- and distance-independent manner that was completely new and that remains the core legacy ofthis military system.

For the network to function two things were required. First, it needed a telephoneswitching system to connect the computers. Because it was a defense system of theCold War era, it was designed with sufficient redundancy to withstand atomic attack.Essentially, if one computer was knocked out, other computers had to immediatelybecome available to assume the processing without interruption. Second, it had tohave a communications protocol or standard so both words and data could flowover a single, common network. That doesn’t sound like a major issue today, butback in the 1960s computers could communicate with one another only over dedi-cated lines because they lacked a common communications “language.” Conse-quently, each two-way communications pair required a separate, unique connectionwith no ability to switch from one collaborator to another.

The University of California at Los Angeles (UCLA) was the first site to test the IMP(interface message processor) in September 1969. The system crashed before thefirst log-in was completed, but it nevertheless demonstrated the viability of the con-cept. A month later, the UCLA installation was linked to a computer at Stanford. Bythe early 1970s more than 20 participant institutions, universities and governmentagencies, were linked by telephone lines and satellites in the continental UnitedStates, Alaska, and Hawaii. In 1973 it became international with connections toUniversity College in London and the Royal Radar Establishment in Norway.

The original ARPANet was the province of a few scientists who needed to interactwith one other and were willing to learn the arcane job control language that wasrequired to operate the system. The system had the capacity to handle a largevolume of traffic, but it had few users in its early days. To the dismay of some of the

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FIGURE 1.1 Interactive Internet Time LineSource: Cochran Interactive/PBS Online. Used with permission.

originators of the network, it quickly became the first digital post office. The volumeof e-mail was far greater than the volume of long-distance computing, and thescientists were enthusiastic about their ability to engage in research collaborationand even gossip over great distances. The ARPANet, now under the auspices of theNational Science Foundation, would remain the domain of a select few users untilthe widespread adoption of the personal computer in the middle 1980s.

Between 1982 and l987 the foundations of the modern Internet were laid. One ofthose foundations was TCP/IP (Transmission Control Protocol/Internet Protocol),the standard language of all Internet computing. During this time period the Internetgrew rapidly. In 1984 there were 1,000 Internet host computers; by 1987 the numberhad grown to 10,000, and to 300,000 by 1990. The rapid growth of the Internet con-tributed to the decommissioning of the ARPANet in 1990, although the NationalScience Foundation (NSF) continued to operate the telecommunications backbonefor the network. The NSF banned commercial traffic on the Internet until 1991.

Figure 1.1 shows an interactive narrative of Internet history, set for the momentousdecade of the 1990s. Not only is this Web page extremely informative, it makes useof various strengths of the medium. It is interactive, allowing the viewer to movearound at will. It offers a text-only version for visitors with slow Internet connec-tions. A series of hyperlinks below the graphic provides other fascinating glimpsesof Internet history with a single mouse click.

Even without commerce in the years prior to 1991, the rapid growth of the Internetwas making it difficult for users to find information. In 1991, there were two impor-tant developments. The first was the release of “gopher,” a text-only Internet searchtool distributed free over the Net. That same year the first computer code for theWorld Wide Web was posted on a relatively unknown newsgroup by Tim Berners-Leeof the European Particle Physics Laboratory (CERN) in Switzerland. Berners-Lee’ssystem included a simple hypertext (text with embedded links) language called HTML(hypertext markup language). HTML (to be discussed in more detail in Chapter 7)


is a language that describes the structure of documents that are to be posted on theWeb. It is easy to learn as compared to programming languages, and it can be cre-ated on any editor or word processor. In time HTML was expanded to allow not onlywords but also pictures and sound to be posted as files onto the Internet.

When Mosaic, the forerunner of Netscape, was introduced as the first graphicalbrowser in 1993, the ordinary computer user could move around the Web in point-and-click mode instead of having to learn cumbersome search terms. Then in 1995Yahoo! was commercialized and, for the first time, the user could locate informa-tion on the Web with relative ease. (Directories and search engines will be discussedin Chapter 7.) The rate of growth of the Internet, by any metric, took off and hasnot looked back.

Many observers suggest that 1998 is the year the Web came of age as a commercialmedium for both information and transactions. In that year alone, America Online(AOL) purchased Netscape, Kenneth Starr released the Special Counsel’s Reportover the Internet, the Department of Justice sued both Microsoft and Intel for an-titrust violations, and e-commerce sales tripled over the previous year. In just a fewshort years the Internet had become a permanent part of the lives of individuals andcorporations alike. Events were soon to show that the Internet had also become astandard part of the economic landscape.

The growth of the Internet during the late 1990s was phenomenal by almost all mea-sures—number of households and businesses connected, number of Web sites, andamount of business conducted over the Net were only a few. Not growing asquickly—in fact, often nonexistent—were profits from the many enterprises thatblossomed as part of the Internet economy. Investors around the world bought thehype surrounding the Internet and e-business models that appeared to have no hopeof a profitable future. The market capitalizations of many Internet firms soared untilthey greatly exceeded that of successful and profitable businesses in the physicalworld. It was also clear that in both the business-to-consumer (B2C) and business-to-business (B2B) spaces there were a greater number of Internet firms than there waspotential business to support them. It was a situation that could not continue.

Beginning in mid-2000 and gaining velocity through early 2001, the upheaval tookplace. Venture capital became unavailable and many unprofitable pure-play Internet-only firms could not survive without it. Stock market values, even for leadingInternet firms, dropped many-fold. In addition major suppliers of Internet prod-ucts and services, telecommunications carriers, and the burgeoning wireless marketwere seriously damaged in the eyes of investors. High prices paid for licenses forwireless spectrum by European firms worsened their financial position. The publiceuphoria disappeared and media pundits wondered if the Internet was a short-termphenomenon.

Throughout this time of turbulence in markets, a number of things were happen-ing. One was that households and businesses around the world continued connect-ing to the Internet in large numbers. By early 2002, the number of new connectionsto the Internet in the U.S. slowed, suggesting a mature market. Growth continuedin other parts of the world, however. In the U.S. and around the globe, consumerscontinued to increase the size and frequency of their purchases over the Internet.Businesses continued implementing e-business strategies to lower the cost anddecrease the cycle time of their procurement activities and to increase their level ofcollaboration with both customers and suppliers. In a painfully Darwinian fashion,

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the strong continued to make progress while the inept pure-play models, along withsome good ones that had not reached maturity, fell by the wayside. At the end of thecarnage, what was left standing were primarily the creations of physical world en-terprises who could use their financial strength to provide the heavy investment re-quired and their trusted brand names to encourage customers to do business in thenew channel.

Many of the survivors were enterprises like the Sabre system. Even though theInternet had only recently emerged as part of the public consciousness, businesseslike Sabre had been developing their information-based strategies for many years.Consequently, when the Internet became commercially viable, they were ready toseize the opportunity it offered to improve existing systems and build new ones.

The Sabre SystemWhat is now the Sabre travel reservation system began quite innocently in the 1960sas an internal system for reservations agents at American Airlines. Only reservationsagents, first in the New York call center headquarters and soon thereafter at airportterminals, were allowed to access the system. At that time customers who needed tomake a flight reservation had only two options; they used a travel agent or theybooked reservations directly by calling the airline. Using two IBM 7090 mainframecomputers, the Sabre system was able to process 84,000 telephone calls each dayfrom customers and travel agents. Because the information technology (IT) environ-ment was still composed of mainframe computers that required massive amounts oftedious custom programming, the research and development and installation of thesystem took 400 worker-years of effort and cost almost $40 million dollars. Althoughreturn on investment was not easy to calculate, by the time the system was fullydeployed in 1964 it was saving American Airlines 30 percent each year in staff time,had an error rate of less than 1 percent, and was believed to deliver a competitiveadvantage that would last for five to seven years.

It was not until 1976 that Sabre began to offer these services to other airlines and thesystem was first installed in a travel agency. This gave agents direct access to multipleairlines inventory databases and allowed them to book reservations without the assis-tance of the airline call center. By year-end there were 130 installations and the Sabresystem held a market share of 86 percent. In 1985 the introduction of easySabre al-lowed consumers to use personal computers to use the system for airline, hotel, andcar rental reservations. Along the way, various applications had been added to per-form tasks such as airline yield management and crew scheduling. By early 2000Sabre claimed that almost all airlines around the world used one or more of its ITmodules to control some aspect of flight and business operations from passengerboarding and cargo operations to sales automation and human resources functions.

By 1996 the Sabre system had become an important business entity in and of itself.It continued its growth by establishing Travelocity.com to offer travel and eventreservation services on the Internet. AMR, the holding company that also controlsAmerican Airlines, made Sabre a separate legal entity in that year. In March 2000AMR distributed the 83 percent of Sabre shares that it still held, making it a fullypublicly traded company with revenues of $2.4 billion. That same month, Sabrecontinued to expand its information-based products by announcing a partnershipwith Ariba, a supplier of Internet services for B2B firms, to develop a procurementsite for the $50 billion industry that serves airlines with operating products and


2“About Sabre,” “Sabre to be 100 Percent Publicly Traded,” “Sabre and Ariba Announce SabreE-Marketplace,” “Sabre Announces New E-Commerce Consulting Business,” www.sabre.com;Travelocity.com Customer Service e-mail, September 22, 2000.

supplies. Only a few months later, it announced an e-commerce consulting servicethat could assist travel-related businesses in developing storefronts, managing Webcontent, conducting transactions and fulfillment, and developing call centers. Thatsame year, it purchased GetThere, a provider of online travel booking tools to For-tune 1000 corporations.

To the consumer Sabre offers direct booking of airline, hotel, and car rental reser-vations through its Travelocity.com Web site. It also offers a personal Web site, Vir-tually There, that contains all the details about an individual’s travel plans and al-lows the traveler to access information about the destination that ranges fromrestaurants to weather. It provides access to departure times and gate assignmentsand to the Flight Tracker service, which allows the traveler and business associates,family, and friends to track flight progress and arrival times. The system is also ac-cessible to a variety of wireless, handheld devices.

To the small business traveler, Travelocity offers a Business Travel Center with all thefunctionality of the base site and additional features of special interest. Special func-tions include Repeat a Trip, which allows easy booking of a frequently used travelitinerary, a Currency Converter, Flight Paging in which Travelocity.com sends flightstatus information directly to the traveler’s pager, and an E-mail or Fax Your Itiner-ary service for easy sharing of information with colleagues and family.

To the large corporation, Sabre offers services that assist in the management andcontainment of employee travel costs. Through agencies or direct to the corpora-tions, GetThere allows business travelers to make their own travel reservations fromthe corporation’s list of approved vendors. It provides various operating and re-porting software modules and online training in using its products. For travel agentsit offers three separate computerized reservations platforms, depending on agencyneeds, along with consulting and management services.2

Business organizations like Sabre were early movers in developing information-driven business processes and marketing strategies. When the Internet opened upnew possibilities, they were ready to seize the opportunities. They were among thefirst to understand that the Internet had created an environment for communica-tions and transactions that was unlike any other that had ever existed.

When the Internet began to emerge in the public consciousness in about 1995 or1996, no one really believed that it would diffuse through the global economy asquickly as it has. Consumers were generally indifferent and business executivesthought they had ample time to understand and adapt to the requirements of thenew medium. To the surprise of all, it has diffused throughout the global economymore quickly than any other medium, as shown in Figure 1.2. In a slower age, radiotook over seven times as long to reach 50 million users. Even cable television tooktwice as long.

The Unique Characteristics of the Internet

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Adoption Curves for Various Media–The Web is Ramping Fast

Years to reach 50 MM usersRadio = 38TV = 13Cable = 10*Internet = 5**

Source: Morgan Stanley Technology Research. E=Morgan Stanley Research Estimate. *The launch of HBO in 1976 was used to estimate the beginning of cable as an entertainment/advertising medium. Though cable technology was developed in the late 1940s, its initial use was primarily for the improvement of reception in remote areas. It was not until HBO began to distribute its pay-TV movie service via satellite in 1976 that the medium became a distinct content and advertising alternate to broadcast television. **Morgan Stanley Technology Research Estimate

FIGURE 1.2 Adoption Curves for Various MediaSource: www.iab.net. Used with permission.

Diffusion theory suggests that rapid adoption implies a relative advantage on the partof the new product or service. The Internet has a number of characteristics that dif-ferentiate it from any other medium or channel in history and that have contributedto its rapid diffusion. We can identify the unique characteristics of the Internet:

• It provides a single, common platform for communications and transactionsthroughout the world. Computer scientists may argue that TCP/IP is notideal, but its universal acceptance as the Internet standard makes it valuable ina way that far surpasses its inherent functionality. Individuals and corporationscan interact with one another over a common network with little additionalinvestment in either software or communications hardware. That creates amedium for communications and a channel for commercial transactionsunlike any that has existed in the past.

• It supplies information in a way that approaches the perfect information conceptof economic theory. Consumers and business customers alike can obtaininformation from any Web-enabled organization quickly and at little or no cost.That allows them to broaden the scope of their search activities, which werepreviously limited to vendors that were geographically nearby or to which theyhad access through media such as catalogs and television advertisements. Notonly is the scope of search increased, but the depth of information that can beobtained on the Internet is much greater than what is available via other media.

• The interactive nature of communications in this medium affords anunparalleled opportunity for meaningful dialogue with customers andsuppliers alike. It also creates the specter of unparalleled intrusion into theprivate affairs of Internet users.

• It is global in scope. Assuming that the necessary infrastructure is available,any individual, business, or nonprofit organization in the world can connect


3See Donna L. Hoffman and Thomas P. Novak, “Marketing in Hypermedia Computer-MediatedEnvironments: Conceptual Foundations,” Journal of Marketing 60, July 1996, pp. 50–68 for an in-depthdiscussion of the Internet as a communications medium.4John J. Marshall, Richard S. Christner, and Erich Almasy, “The Real Point of Going Digital,” MercerManagement Journal 11, 1999, p. 38.

to the Internet and access its functions in exactly the same way as other users.Practical problems of languages, and to some extent cultures, still exist, butthe Internet is a global medium to an extent that has never before been true.

• It offers, in theory at least, the opportunity for organizations to compete ona level playing field regardless of size or distance. Neither the size nor the locationof an enterprise is apparent to a visitor to its Web site unless the enterprisechooses to make it so. To that extent, the playing field has been leveled. At thesame time, the advantages of ample financial resources and a respected brandname cannot be understated in the increasingly competitive and demandingInternet environment.

• The Internet is an always-on communications network. It allows consumersand businesses alike to access information, entertainment, and businessesservices on a 24/7/365 basis.

• It is a many-to-many communications network, as compared to one-to-onenetworks like the telephone or one-to-many systems like television or radiobroadcast.3

The combined effect of these unique characteristics is a network that can reach any-where on the planet, connecting any set of persons or organizations who choose to beconnected. The result is strategic opportunities and options that were previously un-thinkable. In addition, because incremental costs of adding nodes to the network arenegligible, the economics of business processes are being changed in profound ways.According to Mercer Management Consulting, there are four ways in which the In-ternet affects business processes, not at the margin, but by orders of magnitude:

• Cost. An online bank transaction costs $.04 versus more than $1 for atransaction at a branch, a greater than 25� factor of improvement.

• Quality. The entirely electronic design process for the Boeing 777 generatedone-tenth the number of errors generated by the prior physical designprocess.

• Customer access. While a large retail store might be lucky to get 50,000 visitorsa month, a leading electronic retailer can get 5 million visitors or more eachmonth—a 100-fold improvement.

• Choice. Amazon.com, the Internet’s leading retailer, “stocks” over 4 millionbooks, roughly 25 times the assortment of a Borders superstore.4

The Internet is changing business processes in fundamental ways. It is altering thenature of our relationships with customers and other stakeholders and broadeningthe base of those who interact in meaningful ways with the businesses. It enhancesspeed and affects timing of activities of many kinds. Above all, it transforms the na-ture of successful organizations. Hierarchical organizations lack the flexibility tocompete in the information-driven economy. Vertical integration no longer offerssubstantial benefits in either cost or control. Traditional corporate boundaries bluras information moves freely across them, and the most effective organization isoften a virtual one.

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Internal Information

External Connectivity

With Customers,Suppliers, and Partners

Suppliers/Partners

CustomersContent Provider

Aggregator

Peer-to-Peer

ASPPortalBricks ’n’ Clicks

Infomediary

Marketplace

The B2B Space

The B2C Space

Improving CustomerService & DecreasingMarketing & Support

Costs

Building EffectiveSupplier & Partner

Networks

Acquiring ProfitableCustomers

Infrastructure

Machine-to-Machine

Building LoyalCustomer Relationships

BrandBuilding

FIGURE 1.3 The Internet Marketing Paradigm

In the environment just described, marketing takes on new and challenging roles.The nature of the Internet marketing milieu is portrayed in Figure 1.3. The com-plex technological environment of Internet marketing is represented by the twoouter circles in the model. The overall environment for marketing has many char-acteristics that are well covered in introductory marketing texts. They include thenature of customer markets, the economic situation, and the social, legal, and reg-ulatory setting. The key environmental aspect for the Internet marketer is theinformation and communication technology (ICT) infrastructure. The ICT infrastruc-ture is made up of the following:

• Information technology (IT). IT is the hardware and software that enable businessprocesses in general and e-marketing processes in particular. The detailedtechnical underpinnings of the information technology infrastructure makeup the subject matter of specialized courses in other disciplines, primarilymanagement information systems (MIS). However, it is essential that theInternet marketer have a working acquaintance with the key e-marketingapplications. These applications will be covered in later chapters in thecontext of the specific marketing process they enable. When additional

The Internet Marketing Paradigm


technical information is required for an understanding of terminology orfunctionality, it will be separated out into Tech Topics that will providetechnical detail.

• Communications technology. The connectivity that is the heart of the Internet isimparted by the communications infrastructure. There are two ways oflooking at the contemporary communications infrastructure:

• Narrowband (also called baseband) vs. broadband. Narrowbandcommunications take place on wires that can carry only one type ofmessage at a time. For example, the telephone wires that carriedmost communications in past years is made up of two copper wires(“twisted pair”). One wire carries inbound signals and the othercarries outbound messages, whether voice or data. Broadbandcommunications can carry more than one signal simultaneously;for example voice and video at the same time. What users noticemost about broadband communications is its speed.

• Land lines vs. wireless. Land lines can be either copper wire(narrowband) or fiber-optic cables (broadband). They share thecharacteristic of being physical entities that must be installed overlandor underground. Wireless communications, on the other hand, aretransmitted over the air, on assigned radio frequencies or by satellite.Although they require transmission facilities (primarily the towers thatdot today’s landscape), the physical infrastructure requirements forwireless are much less than for land-based lines. As a result, wirelesscommunications are diffusing quickly in areas such as the developingnations where land lines are either scarce or nonexistent.

In the next section we discuss the specific elements of the ICT infrastructure thatsupport the Internet. Specific communications technologies and issues will be dis-cussed throughout this text where they have special relevance to a marketing activ-ity. The social and regulatory context of infrastructure and Internet marketingaround the globe are covered in Chapters 12 and 13.

The marketing organization, exemplified by the two inner rings in Figure 1.3, facesin one direction its customers and in the other direction suppliers of all types in-cluding partners and affiliates. As the Internet permeates business activities, bothcustomers and suppliers become more closely tied to the marketing organization.In all instances, information is the tie that binds them together into the kinds of vir-tual value chains discussed in Chapter 2. Information flows seamlessly across orga-nizational boundaries, admitting both customers and suppliers to domains of infor-mation that previously were regarded as proprietary and available only to selectmembers of the marketing organization. The characteristics of customers, both B2Cand B2B, receive special consideration in Chapter 6.

The middle ring of the model identifies the strategic marketing objectives that are mostcommonly pursued by Internet marketers:

• Acquiring profitable customers. Attracting customers to the product or service hasalways been a key responsibility of marketers. In the Internet environment,where customer actions are trackable, return on marketing investments can bemeasured. The emphasis therefore becomes “profitable customers,” notsimply “customers.” The basis of customer acquisition in both B2C and B2Bmarkets is discussed in Chapter 5 and is the primary focus of Chapter 7.

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• Building loyal customer relationships. Because customer profitability can bemeasured, the focus further shifts from primary emphasis on customeracquisition to customer retention. Marketers have been aware since the early1990s that it is significantly cheaper to retain an existing customer than toacquire a new one. Chapter 5 establishes the basis for retention programs,which are discussed in detail in Chapter 8.

• Brand building. The Internet itself is an interactive, direct-response medium.Consequently, in its narrowband format at least, it is not ideal for brandbuilding. Building a strong Internet brand therefore tends to require acombination of online and offline marketing efforts. Issues related to brandbuilding are discussed in several contexts, especially as a function of Internetadvertising in Chapter 7.

• Increasing customer service and decreasing marketing and support costs. Customerservice is recognized by traditional marketers as important to customersatisfaction and retention. It also tends to be regarded as a cost, and thereforeto be rationed. For the first time the Internet, through its capability of self-service, permits customer service to be improved at the same time the cost ofproviding the service is decreased. The same is true of the extensive customersupport needed to assist customers in learning to use products from computersoftware to telecommunications equipment. The strategic base for Internetprovision of customer service and support is established in Chapter 2 in thediscussion of Internet value chains. Specific applications and techniques arecovered in Chapter 11.

• Building effective supplier and partner networks. Because information-sharing onthe Internet has blurred the boundaries of organizations of all types, thenature of relationships between marketers and suppliers of all types haschanged. Key changes are:

• More marketing functions and activities are being outsourced—contracted to outside specialists. This provides the advantages ofspecialization and increased flexibility. Real-time information transferover the Internet allows the outsourcing to be accomplished with nodecrease in speed or quality of service and often without the customerbeing aware of outsourcing or shared production.

• Partnerships between suppliers of goods and services alike become thenorm, with each partner contributing specialized expertise and with allparties relying on a common base of information. Establishing andmaintaining these partnerships relies both on the ICT infrastructureand on careful partnership management by all participants. This is akey topic in Chapter 2.

The inner ring of the model catalogs the business models commonly used in B2Band B2C markets. The models represent the manner in which the organization in-teracts with its environment and particularly the way in which it creates value forstakeholders, especially customers. On the B2B side, marketplaces are especiallyprominent. Infomediaries, applications services providers (ASPs), and B2B portalsare creations of the Internet. Value networks represent the transformation of tradi-tional channels of distribution into virtual value chains.

On the B2C side, there are portals and free Internet service provider models thatare unique to the Web space. Content providers have their roots in the activities of


5Servers are computers dedicated wholly or in part to responding to requests for files.

physical world media companies, and aggregators are the Internet version of physi-cal world catalog merchants. The two worlds meet in the Bricks ’n’ Clicks model, inwhich retailers who have both physical world and Internet operations can success-fully integrate the two into an operation that produces customer satisfaction in anyof its multiple channels. Peer-to-peer models are a new entrant on the scene andembody person-to-person communication without intermediaries for purposesincluding the trading of music and other content.

Understanding the nature of the various business models is integral to understand-ing Web marketing activities. Chapter 3 is devoted to a consideration of B2C mod-els and Chapter 4 deals with B2B models.

The Internet marketing paradigm operates in a context of business processes andactivities. The Web site is rapidly becoming a focal point for those processes andactivities for enterprises of all types and sizes. The nature of effective Web sites—their creation and management—is the subject of Chapter 9. Web evaluation met-rics are discussed in Chapter 10. Chapter 14 considers marketing issues peculiar toinformation-driven enterprises and Chapter 15 looks at the horizon to see what newdevelopments may affect the near-term future of Internet marketing.

Whatever your perspective, it is clear that the technology that supports the Internetis one of the fastest-changing elements of the environment. Detailed discussion ofthe underlying technology is beyond the scope of this book, although we will discussmarketing applications in depth throughout. It is, however, useful to have a high-level understanding of the basic ICT infrastructure of the Internet.

The technical infrastructure of the Internet is often conceptually described as aninfrastructure stack as portrayed in Figure 1.4. Forming the backbone of the systemis the telecommunications connection, either narrowband or broadband. Telecom-munications services, both wired and wireless, are provided by a variety of carriersin an atmosphere that is increasingly competitive as a result of deregulation effortsaround the world.

The Web site itself must be housed on a server,5 an operation commonly calledhosting. The server that hosts the site must be connected to the network and is ded-icated wholly or in part to performing the functions needed to operate the site.Many organizations, primarily those with either high levels of technical expertise orsmall Web sites, perform this function internally. Other organizations, both largeand small, choose to outsource this highly technical function to external servicesfirms that provide the hosting function.

One reason for the increasingly common decision to outsource Web site hosting isthe large investment required in specialized Internet hardware and software. The hard-ware includes computers needed to serve Web pages to visitors as well as increas-ingly large amounts of either computer or network-based storage required to holdthe content and databases that drive Web services. It also includes a great deal of

The Internet Infrastructure Stack

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Managed/Applications Service ProviderOutsourced Operations

Web Site OperationsLoad Balancing, Security, Caching

Web Site HostingInternal or External

Telecommunications CarrierConnection to Internet

Internet Hardware and SoftwareServers, Routers,

Web/Application/Database Servers

FIGURE 1.4 The InternetInfrastructure Stack

6Routers are specialized computers or software that transfer data on a network. Bridgers work withinlocal area networks (LANs) to connect various parts of the network, regulate traffic, and switch data.Both fall under the heading of specialized telecommunications devices.

specialized telecommunications hardware—items like fiber-optic cables, routers,and bridgers,6 for example. Both the computer and telecommunications hardwareare driven by specialized software necessary to connect to the Internet and to runthe specific applications programs that drive the functionality of the site.

The next level on the stack is the operation of the site, the day-to-day work of keepingthe system running and of fine-tuning it to provide a high level of uptime and fastand dependable downloading of pages to users. This is a purely technical part of theWeb infrastructure, and marketers do not need specialized knowledge of the dailyoperational issues. They do, however, need to exhibit consistent concern about theefficient operation of the site since that is a necessary element of providing a goodvisitor experience.

At the top level of the stack is the applications or managed service provider. Applicationsservice providers (ASPs) provide network access to the software applications that areneeded for Web site functionality. This can include applications like data warehous-ing and personalization, both of which will be discussed in later chapters aspotentially key parts of Internet marketing programs. Organizations can choose topurchase or license applications like this and run them internally, but they areexpensive and require a great deal of technical skill to integrate with other softwareand to run effectively. ASPs, who essentially “rent software,” and managed serviceproviders (MSPs), who provide both applications and hosting services, will be dis-cussed in detail as business models in Chapter 4.


7Adapted from “10 Driving Principles of the New Economy,” Business 2.0, March 2000, pp. 198–284, and“Our 10 Principles of the New Economy, Slightly Revised,” Business 2.0, August/September 2001, p. 85.

The infrastructure stack, of which this is a simplified representation, implies a com-plex set of “make or buy” decisions with regard to the Web site and the execution ofInternet marketing programs. This subject will be referred to throughout the text.At this point, it is sufficient to recognize the reasons for the existence of this issue.An important driver of outsourcing is the lack of the specialized technical expertsneeded to develop and maintain these systems. Both the personnel and the infra-structure are expensive, and unless they can be fully utilized, it is more economicalto procure the services from outside firms. Finally, a carefully reasoned outsourcingstrategy can permit the organization to concentrate on its own areas of product andmarketing expertise, leaving many of the essential but bothersome technical detailsto others. That means that the organization can react with more speed and preci-sion to both problems and opportunities.

Throughout the text the critical importance of organizational flexibility and speedin bringing products and services to market will be emphasized. As a commercialmedium, the Internet is still in its early stages and experimentation and change areeverywhere. For the foreseeable future, managers will live in a milieu characterizedby constant change. In large part their success will be determined by their ability toreact swiftly and in a meaningful way to environmental change.

Yet, in the midst of ongoing change, there are strategic drivers that represent asource of stability. These strategic drivers establish the parameters of the Interneteconomy and provide meaningful direction for businesses that want to take advan-tage of its special capabilities. The strategic drivers describe the Internet macro-environment in which e-businesses operate.

There are many versions of the strategic drivers and many books and articles de-voted to a single aspect of the new Internet economy. The following list of 10 strate-gic drivers, summarized in Table 1.1, incorporates a variety of perspectives into acomprehensive set of strategic dimensions.

1. Information provides the greatest value added, either as added value forexisting products or services or in the form of information products.

The focus of economic activity has switched from the production of physical goodsto the manipulation of information that increases customer value. Many pure-playInternet businesses have been built on using information to provide greater cus-tomer satisfaction. The founder of Drugstore.com saw in the health and beauty aidsector a number of opportunities to use information to enhance value. These over-the-counter products have a major information component that consumers wantand are willing to acquire over the Net. The industry was large, cumbersome, andextremely slow. Technology was available to meet consumers’ needs in a more effi-cient manner. According to Jed Smith, the founder of Drugstore.com:

Our goal is to provide a great product delivery service to consumers and help themfind the health, beauty or wellness products that they want, delivered to their homes

The Strategic Drivers of the Internet Economy7

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TABLE 1.1 Strategic Drivers of the Internet Economy

1. Information provides the greatest value added.

2. Distance no longer matters.

3. Speed is of the essence.

4. People are the key assets.

5. Growth rates are accelerated by the network.

6. Value in a network rises exponentially with market share.

7. Market power is determined by skill in managing information.

8. Marketplace power has shifted in the direction of customers.

9. The Internet makes it possible to deal with customers on a one-to-one basis.

10. The era of instant gratification is here.

8Interview with Jed Smith, Founder, Drugstore.com, May 31, 1999, www.strategyweek.com.9Jim Bessen, “Riding the Marketing Information Wave,” Harvard Business Review, September/October1993, p. 152.

quickly and efficiently. The content side supports our commerce. . . . Our healthcontent, our product information and cross-healthcare information services are allfocused on how can we help customers find the products that they want to get de-livered . . . we’ve been able to constantly focus everything we can on the customer’sexperience by providing superior customer service and learning things. . . . We havea phone service and an e-mail service center that . . . analyzes and sifts all of thedata. . . . We can also prioritize exactly where the issues are that we want to solve toprovide a great customer experience. . . . Customers want to impact the building ofproducts, the interactions that they have, the stores that they shop in. The Internetprovides a very easy and smart feedback loop.8

Some of the features offered on Drugstore.com include a shopping list that allowsfor easy reordering and e-mail reminder services for products and prescriptions.These services provide convenience for the customer and data for the merchant.

For many years existing businesses and industries have been drowning in data thatthey have found difficult to turn into useful information. As recently as 1993, JimBessen wrote in the Harvard Business Review:

Consider the retail food industry. The average grocery store now stocks around20,000 items, with larger stores carrying two or three times that amount. Around10,000 new items are introduced each year. The average supermarket now carriesroughly twice the number of items it carried ten years ago. Given the enormousvariety of weights, flavors, colors, and sizes, the total number of stock-keeping unitsat a supermarket may run to several hundred thousand.9

Various technologies and applications tried to improve the situation, but the onlyaccepted standard was the Universal Product Code and checkout scanners.Although those developments did permit closer tracking at all levels of distribution,


10“The Net Imperative,” The Economist, June 26, 1999, p. 10.11Sandra Swanson, “Tesco Pays $22 Million for 35% Stake in Grocery Works,” Information Week, June 25,2001, www.informationweek.com; Christopher T. Heun, “Grocers Count on IT to Keep Cash RegistersRinging,” Information Week, December 24, 2001, www.informationweek.com.

they only added to a deluge of data that was more than manufacturers, distributors,or retailers could meaningfully utilize. Only the connectivity of the Internet offereda potential solution:

In Britain, Safeway, a supermarket chain . . . has constructed a web-based integratedvalue chain that has revolutionized the way it does business. On the buying side ofits operation, it allows hundreds of its suppliers access to its data warehouse, givingthem real-time information about how each of their products is selling in every oneof Safeway’s stores. . . . Since the cost of connecting to Safeway’s intranet is only afew thousand dollars . . . the supermarket can easily increase the number of its sup-pliers, giving it more choice and better prices. On the selling side, it uses its websitefor remote shopping and electronic cataloguing, as well as collecting and miningdata on customers’ preferences both from the site and from loyalty cards, so it canpersonalise promotions.10

This kind of information infrastructure can provide the platform for a successfule-business. In mid-2001 Britain’s largest supermarket chain, Tesco, acquired a largestake in Safeway’s online division. Operating in tandem as Grocery Works, they havecreated that rarity, a rapidly growing and profitable online business. Their informa-tion infrastructure and the store inventory picking system it supports has made amajor contribution to that profitability. So has the fact that grocery margins areabout four times higher in Britain than in the U.S., where most online grocery busi-nesses have failed.11

The best product and service candidates when it comes to the Internet either havea major information component like travel services, as in the Sabre example, or canadd information in a way that improves the buying experience and/or decreasesrisk as in the health and beauty aid market, or simply provides convenience, as inthe grocery market.

2. Distance no longer matters.

Limitations imposed by distance on the acquisition of knowledge and commercialexchange have been reduced or, in some cases, completely eliminated. Buyers andsellers can connect directly with one another, and economies of knowledgereplace the economies of scale that were the foundation of the modern corpora-tion and the rationale for vertical integration of the stages of production anddistribution.

In electronic marketplaces transaction and coordination costs are greatly reducedor even eliminated. Economists describe these costs as “friction” in an economic sys-tem. Friction includes nonproductive costs of preparing and coordinating agree-ments between parties to a transaction as well as higher costs caused by lack ofknowledge about competitive prices. In a frictionless economy, there is no reasonfor huge, vertically integrated enterprises. They are replaced with confederations ofenterprises, linked by the electronic network. Each enterprise in this system canconcentrate on its core expertise, moving information seamlessly across corporateboundaries. The economic friction that remains is the cost of physical logistics for


12Edward J. Romar and Mary Lou Roberts, “Partnerships, Alliances and the New Economy: Towards aTypology of Web-Based Relationships,” Proceedings of the 2001 Macromarketing Conference; Oliver E.Williamson, “The Modern Corporation: Origins, Evolution, Attributes,” Journal of Economic Literature,1981, pp. 1537–1569; David Warsh, “Nobel Winner Coase Blends Theories of Economics, Law,”Boston Globe, October 16, 1991, p. 63; Ronald H. Coase, “The Nature of the Firm,” Economica, 1937,pp. 386–405.13www.ebay.com.14“Sabre and Ariba Announce Sabre E-Marketplace,” www.sabre.com.

products that cannot be digitized and transmitted across the network. Even thiscost, however, can be greatly reduced by the network, as we will see in various ex-amples throughout the text.

Transaction cost theory was not born out of the Internet. As early as 1937 the Uni-versity of Chicago economist Ronald Coase described the firm’s main role as beingan allocator of resources. When an effective market is available to make price knowl-edge widely available, regardless of time or distance, the market becomes betterable to allocate resources than the firm, and a primary reason for the firm’s exis-tence begins to disappear. In 1981 the Stanford economist Oliver Williamson popu-larized this theory in a paper entitled “The Modern Corporation,” and in 1991Coase won the Nobel prize in economics for changing the way economists thinkabout the nature of the firm.12

The markets that are created in this electronic world are about convenience andcommunities of interest, not about proximity and rules for allocating resources. Aprime example of an open electronic marketplace, and one of the few consis-tently profitable Internet pure-plays, is e-Bay. e-Bay bills itself as “The World’s On-line Marketplace” and describes its mission as being “to help practically anyonetrade practically anything on earth.” In early 2002 e-Bay had 37.6 million regis-tered users who, during an average visit, spent more minutes on e-Bay than on anyother site. Goods and services are sold worldwide off the main site, and in early2002 there were 18 country-specific sites stretching from Argentina to the UnitedKingdom.13

Figure 1.5 shows a consumer item that could be attractive to collectors the worldover. The description of the item also illustrates reasons why doing business one-Bay is comfortable for those millions of users. Not only can the seller include apicture of the item and a written description, but e-Bay also provides ratings ofseller reliability and allows buyers to contribute their experiences to the seller’sprofile. e-Bay also provides a number of trusted third-party payment mechanisms.Part of the fun of doing business on e-Bay is tracking the progress of the visitor’soffer or bid, and that alone brings a visitor back to the site time after time.

In a similar manner, the B2B marketplace launched by Sabre and Ariba takesadvantage of the existing relationships between Sabre and 45,000 travel agencies,10 cruise lines, 50 hotel rental companies, and 45,000 hotel properties. The mar-ketplace will give participants “a single procurement portal through which they canbuy and sell goods and services from capital equipment to cabin services to ticketstock, as well as conduct auctions for sourcing and selling surplus materials such asaircraft parts.” It is expected to produce cost savings of 10 to 15 percent for partici-pants and to offer suppliers new revenue opportunities.14


15Saroja Girishankar, “New Options Fuel Growth in Online Procurement,” InformationWeek OnLine,January 10, 2000, www.informationweek.com.

3. Speed is of the essence in doing business on the Internet.

Through Internet institutions such as e-Bay and the Sabre/Ariba marketplace, cus-tomers are learning to expect real-time access to suppliers who can offer a huge se-lection of products and fulfill their orders accurately and swiftly. Even small busi-nesses can take advantage of these opportunities—and make them available to theirown customers—in Internet space. One example is Ace Hardware Corp., a cooper-ative of about 5,100 local hardware stores. It operates its own procurement extranetas a service to members and also provides access to FindMRO, an external procure-ment service. FindMRO is a procurement site operated by distributor W. W. Grainger,one of the early movers in this market. The site provides access to more than 5 millionmaintenance, repair, and operations items from 12,000 suppliers. “FindMRO givesour retailers access to products that they can’t easily find or don’t normally stock,”according to the manager of Ace’s commercial and industrial supply group, TinaLopotko. “The benefits really add up when you get access to these products at a lowertransactional price and at a quick turnaround.” Ace declines to provide specifics, butindustry experts say that companies can cut procurement costs by as much as half andreduce turnaround time on orders from weeks to days.15

Speed can be enhanced by the addition of information throughout the enterprise.Collaborative processes for product development can reduce cycle time and moveproducts into the marketplace more quickly. Online customer advisory panels canproduce rapid feedback on a variety of issues. Customers can obtain service 24/7from anywhere in the world. It is, however, important to note that firms haveincreasingly recognized that “getting it right” is more important than “getting it fast.”

4. People are the key assets of Internet businesses.

While this may sound like a trite statement to many members of the Internet age, ithas not always been true. The principles of scientific management, best exemplifiedby the productivity principles of Frederick Taylor and the assembly line practices ofthe Ford Motor Company, focused on the task, not the worker. According to PeterDrucker, “The most valuable assets of a 20th-century company were its productionequipment. The most valuable asset of a 21st-century institution, whether business or

FIGURE 1.5 Music Memorabilia for Sale on e-BaySource: www.ebay.com. Photo used with kind permission from Lorna Flesher.


16Peter F. Drucker, Management Challenges for the 21st Century, New York: HarperBusiness, 1999, p. 135.17Don Tapscott, “Minds over Matter,” Business 2.0, March 2000, p. 222.18David Berreby, “The Hunter-Gatherers of the Knowledge Economy,” Third Quarter 1999,www.strategy-business.com.19Ibid.

nonbusiness, will be its knowledge workers and their productivity.”16 Managers ofknowledge workers have long recognized that skilled employees are the only assetthat walks out the door each evening—and may not return in the morning. Theyalso know that “to do effective knowledge work, people must be motivated, havetrust in their fellow workers and company, and have a real sense of commitment,not just compliance, to achieving team goals.”17

Many of these knowledge workers come from the generation X, or Gen X, agecohort of young adults born during the 1960s and 1970s. They present unfamiliarchallenges to managers, most of whom are from the baby boom generation (1945 to1963). A consultant at Booz Allen & Hamilton presented the following profile towriter David Berreby: “They want to come and go as they please, wear what they like,work the hours that suit them—and not too many, thank you—because they value abalanced life more than piling up possessions. They want to work in small groupsand be a part of every decision. Direct orders set their teeth on edge. You mustexplain why you want them to do something or, better, show them by example. Youearn their respect by doing what they do.”18

In a provocative article, Berreby goes on to point out that this is actually an anthro-pological description of a typical band of foragers, the hunter-gatherer life thatmost people followed until relatively modern times. He lists the key traits of thisanthropological typology as:

• Egalitarianism. Relationships and communications are key to successful taskperformance for Gen X workers. At the same time, their disdain for hierarchyis also symbolic of the value they place on personal autonomy.

• Consensus. They also have a strong preference for consensus and unanimity intask groups or when key decisions are being made. They depend on oneanother and have a tendency to impose moral sanctions on people who donot share or who take advantage of other group members.

• Counterdominance. Privilege and authority are rationed, and their use is watchedclosely by the group so that no single member accrues too much power.19

The author’s basic contention is that this is a way of relating and working that sur-vived for millennia, not a set of generational values spawned by electronic mediaand working parents. That makes it less likely that the value set will go away, eitheras a result of an economic downturn or the inevitable maturing of an age cohort.That makes the Gen X worker one of the many challenges with which the modernbusiness organization has to cope.

Managers in these organizations struggle with issues related to motivating andretaining knowledge workers in all age groups. The English telecommunicationsprovider British Telecom (BT) has an obvious interest in encouraging solutions,including virtual teaming and home work, that take advantage of communicationstechnology. On a site called “You Can” that is targeted to business customers, BT hasa section on flexible working. This can apply to home work, mobile connectivity, orworking on a client’s premises.


20www.youcan.bt.com. By early 2002 this topic had been incorporated into a page on flexible workingoptions using BT technology at http://www.bt.com/businesshighway/up running/ways to work smarter.htm.21“How Does OnStar Work?” www.onstar.com.22“Privacy,” www.onstar.com.

The reasons BT gives for adopting a flexible work environment are to reduce costs,keep staff, and “be greener.” It argues that employees are given greater freedom andmore responsibility, experience less stress, and are more motivated and better satis-fied. Believing that it is important to practice what it preaches, BT has created awork environment called Workstyle 2000. Its goals included reducing costs by relo-cating workers outside London, providing a catalyst for IT-based changes in workprocesses, and increasing the speed with which teams could be formed to respondto opportunities and challenges. By early 2000 BT had some 26,000 workers it clas-sified as “nomadic” and 3,500 home workers; the eventual goal is 10,000 employeesworking from home. This would reduce the number of workstations in innerLondon from 10,000 to 3,000 and result in a cost saving of 134m pounds.20

5. Growth rates are accelerated by the networked nature of the new economy.

The network itself is growing rapidly, fueled by decreasing costs and increasing pro-ductivity (see Tech Topics: Moore’s and Metcalfe’s Laws for specifics). Initially net-works were merely computers and printers connected to one another. But today,many items have simple silicon chips that transmit streams of information. Your cellphone is recognizable as such an instrument, whether it is Internet-enabled or not.So is your rice cooker, especially if it uses fuzzy logic algorithms to ensure perfectrice. The time is coming closer when many of these items will be connected, throughthe Internet and increasingly through wireless systems. Electrolux in Sweden al-ready makes a “smart” refrigerator that keeps an inventory of staple items and hasthe capability of contacting a delivery service to order more when supplies run low.

When the chips are connected, important benefits will be obtained. General Motorsfirst introduced its OnStar system on its Cadillac line and soon made it available toother automobile manufacturers. The system uses a mix of technologies to enablethe driver to perform activities ranging from summoning assistance in an emer-gency, to locating a stolen car, to requesting that doors be remotely unlocked.

OnStar starts with sophisticated Global Positioning System Satellite informationto locate the vehicle, wireless communications to seamlessly link the vehicle to theOnStar Center, integration of the OnStar system to the wiring in the vehicle, and aprofessionally staffed center that’s available 24 hours a day, seven days a week withaccess to sophisticated computer databases and mapping software.21

Since the system has the potential for generating a great deal of data, GM is sensi-tive to issues of customer privacy:

OnStar takes the issue of privacy very seriously. The OnStar Center’s experiencedAdvisors will relay vehicle information to subscribers only when the correct Per-sonal Identification Number or Security Code Word is provided. At the sub-scriber’s request, vehicle information will be provided to authorized 911, police,fire, ambulance or roadside-assistance providers. . . . The OnStar system collectsGlobal Positioning System data, which is converted to location information onlywhen you use the “OnStar” button or emergency key to contact the OnStar Center.If we receive notification that your car is stolen, OnStar will track it only after youand the police have been notified. Privacy is paramount to keeping you satisfied.22


Moore’s Law

In 1965 Gordon Moore, one of the founders of Intel, predicted that computing power woulddouble every 18 months while the cost of producing it fell by 50 percent. To the surprise ofmany, his prediction, Moore’s law, has been borne out and scientists expect it to continuefor at least another 10 years.

According to Moore, “The first silicon transistors I was involved in making, we sold for $150a piece. But even when they were [in] fairly high-quality production, they were severaldollars apiece. This would have been in the late 1950s. Now, for several dollars, you can buya 64-million-bit memory chip that has 66 or 67 million transistors on it—so there’s been a60-millionfold reduction in the cost of a transistor.”

Metcalfe’s Law

Robert M. Metcalfe, founder of the 3Com Corp., first made the statement that has becomeMetcalfe’s law, also known as the law of the network, in 1994. He stated that the value of acommunity increases exponentially with the square of the number of participants in thecommunity. That denotes a geometrical increase in value with every new memberconnected to the network.

Tech Topics

Sources: Jeffrey Harrow, “When Will Moore’s Law Hit a Wall?” Opinion, July 31, 2000, www.techweb.com; Kevin Jones, “MatchmakerGrows by Law of Net,” Inter@ctive Week, November 23, 1998, www.zdnet.com; Robert M. Metcalfe, “From the Ether,” InfoWorld,July 17, 2000, www.zdnet.com.

23www.onstar.com.24Steve Jurvetson, “Turning Customers into a Sales Force.” Business 2.0, March 2000, p. 231.25http://advantage.msn.com/msnsites.

GM took the next logical step in 1999 when it announced that it would offer limitedInternet access through the OnStar cell phone. That enabled the system to delivere-mail, news, sports, investing, and weather information specified by the motorist.In early 2002 it announced the coming availability of voice activation to increasethe convenience and safety of the system. Other automobile manufacturers havelicensed the system for use in their cars, and GM estimated that there would bealmost 2 million OnStar subscribers by the end of 2001.23

Users can also become a proponent of network growth. Hotmail was founded in1995 to offer free e-mail. It signed up 12 million subscribers in its first 18 monthsand continued to acquire 150,000 each day through early 2000.24 By November2001 it had over 34 million unique users and a market reach of 32 percent.25 Fromthe beginning Hotmail has spent little on traditional advertising and promotion.Instead, every outbound e-mail contains taglike, “Get Your Private, Free Email athttp://www.hotmail.com.” That represents an advertisement with no incrementalcost and with the implied endorsement of the sender, presumably a friend or at leastan acquaintance of the recipient. This technique has become known as “viral mar-keting” because news, whether good or bad, spreads on the Internet with speedreminiscent of a germ in the biological world.

6. Value in a network rises exponentially with market share.

The old economy was one of scarce resources that became more valuable as theirsupply decreased. Business 2.0 says that, “In the cyberworld the ‘Network Effect’takes over and the converse becomes true: the larger and more vibrant the network,the greater the value because you’re more likely to find the person, information, or


26“Bigger Network, Greater Value.” Business 2.0, March 2000, p. 240.27Kevin Kelly, “New Rules for the New Economy,” September 1997, www.wired.com.28For a detailed analysis of the marketing strategy implications of information, see Rashi Glazer,“Winning in Smart Markets,” Sloan Management Review, Summer 1999, pp. 59–69.29John Hagel III and Jeffrey R. Rayport, “The New Infomediaries,” The McKinsey Quarterly 4, 1997, p. 56.

resource you’re seeking.”26 Robert Metcalfe stated this as another “law” of technol-ogy (see Tech Topics: Moore’s and Metcalfe’s Laws for specifics).

The fax machine provides a classic example. The first fax machine, which probablycost millions of dollars in R&D, was worthless. At that point there was no one towhom to send a fax. The second fax created value. The more faxes on the network,the greater the value of having and using a fax. Fax users became advocates. “Can Ifax you?” became an incentive to acquire a fax machine if the target of the questiondid not already have one. “When you go to Office Depot to buy a fax machine, youare not just buying a US$200 box. You are purchasing for $200 the entire networkof all other fax machines and the connections between them—a value far greaterthan the cost of all the separate machines,”27 said one observer.

In the Internet age, software suppliers like Adobe (Acrobat Reader), RealNetworks(RealPlayer and RealJukebox), and Macromedia (Flash Player) have taken the valueof the network a step further by distributing the user version of their software freeof charge. This makes their professional software, the complex developer tools,more valuable because consumer use is made easier and cheaper, increasing devel-oper demand for their products.

This is a compelling business model, at least for the early days of the build-out of theInternet. Value is determined by the number of connections on the network. Mak-ing your type of connection (e.g., Flash graphics) the standard raises high barriersto entry for follower enterprises. Consequently, first-mover advantage becomes crit-ically important, and giving away free product in order to achieve it becomes aworthwhile investment. However, there is a limit to the number of networks thatpeople and businesses choose to join, and not all the early Internet firms thatcounted on network effects were, in fact, able to realize them.28

7. Market power is determined by skill in managing information.

The importance of managing information—about buyers, about sellers, and abouttransactions between them—has given rise to a new class of intermediaries. Onetype has been dubbed the infomediary. According to John Hagel and JeffreyRayport, an “infomediary [is] a business whose sole or main source of revenuederives from capturing consumer information and developing detailed profiles ofindividual customers for use by selected third-party vendors.”29

Infomediaries can serve business in two different ways. The first is to perform thebroker function. Internet advertising agencies like DoubleClick do create and serveads for their customers, but their core expertise is in the data collection and mod-eling activities that result in the ability to target ads to individual visitor profiles.Lead generators, who may also be characterized as aggregators, collect inquiries andorders from customers and forward them to approved suppliers. For example,Realtor.com serves the real estate market, which is essentially a local activity, by pro-viding a central location for accessing real estate listings of participating brokers allover the United States.


Reselling

Servicing

RepairingInsuring

Financing

Buying

NegotiatingStaying informed

Evaluating

Metamediary(Edmunds)

Automanufacturers

Insurancefirms

Sparesdealers

Mechanics

Financefirms

Auction firms

Autodealers

Warrantyfirms

FIGURE 1.6 An Automobile MetamediarySource: Business 2.0, March 2000, p. 204. Used with permission.

Infomediaries can also serve customers in a number of different ways. Softwareagents (also called bots) rely on information furnished by purchasers and/or in-formation collected as they move about the Web to find the best products at the bestprices and make the connection between supplier and customer. Priceline.com isone of many Internet businesses that perform this function. They can also performa proxy function by representing customers in negotiations with vendors that seekinformation about them. This often takes the form of providing incentives to cus-tomers for providing information directly through online marketing research andmonitoring or for being exposed to advertising. Filters, like CUC International,screen vendors and make their goods available to consumers. The informationintensity of these activities, coupled with the concern of consumers about the wide-spread availability of their data, has given rise to another group of infomediarieswho provide firewalls between consumers and sites that would collect data withoutexplicit permission. We might describe them as anonymizers, of whom anonymousremailers are one example.

Another type of information-oriented intermediary is the metamediary. These enter-prises have grown up to provide all the services a customer needs in connection witha specific purchase. Home purchasers, for example, need everything from mort-gages and insurance to lawn care specialists. Automobile purchasers tend to acquirea great deal of information prior to purchasing and need services ranging fromloans to insurance in order to complete the transaction. Sites that can provide one-stop shopping for this type of complex purchase are becoming increasingly popular.

Figure 1.6 shows a conceptualization of the automobile metamediary Edmunds.com.Edmunds began as a series of published automobile price guides in the middle 1960sand was an early mover onto the Internet. The site has a great deal of information oncars and car purchasing. It covers both new and used cars, and has physical-worldauto shows where attendees can road test a variety of cars. Besides evaluating carmodels, the site has a Buyer’s Advice page where the prospective purchaser can“learn everything you need to know” about buying a car. The site partners withAutobytel.com, GEICO insurance, and PeopleFirst.com to offer one-stop shopping


30www.edmunds.com.31Sean Carton, “What Do People Want Online?” May 24, 2000, www.clickz.com.

for new and used cars, insurance, and automobile loans. Other partners offer otherproducts and services including car parts.30 Today, relatively few consumers are will-ing to purchase a car without resort to a car dealer, although there are a few very busyor very self-confident purchasers who are willing to buy directly from an automobilesite. Whether their numbers will grow substantially and threaten the existence of theautomobile dealer is uncertain. However, it is clear that the level of knowledge aboutcar buying and prices with which many Internet users come to the dealership isthreatening the profitability of traditional dealers.

Many channels of distribution are becoming shorter, and this trend may continuefor some time as firms continue to reap the benefits of electronic commerce. But itis equally clear that we cannot assume that all intermediaries will disappear or eventhat there will be fewer intermediaries in total. The intermediaries of the new econ-omy are, however, more likely to be focused on adding value for either the businessor the customer through the provision and manipulation of information.

8. Marketplace power has undergone a dramatic shift in the directionof customers.

The Internet customer is increasingly demanding with high expectations for easyand convenient shopping, good prices, and meticulous fulfillment. From beginningto end, the shopping and purchasing experience must be satisfying and pleasant.High expectations are conditioned by the customer’s knowledge that if this sitedoes not satisfy, there is a competitive site only a mouse-click away. Although thereis some degree of loyalty among Internet customers, those feelings are easily over-come when the experience turns sour. Customers leave, and many never return.

While it is true that some segments of the online market may be especially attractedby glitz and entertainment (teens and young adults, for example), the ordinaryshopper has pragmatic goals. The consultant Sean Carton looked at two large-scalestudies. “Both shed some interesting light on what people want to do online. Theanswer, it seems, is very utilitarian: People want to accomplish something online.They’re not aimless ‘surfers’ looking for a fix or a novelty. Instead, the average Netuser seems to be a goal-oriented person interested in finding information and com-municating with others.”31 Notice that purchasing goods and services does not yetshow up in studies as a primary reason for most people to be online even though thevolume of online sales has increased dramatically. Nevertheless, customers have thesame high expectations whether they are communicating, searching for informa-tion or entertainment, or purchasing. And marketers ignore any aspect of the seam-lessly satisfying experience at their own peril.

The Silicon Valley consultant Regis McKenna was one of the first to identify the phe-nomenon of endlessly escalating customer expectations. He gives the followingadvice to managers:

New consumers are never satisfied consumers. Managers hoping to serve themmust work to eliminate time and space constraints on service. They must push thetechnological bandwidth with interactive dialogue systems—equipped withadvanced software interfaces—in the interest of forging more intimate ties withthese consumers. Managers must exploit every available means to obtain their


32Regis McKenna, Real Time: Preparing for the Age of the Never Satisfied Customer, Boston: Harvard BusinessSchool Press, 1997, p. 56.33Amir Hartman and John Sifonis with John Kador. Net Ready, New York: McGraw-Hill, 2000, p. 10.

end: building self-satisfaction capabilities into services and products and providingcustomers with access anytime, anywhere.32

What this all boils down to is that customers want to be in control. They want to con-trol when and where they make contact. They want to control what they consumethrough personalized communications and customized products. They want theirprivacy and full disclosure of purchase conditions and information collection anduse. They want all of it in a neat package that allows them to complete their task quicklyand effortlessly. To top it off, they want to receive any service and support they need inthe same 24/7/365 fashion. If the bar is continually being raised in terms of whatmakes for overall customer satisfaction, then this is a formidable challenge indeed!

9. The Internet marketplace makes it possible to deal with customers on aone-to-one basis.

As the first truly interactive medium, the Internet allows even the largest companiesto deal directly with each customer as an individual person or business. As we justnoted, customers are coming to expect interactions that satisfy their individual con-sumer or business needs. However, just because the technology exists to allow com-panies to deal effectively with individuals does not mean that most companies do itwell. A select few, though, do it brilliantly.

Federal Express owes its very existence to its vision of using technology to providegreater customer satisfaction. As such, it was one of the first to understand thepower of providing customers with information that allows them to meet their ownneeds at the time they choose. By providing free tracking software to its customers,FedEx literally allows customers access to a portion of its operational database inorder to schedule shipments, track the progress of shipments, and confirm delivery.Customers are happier because they have the information they need at their fin-gertips. FedEx is happier because incremental Internet inquiries cost it nearly noth-ing as compared to several dollars for a call to a customer service rep. Everyone isbetter off because reps are freed from most routine calls and are able to deal withtroublesome or complex issues that require skilled human intervention.

Another firm that knows the value of turning work it once performed itself over toits customers is Cisco Systems. Cisco managers Amir Hartman and John Sifonis de-scribe the situation as follows:

As recently as five years ago, obtaining the status of a Cisco order was a significantcustomer-facing problem. After studying the situation, the company realized thatmore than 70 percent of the customer calls were requesting the same information.This situation was a classic Pareto problem in that 70 percent of the customers re-quested the same 30 percent of the information. Instead of adding more customerservice representatives, Cisco developed an application to handle the majority ofthe calls. Customers who couldn’t find their answers on the Cisco Web site would beconnected to a support person. By developing a Web-based application (basically, aself-serve model), Cisco increased its customer satisfaction ratings significantly.33

Self-service, especially when it is indicative of individualized information, is not seenas a drawback. It is, in fact, a way to deliver the control customers want.


34www.iprint.com.35Eric Chabrow, “iPrint: Self-Service Printing,” December 13, 1999, www.techweb.com.

10. The era of instant gratification is upon us.

The Internet has compressed time and space and unleashed an era of endlessly ris-ing customer expectations. The gaps between customer problem recognition, eval-uation of alternative solutions, and purchase activities have narrowed to virtuallynothing. Choices seem almost infinite. Consistent pressure to reduce costs presentschallenges to suppliers but additional benefits to customers. New competition arisesfrom unexpected quarters. Existing businesses have to develop new strategies onthe fly, because Internet time stands still for no man, woman, or organization.

The high expectations for speed, service, and even instant gratification open upopportunities on the Internet that can be taken advantage of by either existingfirms or pure-play Internet businesses. iPrint.com was founded in 1996 to serve therapidly growing printing needs of small to medium-size and home-based businesses.The founder, an experienced software developer and entrepreneur, had a clearvision of how to use the Web to better deliver these important and often time-consuming services. According to the iPrint Web site:

The iPrint.com online print solution is designed to be much easier, more conve-nient, and cost-effective than traditional printing alternatives. For example, typicalprint shops require customers to drive to the shop, wait in line, flip through books topick out templates, fonts and graphics, fill out order forms, and then return to pickup the order. iPrint.com eliminates this hassle by moving the entire process online.34

The site, which the founder describes as a “printing portal,” opens on the WeeklySpecials page instead of a conventional corporate home page. It is easy to navigatewith a selection of about 50 product categories, ranging from announcements totote bags, in a pull-down menu on the opening page. The page also lists four majortypes of printing jobs including copying and quotes for custom print jobs. Tabsacross the top of the page offer product types including stationery, banners, and pro-motional specialties. Most of the processes require only three steps from selection toorder. Figure 1.7 gives an example of the process for ordering a business card.

When the prospective customer selects the business card category, she is presentedwith a choice of two basic formats (Figure 1.7a). Clicking on the vertical formatbrings up a templates page with four types of cards. Choosing “Business Contempo-rary” produces about 20 templates, the first four of which are shown in Figure 1.7b.Clicking on the chosen template brings up a design page (Figure 1.7c) which theprospective customer can use to create a unique card, save for further work or ap-proval, and place in a shopping cart. The pages have clean, easy-to-use design. Eachpage has a navigation bar with a link to customer service as well as a prominent GoBack button to easily return the visitor to the preceding step without resorting tothe Back button on the browser.

Large customers can establish their own self-service page on the iPrint site. JanineCiffone, financial officer at the NASA Ames Research Center in California,estimated that processing business card orders for the center’s 1,500 employeestook up eight hours of her time each week. Now a link from the NASA intranet takesemployees directly to iPrint where they can order their business cards as describedabove, entirely freeing Ciffone from involvement in the process.35


FIGURE 1.7 The iPrint Process for Designing and Ordering a Business CardSource: iPrint Technologis, Inc. www.iprint.com. Used with permission.

(a)

(b)


iPrint is a good example of using the interactivity of the Internet to better serve cus-tomers. It is also an excellent example of permeable organizational boundaries.Through its partnerships it acts as an efficient supplier to large office supplies mar-keters. Through its Web site, it sells directly to businesses of all kinds. Throughspecial arrangements with large customers, it allows customers to access automatediPrint processes directly from their desktops. It has a number of the characteristicsof a networked virtual organization.

The hierarchy portrayed in Figure 1.8a exemplifies the traditional linear organiza-tion. It breeds slowness and inflexibility. It also tends to separate the customer fromthe originator of the product or service, often by several rather impenetrable layersof internal organization or intermediaries.

The market-focused organization in Figure 1.8b provides alternative pathwaysby which products and services can be brought to market quickly, often throughe-markets. According to Cambridge Technology Partners, “Size no longer matters.Value, and how efficiently it can be exchanged, does.”

They go on to say:

The transparency of information over the Internet creates an environment wherevalue can be easily discovered, conveyed and exchanged. Since demand will be-come increasingly specific and personalized, the networked economy will be oneinhabited by tightly focused value-creating and value-exchanging entities. In this

Organizations in the Network Economy

FIGURE 1.7 (Continued)(c)

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environment, the successful firms will be those which can quickly and inexpensivelybecome part of a fluid networked enterprise. They will have to concisely establishtheir core competencies and value propositions. In many cases, that means they willhave to choose whether they will be a value-creating or a value-exchanging entity.The days where full service means higher prices are over; in the networked econ-omy, the consummate value proposition will always be only a mouse click away.36

That quote aptly summarizes much of the change in business processes and opera-tions that is taking place as a result of the Internet and related technology. It makesclear that the Internet is a powerful new medium of communication. It is also a

Large Hierarchies, Spanning Multiple Competencies, Evolved toAchieve Economies of Scope while Servicing Mass Markets.

Supplier

Supplier

MassMarket

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& Support

Marketing& SalesOperationsInbound

LogisticsOutboundLogistics

The New Economy Will be Inhabited by Tightly Focused Value-Creatingand Value-Exchanging Entities, Seamlessly Knit Together by the Internet.

E-Market

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Logistics Operations R & D

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FIGURE 1.8 The Hierarchical Organization vs. the Flexible, Market-FocusedOrganization(a) The Essential Hierarchy; (b) The Market in ActionSource: www.ctp.com. Copyright © January 2000, Cambridge Technology Partners, Inc. Used with permission from Novell, Inc.

36Cambridge Technology Partners, “Business Models for the New Economy,” nd, p. 14.

(a)

(b)


channel of distribution for products and services that can be digitized and provideddirectly to customers or ordered over the Web and fulfilled by physical-world logisti-cal systems. Perhaps most important of all, it is a pervasive force for change in busi-ness processes on both the customer-facing and the supplier-facing sides of the busi-ness. Since the Internet connects the organization to many facets of its environment,marketing, along with the technology itself, is a primary driver of these changes. Astime goes on, virtually all marketing tasks will be affected, if not shaped, by the pres-ence of the Internet, making it a key aspect of the marketer’s job.

The advent of the Internet has altered the business landscape with ferocious speed andpower. In that changed terrain the role of marketing has also undergone dramatic up-heaval. Customers, both consumer and business, have access to voluminous amounts ofinformation and many competitive offerings. Their expectations in terms of both qualityand service are high. Marketers must meet ever-increasing expectations, master a newmedium, and drive costs down in order to offer competitive prices—all at the same time.

Gone are the days when appealing to a mass market required more intuition than infor-mation. Gone also are the days when marketing escaped the rigorous accountabilityapplied to other parts of the firm.

Marketing has become an information-driven, technology-enabled endeavor with manynew tasks and techniques. Increasingly, it works in a virtual environment composed ofbusiness alliances, outsourced services, and virtual value chains. Understanding the newtechniques, while keeping a focus on sound marketing strategy in both the online and offline worlds, is the purpose of this book.

ARPANet HTML search engineASP/MSP hypertext serverbrowser ICT infrastructure software agent/botcollaboration infomediary TCP/IPhierarchical organization infrastructure stack vertical integrationhosting outsourcing

1. The origins of the Internet and the World Wide Web are unusual in the history of com-mercial media. What makes them unusual and what qualities does that impart to themedium?

2. What is the basic nature of the ICT environment in which e-marketing operates?

3. The Internet-ready organization is described in the chapter as having boundaries thatare “blurred.” Explain in your own words what that means and what the implicationsare for e-marketing processes and organizations.

4. Disintermediation is an inevitable consequence of the New Economy. Take a positionon this statement and be prepared to defend it.

5. The chapter emphasizes throughout that business and marketing processes arechanging in fundamental ways as a result of the Internet. Be prepared to discuss onespecific driver of change that is altering business processes in elemental ways.

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1. Select an organization (corporate or not-for-profit) with which you are somewhatfamiliar that has at least some New Economy elements. Be prepared to discuss two orthree specific examples of how it is taking advantage of the strategic change drivers.In preparing this assignment, you may find resources listed on the Student Web sitewww.integratingstrategies.com useful.

2. Select three different Web sites that you will follow for the semester. Your instructormay make several different assignments based on these sites, so you should choosesites of substance though they do not have to be large.

For example, a site for a current movie or newly released video game may have littlevariety in its content and may even be taken down before the semester is over. At theother extreme, a mega-site like that of Ford Motor Company (www.ford.com) has indi-vidual sites for different brands, different countries, and different service products.While the entire site is too much to deal with, one of the individual sites (for example,www.landrover.com) would work well. You might also consider sites of governmentagencies or nonprofit organizations.

The more variety you have in the three sites, the more successful your learning expe-rience and assignments are likely to be. To ensure good choices and/or variety withinthe class, your instructor may require that the three sites you have chosen beapproved early in the semester.

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Da Marketing on the Internet: 1