E-commerce Business Models

Changes in the economics of information described earlier have created the conditions for entirely new business models to appear while destroying older business models. Table 10.5 describes some of the most important Internet busi­ness models that have emerged. All, in one way or another, use the Internet (including apps on mobile devices) to add extra value to existing products and services or to provide the foundation for new products and services.

1. Portal

Portals are gateways to the web and are often defined as those sites that users set as their home page. Some definitions of a portal include search engines such as Google and Bing even if few make these sites their home page. Portals such as Yahoo, Facebook, MSN, and AOL offer web search tools as well as an integrated package of content and services such as news, email, instant messaging, maps, cal­endars, shopping, music downloads, video streaming, and more all in one place. The portal business model now provides a destination site where users start their web searching and linger to read news, find entertainment, meet other people, and, of course, be exposed to advertising. Facebook is a very different kind of por­tal based on social networking, and in 2018 Americans will spend more than half their online time at Facebook, about two hours per day! Portals generate revenue primarily by attracting very large audiences, charging advertisers for display ad placement (similar to traditional newspapers), collecting referral fees for steering customers to other sites, and charging for premium services. In 2019, portals (not including Google, Facebook, or Bing) will generate an estimated $10 billion in dis­play ad revenues. Although there are hundreds of portal/search engine sites, the top portals (Yahoo, MSN, and AOL) gather more than 80 percent of the Internet portal traffic because of their superior brand recognition.

2. E-tailer

Online retail stores, often called e-tailers, come in all sizes, from giant Amazon with 2017 retail sales revenues of more than $178 billion to tiny local stores that have websites. An e-tailer is similar to the typical brick-and-mortar storefront, ex­cept that customers only need to connect to the Internet to check their inventory and place an order. Altogether, online retail (the sale of physical goods online) will generate about $598 billion in revenues in 2019. The value proposition of e-tailers is to provide convenient, low-cost shopping 24/7; large selections; and con­sumer choice. Some e-tailers, such as Walmart.com or Staples.com, referred to as bricks-and-clicks, are subsidiaries or divisions of existing physical stores and carry the same products. Others, however, operate only in the virtual world, without any ties to physical locations. Ashford.com and eVitamins.com are examples of this type of e-tailer. Several other variations of e-tailers—such as online versions of direct-mail catalogs, online malls, and manufacturer-direct online sales—also exist.

3. Content Provider

E-commerce has increasingly become a global content channel. Content is de­fined broadly to include all forms of intellectual property. Intellectual property refers to tangible and intangible products of the mind for which the creator claims a property right. Content providers distribute information content— such as digital video, music, photos, text, and artwork—over the web. The value proposition of online content providers is that consumers can conveniently find a wide range of content online and purchase this content inexpensively to be played or viewed on multiple computer devices or smartphones.

Providers do not have to be the creators of the content (although sometimes they are, like Disney.com) and are more likely to be Internet-based distribu­tors of content produced and created by others. For example, Apple sells music tracks at its iTunes Store, but it does not create or commission new music.

The phenomenal popularity of Internet-connected mobile devices such as the iPhone, iPod, and iPad has enabled new forms of digital content delivery from podcasting to mobile streaming. Podcasting is a method of publishing audio or video broadcasts through the Internet, allowing subscribing users to download audio or video files onto their personal computers, smartphones, tab­lets, or portable music players. Streaming is a publishing method for music and video files that flows a continuous stream of content to a user’s device with­out being stored locally on the device.

Estimates vary, but total online content will generate about $23 billion in 2019, one of the fastest-growing e-commerce segments, growing at an estimated 18 percent annual rate.

4. Transaction Broker

Sites that process transactions for consumers normally handled in person, by phone, or by mail are transaction brokers. The largest industries using this model are financial services and travel services. The online transaction bro­ker’s primary value propositions are savings of money and time and providing an extraordinary inventory of financial products or travel packages in a single location. Online stockbrokers and travel booking services charge fees that are considerably less than traditional versions of these services. Fidelity Financial Services and Expedia are the largest online financial and travel service firms based on a transaction broker model.

5. Market Creator

Market creators build a digital environment in which buyers and sellers can meet, display products, search for products, and establish prices. The value proposition of online market creators is that they provide a platform where sellers can easily display their wares and purchasers can buy directly from sell­ers. Online auction markets such as eBay and Priceline are good examples of the market creator business model. Another example is Amazon’s Merchants platform (and similar programs at eBay), where merchants are allowed to set up stores on Amazon’s website and sell goods at fixed prices to consum­ers. The so-called on-demand economy (mistakenly often referred to as the sharing economy), exemplified by Uber (described in the Interactive Session on Organizations) and Airbnb, is based on the idea of a market creator build­ing a digital platform where supply meets demand; for instance, spare auto or room rental capacity finds individuals who want transportation or lodging. Crowdsource funding markets such as Kickstarter.com bring together private equity investors and entrepreneurs in a funding marketplace.

6. Service Provider

Whereas e-tailers sell products online, service providers offer services online. Photo sharing and online sites for data backup and storage all use a service provider business model. Software is no longer a physical product with a CD in a box but, increasingly, software as a service (SaaS) that you subscribe to online rather than purchase from a retailer, such as Office 365. Google has led the way in developing online software service applications such as G Suite, Google Sites, Gmail, and online data storage services. Salesforce.com is a major provider of cloud-based software for customer management (see Chapter 5).

7. Community Provider (Social Networks)

Community providers are sites that create a digital online environment where people with similar interests can transact (buy and sell goods); share interests, photos, and videos; communicate with like-minded people; receive interest-related information; and even play out fantasies by adopting online per­sonalities called avatars. Social networking sites Facebook, Tumblr, Instagram, LinkedIn, and Twitter and hundreds of other smaller, niche sites all offer users community-building tools and services. Social networking sites have been the fastest-growing websites in recent years, often doubling their audience size in a year.

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16^th edition.