PART 4: THE E-COMMERCE ENVIRONMENTINFLUENCING
94. The rate of growth is likely to be determined
by a number of influencing factorsforces which have the
capability to drive or obstruct the take-up of ecommerce.
The purpose of this section is to highlight these factors. The
actions that might need to be taken in response to them are the
subjects of later Parts.
95. Transaction costs can
be defined as the costs of doing business, for example negotiating
with suppliers, arranging deliveries to customers, marketing products.
Since businesses continually seek to reduce their transaction
costs, e-commerce is attractive: it is usually cheaper and quicker
to deal with a customer's requirements over the Internet than
it is by face-to-face meetings, telephone or any other means.
For example the cost to a bank when a customer moves money between
accounts is, approximately, £1 over the counter, 10p by telephone
and 1p over the Internet. Ceteris paribus, businesses will
choose to transact over the Internet.
96. The importance of transaction costs is such that,
independently of ecommerce, organisations and industries
structure themselves in order to minimise these costs. It should
therefore be expected that, as it grows, e-commerce has the potential
to bring about fundamental changes to organisations and industries.
97. All business is regulated to some degree by governments,
both local and national, and international bodies. Because e-commerce
is global and crosses international boundaries, and because it
is electronic and thus less visible than other forms of transaction
it is evident that existing regulations may not be sufficient
to achieve governments' regulatory intentions.
98. Governments may need to regulate but at the same
time want to create environments which are supportive of e-commerce
in order to attract e-commerce activity to their shores. The certainty
of clear and balanced regulation will attract business; too heavy
regulation will discourage. For any nation the regulatory regime
will influence the growth of e-commerce.
Liberalisation of the
99. The basic platform on which the Internet operates
is the telecommunications infrastructure. To date, e-commerce
transactions have been predominantly across telephone wires. The
importance of mobile telephony, in which it is generally agreed
that Europe leads the US, is increasing rapidly. The latest mobile
telephones (so-called Wireless Application Protocol (WAP) enabled)
allow Internet access but this development is in its early stages
and there are still problems to be overcome, such as screen size
and security. Other technologies, such as underground cables and
satellites, also provided an infrastructure but for the foreseeable
future they are not likely to take more than a very small percentage
of the total traffic. The growth of e-commerce therefore hinges
on easy and cheap access to the telecommunications infrastructure.
Countries where the public telecommunications operator is a monopoly,
or where the number of permitted operators is severely restricted,
are not likely to have the sort of competitive environment in
which high quality and inexpensive services can be developed.
100. Since e-commerce is new, many of the organisations
involved in it are also new, especially those providing Internet
services and applications. The ability of fledgling organisations
to secure funding quickly and effectively is self-evidently a
driver of e-commerce growth. The particular issue here is the
fact that many witnesses contrasted Europe unfavourably with the
US. In the US venture capital appears to be available at earlier
stages in the development of an organisation, to be more freely
available, and to have better designed arrangements for rewarding
the venture capitalists.
101. Stock options can be seen as the remuneration
currency of start-up ecommerce businesses. Employees are
paid with a reduced salary together with an option to purchase
stock at a later date (or a gift of stock). This conserves cash
for the company but also, since expectations of equity returns
are high, staff often insist on this form of payment. They trade
off the prospect of a high salary (but not very highit
is a start-up business) against the chance of extremely high stock
returns. This method of payment extends well beyond permanent
and senior staff. In the United States, Amazon.com gives stock
options to its lowest paid staff; in the United States lawyers
advising start-up companies are paid with stock options rather
102. Stock options are now the norm for e-commerce
start-ups but their tax treatment in the US is more generous than
in Europe. In the United Kingdom, for example, stock options are
treated as income rather than capital. This helps to explain why
it is harder to attract and retain top quality managers in ecommerce
in Europe than in the United States.
103. The term "cluster" refers to a geographical
location where e-commerce expertise is gathered together. The
expertise is in a variety of businessesservice and equipment
providers, software developers, application providersas
well as technological universities and research groups. Silicon
Valley in California is the obvious example. In the United States
such concentrations of knowledge are held to be a significant
driver of e-commerce development. Encouraged by the United States
government, clusters allow the easier movement of people and knowledge,
as well as being sources of newly qualified staff and providing
easy routes for the speedy application of new ideas.
104. Competition promotes growth. Environments where
companies are vying one against another to develop new ideas and
offer them in the marketplace will stimulate the development of
e-commerce. Governments wish to create such conditions and companies
wish to locate in such places. A competitive ecommerce environment
is likely to be found where the telecommunications infrastructure
is liberalised and regulation is clear, certain and light.
Barriers to entry
105. Firms already competing within an industry like
to establish high barriers to entry in order to keep out potential
rivals. For example, the high cost of computerised reservation
systems is a barrier to entry for aspiring international airlines.
High entry barriers, however, are obstacles to competition. In
ecommerce, a lack of skilled IT workers, costly software
and red tape are all barriers to entry for new firms. Governments
seek to reduce such barriers in order to foster competition.
Small and Medium Enterprises
106. Much of B2B involves larger companies purchasing
their raw materials and other requirements from suppliers which,
particularly at the second, third and lower levels of the supply
chain, are SMEs. Companies as diverse as Ford, Shell and Sun Microsystems
are reported to be achieving significant cost savings (43 per
cent in the case of Sun Microsystems) from supply chain auctions
over the Internet. Consequently successful B2B is reliant upon
SMEs having e-commerce capabilities.
107. B2C involves customers purchasing from companies.
They need to feel confident about making their purchases and feel
confident that they can trust the vendors. They are exercised
by concerns such as:
- Personal dataage, address, telephone numbers,
purchasing behaviour, for example. Customers like their data to
be kept private if they wish them to be kept private.
- Quality of goods and services. Customers need
to know that goods delivered will be of the same quality as advertised.
- Fraudulent exploitation of credit cards. People
worry that when they give their credit card numbers over the Internet
they will be used fraudulently. It may be no different in principle
from using a credit card over the telephone but it seems different
to Internet purchasers.
- Redress procedures. How will customers be protected
when they have disputes with vendors?
108. e-Commerce is only possible if individual consumers
understand the Internet and know how to use it. If it is to be
a widespread activity, the majority of a country's population
will have to be educated and trained to use it. School education
will not be enough. Education will have to respond to the needs
of all population groups and all divisions of society.
109. A further necessary condition for e-commerce
is that the population as a whole should have access to the Internet.
There are a number of dimensions to the access issue.
- Physical access. The normal means of access is
currently through personal computers. However, not everyone can
afford or have access to one. How can an entire population gain
access? It could be through publicly available computers in the
same way that telephone kiosks provide publicly available telephones.
Or it could be through government or industry subsidies. Or it
could be through a wide range of other technologies, such as mobile
telephones and digital televisions.
- Cost of access. The cost of using the Internet
through charges made by Internet Service Providers (ISPs) and
telecommunications companies varies from country to country. Evidence
submitted to the Sub-Committee has shown that the cost of access,
and even perceptions of the cost of access, depresses Internet
- Quality of access. The so-called last mile of
telecommunications networks is the link between local exchanges
and individual homes. The link is usually based on old-fashioned
twisted wires which have a limited capacity to transmit data.
Consequently Internet responses can be slow and in particular
downloading data such as pictures and videos can be extremely
slow. There are broadly two answers to the problem. The first
is to install higher bandwidth (higher capacity) cables such as
fibre optics. Because of the numerous individual links involved,
this is expensive. Other technologies, such as satellite and cable
television, can solve the problem but they will not be in widespread
use in the United Kingdom in the short and medium terms. The second
answer is to deploy technologies which allow more data to pass
through twisted wires. Such technologies exist but in many countries
this last mile is in the hands of the former/present state monopolies
which own the local exchanges. So-called Local Loop Unbundling
(LLU) will allow other telecommunications companies access to
the exchanges and thereby stimulate competition to develop and
offer these new technologies to customers.
110. The procurement aspect of G2B is similar to
B2B but here the greater need may be to prepare the large company
doing the purchasing ie the Government, for trading over the Internet.
The problem centres on the immense size of Government and the
extent of its procurement needs. A further problem is the traditional
"stovepipe" structure whereby any one Government Department
may be unaware that other Departments are using exactly the same
111. The stovepipe structure also means that Government
is often unprepared for activities which cut across Departments.
This is a "joined up Government" issue. Initiatives
to promote joint activities, for example the development of an
information system to record the extent of Government-wide purchases
from each and every supplier or an initiative to allow an individual
citizen to deal with a range of problems through one access point,
require funding. However, mechanisms to bid for and provide this
funding may be not be adequate.
112. The above factors do not have a uniform influence.
- B2B and G2B are dependent upon SMEs having high
levels of Internet capability.
- B2C requires high levels of consumer confidence.
B2B on the other hand is governed by contracts which cover many
of the "confidence" issues;
- B2C and G2C are dependent on most, if not all,
the population acquiring high levels of Internet education;
- B2C and G2C are dependent upon high quality access,
ie fast data links between local telephone exchanges and residences.
113. As e-commerce develops the importance of the
influencing factors is likely to ebb and flow. For example, the
liberalisation of telecommunications infrastructure could bring
about cheaper, or free, Internet access. Then cost of access as
a barrier to entry would fall away.
114. It would be a mistake to believe that the influencing
factors are solely, or even mainly, to do with technology. The
history of the use of computers in business over many years has
pointed to the crucial role that psychological factors play. Organisational
culture is described as "the way we do things round here".
Organisations where the culture is one in which employees have
a positive attitude to change and to new technologies are much
more likely to adapt quickly to new ideas and use new technologies
115. This is especially true for e-commerce. Several
witnesses have pointed out to the Sub-Committee that the adoption
of e-commerce in an existing company or in a Government Department
is not so much a technological innovation as a change programme,
in the broadest sense of the word. The successful adoption of
e-commerce will depend upon companies seeing through the technology
to the real change issues which lie behind. A particular case
of this is the need to re-design "back office" organisational
processes when e-commerce is introduced. The Sub-Committee has
heard of companies where a B2C order over the Internet is written
down by hand and the piece of paper carried to another office
to be keyed into the "normal" sales/ordering system.
116. The successful deployment of e-commerce may
be concerned with mindsets as much as with technology. The point
was well made by US witnesses who pointed to their entrepreneurial
risk-taking culture. One witness described the Internet as "America's
new Wild West".
28 The CyberFrontier and America at the Turn of
the 21st Century: Reopening Frederick Jackson Turner's Frontier,
Jeffrey R. Cooper, Science Applications International Corporation. Back