1
History of E-commerce
1.1
Precursors and Foundational Technologies
The journey of e-commerce is not a recent phenomenon but a
continuous evolution, built upon centuries of innovation in communication,
transportation, and business processes. This section highlights the pivotal
precursors and foundational technologies that paved the way for modern
electronic commerce. These early developments, while not e-commerce in their
contemporary form, introduced concepts crucial to conducting business remotely
and electronically.
1.1.1
Telegraph
Invented in the early 19th century and widely adopted by the
mid-1800s, the telegraph was the first practical system for long-distance
communication using electrical signals. It allowed for the rapid transmission
of coded messages (Morse code) across vast distances, fundamentally altering
the speed of information flow.
Business Use: Before the telegraph,
business communication relied on physical mail, which could take weeks or
months. The telegraph dramatically accelerated communication for industries
like finance, journalism, and railroads. For example, stock prices could be
transmitted almost instantly, and businesses could coordinate operations across
geographically dispersed locations. While not facilitating transactions
directly, it established the precedent for transmitting business-critical
information electronically and instantaneously, laying a conceptual groundwork
for digital communication in commerce.
1.1.2
Mail Orders
Emerging in the late 19th century, particularly in the
United States (e.g., Sears, Roebuck and Company, Montgomery Ward), mail-order
businesses allowed customers, especially those in rural areas, to purchase
goods from catalogues. Orders were placed via mail, and products were shipped
directly to the customer's home.
Business Use: This model
democratized access to a wide range of goods, bypassing the need for physical
retail stores. It pioneered the concept of remote purchasing, efficient
logistics for product delivery (often leveraging the burgeoning railway
network), and the establishment of trust in buying "unseen" products.
The catalog itself served as an early form of a product display system for
distant shoppers, a precursor to today's online product pages. It proved the
viability of a non-storefront retail model, which is central to e-commerce.
1.1.3
Call Centres
Call centers, which became increasingly common in the
mid-20th century, are centralized departments that handle telephone calls for
an organization. They evolved from simple telephone operators to sophisticated
systems managing incoming and outgoing calls for customer service,
telemarketing, and order taking.
Business Use: Call centers
significantly streamlined customer interactions and facilitated transactions
over a distance. For many decades, they were the primary means for remote
ordering and customer support. They trained businesses in handling high volumes
of inquiries, processing transactions remotely, and managing customer
relationships without face-to-face interaction. The operational efficiencies
and customer service methodologies developed in call centers had a direct
influence on how online customer support and order fulfilment are managed in
e-commerce.
1.1.4
EDI (Electronic Data Interchange)
Developed in the 1960s and gaining widespread adoption in
the 1970s and 80s, EDI is the standardized electronic exchange of structured
business documents (such as purchase orders, invoices, shipping notices, and
customs declarations) between computer systems of different trading partners.
It replaces paper-based document exchange.
Key Features:
Ø
Standardization of Formats:
Documents are exchanged in a universally agreed-upon format, allowing different
computer systems to "understand" each other.
Ø
Direct Computer-to-Computer
Exchange: Eliminates manual data entry, reducing human error and
speeding up processes.
Ø
Automation of Document
Processing: Once received, documents can be automatically processed
by the receiving system.
Advantages:
Ø
Reduced Manual Errors:
Eliminates the errors associated with manual data entry and paper-based
processes.
Ø
Accelerated Transaction Cycles:
Speeds up the exchange of business documents, leading to faster order
processing, invoicing, and payments.
Ø
Improved Accuracy and Data
Quality: Ensures consistency and accuracy of information across
trading partners.
Ø
Cost Savings:
Reduces administrative costs related to paper, printing, mailing, and manual
handling.
Ø
Enhanced Supply Chain
Efficiency: Provides better visibility and control over the flow of
goods and information throughout the supply chain.
Disadvantages:
Ø
High Initial Setup Costs:
Requires significant investment in hardware, software, and training for
implementation.
Ø
Complexity of Implementation:
Can be complex to set up and integrate with existing enterprise resource
planning (ERP) systems.
Ø
Proprietary Nature:
Often involves industry-specific standards or custom setups, making it less
flexible for broad adoption.
Ø
Limited Accessibility for Small
Businesses: The investment and complexity can be prohibitive for
smaller enterprises.
Business Use: EDI
was a critical precursor to B2B e-commerce, enabling highly automated and
efficient inter-company commerce long before the internet became mainstream.
Industries like automotive, retail, and manufacturing relied heavily on EDI to
manage their complex supply chains and trading relationships, proving the
immense value of digitalizing business processes between enterprises.
1.1.5
Web Businesses
With the public introduction of the World Wide Web in the
early 1990s and the development of user-friendly web browsers, businesses began
to establish an online presence. These "web businesses" or
"dot-coms" started offering information, services, and eventually
products directly through websites. This marked the true birth of what we
recognize as consumer-facing e-commerce.
Key Features:
Ø
Graphical Interfaces (HTML):
Enabled rich, multimedia content beyond simple text.
Ø
Hyperlinks for Navigation:
Allowed users to easily jump between related information and products.
Ø
Global Accessibility:
Accessible to anyone with an internet connection worldwide.
Ø
Dynamic Content:
Websites could be updated instantly, providing real-time information.
Advantages:
Ø
Global Audience Reach:
Businesses could instantly connect with customers far beyond their physical
location.
Ø
24/7 Availability:
Online stores were open around the clock, providing convenience for customers
and continuous sales opportunities.
Ø
New Sales Channel:
Offered a completely new avenue for reaching customers and generating revenue.
Ø
Cost-Effective Marketing:
Enabled new forms of digital marketing and advertising that could be more
targeted and measurable.
Disadvantages:
Ø
Limited Internet Penetration
(Early Days): Restricted initial customer base due to low internet
adoption.
Ø
Slow Connection Speeds:
Dial-up connections made Browse cumbersome and slow.
Ø
Security Concerns:
Early users were hesitant about online transactions due to perceived security
risks.
Ø
Dot-Com Bubble Burst:
The speculative investment frenzy led to many unsustainable business models
collapsing, highlighting the need for solid fundamentals.
Business Use: Early web businesses
like Amazon (books), eBay (auctions), and Yahoo! (web directory/portal)
demonstrated the immense potential for direct online sales, digital content
distribution, and interactive customer engagement. They laid the blueprint for
various e-commerce models, from online retail to marketplaces.
1.1.6
Network Economy
Explanation/Definition: The network
economy is an economic system characterized by the increasing importance of
digital networks (like the internet) in facilitating interactions, transactions,
and value creation. In this economy, information, knowledge, and communication
are central drivers, and value often increases exponentially with the number of
participants.
Key Features:
Ø
Interconnectedness:
Businesses and individuals are highly connected through digital platforms.
Ø
Reliance on Information
Technology: IT infrastructure and software are core assets.
Ø
Rapid Diffusion of Innovation:
New ideas and technologies spread quickly through networks.
Ø
Strong Network Effects:
The value of the network increases significantly with each new user.
Advantages:
Ø
Fosters Innovation:
Rapid sharing of ideas and collaboration drives continuous innovation.
Ø
Enables Rapid Scaling:
Businesses, especially those offering digital products/services, can grow
exponentially with relatively low marginal costs.
Ø
Facilitates Global
Collaboration: Businesses can easily collaborate with partners and
employees across the globe.
Ø
Creates New Business Models:
Supports novel approaches to value creation based on connectivity and data.
Disadvantages:
Ø
Increased Vulnerability to
Cyberattacks: The highly interconnected nature makes systems more
susceptible to breaches.
Ø
Potential for Digital Divide:
Not everyone has equal access to the network, leading to disparities.
Ø
Challenges in Regulation:
Rapid technological advancement often outpaces regulatory frameworks.
Ø
Risk of Winner-Take-All
Markets: Strong network effects can lead to a few dominant players,
limiting competition.
Business Use:
E-commerce is a core component of the network economy. Businesses leverage
global networks to source, produce, market, and sell. The concept of network
effects explains the rapid growth of platforms like social media and online
marketplaces, where each new user adds value to all existing users, creating a powerful
competitive advantage for established players.
1.1.7
Real and Virtual Network
In the context of e-commerce, a "real network"
refers to the physical infrastructure and traditional logistical elements
involved in commerce (e.g., manufacturing plants, warehouses, transportation
systems, physical retail stores, cash payment systems). A "virtual
network" refers to the digital infrastructure and online interactions
(e.g., websites, online marketplaces, payment gateways, digital communication
channels, social media platforms).
Business Use: Successful e-commerce
operations require seamless integration and effective management of both real
and virtual networks. The virtual network facilitates customer acquisition,
order placement, and digital interaction, while the real network handles the
physical fulfillment, delivery, and reverse logistics. For instance, an online
retailer uses its virtual network (website, marketing) to attract customers and
process orders, but relies on its real network (warehouses, shipping partners)
to deliver products. Optimizing the flow between these two networks is crucial
for customer satisfaction and profitability in e-commerce.
1.2
Economic Principles and Business Models in
E-commerce
These concepts from economics and business strategy are
fundamental to understanding the dynamics of growth, competition, and
profitability in the history and ongoing development of e-commerce. They
explain how certain companies have achieved immense success and how digital
business models often differ from traditional ones.
1.2.1
Economy of Scale: Offer vs. Demand
Economy of scale refers to the cost advantages that
enterprises obtain due to their scale of operation, with cost per unit of
output generally decreasing with increasing size of output. In e-commerce, this
principle is particularly pronounced, especially for digital goods or services
where the marginal cost of producing an additional unit (e.g., an extra
software license or a streamed song) is near zero. This allows e-commerce
businesses to serve a massive global demand with relatively low incremental
costs.
Business Use:
E-commerce businesses leverage economies of scale to offer competitive pricing
and expand rapidly. For example, a cloud computing provider can serve millions
of users with a single software platform, spreading its development and
infrastructure costs over a vast user base. Even for physical goods, large
e-commerce retailers like Amazon invest heavily in automated warehouses and
efficient logistics to drive down the per-unit cost of handling and shipping,
allowing them to offer lower prices or faster delivery to meet consumer demand
more effectively than smaller rivals. This ability to efficiently meet massive
demand at scale is a core competitive advantage.
1.2.2
Metcalfe's Law
Attributed to Robert Metcalfe, the founder of Ethernet, this
law states that the value of a telecommunications network is proportional to
the square of the number of connected users of the system (V∝n2). This means that as more
participants join a network, the potential number of connections between them
grows exponentially, and thus the overall value of the network increases at a
much faster rate than simply the number of users.
Key Features:
Ø
Network Effects: The
core principle is that each new user adds value to every other user on the
network.
Ø
Exponential Value Growth:
The value grows much faster than the linear increase in users.
Ø
Foundation for Platforms:
Explains the success of multi-sided platforms that connect different groups
(e.g., buyers and sellers).
Ø
Advantages (Implications for
Businesses):
Ø
Rapid Growth and Dominance:
Businesses that can quickly build a large user base can achieve rapid growth
and a dominant market position due to the increasing value proposition.
Ø
Strong Barriers to Entry:
Once a network achieves critical mass, it becomes very difficult for new
competitors to attract users away from the established network.
Ø
Increased Engagement:
More connections lead to more interactions and richer content, enhancing user
engagement.
Disadvantages (Implications for
Businesses):
Ø
Difficulty in Initial
Bootstrapping: Hard to get the first users/participants, as the
network has little value initially.
Ø
Vulnerability to
"Switching Costs": If users can easily switch to another
network without losing significant value (low switching costs), the network
effect might be weaker.
Ø
Negative Network Effects:
Can occur if too many users lead to congestion, spam, or a decline in quality,
reducing value.
Business Use: Metcalfe's Law is a
foundational principle explaining the explosive growth and immense valuations
of many e-commerce platforms and social networks. For instance, an online
marketplace like eBay or Amazon Marketplace becomes exponentially more valuable
as more buyers join (more potential customers for sellers) and more sellers
join (more product variety for buyers). Similarly, a social media platform like
Facebook or LinkedIn gains value as more users connect, increasing the
opportunities for interaction and content sharing. This "network
effect" creates a powerful barrier to entry for new competitors, as users
are less likely to join a network with fewer existing participants.
1.2.3
Dominant Enterprise Model
Explanation/Definition: A dominant
enterprise model refers to the prevailing or most successful business model
within an industry, often characterized by its ability to achieve significant
market share, create substantial barriers to entry for competitors, and dictate
industry standards or trends. In the context of e-commerce, these models often
emerge from strong network effects, superior technology, vast data leverage, or
unparalleled logistical efficiency.
Key Features:
Ø
High Market Share:
Holds a significant portion of the total market within its domain.
Ø
Strong Competitive Moat:
Possesses unique advantages (e.g., technology, network effects, brand,
economies of scale) that make it hard for competitors to replicate.
Ø
Influence over Industry
Standards: Often sets the benchmarks for customer experience,
innovation, and operational efficiency.
Ø
Ability to Expand:
Can leverage its existing position to successfully diversify into new products
or services.
Advantages (for the Dominant
Enterprise):
Ø
Increased Profitability:
High market share and efficiency often translate to superior financial
performance.
Ø
Greater Bargaining Power:
Can negotiate better terms with suppliers and partners.
Ø
Investment in Innovation:
Ability to invest heavily in R&D, further cementing its lead.
Ø
Brand Loyalty and Trust:
Commands significant customer loyalty and trust, reducing customer acquisition
costs.
Disadvantages (Potential for
the Market/Competitors):
Ø
Reduced Competition:
Can stifle innovation from smaller players and limit consumer choices.
Ø
Regulatory Scrutiny:
Often faces antitrust investigations and calls for regulation due to its market
power.
Ø
Risk of Complacency:
Success can sometimes lead to a lack of agility or responsiveness to emerging
threats.
Ø
Dependence on Ecosystem:
Competitors and smaller businesses often become reliant on the dominant
platform (e.g., third-party sellers on Amazon).
Business Use:
Companies like Amazon, Google, and Alibaba exemplify dominant enterprise models
in e-commerce. Amazon's dominance in online retail stems from its relentless
focus on customer experience, vast product selection, efficient logistics
infrastructure (fulfillment centers, delivery networks), and its ability to
leverage data for personalization. Google's search and advertising model
dominates online information and marketing. These dominant models are not
static; they continuously evolve, often by acquiring smaller companies,
expanding into new verticals (e.g., Amazon moving into cloud services with
AWS), or innovating to maintain their competitive edge. Understanding these
models helps businesses identify best practices and competitive strategies.
1.2.4
Cost Model
A cost model outlines how a business incurs, manages, and
allocates its expenses to produce and deliver its products or services. In e-commerce,
the cost model often deviates significantly from traditional brick-and-mortar
retail due to the digital nature of operations and the potential for automation
and global reach. Key distinctions often lie in the balance between fixed costs
(e.g., technology infrastructure, platform development, sophisticated data
centers) and variable costs (e.g., payment processing fees, shipping costs,
per-transaction cloud computing usage).
Key Features:
Ø
High Fixed Costs:
Significant upfront investment in technology, software development, data
centers, and digital marketing infrastructure.
Ø
Low Marginal Variable Costs:
For digital products or highly automated physical fulfilment, the cost to serve
an additional customer can be very low.
Ø
Scalability: The
ability to increase output (serve more customers) without a proportional
increase in costs.
Ø
Leveraging Automation:
Heavy reliance on software and robotics to reduce labour-intensive tasks.
Advantages (for E-commerce
Businesses):
Ø
Higher Profit Margins at Scale:
Once fixed costs are covered; each additional sale can contribute significantly
to profit due to low variable costs.
Ø
Global Reach without
Proportional Cost Increase: Can expand into new markets digitally
without building new physical infrastructure for each location.
Ø
Competitive Pricing:
Ability to offer lower prices due to cost efficiencies, attracting more
customers.
Ø
Agility: Automation
and digital processes can enable quicker adaptation to market changes.
Disadvantages (for E-commerce
Businesses):
Ø
High Barrier to Entry (Initial
Capital): The significant upfront fixed costs can be a barrier for
new startups.
Ø
Dependency on Technology:
Vulnerability to system failures, cybersecurity threats, and the need for
constant technological updates.
Ø
Complexity of Operations:
Managing sophisticated IT infrastructure, data analytics, and global logistics
can be complex.
Ø
Intense Price Competition:
Cost efficiencies can lead to fierce price wars, eroding margins for all
players.
Business Use:
E-commerce businesses often have higher initial fixed costs for platform
development, cybersecurity, and advanced IT infrastructure compared to setting
up a single physical store. However, their variable costs per transaction can
be significantly lower, especially for digital products, leading to higher
profit margins as sales volume increases. For physical goods, while shipping
and warehousing are variable costs, automation within these areas aims to drive
down per-unit expense. Understanding the specific cost model is crucial for pricing
strategies, assessing profitability, and planning for scalability. For example,
a software-as-a-service (SaaS) e-commerce provider has a very high fixed cost
in software development but almost zero variable cost per additional
subscriber, allowing for massive scalability.