The most significant growth in Internet marketing and profitability will be business-to-business sales.[5] Business-to-business sales are expected to reach $7 billion by the year 2000 according to Forrester Research of Cambridge, MA. The total Internet market, including all forms of public access, may be worth as much as $30 billion, by the year 2000.[6] This implies that one-third of all businesses and one-quarter of all households will have some form of Internet access and will use it for online commerce. Additionally, approximately 60% of current privately held electronic data interchange (EDI) business services will shift over to use of Internet technologies in the next four years. However, private business use of leased lines over public data networks, such as Sprint, AT&T, MCI, etc., may still dominate the telecommunications market in terms of total revenues.
Much of this transition will occur as a result of companies already providing EDI services making the necessary investments to provide Internet services to their customers. However, it could be an additional one-to-three years before digital IDs, which will allow authentication between buyer, seller, and their financial institutions, become widespread. A successful business model involving use of Internet technologies must do four things.
For these reasons it is unlikely that companies providing Internet access to mass consumer markets, such as Compuserve or America Online, will be able to deeply penetrate the business-to-business markets if they continue with their current marketing strategies. An additional barrier is that "peak" events like national elections flood the Internet with casual users who are looking for information, but few of them are willing to pay extra fees for it. The flood also bogs down allocated bandwidth causing problems for those seeking to access commercial sites.
Federal Express
One company which has overcome these challenges is Federal Express. It uses a proprietary authentication scheme embedded in software it distributes to online customers. So far, 450,000 Federal Express customers use the system. The company is successful because it has mastered all four steps in the online transaction chain.
- Acquiring customers,
- Validating the ability of the customer to pay,
- Executing secure transactions,
- Delivering goods, services, and customer support.
The company enables customers to complete the entire shipping function from their office or home office PC.
- The user enters a valid FedEx account number and other required information.
- Then the user enter the shipping information
- The user's laser printer completes a label including bar code information for tracking the package
- The user selects a schedule option for package pickup.
- Billing information is uploaded at the completion of the transaction.
This service is available for U.S. domestic addresses. Canadian and international shipment options are expected to be added next year. Federal Express would like to go to the next step in a secure online transaction processing, which is to drop the requirement to manage software at the customer's site. To do this it must imbed digital cash technologies in a WEB site which can handle industrial strength online processing, database updating, and inquiry response.
Chemical Industry
The chemical industry has closely watched Federal Express's success and plans to implement similar arrangements for business-to-business sales.[7] In May 1996 a number of firms announced plans to adapt electronic data interchange (EDI) transactions with key clients to reach a larger customer base more inexpensively and easily. Internet technologies, including email, WEB sites, and file transfers, will be a part of the strategy.
Chemical companies are turning to the Internet's open technology as a way to cut costs by eliminating more costly proprietary electronic data interchange protocols. A key strategy is to strengthen relationships between distributors and end-users of chemical products. This strategy has four major pieces.
- Provide Internet access for producers, suppliers, shippers, distributors and customers.
- Establish WEB sites or other Internet software interfaces for data acquisition for each transaction type, e.g., order, shipment, payment, etc.
- Integrate Internet transactions with other information systems within each user's company, e.g. accounts receivable, accounts payable, sales management functions, etc.
- Establish just-in-time production scheduling to inventory requirements to sales and use.
Barriers to the transition to Internet use by chemical companies include managers who do not have the technical expertise to understand the changes required or who are afraid of unknown risks which might be associated with new ways of doing business. Some companies, like Shell Oil, are concentrating just on intranets, that is, internal networks among business units and organizations which are focused on internal company processes. Reliability and security of Internet technologies continue to be the biggest questions chemical companies have when it comes to adopting the Internet as a basis for transacting business externally. As a result, many firms still rely on proprietary commercial networks for transfer of time-critical business information.
Paying for Class of Service
Some chemical companies are adopting Internet technologies within private networks to insure reliability and security of electronic data interchange. This is giving birth to new classes of service privately financed entirely by those using them rather than by a broader base of public Internet providers and users. For instance, the petroleum industry is building its own network, dubbed Aries, which will be used to exchange massive amounts of scientific and commercial information.[8] The Aries network is being defined as a "mission-specific" network. Amoco Oil Company indicates that it needs to move data at ten times the speed of normal Internet traffic and is willing to pay for that capability because of the time-based value of its information. This is a model for other industries.
In another example of Internet technologies being adapted to proprietary electronic data interchange systems, the auto industry has developed links with its suppliers for exchange of very large graphics files used in computer-aided design of car parts. For instance, Ford plans to connect all 11,000 of its suppliers using this approach. In turn, these electronic drawings are linked to the auto companies' internal computer- aided manufacturing systems. These networks hang off the net, and are linked to it tangentially, but their main benefit is that they are very fast, dedicated, secure resources designed to meet specific needs of an industry group rather than the diffuse needs of mass consumer markets. Companies have indicated they are willing to pay for premium priced data transmission because they can measure the time-based value of their key data sets.
The business models being adopted by the chemical and auto/truck manufacturing industries may have the potential to be successfully transferred to other industries such as food processing
Integrating the Internet with Other Business Information Systems
Vincent Cerf, who is widely recognized as one of the founders of the Internet, sees electronic commerce unfolding on the Internet in three phases.[9]
1st - computers are connected to each other. That's already happened
2nd - people get connected to information. Much of it is free. Some of it is useless. Much of it is corporate identity advertising.
3rd - the interconnection of business processes - inside the company and between organizations - takes place. This is where the largest multipliers in terms of value are expected to be found.
Growth in the third phase is expected to occur in a non-linear fashion. Growth in electronic commerce, Cerf says, will be exponential. Electronic publishing may be one industry which benefits early on from this growth. The arrival and use of online digital cash will be key to its success. Digital cash, which will allow electronic transactions for pennies that cost dollars when handled physically, may open new opportunities to protect and sell intellectual property on the net.
A vast conglomeration of Internet technology and service providers are competing for what appears could eventually be a $30 billion market. This include long-distance telephone giants, regional baby-bell companies, cable TV operators, satellite firms, wireless telecommunications service providers, Internet service providers, and even power companies. The goals of all of these companies are essentially the same - to sell the customer, be it a business or household, a "bundle" of telecommunications services, to provide one-stop shopping, and to secure that customer's business for as long as possible, perhaps for life. This strategy is designed to achieve maximum profits as customers sign on for more and more services over time. By offering as attractive a "bundle" as possible to customers, firms hope customers will not go bargain hunting for individual services.[10]
The primary target of companies offering the "bundle" is the mythical "power user," a business or individual who will likely rack up $300 or more in long distance phone calls, cable, Internet, entertainment, and other telecommunications charges per month. Profits will go to the provider who can cram the most services into the bundle and market it to the biggest users. The change in marketing strategy is from communications companies that sell individual services to all customers to one that sells a broad, interrelated group of services to a preferred set of customers. This may lead to electronic "red lining" of rural and economically depressed areas.
While $300 a month is a threshold figure for the preferred set of customers, service providers hope they will find many users who will push use to much higher levels. It is important to note that the "bundle" includes a collection of services which provide "content," such as entertainment/ cable TV, etc., while other services involve simply offering a carrier to bring to user to third parties, such as Internet ISPs like Sportszone.
Typical Annual Bundle of High Value Services
|
Value | Description |
$ 675 | Cellular Telephone |
$ 525 | Local phone service |
$ 425 | Long distance service |
$ 425 | Home entertainment |
$ 400 | Cable TV |
$ 350 | Paper news subscriptions |
$ 275 | Pager service |
$ 250 | Internet online service |
$3,325 | Total |
The Typical Bundle
A typical high-value residential user might spend as much as $3,000 to $3,600 a year on information services.[11] The major service providers will try to minimize the damage of hammer and tong competition by adding so many valuable services to a "bundle" that the consumer will be loath to bargain hunt for services one at a time. Current values for services supplied to households show Internet services sit at the bottom of the list in terms of annual revenue compared to other communications services, especially those with wireless components. It's clear that just selling Internet connectivity is not going to be a big business in the eyes of the major public data networks like AT&T, Sprint, and MCI. Selling products and services over the Internet offers more robust revenue opportunities, but these are still in the future.
Wireless Networks
Wireless networks may offer the best near-term opportunities for Internet commerce. They don't need the huge capital investments of land lines. The services are so proftable that some companies give away the end-user device, such as cellular phone or pager, in return for the committment by the customer to use the service over a year.
Wireless networks are proliferating rapidly, going digital and harnessing "intelligent networks" technologies to locate and identify roaming customers and to tailor the services they receive to meet their needs. Wireless networks focus delivery of services on portable devices which can have deskbound links to Internet services. For instance, a digital cellular phone may tie into an outbound sales associate's fax, email, and voice mail services from the office as well as providing point-to-point communications with prospects and customers.
The growth of the wireless market has increased pressure on regulatory bodies to allocate more spectrum and on service providers to use spectrum more efficiently by converting from analog to digital technologies. Compared with their analog counterparts, digital systems can both expand the capacity of the medium and compress the data stream it carries. Once wireless service providers switch to digital, they can further increase the number of customers served by compression techniques, which are improving steadily. Even the boost from present digital standards and compression techniques may prove insufficient to provide enough room to pass data-intensive messages among millions of customers.[12]
Managing the User Interface
Competition for the wireless spectrum will become intense as applications in portable, personal digital assistants (PDAs) deliver and send wireless voice, email, data files, and faxes to and from cellular devices. As the robustness of wireless services increases, a problem with user interfaces will arise. The smarter the device must be, the greater the risk its complexity will baffle the user. A solution is to place the intelligence on the network and keep the end-user devices relatively simple. Proposals for the so-called "network PC" incorporate this idea. Industries who want to use wireless technologies to communicate across value-chains, e.g., from producer to supplier to distributor to end-user will have to develop industry-wide standards for data interchange.
Precision Agriculture
A key business model which offers enormous market opportunities is to use a specific set of applications of information technologies as an anchor which produces benefits upstream and downstream for an industry's value chain. For instance, precision agriculture can be used to tie together suppliers of agricultural chemicals with producers allowing data analyses from the farmer's fields to drive just-in-time production and inventory control procedures for delivery of fertilizer and pest control chemicals.
At the other end of the production cycle, for example, assuming the crop is potatoes grown for processing into fast food french fries, real-time yield monitors at harvest can be transmitted to food processing factories, using wireless technologies, to plan for purchasing of commodities such as corn oil and salt; labor force hiring, refrigerated rail car scheduling, and sales marketing systems with distributors and customers.[13]
Market Outlook
A problem with advanced wireless services is billing. Every company wants to be the one that bonds with the customer and collects not only the fees, but also use information that leads to new business opportunities. Because there will be multiple providers all trying to reach the single multi-function PDA carried by the customer, industry-wide standards for data interchange and data compression will be very significant. A company that chooses a proprietary standard may find itself blocked from market entry for lucrative services as a result of differences between its technology and the industry standard. Network-embedded intelligence will have to handle the billing to multiple service providers accessed by the customer from a single device. Opportunities exist to pull together industry experts, computer and telecommunications manufacturers, and end-users to develop data interchange standards.
Price wars are expected to cut the cost of the "bundle," including wireless services, by as much as 50% over the next decade allowing them to compete head-to-head with the wired world of the Internet. This effect will be felt primarily in business-to-business sales. Internet access for households is unlikely to be a big business for at least the next three-to-five years, or at least not a very profitable one outside of a few key niches, including advertising. There will be an endless supply of opportunities to lose money.