Introduction to the E-Commerce & Internet Business


¹ Video Tip
For our brief video introduction to the e-commerce and Internet business, see
The global Internet audience continues to grow rapidly, with the worldwide base of Internet users in the 2 billion range as 2012 began, including a large base of mobile broadband users. This vast base of Internet users encourages businesses to innovate and to offer an ever-evolving array of online services. Sectors that are growing very rapidly online include the sale of entertainment, event tickets, travel, apparel and consumer electronics. The most powerful trends on the Internet include access via wireless devices, migration of entertainment to the web and cloud-based software as a service.
Today, as a result of the recent recession, consumers are more focused than ever on finding the best prices. Consequently, e-commerce firms like Amazon that are known for their high value at low prices are well positioned to prosper. The standout winner in e-commerce continues to be Amazon, where sales have soared thanks to aggressive discount pricing, free shipping for its “Prime” members and an ever-growing variety of merchandise categories. Amazon’s revenues rose by 41% in 2011 to $48.0 billion, and profits grew substantially as well. Books, movies, music and other media now account for only 35% of Amazon’s sales, while electronics and general merchandise bring in the largest share by far. Amazon’s sales outside of North America are booming, and now account for 44% of total revenues. Clearly, there is growing adoption of online consumer purchases throughout the world’s major economies.
Online advertising leader Google’s recent results are a good indicator of the strong growth in online advertising during 2011. The firm saw revenues soar 29.3% in fiscal 2011, to $37.9 billion, while profits rose 14.1% to $9.7 billion.
Growth in broadband subscriptions worldwide continues at a strong pace. Analysts at the International Telecommunications Union (ITU) estimate that there were 1.78 billion broadband subscribers worldwide by the end of 2011 (both fixed and wireless).
The number of American homes and businesses with broadband access capabilities topped 88 million by the end of 2011, thanks in part to modest monthly fees at Internet service providers. This number does not include mobile broadband users, estimated at another 105 million.
Online advertising in 2011 in the U.S. reached $31.3 billion, according to eMarketer, accounting for 20% of all advertising spending in America. eMarketer estimates total online sales of merchandise during 2011 at $188.1 billion, expected to grow to $269.8 billion by 2015. These numbers do not include online sales of travel, which was an estimated $107.4 billion in the U.S. in 2011. Plunkett Research estimates global travel expenditures online at $320 billion for 2011.
A significant evolution is taking place in the world of business, as more and more telecommunications move to the Internet. VOIP continues to grow in popularity, both at home and at the office. Meanwhile, the concept of “unified communications” threatens to completely revolutionize business communications by combining all communications into one screen on the desktop, including phone, fax, e-mail, IM, voice mail and teleconferencing. Voice communications will be digitized and archived, just as e-mail is today. A user’s communications tools will move seamlessly from the desktop to the mobile device.
Convergence: The Internet is about saving time (and therefore saving money), and the potential of the Internet has barely been tapped. New methods of taking advantage of efficiencies are becoming widely accepted, as access to high-speed broadband Internet connections becomes commonplace. Users of the Internet (both business and consumer) are multiplying around the globe, and many companies are earning terrific profits in the process of serving those users. The long-awaited phenomenon of “convergence” of entertainment, computing and communications arrived around 2004 and has been moving forward at high speed ever since. Now, the latest televisions come equipped with built-in Internet connections. This is going to create radical changes in the way TV viewers obtain their movies and TV programming over the near term. For example, subscribers to Netflix are able to stream downloaded movies directly to their Internet-connected TV sets.
Top selling product and services categories online include travel, clothing and accessories, books, music, videos, electronics and specialty foods including wines. In these markets, online shopping amounts to a significant share of sales. Meanwhile, many of the world’s largest storefront retailers now operate some of the most-visited Internet sites. For example, online traffic is extremely strong at the sites of Wal-Mart, Target, Best Buy, J.C. Penney, Sears, Home Depot, Lowes, Macy’s, Kohl’s, Cabela’s and Barnes & Noble.
A Brief History of the Online Sector: The e-commerce and Internet sector has evolved rapidly, going through several distinct stages since its beginnings in the 1970s:
The Internet is Born: First, there were the early days, when the Internet was seen by many as a realm for techies only, one that would produce few, if any, commercial enterprises. Initially designed in 1973, the Internet was a series of communication protocols written by Vinton Cerf as part of a project sponsored by the U.S. Department of Defense’s “Defense Advanced Research Projects Agency” (DARPA). The first demonstration of a three-network Internet protocol-based connection occurred in November 1977. Eventually, a well-enabled Internet was rolled out in 1983, primarily as a failsafe method of defense communications and as a means for researchers at various universities to communicate.
The Web is Created: Next, the World Wide Web and the coding language of HTML were conceived in 1989 and implemented between 1990 and 1993 by Tim Berners-Lee, enabling a never-ending hyperlinked cyberworld where sharing unlimited data became user-friendly thanks to the magic of linked pages.
The Boom Ensues: Starting in 1993 and 1994, entrepreneurs and financiers realized that hyperlinked, electronically posted data could be commercialized with vast, global potential. A dramatic revolution in retailing, publishing and entertainment was visualized, one in which consumers and business people alike would eagerly pay for the convenience of online shopping, trading and viewing of published data. An economic boom ensued, the likes of which hadn’t been seen since the beginnings of earlier technological breakthroughs: electricity, the railroad, the telephone, the automobile and the passenger-carrying airliner.
Thousands of hopeful new businesses were launched. Capitalization for these new Internet-enabled companies ranged from cash-strapped ventures launched with Visa card credit lines, to companies like WebVan that received vast sums from professionally managed venture capital firms only to fail miserably. Roughly 6,000 new firms of significant size raised a cumulative total of more than $100 billion in venture capital in the boom period (1994-2000). About 450 of these companies sold their stock to the public via IPOs (initial public offerings). Stock markets soared and instant billionaires were made. Individuals and families from all walks of life bet their savings on technology stocks and watched their wealth rise quickly. Venture funds that cashed out early reaped phenomenal gains, and financiers easily found additional investors for new venture capital pools. Companies with little or no sales and profits, led by the success of Netscape’s IPO, found eager buyers for their newly issued stocks. The NASDAQ index of stocks rose to 5,000 by early in the year 2000, and the Chairman of the Federal Reserve warned of “exuberant optimism.” Some said this boom couldn’t last—others said it was the beginning of a “new economy” that would last forever.
The Bust: In mid-2000 the Internet industry entered a bleak and dreary phase after the NASDAQ collapsed in March, bringing the entire sector to its knees. Hundreds of thousands of people lost their jobs. Stock portfolio values plummeted.  Thousands of firms closed their doors, filed bankruptcy, downsized or were scooped up at bargain prices by competitors. Sellers of hardware, software, consulting and telecommunications services suffered mightily. Entrepreneurs found it nearly impossible to raise funds to launch or sustain their businesses. The dream of a “new economy” became a nightmare for some—profits still matter; business cycles still happen.
The Reality Phase: By early 2003, this sector’s dark clouds were abating, and a “reality phase” was taking shape. Well-conceived, Internet-based businesses were proving their value. Consumers had become devoted fans of buying over the Internet. Businesses of all types were finding that the Internet creates true operating efficiencies and drives profitability. For example, while most of the airline industry suffered terribly in recent years, value-based discount airlines Southwest and JetBlue enjoyed superior financial performance, in no small part because of their use of e-commerce to efficiently book reservations and sell tickets online. “Efficiency” is the most important factor in the e-commerce and Internet sector’s newfound success. Consumers find the Internet to be a terrific way to efficiently expend their shopping and banking efforts. Travelers find the Internet to be an efficient way to book hotels rooms and airplane seats. Corporate procurement managers find the Internet to be the most efficient way to purchase needed goods and inventory. Hundreds of millions of people worldwide find e-mail, instant messaging and VOIP telephony to be the most efficient ways to communicate.
Low Costs Fuel the Steady Global Growth Phase: Today, access to fast Internet, both wired and wireless, is available at bargain prices in a growing footprint across the globe. Even in relatively undeveloped nations, both consumers and businesses have grown to rely on the Internet for everyday needs. The “second billion” set of users worldwide has been reached, and the third billion is clearly in sight over the mid term, as cheaper devices continue to proliferate. Mobile computing is accelerating at blazing speed thanks to inexpensive cell phone plans offering enhanced Internet access.
Meanwhile, the cost of developing and maintaining web sites has plummeted, opening the door to millions of self-funded entrepreneurs, and making it easier for venture capital firms to fund startups using low amounts of cash. Trends such as open software and cloud computing, along with modular development tools, have made it easier, faster and cheaper to start sophisticated web sites.
Common Online Consumer Activities
Research Automobile Purchases
Banking/Manage Accounts
Instant Message
Read/Post to Facebook, MySpace and LinkedIn
Check/Trade Stock and Investment Accounts
Job Search
Mortgage Information and Application
Participate in Auctions
Play Games
Read News Items
Read Product or Entertainment Reviews
Download Entertainment/Watch Videos
Research Consumer Health Issues
Shop/Check Product Prices and Features
Make Travel Reservations
Visit Pornographic Sites
Source: Plunkett Research, Ltd.,

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Video Introduction to E-Commerce & Internet Industry


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