Major Trends in the Development of Electronic Commerce in the United

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Major Trends in the Development of Electronic Commerce in the United States A CSI Research Report March 18, 2002 Coalition of Service Industries Research and Education Foundation 1 Major Trends in the Development of Electronic Commerce in the United States Executive Summary A CSI Research and Education Foundation report March 18, 2002 Steering Committee Members Miriam Sapiro, Verisign, Steering Committee Chair Casey Anderson, AOL Michael N. Ashton, ACE-INA Tim Fisher, ACE-INA Brant Free, Chubb Orit Frenkel, GE Gary Heard, Chubb Susan Pinder, GE Penny Pruitt, ACE-INA Ray Sander, NY Life, ex officio Robert Vastine, Coalition of Service Industries, ex officio Advisory Committee Members Iren Borissova, Verisign Nina Hachigian, RAND Robert Kramer, Comp-TIA Lilyanne McClean, American Express Russell Pipe, Global Information Infrastructure Commission Steven Siqueira, American Express Author Matthew McTighe 2 Table of Contents Executive Summary Background of the Report Chapter 1: The history of e-commerce in the U.S. " Relationship between U.S.

Government and industry in e-commerce policy " Emergence of e-commerce in the U.S. " Expansion of e-commerce in the 1990's in the U.S. " The current situation of e-commerce in the U.S.

Chapter 1 Charts and Graphs Chapter 2: B2C in the U.S. in 2000 " The emergence and growth ... more. less.

of B2C e-commerce in the United States " Demographic trends in the use of B2C e-commerce among Americans " B2C e-commerce in the sale of technology products " Travel " Content " Additional goods and services " On-line auctions and their effect on B2C e-commerce " Obstacles to successful B2C e-commerce Chapter 2 Charts and Graphs Chapter 3: B2B in the U.S. in 2000 " The emergence and growth of B2B e-commerce " B2B technology " B2B Exchanges " Benefits of B2B e-commerce " B2B case study number one: Cisco Systems " B2B case study number two: Boeing " Obstacles to successful B2B e-commerce " The future of B2B e-commerce Chapter 3 Charts and Graphs Chapter 4: The evolution of e-government and its role in e-commerce in the U.S. " E-government on the state and local level Chapter 5: e-Finance in the U.S. in 2000 " e-Banking " e-Securities " e-Insurance " e-Diversified financial services (credit cards, consumer lending) Chapter 5 Charts and Graphs 3 Chapter 6: U.S. e-commerce policy " The role of federal and local government in e-commerce " U.S. policy regarding protection of privacy in e-commerce " U.S. law regarding the export of encryption technology " U.S. law regarding digital signatures " U.S. intellectual property law " U.S. policy regarding the taxation of e-commerce 4 EXECUTIVE SUMMARY Government 9s Role in E-commerce The dramatic surge of e-commerce in the United States during the past decade has been overwhelmingly driven by the private sector. A central tenet of U.S. e- commerce policy is that, in respecting the doctrine of private leadership, governments should avoid undue restrictions on e-commerce. Accordingly, the U.S. Government has refrained from imposing new and unnecessary regulations, bureaucratic procedures, or taxes and tariffs on commercial activities on the Internet. In cases when government agreements may prove necessary to facilitate e- commerce and protect consumers, governments should establish a predictable and simple legal environment based on a decentralized, contractual model of law rather than one based on top-down regulation. If government intervention is necessary to facilitate electronic commerce, its goal should be to ensure competition, protect intellectual property, prevent fraud, foster transparency, support commercial transactions and facilitate dispute resolutions. Regulations on e-commerce should be imposed only as a necessary means to achieve an important goal on which there is a broad consensus, and private sector participation is necessary in the policy-making process. Existing laws and regulations that may hinder electronic commerce should be revised to reflect the needs of the new electronic age. The U.S. Government also believes that electronic commerce over the Internet should be facilitated globally. Thus, the legal framework supporting commercial transactions on the Internet should be governed by a consistent set of principles across sub-federal, federal and international borders. Because the Internet lacks the clear geographic lines of transit that characterize the physical trade of goods, such principles are needed to provide certainty in transactions regardless of the jurisdiction in which a buyer or seller resides. B2C E-commerce Growth and Development The growth of e-commerce in the United States depends on a solid and rapidly expanding e-commerce infrastructure. Computer and telecommunications technologies, the technological and processing capability to make on-line payments using credit or debit card systems and delivery mechanisms such as rapid and multimodal distribution are all required in a successful e-commerce marketplace. Business-to-Consumer (B2C) e-commerce has created a faster, more efficient way for consumers to shop. On-line consumers can shop from their homes and have access to a wide variety of products, services and digital works from retailers all over 5 the world. E-commerce offers customers more information and choice about products. Moreover, B2C e-commerce lets a customer search for, order, and pay for a product directly in a matter of minutes. U.S. Census Bureau data shows that between 1996 and 2000, total on-line retail sales in the U.S. more than tripled, and rose from $7.7 billion in 1998 to $28 billion by 2000. 1 B2C e-commerce improves the lives of consumers by reducing transaction costs. Lower transaction costs increase the array of choices, expand the size of markets and improve the overall supply and quality of goods and services for the consumer. In the United States, as in most countries, the three most important factors for determining consumer participation in e-commerce are income, education and age. College graduates and those earning higher salaries are most likely to engage in e- commerce. Caucasians remain the largest ethnic group on-line. However, all demographic subsets of the U.S. population have experienced at least mild increases in the number of e-commerce users. Studies show that e-commerce use among African Americans, Hispanics and Asian Americans has increased dramatically in recent years. 2 In the United States, almost every business sector has integrated e-commerce into its operations. Computers and technology products continue to be a high-grossing area of e-commerce sales. Books, music and cars have found markets on the Internet. In 2000, travel Web sites, particularly on-line airfare providers, made an estimated $13.8 billion in revenues from e-commerce sales. 3 B2B E-commerce Growth and Development Business-to-Business (B2B) markets dominate the e-commerce marketplace. B2B transactions now account for 70 to 85 percent of all on-line sales worldwide. Global B2B e-commerce totaled more than $604 billion in 2000. 4 More than 700 B2B marketplaces now exist in the United States. U.S. businesses have connected to their potential customers in many ways. Many small businesses have found it beneficial to use the Internet to establish public e- commerce exchanges (where any company or individual can access potential suppliers). Other businesses have favored building private networks that create a marketplace for selected companies and suppliers based on their particular sector. 1 NUA Internet Surveys. (2001, February 16). cU.S. Census Bureau: B2C sales reached U.S.D28bn in 2000. d 2 NUA Internet Surveys. (2001, February 27). cAfrican Americans lead in U.S. Internet growth. d 3 The Boston Consulting Group, 2001. 4 Coppel, Jonathan. cE-Commerce: Impacts and Policy Challenges. d OECD Economics Department Working Paper No.252, June 30, 2000, pp. 7. 6 Lower handling and production costs, faster and more efficient ordering processes and improved inventory management are just a few of the many benefits to B2B e- commerce. B2B networks speed the development of new products and services, and bring them to market faster. B2B integration can also mean better customer service. B2B gives suppliers a full knowledge of all aspects of a transaction (including, billing, shipping, customs, insurance, financing, installation, etc.). B2B e-commerce also reduces manual processes and paperwork. Government use of E-commerce Governments 9 use of e-commerce is also growing dramatically in the United States. E-commerce allows all levels of government to improve the convenience and lower the cost of payment systems and tax compliance, and improve their communication with citizens. Electronic commerce cuts down on paperwork and streamlines the payment and communication processes within and between agencies and between the government and citizens. Electronic commerce increases efficiency, reduces procurement costs and makes government procurement more transparent. The greatest potential impact of e-government is at state and local levels. It allows much greater access to information about government programs. It facilitates the interaction between governments and citizens by speeding regulatory decisions, licensing, payment of fees and many other functions. E-commerce in the Financial Sector In the financial sector, electronic commerce in the United States has expanded the range of products financial intermediaries offer. In addition to creating new services, such as on-line bill payment or one-to-one marketing, the most obvious benefit of e- commerce is that it significantly reduces the cost of financial services and makes it cheaper for financial institutions to do business with their customers. In the United States, secured financial payments systems have allowed e- commerce to grow rapidly. Business engaging in electronic commerce must successfully adapt their payment systems to incorporate electronic methods of payment, thus making it possible for consumers to purchase goods and services directly over the Internet. Banks, securities brokerages, insurance agencies and diversified financial services companies in the United States have started relying heavily on e-commerce. 7 Customers with access to on-line banking can access account information, pay bills, and transfer funds over the Internet. On-line brokerages allow consumers to trade stocks and manage their investment portfolios over the Web. Insurance companies offer consumers the chance to shop for quotes and purchase insurance plans on-line. Challenges for E-commerce There are several challenges facing e-commerce retailers. Poor Web site organization and slow-loading Web sites are obvious examples. Numerous technical and legal questions, such as determining who the contracting parties in an e- commerce transaction are, where an e-commerce operator is established and whether that operator is complying with all relevant legal obligations and regulatory regimes, pose serious problems. More importantly, on-line retailers must take issues such as on-line security, privacy and consumer protection into consideration if they wish to be successful. In all areas of e-commerce, including both B2B and B2C transactions, customers have consistently ranked concerns about on-line privacy and security as their top reasons for not engaging in e-commerce transactions or prematurely quitting an on-line sale in the middle of a transaction. Consumers require protection across the full spectrum of the e-commerce transaction process, including browsing and searching, entering personal information and payment information such as credit card account numbers. If e-commerce users do not have confidence that the information they are divulging is safe from unauthorized access, they will not use the Internet for e-commerce. Security in e-commerce Electronic commerce requires secure transactions. To ensure that transactions are secure, e-commerce requires reliable telecommunications networks, effective protection of the information systems attached to those networks, and effective means for authenticating and ensuring confidentiality of electronic information. The U.S. Government's policy is to promote the development and use of strong, market-led encryption technologies that enhance the privacy of communications and stored data while preserving government law enforcement agencies 9 ability to gain access to evidence as part of a legally authorized surveillance. Furthermore, certification measures, such as digital signatures, can boost consumer confidence by offering authentication, access control, confidentiality, integrity and non-repudiation. The most general federal law relating to electronic signatures in the United States is the Electronic Signatures in Global and National Commerce (E-Sign) Act. The E-Sign Act establishes equal legal status for electronic 8 signatures, stating that any signature, contract, or other record relating to a transaction may not be denied legal effect or enforceability solely because it is in electronic form. Protection of Intellectual Property An adequate and effective legal framework is necessary to deter fraud and the theft of intellectual property, and to provide effective legal recourse when these crimes occur. Electronic commerce often involves the sale and licensing of intellectual property. To promote this commerce, sellers must know that their intellectual property will not be stolen and buyers must know that they are obtaining authentic products. Domestic laws and international agreements that establish clear and effective copyright, patent and trademark protection are therefore necessary to prevent piracy and fraud. The U.S. Government successfully implemented the two World Intellectual Property Organization treaties signed in 1996 by passing the Digital Millennium Copyright Act. The Taxation of E-commerce The U.S. Government has taken a firm position on the need for a private sector- led, market-driven approach to e-commerce policy. It typically favors an approach to e-commerce taxation that neither distorts nor hinders commerce, is simple and transparent, and can accommodate tax systems already used by the United States and its international partners. That approach is exemplified by a moratorium, adopted by law in 1998, prohibiting state and local governments from imposing taxes on Internet access charges. As technological innovations continue to improve the speed, security and efficiency of the Internet, more businesses and consumers will realize the benefits of e-commerce. Governments can have a profound effect on the growth of electronic commerce. By their actions, they can facilitate their citizens 9 participation in the Internet and e-commerce or inhibit it. Knowing when to act 4and perhaps more importantly 4when not to act, is crucial to the development of electronic commerce. 9 BACKGROUND OF THE REPORT China 9s gradual shift towards freer trade and more open markets will make it a major influence in global markets, including e-commerce. Understanding the achievements of other countries that have developed e-commerce markets successfully, such as the United States, may help China provide foreign investors with extraordinary commercial opportunities. The Coalition of Service Industries (CSI) Research and Education Foundation believes it is very useful for the US and China to exchange ideas and arrive at mutual solutions to the challenges that confront the development of e-commerce, such as those described in the CSI Research and Education Foundation report. Pursuant to these goals, CSI, in concert with several of its member organizations, established a US-China E-Commerce Steering Committee to prepare a joint US-China report on electronic commerce. The resulting document describes in detail the development of e-commerce in the United States and the policies of the U.S. Government regarding e-commerce. It complements the China Electronic Commerce Blue Paper commissioned by the Policy Studies Office of the Central Committee of the Communist Party of China (CCCPC.) The Steering Committee hopes that this report will prove valuable to China as it continues to develop its e-commerce sector. 10 CHAPTER 1 THE HISTORY OF E-COMMERCE IN THE UNITED STATES RELATIONSHIP BETWEEN U.S. GOVERNMENT AND INDUSTRY IN E-COMMERCE In 1997, the White House released its policy briefing, Framework for Global Electronic Commerce, as a guide for the government and U.S. businesses to follow when dealing with e-commerce. 5 The White House report propounded five principles, which have since become the groundwork on which all U.S. Government e-commerce policy has been made. By far the most important of the five principles establishes the notion of a private sector-led approach to e-commerce development. Though the U.S. Government played a role in financing the initial development of the Internet, its expansion has been driven primarily by the private sector. For electronic commerce to flourish, the private sector must continue to lead. Innovation, expanded services and broader participation will thrive in a market-driven arena, not in a highly regulated environment. Accordingly, governments should encourage industry self-regulation wherever appropriate and support the efforts of private sector organizations to develop mechanisms to facilitate the full development of the Internet. One example of how the U.S. has supported a private sector-led approach to Internet operation and expansion is the Internet Corporation for Assigned Names and Numbers (ICANN), a non-profit, private sector corporation formed by a broad coalition of the Internet's business, technical, academic, and user communities. ICANN has been recognized by the U.S. and other governments as the global consensus entity to coordinate the technical management of the Internet's domain name system, the allocation of Internet Protocol (IP) address space, the assignment of protocol parameters, and the management of the root server system. Even where collective agreements or standards are necessary, private entities should, whenever possible, take the lead in organizing them. Where government action or intergovernmental agreements are necessary, on taxation for example, private sector participation should be a formal part of the policy making process. The second principle established by the U.S. Government for e-commerce policy is that governments should avoid undue restrictions on electronic commerce. Parties should be able to enter into legitimate agreements to buy and sell products and services across the Internet with the least amount of government intervention possible. Unnecessary regulation of commercial activities will distort development of the electronic marketplace by decreasing the supply and raising the cost of products and services for consumers the world over. Business 5 The White House, cA Framework for Global Electronic Commerce. d July 1, 1997. The following two pages draw extensively on the five principles outlined in the White House report, particularly that text which is found on pages 4-5. 11 models must evolve rapidly to keep pace with the break-neck speed of change in the technology; government attempts to regulate are likely to be outmoded by the time they are finally enacted, especially to the extent that such regulations are technology-specific. Accordingly, the U.S. Government has refrained from imposing new and unnecessary regulations, bureaucratic procedures, or taxes and tariffs on commercial activities that take place via the Internet. Thirdly, where governmental involvement is needed, the U.S. Government has taken the position that its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce. In some areas, government agreements may prove necessary to facilitate electronic commerce and protect consumers. In these cases, governments should establish a predictable and simple legal environment based on a decentralized, contractual model of law rather than one based on top-down regulation. This may involve sub-federal as well as federal governments. Where government intervention is necessary to facilitate electronic commerce, its goal should be to ensure competition, protect intellectual property, prevent fraud, foster transparency, support commercial transactions and facilitate dispute resolutions. The fourth principle guiding the relationship between the U.S. Government and business on e-commerce issues states that the government should recognize the unique qualities of the Internet. The genius and explosive success of the Internet can be attributed in part to its decentralized nature and to its tradition of bottom-up governance. These same characteristics pose significant logistical and technological challenges to existing regulatory models, and governments should tailor their policies accordingly. Electronic commerce faces significant challenges where it intersects with existing regulatory schemes. The U.S. Government has recognized, however, that it does not make sense to assume that regulatory frameworks established over the past 60 years for telecommunications, radio and television will also fit the Internet. Regulation should be imposed only as a necessary means to achieve an important goal on which there is a broad consensus. Existing laws and regulations that may hinder electronic commerce should be reviewed and revised or eliminated to reflect the needs of the new electronic age. Finally, the U.S. Government believes that electronic commerce over the Internet should be facilitated on a global basis. Since the Internet is emerging as a global marketplace, the legal framework supporting commercial transactions on the Internet should be governed by a consistent set of principles across sub- federal, national and international borders. Those principles will lead to predictable results regardless of the jurisdiction in which a particular buyer or seller resides. While the U.S. Government has taken a firm position on the need for a private sector-led approach to e-commerce policy, issues such as taxation, 12 security and privacy must be addressed with the cooperation of representatives from the government and private industry. 6 EMERGENCE OF ELECTRONIC COMMERCE IN THE UNITED STATES The emergence of e-commerce in the United States essentially began in the mid-1990s. Until that time, the Internet had been seen as a tool used primarily for military and academic purposes. 7 Since the first commercial web browser was made available to the public in 1993, the growth of the Internet as a personal research tool and as a potential business vehicle has been explosive. Driven largely by the invention of the World Wide Web, new models of commercial interaction have allowed businesses and consumers to participate in the electronic marketplace and reap the resultant benefits. For many businesses, e-commerce opens up an entirely new market opportunity, while others see it as a versatile new channel offering opportunities to enhance existing markets. By utilizing the speed, efficiency and economy of the Internet, e-commerce simplifies, makes more efficient, reduces the cost of, or otherwise alters the process by which a transaction takes place. The resulting improvements in the way companies do business, both with consumers and with other businesses, has helped bolster the U.S. economy while laying the groundwork for future innovations that will lead to even greater efficiency and opportunity in the global market. Though there is no universal definition of e-commerce, it can be described at its most basic level as any use of electronic networks for commerce and other economic activity. What that means in the context of business transactions, however, can have broad implications that affect the design, production, cataloguing, advertising, purchasing, ordering, and delivery of any goods or services purchased through electronic means. The term e-commerce itself actually refers to several facets of the e-economy, the two most prominent of which are in the business to business market (B2B) and the business to consumer market (B2C). There are at least four major tenets of e-commerce as it exists in the United States today. They include, but are not limited to, the following: " The ability of a consumer or business to search for a particular good or service using electronic means; 6 The White House, pp. 4-5. 7 The Internet is a global matrix of interconnected computer networks using the Internet Protocol (IP) to communicate with each other. For simplicity, the term cInternet d is used throughout this paper to encompass all such data networks and hundreds of applications such as the World Wide Web and e-mail that run on those networks, even though some electronic commerce activities may take place on proprietary or other networks that are not technically part of the Internet. 13 " The ability of a consumer or business to order a good or service to fit the specifications that they require using electronic means; " The ability of a consumer or business to securely pay for a good or service using electronic payment transfers, credit cards or other modes of payment; " The ability of a consumer or business to ensure that a good or service is delivered to them. The emergence of a successful e-commerce market that adheres to the four criteria listed above has been made possible in the United States by the existence of several prerequisites that are required in order for e-commerce markets to prosper. First, e-commerce relies on a variety of computer and telecommunications technologies that must be in place and available to businesses and consumers before e-commerce transactions can be carried out. Telecommunications wires, coaxial and fiber-optic cables, and satellites serve as the arteries for information that is sent throughout the world. Internet Service Providers (ISPs) are needed to connect individuals and businesses to those arteries, and end-user devices such as personal computers, mobile phones, and televisions allow individual users to access the information. In the United States, private sector investments, entrepreneurship and human capital have played the most important role in developing those new technologies. Real business investment in Information Technology (IT) equipment and software more than doubled between 1995 and 1999, from $243 billion to $510 billion. 8 In the telecommunications sector, manufacturers and software companies have helped develop new technologies to allow higher-bandwidth communications across existing copper network infrastructure, including digital subscriber line (DSL) technologies, compression and faster electronic switches. Satellite, electronic and aerospace companies have invested close to $27 billion dollars to expand a global broadband network, and cable companies and wireless providers have made similar investments into new technologies that make up the infrastructure on which e-commerce is based. 9 The second major requirement for the establishment of an efficient e- commerce marketplace is the technological and processing capability to make on- line payments. Credit, debit and smart cards, along with digital cash, make it possible to create a direct link between the customer and the financial marketplace so that transactions can be done more rapidly. This topic will be discussed in further detail later in the paper. 8 cThe Digital Economy 2000 d Economics and Statistics Administration, U.S. Department of Commerce, Office of Policy Development. June 2000, 9 U.S. Department of Commerce, cThe Emerging Digital Economy. d April 1998. 14 Third, e-commerce relies on the ability to deliver goods and services to consumers both physically and over the Internet, and to do so securely. Mechanisms such as rapid and multimodal distribution and delivery bring those products ordered via the Internet directly to the businesses and consumers, thus interweaving the Internet and the physical marketplace. In addition, data transferring technologies must be operational to ensure the delivery of things like content, insurance policies, music and electronic airline tickets. Finally, standards, regulations and laws must support the expansion of e- commerce without unduly burdening it. For example, connectivity standards, technical communications standards, electronic signature and intellectual property laws and privacy protections are necessary to allow a secure and successful e- commerce marketplace to flourish. 10 Government support of a pro-competitive market is also necessary. The main reason that the growth of e-commerce in the U.S. has been so dramatic is that the government has favored a private sector-led approach and has exercised regulatory forbearance. EXPANSION OF E-COMMERCE Since its widespread emergence less than a decade ago, the growth of the Internet in the United States has been nothing short of explosive ( See Figure 1A ). After the first commercial web browser arrived on the consumer market in 1993, the number of Internet hosts has ballooned from 1.3 million to more than 93 million in 2000. 11 In that same period, the number of Internet users around the world has increased by almost 423 million. 12 In the United States, the number of Americans on-line has risen from roughly 90,000 people in 1993 to more than 137 million people today. 13 Some observers predict that within five years, some 91 percent will be on-line. 14 According to a report published by the Institute for International Economics, three factors have contributed to the breathtaking growth of the Internet: " The steep decline in the prices of information technology (IT) products, such as computers and software; " The development of interoperable platforms like Transport Control Protocol/Internet Protocol (TCP/IP), and the mass distribution of Internet browsers like Netscape, which on the one hand provide a relatively easy way for firms to develop user-friendly interfaces such as Web sites and on 10 Mann, Catherine L., Sue E. Eckert, and Sarah Cleeland Knight. cGlobal Electronic Commerce. d Institute for International Economics, July 2000, pp. 9-10. 11 Internet Software Consortium, cInternet Domain Name Survey, d July 2000. 12 Pegasus Research International, cWorldwide Growth in Net Usage, d December 2000. 13 U.S. Internet Council and ITAA Inc., cState of the Internet, d April 2000. 14 NUA Internet Surveys quoting IDC Research, October 1999. 15 the other hand enable individuals to receive and send electronic documents and surf the World Wide Web; " The commercialization of the Web itself with media-rich content and electronic commerce sites such as those of on-line B2C retailers and B2B exchanges. 15 As with the case of the Internet and IT industry as a whole, the growth of e- commerce in the U.S. can be attributed mainly to private investment, competition, and open access to Internet technology. Open access is made possible by the sharing of a common IP, which is not owned, licensed, or restricted by any individual or company. Because the IP is available for all to use, there has been exponential growth of the Internet and its subsequent commercial, educational, social and communicative tools, demonstrating the eagerness of companies and individuals to capitalize on the Internet 9s availability. The number of Internet connections, especially in the United States, has surged as a result of increased investment in Information Technologies stemming from declining IT prices and years of sustained economic growth. Real business investment in IT equipment and software more than doubled between 1995 and 1999, from $243 billion to $510 billion. The software component of these totals increased over the period from $82 billion to $149 billion. 16 IT industries produce less than 10 percent of total U.S. output. Nevertheless, between 1995 and 1999, because of IT industries' extraordinary growth and falling prices, they accounted for an average 30 percent of total real U.S. economic growth. 17 In addition to the factors listed above, no explanation of the growth of e- commerce in the United States would be complete without looking at the role of telecommunications. Due to substantial telecommunications privitization and private sector-led investment over the past decade, the communications infrastructure that supports e-commerce has grown in capacity and technical sophistication. The cost of developing and producing faster, more efficient communication technologies has also fallen considerably. Moreover, lower access prices across the telecommunications network have driven the deployment of innovative and inexpensive Internet access services. In 2000, the average cost of basic telephone service to residential consumers was between 13 and 29 dollars per month. 18 Since hundreds of ISPs offer unlimited dial-up access over those same inexpensive phone lines for 20 dollars per month, Americans have access to 15 Mann pp. 13-14. 16 Economics And Statistics Administration U.S. Department Of Commerce pp. 15. 17 These estimates are based on inflation adjusted "income side" data provided by the U.S. Bureau of the Census; i.e., income attributable to IT industries compared to growth in Gross Domestic Income (GDI). Income side data were used here because "product side" data--the data used to estimate GDP--are not sufficiently disaggregated to describe the economic performance of all IT-producing industries. 18 Oxman, Jason. cThe FCC and the Unregulation of the Internet. d Office of Plans and Policy, FCC, Working Paper No. 31, July 1999, pp. 5. 16 an amazing array of Internet and e-commerce services at an affordable rate. A competitive telecommunications market is a prerequisite to affordable Internet access. In countries where a monopoly provider has traditionally supplied a large chunk of state revenues, e-commerce cannot develop unless the government moves boldly and firmly to liberalize the sector. Coinciding with the rapid development of the Internet and related telecommunications technologies, growth in e-commerce has been similarly impressive. In 1991, when the Internet had less than 3 million users around the world, its applications to e-commerce were non-existent. By 1999, however, one quarter of the estimated 250 million users who accessed the Internet made purchases on-line from e-commerce sites, worth approximately $110 billion. If the expansion in e-commerce continues at this rapid pace as is expected, B2B and B2C e-commerce transactions will account for about five percent of worldwide inter-company transactions and retail sales within the next four to five years. 19 Though analyst projections vary regarding the expected growth of the Internet, all agree that worldwide e-commerce sales will continue to grow as technologies become cheaper and more efficient and companies throughout the world learn to streamline their e-commerce operations ( See Figure 1B ). In a 1997 report, the OECD estimated that e-commerce sales in the United States would range from $10 billion to $1.5 trillion by 2005. 20 Nevertheless, projections for both the number of Internet users in the United States and the number of on-line buyers expected to take part in e-commerce transactions are projected to continue a steady rise in years to come ( See Figure 1C ). Because U.S. businesses were among the first to adopt e-commerce, in 1999 close to 85 percent of electronic commerce was concentrated in the United States. As new e-commerce markets have emerged in Western Europe, Latin America and Asia, electronic commerce has become a global activity. Ninety percent of U.S. companies say that electronic commerce affects or will soon affect the way they do business. Many businesses source from firms overseas and sell to buyers all over the world, reinforcing the global nature of business 4both in terms of production and distribution. With firms doing business in an international arena, countries that do not have an environment conducive to Internet usage and electronic commerce will be left out of the globalized production process and the global economy, at an increasingly greater cost to their citizens. 21 A broad range of variables affect who is using the Internet and e-commerce; including age, income, and education. Studies have shown a positive relationship between per capita GDP and the density of Internet hosts in countries. Higher 19 Coppel, Jonathan. cE-Commerce: Impacts and Policy Challenges. d OECD Economics Department Working Paper No.252, June 30, 2000, pp. 3. 20 OECD 1999b, 27. 21 Mann pp. 16-17. 17 income per capita is associated with higher share of those using the Internet. 22 Other measures, such as the Human Development Index, show that as human development indicators (such as education, life expectancy and income) increase, Internet and e-commerce in a country will expand more rapidly. 23 However, looking at this issue within any particular country over time, rising levels of Internet use for a country as a whole do not necessarily translate into proportional increases in Internet usage for all groups of individuals in that country. An example of this is the United States, which has had relatively cheap and widespread Internet availability for some time yet still has disproportionately less usage of the Internet among people with lower incomes or those living in rural areas. Yet, even the cdigital divide d seems to be narrowing, as Internet and e-commerce usage in the United States continues to grow exponentially. The latest research shows, for example, that the percentage of rural households with Internet access has shot up 75 percent since 1998, and new efforts to extend high- speed Internet access and broadband technologies into rural America will help create a faster, more efficient market for e-commerce. 24 It is worth noting, however, that only about 10 percent of on-line U.S. Households are expected to be using broadband technology (e.g. DSL, Cable TV) by 2003. Most will continue using traditional narrowband technology, such as dial-up modems ( See Figure 1D ). 25 The vast growth of e-commerce only begins to hint at the more profound changes that many observers believe IT is producing in the overall economy. Despite making up a modest 8.3 percent share of the economy in 2000, IT industries helped power an improved economic performance that led to sustained economic growth at the turn of the century ( See Figure 1E ). By increasing productivity, creating new employment opportunities and allowing individuals to tap into an extensive global network of unlimited information and commercial opportunity, the Internet and the IT industries have changed the way companies and individuals do business. The topic of e-commerce expansion will be discussed in greater detail later in this paper in the sections on B2C and B2B e-commerce, and again in the sections on e-finance. 22 UNCTAD 2000, 75, figure 12. 23 ITU 2000, 22, figure 2.2. 24 cLeadership for the New Millennium: Delivering on Digital Progress and Prosperity. d The U.S. Government Working Group on Electronic Commerce, 3 rd Annual Report, 2000, pp. vi. 25 Yankee Group, cDial-Up Access to the Internet Will Continue to Dominate d, 2000. 18 THE CURRENT SITUATION OF E-COMMERCE IN THE UNITED STATES Over the last five years, the United States has experienced an exceptional increase in productivity, falling inflation and very strong growth. Although recent indicators such as a dwindling economic growth rate, rising layoffs and weakening business conditions have reflected an economic slowdown, the current condition of e-commerce in the United States remains strong. According to a report published by the U.S. Commerce Department at the end of July 2001, consumer and government purchases in the first half of 2001 narrowly offset a huge drop in business spending. Consumer spending, which accounts for two- thirds of all economic activity, rose by a larger-than-expected 0.4 percent in June, following a 0.3 percent rise in May. 26 According to the most recent census information taken in 1999, on-line sales by retail establishments totaled $5.3 billion, or 0.64 percent of all retail sales in the United States. 27 Though more recent figures are still uncertain, it is estimated that today, e-commerce spending in the United States generates close to $16 billion in revenues. One explanation for why e-commerce spending has continued to grow despite a worldwide economic downturn is the ubiquity of electronic connectivity among businesses and individuals. Adding to the overall success of U.S. e-commerce markets has been a high propensity for e-business development. In a recent study done by the Economist magazine 9s Economist Intelligence Unit (EIU), the United States was ranked as the world 9s most ce-business-ready d country. The study, which surveyed e- business indicators for 60 countries, compared the general business environment and Internet connectivity rates of various countries in order to determine their rankings. It concluded that those countries that were the most e-business ready would reap the benefits from the growing network economy while those countries at the bottom of the list would struggle with the digital age. Using a ten-point scale (with ten signifying the highest level of e-business readiness), the United States received an e-business readiness rating of 8.8. Several factors have kept e-commerce from realizing its full economic potential in the United States. Following the collapse of the dot-com market in 2000, the increase in the number of Americans using the Internet appeared to slow according to a Pew Research Center poll conducted in July. That study, however, showed that although fewer new customers were logging on to the Internet, those who already were connected were using it more frequently and more intensely. 28 One recent study shows that fewer people are turning to e-commerce sites for on- 26 cConsumer Spending Up 0.4 Percent. d Associated Press, July 31, 2001. 27 Economics And Statistics Administration U.S. Department Of Commerce. cDigital Economy 2000. d Office of Policy Development. June 2000, pp. 17. The Census retail e-commerce estimate was obtained by surveying goods retailers. 28 Harris, S. (2001, July 16). cDot-com collapse not affecting Internet use, study says. d The Industry Standard. 19 line shopping. A report published by the Markle Foundation in July revealed that more people are using the Internet as an information source rather than as an on- line shopping mall. The study, which surveyed a large sample of Internet executives, software engineers and 1,000 randomly selected adults nationwide, concluded that only 14 percent of people surveyed thought of the Internet as a shopping tool. 29 Despite any of its recent shortfalls, however, e-commerce in the United States is expected to grow and prosper in both the immediate future and the long term. As technological innovations continue to improve the speed, security and efficiency of the Internet, more businesses and consumers will realize the benefits of e-commerce. 29 Perine, K. (2001, July 10). cNet is still popular, but not to shop. d The Industry Standard. 20 CHAPTER 1 CHARTS AND GRAPHS Figure 1A. Figure 1B. Consultant Estimates of World-Wide E-Commerce In Billions of U.S. Dollars 19992003 Average Annual Growth e-Marketer98.41,24489 IDC111.41,31785 ActivMedia951,32493 Forrester Low Estimate* 701,800125 Forrester High Estimate* 1703,200108 Boston Consulting Group 1,0004,60046 Includes Internet-based EDI. Source: Cited in e-Marketer (2000) and Boston Consulting Group (1999). Growing Internet Connections, 1993-2000 0 10 20 30 40 50 60 70 80 Source: Internet Software Consortium, Internet Domain Survey, January 2000. In "Global Electronic Commerce." Internet Hosts 21 Figure 1C. Figure 1D. Consumers Engaged in E-Commerce Activities 0 20 40 60 80 100 120 140 160 180 199819992000200120022003 *Dates for 2000 through 2003 are projected figures, Source: Jupiter Communications, in the Industry Standard Online Buyers Internet Users 0 10 20 30 40 50 60 U.S. Households in Millions 199819992000200120022003 Source: The Yankee Group Number of U.S. Households with Narrowband and Broadband Access to the Internet Narrowband Broadband 22 Figure 1E. 0 1 2 3 4 5 6 7 8 9 Percent of U.S. Gross Domestic Product 1977198019851990199319981999 Source: U.S. Department of Commerce Economics and Statistics Administration. Estimates based on Bureau of Economic Analysis and Census data IT's Share of the U.S. Economy % of U.S. GDP 23 CHAPTER 2 B2C IN THE UNITED STATES IN 2000 THE EMERGENCE AND GROWTH OF B2C E-COMMERCE There is no question that the Internet has revolutionized retail and direct marketing throughout the world. In the B2C market, it has radically altered the classic business and economic paradigms by creating a faster, more efficient way for consumers to shop. On-line consumers can shop from their homes and have access to a wide variety of products, services and digital works from retailers all over the world. Much like ordering from a catalogue, B2C e-commerce allows a customer to view and order their desired product without having to go to the actual store. Unlike traditional catalogue shopping, however, e-commerce offers customers a great deal more information and choice about products, sometimes offering reviews from other customers who have bought the product or virtual, 3- D images that allow a customer to see what a product will look like from various angles. Moreover, B2C e-commerce lets a customer search for, order, and pay for a product directly in a matter of minutes. Considering the rapid growth and expansion of IT and the Internet, it is no surprise that B2C e-commerce in the United States has skyrocketed in recent years ( See Figure 2A ). Even the most conservative estimates from the U.S. Census Bureau show that between 1998 and 2000, total on-line retail sales in the U.S. more than tripled, rising from $7.7 billion in 1998 to $28 billion by 2000. 30 Other studies from reputable economic research groups offer estimates that are considerably higher. One, from the Forrester Research group, puts the total revenue from U.S. B2C e-commerce at about the $33 billion mark for 2000. 31 Still another from the Boston Consulting Group puts the figure close to the $45 billion mark. 32 In recent months, B2C e-commerce revenues have fluctuated. Consumers spent more than $3.9 billion on-line in May 2001, a 35.6 percent jump from the previous year. 33 That number, however, dipped to $3.2 billion in June. Furthermore, the average purchase per consumer has shifted multiple times in 2001, rising from $230 per customer in January to $265 per customer in May before falling back to $245 billion in June. 34 30 NUA Internet Surveys. (2001, February 16). cU.S. Census Bureau: B2C sales reached U.S.D28bn in 2000. d 31 Forrester Research, U.S. E-commerce 1998-2003. 32 NUA Internet Surveys. (2001, May 8). cBoston Consulting Group: B2C not doing so badly in U.S.. d 33 Forrester and Greenfield On-line. cU.S. B2C spending up in March. d On-line Retail Index, April 26, 2001. 34 Emarketer, The Quick eStats Newsletter (2001, July 30). cOn-line Retail Drops d. Issue No. 147. 24 The country 9s largest ISP, AOL-Time Warner, reported that its members spent a record $6.7 billion during the first three months of 2001, a 70 percent increase from the same three-month period in 2000. 35 Today, it is estimated that there are 24 million U.S. households actively buying on-line, accounting for 69 percent of all homes with Internet access and 23 percent of the total number of U.S. households altogether. It is also projected that by 2004, 58.5 million households will be on-line, with nearly 51 million expected to be making on-line purchases. 36 Perhaps most telling of all, however, are the results of a recent study by Nielsen/NetRatings and Harris Interactive, two Internet audience measurement services. The study shows that nearly half of all Americans, or about 100.2 million people, have made at least one e-commerce purchase on-line since the Internet was made available to the public. 37 One simple explanation for the remarkable growth of B2C e-commerce is that it has the potential to improve the lives of consumers by reducing transaction costs. Lower transaction costs, in turn, can increase the array of choices, expand the size of markets and eventually, through competition, improve the overall quality of existing goods and services for the consumer. DEMOGRAPHIC TRENDS IN THE USE B2C E-COMMERCE AMONG AMERICANS Demographic data shows that consumers are not taking part in e-commerce at a proportional rate. In the United States, as in most countries of the world, the three most important factors for determining e-commerce participation continue to be income, education and age. For example, in the U.S., the rate of Internet users among university graduates is about three times the level of those with a high school diploma or less. In terms of income, over half the population with annual household incomes above $50,000 access the Internet compared to less than 20 percent for those with annual household incomes of $20,000 or less ( See Figure 2B ). 38 And while the majority of Internet and e-commerce users in most other countries tend to be youths aged 18 and younger, young and middle-aged adults 4those ranging from 18 to 49 years old 4make up the largest percentage of on-line users and e-commerce shoppers in the United States. 39 According to a recent study by Jupiter Media Matrix, adults spent an average of 837 minutes on- line each month compared to only 264 minutes for the average teenager. Not surprisingly, the large majority of teens (89 percent) under 17 were found never to 35 Kapadia, R. (2001, May 24). cAOL-Time Warner members spent $6.7 billion on-line. d The Industry Standard. 36 Allen, D. (2001, July 11). cHow many U.S. households are buying on-line? d Emarketer.com. 37 Nielsen/NetRatings & Harris Interactive. cE-Commerce Pulse. d March 2001. 38 Coppel, 2000, pp. 9. 39 Coppel 2000, pp. 9-10. 25 have made an on-line purchase, primarily because most teenagers do not have credit cards which are often required for on-line purchases. 40 Though new youth- oriented on-line payment systems such as Rocket Cash and Visa Buxx were designed to offer youths the ability to make on-line purchases as if they were using a credit card (the two cards are actually cstored value d cards that require an up-front deposit), such payment methods have yet to catch on in the youth market. Instead, most teenage shoppers used the Internet to investigate products and cshop around d before actually going to traditional stores to make their actual purchases. 41 That left adults ages 18-49 4a demographic group that made up 76 percent of the on-line population in 2001 4responsible for close to 80 percent of B2C e-commerce transactions, according to demographic information provided by InsightExpress, a web research firm. 42 Other social and economic factors, such as gender and race, also played a role in determining the profile of American e-commerce shoppers. The difference in the percentage of women who made e-commerce purchases in the last quarter of 2000 (73 percent) and the number of men who made purchases (71 percent), may seem minor, except that it reflects a significant change in the profile of the typical e-commerce shopper 4young, relatively wealthy males 4that was considered the norm as little as five years ago. 43 According to Nielsen/NetRatings, Caucasians remain the largest ethnic group on-line, currently accounting for 87.5 million of America's home Internet users. However, the African American on-line population increased by 44 percent to 8.1 million between December 1999 and December 2000. Internet use among Hispanics also grew by 19 percent to more than 4.7 million people, while the number of Asian American Internet users reached 2.1 million, an increase of 18 percent. 44 The recent surge in the number of minorities using the Internet has been attributed by some to a decrease in PC prices and Internet service charges. On-line e-commerce purchases by minorities, however, still remain relatively low according to statistics. One study done by Cyber Dialogue, for example, reported that Hispanics are more likely than all on-line adults to click on ads, but that they are less likely to shop on-line and more likely to buy things offline after seeing them on-line. 45 40 Thorsberg, F. (2001, July 18). cAdults dominate net, even in summer. d PC World.com. The article quotes a study by Jupiter Media Matrix that was released in July 2001. 41 Thorsberg, F. cAdults dominate net, even in summer. d 42 Business Wire (2001, July 12). cGap between U.S. on-line population and general population narrowing quickly, says InsightExpress. d Yahoo Finance, Press release. 43 Gimenez 2001. 44 NUA Internet Surveys. (2001, February 27). cAfrican Americans lead in U.S. Internet growth. d 45 NUA Internet Surveys. (2001, July 17). cA third of U.S. Hispanics on-line. d 26 B2C E-COMMERCE IN THE SALE OF TECHNOLOGY PRODUCTS The demographic breakdown of B2C e-commerce customers has become increasingly important for retailers as they attempt to capitalize on the potential of e-commerce. Equally important as the question of who is making on-line purchases through e-commerce is the question of what goods and services those people are actually buying. Demographic information serves little purpose to on- line retailers if that information cannot be tied to a specific product that is desired by consumers. When the Internet first became widely available to the public several years ago, the bulk of e-commerce transactions involved the purchase of technology products such as computer hardware and software. Years later, technology products still rate among some of the most frequently purchased items on the Web, and the percentage of technology products purchased on-line relative to the total number of technology products sold in the U.S. is larger than for any other single product. According to the U.S. Census Bureau 9s cStatistical Abstract of the United States: 2000, d 24 percent of all PC sales (worth an estimated $5.1 billion) were made on-line, while 21 percent of all software sales (about $1.3 billion) were made on-line. 46 In addition to computers and technology products, the development of new web-exclusive cdot-com d companies, coupled with the widespread development of e-commerce sites among existing businesses, has created a new market for countless other products and services. Books, CDs and even cars are some of the many products that have seen e-commerce sales skyrocket in the past five to seven years, and their sales account for billions of dollars in revenue annually. TRAVEL Travel sites led the way in e-commerce earnings last year. In 2000, sales from on-line travel sites were estimated to be around $13.8 billion. 47 The overwhelming majority of those revenues came from on-line airline ticket sales, which accounted for six percent of all e-commerce revenue in the U.S. and 16 percent of all B2C revenue. 48 Two reasons why travel companies have benefited so highly from e- commerce is that the Internet offers consumers lower sales and marketing costs for items like airline tickets, while allowing for greater consumer choice and convenience. Rather than waiting on hold with an airline representative or paying service fees charged by travel agents, consumers can simply visit any of the countless discount airfare distributors and travel sites, such as Travelocity or 46 NUA Internet Surveys 2001. 47 The Boston Consulting Group, 2001. 48 NUA Internet Surveys. (May 2001). cIDC Research Study: On-line air ticket sales to soar. d 27 Orbitz, and secure their reservation in a matter of minutes. Passengers can select their travel dates, destinations, flight times, and even their seat assignments all at the click of a mouse. And rather than having to pick up their tickets at the airport or have them shipped by mail, many airlines and on-line travel companies offer e- ticketing options that allow customers to purchase and print their tickets using their home printers. In addition to lowering prices for customers, the financial benefits of on-line ticketing carry over to the airlines themselves. An evaluation of ticket sales by the Air Transport Association of America showed that processing costs for airline tickets varied dramatically depending on how they were purchased. In cases where travel agents booked tickets using computer reservation systems, the processing cost for tickets was $8.00. When travel agents booked directly with airlines, the cost was reduced to $6.00. However, when customers purchased electronic tickets themselves using airline reservation Web sites, the processing cost was only $1.00. 49 Overall, business and leisure travel spending has dropped in the past year, but significant demand for on-line travel remains. This year, on-line business and leisure travel booking is expected to bring in revenues of about $22 billion, according to a study by Jupiter Media Matrix. That same study suggests that on- line ticketing, a market once dominated by discount airfare sites that allow customers to compare flight fares for multiple airlines, is now subject to increasingly intense competition from airlines that have recently created their own on-line ticketing sites. The Jupiter study shows the number of people who visited airline Web sites increased by 26.1 percent between February 2000 and February 2001 (from 8.2 million people to 10.4 million). While discount airline agencies still attracted more visitors to their Web sites (approximately 15.4 million) in 2001, that was only a 7 percent increase from the previous year. 50 CONTENT Content has also seen a great deal of growth as the result of e-commerce. News from all over the world is now available on the Internet and is often free for consumers. In 1998, more than 2,700 newspapers had on-line editions, and over 60 percent of those were based in the United States. 51 In addition, all but three of the top 50 magazines in the country (as defined by paid circulation) had a Web presence in 1998. 52 Television, too, has garnered a significant Internet base, with 49 U.S. Department of Commerce, 1998, pp. 28. 50 Sharkey, J. (2001, April 4). Business Travel: booking on-line has real traction. d The New York Times web edition. The article previewed a study by Jupiter Media Matrix that was released on April 23, 2001. 51 Number of On-line Newspapers on the World Wide Web as of 3/17/98. http://www.mediainfo.com/ephome/npaper/nphtm/stats.htm 52 cTop magazines by paid circulation: six month averages ended June 30, 1997. d Figures compiled by the Audit Bureau of Circulations and BPA International figures. The three magazines 28 more than 800 television stations across the United States operating Web sites that same year. 53 Radio stations have also created sites that allow them to project their broadcasts via the Web, and a new crop of Web-exclusive content magazines and news sites were developed for the Internet. 54 The main reason why the Internet has become such a popular medium for displaying and retrieving content is that it is extremely inexpensive. Where the ability to distribute information and disseminate opinion once required access to a printing press, the Internet makes it possible for anyone to post their thoughts on Web sites where they can be read by millions of people. However, the greatest benefactors of this cost-effective method of information spreading are the newspapers and magazines that already have an audience of readers accessing their information through offline channels (i.e. magazines or printed newspapers). Posting content on-line eliminates the costs of ink and paper, and the required initial investment for Web servers and Internet software is relatively small. Once a story is posted on-line, there is virtually no difference in distribution cost whether the article is read by one or 100,000 people. What 9s more, since it is so easy to post content on-line, newspapers that normally only print a single edition each day can update their Web sites around the clock so that the news can be reported almost immediately after it happens. There is a downside to putting content on the Web which newspapers and other publishing entities must consider. Though it is relatively cheap and easy to make on-line content available to the public, it can often be difficult for on-line content businesses to generate adequate revenues. In order to build an audience of readers, content businesses must often forego any subscription fees for their service, instead relying entirely on the sale of advertisements to make any revenue. While recent studies suggest that many Americans are beginning to turn away from traditional forms of media (such as magazine and newspaper subscriptions) in favor of popular on-line content providers, many smaller content providers and new businesses are finding it harder and harder to compete for the limited revenues available in an already flooded on-line content market. 55 Nevertheless, the mere fact that those smaller companies, publications and individuals can post content on such a widely-viewed information medium has ushered in a new era of communication and education in the United States. that could not be located on the web were: the Cable Guide, American Rifleman and Home & Away. 53 Zollman, Peter M. cFirst profitable TV web site WCCO of Minneapolis. d E&P Interactive. October 17, 1997. 54 Maddox, K. cInformation still killer app on the Internet. d Advertising Age. October 6, 1997. 55 Content Intelligence, Lyra Research, July 2001. Published on eMarketer.com on July 26, 2001 in article titled, cNot the Net? Don 9t Need it. d Respondents were adult Internet users age 18 and over. 29 ADDITIONAL GOODS AND SERVICES Aside from the development of travel and content e-commerce sites, e- commerce has stimulated sales of innumerable other products and services. Books, apparel and toys have sizeable on-line markets, with a handful of large on- line retailers leading the way in sales. Amazon.com, for example, established a model for on-line book selling that quickly spawned several competitors. By 1999, 45 percent of on-line purchases by U.S. households were for books, making them the most popular goods being bought on-line. 56 The clothing and apparel market has also mirrored the success of companies like Amazon.com. Today, there are thousands of clothing and apparel companies with e-commerce sites on the Internet. Many are Web-exclusive companies, while others, such as JCPenney.com and GAP.com have stemmed from large cbrick and mortar stores d (traditional retail stores where customers can physically go to shop). According to June 2001 data from Nielsen/NetRatings, traditional stores have been successful in bringing their offline customers on-line. Walmart.com leads the way with more than 2 million unique visitors, a 133 percent increase since June 2000. In second place is JCPenney 9s site, which also logged a total of 2 million unique visitors, a 34 percent increase over the previous year. Kmart, Target and Sears also experienced significant increases in the number of customers visiting their Web sites. 57 Even cars, which require a far greater investment than typical retail purchases, have managed to increase their sales through e-commerce. This year it is estimated that more than 20 percent of all new car purchases in the United States will use the Internet. 58 Because the costs of supporting a virtual store are far lower than a physical store, most retailers can benefit from setting up electronic commerce sites. Services will also benefit from e-commerce. In the financial

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