Electronic Commerce

ELECTRONIC COMMERCE

Ninth Edition

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ELECTRONIC COMMERCE

Ninth Edition

Gary P. Schneider, Ph.D., CPA

Quinnipiac University

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

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Electronic Commerce, Ninth Edition

Gary P. Schneider, Ph.D., CPA

VP/Editorial Director: Jack Calhoun

Publisher: Joe Sabatino

Senior Acquisitions Editor:

Charles McCormick, Jr.

Senior Product Manager: Kate Mason

Editorial Assistant: Nora Heink

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Manufacturing Coordinator: Julio Esperas

Marketing Manager: Adam Marsh

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Libby Shipp

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Cover Designer: Craig Ramsdell

Cover Image: iStock Photo

Compositor: Pre-Press PMG

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Library of Congress Control Number: 2009939853

Student Edition

ISBN-13: 978-0-538-46924-1

ISBN-10: 0-538-46924-2

Instructor Edition

ISBN-13: 978-0-538-47139-8

ISBN-10: 0-538-47139-5

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BRIEF CONTENTS

Preface xvii

Part 1: Introduction

Chapter 1

Introduction to Electronic Commerce 2

Chapter 2

Technology Infrastructure: The Internet and the World Wide Web 53

Part 2: Business Strategies for Electronic Commerce

Chapter 3

Selling on the Web: Revenue Models and Building a Web Presence 108

Chapter 4

Marketing on the Web 163

Chapter 5

Business-to-Business Activities: Improving Efficiency and Reducing Costs 217

Chapter 6

Social Networking, Mobile Commerce, and Online Auctions 261

Chapter 7

The Environment of Electronic Commerce: Legal, Ethical, and Tax Issues 299

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Part 3: Technologies for Electronic Commerce

Chapter 8

Web Server Hardware and Software 352

Chapter 9

Electronic Commerce Software 395

Chapter 10

Electronic Commerce Security 437

Chapter 11

Payment Systems for Electronic Commerce 493

Part 4: Integration

Chapter 12

Planning for Electronic Commerce 530

Glossary 561

Index 597

vi Brief Contents

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Preface xvii

Part 1: Introduction

Chapter 1 Introduction to Electronic Commerce 2

Electronic Commerce: The Second Wave 4

Electronic Commerce and Electronic Business 4

Categories of Electronic Commerce 4

The Development and Growth of Electronic Commerce 8

The Dot-Com Boom, Bust, and Rebirth 9

The Second Wave of Electronic Commerce 10

Business Models, Revenue Models, and Business Processes 14

Focus on Specific Business Processes 14

Role of Merchandising 15

Product/Process Suitability to Electronic Commerce 15

Advantages and Disadvantages of Electronic Commerce 17

Advantages of Electronic Commerce 17

Disadvantages of Electronic Commerce 19

Economic Forces and Electronic Commerce 21

Transaction Costs 22

Markets and Hierarchies 24

Using Electronic Commerce to Reduce Transaction Costs 25

Network Economic Structures 26

Network Effects 27

Using Electronic Commerce to Create Network Effects 28

Identifying Electronic Commerce Opportunities 28

Strategic Business Unit Value Chains 28

Industry Value Chains 30

SWOT Analysis: Evaluating Business Unit Opportunities 32

International Nature of Electronic Commerce 34

Trust Issues on the Web 34

Language Issues 35

Cultural Issues 36

Culture and Government 38

Infrastructure Issues 40

Summary 43

Key Terms 43

Review Questions 44

Exercises 44

Cases 45

For Further Study and Research 49

TABLE OF CONTENTS

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Chapter 2 Technology Infrastructure: The Internet and the

World Wide Web 53

The Internet and the World Wide Web 55

Origins of the Internet 56

New Uses for the Internet 56

Commercial Use of the Internet 57

Growth of the Internet 58

Emergence of the World Wide Web 59

Packet-Switched Networks 62

Routing Packets 62

Internet Protocols 64

TCP/IP 64

IP Addressing 65

Domain Names 66

Web Page Request and Delivery Protocols 68

Electronic Mail Protocols 69

Unsolicited Commercial E-Mail (UCE, Spam) 70

Markup Languages and the Web 71

Markup Languages 72

Hypertext Markup Language 72

Extensible Markup Language (XML) 79

HTML and XML Editors 84

Intranets and Extranets 85

Public and Private Networks 85

Virtual Private Network (VPN) 86

Internet Connection Options 86

Connectivity Overview 87

Voice-Grade Telephone Connections 87

Broadband Connections 88

Leased-Line Connections 89

Wireless Connections 90

Internet2 and the Semantic Web 94

Summary 96

Key Terms 97

Review Questions 99

Exercises 99

Cases 101

For Further Study and Research 103

Part 2: Business Strategies for Electronic Commerce

Chapter 3 Selling on the Web: Revenue Models and Building a Web Presence 108

Revenue Models 110

Web Catalog Revenue Models 110

Digital Content Subscription Revenue Models 117

Advertising-Supported Revenue Models 118

Advertising-Subscription Mixed Revenue Models 123

Fee-for-Transaction Revenue Models 125

viii Table of Contents

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Fee-for-Service Revenue Models 133

Free for Many, Fee for a Few 134

Revenue Models in Transition 135

Subscription to Advertising-Supported Model 135

Advertising-Supported to Advertising-Subscription Mixed Model 135

Advertising-Supported to Fee-for-Services Model 136

Advertising-Supported to Subscription Model 136

Multiple Transitions 137

Revenue Strategy Issues 138

Channel Conflict and Cannibalization 138

Strategic Alliances 139

Creating an Effective Web Presence 139

Identifying Web Presence Goals 140

Web Site Usability 144

How the Web Is Different 144

Meeting the Needs of Web Site Visitors 145

Trust and Loyalty 147

Rating Electronic Commerce Web Sites 148

Usability Testing 148

Customer-Centric Web Site Design 149

Connecting with Customers 150

The Nature of Communication on the Web 150

Summary 154

Key Terms 154

Review Questions 155

Exercises 155

Cases 156

For Further Study and Research 159

Chapter 4 Marketing on the Web 163

Web Marketing Strategies 165

Product-Based Marketing Strategies 166

Customer-Based Marketing Strategies 167

Communicating with Different Market Segments 168

Trust, Complexity, and Media Choice 169

Market Segmentation 171

Market Segmentation on the Web 173

Offering Customers a Choice on the Web 173

Beyond Market Segmentation: Customer Behavior and Relationship Intensity 174

Segmentation Using Customer Behavior 174

Customer Relationship Intensity and Life-Cycle Segmentation 177

Acquisition, Conversion, and Retention of Customers 179

Customer Acquisition, Conversion, and Retention: The Funnel Model 180

Advertising On The Web 181

Banner Ads 182

Text Ads 184

Other Web Ad Formats 185

Site Sponsorships 186

Online Advertising Cost and Effectiveness 187

Effectiveness of Online Advertising 189

Table of Contents ix

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E-Mail Marketing 189

Permission Marketing 190

Combining Content and Advertising 190

Outsourcing E-Mail Processing 191

Technology-Enabled Customer Relationship Management 191

CRM as a Source of Value in the Marketspace 192

Creating and Maintaining Brands on the Web 194

Elements of Branding 195

Emotional Branding vs. Rational Branding 196

Brand Leveraging Strategies 196

Brand Consolidation Strategies 196

Costs of Branding 197

Affiliate Marketing Strategies 197

Viral Marketing Strategies 198

Search Engine Positioning and Domain Names 199

Search Engines and Web Directories 199

Paid Search Engine Inclusion and Placement 200

Web Site Naming Issues 204

Summary 207

Key Terms 207

Review Questions 209

Exercises 209

Cases 210

For Further Study and Research 214

Chapter 5 Business-to-Business Activities: Improving Efficiency

and Reducing Costs 217

Purchasing, Logistics, and Support Activities 219

Purchasing Activities 220

Direct vs. Indirect Materials Purchasing 222

Logistics Activities 224

Support Activities 225

E-Government 226

Network Model of Economic Organization in Purchasing 228

Electronic Data Interchange 229

Early Business Information Interchange Efforts 229

Emergence of Broader EDI Standards 230

How EDI Works 232

Value-Added Networks 236

EDI Payments 239

EDI on the Internet 239

Supply Chain Management Using Internet Technologies 240

Value Creation in the Supply Chain 240

Increasing Supply Chain Efficiencies 242

Using Materials-Tracking Technologies with EDI and Electronic Commerce 243

Creating an Ultimate Consumer Orientation in the Supply Chain 246

Building and Maintaining Trust in the Supply Chain 246

Electronic Marketplaces and Portals 247

Independent Industry Marketplaces 247

Private Stores and Customer Portals 249

x Table of Contents

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Private Company Marketplaces 249

Industry Consortia-Sponsored Marketplaces 250

Summary 252

Key Terms 252

Review Questions 253

Exercises 253

Cases 254

For Further Study and Research 257

Chapter 6 Social Networking, Mobile Commerce, and Online Auctions 261

From Virtual Communities to Social Networks 262

Virtual Communities 263

Early Web Communities 263

Social Networking in the Second Wave of Online Communities 264

Revenue Models for Social Networking Sites 268

Mobile Commerce 271

Mobile Operating Systems and Applications 271

The Future of Mobile Commerce 273

Online Auctions 274

Auction Basics 274

Online Auctions and Related Businesses 278

Auction-Related Services 286

Summary 290

Key Terms 290

Review Questions 291

Exercises 292

Cases 292

For Further Study and Research 295

Chapter 7 The Environment of Electronic Commerce: Legal, Ethical,

and Tax Issues 299

The Legal Environment of Electronic Commerce 301

Borders and Jurisdiction 301

Jurisdiction on the Internet 305

Conflict of Laws 308

Contracting and Contract Enforcement in Electronic Commerce 308

Use and Protection of Intellectual Property in Online Business 315

Copyright Issues 315

Patent Issues 318

Trademark Issues 319

Domain Names and Intellectual Property Issues 319

Protecting Intellectual Property Online 321

Defamation 322

Deceptive Trade Practices 323

Advertising Regulation 323

Online Crime, Terrorism, and Warfare 325

Online Crime 325

Online Warfare and Terrorism 328

Table of Contents xi

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Ethical Issues 328

Ethics and Online Business Practices 329

Privacy Rights and Obligations 330

Communications with Children 334

Taxation and Electronic Commerce 336

Nexus 336

U.S. Income Taxes 336

U.S. State Sales Taxes 337

Import Tariffs 338

European Union Value Added Taxes 339

Summary 340

Key Terms 341

Review Questions 342

Exercises 342

Cases 343

For Further Study and Research 346

Part 3: Technologies for Electronic Commerce

Chapter 8 Web Server Hardware and Software 352

Web Server Basics 354

Dynamic Content Generation 355

Various Meanings of “Server” 357

Web Client/Server Architectures 357

Software for Web Servers 360

Operating Systems for Web Servers 360

Web Server Software 361

Finding Web Server Software Information 362

Electronic Mail (E-Mail) 363

E-Mail Benefits 363

E-Mail Drawbacks 363

Spam 364

Solutions to the Spam Problem 365

Web Site Utility Programs 375

Finger and Ping Utilities 375

Tracert and Other Route-Tracing Programs 375

Telnet and FTP Utilities 377

Indexing and Searching Utility Programs 377

Data Analysis Software 378

Link-Checking Utilities 378

Remote Server Administration 379

Web Server Hardware 379

Server Computers 379

Web Server Performance Evaluation 380

Web Server Hardware Architectures 380

Summary 385

Key Terms 385

Review Questions 386

xii Table of Contents

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Exercises 387

Cases 387

For Further Study and Research 391

Chapter 9 Electronic Commerce Software 395

Web Hosting Alternatives 397

Basic Functions of Electronic Commerce Software 399

Catalog Display 400

Shopping Cart 402

Transaction Processing 407

Advanced Functions of Electronic Commerce Software 408

Databases 408

Middleware 409

Enterprise Application Integration 409

Integration with ERP Systems 410

Web Services 411

Electronic Commerce Software for Small and Midsize Companies 415

Basic Commerce Service Providers 415

Mall-Style Commerce Service Providers 416

Estimating Operating Expenses for a Small Web Business 417

Electronic Commerce Software for Midsize to Large Businesses 418

Web Site Development Tools 419

Electronic Commerce Software for Large Businesses 421

Enterprise-Class Electronic Commerce Software 421

Customer Relationship Management Software 423

Supply Chain Management Software 425

Content Management Software 426

Knowledge Management Software 426

Summary 428

Key Terms 428

Review Questions 429

Exercises 429

Cases 431

For Further Study and Research 433

Chapter 10 Electronic Commerce Security 437

Online Security Issues Overview 439

Computers and Security: A Brief History 439

Computer Security and Risk Management 440

Elements of Computer Security 441

Security Policy and Integrated Security 442

Security for Client Computers 444

Cookies 444

Web Bugs 446

Active Content 446

Java Applets 447

JavaScript 448

ActiveX Controls 449

Graphics and Plug-Ins 449

Table of Contents xiii

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Viruses, Worms, and Antivirus Software 450

Digital Certificates 455

Steganography 458

Physical Security for Clients 459

Communication Channel Security 459

Secrecy Threats 460

Integrity Threats 462

Necessity Threats 463

Threats to the Physical Security of Internet Communications Channels 463

Threats to Wireless Networks 464

Encryption Solutions 465

Ensuring Transaction Integrity with Hash Functions 472

Ensuring Transaction Integrity with Digital Signatures 473

Security for Server Computers 474

Web Server Threats 474

Database Threats 475

Other Programming Threats 475

Threats to the Physical Security of Web Servers 476

Access Control and Authentication 478

Firewalls 479

Organizations that Promote Computer Security 481

CERT 481

Other Organizations 482

Computer Forensics and Ethical Hacking 482

Summary 483

Key Terms 484

Review Questions 485

Exercises 486

Cases 486

For Further Study and Research 488

Chapter 11 Payment Systems for Electronic Commerce 493

Online Payment Basics 495

Payment Cards 497

Advantages and Disadvantages of Payment Cards 498

Payment Acceptance and Processing 499

Electronic Cash 502

Micropayments and Small Payments 503

Privacy and Security of Electronic Cash 504

Holding Electronic Cash: Online and Offline Cash 504

Advantages and Disadvantages of Electronic Cash 505

Electronic Cash Systems 506

Electronic Wallets 509

Microsoft Windows Live ID 510

Yahoo! Wallet 510

Stored-Value Cards 511

Magnetic Strip Cards 511

Smart Cards 511

Internet Technologies and the Banking Industry 513

Check Processing 513

Mobile Banking 515

xiv Table of Contents

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