The first three levels of the hierarchical framework are the technological infrastructure of E-commerce. The foundation is the intermeshed network of wide-area telecommunications networks, extended by the metropolitan and local-area nets. Deploying both guided (such as the fiber-optic and coaxial cable) and wireless transmission media (such as the satellite microwave and the radio) under computerized control, these networks span the globe. Thus, E-commerce is inherently global. Yet there are, and will persist, major differences in national and regional development of the infrastructure, as well as in the national governance of telecommunications, with government monopolies in a number of countries limiting the development and imposing high telecommunications costs. In Europe and, to a degree, in Latin America a movement toward privatization has produced, or is expected to produce, beneficial effects on prices and services. In salutary cases of government intervention, such as that of Singapore, national development programs support the development of E-commerce. The inadequacies of the telecommunications infrastructure in many developing countries make it impossible for them to partake of the benefits of E-commerce and perpetuate their underdevelopment (Dutta, 1997).

The telecommunications capabilities are delivered for business use through two essential means. The older order is that of proprietary value-added networks (VANs), established by vendors to deliver services over and above those of common carriers that are licensed by governments to provide communications services to the public. The new order is that of the Internet, which has become the principal vehicle of E-commerce. The history of the almost organic emergence of the today’s Internet from its U.S. Department of Defense-sponsored origins as a network for research support is well known. The salient features, conditioned by the development trajectory of this de facto global information infrastructure are: easy and relatively inexpensive public access in the more developed countries of the world; absence of centralized control and the consequent organic growth combined with the limited security, reliability, and bandwidth; reliance on an open and simple packet-switching protocol suite (TCP/IP), and thus the ease of linking in additional networks with routers, with the standardization managed by the Internet Society and its subsidiary bodies, such as the Internet Architecture Board.

The Internet has become the driver for E-commerce thanks to the invention of the World Wide Web as a principal means of sharing information and of the browser as the universal front end. The Web has turned the Internet into a global, distributed, and hyperlinked multimedia database. By relying on the client/server architecture, the Web further builds on the decentralized model of the Internet. It is easy to join and it is easy to organize an information space for a small or a very large group. Internet communities can carve out and shape the space that suits their purposes (Armstrong & Hagel, 1996). The Web can serve as a medium for presentation, distribution, and use-based sale of passive or active (in the sense of software) information objects. Specialized platform-independent programming languages, such as Java, facilitate making the electronic pages of the Web into a source of active software objects. It needs to be seen clearly that, as a separate and software-based layer, the Web can and may be replaced in the future by an information management mechanism that would better meet the demands of very-large-scale use of the global network of networks.

The meta-level of services consists of provision of secure messaging and of enabling services for E-commerce. Taken together, these services provide the business infrastructure for E-commerce.

As opposed to the traditional, EDI-based, E-commerce relying on secured private VANs, the public communication utility of new E-commerce is based on the TCP/IP protocol suite that was developed to share information freely rather than to underlie a marketplace. The fundamental security flaws in the Internet infrastructure include the ability of any computer that lies on the path of a communication between two parties to eavesdrop (and potentially be a tool in stealing information such as a credit card number), the absence of authentication of the communicating parties (making impersonation at either end possible), and no precautions against altering the contents of message’s packets (Bhimani, 1996).

Secure messaging for business transaction processing has to feature the following attributes: confidentiality (generally accomplished through encryption, but secure key logistics remains a problem even in the public key systems); message integrity (achieved with hash totals or similar tokens accompanying the message); authentication of both parties (generally via a digital signature and possession of a private key); and nonrepudiation by either party (achieved through a combination of the means mentioned before). Some transactions require additional attributes; thus, generation of electronic cash requires anonymity of the receiving party (accomplished with a blinding factor during the encryption).

Considering the limitations of the Internet’s protocol suite, the attributes of secure messaging have to be provided by other means, and the organization’s own information systems are generally separated from the public Internet by a firewall system that screens out unauthorized traffic. A number of secure protocols are being actively considered for various levels of communication, from the network to applications. A notable example is the Secure Electronic Transaction (SET) protocol layer, developed by the Visa and MasterCard organizations to secure credit card transactions over the Internet, which relies on digital certificates to be issued to cardholders and presented by them when making a purchase. At this time, a uniform secure environment has not been created and the perceived lack of security remains a fundamental obstacle to E-commerce. In particular, by often making it necessary to separate the settlement from the informational and contracting steps in an acquisition, the security concern is a serious obstacle to consumer-oriented E-commerce.

The principal messaging services include EDI, electronic funds transfer (EFT), and E-mail; voice messaging and telefacsimile are also available and have high potential as business initiatives when placed on the Internet. The basic motivation for implementing EDI is economy. Thus, corporations spend on the average about $150 to process a paper order, but only about $25 to process an electronic order (Verity, 1996). Beyond economy, companies seek strategic benefits, such as a compressed business cycle and intensified relationships with business partners. Time-based competitive moves of quick-response retailing by "pulling in" demanded products from the supply chain and just-in-time manufacturing with close-to-zero inventories are enabled by EDI.

Traditional EDI relies largely on the hub-and-spoke model, with a dominant business partner (the hub) gradually surrounding itself with the spokes of its supplier, customer, and collaborator firms. This form of EDI is still largely VAN-based, with proprietary standards and relatively high costs of bundled-in services. While industry standards have emerged in such segments as grocery or railroads, the international EDIFACT standard has found only a limited measure of adoption. At this time, many leading companies are moving their EDI communications to the Internet, seeking the benefits of lower costs and seamless global connectivity. This move will have important consequences for industries and entire economies, even more so when combined with a semantically enriched open-EDI. Such open-EDI will offer public international standards for common business scenarios. The objective is to interact spontaneously with a new trading partner, without a prior agreement on a common protocol of interaction. Multilateral interactions may be facilitated as well. Global business-to-business E-commerce is expected to benefit hugely by moving forward from the simple transaction sets of the traditional EDI, which are basically electronic equivalents of paper forms, to far more elaborate, validated, and customizable business scenarios of open-EDI ("The Open-edi," 1996; Bons, Lee & Wagenaar, 1998).

A form of messaging is also a special type of secure EDI used in electronic funds transfer systems (EFTS) that enable interbank transfers of funds in the form of information. Electronic mail (E-mail) has become a ubiquitous means of communication and organizational integration, often with profound organizational effects². E-mail remains the most popular use of the Internet. It may be expected to remain such, incorporating the transmission of multimedia documents and combined with such enabling services as, for example, negotiation tools and smart software agents.

The most turbulent technological and entrepreneurial activity is taking place at the level of enabling services. These services facilitate searches for business information as well as for business partners, negotiating and maintaining a business relationship, as well as consummating business transactions by financial settlements and other information-equivalent transfers. This E-commerce level includes (or will include) digital libraries (Fox et al, 1995), electronic catalogs and directories, smart agents helping to seek out a desired good or service, electronic authentication services helping to establish the bona fides of a partner, copyright-protection services (perhaps relying on digital watermarks), traffic auditing to establish the worth of an electronic site for the advertising purposes (the dominant revenue source for many Web sites that do have significant revenue), smart-card systems that enable financial and information transfers of various kinds, and a variety of other services that are being invented and introduced (Kalakota & Whinston, 1996).

In particular, the development of electronic money (E-money) is the subject of much work and popular excitement. Called reengineering of money by some (Clemons, Croson, & Weber, 1996-97), it may be expected to further limit the role of cash in the economy. E-money in its various forms is expected to become a substitute for credit (e.g., credit cards) and debit instruments (e.g., checks or debit cards), or for bank notes and coins that offer anonymity to the owner (within certain legal limits in the United States) at the considerable expense of handling to commercial organizations. At present, the money supply of the United States surpasses $4 trillion, but only one-tenth of that, $400 billion, exists in physical form of bills and coins. Moreover, two-thirds of even that amount has been taken out of circulation, largely in the form of $100 bills, by various agents (many of them abroad) uninterested in banking (Gleick, 1996). Thus, most of the currency extant today in the United States and other developed countries already exists only as magnetized domains in the secondary storage of a computer system. Many actors other than buyers and sellers have a vested interest in the course the development of E-money will take; these include the vendors of the new instruments, but also the banks of issue, regulators, and the agencies entrusted with the national security and law enforcement.

Products and structures of E-commerce cover its three categories: consumer-oriented commerce, business-to-business commerce, and intraorganizational business. All three are experiencing vigorous developments, albeit with differing economic outcomes at this time.

The most highly touted applications of E-commerce are consumer-oriented. They include remote (or home) shopping, banking, and stock brokerage, accompanied by (and in some cases, so far paid by) on-line advertising. The intended audience for this market has not reached a critical mass, although the immense potential of this segment is driving much of the interest in E-commerce, as expressed, for example, by the stock-market capitalization of a number of companies that address it. The fact that the relatively successful vendors are so well known is a testimony to their dearth. These vendors include Amazon.com, a bookseller with huge, since virtual, inventory of 2.5 million titles, an impressive market capitalization, and a large following that has grown just in the third quarter of 1997 by 54 percent (Carvajal, 1998) . CDnow and N2K are reportedly profitable sellers of recorded music and already public companies with very high valuations relative to their sales. Virtual Vineyards, a virtual storefront selling wine and gourmet foods, and SportSite.com that sells sports equipment and apparel, are other well-known (yet limited-size) examples. A large number of traditional vendors derive incremental revenues from E-commerce. In many cases, purchase over the Internet is a substitute for a purchase in a physical outlet. This cannibalization belies its name by its desirability. Thus, Dell Computers, for example, realizes very significant savings by selling to consumers over the Web $3 million worth a day of personal computing hardware and software³. A number of firms provide remote financial services. Security First National Bank has successfully introduced branch-less banking over the Internet (Clark & Lee, 1998) and has been acquired by the Royal Bank of Canada at a valuation significantly exceeding that suggested by $54.7 million in deposits accumulated by Security First. Lombard Brokerage (now Discover Brokerage Direct) was the most notable pioneer of offering securities on the Web, along with a variety of free information services. For a chance of success in the consumer marketplace, the firm must identify an actual customer need and the firm’s relationship with the customer must build on the key feature of the medium, namely interactivity (Hoffman, Novak, & Chatterjee, 1996).

The other principal consumer-oriented segment is infotainment-on-demand. The segment builds on the Web as a new communication medium, whose nature is as yet being explored. Infotainment ranges from education, through the delivery of specialized information, on to entertainment. Many educational offerings can respond to just-in-time, specialized requirements. Some of the educational programs and courses may be expected to bear appropriate accreditation and degrees; virtual universities are being formed and some see the traditional university model threatened. The segment also includes such content sites as webzines (such as HotWired and Microsoft’s Slate, both not viable commercially at this time) as well as electronic newspapers and books, access to analytical reports, expert opinions, and to the experts themselves. Legitimation of expertise, packaging of knowledge and information from several sources, preservation of intellectual property, and use-based payments (including micropayments for the chunks of information bundled together) are issues to be resolved through further research, development, and experimentation in the marketplace. The entertainment side, overlapping with the informational one, includes several categories of webzines and electronic books, as well as video-on-demand, virtual-reality experiences on demand, and games that can provide an engrossing and continuing experience to multiple players. The sector known as adult entertainment is reputed to be the most profitable aspect of infotainment (Weber, 1997).

The consumer-oriented category is expected to expand in many ways, only some of which can be foreseen. For example, electronic benefit systems can be used to distribute government transfers over the Internet, which can then be employed for direct payments; the multimedia capability can redefine the notion of a magazine by including, for example, film clips; a variety of electronic interactions with "live" creators of infotainment may be expected to complement their creations.

The business-to-business supplier-customer linkages maintained with EDI are the best established category of E-commerce application. This category will be vastly expanded by the growth of new E-commerce, leading in many cases to interorganizational supply-chain management, which we shall discuss below. The business-to-business commerce is facilitated by consortia such as CommerceNet and by firms that organize industrial marketplaces on the Web, such as Industry.Net. Total business-to-business purchases made on the Web in the United States in 1997 are estimated at $10 billion by International Data Corporation ("Commerce by numbers," 1998).

The fastest growing area on this level of E-commerce is the intranet- and extranet-based information sharing and collaboration. Intranets support the opening of the organizational databases and data warehouses within the firm, dissemination of information on Web pages, as well as geography-independent team-oriented collaboration within the corporate firewalls. A typical intranet, employed by Morgan Stanley, displays on the globally accessible Web site automatically generated up-to-the-minute data summarizing the company’s investment positions. More active uses of intranets are being developed and include on-line collaboration on common projects by working on electronic documents and communicating via videoconferencing. Thus, Ford Motor Company has linked with an intranet its design centers in the United States, Asia, and Europe, enabling the engineers to develop on-line electronic prototypes of automobiles and their components. The intranet-based use of the Internet facilities may lead to spectacular returns on investment ("The Chief Executive," 1998).. An extranet accessible to Harley-Davidson’s dealers enables them to file warranty claims, check recall status, and submit financial statements to the motorcycle manufacturer, with the capability to order parts and accessories being implemented. It has become an inexpensive means of converting paperwork to electronic communications (Kalin, 1998).

At the apex of the E-commerce framework are the electronic marketplaces and electronic hierarchies that facilitate business relationships and transactions between firms. Electronic marketplaces are created to facilitate transactions over telecommunications networks between multiple buyers and multiple suppliers. Electronic hierarchies are long-lasting supplier-customer relationships between firms, maintained with telecommunications networks and coordinated largely by management, rather than by the market forces.

Market-based coordination can be classified into four categories (Garbade, 1982): direct-search markets (where the future partners seek out one another), brokered markets (with the brokers assuming the search function), dealer markets (with the dealers holding inventories against which they buy and sell), and auction markets. Industry.Net is an example of an established direct-search market for industrial products; OnSale provides an electronic auction market. Lee & Clark (1996) offer further analysis of several electronic marketplaces.

The formation of interorganizational electronic hierarchies is being supported by the fashioning of integrated supply chains, promoting just-in-time manufacturing, pulled by the actual customer orders. The partners’ value chains are integrated to a significant extent with the use of information systems and telecommunications networks. The visibility of stocking levels throughout the supply chain helps to minimize inventories and to reduce working capital. This mode of operation imposes tight constraints on intra- and interorganizational coordination, in which intranets, extranets, and the Internet in general may be expected to play a significant role. Indeed, the reliance by all three on the same fundamental technology package is vital for the integration.. By securely linking its subnetworks with those of business partners in an extranet that relies on the Internet connectivity and software, the enterprise and the involved partners can coordinate product development, production, and delivery. Heineken U.S.A., for example, uses its HOPS extranet to collaborate with the distributors and suppliers on scheduling, forecasting, and just-in-time replenishment of supplies, consistently moving towards an electronically integrated supply chain. New intra- and interorganizational structures are necessary to take advantage of the Internet technologies in supply-chain management.

The hierarchies of individual firms and the open marketplaces may be considered the two ends of the continuum of business governance, with electronic hierarchies situated in the middle. As the next section elaborates, the spreading of new E-commerce will alter the comparative advantage between the hierarchy-based and market-based coordination, and among the various ways of structuring the market. Many and serious questions about the effects of E-commerce on business governance remain open.

The business, societal, and research problematic of E-commerce spans an immense range, which reflects the depth of change being caused by this rapidly expanding mode of doing business (any business, including that of governing and educating). It is, of course, possible here to point only to some nodal impacts and issues within the hierarchical framework we have discussed. In keeping with the nature of our framework, we are discussing the problematic at the macro level.

In discussing the issues of E-commerce, we shall move up the hierarchy of Table 1, from the infrastructure to the business governance. The following aspects of E-commerce will be discussed: the limitations and asymmetries of the technological infrastructure of the Internet, integrating the transaction process in consumer-oriented E-commerce by incorporating the payment stage into it, building the consumer marketplace, moving products and stages of supply chains into marketspace. changes in business governance, and the new intermediation in the electronic marketplaces

Although we should be wary of a technology-centered, "field-of-dreams" view of success factors, an appropriate technological infrastructure is necessary for the development of E-commerce. The infrastructure of the Internet, which acts as the current global information infrastructure, has acknowledged problems. The issues turn on the provision of sufficient bandwidth for the surging use that is also moving to multimedia transmissions, and on the problems fostered by the decentralized nature of the Internet.

The bandwidth of the telecommunication infrastructure is considered a serious limitation by many analysts. The current Internet 2.0 backbone operates at 45-155 megabits per second, enabling the World Wide Web (Bell and Gemell, 1996), but not sufficient for the massive use of video-on-demand, for example. However, the poor performance experienced by users often stems from the limitations of the equipment and of the connectivity of their access providers, rather than from the limited backbone bandwidth. Significant asymmetries exist between the bandwidth actually available to larger organizations and that available to small businesses and homes (where the consumers, telecommuters, and increasing numbers of very small businesses are). Solving the last problem, known as the "last mile problem," or "fiber to the home," outside urban areas by rewiring is prohibitively expensive. The mitigating factor is the increasing use of high-bandwidth T-1 lines, and of the newer and cheaper Digital Subscriber Line (DSL) technology. The issues pale in comparison with limitations of the infrastructure in a number of (slowly) developing countries. Fifty countries, some of them admittedly small island nations, that bring up the rear of the host survey by Market Wizards as of January 1998 currently run nine host machines out of the total of about 30 million Internet hosts ("Distribution," 1998).

Market-oriented solutions, in some cases stimulated by a government intervention, are in view in the developed and rapidly developing countries. A number of U.S. corporations are acquiring the requisite bandwidth on parallel for-profit networks with premium high-bandwidth links, using services of companies that offer connections via direct leased circuits (such as Digital Island in Oahu, Hawaii), and are accessing commercial duplicate Web sites. The trend to the provision of premium high-bandwidth services with multi-tier pricing may be expected to expand greatly. This will split the issue of public access from that of open systems. As the provision of premium infrastructural services accelerates and as the data traffic begins to dominate the voice, pressures will develop on the providers of local telecommunications services, generally sheltered from competition until now. New and powerful entrants appear in the marketplace to compete for the provision of the "Web tone" – instant and wide-bandwidth connection to the Internet (Woolley, 1998).

The future development of the multimedia Internet 3.0 backbone that would be able to carry simultaneously data, video, and voice communications is a widely open issue. Aside from the financial risk and technological problems, public policy questions of access will arise. Regulatory changes may be expected to attempt to facilitate funding.

As the use of its facilities expands exponentially, Internet protocols require updating as well. In a longer view, the shortage of Internet addresses in the current IPv4 protocol that relies on a 32-bit address system is considered a serious limitation as we are moving into the era of Internet-connected appliances, from personal digital assistants to cars. The proposed IPv6 protocol, with its 128-bit addressing, has not yet been adopted by the makers of the Internet equipment, such as routers.

A number of limitations are apparent on the Web level of the infrastructure - and they do translate into business problems. Many of the integration solutions are provided by middleware, systems placed between the client and the server software. Because of the sessionless nature of the hypertext transfer protocol (HTTP), you would need to identify yourself to every electronic page of a site during a single session in order to do business. There is no built-in way to maintain a continuity of a connection - and perhaps make another offer next time the caller dials in. This clearly highlights business effects of technological limitations - and their unintended consequences, which in this case is the attack on privacy. "Dropping a cookie" into a caller’s system is a way around this limitation, but is invasive of the user’s privacy. Stored as a text file by the accessed Web server in the user’s computer system, a cookie identifies the user, along with the user’s preferences and past purchases, to the server during future accesses.

Major infrastructural questions remain: Assuming that the Internet will further evolve as the global information infrastructure, will it remain fundamentally decentralized? How do we create a protected, secure, and reliable business environment in a decentralized infrastructure? Has the time come for a more transparent organizational structure in Internet management? Is the limited bandwidth a real barrier for the consumer, or are there other and more lasting forces at work? What infrastructure can be provided to enhance the ability of vendors to differentiate their offerings and the ability of customers to compare them? (Baty & Lee, 1995, present one such attempt)

Consumer-oriented E-commerce is significantly lagging behind its business-to-business segment and current estimates place it at less than 10 percent of the total volume. The settlement phase of transacting on the Web is often pointed to as one of the limiting factors. The consumer should be able to pay for a purchase on the Web easily and with a perception of security. Although the overall shopping experience, product perceptions, and customer service on the Web today lead to a dissatisfaction of potential customers (Jarvenpaa & Todd, 1996-97) and require attention of marketers and researchers, the problem of settlement is the one capable of a systemic solution. As stated earlier in the paper, electronic equivalents of all the payment instruments in use today are appearing on the Web ("Electronic money," 1997).

The multifaceted impacts of electronic banking call for much research on the acceptability of various solutions to consumers, the apportioning of the risk, the institutional framework, the effects of the electronic cash on the economy, and, certainly not least, making electronic settlement of transactions secure.

Some would argue that the main question of E-commerce today is how to convert Web surfers from browsers to consumers by creating an encompassing marketspace for information, services, and goods. The statistics of the phenomenal growth of the Internet use, with 29.2 million Web users in the United States as of the end of 1997 ("Commerce by numbers," 1998) and with 27.8 million unique visitors during January 1998 to the top-ranked site – Yahoo! ("Top 20 sites," 1998), all of this accomplished within some four years, have to be counterbalanced by the modest statistics of the actual consumer buying. Yet, rapid growth is apparent in this sector as well. The approximate $132 million spent by the consumers in 1995 according to (Martin, 1996) has reportedly grown into $1 billion spent during just the fourth quarter of 1997 according to Forrester Research (Guglielmo, 1998), a figure that appears too high when placed in the context of other estimates. A large number of widely diverging, yet generally highly optimistic, forecasts of future growth exist (Folley & Sutton, 1998). The statistics and, far more so, projections are debatable; yet the growth trend is not.

The consumer marketplace encompasses auction sites, reverse markets, and digital retail outlets. As we have said before, the auction approach is a successful means to capitalize on the ubiquitous accessibility of the Internet medium. Along with other roles, an auction intermediary facilitates price discovery. Such sites as OnSale, auctioning computer and electronics equipment, and eBay, an auctioneer of collectibles, are relatively limited-size U.S.-based virtual auction houses. The two sites are built on two different business models. OnSale, a public company by now, is a dealership-type of marketplace, which takes an active role in the ownership and delivery of goods, and customer service. This is reflected in the much higher net revenue as the percentage of sales than that of eBay, which simply provides the sites as a form of a digital agora, accessible to sellers and buyers, and realizes a commission of 1.5 to 5 percent of an item’s price. The success of both sites points up the variety of approaches that can be taken in the Web-based consumer market. Auction houses have a potential to coalesce into large and multifaceted marketplaces that take on additional intermediary responsibilities in lowering the risk of the transacting parties by certifying the quality of goods and facilitating logistics.

Reverse markets are also based on the inexpensive ubiquity of the Internet medium and place the consumer in the driver seat. By broadcasting the need over the Internet, the prospective buyer of a product, a service (or a job, though ceasing to be a consumer in this relationship) is able to increase the consumer’s surplus by extracting more favorable offers than those available publicly. A number of facilitators of reverse markets provide "wanted" sites.

Several approaches have been identified within the general business model of Web-based digital retailing at fixed prices (as opposed to creating marketplaces that include price discovery). These on-line retailing outlets have been classified by Hoffman, Novak & Chatterjee (1996) into (1) on-line storefronts or catalogs actually selling products or just establishing awareness of them, (2) content sites providing information and support, and (3) Web traffic control sites, such as malls and search engines. Westland & Au (1997-98) classify the digital retailing approaches into catalog sites, bundling outlets, and virtual-reality storefronts. The bundling and virtual reality approaches may be considered of particular promise in experimenting with Web retailing. Theoretical work indicates that the bundling of goods is attractive for the goods of low marginal cost, with uncorrelated demand, and of approximately equal consumer valuation, with information goods (such as software) being a prime example (Bakos & Brynjolfsson, 1997). Bundling is seen also promising for such goods as flower arrangements and gifts, where the consumer can conveniently limit the extent of necessary decision making and the vendor can substitute products at will. In a kiosk-based experiment, Westland and Au (1997-98) find that the additional time necessary to interact with a virtual-reality storefront does not result in a greater consumer spending.

Spiller and Lohse (1997-98) further classify empirically the catalog-type on-line sites actually available on the Web into five categories, summarized in Table 2. Note that several categories of digital retailers include on their sites what we call bonding features, which are expected to motivate repeated visits. Such features include product-related webzines, lotteries, and tips. These researchers find that digital retailing outlets offer limited product selection, few service features, and poor interfaces. As a confirmation of these perceptions, consumers find offering lists to be shallow and are also concerned about the performance and personal risks, such as payment-related security and privacy (Jarvenpaa & Todd, 1996-97).

In the case of digital products, such as software, music, or multimedia, the Internet plays the role of distribution medium. A number of firms, including Cybermedia, TestDrive, and Tuneup.com, market software over the Internet, for example. Worth watching is the future of renamed Egghead.com, which under competitive pressures has decided to move its software retailing business from the brick-and-mortar outlets of limited size to the Internet in September 1997, with encouraging initial results. The range of digital products will vastly expand with the growth of E-commerce, with many new products emerging, for example, as symbolic tokens replacing hard goods (Choi, Stahl & Whinston 1997). We shall further discuss the virtualization of products below.

An emblematic trajectory taken by a small merchant on the Web is that of GolfWeb, which had painstakingly built up a following – a golf-centered community - on its electronic site before turning it into a retail outlet. By providing extensive golf-related features and information, GolfWeb had been able to attract some 500,000 hits a day to its 25,000 pages and had relied on advertisers for any revenue before starting its virtual pro shop to produce sales. The firm does treat the Web as a new medium by providing, for example, such interactive features as virtual equipment fitting for customers. Yet, questions remain: Will many smaller firms, encountering a relatively low entry threshold ($1.7 million of venture capital in the case of GolfWeb), make money on the Web? Will the business model such as that of GolfWeb ultimately lead to profits? What are the successful consumer-oriented business models for the Internet? And how do we measure what is actually happening on the Internet?

The potential in the expansion of the Internet-based consumer marketplace can be seen in experimentation going beyond the facilitation of consumer search and order taking. Building demand for the products, customizing products to the individual requirements, and developing lasting relationships between the vendor and the customer are the long-term objectives of Web sites. Specifically, stimulating sites can build demand for products, regardless of the ultimate manner of purchase. The interactivity of the medium gives a vast opportunity to customize, and thus engage in one-to-one marketing at relatively low incremental costs. If it appears unlikely that one would purchase a pair of shoes over the Internet, it is far more likely that one would if offered a customized product, based on the measurements transmitted over the network, such as the services currently available in some brick-and-mortar outlets.

Selling on the Web can provide on-line demonstration, consultation, and assistance to these virtual communities. Clearly, the nature of many existing electronic communities is antithetical to commerce and a pull-model of doing business has to be built for them. Will the community-oriented model of digital retailing prove to be only a stage in acculturating consumers to the new buying venue? Will the purely transactional approach take over for the appropriate products as the Internet selling matures? The digital retailing practice has to embrace the broad approach to the opportunities offered by an interactive medium that attracts many millions of potential buyers. The future research on building consumer marketplaces would do well by adopting this broader approach to the Web sites as well, which would of course require a longer experience and longitudinal studies.

It is recognized that the networked infrastructure offers new opportunities for adding value by moving the stages of corporate value chains into the realm of information processing, saving money and time in the process (Rayport & Sviokla, 1994). We are witnessing the virtualization of value-chain segments, and, in the future, perhaps also of an increasing number of products. Business processes can be moved into the virtual, informational value chains, be they paperless transaction processing or electronic prototyping. The development of Boeing 777 based on virtual prototyping is probably the best known example. Rapid prototyping and rapid manufacturing technologies move the electronic model of a product directly from the computer-aided design (CAD) file into the machine that builds up a final, physical, prototype – or the final product - layer by layer, or powdered particle by powdered particle (Bylinsky, 1998). A virtual-reality based system for developing customized clothes, called Virtuosi, affords three-dimensional viewing and manipulation of fashion designs over the Web; voice-controlled mannequins demonstrate the clothes on the virtual runway in this experimental system (Gray, 1998). Indeed, a computer hardware design can be sent over the Web, when field programmable gate arrays are used (Mangione-Smith et al, 1997).

This virtualization of products and processes is only at its origins and we may expect very significant development and efficiencies to derive from it. As they move from the purely informational to the collaborative use, corporate intranets can serve as vehicles for these virtual elements of value chains. Corporate extranets, open to business partners, suppliers, and customers can become secured extensions of the Internet in the interorganizational marketspace networks.

What goods and services can be converted to information that can be moved around and traded over the electronic marketplace? Rayport and Sviokla offer an example of the answering machine (1995). Cash is another example of a good that can be virtualized (a special kind of good that it is), video-cassettes are another such good, retail services are already delivered over the Web instead of in physical stores, and many personal computers may be converted to appropriate over-the-network services. After all, a network computer is just such an attempt. Many questions regarding the relative economic efficiency of physical-versus-virtual organization of work and product delivery need to be formulated and researched.

Our understanding of a firm as a monolith has been problematized by Coase’s milestone paper (1937). Transaction cost economics that arose from this work helps us see the boundary of the firm as defined by the equilibrium between the advantages of the lower transaction costs of internal production on the one hand, and the lower agency costs (such as the costs of management) and economies of scale and scope of outside procurement on the other (Williamson, 1975). In other words, the costs of conducting marketplace transactions, i.e., information seeking, negotiating the terms, and settlement, define to a large extent what a firm will buy, instead of making it. Since these coordination costs are lowered in E-commerce, a general agreement exists (following the analysis by Malone, Benjamin & Yates, 1987) that more outsourcing - buying rather than making in-house - will take place. There is a considerable evidence that the use of information technologies is indeed associated with the emergence of small firms as the result of outsourcing of non-core activities (Brynjolfsson et al, 1994). Will the Internet reaffirm and amplify this trend? Will the maturing Internet enhance the opportunities for smaller firms and if so, to what extent?

Going beyond the "boundaries-of-the-firm" analysis, the electronic market hypothesis offered by Malone, Benjamin & Yates (1987) suggests that the development of interorganizational systems based on telecommunications networks will move the governance towards the market end of the spectrum, with increased transaction-oriented buying from multiple suppliers. Yet the "move-to-the-middle" hypothesis by Clemons, Reddi & Row (1993) postulates that the outsourcing will go only as far as long-term collaboration with a limited number of suppliers. Likewise, Bakos & Brynjolfsson (1993) argue that the consideration of coordination costs needs to be combined with the incentives for noncontractible investments that suppliers need to make to maintain a relationship with a buyer. These relationship-specific investments have to be made to ensure, for example, the appropriate quality control, the implementation of information-sharing systems, and the modification of business processes. This consideration leads the authors to postulate the "move to the middle" as well.

The evidence available at this time tends to support the second hypothesis. For example, a study of computerized loan-origination systems found no move to the market (Hess & Kemerer, 1994). A study of the effects of the French Teletel system, whose Minitel terminals are a part of the landscape in that country (40 percent of non-retired population has access) found stable customer-supplier relationships as a result (Streeter et al, 1996). However, new E-commerce relies on tools that are radically different from, for example, the French Teletel (whose technology is outdated) and the developments surrounding the Internet (e.g., open-EDI that would foster a transactional approach to the marketplace) are certain to lead to further analyses of the issue.

Within the market governance, profound changes can be expected. For example, the global reach and the low access cost of the Internet can be expected to promote the growth of auction markets⁴. Electronic auction companies that are able to tap into an enthusiastic user community are almost instantaneously successful. Reverse markets, where willing buyers seek out sellers, are expanding as well. This naturally leads to the next question: Will there be a role for business intermediaries in a business world where the ultimate agents - the buyer and the seller - can seek one another out, negotiate the terms, and settle the trade over the Internet or a similar global open network?

An argument is being commonly advanced that the greater reliance on the open telecommunications networks for doing business will lead to disintermediation: the disappearing role of an intermediary, such as a dealer or a broker. Indeed, a perceptible pressure can be felt on the role of car dealers (Armstrong, 1998), for example. Electronic commodity and stock exchanges are being created, which will squeeze out some intermediaries to the trade, as it has happened at the London Stock Exchange or at the Swiss Electronic Exchange. Removing intermediaries from a supply chain can result in significant economies, with much of the savings competed away and returned as a part of consumer surplus (Benjamin & Wigand, 1995).

Powerful social and organizational barriers counteract many of these developments (Lee & Clark, 1996). Beyond that, intermediaries do play an important economic role in business exchanges by limiting the risk of the trading parties, by creating economies of scale and scope, and by facilitating transactions. The latter role includes the assistance in the search for a trading partner, in negotiation (or price discovery in auction markets), and settlement. It may be even argued that the role of intermediaries will be reinforced in E-commerce (Sarkar, Butler & Steinfield, 1995).

Quality certification plays a crucial role in the success of the AUCNET, the electronic auction house for used cars in Japan (Lee, 1998). AUCNET is able to extract on the average higher prices in its electronic auctions than the traditional auction houses in that country are able to do. This can be accounted for by the avoidance of the need to transport the car to an auction, with the lower transaction costs and wider reach thus attracting better cars on the seller side, and the local availability of cars producing savings for buyers. The virtuous spiral attracts ever higher-quality cars, naturally commanding higher prices.

New intermediaries can provide packaging and enhancement of information-based goods, for example, by delivering customized targeted multimedia information packages, with use-based payments to the holders of intellectual property rights, and with the access to the authors as a premium service. Suppliers receive the efficiency of a single payment; customers save on search costs, and get a more focused and comprehensive product. Intermediaries can track the copyrights and licensing payments, for example, enforcing site-license agreements. If in the future persistent software copies will not need to be made for many products, which will be simply downloaded for each use, appropriate billing can be provided by an intermediary. Intermediaries can also handle support services and updating of information-based products. At the same time, those traditional publishers and resellers of information-based products which cease to provide value in the new constellation, may indeed be disintermediated.

An excellent example of a territory being carved out by a new intermediary is Healtheon, a company formed by Jim Clark, the founder of Silicon Graphics and Netscape Communications. Healtheon expects to sell its services to insurers and health maintenance organizations, which will use the firm’s software to present their own services to employers and to register their employees. The firm will also provide health-plan management for these employers. It will use the Web as its operations platform and has prospects to expand into a ubiquitous electronic network for health care.

The principal expected impacts of E-commerce on distribution channels have been summarized in Table 3. The table allocates the factor to the channel’s actor where the impact may be expected to be felt most. For example, although the size of both the seller and the buyer is not directly transparent on the Internet, it is the partly opaque size of the seller that has the greatest effect on the course of a transaction. Notable is the price pressure on the sellers, which emerges from the reduced buyer search costs (Bakos, 1991; Bakos 1997). All the channel impacts listed in the table require further study.

New E-commerce is still in its formative stage. E-commerce is currently dominated by the business-to-business and intraorganizational segments. Many major digital retailers are as yet in the investment and brand-building mode and show no profits; yet many established retailers realize profits from the new selling channel. Buoyant growth is apparent throughout.

The hierarchical framework presented above offers an opportunity to separate concerns and analyze the specific aspects of this enterprise. The technological infrastructure currently imposes several limitations on the development of a global marketspace and on the personal convenience of the participants. An integrated consumer-oriented transaction space is yet to emerge. The consumer marketplace is being developed by a large number of entrepreneurial initiatives, many of them experimenting on the frontiers. Moving the links of supply chains and products into marketspace offers a major promise in raising economic efficiency of both manufacturing and service industries. As these moves take place and as the supply chains are reconfigured, many new firms may be expected to emerge and specialize around newly redefined core capabilities. The business models of many existing firms will be threatened. Although several intermediary roles are threatened by E-commerce, others are not, and new intermediary opportunities emerge.

The capabilities of the new marketplace that combines the properties of a medium with that of a global (virtual) location will be exploited to redefine many products and marketplaces. Notable are the possibilities to provide customized products, in the process moving ever larger segments of the supply chains to the Internet, branding through bonding to a Web site and thus to its sponsor, the advantages of virtual auctions, and the possibility to create large reverse markets.

New E-commerce will present over time countless opportunities and challenges to our economies and societies. Expansion of commerce and technological innovations are two of the levers of economic growth (Mokyr, 1990). These forces are combined in the progress of E-commerce. The macroeconomic effects of E-commerce on the national and regional economies, and on the international trade and its terms will need to be assessed and analyzed. The prevailing judgment at this stage of E-commerce development is to allow free-market forces to assert themselves unhampered by excessive government regulation ("A Framework," 1997). The traditional institutions, such as banks of issue, commercial banks, universities, established business intermediaries, media and publishing companies, will find a need to redefine their roles in the new environment. The taxability of products traded globally over the Internet is as yet an open issue. Intellectual property that can be converted to on-line content may find itself revaluated in the global marketplace.

The tension between the transactional efficiency of spot purchasing facilitated by electronic markets and the need for long-term relationships of trust and forbearance, enabled by electronic hierarchies, will persist and call for much study. The geographical limitations that have bound the place of residence to the place of work, and that have already been eroded by the growth of telework, may be expected to be even less binding. Indeed, the possibilities of the loss of rural space to the new ex-urbanites are already causing environmental alarms (Snider & Moody, 1995). A number of countries that had been marginalized by their geographical position take extremely active interest in E-commerce as the means to move to the center of the virtual geography. The redistribution of work has to be studied from multiple perspectives.

E-commerce has entered a stage of rapid and sustained development. A large number of business models have been enabled by it. A number of questions have been posed here. All of these and many others will require further experimentation, experience, observation, analysis, and research.

Endnotes