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News flash: you can sell things over the Internet!

OK, maybe that's not news, but there does seem to be a lot of confusion surrounding electronic commerce, or e-commerce, on the Net. To help clear up matters, we've asked--and answered--20 key questions about e-commerce, from "What is it?" to "What stands in its way?"

Once you learn these e-commerce basics, you'll be able to throw your e-cash around with the best of them, and you'll be well on your way to converting your run-of-the-mill Web site into a money-making online retail store or a cost-cutting distribution operation. So what are you waiting for?

20 Questions and Answers about E-commerce.

What is E-Commerce?

Most people think that e-commerce means online shopping--workaholics pointing their browsers to Amazon.com to order an emergency present because they forgot someone's birthday again.

But Web shopping is only a small part of the e-commerce picture. The term also refers to online stock and bond transactions and buying and downloading software without ever going near a store. In addition, e-commerce includes business-to-business connections that make purchasing easier for big corporations. And many people hope that so-called micro transactions will let people pay small amounts--a few cents or a few dollars--to access online content or games.

QVC, the shopping channel whose Web subsidiary iQVC opened last September, argues that it has been doing electronic commerce for the past 11 years by broadcasting on cable TV and taking orders over the phone. But the kind of e-commerce that everyone is interested in right now refers to systems that let money change hands over the Internet.

Is anyone really making money with e-commerce?

That depends on how you crunch the numbers.

According to ActivMedia, less than a third of online merchants are actually making a profit from their sites. On the other hand, studies show that most Internet users read up on a product online and then buy it elsewhere. So, even if a Web site isn't generating many online sales, it could still be contributing to sales via other channels.

As for companies focusing on business-to-business e-commerce, they're not out to turn a profit so much as they're trying to cut expenses and improve customer service.

The consumer side of the market is still immature: sex sites make up about a tenth of all retail business done online, according to Forrester Research. But those sites are not alone. Computer companies such as Dell and Gateway 2000 claim that as much as 10 percent of their sales are made over the Internet.

Having a recognizable brand name helps. Less than a year after its launch, iQVC claims to be profitable, ringing up more than $1 million in sales per month. Research by The NPD Group says that iQVC garners 1 percent of all Web traffic, the broadest reach of any online merchant.

But profitability requires more than making sales: sites must also control expenses. Apart from the cost of developing e-commerce software to track the 100,000 items it sells online, iQVC's expenses have been low. The online subsidiary shares the ordering systems developed for its cable parent and hasn't had to do much marketing or advertising. Other e-commerce ventures are saddled with huge costs for building traffic and establishing a brand name. Virtual bookseller Amazon.com, the poster child for e-commerce, lost $6.7 million for the quarter ending June 30, 1997. And that's despite sales soaring to $27.9 million, up from $2.2 million in the same quarter last year.

Is the government going to regulate e-commerce?

"The Framework for Global Electronic Commerce," a White House position paper released in July, makes it clear that the Clinton administration doesn't want any new taxes or regulations imposed on cyberspace.

Congress seems likely to go along. One bill, introduced by Sen. Ron Wyden (D-Oregon) and Rep. Christopher Cox (R-California), proposes a temporary ban on new state and local Internet taxes, at least until all parties agree on a uniform way to define Net taxes.

While the feds favor no additional taxes, state governments are grappling with the issue individually. Texas not only taxes Internet access charges, but also all the money collected when content providers sell online subscriptions, as well as the fees charged by Web developers for building sites. On the other hand, New York decreed in January that Internet access charges are not subject to state sales or telecommunications taxes.

Most states still don't know what to do, according to the accounting and consulting firm Deloitte & Touche, which recently published a comprehensive guide called "Taxation in Cyberspace."

For now, e-commerce providers such as AT&T are treating Web purchases much like mail-order sales. The providers collect taxes if the merchant has a significant presence in the state where the buyer resides. "There are lots of gray areas," acknowledges James Kwock, a Web services marketing director with AT&T Networked Commerce Service, "but I don't feel any pressure from tax lawyers yet."

There's another problem with Net taxes: the Internet crosses international borders as easily as it skips over state lines. President Clinton wants to turn the Internet into a free-trade zone within the next 12 months. Japan agrees, but other countries have already indicated a willingness to regulate the Net. For example, France has long tried to mandate the use of French on Web sites, while Germany has attempted to stamp out both pornography and neo-Nazi materials online. While neither country has addressed the question of Net taxes yet, they may be more willing to regulate the Net economically as well.

Is e-commerce safe for merchants?

The incident proves that nobody is really safe online. But while Internet security breaches like these have gotten a lot of press, most vendors and analysts argue that transactions are actually less dangerous in cyberspace than in the physical world.

That's because a great deal of credit card fraud is caused by retail sales employees who handle card numbers. E-commerce systems remove temptation by encrypting the numbers on a company's servers. For merchants, e-commerce is actually safer than opening a store that could be looted, burned, or flooded. The difficulty is in getting customers to believe that e-commerce is safe for them.

Is e-commerce safe for customers?

But in version 2.0 (or later) of Netscape Navigator or Microsoft Internet Explorer, transactions can be encrypted using Secure Sockets Layer (SSL), a protocol that creates a secure connection to the server, protecting the information as it travels over the Internet. SSL uses public key encryption, one of the strongest encryption methods around. In Navigator, you can tell that you're in the secure mode when an unbroken key appears on the bottom left corner of your browser window. Internet Explorer displays a padlock on the bottom right of the screen. Another way to tell that a Web site is secured by SSL is when the URL begins with https: instead of http:.

Browser makers and credit card companies are promoting an additional security standard called Secure Electronic Transactions (SET). SET encodes the credit card numbers that sit on vendors' servers so that only banks and credit card companies can read the numbers.

No e-commerce system can guarantee 100-percent protection for your credit card, but you're less likely to get your pocket picked online than in a real store.

How big is e-commerce?

According to a survey from IntelliQuest's Worldwide Internet/Online Tracking Service, only 15 percent of Netizens use e-commerce. The research firm Computer Intelligence recently interviewed 40,000 U.S. businesses, and found that less than 2 percent of the country's 4.8 million computerized business locations are involved in some form of electronic commerce. But--and this is the part that everyone is excited about--that figure is double the one reported just last year.

According to Forrester Research, consumers and businesses will funnel a total of $8 billion through e-commerce sites this year. And in an October 1996 report, Forrester predicted that by the year 2000, more than $546 billion will be spent online--and the organization is currently revising that number upward.

As for the hottest areas of e-commerce, in terms of tangible goods sold via the Internet and other electronic means (such as interactive TV), Cowles/Simba says the biggest sellers last year were computer products ($196.2 million), consumer products ($186 million), books and magazines ($38.3 million), and music and entertainment products ($35 million). The agency put total 1996 hard-goods sales at $993.4 million.

How do I start selling online?

Small businesses may not have to look beyond their local Internet service providers for a bare-bones solution. For example, Brooklyn's Forman Interactive offers Internet Creator for less than $150. The software uses a series of wizards to help you create secure pages for selling your product. Plus, if your pages reside on Forman's servers, the company handles electronic payments via CheckFree.

If you're ready to step up, you can license Viaweb's Viaweb Store, which lets you create a transactional business Web site from your browser.

Who's buying, consumers or businesses?

Everybody talks about retail sales moving online, but it's really the business-to-business market that's driving e-commerce.

Forrester Research says consumers rang up $530 million in online transactions in 1996, and it predicts $7.17 billion in sales by the year 2000. Cowles/Simba, another research outfit, pegs Internet consumer sales at $733.1 million in 1996, growing to $4.27 billion by the year 2000.

The typical e-commerce customer is a 30-something white male earning $78,000 per year, according to a survey of more than 1,000 online shoppers conducted by Binary Compass Enterprises. Men comprise the vast majority of e-commerce buyers, between 69 and 79 percent, depending on the survey.

But Forrester expects that Net-based business-to-business transactions will reach $8 billion this year and a whopping $66 billion by the year 2000. And General Electric, the U.S.'s largest and most profitable corporation, expects to do $1 billion worth of business this year all by itself on its Trading Process Network Web site, which is designed to tighten relationships with its component companies.

For most businesses, e-commerce is not about online catalogs, credit cards, or ordering sweaters. It's not really about selling at all, but about improving relationships among suppliers, distributors, and customers.

For example, e-commerce could make it easier for a corporate customer to buy a new paper shredder from a stationery supply company. Typically, a corporate office worker must get approval for a purchase that costs more than a certain amount. That request then goes to the purchasing department, which has to procure the goods from the sales rep of the approved vendor. Business-to-business e-commerce automates that entire process. Employees can go directly to their company's extranet, find the item at the stationery store's site, and get what they need at a price prenegotiated by their company. If approval is required, the boss is notified automatically.

Or consider the case of Fruit of the Loom. The underwear manufacturer supplies plain white T-shirts to distributors who, in turn, sell the shirts to designers who add logos touting colleges and other organizations. Fruit of the Loom's e-commerce system, built on Connect's high-end e-commerce application, automatically ships T-shirts to distributors at the negotiated price, whenever stocks run low.

How do I attract online customers?

Are there any technology standards for e-commerce?

Electronic Data Interchange (EDI): created by the government in the early 1970s and now used by 95 percent of Fortune 1,000 companies, EDI is a common document structure designed to let large organizations transmit information over private networks. EDI is now finding a role on corporate Web sites as well.

Open Buying on the Internet (OBI): this standard, created by the Internet Purchasing Roundtable, is supposed to ensure that all the different e-commerce systems can talk to one another. OBI, which was released by the OBI Consortium this June, is backed by leading technology companies such as Actra, InteliSys, Microsoft, Open Market, and Oracle.

The Open Trading Protocol (OTP): due for publication this summer, OTP is intended to standardize a variety of payment-related activities, including purchase agreements, receipts for purchases, and payments. It was created as a competing standard to OBI by a group of companies, including AT&T, CyberCash, Hitachi, IBM, Oracle, Sun Microsystems, and British Telecom.

The Open Profiling Standard (OPS): a standard backed by Microsoft and Firefly, OPS lets users create a personal profile of preferences and interests that they want to share with merchants. The idea behind it is to help consumers protect their privacy without banning online collection of marketing information.

Secure Sockets Layer (SSL): this protocol is designed to create a secure connection to the server. SSL uses public key encryption, one of the strongest encryption methods around, to protect data as it travels over the Internet. SSL was created by Netscape but has now been published in the public domain.

Secure Electronic Transactions (SET): SET encodes the credit card numbers stored on merchants' servers. This standard, created by Visa and MasterCard, enjoys wide support in the banking community. The first SET-enabled commerce is already being tested in Asia.

Truste: this partnership of companies seeks to build public trust in e-commerce by putting a Good Housekeeping-style seal of approval on sites that don't violate consumer privacy.

What buzzwords do I need to know?

E-commerce is rife with buzzwords and catchphrases. Here are some of the current terms people like to throw around:

Digital or electronic cash: also called e-cash, these terms refer to any of several schemes that allow a person to pay for goods or services by transmitting a number from one computer to another. The numbers, just like those on a dollar bill, are issued by a bank and represent specified sums of real money. One of the key features of digital cash is that it's anonymous and reusable, just like real cash. This is a key difference between e-cash and credit card transactions over the Internet. For more information, see PC Webopaedia or DigiCash's e-cash FAQ.

Digital money: a grab-bag term for all the various e-cash and electronic payment schemes on the Internet. Yahoo lists 28 companies offering a form of digital money.

Disinter mediation: the process of cutting out the middleman. When Web-based companies bypass traditional retail channels and sell directly to the customer, traditional intermediaries (such as retail stores and mail-order houses) may find themselves out of a job.

Electronic checks: currently being tested by CyberCash, electronic checking systems such as PayNow take money from users' checking accounts to pay utility and phone bills.

Electronic wallet: a payment scheme, such as CyberCash's Internet Wallet, that stores your credit card numbers on your hard drive in an encrypted form. You can then make purchases at Web sites that support that particular electronic wallet. When you go to a participating online store, you click a Pay button to initiate a credit card payment via a secure transaction enabled by the electronic wallet company's server. The major browser vendors have struck deals to include electronic wallet technology in their products.

Extranet: an extension of a corporate intranet. It connects the internal network of one company with the intranets of its customers and suppliers. This makes it possible to create e-commerce applications that link all aspects of a business relationship, from ordering to payment.

Micro payments: transactions in amounts between 25 cents and $10, typically made in order to download or access graphics, games, and information. Pay-as-you-go micro payments were supposed to revolutionize the world of e-commerce. One early scheme, for example, let visitors to ESPN SportsZone use their CyberCash CyberCoin accounts to buy a $1 day pass to the site's premium content, without having to spring for a full month's subscription. But many potential customers have been unwilling to play along with micro payments.

Where can I learn more?

Check out these sites and organizations to get a running start on your own e-commerce site:

CommerceNet is an industry association dedicated to promoting electronic commerce. Launched in April 1994 in Silicon Valley, it now includes more than 500 companies and organizations worldwide. Members include banks, telecommunications companies, Internet service providers, online services, software and service companies, and real, live customers.

The Internet-Sales Discussion List was started in November 1995 to provide a forum for merchants to discuss online sales issues. The group compiles postings from its subscribers into the I-Sales Digest, which is sent for free every day to 5,500 subscribers from more than 65 countries.

Electronic Commerce World magazine (formerly EDI World) is a magazine about business-to-business e-commerce.

The World Wide Web Consortium (W3C) is an online standards body active in many fields, including ways to make the growing variety of payment methods on the Web interoperable. This project is called the Joint Electronic Payments Initiative, or JEPI.

The Electronic Commerce Resource Center Program is designed to promote awareness and implementation of e-commerce and related technologies.

"The 10 Secrets of Selling Online" from Viaweb includes some obvious but useful tips to help make your e-commerce site a success.

What can I buy online right now?

Leading consumer e-commerce sites include Wal-Mart Online, which features a catalog of some 40,000 general goods divided into 27 categories, from groceries to hardware. The Web site also offers sections for hot buys, special sales, and Wal-Mart's community involvement programs.

BarnesandNoble.com was recently opened by bookselling giant Barnes & Noble to give Amazon.com a run for its money. Features include searches through more than a million titles, book forums, editor's picks, live events, and Firefly technology for personalized recommendations.

Dell probably has the most successful Internet-based computer sales operation around. (For more info on buying computers over the Net, see "how to buy a PC online.")

CDworld lists more than 240,000 CDs, tapes, videos, games, software, postcards, and other merchandise. You can preview your choices via 200,000 RealAudio clips, or you can visit a music chat area to ask other fans for suggestions.

1-800-Flowers lets you send flowers to your mom without leaving your desk. Pick from the "Best of the Bunch" or browse through the selection of more than 150 flower and gift products.

CNET's BUYDIRECT.COM delivers software directly from developers to your PC. You'll find Web browsers, Internet utilities, HTML editors, plug-ins, applets, and more.

If you don't see what you want in the above list, your best bet is probably to check out one of several directories of shopping sites. BizRate aims to become the Consumer Reports of online shopping. The site hires people to make actual purchases online and then publishes their evaluations. It has rated more than 250 online shopping sites and makes money by selling the information it gains back to the merchants. For more shopping directories, see the annotated list compiled by WebCrawler.

How can small businesses take advantage of e-commerce?

Large companies pour millions into fancy e-commerce sites, but even mom-and-pop shops can make money on the Web with a simple, no-frills site.

Sometimes, all it takes to succeed is the promotional savvy to get noticed by customers. Word of mouth, postings in newsgroups, and registration with search engines may be enough to get the customers rolling into your site.

Kevin Donlin is a writer and Web developer who opened Guaranteed Résumés on the Internet back in 1994. Now he gets about 100 visitors each day and draws half his income from his resume-writing business.

Donlin succeeds by keeping his costs down: the site sits on the server of his local ISP. Customers, who come from Japan and Europe as well as the United States, pay with a credit card via phone, fax, and even email. Instead of subscribing to an expensive, third-party payment system to handle the credit card transactions online, he enters all the purchases into a swipe terminal that he leases for $30 per month.

While most businesses can benefit from a home page on the Web, e-commerce isn't for everyone. Firms likely to profit most are those offering unique products or services that are not readily available locally. A small bookstore such as Moe's Books in Berkeley, California, might want to advertise readings by authors and tell its customers about specials, but it would not want to compete with Amazon.com. But Only Gourmet--a Web-based business that sells premium coffee, chocolate, and specialty foods--might find new customers in small towns around the country, where people can't find lemongrass or Swiss bitter chocolate at the corner store.

What are the biggest barriers to e-commerce?

According to a survey conducted in March by CommerceNet, shoppers don't trust e-commerce, they can't find what they're looking for, and there's no easy way to pay for things. Other than that, it's smooth sailing.

Clearly, e-commerce for consumers is in its early stages.

Customers are worried about credit card theft, the privacy of their personal information, and unacceptable network performance. Most shoppers still aren't convinced that it's worthwhile to hook up to the Internet, search for shopping sites, wait for the images to download, try to figure out the ordering process, and then worry about whether their credit card numbers will be filched by a hacker. Even worse, many shopping sites, such as L.L. Bean's, don't sell everything online that you can get from the company's printed catalog. So why bother?

To convince consumers, e-merchants will have to do a lot of educating. However, Gail Grant, the president and CEO of GLG Consulting and the head of CommerceNet's financial research arm, predicts that most buyers will be won over in just a few years.

Grant says that if Web pages were labeled with tags giving product and pricing information, it would be easier for search engines to find stuff to buy online. That hasn't happened yet, she adds, because merchants want people to find their products but not their competitors'--especially if another company's goods are cheaper.

Grant feels that the forthcoming SET standard will help cure shoppers' confusion regarding payment schemes. But she says the industry must also standardize its invoices, possibly with OBI.

As for business-to-business systems, the issues are less emotional but still serious. Businesses do not yet have good models for setting up their e-commerce sites, and they have trouble sharing the orders and information collected online with the rest of their business applications. Many companies continue to grapple with the idea of sharing proprietary business information with customers and suppliers--an important component of many business-to-business e-commerce systems.

The key to solving the business model is for merchants to stop relying on fancy Java applets and to restructure their operations to take advantage of e-commerce, says GLG's Grant. "E-commerce is just like any automation--it amplifies problems with their operation they already had."

Isn't e-commerce just a way to sell dirty pictures?

Instead of disapproving, sellers of more general-interest merchandise can learn a lot from these "adult" sites. After all, porn operations pioneered the use of e-commerce, with some of the most sophisticated ordering and payment systems online. And out of sheer self-protection, they've also developed the most complex membership schemes to keep kids out and paying customers in.

But smut still represents only a fraction of what you can buy online, and that percentage appears to be shrinking as general merchants move into e-commerce.

Doesn't Microsoft own e-commerce?

Microsoft runs two major e-commerce sites. Expedia is a Web travel service that grosses $1 million per month in airline, hotel, and car reservations. CarPoint, a car-search service that opened June 23, has already sold $37 million worth of cars.

Microsoft has also licensed its Travel Technologies platform, on which Expedia is based, to American Express for the corporate reservations system called American Express Interactive, set to launch later this year. Plus, Microsoft has just released Site Server, which is designed to support e-commerce.

But all of these products account for only a small fraction of online commerce, and they face plenty of competition. So Microsoft may dominate other aspects of computing, but e-commerce is still wide open.

Who stands to lose the most from businesses moving online?

The companies most directly threatened by e-commerce include travel agencies, entertainment ticket operations, mail-order catalogs, and retail stores--particularly software stores. E-commerce is already successfully invading their territories. A recent Forrester Research report predicts that sales of entertainment and travel tickets on the Internet will climb from $475 million this year to more than $10 billion by the year 2001. Forrester says that figure represents 8 percent of all travel tickets.

As Bill Gates puts it, e-commerce is about to eliminate the middleman. The buzzword of the day is disinter mediation, a way of saying that anyone between the seller and the buyer is in big trouble. But a closer look reveals that e-commerce may be creating of a new kind of middleman.

The most talked-about e-commerce success stories, Amazon.com and Virtual Vineyards, are really a new kind of intermediary. Amazon.com doesn't publish books, after all, and Virtual Vineyards doesn't make wine. They are simply online distributors.

But these e-middlemen must demonstrate that they add value to the buying process, through marketing, customer service, or some other method. If they don't, customers will vote with their modems and cut them out of the loop.

What about these online malls that keep failing?

The mall organizers said they would provide "superbranding" for their tenants: attracting customers through the power of the organizers' own brand names. But this too has failed in many cases.

When IBM tried to promote its World Avenue with a television campaign, its vendors got jittery because they feared their own brands would get lost in the shuffle, explains Karl Salnoske, the general manager of IBM's Internet Application Solutions. So instead of running online malls, most companies like IBM, MCI, GTE, and AT&T now want to sell hosting services for individual e-commerce sites.

But not even IBM is giving up on online malls. Despite its failure with World Avenue, IBM is hoping that professional marketing and better promotion will do the trick for an online collection of high-end and specialty stores it's putting together for a Hong Kong credit card company. The new mall will be marketed by Mitsubishi.

And there is evidence that some online malls will work, depending on who runs them. America Online's newly redesigned mall, dubbed the Shopping Channel, is enormously successful. The online service's new strategy is to collect "rent" from its electronic retailers, rather than taking a cut of their online sales. Under this system, the most prominent screen buttons on the Shopping Channel will probably rent for about $250,000 a year, indicating that placement in some online malls is indeed valuable.

What is the future of e-commerce?

Rest assured, there is a future for e-commerce. Once the details of online commerce are worked out, it and the Internet in general could reshape the structure of the business world.

The huge growth of virtual communities--people getting together in ad hoc interest groups online--promises to shift the balance of economic power from the manufacturer to the consumer. At least, that's the view of John Hagel and Arthur Armstrong, a pair of analysts at McKinsey & Company, an international management consulting firm.

These virtual communities are already making their presence felt. Motley Fool, an investment site formed on America Online and now living on the Web as well, lets members exchange investment advice without the benefit of a stockbroker. ParentsPlace is a meeting ground for parents that gives smaller vendors an avenue to reach potential customers for products such as baby food and shampoo.

Virtual communities erode the marketing and sales advantages of large companies. A small company with a better product and better customer service can use these communities to challenge larger competitors--something it probably couldn't do in the real world.