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First Monday, Volume 3, Number 10 - 5 October 1998

Read related articles on Internet economics

This paper is included in the First Monday Special Issue: Commercial Applications of the
Internet, published in July 2006. For author reflections on this paper, visit the Special Issue.

This paper attempts to clarify terminology discussing the interface between commerce and the
Internet. It is also an empirically derived classification system or taxonomy of existing Internet
business models. This taxonomy has two main branches - transplanted real-world business
models and native Internet business models. The latter part of the paper discusses the role of
business, governments, regulation and ideology in the development of I-Commerce and makes
some cautious speculations regarding its future.

Contents
Introduction
Transplanted Real-World Business Models
Native Internet Business Models
Government and Internet Commerce
Privacy and Internet Commerce
I-Commerce and Economic Rationalism
Scarcity, Territory and Cyberspace
Disintermediation and Competition
Conclusion: Internet Imperialism

There are several terms used to describe business that takes place on the Internet. These
include Electronic Commerce (E-Commerce), the Information Economy, the Online Economy
and Internet Commerce. Literal interpretations of these terms denote particular domains of
activity and little rigour is applied to their application. As the terms Electronic Commerce (E-
Commerce), the Information Economy, and the Online Economy denote activities not limited to
the Internet the term Internet Commerce (or I-Commerce) will be used in this document to
denote commercial activities associated with the Internet. The term Electronic Commerce (e-
commerce) should be understood to include the conduct of business with the assistance of
telecommunications and information technology; it is not limited to business conducted on the
Internet.

In this taxonomy, Internet Commerce falls into two broad categories. These are Transplanted
real-world Business Models (business activities which occur naturally in the real-world and have
been transplanted onto the Internet) and Native Internet Business Models (business activities
which have evolved in the Internet environment and are native to it). I am using the term
"business" in its broadest sense including barter, exchange, interaction and activities of a
transactional nature. These do not necessarily involve money but are still commercial. Business
or commerce should be understood as those cultural activities which are transactional. The net
is a hot house of transactional fecundity and for this reason this taxonomy is necessarily
incomplete.

Transplanted Real-World Business Models

These are business models or activities which exist in the real-world and have been
transplanted into the Internet environment.

The mail-order model is typified by enterprises such as Amazon.com where a Web site shop
front is employed to sell physical goods which are then posted or delivered. While goods are
advertised and payment is made via the Internet these enterprises are very much based in the
real-world and are really traditional retail operations with a Web-based shop front. This is

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probably the most common Internet business model and is the model best understood by
governments.

The advertising based model accounts for the success of many search engine companies
such as Yahoo and also supports many other free Web sites. This model is similar to that used
by commercial television and free print publications, where advertising revenues support the
operation of a free service. There are numerous variations on this model but many involve the
use of banner hyperlinked ads. Clicking on an ad banner takes a Web surfer to a product home
site and also records a click on the original site. There is usually some relationship between ad
banner click rates and fees paid to the site owners hosting the ad banner by the advertiser.
Cookies or other means may be employed to count clicks.

The subscription model is well suited for combination with digital delivery. Typically a user
will subscribe for access to a database of digital products for a specified period of time. Some
music sites and most pornography sites operate in this way. Adult verification services, where a
fee is paid via credit card for access to a large number of adult sites, are also examples of the
subscription model.

The free trial model for software is similar to the "30 days free trial" retail model. Basically
software is available for free download or distributed on CD-ROM but will only work for a limited
period or will not be fully functional until a fee is paid and the software is registered.
Registration is often mediated by an automated Internet session. Commercial software
companies use this model as well as individuals and groups who are independent software
developers. The software developed by these independents is often called shareware. The fee is
generally small compared to mainstream commercial software.

The direct marketing model. The use of electronic mail direct marketing (known as spam)
on the Internet has become so widespread and intrusive that it is almost universally abhorred.
Spam is probably the most dramatic example of a real-world business model being crudely
transplanted on to the Internet. The lack of real-world controls on the Internet has permitted
the unrestrained proliferation of spam. What is remarkable about spam is that by and large the
adverse public relations created by its use has not functioned as a deterrent to the spammers.

The real estate model. Some enterprises apply this model by selling Web space, domain
names and e-mail addresses. While the word "domain" implies ownership or control of territory,
the management of the imaginary territory of the Domain Name System is somewhat confused
and distorted by commercial considerations. There are legitimate concerns over intellectual
property such as trademarks and practices which in the real-world are characteristic of the real
estate business. There is obvious utility to having an address which is simple and memorable or
which resembles a product name. Such names are necessarily scarce if not unique and
therefore valuable. There are some Web-based enterprises which have secured ownership to
domains which incorporate common names and words.

Incentive scheme models are sometimes combined with advertising. Examples include so-
called "permission-marketing" and competitions. Opportunities to win prizes or to secure "free"
or inexpensive goods or services are used to entice people to accept advertising or to provide
personal information. Some Web-based market research companies use this model.

Business to Business. The aforementioned models concentrate on the consumer market, but
there's a large amount of business transacted between corporate entities via the Internet. The
payment infrastructure behind I-Commerce involves activity between vendors, credit card
companies, banks, Internet Service Providers (ISPs), Certification Authorities (CAs), software
companies and others. Internet business-to-business transactions also include (but are not be
limited to) financial, research, legal and employment services.

Combinations of the above models. The digital environment encourages the combination of
various business models and many Internet enterprises employee creative combinations of
various models. There are numerous software suites which enable online shopping (including
virtual shopping baskets) and online payment (an extremely competitive market at present).
Online payment is still largely dominated by credit cards since e-cash, cyber-cash, and micro-
payment systems have not yet flourished. The domination of credit cards may be augmented
by the introduction of smart cards including anonymous stored value cards. Other software
products which facilitate forms of I-Commerce include multimedia digital delivery products
which enable the "streaming" of digital video and audio.

Native Internet Business Models

It is rarely acknowledged that most of the business that takes place on the Internet does not
involve money. Much of the software that underpins the Internet and the World Wide Web is
freeware or shareware. In the midst of the current hype about e-commerce, most users of the
Internet are not engaged in actually spending money but rather securing free products or in
obtaining some product or service by barter.

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The nature of the native Internet economy is explored in the paper "Cooking pot markets: an
economic model for the trade in free goods and services on the Internet" by Rishab Aiyer
Ghosh. He notes that most Web sites are created by amateurs who expect no financial return
and similarly that postings to discussion groups do not involve financial transactions. He argues
that much of value is created and exchanged on the Internet but that the interactions involved
are not financial but may involve the accumulation of "reputation capital".

Unlike the real-world the native economy of the Internet is not based on scarcity but on
abundance. There is an abundance of information and anyone can trade in it. Clearly the
scarcity-based capitalist system that dominates the real-world economy is quite different from
the native Internet economy. Unfortunately, governments and real-world business interests
have tended to treat the Internet like a piece of real estate or a coal mine (as a scarce resource
to be exploited). Here are a few native Internet business models.

The library model. The Internet and the Web in particular are sources of free information.
Librarians, academics and scientists were among the first professional groups to grasp the
potential of the public network for disseminating and making available free information. One of
the basic templates for a Web presence is a site that offers free information; many sites
conform to this template.

The freeware model is used extensively by the Internet software community. Much software,
including popular Web browsers such as Netscape Navigator and Communicator are available
for free download. Other widely used popular freeware or shareware includes the Apache Web
server (used to maintain over 50% of Web sites); Linux (Unix-based operating system); GNU;
Perl (used for much of the active content on the Net); Majordomo (a mailing list application);
Sendmail (e-mail handling and delivery program); INN (which manages Usenet newsgroups);
BIND (Berkeley Internet Name Daemon, which maps text domain names to numerical IP
addresses); and, numerous development tools. The Free Software Foundation actively
promotes a distributed software development model with an unconventional attitude towards
copyright.

In the commercial arena, basic versions of software may be free but more extended versions
are for sale; Netscape is a successful example of this model. As Netscape's Web browsers
became ubiquitous, the company was in a position to market software to corporate clients and
offer an extended range of products for sale. This type of asymmetric benefit can result from
the native Internet economy.

Open source code is often associated with the freeware business model and the ongoing
collaborative development of HTML is just one example. The open source model has largely
been responsible for the development of the public network; the development of proprietary
standards by some software companies is diametrically opposed to the native freeware culture
of the Internet.

The information barter model is very common. It usually involves some sort of exchange of
information over the Internet between individuals and organisations. There may be privacy
implications where personal information is exchanged for a digital product or service. In some
cases personal information may be sold to others to create mailing lists or the information may
be used to create profiles or customized advertising without the individual's consent. Some of
the popular Internet news services subscribe to this model.

Digital products and the digital delivery model. Digital products exist in the digital realm
and may never need to be manifested as physical objects (although they can be). These
products include images, movies, animation, audio, text, certificates and software. Digital
delivery may take place when products are purchased or where information is bartered. A great
deal of digital material that is transmitted or exchanged on the Internet does not involve a
financial transaction. There is a natural division between Internet Commerce - which involves
the digital delivery of digital products - and that which involves the digital purchase of physical
products - which must be posted or physically delivered.

The access provision model is absolutely fundamental to the operation of the Internet but is
often neglected in discussions about I-Commerce. This business provides access to the Internet
with enterprises called Internet Service Providers (ISPs).

Web site hosting and other Internet services. Many ISPs and other Web-based enterprises
provide services such as hosting Web servers, electronic mail and URL and e-mail re-direction

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services. Some enterprises provide free Web hosting and e-mail. These are usually financed by
the inclusion of advertisements on certain sites and within e-mail.

Government and Internet Commerce

The role of governments falls broadly into two categories. Some governments support the
development of the Internet as a public enterprise, taking advantage of the Internet to reach
the public and encouraging the public and business to use the Internet to communicate more
efficiently. Other governments have decided to encourage the Internet as a private initiative,
with little governmental involvement. In a number of western states the former role is
reasonably well advanced, with many government agencies providing access, information and
services via the Internet. Progress in governments supporting private development is generally
less advanced.

To some extent this lack of progress on the part of some governments stems from ideological
confusion over regulation. The Economic Rationalist ideology holds that private sector business
is encouraged by minimum government regulation. This ideology is usually coupled with a
Conservative Moral ideology which calls for strict criminal law enforcement and a limitation of
personal liberty. When applied to the Internet these two ideologies result in regulatory
confusion. Governments seem reluctant to regulate even the most rapacious commercial
activities (such as spamming, predatory marketing practices and privacy intrusion) but are
keen to apply strict regulation to the distribution of adult-oriented content, the use of
cryptography and free speech. This approach - combined with the international reach of the
Internet - has worked to promote the proliferation of intrusive and dysfunctional commercial
behaviour. It has also discredited many governments in the view of the Internet community.

It is argued by some netizens that to effectively encourage I-Commerce governments should

reverse their existing regulatory policies. This would involve the regulation of abusive
commercial activities and the relaxation of controls over cryptography and free speech. As Marc
Rotenberg (of the Electronic Privacy Information Center) recently put it "The current U.S.
privacy policy is backward, we place restrictions on the development of new technologies to
protect privacy, where free market solutions would be preferable. And we leave privacy
problems to the market, where government involvement is required."

Privacy and Internet Commerce

Because of the capacity of technology and the Internet to process and manipulate information,
there is considerable value and competitive advantage in in exploiting personal information. In
unregulated free markets the interests of individuals are invariably overwhelmed by commercial
considerations. While most information on the Internet is free, personal information retains
value both to individuals and commercial interests. Unfortunately a black market in personal
information has emerged on the Internet.

The reluctance of some governments to regulate this trade in personal information to protect
the interests of individuals in combination with the extra-national nature of the Internet has
encouraged the proliferation of abusive practices such as spamming, clickstream surveillance,
intrusive marketing and profiling. While the reluctance of governments to regulate is largely the
result of ideology, the exigencies of pragmatism may intervene. Privacy advocates have argued
that the development of I-Commerce has already been retarded by privacy abuses. Economic
Rationalists tend to argue that privacy protection will emerge from the action of markets, but
this argument is becoming increasingly discredited

I-Commerce and Economic Rationalism

It is clear that there are fundamental differences between the operation of business on the
Internet and in the real world. Indeed it would be surprising if this were not the case. Still there
is widespread expectation that business will operate on the Internet in much the same way it
operates in the real world. Governments conduct expensive public relations campaigns
designed to encourage corporations to "embrace e-commerce". While it is clear that new
business opportunities exist on the Internet, governments and businesses, not already engaged
in I-Commerce, tend to have a sketchy or erroneous understanding of the Internet (especially
its culture) and the nature and potential of I-Commerce.

It may be that the predominant ideology - Economic Rationalism - prevents or hinders a

realistic understanding of the Internet and I-Commerce. Economic Rationalism is a set of
concepts and beliefs which have shaped and determined government policy, particularly in the
developed world for the last two decades. It is in many ways a simplistic and nostalgic ideology,
harking back to notions initially described by Adam Smith and Charles Darwin. Its central tenet
is that the market should be left unhindered by government regulation and that the free
operation of the market will produce maximum prosperity. Adam Smith's "invisible hand" has
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been resurrected and renamed "market forces". Couple this notion with a tautology of "the
survival of the fittest" and you produce an aggressive ideology not amenable to falsification.
Economic Rationalism essentially reduces everything to an economic value.

Under Economic Rationalism, the concentration of wealth in the hands of a small percentage of
the world's population has accelerated alarmingly. In part this trend is due to divestment by
governments of public assets and utilities which have been "privatised" or sold. Economic
Rationalist governments seem to be intent on "privatising" the Internet. By turning the Internet
over to business, there is an assumption that government revenues will increase through
taxation and the global economy will continue to grow.

While much of the infrastructure of the Internet was created by government initiatives,
particularly in the United States, much of its practical development has largely been fashioned
by its end users. It is the culture of these users which has largely shaped the Internet. Many
early Internet users were scientists, programmers, academics, librarians, intellectuals,
philosophers, political activists, utopians and artists; they were not representatives of
corporations. In recent years, more individuals have joined and contributed to the development
of this unique Internet world, making it a viable alternative to the real world (which may
explain its fundamental popularity). Native Internet business and culture operates quite
differently from real-world business and culture.

Scarcity, Territory and Cyberspace

Humans are territorial; status and fitness are measured largely by the ownership of territory
and property. Human economic hierarchy is based on this behaviour and the fact that in the
real world territory and property are scarce (which leads to competition). For the purposes of
this discussion, territory and property should be understood to be any resource that is scarce,
anything from agricultural produce to artifacts such as CPU chips. Scarcity underpins the real-
world economy. If some object is scarce, it is valuable; if some objects are abundant, then they
are relatively less valuable. Money is a measure of the relative scarcity of property. Some
property (such as land) is intrinsically scarce and is therefore intrinsically valuable.

Several Internet terms betray our territoriality, such as domains, cyberspace, namespace, e-
mail and IP addresses, and Uniform Resource Locator. We have invested a communications
network of computers with imaginary territory, space and place. In reality there is no "there"
on the Internet except in the physical location of cables and hardware. Our spatial conception
of the Internet is pure analogy.

The native Internet culture has adapted to this imaginary Internet space, which is by definition
abundant. Information - the predominant property or commodity - is abundant and largely
free. So the native Internet economy is based not on scarcity but on abundance, this is the
primary difference between the Internet economy and the real-world. In many ways the native
Internet economy is similar to that of hunters and gatherers who inhabit tropical rain forests.
Resources are abundant, giving and sharing are culturally valued, status is determined by
prowess, contribution and reputation rather than possession of property and territory. The
interface between the real-world economy and the native Internet economy is essentially a
clash of cultures.

Disintermediation and Competition

Disintermediation is the elimination of the middleman. The proliferation of free products and
services as well as non-monetary transactions on the Internet can be related to the grassroots
nature of much Internet activity. The fact that many individuals and groups have donated their
time, energy and expertise - operating on a digital shoestring - means that they necessarily
operate in a disintermediated environment.

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While some native Internet business models (such as ISPs and other service providers) are
intermediatory, most native Internet business is disintermediated. Hence it is cheap or free.
Most real-world business activity is intermediatory; this includes the retail and financial services
sectors. A relatively small proportion of real-world business activity produces real goods or
services.

The colonisation of the Internet by real-world business enterprises is bound to introduce new
layers of intermediation. Such intermediation will tend to introduce a cost. Where a free
product or service already exists on the Internet it may be difficult or impossible for a
comparable fee-based product or service to compete. The only way for many real-world
enterprises to compete is to offer free products and services; access to free browsers from
Netscape and Microsoft is an example of this phenomenon. While this situation may present
advantages to consumers, it is difficult to see how viable profit margins can be maintained by
traditional real-world businesses which seek to colonise the Internet.

Conclusion: Internet Imperialism

It is not clear whether transplanted real-world business models and native Internet business
models can co-exist indefinitely. The aggressive nature of real-world business and Economic
Rationalism tend towards domination. The native Internet economy and culture islargely free,
disintermediated, deep-rooted, ecological, decentralised, radical and politically sophisticated.
These two cultures are opposed (if not mutually exclusive) and one or the other may ultimately
prevail or new hybrids may emerge.

It is quite possible that I-Commerce will fail to achieve what governments and business expect.
Currently, corporations are engaged in the colonisation of the Internet with the assistance of
some governments. As planetary environmental limits stem the infinite growth required by
capitalism, the Internet is regarded as an infinite territory capable of infinite growth and infinite
exploitation. This view of the Internet is fallacious as all human economic activity is limited by
physical reality. As Tim May said "You can't eat cyberspace". A global economic recession or
depression would undoubtably affect the Internet and the development of I-Commerce.

The unresolved debate around Internet regulation is also a limiting factor. The regulatory
controls that have evolved in the real-world economy are not generally operational to the
Internet. There is reluctance by some governments and some netizens to accept the necessity
of such regulation. While such a regulatory limbo prevails it is unlikely that consumers will
embrace I-Commerce en masse. The assumption that consumers will gladly relinquish locally
based real-world business (which is usually well regulated by consumer protection regulation
and legislation) for a global economic free for all underpins the hyped projections of the
exponential growth of I-Commerce. This mass acceptance of Internet Commerce by consumers
has not yet happened and may never occur under current conditions.

Internet Commerce may not fail, but its ultimate successful form is probably not what is
envisioned by the current crop of Internet Commerce evangelists.

Acknowledgements

The author would like to acknowledge those friends and colleagues who kindly reviewed the
document and contributors to the seminal Australian e-list - the Link List
(http://sunsite.anu.edu.au/link).

About the Author

Paul Bambury is a composer and producer of electronic music who has released music in
Australia and in the USA under the names Alien Headspace and the Trancendental Anarchists,
respectively. His interest in Internet Commerce originally sprang from a desire to market his
music on the Internet and avoid the exploitative intermediation of some record companies. He
is particularly interested in hearing from electronic musicians who seek to use the Internet to
sell their music.
E-mail: taqpah@webone.com.au

Copyright © 1998, ƒ ¡ ® s † - m ¤ ñ d @ ¥

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