Business and the Internet

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Introduction

Today creating a business has become a great opportunity as well as a challenge. Since there is so much competition entrepreneurs have to gain competitive advantage. Due to the emergence of the Internet the business world has dramatically changed. The perception of consumers has as well. Ever since the Internet appeared and became extremely successful for people it became a big part of their lives and for businesses it opened never before seen opportunities. ‘The Internet has proven itself to be the most significant economic and social phenomenon of the latter half of the 1990s’ (Cohan, 1999). At the beginning of the internet there has been an extreme increase in each year after: ‘In the fall of 1994 the number of commercial Internet users exceeded the number of educational and research users for the first time, signalling a major change in the composition of the global network’ (Cronin, 1995). Business seemed to see the possibilities that the Internet could bring and use these to their best advantage. Many businesses discovered that the Internet and World Wide Web are great tools to gain competitive advantage especially in the global market place. However, it really depends on how well the organisation incorporates all the opportunities that the Internet has to offer: ‘The greatest advantage comes from matching Internet capabilities with the key opportunities for adding value to the core functions like marketing, sales, customer support and information management’ (Cronin, 1995).


History

Initially the Internet was funded by the government, therefore, it was restricted to research, government and education uses. Commercial uses were limited unless they helped the aims of research and education. This ended when in early 90’s all limitations disappeared. This was the time when businesses started to use the Internet to its advantage. As more people as well as businesses became more comfortable with the Internet a lot more companies that are similar to one another started to compete no matter of their size. Since the Internet offer an open environment it gradually became easier to compete in a certain market. Therefore, the marketing on the Internet progressed throughout the end of 20th century and the beginning of the 21st. The Internet offered an opportunity to businesses to display their products, various offers and prices very easily and made it less difficult to compete in the global market place. The developments and growth of the Internet became a big part of the way businesses not only market themselves but also manage sales, information and customer support.

Around this time many internet based companies appeared. One of the first ones that attracted extensive stock market attention was Netscape (founders Jim Clark and Marc Andreessen). Many other businesses developed such as Yahoo, AltaVista, WorldCom, MCI, etc. A lot of .com companies appeared selling everything from toys (eToys) to pet food (pets.com) to medical advice (webMD.com) (Schifferes, 2006). This period is known as Boom times. Since there were so many companies founded in the 90’s so quickly, there had to be a slowdown. In 2000 stock prices of many internet companies decreased. This was the time for dominant companies that during this time were able to strengthen their position in the market even more. These included businesses like Google, Yahoo, Amazon and eBay. Schifferes (2006) compares the internet boom to the ‘railway mania’ of the 19th century. ‘Although prices were inflated, and over-investment occurred, the new means of communication, just like the new means of transportation in the 19th century, soon revolutionised many business functions by lowering transaction costs’. This led to broadband revolution when the internet became faster.

Today most businesses have their websites and most consumers check the products, their availability and compare the prices on these websites. The statistics that show the internet change and its influences to people and business just prove that internet developed into a big part of how we do things. The growth of the internet and its presence in the society can be seen in these facts:

  • The most common products consumers' research online and purchase off-line (at the store or outlet) are: automobiles, computer, hardware, travel, electronics, books, appliances, music, sporting goods and clothing.

  • Over 25 percent of all business-to-business purchases are placed through some type of internet connection.

  • The five top business-to-business e-commerce products are computers and electronics, motor vehicles, petrochemicals, utilities, papers and office products.

  • In 2004, 10 percent of business-to-business advertising dollars were spent on the internet. The total amount spent was $8.7 billion.

  • About 54 percent of the e-mail users have responded to an e-mail advertisement. Almost half purchased a product.

  • Internet retail sales account for almost 2.5 percent of all retail sales.

(Abdulla, 2009)


The Long Tail

Chris Anderson, who is the editor – in – chief of Wired magazine, popularised the theory of Long Tail. This theory is explaining the change in customers’ preferences due to the internet based companies and in some cases different technology. ‘The theory of the Long Tail is that our culture and economy is increasingly shifting away from a focus on a relatively small number of "hits" (mainstream products and markets) at the head of the demand curve and toward a huge number of niches in the tail’ (Anderson, 2006). The internet provided the opportunities for businesses to get rid of the physical shelves place, which usually costs a lot of money, and stop trying to sell only the most popular products. The long tail represents the idea that there is now a possibility to choose from a greater variety of products rather than to rely only on the popular products and services. In the graph below this represented by the orange part of the sales chart. ‘The vertical axis is sales; the horizontal is products. The red part of the curve is the hits, which have dominated our markets and culture for most of the last century. The orange part is the non-hits, or niches, which is where the new growth is coming from now and in the future’ (Anderson, 2006). In the earlier research Castells (1996) identifies shift from mass to a flexible production. It can be seen as the early developments of Long Tail theory. 'When demand became unpredictable in quantity and quality, when markets were diversified worldwide [...], when the pace of technological change made obsolete single - purpose production equipment, the mass production system became too rigid and too costly' (Castells, 1996).

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Source: Long tail (2006)

Due to the internet based companies that are now offering endless choice for consumers, the real shape of demand can be seen. The number of products which are not that popular (a huge number of sales per same item) all put together outgrows the number of the hits that are sold. When Amazon first started there were quite a few examples of people who bought one book and found similarities to another book that might have been much older also bought the latter book.


Chris Anderson describes this in his book ‘The long tail: how endless choice is creating unlimited demand’:


‘When Into Thin Air first came out, a few readers wrote reviews on Amazon.com that pointed out the similarities with the then lesser – known Touching the Void, which they praised effusively. Other shoppers read those reviews, checked out the older book, and added it to their shopping carts. Pretty soon the online bookseller’s software noted the patterns in buying behaviour and started recommending the two as a pair’.


Some time ago most people would not even be aware of the older book and most probably if they were the book was nearly out of print. Businesses like Amazon gave consumers the possibility to first of all find out about the book (giving suggestions as we see now: if you are looking at one book, they are also suggesting what you might be interest due to the first one you looked at) and second of all to be able to purchase it.

This is just one of the examples of the Long Tail. Anderson also discusses other businesses that changed the way we buy things. He explains how the record business has been transformed by the iTunes and Rhapsody, which will be discussed later on.

Anderson (2006) also suggests how to create a long lasting long tail business like Amazon, iTunes or Google. There are two imparatives:

  • Make everything available.

  • Help me find it.

Today, when the internet is used so extensively in most parts of our lives and in a lot of parts of a business, it makes it easier to achieve. However, there are limitations to this. Anderson (2006) identifies some of them. Legal restrictions can minimize the chance of distributing the music, films etc.

Rules for successful Long Tail business

He also identifies nine rules that have to be followed in order to create a successful long tail business. These are:


- Lower your costs

1. Move inventory way in . . . or way out

A lot of businesses are using their existing warehouses to store products rather than showing them on the shelves and offering these to buy online. [[image:/-/file/view/file/view/success_pic.jpg%2F312982296%2F288x241%2Fsuccess_pic.jpg width="288" height="241" align="right"]]Businesses such as Amazon go even further offering products that they do not even have in their warehouses. They have their ‘virtual inventory’, products that are located in the partner’s warehouse but are sold on the Amazon website.

2. Let customers do the work

The reviews of the customers created businesses such as Wikipedia, eBay and MySpace. Peer reviewed material is often more valuable to customers. Consumers are more likely to trust this kind of reviews. This does not cost the company a thing and therefore, saves money for other developments.


- Think niche

3. One distribution method does not fit all

Businesses need to consider that all people are different, some of them like to shop online some do not, other like to look around in store and buy online and vice versa. If a business tries to target only one group of people they might lose the other one.

4. One product does not fit all

Today customers have a choice online. Looking at the music, there used to be a time when the only way to buy music was to go to a shop and buy an album. Now with the internet and the businesses that it helped develop you can buy one song, a remix of that song, a ringtone or a music video. The idea is to divide a product into ‘chunks’ and let the customer decide how they want to consume it.

5. One price does not fit all

Retailers most often can offer only one price at a time. In contrast, internet companies like eBay try to give consumer a choice offering auctions or ‘Buy it now’. This depends on how much money or time a person has.


- Lose control

6. Share information

Tools such ‘rank by price’ and ‘rank by review’ helps a customer to make a decision and buy the product. Also buying patterns which later change into recommendations can be an influential tool. This kind of information is not available in stores.

7. Think ‘and’, not ‘or’

Rather than focusing on either/or choice businesses should concentrate on ‘and’ approach. In the endless possibilities of the internet it is better to offer it all. People try to predict the choice that most consumers would make, but there is always a group of people that would make a different choice.

8. Trust the market to do your job

In usual markets you have to predict what will sell, on the internet you do not have to guess and just put everything. Measuring what is already sold is much easier and more accurate than predicting what will be sold. Thus, it becomes easier for consumers to compare goods, because there is so much accurate information already out there.

9. Understand the power of free

Because the online services are so cheap to offer the price of them is near to zero. Companies such as Skype or Yahoo are able to offer their services for free and have only a tiny amount of people that upgraded their services and need to pay for it.

Online Shopping

Introduction to Online Shopping:

Online shopping has been increasingly popular in the UK and is on the rise. Customers have more of a variety of choice from grocery brands and comparison sites as well as entertainment and downloads. With customers using easy and time friendly ways to purchase their products online shopping has becoming big in the Online Business market. The rise of technology it is important for supermarkets and other larger companies to stay competitive and create successful and user friendly shopping sites.

Target Market:

Online shopping has started to pick up and become successful in the UK market. The age profile of online grocery shoppers broadly follows the age profile of all internet shoppers, with a profile which skews largely towards the younger shopper. This is particularly the case for 25-44 year-olds, and is closely linked to the presence of children in the household. (The food and Grocery Experts:2011)

As stated above 25-44 is the more likely age group to do online grocery shopping, this could be due to the ability to use online services well and the fact it is less time consuming therefore for the working professional Online shopping is a convenient way of shopping Online.

Online grocery forecasts to 2015 (£bn)

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(The food and Grocery Experts:2011)

Above shows the expected revenue forecast for online shopping, there is a clear indication that this innovative business will keep on increasing and attracting more customers to change their shopping habits. From 3.3 billion to a estimated 9.9 Billion by 2015.

Competition with Online Shopping

With the demand of online shopping becoming increasingly competitive many of the supermarket chains are competing with each other to dominate the online market. Tesco.com will lose its online shopping dominance to Asda within just six months if consumer trends continue, according to the UK’s leading discount website. So far Tesco is losing the lead to Asda, with a share of 36% and 31% respectively. ( Asda is closing the gap on Tesco’s online sales,2010). As stated Tesco was dominating the market share of online shopping however with more grocery brands becoming aware of the benefits of online shopping Asda has taken over with a 5% more advantage in the market.

For the global consumer, these are truly the best of times because the countless online shopping sites are waging a fierce competition to give them the best products and services at the lowest possible prices. ( The Shopster Blog,2011). Even though there are a number of brands competing in the market this is good news for consumers. This gives the consumer more choice of brands and products for the best price.

The main reason customers use online shopping services is to save money on shopping. The No. 1 reason consumers abandon shopping carts online is that they find a good deal, then get to checkout and see additional shipping and handling and taxes ( Rothman,2007). As the author has clearly highlighted, online shopping may have many advantages such as variety of products displayed and cheaper costs however companies can add shipping and delivery costs which can be considerably high, this may have a negative impact on sales as some customers may not see the benefit for paying money for delivery and shipping.



Music revolution


With the appearance and developments of the internet the whole business world has changed dramatically. One of the areas that were modified in a radical manner was music industry. The internet and businesses that developed during this time changed the way consumers acquire music and the way that businesses distribute it. ‘From the relatively burdensome usage of the CD player and physical collection of several CDs, these have morphed into the single digital library on a person’s computer which is synced on their MP3 player which easily goes everywhere they will’ (Kennedy, 2012).


Mewton (2001) identifies the positive impact of the internet on the:


  • Record labels and publishers


Online marketing can help record labels advertise more extensively as well as reach niche audiences. Not to mention that labels can now sell their music directly to the customers rather than going through retailers.


  • Musicians


The internet gives musicians so many more opportunities to appeal to their fans. This happens when unsigned musicians promote themselves to record companies or already known musicians who have a fan base promote their music directly to people rather than using the help of record companies.


  • Music fans


This is the first time that customers have so much choice. They can choose only one track or the whole album, listen to original version or a remix. While the broadband is getting faster and faster, fans are getting the music more efficiently in the comfort of their own homes. Various concerts and gigs are available to stream for fans that are too far away from where the concert is or for the ones who cannot afford it.


Case study: iTunes

[[image:/-/file/view/file/view/itunes_logo.jpg%2F313134730%2F320x100%2Fitunes_logo.jpg width="320" height="100" align="right"]]iTunes was introduced by the Apple company in 2001. It is a computer program that allows users downloading, storing, playing and organising their music, music videos, movies, TV shows, podcasts, etc. Later on iTunes introduced iTunes store, which offers customers to buy and download the music. This way of buying music became so successful that over 2million songs were sold in the first few weeks. But why did it become so successful? Morris (2010) identifies that selling music on the internet is not a new idea or that the equipment needed (right software, PC with a CD burner, connection to the internet) was available for a while. Previously ‘the record industry went overboard on copy protection schemes, and the public wouldn't buy it’ (Morris, 2010). Apple chose new approach. They understood that people want to buy their music and be able to have it in any format later whether to listen to it on their iPod or burn a CD. ‘The site offers users safe and legal access to an extensive collection of music at a price they perceive as fair’ (Larreche, 2008).

iTunes is a great example of a company that changed how businesses can incorporate the internet to their best advantage. It is also a great example of how the internet and current businesses modified how the public listen, download and buy music. The revolution of music is one of the greatest changes in the music distribution history over the past few decades. One of the Ted.com speakers David Pogue, who is the technology columnists for the New York Times, performs a medley summarising the changes in music and television industries.












Case Study: Spotify


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Introduction

“The emergence of broadband networks, for mobile and fixed environments, has stimulated the multimedia market for the delivery of enriched digital media and entertainment services” (Pavlovski and Staes-Polet, 2005). While iTunes was part of a revolution to make music available for digital download it is no longer the newest way for people to get music online. The next big step in the music revolution is Spotify. “Spotify is a music streaming service offering low latency access to a library of over 8 million music tracks. Streaming is performed by a combination of client-server access and a peer-to-peer protocol” (Kreitz and Niemela, 2010). Spotify is completely legal and comes in the form of a desktop application that can stream music even when you're offline. However this music-subscription service comes with a catch. The following video is a quick advert by Spotify showing how their service fits into the music revolution.




Spotify is expected to drive people to paid subscriptions by capping the hours of free listening per month as well as the number of free plays per song. For £4.99 per month, customers can eliminate adverts between songs and visual ads within the application while for £9.99 per month users can utilise the mobile application as well which will stream selected playlists even when the listener is offline. This is planned to take place soon in America and the site made this shift in Europe in April 2011, where a 10th of its 10 million users now have premium accounts, a sign that Spotify could be one of the first online music services to really understand the digital economy (Townsend, 2011). The fact that the founder of Spotify, Daniel Ek, is in joint 10th place on the Sunday Times Rich List with Sir Mick Jagger also suggests the company knows what it’s doing. The Swedish entrepreneur founded Spotify in 2006 and it now has three million paying subscribers, having launched in the US last year and announced a partnership with Facebook. The business is valued at £1.2 billion (Singh, 2012).

Spotify has also turned what was previously just a music app into a music platform. Spotify now has a new open platform that will let developers create third party applications to run on his system this strategy has previously adopted by both Apple and Facebook with great success. The application now running on Spotify fulfill various functions such as increasing the social nature of the service or providing lyrics to the songs (Bertoni, 2011). Another popular function for applications is the creation of playlists for users to enjoy.



Revenue Model


Spotify’s success may be down to its use of several different revenue models which allow it to capitalise on the benefits of both methods and to use one to power the other. The first model is their advertisement funded system, in this version of Spotify users do not pay any subscription charges but are subject to adverts while the company has paying customers, they numbered less than 10% of its user base according to comments from CEO Daniel Ek at a London conference in 2009 (Bruno and Paine, 2009).

The second way in which Spotify make money in their free version is through downloads. By limiting the number of times a song can listened to, not allowing music to be listed to offline, and not allowing use of the smart phone application the company encourages users to download their favourite songs through Spotify. This process is simple and easy to use and comparable to that of iTunes. The downloads side of the operation is run through a partnership with 7digital and combined with the advertising revenue “a significant revenue source” (Bruno and Paine, 2009) according to Gustav Söderström, head of mobile at Spotify.

However according to Bruno and Paine (2009), “no ad-funded service has been able to turn a profit from advertising and download revenue alone. Which is why Spotify doesn't intend to. Using the ‘freemium’ model, the company hopes to convert a portion of its free user base to the premium tier.”

The free version of Spotify acts as a customer acquisition method and may not even be the most expensive one they could use. Napster previously estimated its customer acquisition cost at $100 per user, due to all the advertising needed to explain its subscription model (Bruno and Paine, 2009).By allowing users free access to any song on demand amounts to an indefinite trial period. While competitors such as Rhapsody and Napster usually limit their trial periods to around one week, after which users will need to pay and this short trial period may not be long enough to get users interested in the idea of subscribing. This free trial makes the customer acquisition process easier than it would be if the company were to start with no users. They would have to put a lot of money into their marketing to get users attention where as Spotify need not do this (Bruno and Paine, 2009). One particular way in which Spotify can be seen to be promoting its subscription service for free is the offering of a 30 day free trial of its premium service for all free users, this allows users to experience the benefits of the subscription service which may lead to users becoming customers when they miss the lack of adverts and unlimited access. Spotify also uses this trial to obtain their users payment details which makes it even easier to upgrade or to download tracks in the future.

This leads to Spotify’s third method for making its money, through subscription. While evidence for the success of this method in conjunction with the others used by the company has already been suggested it has been put forward that this revenue model is one of Spotify’s weaker offerings. The value proposition of subscription has to change," Forrester's Gandhi says. "There has to be ownership. There has to be something besides just renting music." (Bruno and Paine, 2009). One suggestion is that users could be allowed to keep a certain number of songs per month, such as the five tracks Napster gives away as part of its $5-per-month streaming plan. One element which could provide some increased benefit to this model is the inclusion of the Spotify mobile application with premium subscription.

Previous offerings of a portable subscription options required transferring tracks from desktop to portable device, which users needed to synch with an online service at least once per month to refresh the licenses. Services were based on digital rights management technology from Microsoft that had a reputation for being unreliable and the dominance of the iPod had made them irrelevant (Bruno and Paine, 2009).

Spotify uses the mobile phones to stream the music rather than download it which gets around these issues. Since mobile networks can be unreliable, it is also possible to temporarily cache more than 3,000 songs on supporting mobile phones, without using the 10 GB of storage normally required to do so. Users of the application must still connect to Spotify every 30 days to verify their premium subscriber status but this now provides a viable subscription based alternative to using an iPod on the move.



Criticism



As well as some criticisms over the value of subscribing to Spotify some artists are withholding their music from streaming services like Spotify. Notably Adele’s latest album 21 is not available on Spotify and while her single Someone Like You was being played all over the radio it was not available on Spotify. This may have a negative effect of user’s perceived value of the service if they cannot find tracks they want to listen to. Even if it does represent a small percentage of the music out there if more popular music is not available then users will download or purchase the music elsewhere instead.

Another example of this lack of willing to make music available through Spotify is Coldplay’s album Mylo Xyloto. This is available through the application now but was only made so for several months until after its release on iTunes and in stores. In this Coldplay’s manager and other like minded managers “are mimicking the so-called windowing practice pioneered by Hollywood. Movie studios usually stagger the release of films, first to theatres, then on DVD, and later on cable channels and streaming sites like Netflix. That strategy maximizes revenue for movie and TV producers, says Needham analyst Laura Martin, but could be a problem for streaming sites if the practice becomes widespread in music” (Fixmer, 2012).

This, according to Fixmer (2012), is not only a problem for Spotify but for the music industry. Several major record labels, including Sony Music entertainment and Warner Music Group, have taken advanced payments from Spotify to allow their music to be streamed through the service. The problem is they cannot force major acts to support the site either due to contractual agreements or just because the star has too much leverage.

In response to this issue supporters of Spotify say that streaming services “are already the recording industry’s second-largest source of revenue after iTunes” (Fixmer, 2012) and with Spotify paying $150 million to rights holders in 2011 (Fixmer, 2012) it would seem that artists resistance to allow their music to be streamed may be making a mistake. One point is that Spotify does not replace the downloading of music tracks, especially true if the user is using the free service and even in the case of the first tier subscription service. This can lead to people using Spotify and deciding they like a song so much they wish to download it or purchase it elsewhere, the streaming service then can be seen as a promotional tool for artists. Despite their bands lack of willing EMI, Coldplay’s label, are enthusiastic saying "Services such as Spotify are currently generating more revenue per user to EMI and our artists than the average digital music consumer generated in a world without these services," according to Mark Piibe, head of business development for EMI (Fixmer, 2012).

Justin Bieber’s manager says the problem may simply be technophobia. According to Braun "there were a bunch of artists who wouldn't sell music on iTunes when that first started, and now it's standard," he believes "the same thing will happen with Spotify” (Fixmer, 2012).


Discusion


Spotify has made good efforts to promote itself and to encourage subscription to their service. Critics believe that the paid options for Spotify do not represent good value for money with too few benefits for the cost of subscription but as the company is performing well financially so far it would suggest that people are happy with the service they are receiving.Overall it would seem there are positives and negatives to Spotify with various sources both singing its praises and criticising its faults. It may not be possible to say whether Spotify is definitely the next big thing but the evidence would suggest that people are very receptive to subscription music streaming services and Spotify may be one way to deliver this service.The evidence seen here suggests that the music revolution will continue and businesses will have to find more ways to use the internet to provide people with services and products which they want especially in the digital delivery of media.


For managers this kind of business brings its own challenges, not only do they have to be seen to be providing value for money to their subscribers but they also have to convince th music industry that allowing their music to be streamed is benificial for them too. In the future it is possible that this kind of service could replace the current music download services like iTunes but at the moment the people behind spotify need to show the benefits their product offers over the existing competition.

Conclusion

The internet changed the way business does various things in the last couple of decades. Nowadays most businesses use the internet and World Wide Web to gain competitive advantage over the other companies in the same market place. The most efficient way that business should use the internet to acquire that advantage is to know how to incorporate it into some or most of the parts in their business. These might include marketing techniques to apply to a greater number of people and customers who otherwise would be unreachable, techniques to increase sales or improve customer support. In any way the internet offers unlimited opportunities to various businesses.

One of the industries that have been changed by the internet and technologies is music business. The developments in these kind of companies such as iTunes impacted people habits and changed the way we perceive music distribution, storage and shopping. Not only did it changed buyers' perspectives but also modified the business model for these kind of companies.

References


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Spotify has just turned its music app into a music platform. Today in the West Village Spotify co-founder, Daniel Ek, took the stage to showcase Spotify's new open platform that will let developers create third party applications to run on his system--a strategy previously adopted by both Apple and Facebook with great success.