In the theory of microeconomics, perfect competition models are very useful in studying and understanding real markets. However, we are accustomed to think of these models as theoretical concoctions with such abstract terms as undefined price elasticity and little bearing to economic reality.
We may experience a paradigm shift when we look closer at the impact of the Internet on the worldwide commerce.
The year 1995 witnessed the advent of Amazon.com and is now considered the birth year of e-commerce. Initially e-commerce was slowed down by security concerns, technological barriers, and the resulting lack of shopping audience. Amazon.com was one of the firsts to overcome these problems by a positive feedback of sales and customer trust. 1998 has brought a number of breakthroughs of which massive on-line store outsourcing have taken away payment processing and security worries from the merchants and ultimately from the customers.
With cheap outsourcing, nearly anyone can become a telecommuting e-tailer. With low market entry barriers and comparison shopping, on-line retailers are forced into the position approaching zero price cross-elasticity reminiscent of perfect competition in which prices are determined by normal profit leaving no margin for any attempt to undercut the competition.
No wonder that conditions of nearly ideal information exchange forced the trend called disintermediation in which old business models crumble to benefit the new model based on portals, shopping guides and original manufacturer sites. Interestingly, even Amazon.com does not exactly subscribe to this model which forces it to make use of economies of scale, expanding customer base, broadening the definition of the business model and constant catch-up game with global e-commerce trends.
As a result of e-commerce explosion, the theories of profit will all converge onto a single model with little space for friction and monopoly theories. Despite this drive towards perfect competition, the economic profit of a future e-commerce enterprise will not be zero. Businesses subsisting on normal profit would mean a sad disappearance of the flamboyant likes of Rockefellers and Gates and the arrival of a bleak all-leveling rat race. Zero inflation and full-employment cannot be of comfort here. However, it is well known that advertising is the main non-merger factor of market concentration. The concept of a free hyperlink is likely to act in the same way. However, this is a largely product-independent factor. At the same time, it becomes evident that all compensatory, functional, and innovation-based theories of profits will likely be unified and that the economic profit of future e-commerce enterprises will be a direct derivative of innovation. This will be further solidified in terms of market share by the economies of scale; however, the level field of ubiquitous information will place innovation at its right place in business: at the top of the hierarchy of priorities. Additionally, recent trends show that on-line trading in shares can completely change the way upstart companies are financed and change the criteria used in judging their earning potential. Recent IPOs indicate a upsurge of popular interest in all dot com companies with little relevance in their actual bottom line. It is clear that good ideas will find it easier to seek solid financial backing (cf. www.garage.com). Its good news for innovation.
By the year 2000, 300 million people will have gained the access to the Internet (more than the population of the United States). In the US, already 50% of Internet users are e-commerce ready. This way, apart from being good news for innovators, e-commerce is also bound to become a significant chunk of the global economy. Forrester Research Inc. (1998) puts the expected on-line retail sales at 6% of total retail by 2003. 2-3 years later, the same proportion of global GNP will be generated by e-commerce.
Interestingly, the size of the web is doubling every eight months while traffic doubles every 100 days. In conclusion, an orphaned page registered with a single search engine might expect a noticeable increase in the number of random hits with time.
Naturally, the true net traffic gains will come from information consolidation, information quality and from innovative content. This bodes well for businesses with their own innovative contribution to live up to the principle saying that quality information (and products) beget dissemination which begets traffic which begets sales.
In these circumstances investment in content and the reliance on syndicated traffic or syndicated sales may produce better returns than investment in classic forms of promotion, including the Internet promotion (e.g. banner advertising). That is again good news for innovative businesses that can dissipate fewer resources on attracting poorly targeted audiences. It will not spell the demise of advertising campaigns in classical media but it will certainly sharpen the criteria of expected return on investment.
The number of marketing tools made available to an on-line merchant is staggering and is growing constantly along with the net technology. You name an idea and you sure have or will soon have it implemented to benefit your promotional effort. And one of the best promotional tools … free information.
One of the central issues in e-commerce will be the effort to increase sales-to-visits ratio. As traffic growth seems nearly guaranteed, the focus is on providing the customer with high quality shopping experience to effect the sale and capitalize on customer loyalty and repeat purchases. This is also good news for the customers who are suddenly catapulted to a true focus of attention of companies that can now shift resources from other aspects of running a business.
The case in point I want to discuss throughout this article is SuperMemo: a software application based on a novel learning technology called the repetition spacing. Repetition spacing makes it possible to compute optimum inter-repetition intervals in learning thus practically eliminating the problem of forgetting. SuperMemo has been developed and marketed since 1991 by SuperMemo World, a company set up exclusively with promoting the repetition spacing technology in mind. As of June 1997, SuperMemo has been available via the Internet and a great attention has since been paid to increase the proportion of Internet sales in total company revenue.
We believe that SuperMemo is an example of a product that is bound to be an excellent material for success in e-commerce. As argued above, its strongest point is innovation. Indeed, in its category of repetition spacing software it does not practically have competition. There are only a couple of programs in the flash-card category and some more in the areas of learning enhancement, mind-mapping, speed-reading, etc.
With its monopoly on core technology, SuperMemo can enjoy a new renaissance on the Internet. There are few customers who search for software of its kind. The vast majority yet need to discover that findings on memory and learning can neatly be used in practice and it all has already been encapsulated in a piece of software than can run on 90% of PCs worldwide.
The novelty factor has traditionally made it difficult to sell SuperMemo via classical distribution channels. Thanks to its constant adaptation to current trend, SuperMemo has gained significant prominence in its home country, Poland, and as such was easily placed in all major distribution channels. However, with the maturation of the software market it became apparent that major distribution channels rendered its sales ineffective in comparison to popular demand applications. Consequently, the sales had to be driven by constant stoking up of the interest of the press, intimate dealership, dedicated sales representatives, advertising, etc. Similarly, worldwide sales had strongly been correlated with the particular distributor’s ability to capitalize on the novelty of the product. It has never gained the heart of box-shifters, while it has stayed with lesser dealers who were able to develop an intimate relationship with the customers and the media.
Only the Internet made it possible to overcome the major purchase barrier: lack of support and quality information about the product. SuperMemo websites became an effective marketing tool of constantly increasing importance. Only now the true value of releasing earlier software versions into public domain becomes evident. There are few shareware users ready to register through a payment. However, there are scores of those who gladly buy the newest commercial version of the program.
Sales of SuperMemo via the Internet have grown from 0% in 1997 to 13% of the total company SuperMemo-derived revenue in 1998 [this percentage dropped significantly upon the release of Easy English in Poland]. The same year, the Internet sales outpaced the total revenue growth by 10 fold. Remarkably, SuperMemo is now sold to remote places the company could by no means reach via the traditional channels. Be it a small sultanate of Brunei Darussalam or Saudi Arabia where government restriction make Internet access a privilege of a few.
It is important to note that in 1998, 82% of the web was written in English and 80% of users of the web speak English. This is why English-language site is particularly important for the company. It is composed of two integral parts, an information server at www.supermemo.com and an on-line store at www.super-memo.com located at Yahoo servers. The information server is composed of three components that are also tightly integrated but provide independent look and navigation: (1) SuperMemo information component, (2) SuperMemo support component and (3) SuperMemo learning material component.
The expected path through which new visitors are lead to become loyal repeat customers is this:
- a new visitor finds out about SuperMemo from the SuperMemo component on the information server. This component provides all customer information, technical information as well as background information with history of the method, software and research
- the trustworthiness of the site is ensured by 24-hours monitoring by Public Eye which is an on-line equivalent of Better Business Bureau. All customers can file their reports on the merchant making sure that quality service is reflected in report statistics
- the customer is then directed to the commercial component: the on-line store where he can purchase SuperMemo software which can be downloaded immediately upon providing credit card data information
- the customer is then served with support information to ensure he or she can fully exploit the strengths of the software and become a repeat customer for upgrades and the learning material
- finally, the customer is directed to SuperMemo Library which serves as a learning material directory with links to other places on the web where such material can be downloaded or purchased
The on-line store is an outsourced site serviced by Yahoo Stores. Yahoo Stores has been created as a result of $45 million purchase of Viaweb Inc. by Yahoo in June 1998. Yahoo Stores provides unique opportunity for merchants to create a secure on-line store at $100-$300 monthly rate using ready-made templates and high quality e-commerce software. Currently, Yahoo Stores are not open for international resellers (SuperMemo World belongs to the lucky few that have been allowed to open a store). However, this will change in the future making it possible for all merchants to open an on-line store within days without the hassle of software installation, security worries, shopping cart handling, etc.
Additionally, SuperMemo World is currently in talks with Digital River, Inc. which pioneered ESD (electronic software delivery). Entering into a cooperation with Digital River automatically puts software into their 1400 sales channels on the web. Interestingly, all these channels use the same back-end handled entirely by Digital River software. This back-end serves also the original software developer sites and is modeled to approximate the original site’s look and feel. All purchases are handled on-line with real time credit card processing and software delivery via an FTP download.
The greatest advantages the Internet has brought to the promotion of SuperMemo are:
- up-to-date, extensive and complete information about the product is available 24 hours a day, 7 days a week, throughout the world
- the act of sale to the most remote location on the planet takes less than 10 minutes (most of that time is taken by the software download procedure). There is no middleman. All sales go directly via SuperMemo World or its local franchisees serving national language areas
- direct contact with the customer makes it easy to chart future development and understand customer needs and problems. Indeed, only the Internet made a true customer-oriented development possible. Especially that the direction is not blurred by those who purchase SuperMemo CD-ROM titles for their content rather than for SuperMemo itself
- beta-testing over the Internet might be 5-10 times more effective than traditional testing in the field. Sites dedicated to beta-testing make it easy to attract droves of new testers. Many of them become loyal customers providing development feedback for months and years to come. This feedback also provides an excellent way of balancing innovation with software stability
- customer decisions and interests can be studied via on-line questionnaires as well as plain site statistic tools
- costs of support drop manifold due to immediate conversion of user problems into improvements in the on-line documentation (including priceless FAQ files)
SuperMemo does not have to monitor compare.net listings as it is practically a monopolist in its category; however, as any promising technology that is based on algorithms that cannot be fully protected with patents, SuperMemo has seen a number of attempts to copycat its software in the past. Some of these attempts might have seemed to stand a chance to derail SuperMemo World’s effort of standardizing its repetition spacing technology. However, the Internet has clearly reversed all negative trends as technical reference information associated with the product cannot easily be reproduced without copyright infringement and technological superiority of SuperMemo’s core technology must be evident at closer scrutiny. Hence it is now more difficult to encapsulate the algorithms in deceptively attractive package that would mislead the customer as to its true validity. The Internet exposes the core and makes the truth evident. All attempts to produce competitive products of similar functionality will definitely steal away from SuperMemo’s comfortable 100% market share. However, SuperMemo World hopes to succeed in teetering on the thin equilibrium line between technological superiority over the competition and the strength of the competition that is always proportional to technology’s success. In other words, for long we have always managed to stay a few steps ahead of the competition proportional in strength to the size of our unexplored market. Time will tell if this approach will not ultimately attract the attention of a major player that would recognize the potential of accelerated learning and overwhelm our innovative potential with superior resources (rather than opting for licensing or buy-out).
The Internet clearly magnifies the innovative potential of individual businesses. The technology is thus less likely to lose out to unfair competition and the market is more likely to favor the best player. The greatest and the ultimate winner in this game are the consumers: whatever the outcome of the race for a piece of the market pie.
The Internet is a blessing for innovation, which will definitely trigger a positive feedback with technology growth that will ultimately result in a speedy conversion of the global population into an information society
See also: The Economics of Innovation by Ray Kurzweil (1991)