A year ago, when amazon.com's founder and chief executive, Jeffrey Bezos, flew in from Seattle to visit the Harvard Business School course on electronic commerce, a student drove him to the airport for his return flight. But Amazon.com, which sells books and music on-line, went public last year; this spring, Bezos made his B-School pilgrimage by corporate jet and limousine. Amazon's rising fortunes are perhaps the best-known example of how Internet business has grown, but the delivery of services through technological channels goes far beyond books and music. "The service economy represents about 80 percent of the wealth creation in the United States," says associate professor of business administration Jeffrey F. Rayport '81, Ph.D. '92, who teaches the "marketspace" course. "And the biggest revolution going on in that big chunk of the economy is the use of screens: face-to-face transactions are being replaced by screen-to-face transactions. It includes not just computers and the Web, but things like kiosks, ATMs, and cable television."
Consumers can buy auto parts, software, and even groceries by computer. "There are trade-offs between the time it takes to go to the store physically and the shopping advantages of being there," says Rayport. But "they'll bring a UPC [Uniform Product Code] scanner to your home to scan the codes on the packaged foods in your pantry and record an inventory of your preferences. Any branded product could be marketspaced. You can click on the degree of banana ripeness you want on your computer screen."
Books and CDs are ideal products for "e-commerce" because they are fungible: all new book titles are physically identical objects, no matter where and how they are sold. By operating in virtual space and fulfilling orders by mail, Amazon.com vastly reduces its overhead: it has warehouses, but no physical bookstores. Consequently it can discount books dramatically, and offer 2.5 million titles; it will also search for many titles that are out of print. (The largest book superstores stock only 170,000 titles, and there are only three of that size in the country.)
Bezos chose the company's name in part because "A" begins the alphabet--positioning Amazon.com at the top of alphabetical lists retrieved by computer searches--and partly as an allusion to the world's largest river (the company bills itself as "earth's largest bookstore"). Though a bookselling behemoth, it is not alone in the marketspace: Barnes and Noble, which has 550 book superstores, began selling books online in 1997. Michelle Toth, M.B.A. '95, who assisted with Rayport's course, compares the current "duopoly" competition between these two giants to Coca-Cola and Pepsi in soft drinks, or Microsoft and Netscape in Web browsers: "It's head-to-head, a mature company and a start-up company, selling the same thing in the same space. The players respond almost immediately to every strategic or tactical move by the rival."
To build a customer base, each firm has been enrolling other websites as "associates" (Amazon.com) or "affiliates" (Barnes and Noble). An associate of Amazon.com (there are now about 100,000) can act as a "storefront" with an embedded link to the megabookstore; whenever a consumer clicks through the portal and buys a book, the associate receives up to a 15 percent commission on the sale price.
Rayport and Toth, along with Baker professor of business administration Len Schlesinger, D.B.A. '79, who helped teach this spring's course, found a novel way to give students a feel for the pace and parameters of e-commerce. They divided their 300 students into 40 teams of six to eight members, and had each team design an on-line bookselling site associated with Amazon.com, Barnes and Noble, or a smaller competitor, Bookstacks.com. "We wanted to bring a real world, real-time experience to the fingertips of the students," says Toth. "This is not Monopoly money; it's reality."
The 40 electronic bookstores were open for four months and donated their profits to charities; an adventure-book site, for example, helped The Nature Conservancy. "LDS Books," which took its acronym from Latter Day Saints and specialized in Mormon books, sold the most volumes, 77. But the most profitable site was "Twice the Gift," which generated $129.37 in commissions on expensive gift books. This virtual store even offered a consultation service--"Ask the Gift Guy"--which helped the course instructors find a perfect gift for a chocolate-loving Business School colleague who was becoming a minister: The Chocolate Bible. A site with a sexual theme opened as "Hotbooks.now!" and got plenty of hits, but made few sales. The team then did focus-group research, redesigned and renamed their site "HeartandSoul.com," and watched sales climb. One site was even brought down by lawyers who charged it with trademark infringement. "Now there's a site that we know somebody cared about," jokes Schlesinger.
Thus, the e-commerce course erased some of the boundaries between the academy and the real world of retailing via screen. Among other things, students learned that even though the store shelves are virtual and some operating policies and conditions are radically new, electronic commerce is not necessarily exotic. "It's not about technology," as Michael Speiser, M.B.A. '98, puts it. "It's about marketing."
~ Craig Lambert