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Electronic Commerce

Any sales transaction that takes place via computer or over the INTERNET.

In 1990, nobody would have predicted that by the end of the twentieth century people could conduct nearly all of their commercial transactions electronically. Today, a person with a simple Internet connection can purchase anything from clothing to books to jewelry to stereo equipment online. It is possible to purchase insurance, pay one's telephone bill, and buy groceries over the Internet. Banking transactions such as transfers from one account to another can be accomplished online quickly and efficiently. Although most commerce is still conducted in person, more than one-third of adults in the U.S. made at least one purchase online in 2002.

Electronic commerce (or e-commerce) has its origins in the 1960s, with the introduction of a computerized check-processing system called the Electronic Recording Machine—Accounting (ERMA). Banks used ERMA to process billions of checks each year, making it possible for nine employees to do the work of 50. During the 1970s, companies began using Electronic Data Interchange (EDI) to process purchase orders, invoices, and shipping notifications. Although EDI could save time and money, it was an expensive and somewhat cumbersome system, and small to mid-size businesses could not afford it.

The introduction of the Internet in the mid 1990s opened electronic processing up to companies of all sizes; anyone with a computer could connect to a global system that reached into countless businesses and homes.

The first major "virtual" company to appear on the Internet was Amazon.com, founded by Jeff Bezos in Seattle. Amazon.com began doing business in July 1995. Its premise was simple: People could purchase books online through Amazon.com for less money than the same books would cost at a local bookstore. Because Amazon.com had no actual retail stores (the books were stored in a warehouse), it could afford to keep prices lower than the competition. If Amazon.com had a buyer's order in stock in its warehouse, it could be delivered within two to three days. In some bookstores, a special order for an out-of-stock book could take weeks. (Today, Amazon.com sells a wide variety of products in addition to books.)

Not long afterward, in September 1995, Pierre Omidyar and Jeff Skoll founded eBay, an online auction service. Essentially, eBay allows sellers and potential buyers to deal online; as with a live auction, various buyers bid for an item, and the seller accepts the highest bid.

In the ensuing years, Amazon.com, eBay, and similar virtual companies cropped up on the Internet. Established "brick and mortar" companies also established an Internet presence. Today, the average person can find the local lawyer, doctor, dry cleaner, and baker on the Internet along with companies such as Amazon.com and eBay. Not every company offers online retail services; in truth, many smaller companies merely have one or two web pages on their site with a telephone number and a link to an E-MAIL address. For some companies, the Internet has proven to be a double-edged sword. On the one hand, a growing number of consumers expect that the businesses they deal with will have a web site. Even many self-employed individuals have web sites for precisely this reason. On the other hand, a web site that has nothing of substance to offer will simply drive potential customers away.

Why do people shop online? One compelling advantage is convenience. The idea of being able to sit in front of one's computer, look at different objects, compare prices, enter some data, press a button, and wait for a package to arrive two or three days later is attractive to many people, especially if they do not live close to major retail stores. (Or, for that matter, a person on the East Coast can make an online purchase from a West Coast store.) Speed is another factor. Most e-commerce retailers offer two- or three-day delivery (or next-day service for an additional fee. An online bookstore might be able to ship a hard-to-find book to the buyer in less time—and possibly for less money—than a small neighborhood bookstore that tries to track the book down.

In 2002, according to UCLA's third annual Internet Report (released February 2003), the percentage of adults using the Internet to make purchases actually dropped to 39.7 percent from a high of 50.9 percent the previous year. That figure does not necessarily reflect a loss of confidence or interest in online shopping, although some people may simply stop making online purchases once the novelty wears off. In fact, the average number of purchases made by those who still use the Internet for shopping nearly tripled between 2001 and 2002, from an average 0.8 to 28.32. The average dollar figure also rose between 2001 and 2002, from $70.21 to $100.70.

Even consumers who use the Internet on a regular basis do not necessarily see online shopping as a routine option. In fact, according to the UCLA report, many Internet buyers wait before they make their first online purchase (nearly half waited more than two years after their first Internet experience). By far the most common reason cited (32.4 percent) is fear of providing credit card information online. Other reasons include fear of deception, not knowing whether the online purchase would be cheaper than a "live" purchase, and uncertainty over what is available for sale online.

Thanks to improved technology that allows information to be encrypted when it is sent from one computer to another, it is extremely difficult for an unauthorized person to obtain one's credit card number or SOCIAL SECURITY number. (Proponents of e-commerce argue that it is no more dangerous to send one's credit card number over the Internet than it is to have it on a receipt that can be read by countless people.)

As for missing out on the experience of actually seeing and touching an object before purchasing it, many web sites now have detailed information as well as photographs of the merchandise being offered for sale. Even retailers that do not offer electronic purchases can do this. Lenscrafters, the large optical chain that is famous for its one-hour glasses service, clearly cannot sell its wares over the Internet. The Lenscrafters web site has pictures of many of its frames, as well as a guide to help visitors determine their facial shape and which frame would look best on them. (According to the UCLA study, many Internet shoppers browse through their local retail stores to examine a product, and after that they look on the computer to see whether they can order it for less online.)

A major breakthrough in safe electronic transactions came with the passage of the Electronic Signatures in Global and National Commerce Act. The statute, which was signed into law by President BILL CLINTON on June 30, 2000, had been passed 426 to 4 by the House and unanimously passed by the Senate. Better known as the E-Sign Act, it removes one of the most stubborn barriers to e-commerce by making it safe for people to transmit personal information over their computer.

The E-Sign Act authorizes legal recognition of electronic (digital) signatures, contracts, and records. It also provides a uniform framework for all of the states to follow. A number of states had enacted their own laws, which made interstate electronic commerce cumbersome at best. E-Sign can be quite useful for people who need to sign something by a deadline. A person who wishes to purchase HEALTH INSURANCE online, for example, can do so over the computer instead of having to fill out a form and mail it in and risk being presented with a rate increase that went into effect before the paperwork was received. With an electronic signature, the transaction is completed on the spot.

In June 1998, the U.S. DEPARTMENT OF COMMERCE issued a white paper that called for the creation of a not-for-profit corporation to help manage the Internet's infrastructure. This corporation became known as the Internet Corporation for Assigned Names and Numbers (ICANN). The best known function of ICANN is its coordination of the Domain Name Service

(DNS). In other words, ICANN is responsible for overseeing the technology that allows Internet users to type in domain names (i.e., www.domainname.com) instead of long strings of numbers. This technology makes it easier for users to type in names of retail stores or online commerce sites. ICANN also oversees the Uniform Domain-Name Dispute Resolution Policy (URDP). This policy governs the methods by which corporate entities can choose and protect their domain names. All URDP cases are arbitrated through the World Intellectual Property Organization (WIPO), a group created in 1970 to safeguard intellectual property rights. Companies whose names are trademarked, or who are well-known organizations, are sometimes forced to contend with individuals who try to use a similar domain name. This practice is known as "cybersquatting." An example of a company that was the victim of cybersquatting is ABC Carpet Company, an established New York City-based retailer of rugs and other home accessories. In 1998, ABC registered the name "ABC Carpet & Home" (which it had begun using in 1995) with the U.S. PATENT AND TRADEMARK OFFICE. Two separate individuals tried to use domain names with "ABC Carpet & Home" in them, and in both cases WIPO ordered that ownership of the domain names in question be transferred to the New York company. ABC Carpet Co. v. Helen Gladstone, WIPO Case No. D2001-0521; ABC Carpet Co. v. Tom Boltz and abccarpetandhome.com, WIPO Case No. D2001-0531.

One e-commerce question that has generated interest is whether states should be able to tax sales conducted over the Internet. Technically, Internet transactions are taxable, but a 1992 ruling by the U.S. Supreme Court held that states could only require sellers to collect taxes if they have a physical presence in the same state as the consumer. In 1998, Congress imposed a three-year MORATORIUM against any Internet taxes, which was renewed for two years in 2001. Meanwhile, the National Governors Association (NGA) introduced the Streamlined Sales Tax Project (SSTP) in 2000 to adopt uniform tax rates among the 50 states. The estimated date for SSTP's completion is late 2005.


Mark, Roy. 2003. "Bush Backs Internet Moratorium." Boston Internet News (May 16).

Secretariat on Electronic Commerce. 1997. The Emerging Digital Economy. Washington, D.C.: U.S. Department of Commerce.

UCLA Center for Communication Policy. 2003. The UCLA Internet Report: Surveying the Digital Future. Los Angeles: University of California Regents.

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