As of May, 1999, 171 million people are on-line. (U.S. Commerce Report) Worldwide e-commerce sales continue to soar and are expected to reach a volume of US $1 trillion by 2003. (www.wired.com E-Biz Heavies Going Global; September 14, 1999). The Internet’s ability to reach a vast audience, coupled with the potential for staggering windfalls, has created a frenzy amongst businesses that are anxious to participate in the e-commerce industry. Ventures include small businesses looking to expand on-line, fortune 500 companies spinning off e-commerce divisions and entities investing in, or partnering, with an e-commerce company. In the rush to get on-line, however, many companies fail to develop comprehensive e-business strategies. This article highlights some key business, technical and legal issues to consider when kicking the tires of an e-commerce business.
An on-line business faces many of the same operational, management, marketing, customer relations, accounting and legal issues as a traditional business. A successful e-commerce company, however, must also address certain issues unique to the Internet. A good e-commerce business strategy addresses such issues as on-line marketing, technology, financial and management issues, creation, design and maintenance of a web site, customer relations, strategic partnerships and, of course, related legal concerns.
Any e-commerce business strategy must have clear e-commerce goals. At the outset, a company must decide the type of web presence it will have (e.g., informational or transactional web site). If the company’s objective is to be a fully interactive site and to sell products or services on-line, the company must address several of the issues discussed in this article. If, however, the primary purpose of the web site is to drive customers to a physical location, rather than to sell products or services on the Internet, the company may only need to develop an informational web site. This site may include an on-line “brochure” containing general information about the company’s products and/or services and instructions on how customers may contact the company. A company currently operating an informational web site also should have a long-term strategy to eventually develop a fully active on-line business. Finally, if the company has a traditional (“bricks and mortar”) business, its cyber success will be determined largely on its ability to incorporate the traditional (“bricks”) and cyber (“clicks”) concerns into a well thought out business plan.
The single most important goal for any successful e-commerce business is to drive traffic to its web site. A marketing strategy that actively recruits visitors is vital to the company’s success. In connection with “going live,” a company should have listed its web site with all of the major search engines, and should have provided metatags (i.e.,key terms and phrases to describe the web site) to search engines that accept such information to help guide surfers to the site. In addition, the company should be engaged in “synchronized” advertising which includes offline (traditional) and on-line advertising efforts. Traditional advertising (e.g., print advertising, direct marketing, television and radio spots, and promotions in the company’s physical stores) builds credibility and increases brand recognition by utilizing familiar media. On-line advertising efforts target a more focused audience and include banner advertising, links to third party web sites and co-branding with cyber-business partners. In addition, the company may help build its on-line presence by participating in Usenet groups, bulletin boards and chatrooms.
One of the latest marketing tools is “opt-in e-mail,” where a web site visitor “signs-up” to be included on a company’s e-mail list to receive information about the company’s goods, services and promotions. Opt-in-e-mail is a cost-effective way to reach prospective customers without spamming, and enables a company to generate e-mail lists and to create databases of information about its visitors and customers. In fact, these e-mail lists and databases may be the most valuable assets of an e-commerce company. (quote.)
A web site is only as good as its underlying technology. A detailed technology strategy that anticipates changing company needs is crucial to the success of the e-commerce business. The technology plan should address several technological issues including sufficient bandwidth needs, redundancy in the system, backup and contingency plans in case there is an interruption in service and speedy user access and download times. The plan must provide for the web site to interact seamlessly with backend systems (e.g., order processing, fulfillment and tracking). A well thought out technology plan also must provide for upgrades and modifications to the web site in order to adapt to changing technologies and increased traffic to the web site. Finally, a good technology plan should address how a company will access the technical know-how and computer resources necessary to develop, maintain and grow an e-commerce business, whether in-house or via third-party service providers.
The company’s financial plan for its e-commerce activities should include a budget to support its current and future marketing and technical strategies, as well as its operational and legal needs. For example, the financial plan should address whether it is cost-effective for a company to outsource many of its daily on-line operations as opposed to conducting them in-house. The plan should also identify the type of revenue streams the business expects to receive from its site. A company that does business-to-business transactions may charge its clients or customers fees to participate in activities on its web site. A consumer-oriented business may generate revenues from banner advertising. In addition, if a company has valuable brand identity, it may receive revenues from co-branding or related deals with its strategic business partners.
The management of an e-commerce business is crucial to the business’ success. When reviewing the management, one should consider the following: Are the key personnel fully committed to the on-line business or do they have a “day” job elsewhere? Are they technically proficient so as to contribute meaningfully to the technical and business strategy? Do they have experience in the core business being conducted? Are they bound by non-compete and confidentiality obligations from former employers? What kind of financial background or experience do they have with respect to on-line activities? It is important to note, as with a traditional business, an e-commerce business’ management also must be able to adapt to and anticipate the changing on-line business environment.
The creation, design and development of the web site are fundamental to the success of the e-commerce business. The design of the web site must incorporate the company’s business strategy, including the type of web presence a company elects, issues of security, privacy, ease of use and customer relations, as well as technological and legal concerns.
A critical first step in developing an e-commerce business is to reserve a domain name that serves as the address for the web site. If the company currently owns valuable trademarks, it should have selected one as the domain name in order to capitalize on consumer recognition, which in turn helps drive traffic to the web site. If the company has chosen another name, it should have conducted a trademark search prior to registering a domain name, in order to avoid potential trademark infringement, dilution or misappropriation claims. The current trend is to register in all top-level domain categories (.com, .net, .org), and also to register variations of the domain name in order to prevent competitors from using those names. In addition, the company should have filed a federal trademark application to further protect its domain name. It is important to note that the domain name registration process is not confidential. Therefore, a company wishing to keep its plans to develop an e-commerce business confidential, should not register its domain name prior to a public announcement regarding its business, or it should register using an agent.
A company must own or have a valid license to use the designs and any content created for the web site. In addition, the company must be able to exercise total discretion regarding its site, and have the ability to block access to the web site, take it off line, or change its content at anytime. The content should be interesting, current and include company contact information such as an e-mail address and 1-800 number. A company should encourage repeat web site visits by providing current news about its business and its industry in general, posting frequently asked questions (FAQs) about the company’s products and/or services, requesting visitor feedback and responding to comments in a timely manner. In addition, if the company offers products for sale, it should include a catalogue with full descriptions and availability of the goods as well as any return, exchange and delivery policies. A company needs to refresh its information and images periodically, and may consider offering certain services not necessarily integral to its core business to attract visitors (e.g., free e-mail services, general news, portals and links to third party sites).
Studies show that the speed of access, rather than the flashiness of a web site, is more important in attracting traffic (e.g., current benchmarks recommend sufficient bandwidth should be 4 times greater than current peak traffic levels) (www.planetit.com “The Cost of Downtime”). The Web site should be user friendly and easy to navigate, and should not be overly designed or include so much content that the site is too cumbersome such that user access is slow. Typically, if it takes longer than 8 seconds for a viewer to access a web site, the viewer will move on to another site (Id.) In addition, the web site should be compatible with a variety of computer platforms to increase the number of visitors. Finally, the site should be designed to adapt to developing technologies.
Cyber success depends on the company’s ability to anticipate and manage its customers’ online needs and expectations. Visitors tend to expect the same quality of service from an e-commerce company as they would from a traditional business. Unlike traditional businesses that have human interaction with their customers, cyber companies must be able to personalize the e-commerce experience in one click. For example, many companies provide web based customer service through e-mail or a real time 1-800 number with 24-hour live service. The company should have mechanisms in place to reply quickly to any questions or complaints regarding its products and services. Additionally, in order to ensure on-going quality service, a company must continually evaluate the effectiveness of its web site and monitor third parties that carry out its site’s daily operations (especially its order fulfillment processes). A good practical benchmark of whether a site has the key elements to be successful is to check out periodically what steps the competition has taken in connection with their on-line activities.
Concerns about security along with fears regarding fraud and theft are threatening to inhibit the growth of e-commerce. (www.ecommercetimes.com September 11, 1999) Recent studies show that 64% of Web users do not trust the sites they visit due to security concerns (www.news.com August 20, 1999 referring to Jupiter Communications). A well-developed e-commerce web site addresses these concerns prior to “going live”. The company’s web site should have a secure on-line environment that includes secure servers and the appropriate security software that protects data through encryption and authenticates information.
Doing business on-line does not replace a traditional legal analysis but, in fact, adds another layer. For example, a publicly traded company that posts financial and related information on its web site must still comply with Securities Exchange Commission regulations and a consumer goods company must still be in compliance with Federal Trade Commission regulations. The company web site and all of the underlying documentation (contracts, licenses and intellectual property) should be carefully reviewed to ensure that the proper contracts have been entered into and are broad enough in scope to cover the Internet and any subsequent technology which may be developed. In addition, adequate indemnities, insurance, control of web site and other related issues must be fully addressed. Further, the company should post on its web site all necessary disclosures, cautionary statements, disclaimers, terms and conditions and FAQs regarding its legal policies. In particular, if the web site provides links to third party sites, the company needs to notify visitors that they are leaving its web site, that the company is not responsible for and does not endorse any content on the third party site, and is not affliliated with such third party site. Failure to address these issues during development and on an on-going basis, may lead to significant problems, both practically and legally.
Third Party Agreements
Generally, companies tend to hire third parties to provide a variety of services for their e-commerce needs. Agreements with third parties must be broad enough to cover changes in technology and growth in the company’s on-line activities. Development contracts should specify that the company owns all content and software specific to the site, and that the company has control over the site. Maintenance agreements should specify that the service provider will utilize up-to-date technology, and warrant that the site will be operational seven days a week, 24 hours a day. In addition, agreements with third parties should include appropriate confidentiality and non-compete provisions. Related agreements may include content provider, linking, framing, cobranding, relationship, trademark and copyright license agreements.
The company may also enter into third party agreements with web site customers. via “click-wrap” licenses. Click-wrap licenses require web site visitors to press a button indicating their affirmative acceptance with certain terms prior to the purchase of products or receipt of licensed material. Click-wrap licenses are gaining acceptance and, like shrink-wrap licenses, have been found to be enforceable.
Intellectual property issues and content are inextricably entwined in a cyber medium. These issues include copyrights, trademarks, service marks, trade secrets, patents and rights of publicity. The company must own, or have a valid license to use, all of the content on its web site, and must place all appropriate proprietary notices regarding such content. Content may include photographs, music, film, drawings, designs, literature and the names and likenesses of third parties. Also, if the web site offers a link to, or frames any, third party web site, the company should have entered into the appropriate arrangements with such third parties. Despite the Internet’s unique medium, and evolving changes in intellectual property laws, many e-commerce companies overlook the intellectual property component, which is potentially one of the greatest areas of risk. As part of a good risk management program, an e-commerce business must devote adequate resources for rights clearances (e.g., acquisition of rights, licenses, in-house creation, consulting arrangements) and for general compliance with current intellectual property laws.
Legislation in the e-commerce arena is emerging as fast as new on-line businesses. Currently there are approximately 31 active bills on the 106th Congress docket affecting everything from government regulation, consumer privacy and national security to gun control, gambling and censorship. Recently, the Digital Millennium Copyright Act was enacted in part to protect third party proprietary rights on the Internet and to provide certain safe harbors for Internet service providers. Congress also passed the Internet Tax Freedom Act which placed a three year moratorium on certain taxation of Internet access and multiple or discriminatory taxes on e-commerce. Because the Act does not circumvent certain existing state laws, e-commerce companies need to review which laws apply to them. In addition, there are several initiatives underway throughout the world, including the Clinton Administration’s appointment of a senior advisor to coordinate e-commerce issues, and the World Trade Organization’s efforts to develop international policies for the Internet and e-commerce. A company must not only be vigilant in tracking new developments and pending legislation, but also must be prepared to make necessary adjustments in its on-line business activities.
This article highlights issues related to e-commerce as it exists today. Rapid advancements in technology and on-line business practices means that the e-commerce business culture cannot be easily predicted. A successful on-line company will anticipate change and recognize that its survival depends not only on a well-designed web site, but also upon its ability to adapt its business activities with one click.