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The Bumpy Road of Electronic Commerce
Andrew Odlyzko
AT&T Labs — Research
amo@research.att.com
Abstract: Electronic commerce is widely expected to promote “friction-free” capitalism, with consumers sending
software agents to scour the Net for the best deals. Many distribution chains will indeed be simplified and
costs substantially reduced. However, we are also likely to see the creation of artificial barriers in electronic commerce,
designed by sellers to extract more value from consumers. Frequent flyer mileage plans and the bundling
of software into suites are just two examples of the marketing schemes that are likely to proliferate. It appears that
there will be much less a la carte selling of individual items than is commonly expected, and more subscription
plans. Therefore many current development plans should be redirected. Electronic commerce is likely to be even
more exasperating to consumers than current airline pricing, and will be even further removed from the common
conception of a “just price.” As a result, there are likely to be more attempts to introduce government regulation
into electronic commerce.
1. Introduction
Electronic commerce (or ecommerce for short) is still small, at least if we consider only online consumer transactions,
such as ordering a book from amazon.com over the Internet. In a broader sense, ecommerce is much larger,
since financial, news, and legal information services such as Bloomberg, Reuters, and Lexis have total revenues in
the billions of dollars. In a still broader sense, electronic funds transfers are already huge, with daily transactions
in the trillions of dollars. All these types of transactions are expected to grow, and to become part of a much larger
and uniform system of electronic transactions. (For a survey of the current state of ecommerce, and expectations
for growth, see [Cohen et al. 1996].)
While we are rapidly moving towards the Information Age, food, shelter, and clothing will remain our most important
needs. However, their shares of the economy are decreasing, and the information content of their goods is
increasing. This is an old trend. Agriculture has moved from being the largest segment of the economy a century
and a half ago to a relatively minor industry, dwarfed by the medical sector, for example. Furthermore, the cost
of the basic ingredients in cereals and other foods is a small portion of the total price. As a further example of the
decreasing value of raw materials and factory labor, a single celebrity is often paid as much for endorsing an athletic
shoe model as all the workers in the undeveloped countries who assemble those shoes. We can expect a continuation
of this trend, with the work of the “symbolic analysts” (who, in Robert Reich’s terminology, include lawyers,
software writers, and advertising executives) increasing its share of the economy.
The main concern of this essay is electronic trade in information goods, such as news, novels, software, music,
movies, as well as legal, medical, and credit information. How will these goods be distributed, and how will their
productionbe financed? Esther Dyson [Dyson 1994] predicts that almost all intellectual content will be available for
free. In her view, some content productionwill be supported by outside advertisers (who already pay for most of the
cost of newspapers, for example, as well as all the costs of the commercial TV networks). Some content will likely
be made available for free, as a form of advertising for other services by the producers (as the Grateful Dead do
in encouraging people to tape their performances, in the hope this will bring more people to their concerts). While
Dyson’s vision will come true for a large part of the material on the Net, it seems unlikely that it will be universal.
Movie studios such as Disney attract large paying audiences to theaters and purchasers to their videotapes through
the quality of their products, and are likely to do so in the future. While some novelists make more money from
selling movie rights to their plots to Hollywood than from royalties on books, this is rare. Each year, over a hundred
times as many books are published as there are movies produced, and books bring in much more money than movie
theater tickets. Thus we can expect that content producers will usually want to be paid directly for their work, as
that will be the only feasible route to earning a living. Furthermore, Dyson herself [Dyson 1994] emphasizes that
1 This paper incorporates material from an earlier article on electronic publishing, [Odlyzko 1996].