Digital Delivery of Goods and Services

Software, CDs, magazine articles, news broadcasts, stocks, airline tickets, and insurance policies are all intangible goods whose value does not rely on a physical form. Much of today's intellectual property is produced, packaged, stored somewhere, and then physically delivered to its final destination. The technology exists (or soon will exist) to transfer the content of these products in digital form over the Internet.

Excerpted from Chapter Four of the recently published Commerce Department's "Emerging Digital Economy" report. The web site iswww.ecommerce.gov/chapter4.htm

CONTENT
News from around the world is now available on the Internet, usually free of charge. More than 2,700 newspapers have on-line businesses, of which over 60 percent are U.S.-based. All but three of the top 50 magazines in the country (as defined by paid circulation) had a Web presence as of January 1998. More than 800 TV stations across the U.S. have Web sites. UltimateTV.com lists 151 U.S. cable channels, including CNN, fX, HBO, MTV, the Weather Channel, and a host of others. AudioNet calls itself the leader in Internet broadcasting, with live continuous broadcasts of over 175 radio and television stations, play-by-play of thousands of college and professional sporting events, live music, on-demand music from the CD Jukebox (over 1,600 full-length CDs), live and on-demand shows and Internet-only Webcasts, and live and on-demand corporate and special events.
      The rapid emergence of information services on the Internet is being driven by consumer demand, more effective distribution, and an expected shift in advertising revenues away from traditional media to the Internet.

Consumer Demand
Nearly 90 percent of Web users go on-line to get news and information. There, they can find obscure or limited circulation journals on-line as well as the top sellers. Articles limited to text and perhaps a picture in a print edition may be supplemented in the on-line version with video or audio clips, maps or in-depth background research.
      Still somewhat difficult to navigate, the Internet's wide selection of content sites save individuals time when conducting research, and yields much more complete and up-to-date information than off-line alternatives. As technology advances, and search tools become easier to use, individuals can be expected to increasingly turn to the Internet's content sites to do research, to learn about the day's news, and to be entertained.
      How quickly individuals change their behavior in favor of the Internet, and away from other media, is difficult to determine. Recent studies indicate that as use of the Internet increases, television viewing declines. However, some of today's Web businesses point out that circulation for their existing newspapers and magazines has not dropped, even while their Web audiences increase. They state that some in the on-line audience are also found among their most loyal print readers, but look to each medium to satisfy different purposes. For instance, Business Week reports that visitors to its Web site read the front-page article and then use the site to research the magazine's archives and special report sections, features they do not have in the print version.
      It may take a number of years before the impact is felt. For instance, McGraw-Hill's financial information services division began to distribute its products electronically over ten years ago. Up until three years ago, print revenues made up 85 percent of the division's sales. Today, digital products account for more than 50 percent of sales.

Lower Capital and Distribution Costs
The New York Times invested $350 million in its new printing press. Readers can now see front-page photos in color instead of black and white. Readers accessing the New York Times on the Web not only see color photos from the print version's front page — but they also get radio clips, color spreads on special feature sections for the Web only, and the chance to interact with other New York Times readers interested in the day's or week's hot topics.
      Web content businesses require a much lower capital investment than their print counterparts, lowering the barrier to entry in this on-line industry. With the Internet, the content of a newspaper or a magazine does not have to be printed and delivered to news stands or doorsteps across the city in order to be consumed — steps that add 30 to 40 percent to the cost of the product.
      Instead, content delivered via the Internet can be entered directly into a computer, stored digitally on a server and appear directly on a reader's computer screen with a few simple commands the reader enters on the Web site. The consumer can then read the information on the screen or print it out. The publisher's distribution costs include paying off the investment in the Web servers and other technology that ensures that when someone enters the site, it responds quickly. Unlike newspaper or magazine content that gets used once, digitally stored content offers the potential for repeated repackaging and reuse. Once the content has been created and stored, there is little or no extra cost to send it to one reader or 1,000 readers. That increases the efficiency of the newspaper and magazine businesses dramatically.
      However, simply establishing a presence on the Internet does not guarantee that a business will succeed. Building brand awareness through advertising and marketing is critical to success in a new and rapidly evolving market, particularly on the Internet where consumers have the choice of spending their time and money at thousands of different sites. If the Internet evolves in such a way that a limited number of sites become the "funnel" that guides a viewer through its vast content, businesses looking to appeal to mass audiences may have to pay large fees to secure "shelf space" on those sites. Or, they may be excluded altogether. In this scenario, advertising and marketing costs may become too expensive for some to bear. If, on the other hand, technology and consumer preference evolves so that consumers access and navigate the Internet using a variety of devices and tools (perhaps personal software "agents"), then high rents might be avoided.
      Statistics on Web traffic indicate that the "funnel" model is winning out today. Over time, as people begin to access the Web via their TVs, telephones, and personal digital assistants, and as the Web becomes easier to navigate, this may change and lower advertising and marketing costs may result.

Shift of Revenue Sources to the Internet
Even with their lower costs of operation, content businesses on the Web do not yet generate adequate revenues. Unlike newspapers and magazines that rely on subscriptions for some of their revenue, most Web businesses currently shy away from charging subscriptions in favor of building an audience and attracting advertising and direct marketing/ transactions revenues. Though growing, these revenue sources are still small.
      At this early stage of development, it is unclear how quickly Internet content businesses will draw readers or viewers away from traditional media sources such as newspapers, magazines and television. As it happens, advertising and subscription revenues flowing to the Internet are likely to increase. Even if the total audience for a newspaper or a TV sitcom does not decline, advertisers may shift spending to the Internet if they feel that it provides a more effective means to reach their audiences.
      Current trends in classified and local advertising spending indicate a shift already taking place. Newspapers have been watching their share of classified advertising dollars shrink as real estate agents, car dealers and owners, and businesses looking to hire employees increase their advertising in niche publications, direct mail, and on-line services. A 1996 Newspaper Association of America study points out that newspaper publishers could lose as much as 50 percent of their classified ad dollars in the next five years if current trends continue. If that happens, the average newspaper's operating margin, now 14 percent, would drop to 3 percent. To maintain revenues from classifieds and to attract local advertising dollars, newspapers have been quick to establish Web sites featuring classified ads and city guides.
      Other industries are also seeking a share of classified and local advertising revenues. Software companies, telephone companies, Internet service providers, television networks, and newspapers are gearing up to compete for a share of this potentially large market. A New York-based research firm, Find/SVP, reported that more than 60 corporations ranging from Warner Brothers and PacTel to NBC and U.S. West have launched, or are in the process of organizing, Web sites with a strong emphasis on local content.
      Software companies and search engines feature city guides listing movies and restaurants, arts and music, current events, places to go, local sports, weather, and news. Some broadcast and cable networks combine coverage of national news and entertainment with local news from affiliates and searchable databases of on-line classified ads. Directory listings and mapping services partner with newspapers, software companies, and others to offer their own city guides. Telephone companies have their own directory listings and mapping services and are partnering with others for real estate listings, restaurant guides, and other local information and services.
      Analysts project significant growth in revenues available for on-line content businesses. Forrester Research predicts that revenues from advertising, subscriptions, and transactions fees will grow to $8.5 billion [thousand million] within five years, or almost 5 percent of the $175 billion [thousand million] advertisers spent in newspapers, TV, radio, direct mail, billboards, and other traditional media in 1996.

TRAVEL
Vacationers and business travelers can now find information on the Internet about cities they plan to visit, from driving directions and recommended itineraries to weather patterns and business telephone numbers and addresses. Many hotels have detailed property descriptions, along with photos of the property's grounds, public rooms, and bedrooms. Rental cars can be reserved on-line. Top travel magazines offer on-line suggestions for the best weekend getaways.
      The largest initial on-line travel business is the sale of airline tickets. Web-based travel services offer the reservations engines that airline customer service representatives and travel agents use directly — to leisure and business travelers. Customers enter point-to-point destinations, desired travel times and dates, preferred airlines, and other preferences into the reservation system. The system processes the information and delivers a choice of options, along with a secure transactions environment for customers who wish to purchase the ticket on-line.
      In 1996, Web users booked $276 million worth of travel this way. For 1997, on-line travel sales are estimated to have reached $816 million. By the year 2000, on-line travel sales could reach $5 billion [thousand million], or close to 7 percent of U.S. airlines' revenues for passenger air travel.
      According to a survey released in November 1997 by the Travel Industry Association of America, 13.8 million Americans used the Internet to plan their trips and 6.3 million made reservations on the Internet. And, consumer acceptance is growing. In 1996, 10 percent of Internet users used the Internet to make travel plans and purchases. When polled in 1997, nearly 70 percent of Internet users said they planned to use the Internet for travel in the upcoming year. Acceptance is high among the general population, as well. Thirty-eight percent of all adults said they would consider using the Internet for their travel in 1998.

Lower Sales and Marketing Costs
Lower sales and marketing costs, and increased consumer choice and convenience are driving the Internet's increased use in travel planning and reservations.
      It is cheaper for an airline to process a ticket sale on-line than to use a travel agent or a reservations center. Not only are transaction fees reduced, but savings are also realized when cheaper electronic tickets can be substituted for more expensive paper tickets. Through the use of the Internet and other information technology, airlines expect to be able to significantly cut distribution costs.
      At $12 billion [thousand million], distribution, travel agent commissions, marketing and advertising expenses, labor and other expenses for airline central reservations services are the airline industry's second largest operating expense.
      How a ticket is sold, through an agent or by the airline directly, and whether the ticket is paper or electronic, can mean the difference between paying $8.00 or $1.00 to process a ticket. Airlines are pursuing various strategies to drive their distribution costs down: lowering travel agent commissions, selling through the Internet, and promoting electronic ticketing.
      Southwest Airlines was the first major U.S. airline to let passengers buy tickets directly on its Internet site in 1996, bypassing the agent and the commission. New Web travel services quickly emerged: on-line travel sites sponsored by airlines themselves, "virtual" travel agents like Microsoft's Expedia.com and The SABRE Group's Travelocity.com, and travel agents' own sites. Whether customers purchase tickets on an airline's site or through on-line travel agents, the airlines save money since their own travel reservations centers do not have to be involved in the purchase. In addition, the commissions they pay to on-line agents are about half what they pay to traditional agents.
      While the airlines' ability to move customers away from paper tickets to lower-cost electronic tickets does not depend on the Internet, it is proving to be a useful vehicle for accelerating the shift. Some airlines encourage their Internet customers to use electronic tickets by offering frequent-flyer miles for travel booked on-line with an electronic ticket. Because Internet customers reserve their tickets, select seats and give credit card information on-line, getting an electronic ticket rather than a paper one seems natural.
      Airlines also use the Web to generate additional revenues. No matter how precise an airline's forecasting, seats still go unsold on some flights. Auctioning airline seats to the highest bidder and offering special "cyberfares" for leisure travel are two techniques made possible by the Internet.
      Every Monday or Tuesday, American Airlines looks at its yield management results and picks out low-performing markets. Midweek, more than one million "NetSAAver" subscribers receive an e-mail from American Airlines listing special discounted fares for travel in selected markets during the upcoming weekend. The NetSAAver program has generated tens of millions of incremental dollars for the airline since its launch in March 1996.

RETAIL BANKING
Internet banking is still in its infancy. Although most of the top 100 banks in the U.S. have a Web site, the Online Banking Report classifies 24 of them as "true Internet Banks" — banks that let their customers review balances, transfer funds and pay bills on their Web sites. Smaller banks also have Web presences. In Online Banking's list of 133 "True Internet Banks," 109 do not make the list of the top 100 U.S. banks ranked by assets.
      Before the decade is out, customers are likely to be able to do most of their banking transactions on the Web. According to a 1996 Booz-Allen & Hamilton survey of North American financial institutions with Web sites, 80 percent of respondents planned to allow their customers to conduct most traditional banking transactions over the Internet within three years.
      On-line retail banking is being driven by lower operating costs, the ability to offer new services, and the ability to do one-to-one marketing.

Lower Operating Costs
On-line banking services are less expensive to offer to customers than other forms of banking. Checking an account balance or transferring funds from a checking account to a savings account can be done in person at a branch bank, over the telephone, with an Automatic Teller Machine (ATM), at home using a PC, or, in some cases, on a bank's Web site.
      A branch bank can serve as many customers as it has staff to handle. Once the investment is made to create a fully functioning Internet site (for a large bank, the initial investment could be millions of dollars; a more limited solution for a small bank might cost tens of thousands of dollars), the bank's Web site can handle one customer inquiry or tens of thousands a day.
      Booz-Allen & Hamilton estimates that it costs about a penny to conduct a banking transaction using the Internet and more than one dollar if handled by a teller at a branch bank.

New Services
Today's on-line banking allows customers to check account balances, transfer funds, and update customer information — transactions that can already be performed through traditional banking channels. For some customers, the convenience of banking from home or the office is preferable to calling the bank's automated phone service or going to a branch bank. Others do not find the services offered on-line today reason enough to change their banking habits.
      In the future, analysts expect that Internet banking will be enhanced with new services that make on-line banking easier and more convenient than banking by ATM, by phone, or visiting the branch bank. Paying bills electronically is one such example.
      Checks are the preferred method of bill payment in the United States. For a business, preparing and sending paper bills can be costly. For a consumer, paying bills by check can take a great deal of time. Billers print out and mail the bills to a consumer's home. The consumer writes a check, records the check number and amount paid, balances the checkbook, finds a stamp, and mails the check back to the biller. The biller receives the check, updates his accounts, and sends the check to the bank to credit to his account. Handling paper bills and checks can cost a biller between $1.65 and $2.70 each time he sends out a bill. It costs the customer time and the price of a stamp to pay each bill.
      Today's Internet-based bill payment services take some of the paperwork out of the process. Rather than writing a paper check and mailing it to the vendor, a customer authorizes his bank to pay bills on his behalf. This saves the customer some time, and may save the vendor some money, if all steps are completed electronically. However, vendors still incur the costs of mailing the bill to the customer. And, smaller vendors without an electronic connection still have a series of manual and paper-based steps to complete.
      Some banks believe that future Web-based bill payment services can make the entire process paperless. The vendor will send an electronic image of the bill to the customer's bank. The customer will electronically authorize the bank to pay the bill, the bank will debit the customer's account, and the vendor will receive payment electronically. The vendor's printing and mailing costs are eliminated, and processing costs are greatly reduced. The customer enjoys the convenience of paying bills without having to keep stamps and envelopes on hand. With services that automatically update account balances, the customer also saves time he formerly spent balancing his checkbook.

One-to-One Marketing
Today, most banks are still equipping their Web sites with basic transactions processing and do little with tailored or one-to-one marketing. However, some now realize that through the Internet, a bank can get to know a customer's banking priorities and preferences even better than it could when banking was done in small neighborhood branches.
      Bank of America's "Build Your Own Bank" provides an example of how one-to-one marketing could work. Internet customers using this service provide the bank with basic information about their place of residence, occupation, age, income, and gender, whether they own or rent a home, and what types of accounts they have with the bank. They then indicate their financial interests and priorities — whether saving and investing, home buying/ improvement, building a business, retirement, economic and financial markets, electronic commerce, or simply better financial organization and budgeting. Based on these inputs, the bank responds with Money Tips and news items geared to the customer's interests, and special offers for the services the customer has prioritized.
      These and similar mechanisms give banks the opportunity to cross-sell products and services. Ideally, the customer benefits from these tailored offerings, as well. At a minimum, he should benefit from greater convenience. Because his account profile automatically gets called up when the customer logs into a personalized site, he wastes no time entering account information. Having up-to-date information about balances in each account gives the customer a snapshot of his holdings with the bank without having to do the math himself. The personalized tips and special offers may help the customer to make important financial decisions.

The Future
Over the next few years, a growing number of American households are expected to do their banking on-line _ whether through a dial-up connection to their bank or through the Internet. Roughly 4.5 million households were banking on-line in 1997. By the year 2000, as many as 16 million households are expected to bank on-line.

INSURANCE
Insurance carriers' Web sites typically provide customers with basic corporate and policy information, but refer customers to off-line agents or customer-service phone representatives in order to make a purchase. A more limited number of carriers' sites, and other sites, including banks, securities brokerages, real estate companies, and automobile marketplaces, allow Internet customers to purchase term life, automobile, and homeowners' insurance on-line.
      By 2001, analysts project that more than $1 billion [thousand million] in premiums will be generated via the Internet. The rapid increase in sales will be driven by cost savings, increased competition, and growing consumer acceptance.

Cost Savings
Distribution costs for life and property and casualty policies can be as high as 33 percent or more of the product's price.
      Selling policies and providing customer service over the Internet are much less expensive than via an agent or a telephone representative — as much as 58-71 percent lower over the lifetime of a customer. In a direct on-line sale by the carrier, the agent commission is avoided. If the sale is completed by an on-line agent such as Quicken InsureMarket, it can be more than cut in half. Even if a traditional agent completes the transaction started on the Internet, the transaction is less expensive. The Internet prequalifies the customer for the agent, saving sales time and expense. The Internet can also be used for electronic communication between agents and carriers, reducing time spent on routine tasks such as applications processing, updating customer account information, and reporting on the status of claims.
      In addition to saving money, the Internet can generate new sales opportunities. Carriers that traditionally sell through agents may pick up new customers on the Internet that agents cannot effectively reach. Because of the time needed to acquire a new customer, agents tend to focus on clients they believe will buy larger policies. One insurer, Lincoln Benefit Life, reports differences in the face value of the policies it sells via the Internet and through independent agents. The majority of policies sold by an agent have face values of $500,000 or greater. On-line, Lincoln reaches customers who wish to purchase policies with face values of $500,000 and under.

Increased Competition
Banks and securities brokerages have begun to sell insurance in their aim to be the one-stop shop for consumers' financial services needs. Whether through alliances with insurers or in direct competition with them, these new entrants will affect how insurers go to market. At the moment, both banks and securities brokerages are embracing the Internet more rapidly than insurers.

Growing Consumer Demand
Surveys indicate that people would like to be able to get quotes, pay premiums, and update their policies on-line — functions that are not yet provided on most insurance carriers' sites today.
      Insurance executives believe that, within five years, their customers will prefer to purchase and receive auto and term life policies on-line — to purchasing from an agent. They will use the Web to get product information and quotes, pay premiums, compare prices, access their claims status, access and update their policy information, and get advice from financial-service experts.

THE FUTURE
Most industry watchers predict that the market for the digital delivery of products and services will evolve quickly. The rate varies considerably by industry, however.
      Selling travel on-line appears to have the fewest constraints, perhaps because computer reservations systems have been in place for years. Analysts predict rapid growth in travel services, from less than $1 billion [thousand million] in 1997 to close to $8 billion [thousand million] within three to five years.
      Similarly, the financial services area is poised for quick growth. Nearly five million people actively trade stocks on-line and pay $8 - $30 per trade (traditional brokerages charge an average of $80 per trade).
      Investment bank Piper Jaffrey estimates that $614 million in broker commissions were generated on-line in 1997. This represents more than 4 percent of total retail brokerage commissions and 29 percent of the $2.1 billion [thousand million] in commissions attributable to the discount brokerage sector. Analysts predict that 10-16 million households will bank on-line by 2000, more than double the number in 1997. Internet-generated premiums for insurance are expected to grow from $39 million in 1997 to $1.1 billion [thousand million] by 2001.
      Other digital products and services have significant growth potential, but their long-term success is tied to solutions for protecting copyrights and to improvements in the Internet infrastructure. Intellectual property holders — software developers, recording artists and record companies, movie studios, authors and publishers — worry that digital copies sold or transmitted over the Internet may be prone to copyright infringement and piracy. The Internet is a natural, low-cost distribution channel for these digital products, but the uncertainty of whether their products can be protected impedes growth. Companies are working with technological solutions, such as "watermarks" and "digital object identifiers," so that they can keep track of their products on-line.
      In December 1996, governments negotiated treaties at the World Intellectual Property Organization (WIPO) to address the question of how copyright should be recognized and protected in global Internet commerce. The U.S. government is working to have these treaties ratified in the United States and around the world.
      For the multimedia industry, the question of bandwidth is crucial. Until Web users can download a video in a matter of seconds, Web sites will not create many video products to sell on-line and Web users will prefer to read text, watch television, or use their VCR.
      Increased bandwidth will also benefit education and health care services. Educational services will be able to use more video programming to supplement other on-line resources. The Web can also be a very useful tool in medical education and for the delivery of health care diagnostic services. Today's Web users can access some information from their health plans and physicians about medical conditions, symptoms, and suggested treatments. Increasingly, they will be able to schedule appointments, pay bills, and check the status of their [insurance] claims on-line. As new equipment is developed for remote diagnosis, doctors will be able to diagnose some medical conditions and recommend treatments to patients via the Internet (state laws and regulations regarding telemedicine and licensure may limit how widely remote diagnosis is used). However, because some medical diagnostics require very-high-quality images (poor resolution could give the impression of a tumor or a fracture where none exists, for instance), improvements in bandwidth, image quality, and reliability will need to occur before telemedicine and remote medical diagnostics emerge as viable industries on the Internet.