Select Committee on European Union Fourteenth Report


94. The rate of growth is likely to be determined by a number of influencing factors—forces which have the capability to drive or obstruct the take-up of e­commerce. The purpose of this section is to highlight these factors. The actions that might need to be taken in response to them are the subjects of later Parts.

Transaction Costs

95. Transaction costs can be defined as the costs of doing business, for example negotiating with suppliers, arranging deliveries to customers, marketing products. Since businesses continually seek to reduce their transaction costs, e-commerce is attractive: it is usually cheaper and quicker to deal with a customer's requirements over the Internet than it is by face-to-face meetings, telephone or any other means. For example the cost to a bank when a customer moves money between accounts is, approximately, £1 over the counter, 10p by telephone and 1p over the Internet. Ceteris paribus, businesses will choose to transact over the Internet.

96. The importance of transaction costs is such that, independently of e­commerce, organisations and industries structure themselves in order to minimise these costs. It should therefore be expected that, as it grows, e-commerce has the potential to bring about fundamental changes to organisations and industries.


97. All business is regulated to some degree by governments, both local and national, and international bodies. Because e-commerce is global and crosses international boundaries, and because it is electronic and thus less visible than other forms of transaction it is evident that existing regulations may not be sufficient to achieve governments' regulatory intentions.

98. Governments may need to regulate but at the same time want to create environments which are supportive of e-commerce in order to attract e-commerce activity to their shores. The certainty of clear and balanced regulation will attract business; too heavy regulation will discourage. For any nation the regulatory regime will influence the growth of e-commerce.

Liberalisation of the telecommunications infrastructure

99. The basic platform on which the Internet operates is the telecommunications infrastructure. To date, e-commerce transactions have been predominantly across telephone wires. The importance of mobile telephony, in which it is generally agreed that Europe leads the US, is increasing rapidly. The latest mobile telephones (so-called Wireless Application Protocol (WAP) enabled) allow Internet access but this development is in its early stages and there are still problems to be overcome, such as screen size and security. Other technologies, such as underground cables and satellites, also provided an infrastructure but for the foreseeable future they are not likely to take more than a very small percentage of the total traffic. The growth of e-commerce therefore hinges on easy and cheap access to the telecommunications infrastructure. Countries where the public telecommunications operator is a monopoly, or where the number of permitted operators is severely restricted, are not likely to have the sort of competitive environment in which high quality and inexpensive services can be developed.

Venture capital

100. Since e-commerce is new, many of the organisations involved in it are also new, especially those providing Internet services and applications. The ability of fledgling organisations to secure funding quickly and effectively is self-evidently a driver of e-commerce growth. The particular issue here is the fact that many witnesses contrasted Europe unfavourably with the US. In the US venture capital appears to be available at earlier stages in the development of an organisation, to be more freely available, and to have better designed arrangements for rewarding the venture capitalists.

Stock options

101. Stock options can be seen as the remuneration currency of start-up e­commerce businesses. Employees are paid with a reduced salary together with an option to purchase stock at a later date (or a gift of stock). This conserves cash for the company but also, since expectations of equity returns are high, staff often insist on this form of payment. They trade off the prospect of a high salary (but not very high—it is a start-up business) against the chance of extremely high stock returns. This method of payment extends well beyond permanent and senior staff. In the United States, gives stock options to its lowest paid staff; in the United States lawyers advising start-up companies are paid with stock options rather than fees.

102. Stock options are now the norm for e-commerce start-ups but their tax treatment in the US is more generous than in Europe. In the United Kingdom, for example, stock options are treated as income rather than capital. This helps to explain why it is harder to attract and retain top quality managers in e­commerce in Europe than in the United States.


103. The term "cluster" refers to a geographical location where e-commerce expertise is gathered together. The expertise is in a variety of businesses—service and equipment providers, software developers, application providers—as well as technological universities and research groups. Silicon Valley in California is the obvious example. In the United States such concentrations of knowledge are held to be a significant driver of e-commerce development. Encouraged by the United States government, clusters allow the easier movement of people and knowledge, as well as being sources of newly qualified staff and providing easy routes for the speedy application of new ideas.


104. Competition promotes growth. Environments where companies are vying one against another to develop new ideas and offer them in the marketplace will stimulate the development of e-commerce. Governments wish to create such conditions and companies wish to locate in such places. A competitive e­commerce environment is likely to be found where the telecommunications infrastructure is liberalised and regulation is clear, certain and light.

Barriers to entry

105. Firms already competing within an industry like to establish high barriers to entry in order to keep out potential rivals. For example, the high cost of computerised reservation systems is a barrier to entry for aspiring international airlines. High entry barriers, however, are obstacles to competition. In e­commerce, a lack of skilled IT workers, costly software and red tape are all barriers to entry for new firms. Governments seek to reduce such barriers in order to foster competition.

Small and Medium Enterprises (SMEs)

106. Much of B2B involves larger companies purchasing their raw materials and other requirements from suppliers which, particularly at the second, third and lower levels of the supply chain, are SMEs. Companies as diverse as Ford, Shell and Sun Microsystems are reported to be achieving significant cost savings (43 per cent in the case of Sun Microsystems) from supply chain auctions over the Internet. Consequently successful B2B is reliant upon SMEs having e-commerce capabilities.

Consumer confidence

107. B2C involves customers purchasing from companies. They need to feel confident about making their purchases and feel confident that they can trust the vendors. They are exercised by concerns such as:

  • Personal data—age, address, telephone numbers, purchasing behaviour, for example. Customers like their data to be kept private if they wish them to be kept private.
  • Quality of goods and services. Customers need to know that goods delivered will be of the same quality as advertised.
  • Fraudulent exploitation of credit cards. People worry that when they give their credit card numbers over the Internet they will be used fraudulently. It may be no different in principle from using a credit card over the telephone but it seems different to Internet purchasers.
  • Redress procedures. How will customers be protected when they have disputes with vendors?


108. e-Commerce is only possible if individual consumers understand the Internet and know how to use it. If it is to be a widespread activity, the majority of a country's population will have to be educated and trained to use it. School education will not be enough. Education will have to respond to the needs of all population groups and all divisions of society.


109. A further necessary condition for e-commerce is that the population as a whole should have access to the Internet. There are a number of dimensions to the access issue.

  • Physical access. The normal means of access is currently through personal computers. However, not everyone can afford or have access to one. How can an entire population gain access? It could be through publicly available computers in the same way that telephone kiosks provide publicly available telephones. Or it could be through government or industry subsidies. Or it could be through a wide range of other technologies, such as mobile telephones and digital televisions.
  • Cost of access. The cost of using the Internet through charges made by Internet Service Providers (ISPs) and telecommunications companies varies from country to country. Evidence submitted to the Sub-Committee has shown that the cost of access, and even perceptions of the cost of access, depresses Internet use.
  • Quality of access. The so-called last mile of telecommunications networks is the link between local exchanges and individual homes. The link is usually based on old-fashioned twisted wires which have a limited capacity to transmit data. Consequently Internet responses can be slow and in particular downloading data such as pictures and videos can be extremely slow. There are broadly two answers to the problem. The first is to install higher bandwidth (higher capacity) cables such as fibre optics. Because of the numerous individual links involved, this is expensive. Other technologies, such as satellite and cable television, can solve the problem but they will not be in widespread use in the United Kingdom in the short and medium terms. The second answer is to deploy technologies which allow more data to pass through twisted wires. Such technologies exist but in many countries this last mile is in the hands of the former/present state monopolies which own the local exchanges. So-called Local Loop Unbundling (LLU) will allow other telecommunications companies access to the exchanges and thereby stimulate competition to develop and offer these new technologies to customers.


110. The procurement aspect of G2B is similar to B2B but here the greater need may be to prepare the large company doing the purchasing ie the Government, for trading over the Internet. The problem centres on the immense size of Government and the extent of its procurement needs. A further problem is the traditional "stovepipe" structure whereby any one Government Department may be unaware that other Departments are using exactly the same suppliers.

Inter-agency funding

111. The stovepipe structure also means that Government is often unprepared for activities which cut across Departments. This is a "joined up Government" issue. Initiatives to promote joint activities, for example the development of an information system to record the extent of Government-wide purchases from each and every supplier or an initiative to allow an individual citizen to deal with a range of problems through one access point, require funding. However, mechanisms to bid for and provide this funding may be not be adequate.


112. The above factors do not have a uniform influence. For example,

  • B2B and G2B are dependent upon SMEs having high levels of Internet capability.
  • B2C requires high levels of consumer confidence. B2B on the other hand is governed by contracts which cover many of the "confidence" issues;
  • B2C and G2C are dependent on most, if not all, the population acquiring high levels of Internet education;
  • B2C and G2C are dependent upon high quality access, ie fast data links between local telephone exchanges and residences.

113. As e-commerce develops the importance of the influencing factors is likely to ebb and flow. For example, the liberalisation of telecommunications infrastructure could bring about cheaper, or free, Internet access. Then cost of access as a barrier to entry would fall away.

114. It would be a mistake to believe that the influencing factors are solely, or even mainly, to do with technology. The history of the use of computers in business over many years has pointed to the crucial role that psychological factors play. Organisational culture is described as "the way we do things round here". Organisations where the culture is one in which employees have a positive attitude to change and to new technologies are much more likely to adapt quickly to new ideas and use new technologies well.

115. This is especially true for e-commerce. Several witnesses have pointed out to the Sub-Committee that the adoption of e-commerce in an existing company or in a Government Department is not so much a technological innovation as a change programme, in the broadest sense of the word. The successful adoption of e-commerce will depend upon companies seeing through the technology to the real change issues which lie behind. A particular case of this is the need to re-design "back office" organisational processes when e-commerce is introduced. The Sub-Committee has heard of companies where a B2C order over the Internet is written down by hand and the piece of paper carried to another office to be keyed into the "normal" sales/ordering system.

116. The successful deployment of e-commerce may be concerned with mindsets as much as with technology. The point was well made by US witnesses who pointed to their entrepreneurial risk-taking culture. One witness described the Internet as "America's new Wild West".[28]

28   The CyberFrontier and America at the Turn of the 21st Century: Reopening Frederick Jackson Turner's Frontier, Jeffrey R. Cooper, Science Applications International Corporation. Back

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