Select Committee on European Union Written Evidence

Memorandum by Science and Technology Policy Research (SPRU), University of Sussex, on Alternative Models for Creating Confidence and Stimulating e-Commerce


New institutions are emerging to support electronic commerce. Institutions in this case refer to both the rules and norms that assist in the co-ordination and control of human behaviour as well as to the organisations that emerge to create, promote, and enforce such rules and norms. The evolution of these institutions is influencing new market opportunities for e-commerce providers. The following outlines two alternative models of the most likely pathways for their development.

Electronic Environment Scenarios

  Companies participating in e-commerce confront the phenomenon of "Internet time", a process of extremely rapid change as new users and services flood into the electronic environment. The directions of these changes have important implications for e-commerce offerings. Recent developments are leading toward a scenario that we label the competing services model. In this model, e-commerce companies such as financial service companies or retailers will have to make choices between the alternative institutions that could support their offerings and it is unlikely that market developments will lead to a single set of technical standards.

  The competing services model suggests a more uncertain and complex world than the outcome of the second scenario that we label the common infrastructure model. In this second, less likely, model, there would be widespread acceptance of common standards and institutions. e-Commerce companies would have more certain and straightforward platforms for their offerings.

A Framework for Analysis

  Two important axes of change are affecting the development on Internet institutions. The first axis is the design principle employed by service providers to create new Internet institutions, ie, whether a new service is meant to be highly differentiated and specialised (custom) or broadly employed and accepted (standard). The second axis is the state of competition among these service providers. This axis indicates the extent of competition among new Internet institutions. A service may be broadly endorsed by market success and essentially be the dominant service in that market, or it may be competing with other services. Figure 1 illustrates these possibilities.

  With respect to the design principle axis, service providers may seek to develop a new institution that will become a universal and commonly endorsed standard for the Internet. If they are successful, that institution will be located in the lower left or quadrant (3) of Figure 1. The design of this kind of institution has to be endorsed broadly by the user community and other service providers must either fail to offer an alternative, or fail to win acceptance for their alternative from the user community. An endorsed institution is one that is generally accepted as appropriate. This may be augmented by formal endorsements such as those granted to suppliers promoting the institution, by major user adoption, or by formal voluntary public standards. The usual role of formal mechanisms is to reinforce social and economic acceptance.

  If service providers offer alternatives and they are accepted, the result will be a proliferation of competing standards. In this case, the new institutions would be located in the lower right or quadrant (4) of Figure 1. This occurs because standards that could have been universally endorsed fail to be endorsed and become competing standards. This is likely to be an unstable outcome. Under conditions that often apply in markets for information goods and services, it is possible to achieve widespread acceptance of a common standard when that standard provides network externalities to its users. Thus, a slight advantage in favour of one of the competing standards may be amplified into widespread endorsement and produce an endorsed standard institution (in the lower left quadrant (3)).

  However, service providers may recognise that differences in user needs and interests dictate a different design principle, that of customisation. In this case they may offer a service in quadrants 1 or 2. The service is located in these quadrants by a mixture of the supplier's choice (how specialised to make the service) and market conditions (the extent of rivalry). The service provider may fully expect that other service providers will offer alternative institutions addressing other real or imagined user needs and interests. It is possible that this kind of "custom" institution will be endorsed broadly by users and become a universal solution (an institution in the lower left quadrant).

  A more likely outcome is that "custom" institutions will retain distinct characteristics. They achieve some degree of mutual accommodation through the construction of bridges or gateways that allow them to be interconnected. In this case, in the upper left hand quadrant of Figure 1, there is an endorsement of a cluster of interconnected, but partially customised, institutions (rather than a universal standard). Such mutual accommodation is unstable. It is likely to be resolved in one of two ways. The institution may become a standard despite the fact that it was designed according to the custom design principle. The most likely possibility is that competing service providers will further differentiate the institution that they are sponsoring. In this case, fully competitive, alternative custom institutions will be offered (the upper right hand quadrant (2) of Figure 1).

  To summarise, a position in either the upper left (1) or lower right (4) quadrant of Figure 1 is unstable. Thus, the lower left (3) or upper right (2) quadrants are the regions in which institutions are most likely to be located as a result of the interaction between the design principles (standardisation and customisation) and the competitive process. The directions for the maturation of these institutions are illustrated in Figure 2 above.

The Current State of Play

  Figure 3 illustrates the current position of some of the key institutions for e-commerce.

  The technical institutions concerned with basic connectivity and some services such as e-mail have achieved widespread acceptance or "endorsement". They are located to the left of Figure 3. Examples are the technical standards used for connecting to the Internet and World Wide Web (respectively, the Internet Protocol (IP) and Hyper Text Mark-up Language (HTML)).

  Simple text e-mails organised around the Simple Mail Transfer Protocol (SMTP) technical standards have been widely accepted. However, e-mail communication is best represented as an interconnected set of services. This is because SMTP allows users to attach messages, some of which other users will find indecipherable because they do not have the appropriate application to "decode" the contents of the message. Thus, the institution of e-mail (which includes both simple text messages and attachments) is an example of an endorsed (in widespread use) custom institution. This is an unstable position. The most likely direction of change is the further differentiation of file formats attached to e-mails which implies movement toward the upper right quadrant of Figure 3. Somewhat less likely is the development of a common application for accessing attachments (independent of the application used to create the attachment) in which case e-mail would move toward a location in the lower left portion of Figure 3.

  In the case of virtual community institutions, although there are some common standards, many alternatives already exist. It is likely that these alternatives will continue to compete due to several factors including the diversity of user needs. Virtual communities are good examples of the `competing services model' outcome.

  Intelligent agents such as search engines have the potential to become a universal standard with broad endorsement although this has not happened as yet. Instead, several approaches to intelligent agents are vying for a share of the e-commerce market. This is an unstable position as suggested by the disproportionate market share of Yahoo! Yahoo!'s success indicates the possibility of the emergence of a common standard in the search engine type of intelligent agent. Movement in this area is almost entirely based upon patterns of user endorsement. There is little doubt that specialised search engine applications will continue to exist. The business model supporting the operation of specialised service providers will need to change if trends toward growing endorsement of the Yahoo! common standard continue.

  It is less clear where trust service provision should be located. There is some optimism that an endorsed standard will emerge based upon government or private sector initiatives. However, if these alternatives fail, there is likely to be movement toward further customisation of this institution. This could lead to the location of such institutions in the upper right quadrant of Figure 3.

Alternative Scenarios

  This framework provides a basis for examining the two emerging scenarios for the evolution of e-commerce. The first scenario, the common infrastructure model, is shown in Figure 4.

  In this scenario, there is a broad endorsement of common institutions as standards for the conduct ofe-commerce. Trust services are standardised around a single model. Broad endorsement of a common standard for intelligent agents leads to a strong position of a few (or a single) approaches to intelligent agent-based services such as portals. The advantages of interconnectivity lead to a broad acceptance of standards for message communication and the development of universal standards beyond SMTP. Even in the area of virtual communities, common standards offer advantages. For example, one possibility is the creation of virtual identities that would allow an individual to be recognised across different virtual communities. Such a standard would allow individuals to accumulate reputation, credit worthiness and other attributes that could be recognised outside their local virtual community, while preserving their privacy.

  This scenario has numerous advantages for companies that are attempting to build e-commerce businesses. The most important is a reduction in the number of platforms or configurations of institutions that these companies have to evaluate and maintain to provide services. The simplifications offered by this model are also important in reducing user confusion and uncertainty about how to interact with service providers. It is not surprising that there are frequent statements in the trade press and in government policy forums about the desirability of this type of model.

  The alternative scenario, the competing services model, is shown in Figure 5. It is the more likely outcome of the interaction between the design principles and competition in the electronic environment.

  The driving force favouring this scenario is the quest for variety. Variety is not an end in itself but a means of catering for diverse user needs. The enormous flexibility allowed by information and communication technologies to deliver customised services is both a benefit and a cost in the development of new e-commerce institutions. As a benefit, it provides the opportunity to tailor services according to individual preferences and capabilities. For example, novice users can be treated differently than "power" users. The possibilities for differentiation are endless. At the centre of these developments is the process of creating virtual communities in which people are able to conduct their business or pursue their interests in different ways.

  The competing services model scenario is consistent with the view that the Internet represents an anarchistic community where the history of respected institutions offers little advantage. This view has little validity however. This is because there are clear advantages for many services providers and users in a more systematic integration of services under common standards. Although early users of the Internet were over-represented by those with anti-establishment sympathies, the floor of new users is making the Internet user base somewhat more representative of the general population. Government policy, the interests of large users, and the interests of many service providers, tend to support the growth of common standards. For this reason, the common infrastructure model is a credible alternative to the competing services model.


  The social process of constructing e-commerce institutions provides junctures at which it is difficult to achieve closure in establishing a common framework for technical and institutional standards. Public authorities are seeking to promote an institutional framework that will support the rapid development ofe-commerce. They often seek to do so based on the premise that a prevailing institutional standard fore-commerce will emerge from market competition or that such a standard can be promoted through selective policy intervention. In the case of virtual communities and intelligent agents, no such institutional standard appears likely to emerge in the short and medium term. In the case of trust services, Government efforts to provide an institutional framework for delivery of trust services are often regarded by providers as incidental to the issues they are facing in building trust service institutions.

  Each of these scenarios represents a possible path of evolution for e-commerce institutions but the competing services model is the path of most likely development. In the industry-favoured competing services model, the main objective is for trust service providers to establish ways of building trust with users and of resolving potential conflicts as and when they arise. Because many institutions already perform this role, this approach is regarded as favouring the entry of incumbents and new players into this market. Establishing a new regime for governing e-commerce is not a simple matter of replicating the ground rules for trading in physical markets. Government interests in national security, legal enforcement of contracts, individual privacy, and the competitiveness of national markets within a global trading environment, point to the likelihood that some form of public common infrastructure model will emerge. In the short and medium term, however, the predominance of the competing services model will encourage diversity and variety in service offerings but it may also create sufficient uncertainty in the potential user population for business-to-consumer e-commerce to slow the growth of new markets.

22 May 2000

91   This text is based on R Mansell, I Schenk and WE Steinmueller (2000 forthcoming) Net Compatible: The Economic and Social Dynamics of Electronic Commerce, Communications & Strategies, presented at the EURO Communication Policy Research Conference, Venice, 26-28 March 2000. Back

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