SU Students Strike
Chord with MP3 Company
Sometimes, new ideas come from the most unlikely sources. Consider School of Management student Jim Milton’s inspiration. Two years ago, he read an article about a lawsuit between the Recording Industry Association of America and Diamond Multimedia, which was defending its manufacturing of an MP3 playback device. MP3, or MPEG Audio Layer 3, software compresses digital music files, so that they can be easily stored and shared over the Internet.
But it wasn’t the lawsuit’s outcome that interested Milton ’01, it was the opportunity that such a technology presented. “I saw the digital distribution of music as the Holy Grail of e-commerce, since digital music is one of the few soft goods deliverable via digital download,” Milton says.
With that, Milton launched The Digital Music Company Inc. (TDMC), a retail and promotional outlet for musicians. Using Milton’s site, www.BuyMP3.com, artists can release music that consumers purchase directly over the Internet.
Milton recruited fellow students and other friends to help build the company. Finance major Shawn Socoloff ’00 is project manager, while computer science major Philip Strnad ’00 and information studies graduate Kenneth Beinert ’99 provide technical support. “We all sacrifice our social lives for this company,” Milton says. “Forging strategic alliances, building the technology, licensing music, and forming our entry and exit strategies leave little time for anything else.”
The site’s featured artists are a combination of those signed to labels the partners are familiar with, and those who sought www.BuyMP3.com as a means of distribution. The key to success, Milton says, is knowing the customer. “We choose featured content based on what we believe will provoke maximum sales from our customer base,” he says. “In the future, we plan to accommodate the total consumer demand for digital music from within a network of different web sites. We’ve had the luxury of watching our competitors spend their money first, giving us the opportunity to see customers’ reactions.”
The company will change the site’s name to www.BuyDigitalMusic.com and expand its distribution methods, keeping in step with changing audio formats. “The future of digital music ultimately lies in the wireless transmission of streaming media,” Milton says. “In addition to our e-commerce site, TDMC is developing complementary sites: www.audioSurge.com, an interactive record label; and www.InternetStereo.com, a music access service that is set to launch in the fourth quarter of 2000.”
Socoloff credits the School of Management and the School of Information Studies with providing support and recognizing e-commerce as an important element of the marketplace.
Milton believes the impact of e-commerce will have far-reaching consequences for the international business landscape. “In a world where the consumer is empowered by the Internet, given the awesome ability to pull information on demand, making progress in business is essential,” he says.
Retail/consumer sales on the Internet grew from $2 billion in 1996 to $20.2 billion in 1999, according to Internet analyst Forrester Research Inc. Wigand, an internationally renowned e-commerce scholar and researcher, says there is no question that electronic markets will continue to flourish. “Typically you have this marketing hierarchy—the manufacturer sells the product to the wholesaler, who sells it to the retailer, and then we can go to the store and buy it,” he says. “Now, especially if your product is information-based, you can bypass that market chain. In essence, you can leapfrog over the wholesaler and retailer, and the technology makes it possible.”
Travel and real estate agents and stockbrokers already are feeling the heat, as buyers and sellers find each other through the World Wide Web. Wigand says the astonishing successes of online stockbrokers Schwab.com and E*Trade are causing industry giants such as Merrill Lynch to reconsider their opposition to Internet trading. “Merrill Lynch made a clear-cut announcement two years ago: 'We will not put our customers out there on the Internet. Our customers need advice, they need person-to-person contact.’ And you pay heavy-duty fees for that advice and the subsequent commissions for buying and selling of stocks. Well, guess what? Last summer Merrill Lynch came around, saying it will now offer this service to customers. So it does both, in essence.”
There are now 55 companies in the online brokerage arena. Wigand believes many will either fold or be bought by bigger companies within three years. Wigand says E*Trade, the number-two company behind Schwab.com, has advertised heavily with prime-time commercials and full-page Wall Street Journal ads. The company spends 50 percent of its revenue on advertising. “It’s losing money right now but certainly has its foot in the door,” he says. “The idea is to grow the customer base, get as many customers as possible, become established as a brand name. Given its marketing and advertising costs, E*Trade now spends $150 on average to get a new customer. That figure may be $1,500 in a few years.”
Businesses are finding ways to use electronic commerce to cut costs. For some time, retailers have used “just-in-time delivery” to reduce warehouse costs. The average grocery store, for example, handles reordering nearly automatically—every time a product is scanned at the register, an inventory program takes note. If the inventory is getting low, the program—which knows how much of the product is sold seasonally at the store—reorders from the supplier so the stock will arrive when needed. “The ideal warehouse is no warehouse at all,” Wigand says. “In many ways, warehouses today have become trucks on the road from the supplier to the place where the product is sold.”
Chen says Dell Computer’s online ordering process eliminates the need for inventory. “Dell keeps only parts on hand, not assembled computers,” he says. “The company receives your order, processes it within 24 hours, and ships it out. Everything’s online, so it doesn’t need many offices to handle these orders.”
What Dell and other electronic retailers do need, however, are large enough web servers to accommodate visitors to their web sites, Chen says. As an example, he points to the failure of Toysrus.com’s designers to predict how many people would simultaneously visit the company’s site. “This obviously was a mistake by their information managers, who wanted to save some money,” he says. “When they designed their system, they said this is the storage space we’ll need for maybe 10,000 visitors at the same time. But what happens when there are 20,000 or a half-million visitors there? Nothing’s going to move.” Such technology forecasts are difficult, he says, because there are no past data to rely upon. “We don’t know how many people will be online next year. The growth rate is still unknown.”
The most successful web sites are interactive, allowing consumers to provide input, Chen says. “In the traditional market, vendors show their products, and the buyers come and buy what they like,” he says. “So the actual purchases show consumers’ preferences. People usually use some kind of market research to find out what customers need. But 7th e-commerce, oftentimes consumers provide the information to you, even without transactions.” Visitors to Amazon.com are asked to click on buttons showing their interests. “You go through this book review, you click this, and Amazon.com records it,” Chen says. “Then Amazon.com learns about you, the consumer, and your interests. You don’t even have to buy anything. You go through three book reviews today; one month later, you go to the site and it says, ‘We have some new books related to your interests.’”
Trust is an ongoing concern in e-commerce, both for consumers and businesses. “You find this new store on the World Wide Web, but you don’t know who is behind it,” Wigand says. “Is it two guys in a basement who weren’t around last week, or is it a subsidiary of General Motors? You don’t know. You not only trust them with a purchase, you give them your credit card. And the whole thing could technically be a fraudulent setup to get a bunch of credit card numbers to do nasty things with, and then they close up shop once things get hot.”
College of Law professor Lisa Dolak, who teaches in the Law, Technology, and Management Program, notes that credit card holders are liable only for the first $50 of unauthorized charges. In addition, she says, such sites as Amazon.com offer a 100 percent security guarantee. Wigand says secure transaction standards, used by most web sites that deal with credit cards, encrypt information so well that it is unlikely to be broken. In fact, the two most popular web browsers, Netscape and Microsoft Explorer, have versions available that feature encryption so powerful that anyone downloading them must sign a statement verifying U.S. citizenship, since federal law prohibits export of such technology.