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Documents that are authenticated by one of these methods are typically entitled to a more
robust set of legal entitlements, for example, a presumption concerning the identity of
the signer and the integrity of the document™s contents. At this second level, the
legislation also states requirements to address issues that are specifically associated
with the operation of a Public Key Infrastructure, such as the operational requirements
and liabilities of Certification Authorities.
This approach achieves the goal of technological neutrality by granting a minimum level
of legal recognition to all or most authentication techniques, mostly with regard to
satisfying form and writing requirements. At the same time, it affords greater legal
certainty and benefits to those authentication mechanisms whose security and reliability
permit greater confidence in their use. This approach also recognizes that some authen-
tication mechanisms, and particularly those that are used in open systems, require a
better-defined legal environment, while not depriving legal recognition to those authen-
tication mechanisms that do not require a significant external legal framework. The most
elemental objective of any electronic authentication legislation is to ensure that elec-
tronic signatures are accorded appropriate legal recognition. Virtually every jurisdiction
has laws that require that certain types of documents be signed, or “in writing” or any
one of countless other formulations that could be construed to require a physical
document or hand-written signature.
The recent trend in legislation considering electronic signature utilization is for broad
enabling legislation. When dealing with a technology that is new, it seems premature to
draw up specific technology-related legislation. This could hamper innovation. Most
countries define both electronic and digital signature, that are defined as:
• Electronic signature: Any letters, characters, or symbols manifested by electronic
or similar means, executed or adopted by a party with the intent to authenticate a
writing. A writing is electronically signed if an electronic signature is logically
associated with such writing;
• Digital signature: A type of electronic signature that transforms a message using
an asymmetric cryptosystem (public and private key capability) such that a person
having the initial message and the signer™s public key can accurately determine
whether the transformation was created using the private key that corresponds to
the signer™s public key, and whether the initial message has been altered since the
transformation was made.


A digital signature, that corresponds to advanced electronic signature in European
Union, is intended by the party using it to have the same force and effect as the use of
a manual signature, and it is unique to the party using it with capability of verification
under the sole control of the party using it. It is also linked to data in such a manner that
it is invalidated if the data is changed, and it is in conformity with rules that state a
Certification Authority obligations and functionality.
This notion provides that unless otherwise provided by law, an electronic signature may
be used to sign a writing and shall have the same force and effect as a written signature.
It also provides that electronic signatures will be given the same force and effect as
manual signatures, but also recognizes digital signatures. The validity of electronic



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126 Ruzic


signatures is not dependent on a licensed Certification Authority or other regulator,
however, provision is made for licensure and regulation of certification authorities.
Most of countries within G4 (USA, Canada, Japan, and EU) have enacted legislation that
would legalize digital technology for both the private and public sector. Some of them
have restricted the technology to just state government business applications. One of
the primary goals of most states is to promote electronic business, electronic commerce
and online government and to ensure the security and reliability of electronic commu-
nications and records. At the same time, many countries adopted Public Key Infrastruc-
ture modeling schema and enacted legislation needed for the process of licensing
Certification Authorities that would be issuing qualified certificate of electronic signa-
tures.
The formal requirements for legal transactions, including the need for signatures, vary
in different legal systems, and also vary with the passage of time. There is also variance
in the legal consequences of failure to cast the transaction in a required form. The statute
of frauds of the common law tradition, for example, does not render a transaction invalid
for lack of a writing signed by the party to be charged, but rather makes it unenforceable
in court. During the last decade, most legal systems have reduced formal requirements,
or at least have minimized the consequences of failure to satisfy formal requirements.
Nevertheless, sound practice still calls for transactions to be formalized in a manner
which assures the parties of their validity and enforceability. In current practice,
formalization usually involves documenting the transaction on paper and signing or
authenticating the paper.
The legislation in many countries adopts slowly, but evidently in progressive way, along
the general rule of validity of an electronic signature that is recognized as the essential,
core category of the digital economy legislation. The general rule of validity is that a
signature, contract, or other record related to any transaction in or affecting interstate
or foreign electronic business may not be denied legal effect, validity, or enforceability
solely because it is in electronic form.
When we sign a document, we become accountable. Our signature indicates our
agreement, acceptance and authorization to act and move forward. Our business
processes rely on the signatures of customers, managers, suppliers and business
partners to keep work flowing. Patients sign consent forms, judges approve warrants,
mortgage lenders need a signature for a loan, engineers stamp drawings, insurance
providers can not proceed without a signature on an application. These acts of signing
are critical to an organization™s operation and success.
E-Business needs uniformity of e-signature in electronic transactions. Despite E-
Business efforts to implement lawful e-signatures in electronic transactions, the world-
wide digital economy still suffers from a substantial lack of uniformity. This lack creates
substantial doubt in the minds of those wanting to sell goods and services over the
Internet and definitely impedes e-commerce. Non-uniformity also makes parties more
likely to specifically designate the law governing a transaction consummated electroni-
cally. In the same time, the Internet allows remote parties to enter into and perform
contracts through systems that span multiple jurisdictions and may not depend on the
physical location of either party. Conflict-of-law principles that apply when the parties
fail to designate the governing law are complicated, archaic, and were certainly never



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Electronic Signature 127


written with electronic transactions in mind. In light of such uncertainty, many online
brokerage firms and financial institutions are reluctant to open brokerage and bank
agreements with electronic signatures via the Internet.




Remarks for E-Business
Any testimonial law provides that a signature, contract, or other record relating to such
transaction may not be denied legal effect, validity, or enforceability solely because it
is in electronic form. Moreover, a contract may not be denied legal effect, validity or
enforceability solely because an electronic signature or electronic record was used in its
formation. These straightforward provisions outlaw discrimination against electronic
formats, and bring the fundamental for E-Business activities. To the extent that contract-
ing parties do not understand proposed electronic formats, they can just say “no” to
electronic agreements and signatures, but the result of saying “no” to electronic
transaction can result in efficiency losses and missed opportunities to participate in
global electronic business.
With low-value items, merchants may be willing to ship goods with just credit card
information and without a legally binding contract. More sophisticated transactions,
however, require a contract to create an enforceable agreement, and the entire process
can take one to several days. Contrary, the acceptance of electronic signatures stream-
lines the whole process. An E-Business firm can expedite and simplify the entire
processes by having the consumer sign and return the contract electronically. Electronic
signatures greatly reduce the time to process the transaction, the consumer receives his
goods faster, and the E-Business firm is legally entitled to receive payment prior to the
shipment of goods.
Today, many organizations are interested in replacing paper-based systems with auto-
mated electronic systems. One of the inhibitors to the increasing use of electronic
commercial transactions has been the concern for the risks of forgery over unsecured
networks. This focus has brought about the need for a reliable, cost-effective way to
replace a handwritten signature with an electronic signature. Like a handwritten signa-
ture, an electronic signature can be used to identify and authenticate the originator of
the information. It can also be used to verify that information has not been altered after
it is signed. Electronic signatures play a key role in enabling electronic business by
helping to ensure that electronic documents are unaltered and have not been forged.
Companies considering the use of electronic signatures should evaluate their paper-
based processes to determine where the risks are acceptable. The assessment requires
a partnership between the Information Communications Technology people, the busi-
ness people and the company™s attorneys to establish what™s possible, what makes
sense accordingly to the risk and capital investment prepositions. In deciding which
documents and processes require which types of electronic signatures, companies have
to weigh the value of the underlying transaction and the confidentiality of the informa-
tion. Does anybody have a motive to change the document after it™s been signed? It may
turn out that vacation requests that have always required a handwritten signature could


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permission of Idea Group Inc. is prohibited.
128 Ruzic


be handled without any type of signature, but a million-dollar purchase order would
clearly require strong authentication and signal of intent.
For any E-Business firm, there is a need to determine its overall business needs and time-
frames. It should establish focus groups to identify business processes that would be
enhanced or require the use of any electronic signature technology. The requirements
from these business processes should be determined. A working group should be
established to accomplish these goals. Both program staff and agency legal staff should
be included.
At the same time, there are numerous applications that the entire government and public
administration bodies (agencies) could use electronic signatures for, ranging from
driver™s license applications, vendor contracts, bids, purchase orders, employee appli-
cations, and voter registration to state employee time sheets. Again, when considering
business requirements, consider any document requiring a signature that could be
transmitted or filed electronically to be a candidate for the technology.
In the paper world, paper is the lowest common denominator, but in the digital world, there
is no one common file format. To make e-signatures useful to the overall business
community, the E-Business company shouldn™t have to convert one format to a certain
representation just for the sake of signing.
Transacting business remotely means making sure the receiving party can interpret the
entire e-signature and trust the digital certificate behind it (Skrbek, 2003). Vendor
interoperability is a problem, although not necessarily a technological one since almost
all PKI certificates are based on the universal X509 standard, so interoperability is more
a matter of business trust than of technology.
In the scope of e-signature standardization development, there is an open platform that
could solve most of the interoperability problems. This platform is under the term XML-
Signature Syntax and Processing standard (XML Signature) that is being incorporated
into new products and services dealing with e-signature utilization. XML Signature is
designed to work with existing XML (Extensible Markup Language) software, making it
easier for modern software developers to incorporate the signature verification technol-
ogy into new programs they develop. XML is the generation of Web-based software
designed to make publishing data on the Web more flexible and adaptable than the fixed
coding used in HTML, the programming language on which most Web sites are still
based. By virtue of using the structured data formatting of XML software, users can
apply their digital signature to distinct parts of an XML document. Most existing
electronic signatures treat documents as single indivisible documents.
This is important for electronic documents that pass through multiple intermediaries,
allowing the information to be open, read and then retransmitted while preserving the
validity of the electronic signature embedded in the information (Onieva, Zhou, Carbonell
& Lopez, 2003). Thus users may choose to sign portions of an electronic document but
leave other parts unauthorized. Commercial applications can be sent through a series of
intermediaries, with each party validating those portions of the document relevant to
them. A mortgage applicant could sign an electronic form and forward it to a broker who
would open it, process it, sign it and forward it on to a bank for final action. At the same
time, the standard can be used to verify the authenticity not simply of text, but also of




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permission of Idea Group Inc. is prohibited.
Electronic Signature 129


graphics and images stored in standard data compress formats such as “bitmaps” and
“jpegs” used to transmit data-intensive images and other digital media.
For e-commerce to grow, businesses must implement the use of electronic signatures
correctly and legally. Electronic commerce has changed the way we buy books, sell, and
pay bills. Now, with the advent of electronic signatures, e-commerce is changing the way
we sign and store documents. Eventually, any business that wants to succeed in e-
commerce must deal with electronic signatures. Thus, any E-Business manager needs to
understand
• what a signature is legally, and when it is needed,
• the various electronic-signature standards,
• current electronic-signature legislation, and
• some basics about electronic-signature technology.


Although the commercial world bases its need for “signed” documents on pre-Internet
legal principles, this need is even more important today with remote buyers and sellers
agreeing to exchange consideration for goods or services. Web sites that embrace
electronic signatures and incorporate new document preparation and signature tech-
nologies will decrease transaction processing time and transaction non-fulfillment. More
importantly, buyers and sellers using those Web sites will have more certainty of
transaction fulfillment, creating participant loyalty to those Web sites, which in turn will
create more usage and a more defensible market-share position.
Accordingly to the most often found statement, the electronic purchase of goods of
greater value cannot be enforced in the absence of a signed contract. In contrast, with
low-value items merchants are willing to ship goods with just credit card information and
without a legally binding contract. More sophisticated transactions, however, require a
contract to create an enforceable agreement. For example, Dell Financial Services requires
a user to print an agreement, physically sign it, and return it by fax to Dell Financial
Services when a consumer finances the purchase of a Dell computer or leases a Dell
computer. This entire process can take two or three days. The acceptance of electronic
signatures streamlines the whole process. A Web site operator can expedite and simplify
the entire process by having the consumer sign and return the contract electronically.
Electronic signatures greatly reduce the time to process the transaction, the consumer
receives his goods faster, and the Web site operator is legally entitled to receive payment
prior to the shipment of goods.
First-generation e-signature solutions are focused on platform-and application-specific
solutions. Since then, many second-generation e-signature solutions are being imple-
mented using open standards. These second-generation products and services will
better integrate with corporate databases and security mechanisms, including biomet-
rics. This is a perfect time to assess current business processes that require signatures.
No industry is immune from the e-signature challenge. There are some big paybacks for
implementing e-signature technology “ especially for big-ticket transactions in the
consumer market place and in business-to-business processes. In particular, there is the




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permission of Idea Group Inc. is prohibited.
130 Ruzic


idea of using an e-signature to simplify auto and home loan processes and to speed up
supply-chain operations.
Yet, you will now have to determine what changes you™ll need to make to support e-
signatures. More important, carefully examine available e-signature solutions and watch
where they are going. Choose solutions and services that are platform and application
agnostic. And look for those that will best integrate with the rest of your data and your
security strategy.
E-signatures require businesses to obtain consent before sending information electroni-
cally, and to confirm that consumers can access the electronic form to be used. (For
example, if a document were sent as a PDF, an end-user would need software with which
to open it, such as Adobe Acrobat.) Anecdotal evidence suggests this provision can be
a deterrent to e-commerce. Even if someone opens a trading account with an online broker
at a storefront office, and asks for electronic account statements, that individual would
also need to confirm the request electronically. The consumer consent provision can
create headaches for companies if they change their electronic formats for users. A
company using PDFs may decide to switch to a different format in a couple years, but
when that happens they must receive new confirmations from all consumers to ensure
they have access. Otherwise, the company can no longer send the information electroni-
cally.
As advice to E-Business, it is functional to start in applying electronic signatures to low-
value transactions, and gradually work your way up to higher security. As businesses
work up to more important and secure processes and documents, it is preferable to make
sure you have the flexibility to migrate to a more secure solution such as Public Key
Infrastructure combined with smart cards. It is slowly but surely becoming possible to
conduct secure, legally binding transactions online. Forward-thinking companies are
finding ways to make electronic signatures easy for customers to use and simple for the
company to manage. Each business process has its own unique challenges, so there are
few one-size-fits-all approaches. Aside from the reduced paperwork and faster process-
ing, many business say they are happiest with the level of security and verification
provided by the electronic signature utilization.
The Future of Electronic Signatures “ Small businesses will be a significant driver to the
growth of the business-to-business market. According to real business activity, Internet
penetration among small businesses will steadily increase, reaching over 80 percent by
2004, and small businesses will generate 35 -40 percent of worldwide Internet commerce
revenue by 2004. The entry of multiple small businesses into online marketplaces will
decrease the overall credibility and credit worthiness of Internet market participants.
This decrease will cause other participants to demand legally binding agreements based
on an electronic signature to support online transactions prior to shipping goods.
Another driver to electronic signatures will be financial institutions. As small businesses
increase their purchases via the Internet, it will encourage financial institutions to
provide online financing and participate in this explosive growth. Already, Citibank NA
has formed an online market in Asia, and First Union Corp. (another US financial
institution) recently announced that it is building a business-to-business Internet market
targeted at its 700,000 small businesses. Financial institutions have significant lobbying




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permission of Idea Group Inc. is prohibited.
Electronic Signature 131


power and can cause the government and various states to initiate uniformity in
electronic signature laws.
A third driver to electronic signatures is developing procedures for accepting signatures
in digital or other electronic form with a goal of having at least 80 percent of all state tax
and information returns filed electronically. As consumers grow more comfortable with
electronic signatures, their use and popularity will increase.


E-Signature Utilization in a Real World

Loans “ USA Funds Supports E-Signature

The electronic-signature process reduces paperwork, speeds the delivery of funds, and
simplifies the education-loan process for schools, lenders and borrowers. USA Funds®
provides functional ways of supporting e-signature utilization in loan processes. By July
1, 2002, or by the date they subsequently adopt e-signature usage, lenders must provide
to USA Funds® a general explanation of each of their e-signature processes. The
description must include an overview of the steps that borrowers must follow in
completing that lender™s e-signature process. If the lender uses multiple processes, the
description also must outline how to identify which process was used for each loan. After
providing this initial summary, lenders also must notify USA Funds of any significant
changes in their e-signature processes. In addition, lenders must retain detailed docu-
mentation of the e-signature processes that they use, as well as documentation of any
changes to their e-signature processes, including the effective date of these changes.
This documentation should clearly describe the process under which individual notes
are endorsed. Unless the lender follows guidelines established in the U.S. Department
of Education™s Safe Harbor policy for e-signatures, loans are not insured if deemed by
a court to be legally unenforceable because of the e-signature process in use at the time
the note was endorsed. If, however, a borrower who signed a promissory note through
the electronic-signature process offered by USA Funds later challenges the validity of
the promissory note, or the U.S. Department of Education determines that the loan is
ineligible for reinsurance, because the note was executed using the electronic-signature
process offered by USA Funds, USA Funds will not require the lender to repurchase the
loan.
Federally subsidized Perkins and Stafford loans are the need-based loans available to
students. To apply for Federal Stafford Loan, all first-time borrowers must complete a
Master Promissory Note (MPN). To complete an MPN online, a candidate would fill out
Apply for a Loan. Before selecting the “Sign electronically using my US Department of
Education PIN” option, candidate should be sure that she/he has already obtained a PIN.
AES is required to ask for consent in order to complete this electronic transaction, so a
candidate will need to give her/his consent prior to proceeding. This process is active
in the online environment and with e-signature utilization it gives more credibility and
security to lenders and borrowers.
The standards provide that if a lender or holder™s processes used for electronic
signatures and related documents satisfy the standards set forth, those lenders or


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132 Ruzic


holders, “will be protected from the loss of Federal benefits on a loan if the loan is
determined to be legally unenforceable by a court based solely on the processes used
for the e-signature or related records.” If the holder or lender does not follow the
procedure set forth, “the Secretary will determine on a case-by-case basis whether
Federal benefits should not be denied or repaid.”
The online application process is guided through three steps:
1. Student logs in, selects school and lender. (Student™s name and address data are
pre-populated using data from their log-in account.)
2. Student selects one of the following options:
• Print at their printer.
• Have AES print it and mail it to them.
• Save the form for completion at a later date.
• Sign electronically using their USDE PIN.
3. After the signed process, the student gives consent to complete the Stafford MPN
process electronically.

Figure 8: Selection window to submit application including e-signature option

Please select one of the following options:


¤ Print MPN Form on Your Printer
¦ AES will Print the MPN Form
¦ Save Information for Later
¦ Sign Electronically with my US Dept. of Education PIN


Submit Reset




Figure 9: Consent-giving window to approve signing electronically




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Electronic Signature 133


The student is informed of impending signature, MPN data and clicks are stored. Thus,
the overall application process is done electronically saving time, money and organiza-
tional procedures.


Production “ Ford Credit Introduced Electronic Signature

Interlink Electronics, Inc. and Ford Credit, a subsidiary of Ford Motor Company, are
introducing in second half of 2003 Interlink™s ePad handwritten electronic signature
solution at thousands of dealerships throughout the US. ePad implementation will utilize
electronic signatures to automate processing of some of its lease end documents, as the
organizational solution for a system-wide transition from paper lease end documents to
electronic lease end documents. The processing of thousands of lease end documents
yearly will reduce operations costs by providing a handwritten electronic signature that
is understood and accepted by the consumer, easy to use, and legally binding. Electronic
signature solutions, like that software, are being deployed by larger companies to enable
customer hand-signing of electronic forms and applications. Motivated by sharp
reductions in processing costs and transaction times, companies are leveraging their
investment in information systems to carry more revenue directly to the bottom line. ePad
solution captures the handwritten signature converting it to a biometrically -secure e-
signature for use in electronic forms and transactions. By providing user-intuitive
electronic signatures, ePad enables enhanced workflow, reduced operations costs and
faster document processing times. ePad e-signatures may be permanently bound into
office-based digital files, Internet documents, and many proprietary forms and transac-
tions, and it is used to authenticate the identity of the signer.


Healthcare “ E-signature at Hospital Registration

At hospital registration, patients are normally required to sign a wide range of pre-printed
forms and documents, with each generating a hard-copy duplicate that must be pro-
cessed and filed in a document storage area in the medical records department. With e-
Signature products, hospitals are able to secure a legally acceptable patient signatures
without generating paperwork. In an e-Signature-enabled environment, patients com-
plete a set of admissions forms as usual, but each document is now placed on an Access
e-Signature tablet before signature. As the patient signs the paper document, the
signature is simultaneously captured by the e-Signature tablet, encrypted, and bonded
to an electronic version of that same document, which resides in, and is managed by, the
hospital™s database. In this scenario, there is only one set of hard-copy forms, which is
given to the patient for his or her own records. No duplicate copies are left behind in
registration for filing, allowing for a paperless registration process. As needed,
registration staff can, with a single keystroke, digitally distribute the completed form to
outputs such as document imaging systems, faxes, e-mail boxes, wireless messaging
devices, or printers throughout the hospital.
The e-Signature devices are supported by a software application that ensures tamper-
proof encryption and authentication of digital signatures and their associated source



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permission of Idea Group Inc. is prohibited.
134 Ruzic


documents. e-Signature devices and software prevent encrypted signatures from being
printed separately from their original source documents, thus making it virtually impos-
sible for captured digital signatures to be stolen, falsified, or re-applied to fraudulent
documents. To further increase security, e-Signature also uses proprietary technology
to encrypt signatures with their uniquely identifiable biometric characteristics. With
each signature, Access™ technology captures specific information including speed,
stroke, and pressure and digitally encodes this information to the document to ensure
legal verification.




References
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Wenderoth, D. (2001). Development of an European-Wide Citizen Javacard to Support
Administrative Processes by the Use of the Electronic Signature and the Biometric
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permission of Idea Group Inc. is prohibited.
136 Mowatt




Chapter VII



Impacts of the
Digital Economy:
The Shift to
Consumer-Driven
Competition and
Life-Span Products
Simon Mowatt
Auckland University of Technology, New Zealand




Abstract
This chapter examines changes in innovation and competition made possible in two
traditional industries by the adoption of integrated information and communication
technologies. Using empirical interview-based research the chapter highlights the
importance of consumer-driven innovation. The development of complex innovation
networks to supply consumer needs is demonstrated using two example sectors, the UK
magazine publishing and grocery retailing industries. The innovation process is
outlined in detail and the importance of linkages to the end-consumer and market
experts is acknowledged. In addition, this chapter offers the concept of “life-span”
goods as those developed from the outset as having a short life dependent on changing
consumer tastes and fashions. Within this environment firms act more as project
orchestrators, using core skills in developing innovation teams based on a deep
knowledge of consumer activities. Finally the chapter concludes by examining the
challenge to economic analysis and to the theory of the firm provided by shifting and
temporary alliances.



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permission of Idea Group Inc. is prohibited.
Impacts of the Digital Economy 137


Introduction
The adoption and use of digital technologies by firms has created both many new
industries and opportunities for existing firms to enter new markets. In addition to this,
a key aspect of the use of digital and communications technologies based around those
of the Internet has been to allow firms to reorganise their internal operations. This chapter
provides an examination of the organizational responses to technological change made
by firms in two industries transformed by the use of the “integrated information
channels” (Nicol, 2001) which characterize the digital economy. Whilst the focus of many
studies examining the impact of new digital technologies has been on high technology
sectors, the adoption of digital communications technologies has also led to new
competitive pressures in industries that could be characterized as low technology (Cox,
Frenz and Preveezer, 2002). Firms in traditional industries have been able to gather more
detailed information about the requirements of consumers, and the factors of competitive
success have moved toward the ability to innovate the products and services which fulfill
customer needs. An important aspect of organization and competition in the digital
economy is therefore the process and management of innovation itself. This chapter
argues that a key feature of competition in the digital age is that there has been a
significant shift in competitive advantage toward the consumer-facing firms which are
best placed to use details of consumer preferences to drive innovation, and that they are
increasingly able to do this through the use of complex network arrangements. The
balance of power between manufacturers and downstream companies has been shifting
as a result of these changes, and the consequent reconfiguration of existing industries
has important consequences for our understanding of economic analysis, particularly
of organization, innovation, competition and industrial structure.




Background
The two industries that are the focus of this chapter are the food retailing and the
magazine publishing sectors in the UK. Although distinctly different in character, both
of these activities have been transformed from ones where competition was driven
primarily by economies of scale in production to sectors where competitive success is
conditioned by the ability to engage in continuous innovation driven by customer needs.
In both examples the greatest impact of the digital revolution has been the changes in
organizational structure within and between firms in the value-chain, although this may
not readily be apparent. The temptation in these industries is to focus exclusively as to
how the digital age has reduced the importance of “bricks and mortar” delivery relative
to “clicks” and Internet delivery. Magazine publishers, for example, deal with an
information product whose composition has become potentially purely digital. With the
possibility of scale-free delivery on the Internet many industry observers predicted the
end of paper-based magazines. Not only has this markedly failed to occur, with many
magazine companies such as EMAP which invested heavily in digital brands and delivery
scaling back their investment after losses in the early 2000s, but the range of paper-based


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138 Mowatt


magazines has proliferated hugely in the last decade (PIRA, 2002). Similarly, supermar-
kets have established their dominance as a retailing format by concentrating a large range
of products in a specific outlet”often a large out-of-town shop. With the well publicised
move to Internet-based ordering and home delivery, the significance of the wider
changes to the industry conditioned by new technology may be overlooked. To date, for
example, the vaunted benefits expected to accrue from online shopping have also proved
to be elusive (Hughes, 2002). The leading exponent of this approach in Britain, Tesco
plc, now holds 60% of the UK internet grocery provision market, with annual sales
currently valued at £365 million (Tesco, 2002). Whilst this amount is larger than the entire
European market for online grocery sales (Keynote, 2002), it nevertheless represents
only 1.7% of Tesco™s UK sales turnover. Rather, it has been the responses to customer
preferences made possible by the application of digital technologies to other parts of
their operations which Britain™s supermarkets have used for competitive advantage.
By exploiting information gathered directly from and about their customers via scanning
technology, inventory management software systems, data warehousing and mining,
and consumer participation in online groups and surveys, supermarkets and magazine
companies have been able to benefit directly from a strategy of new product development
based on these requirements. Further to this, by engaging in innovation these consumer-
facing firms have created a web of inter and intra-firm alliances and networks that have
served to transform relationships within the industry™s value system.
The interesting aspect to the transformation of these industries is that in many respects
they appear much as they always have in terms of concentration ratios, the composition
and identities of the largest firms, and superficially in the nature of activities undertaken.
In the publishing industry the UK™s two long-running dominant firms, EMAP and IPC,
are still the largest consumer magazine publishing companies. The food manufacturing
and retailing industry is still comprised of large multinational food manufacturers and
large, mainly national retail groups. In the UK the top five supermarkets continue to
control the grocery market. However, close empirical study reveals that the competitive
dynamics within these two industries has changed substantially, with the balance of
power shifting from firms engaged in production to those in closest proximity and control
over information about the end consumer. Conventional measures of industrial structure
such as concentration ratios fail to adequately depict the changes in activities under-
taken by firms and fail to reflect the importance of the large number of small suppliers who
are critical to the performance and operation of flexible business networks.
The detailed descriptions of the operation of the industries and the innovation processes
described in this chapter are based on a four-year empirical investigation completed in
December 2002 and a review of published sources. The study of the magazine publishing
industry was undertaken by a programme of 28 semi-structured interviews in the
consumer sector with senior managers who had an overview of both editorial and
business functions, typically publishers or publishing directors (in the US this function
is often referred to as the magazine general manager), printing firms and distribution
companies. The particular sub-sectors used as vehicles to explore consumer-responsive
innovation were the men™s lifestyle, computer gaming and cycling segments. In support
of the interview-based research we also undertook a census questionnaire survey of 246
publishing firms in the entire magazine publishing sector. A response rate of 23% was



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Impacts of the Digital Economy 139


obtained from a statistically representative sample, comparison being made with a
random selection of firms in the industry (Cox, Mowatt and Young, 2003). The retail
industry was researched with a similar interview based programme, concentrating on the
innovation network, suppliers and distributors to a leading supermarket, which we name
here SuperCo for reasons of confidentiality.
This chapter illustrates the issues outlined above in the following manner: the next
section examines the shift to consumer-driven competition in the two focus industries,
with a focus on the importance of innovation. Following this the concept of “life-span”
products is offered as a hallmark of the change in products to those characterised by
consumer-driven pressures. The chapter then proceeds to examine in detail the innova-
tion networks employed within the two exemplar industries. From this a review is offered
as to how these issues may affect our understanding of innovation and the use of
conventional economic approaches to analysing firms in the digital age. Finally the
chapter concludes.




The Shift to Consumer-Driven
Competition
The magazine market has changed markedly since the introduction of digital technolo-
gies. The market has shifted from being dominated by few publishing firms whose main
activity was publishing largely undifferentiated established weekly magazines to a
market characterised by a large number of often transient high-quality monthly niche
titles. These titles are targeted towards narrow interest groups and publishing firms need
to be able to both find information about target markets and be able to create new titles.
The initial benefit to publishing firms is that consumers are willing to pay high prices for
magazines that are based on their special interests. In the food retailing industry a similar
shift has occurred from supermarkets vying to supply branded basic good at low price
produced by the large manufacturers, to quality-based competition whereby firms sell
products that consumers want. If food manufacturers do not supply these products the
supermarkets have used their own brands to develop, procure and supply new products.
This section reviews these changes before the next section examines how publishing and
grocery retail firms innovate and supply new products.


The Magazine Publishing Industry

Before the adoption of digital technologies, competitive advantage in the food retailing
and magazine sectors was held largely by the firms engaged in production and manufac-
ture. Manufacturing firms could produce generally undifferentiated products at large
scale and gain an advantage over competitors with the ability to offer lower prices. The
change in the competitive process away from this paradigm within the magazine
publishing industry is well illustrated by the change in industrial logic that has governed



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140 Mowatt


the fate of the UK™s dominant firm in the sector. IPC Magazines was formed by the
agglomeration of several publishing and printing firms by the Mirror Newspaper group
in 1958 and later acquired by the publishing company Reed International in 1970. The
driving force behind the creation of IPC and its acquisition by Reed was economics of
production ” economies of bulk buying of paper, the benefits of concentration allowing
predatory pricing and the ownership of high-speed printing presses as decisive strategic
assets (Price Commission, 1978; Mowatt, 2002). The nature of the product also was
favourable to vertical integration. A paper-based magazine had to be laid out mechani-
cally; a laboriously labour-intensive process where the product had to move physically
from copy editors to the printing press and the distribution system to reach consumers
(Bannard, 1990; Reed, 1997). Revenues at IPC were derived jointly from copy sales and
through advertising sales. Copy sales were at a low cover price to deter competitors (and
IPC was subject to Price Commission investigations concerning predatory pricing in the
late 1970s) and large print runs kept costs down. Advertising was at a premium. As an
example of this the largest magazine segment in 1977 (20%) was women™s interest and IPC
controlled 79% of this market with four titles. Even though IPC published 70 titles in total,
52% of its revenue was derived from these four titles alone, and 59% of that revenue was
from advertising (Price Commission, 1978; BRAD data). With the widespread introduc-
tion of computers into editorial offices in the mid-1980s magazines could be created as
“soft copies,” and design, layout and composition became “virtual” rather than craft-
based activities (Mowatt, 2002). The activity of printing therefore was stripped of these
value-adding tasks, and became a residual function in the magazine publishing industry.
By the 1990s our survey indicated that all printing was outsourced to external printing
firms (Cox, Mowatt and Young, 2003). Desk Top Publishing systems (DTP) therefore
removed much of the basis for vertical integration in the industry, although the rigid
system of labour union control initially made it difficult for publishing firms to reorganise
in response to technological change.
The change in technology not only changed the industrial logic of the dominance of few
producers in publishing, but allowed both small firms and individuals to create their own
“magazines” based on their special interests ” at least on their own computers. Vertical
disintegration and the dissolution of union power that had hampered the introduction
of early digital technologies (Royal Commission on the Press, 1962) in the printing
industry provided a channel for low-cost printing which potential publishers could
access in order to join the industry. The early and mid-1980s witnessed an explosion of
small publishing companies in the UK, such as Dennis and Future Publishing, whose
founders initially saw opportunities for magazines catering for new market niches, often
starting out as one-man operations working from a home office. The growing computing
and gaming industry was one such area where many small publishers saw the chance to
launch new titles into markets that the dominant printing firms were still too inflexible to
enter quickly. Table 1 shows that although IPC has been able to retain its enduring
position as top company in the women™s weekly market (White, 1970), its total market
share has been eroded from 79% in 1977 to 32% in 2002 by the entry of other low-cost
producer firms in the weekly market (Mintel, 2002a; 2002b).
The monthly market, and new magazine segments established in the mid-1990s such as
the men™s lifestyle market, are contested by a much broader range of specialist publishers
who are able to compete with larger companies head to head based on their ability to



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Impacts of the Digital Economy 141


Table 1. Magazine publishers™ market shares of women™s and men™s interest market,
2000 (Mintel, 2002a; 2002b)

Women's weekly Women's monthly Men's monthly
Publisher
Market share (%) Market share (%) Market share (%)
IPC Media 32 26 19
Bauer 24
Northern & Shell 17
Hello! 12
EMAP Elan 3 24 32
DC Thomson 7
National Magazines 5 34 3
The Lady 1
Conde Nast 7 6
Attic Futura 6
Dennis Publishing 15
Rodale Press 9
Cabal Communications 7
Others 3 10
Total 100 100 100


respond to consumer needs. IPC and EMAP as dominant producers were able in the late
1990s to reorganise around consumer market groups and to recognise the potential for
reorganisation afforded by technology. The following section on innovation networks
examines this process. The shift to digital composition also had one further significant
impact on the magazine industry. Coupled with regulatory changes governing foreign
ownership of the media, large-scale, low-cost producers of magazines could not only use
existing competencies to enter the weekly market, but do so internationally. Large-scale
European publishers such as Bauer were able to enter the UK market. The market
therefore split between monthly magazines targeted at narrow markets and weekly
magazines where low production cost and cover prices was still a key feature.
The ability of magazine publishing firms to become consumer-driven has been demon-
strated by the increase in the number of magazine titles, from 2,000 consumer titles in the
mid-1990s to over 3,000 titles in 2002. The UK is now arguably the leading player in the
global magazine industry, easily outstripping countries such as the USA, Germany and
France in terms of number of titles sold per million population (Pira International, 2002:
Figures 8.12 and 9.2). The dual ability of existing firms such as IPC to restructure to
consumer responsive media firms engaged in innovating new titles for the monthly high
value-added market along with the entry of many niche publishers has fueled this growth.
In 2001 IPC, now IPC Media, was bought by the multinational media conglomerate AOL-
Time-Warner. The reason for this acquisition was not based on the economics of
production, but was justified in terms of the ownership of knowledge. Cross-media
content sharing was seen as the key to competitive advantage. Titles, and increasingly
services, could be supplied across different media formats charged at premium prices to
narrowly targeted consumer segments. Whilst the logic of this approach has yet to be
established as a viable business model across a media conglomerate, the advantage of



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142 Mowatt


a flexible publishing firm to use knowledge as a key strategic asset can be examined in
the innovation section.


The Food Retailing Industry

The rise of powerful retailers such as the supermarkets in the UK and Wal-Mart in the
US has demonstrated how effectively firms close to consumers can use their control of
information management systems to not only gain advantage over competitors but to
also exert pressure on manufacturers with monopoly power. Competition authorities are
beginning to recognise that they need not only to concentrate on the power of
manufacturers but that retailers™ buying power can be significant in the modern age
(Graham and Steele, 1997). Both Wal-Mart and British retailers have ruthlessly exploited
their supply-chain management and category management systems in order to drive
down supplier costs and decrease the costs of warehousing and prices paid to branded
and own-label suppliers (Fernie and Sparks, 1998). The UK Competition authority
recently delivered its verdict on the activities of the leading British supermarkets
(Competition Commission, 2002). Concentrating on the use of buyer power the report
presented evidence of supplier relationships with great differences in power between
retailers and suppliers, but also gave contrary evidence of very close trust-based
relationships between small suppliers and retailers. From the market power perspective,
this proved problematic for the conclusive findings of the report, but can be explained
by the shift to consumer-driven innovation networks. The ability to gain effective control
of the supply chain has been decisive for retailers to not only challenge the dominance
of branded manufacturers and squeeze supplier revenues, but to also respond more
effectively to consumers. Information systems enable network hubs ” the retailers in
this case ” to identify the value-adding activities in the value-chain, and the ability to
use complex networks allows them to control these activities directly without ownership.
The value-adding activities are those that drive innovation: consumer knowledge,
controlled closely by the retailer, and the ability to create new batch-driven products
quickly, offered by small suppliers. Where consumer responsiveness and flexibility are
important, trust and cooperation rather than price-based relations will be central. The
next section elaborates on this process, and the later section on innovation examines
trust within the innovation process.
British supermarkets built their capacity to both source and supply novel products in
three stages. First, their control of the supply-chain allowed British supermarkets to build
up a detailed picture of suppliers operations and cost structures. Although retailers
controlled distribution only from secondary consolidation points, the information
management systems they employed enabled retailers to effectively control the entire
supply-chain. Manufacturers and independent logistics companies have been manoeu-
vred into acting as agents in the supply-chain, picking up deliveries from small suppliers
to feed into the retailers™ distribution system. Second, the move in the late 1990s to
replenishment-based logistics and to strategic inventory management in the early 2000s
gave retailers the ability to supply retail stores with small deliveries ” a few items per
store for short-shelf-life products. Third, this ability to control the supply chain from
small suppliers to batch deliveries enabled many suppliers too small to find independent



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Impacts of the Digital Economy 143


distribution into the industry™s value-system, and often as own-brand contractors. In
this way the total number of firms engaged in the value-creating chain in the grocery
sector has dramatically increased.
Supermarkets increasingly try to supply novel products to consumers based on customer
desires. Retailers can supply these products to stores in a customer responsive fashion
due to their mastery of the supply-chain. Information about consumer needs is obtained
through a variety of channels: by analysing consumer information captured with loyalty
cards at point of sale, with data mining and strategic ordering systems in dedicated data
warehouses, with qualitative information as to consumer requirements gathered from
customer feedback and focus groups, from Internet order histories, observing changing
social trends (such as shifts in restaurant trends), and by consulting experts from past
moving consumer areas such as those represented by “celebrity” chefs. Whilst increas-
ing buyer power and category management techniques allows supermarket to offer
cheaply produced own-label low cost versions of branded goods ” sometimes manu-
factured by the branded producers themselves ” knowledge of customer trends is also
allowing them to out-compete manufacturers in high-value-added market segments by
using innovation networks to create and produce their distinct own-brand products ”
although they neither own nor operate the production process.
The process of creating new magazine titles and novel own-brand products is the subject
of the section on innovation networks. A key feature of these products however is that
they are designed from the outset as short-life products and this attribute is the subject
of the following section.




From Life-Cycle to Life-Span Products
The use of digital technology in publishing has removed many of the entry barriers to
the industry. Competition in the high-value segments (i.e., monthly magazines) is
therefore about addressing consumer needs ” and consumer needs often change in line
with current fashions, trends and new technologies”rather than printing costs. Maga-
zine publishers and small independent entrants are able to use their detailed knowledge
of “lifestyle” areas to offer specialist magazines. Consumer-driven innovation is not
however about identifying one key product ” a “killer app” ” that will enable the
producer to gain a competitive edge through an efficient scale of production to support
low costs and moderate margins. Rather it is about the ability to manage a continuous
process of development and innovation based on supplying products for changing
consumer needs. The magazine publishers who identify fans of TV series such as “Buffy
the Vampire Slayer” or a new computer gaming platform such as the X-Box do not expect
that magazines targeted at these audiences will have more than a limited life-span. In the
same way competition between the vertical networks supporting retailer™s own-brands
is enacted though the constant supply of products. Innovation for life-span goods is
about managing constant innovation.




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144 Mowatt


The publishing industry questionnaire responses showed that consumer magazine
companies have extended their activities to exploit their knowledge of consumer markets
by supplying new titles and also other products and services. Television stations, shows
and radio programmes based on magazine brands (such as KaRang! TV for heavy metal
music fans), licensing for foreign distribution, Internet advertising, event sponsorship,
fairs, exhibitions and direct activity with consumers are all ways in which consumer
knowledge has been exploited (for a detailed review of the questionnaire results, see Cox,
Mowatt and Young, 2003). Consumer firms can get very close to consumers. In the
mountain biking segment for instance riders may meet the editors of mountain biking
magazines on public trails and also on trails actually sponsored and created by maga-
zines. One magazine in the segment, MBUK, has an extremely active Internet chat room
and forum with hundreds of discussion threads generated by mountain bikers per week.
The magazines editorial staff not only engages in the sport themselves, and observe
reader™s activities directly, but also interact through the Internet: for example, six MBUK
readers who had complained about the magazine online in a discussion were brought into
the magazine company to work for a week and this later became the basis for a story ”
and continued dialogue on the forum. It is the speed, quality and depth of this interaction
that characterises consumer-responsive firms in the digital age. This interaction allows
firms to explore new niche markets and service, for example launching a new magazine
to capture emerging trends in the sport and launch spin-off, single edition or special
edition titles.
In the supermarket the chilled ready-meals story in the UK provides a compelling example
of the transformation from producer to consumer-driven competition and the shift to life-
span products in the food retailing industry. Chilled ready-meals are the prime example
of retailers™ ability to differentiate quality own-brands, and are high value-added premium
convenience products, which have displayed consistent rapid growth from the 1990s to
date. They are ready-prepared, short-shelf-life, complete meals which are chilled, not
frozen, for freshness. Unlike frozen ready-meals, where four branded manufacturers still
control 50% of the market, 95% of the chilled market is controlled by supermarket own-
brands, supplied through innovation networks comprised largely of small firms (Cox and
Mowatt, 2004). The appeal of the sector lies not only in its convenience, but also as a
substitute for takeaway and restaurant meals, and retailers therefore need to be able to
offer their customers an expanding and changing range of high quality products in line
with fashionable eating trends. SuperCo offered a total of 141 different chilled ready-
meals in 2000, having introduced some 44 new products in 1999 alone. Retailers tend to
source the inputs for chilled ready-meals from a great number of suppliers (180 in 2000)
in order to respond quickly to new restaurant trends with new recipes, exploiting the
flexibility of small suppliers. The process of innovation is examined in the following
section.




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Impacts of the Digital Economy 145


Innovation Networks for Life-Span
Products

Publishing Firms

Publishing companies are able to use innovation networks to supply new titles and
services to customers willing to pay high prices for quality magazines. People with expert
knowledge of a special interest can take advantage of the low entry barriers in the
industry to originate their own magazine titles ” something that was possible before the
digital age but very rare (the launch of an independent high-value monthly in the early
1980s such as the Face was exceptional). It is more usual that actors with experience in
the publishing industry develop their network of expert contacts in order to create new
titles. For example, publishers within large production-orientated firms that were until
recently operating in the old paradigm had developed linkages with consumer experts
across several market areas, and within the firm and through their personal contacts in
the industry a network of technical and editorial people. Publishers and editors who
identified new opportunities often either left their company to form their own start-ups
or themselves launched a new title pilot to demonstrate the potential to the company. A
typical story from one publisher detailed how he and his editor on a style magazine
received a lot of feedback from readers concerning a feature on celebrity diets. The
publisher was able to put together an informal team comprised from his personal networks
to develop a spin-off title to cater to this market at this own personal initiative. In the last
few years large magazine publishers have begun to realize that they are repositories of
expert knowledge that can be used not only to publish existing magazines but to see their
activity as coordinators of networks that can be flexibly rearranged to generate new titles
quickly in response to consumer trends. For organisations this had meant re-forming
around consumer interest groups, and using an essentially project-based approach to
spin off new titles and products.
The small publishers formed in the first wave of digitization in the mid and late 1980s have
also grown on this principle ” using experts to inform the company about new
opportunities and to put together a project-based team to develop a new title. This
process relies on contributions from external actors (contract journalists and experts
commissioned for work) which has greatly increased the scope of the production system
coordinated but not internalized by firms. The digitization of publishing has occurred
simultaneously with the externalization not only of printing, but also of journalism and
copy-based tasks (Stanworth and Stanworth, 1988). For consumer-driven areas it is vital
that these informants, who may compose copy, send reports or be brought in as technical
advisors, journalists or editors, are authentically connected to consumer trends ” which
is one reason why a flexible external network rather than in-house journalists is a feature
of project-based networks. On publisher described how he worked with people on a
surfing magazine. The credibility of being informed by “real” surfers enabled the
magazine to appeal to readers. The publisher noticed that surfers were increasingly riding
mountain bikes after surfing, and snowboarding in winter ” at a time when these sports
were less well-known in the UK. He was able to develop new informants from these sports



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146 Mowatt


Table 2: How publishing firms receive copy from external and contact staff

Method of Supply Two Years Ago Now
Physically (e.g., Film by post/couriers) 40 31
By EDI or Integrated Network Linkages 9 43
Electronically through the Internet 4 23
Only Electronically 4 26
Total Respondents 44 57



and put together magazine teams from his technical network to exploit these opportuni-
ties. These external experts and actors can be coordinated remotely by e-mail and
Internet-based communications technologies, something increasing apparent from the
response to our questionnaire (see Table 2), and again this flexibility allows a far faster
and wider contribution to firms. In the innovation networks employed by magazine
publishing firms the value-adding activities are those which provide quality to consum-
ers ” in terms of content (through expert contribution), layout and style. DTP allows
editorial teams complete control over these key design processes with only a small staff
per title. Supporting activities such as advertising sales can be centralized across
consumer groups, rather than tied to a changing array of specialist titles. A final story
illustrates the changing flexible nature of the magazine publishing firm: Roger (name
changed) worked for a large magazine house as editor to a specialist water sports title.
He left the company in 1994 and founded his own rival title using his trusted expert
contacts from both the sport and the publishing world. From this he established several
spin off titles, including one in the men™s interest sector ” competing head-to-head with
international firms such as EMAP and IPC. From one title in the mid-1990s, he has
established a portfolio of seven titles by 2002, having opened and closed four others.
His main activity is now looking for new niches ” those far from the related areas of
lifestyle and sport. His competitive advantage is speed in developing new titles, a low-
cost and low-risk process with current technology for specialist rather than weekly mass
market titles. The UK has a very established magazine distribution system, with multiple
magazine outlets such as WHSmith stocking a large number of tiles in each store (usually
with a list of over 2,000) so it has been relatively simple to gain access to consumer points
of sale (although retail pressures are beginning to change this). Roger™s comment was
that, “It is simple finding local experts to develop your copy once you have found a
market.”


Innovation in Food Retailing

In this section we examine the operation of SuperCo™s innovation network to understand
how life-span products are created through flexible innovation networks of firms in loose
strategic alliances. SuperCo™s innovation network evolved from its initial development
of own-label specifications through internal hygiene and later product development
departments for its own-brand goods (Fernie, 1997; Hughes and Merton, 1996; Senker,
1986, 1988). The consumer information which SuperCo collects is considered in conjunc-



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Impacts of the Digital Economy 147


tion with strategic alliance partners, whose activity is act in a co-ordinated way is
possible because of the retailer™s control of the supply-chain. SuperCo accepts that,
“Many new product ideas come from our suppliers and we work very closely with some
of the top chefs ¦ so we follow those consumer trends which are very fashionable.” In
this sector the relationships engaged in are best understood as inter-organisational
networks whereby manufacturers and packaging firms develop new products in conjunc-
tion with retailers. SuperCo claims to have “very long-term relationships” with some
suppliers and accepts that trust within long-term relationships is critical (Lane and
Bachmann, 1998), especially as SuperCo has no capital stake in suppliers and there are
few formal contracts between retailers and food suppliers in the chilled ready-meal sector.
Relations essentially take the form of a “gentleman™s agreement” and this is made
possible by the structure of the industry created by the innovation network itself.
SuperCo uses many small suppliers to ensure it has access to a large variety of recipes,
but relies on a key supplier for 50% of its ready-meals by sales volume. This firm, with
a turnover of over £750m in 2002, has grown principally as a supplier to the supermarket
sector and has a dedicated factory for SuperCo, guaranteeing confidentiality and
exclusivity. This trust has enabled SuperCo to move from business plans of typically
three years to longer terms of five years, and implement joint investment plans. These
plans range from non-contractually based agreements in which SuperCo agrees to
“deliver a volume of business to a manufacturer for five years and the manufacturer
invests in a dedicated factory,” to arrangements to supply small firms with technical
assistance in return for access to new recipes. For this process to be effective the retailer
must ensure that its quality standards and processes are adopted and integrated with its
packaging and, crucially, own-brand marketing strategy. Information needs to be passed
between the partners in this network. The “relationships in this sector are different than
when you are working with the big branded suppliers as we work very closely with ready-
meal suppliers and the confidences that we tell them we wouldn™t do on the branded side.”
This is especially significant for small-scale suppliers where the retailer is their sole client.
This series of very close relations binds the network firms into mutual dependencies. In
the case of large manufacturers the relationship centers on negotiation over exclusivity
agreements, the use and development of dedicated manufacturing centers, and the co-
ordination of new hygiene technologies and processes, such as the development of
specific packaging systems. Relations with smaller firms were characterized more by an
exchange of hygiene technician staff to co-ordinate basic standards and to transfer
technological information, especially information about production systems from manu-
facturers, from the retailer to small producers.
Knowledge is developed and disseminated throughout the innovation network. The
process of working in a network is itself important knowledge. Relations in the innovation
network are “fluid and dynamic” within and between firms. SuperCo™s chilled ready-meal
innovation unit is part of the fresh foods division and incorporates buyers responsible
for recipe development and has a permanent team of 26 people. SuperCo staff and supplier
staff spend around 50% of their time in each other™s firms and meet in other locations.
Flexibility and face-to-face contact are important when “some of the factories now are
like large hotel kitchens, because it has become more and more specialized and the runs
have become smaller.” Far from the picture of adversarial price-based negotiation
between suppliers and retailers which was partially responsible for the Competition



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148 Mowatt


Commission enquiry into the activities of supermarkets in the UK, network relationships
where complimentary assets (consumer information for new product; the ability to
flexibly supply new quality recipes) are mutually beneficial to both firms and vital for the
supply of life-span goods.




The Extension of Innovation Networks
In the preceding two sections we have examined how firms in two distinct sectors have
been able to use innovation networks to produce and supply high-value niche products.
A key element of this strategy has been for firms to be able to identify end-consumer
desires. The ability to assemble project-based teams to source, design, manufacture and
deliver products is in itself a key element of competitive success in the digital era. This
flexibility has also enabled firms to be able to extend innovation networks, exploiting key
consumer knowledge by offering additional products and services. In the example of the
magazine industry, the spread of services from magazine production into supplying
services to consumers was acknowledged. Similar observations can be made in the
supermarket sector. Some supermarkets, for example, have exploited their proximity to
consumers and their ability to innovate branded products through contractors to enter
the magazine market. The retailer J. Sainsbury, for example, uses its contract publisher
New Crane to offer The Sainsbury™s Magazine. This magazine had a circulation of 278,043
copies in the first half 2003 (ABC data) and although only sold in Sainsbury™s supermar-
kets, it competes directly with magazines offered by mainstream publishers. In this way
coordinators of consumer-critical information are able to compete across industrial and
market areas outside of their usual line of business. This underlines the complexity of
competition in the contemporary period.




Shift to Consumer-Driven
Life-Span Competition in Analytical
Context
The ability of the firms in these two industries to leverage critical consumer information
to drive innovation through the use of networks presents challenges for our understand-
ing of innovation and organisation in the digital age. It has been suggested that the role
of knowledge in the digital economy has led to “New Innovation Regimes” (Windrum,
2000) in seeking to explain innovation in “knowledge-intensive services.” This perspec-
tive demonstrates that Schumpeterian approaches to innovation, first concentrating on
the role of the individual in the innovation process (entrepreneurial capitalism) and later
conceptualised in terms of the action of large firms upon innovation and the ownership
of knowledge by big business, is limited in dealing with firms in the digital economy. From
the evidence presented in this chapter it should be clear that rather than acquiring


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Impacts of the Digital Economy 149


innovative capacity by internalising entrepreneurs as predicted by Schumpeter, firms are
increasingly able to coordinate and control innovation through networks. The networks
described are not only inter-organisational but bring in individuals and the end-
consumer. A key feature of these networks is that the central hub firms co-ordinating
information and innovation ” magazine publishing firms and supermarket retailers ” are
managing many simultaneous networks with large numbers of suppliers. The analysis of
these collaborative relationships is problematic for a transactions-cost approach to the
organisation, with its central concerns of establishing the legal boundaries of the firm,
make or buy decisions in production, bounded rationality and opportunism (Williamson,
1995), in attempting to understand the operation of these firms and competition between
them.
Ekinsmyth (2002) has argued that the magazine publishing industry is project-based, and
although this analysis focused on the operation of single magazine titles, our findings
have borne this out. I argue that many new consumer-sector, project-based organizations
are essentially concerned with life-span products, with a necessary focus on temporary
and shifting patterns of alliances in production. From an analytical economic perspective
recourse to a legal-ownership definition of the firm as recently argued by Foss (2002) does
not further our understanding of production systems ” surely the purpose of firm™s
activities ” where due to the transient nature of activities internalization is unlikely.
The digital age has made new systems of innovation possible which are neither within
nor outside of the legal definition of the firm, but managed through complex network
arrangements. From this perspective the boundaries of firms are less important than the
information flows that the firm controls. An approach to the analysis of firms offered by
Casson (1997) allows us to conceive how resources outside of the ownership of the firm
are potential strategic assets providing that firms can control them. Digital economy
project-based, life-span firms as examined in this chapter are also problematic for
conventional analysis as they are based on generic technologies. Unlike traditional R&D
in manufacturing, where the focus is on the development of idiosyncratic assets
developed through bespoke design, many features of the innovation systems that we are
examining here are based on generic systems and even in some cases freely available
software. For the “pervasive technologies” of the digital age (Cantwell and Noonan,
2001) their value rests not in their uniqueness, but conversely, in their availability to all
partners in the value-chain (Nicol, 2001).
Network study approaches have attempted to move beyond a simple transactions-cost
framework (see Ebers, 1997, for a review) and incorporate conceptualizations of the trust
relationships that are important in innovation networks (Lane and Bachman, 1998,
provide an overview). However, the value-chain and innovation systems in the indus-
tries illustrated also incorporate information directly from end-consumers, and few
analysis of consumer-driven innovation to date treats the final consumer in these “edge”
markets (White, 2002), as the majority of transactions within an industrial economy are
those between firms involved in intermediate forms of production and related services
(the customer is often taken to be another supplier or firm in the value chain). However,
the communication potential of current technology allows firms to greatly increase their
information reach. Consumer-driven competition makes it more likely that firms will
extend their innovation networks to final consumers, and that the features described in



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150 Mowatt


these industries may be generalized across the economy more widely. Network analysis
also often attempts to describe long-term or embedded social relationships rather than
the dynamic short-term ones that characterize innovation networks for life-span goods.
The challenge for economic analysis is to explain empirical realities with theories that can
deal with the complex nature of firms and production systems in the digital economy.




Conclusions
This chapter has examined how two distinctly different “low-tech” industries have been
able to embrace new forms of information management and complex network forms of
organization in response to the use of new digital technologies. The common themes in
examining the innovation process in both sectors is the importance of firms being able
control and observe information flows through the use of information systems to engage
in consumer-driven innovation. The key driver of innovation is the ability of firms to
transform the critical information about consumers into knowledge about consumer
preferences coupled with the ability to supply these needs through network arrange-
ments. The products offered are more likely to have a short life-span, and this will be
recognized from the outset.
This ability has transformed competitive pressures within traditional industries from
those conditioned by the economics of production to the ability to engage in consumer-
driven innovation. In the food industry the large retailers in the UK have successfully
challenged the dominance of food manufactures in several key product areas and
founded several new, highly profitable, own-brand-dominated product markets such as
that represented by chilled ready-meals. The manufacturing in this case is undertaken
not by the food manufacturers or the retailers but by many small flexible companies
encompassed by the retailer™s innovation network. In the publishing industry the
advantage held by magazine companies whose competitive success had been founded
on the ownership of production evaporated with the advent of DTP and ICTs. Competi-
tive advantage in this industry shifted from economies of scale in production to firms able
to innovate new magazines and services desired by end customers. Large incumbent
firms have found that they can refocus their activities around consumer-driven innova-
tion and establish a competency in managing knowledge leveraged through extensive
networks of contract journalists and specialists. In both cases external experts and
suppliers are crucial in supplying the information that the core firms in the network can
transform into knowledge about consumer requirements.
Traditional economic approaches to analyzing the operations of firms find temporary and
trust-based networks challenging. The focus on ownership and boundaries is of limited
utility for understanding innovation networks. A key challenge for the firms in the digital
economy is for firms to determine how to control the crucial, consumer-based information
that drives the innovation of new products and services. Firms that offer little in the way
of value-adding activities may find that they are unable to prevent firms from squeezing
their margins. Firms far from sources of consumer information may find that they are
increasingly beholden to retailers for distribution. Participation by small suppliers and



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Impacts of the Digital Economy 151


contractors in innovation networks provides new opportunities for access distribution
and growth through collaborative partnerships. The systems described in this chapter
present new challenges for competition authorities and our understanding of the theory
of the firm, which should seek to extend network-based analysis. Further detailed study
is needed into other empirical examples of new and existing industries characterized by
consumer-driven, life-span products.




Acknowledgments
The empirical work for this project was supported by a Leverhulme Trust Institutional
grant. The research itself is indebted to the managers who were interviewed for this
project. The analysis of the work also owes great thanks to Howard Cox who has co-
authored several papers on networks and business history with the author, and Stuart
Young who has analysed the questionnaire results with the author and Howard Cox.




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permission of Idea Group Inc. is prohibited.
154 Schneider




Chapter VIII



Digital Products
on the Web:
Pricing Issues and
Revenue Models
Gary P. Schneider
University of San Diego, USA




Abstract
Products that exist in digital form can be bought, sold, and, in some cases, delivered,
online. The pricing issues that arise in the sale of these products are different from those
that sellers face when pricing physical goods and can lead to interesting opportunities
for devising revenue models. The success of revenue models for companies that sell
digital products depend on the nature of the product, the characteristics of the buyers,
and the traditional practices in the industry. This chapter examines the nature of
digital products, their pricing issues, and the efficacy of various revenue models that
have been implemented by companies that deal in digital products.




Digital Products
Some products exist only in digital form, such as software and certain types of information
databases. Many more types of products exist in physical form, but can be digitized.




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permission of Idea Group Inc. is prohibited.
Digital Products on the Web 155


These products include many forms of intellectual property such as text, pictures,
photographs, architectural drawings, choreography notes, sound recordings, and video
recordings. In some cases, digital products arise from the transmission of other digital
products, as in the case of telephone and fax transmissions.


Defining Digital Products

Krishnamurthy (2003) defines a digital product as anything that can be digitized and
includes such items as “advertisements” and “financial assets” such as stocks or bonds.
This overly broad definition contrasts with Choi and Whinston™s (2000) definitions of
knowledge-based and knowledge-enhanced products. Choi and Whinston (2000) in-
clude “information, knowledge, news, databases, software, literature, arts, and other
forms of human creation” in their definition of knowledge-based products and any
products that can be “enhanced by knowledge, networked, and customized” in their
definition of knowledge-enhanced products. Note that these “goods” as defined can
include sales of what might have been called “services” in the past.
Ease of use of digital products can be affected by changes in the underlying technologies
used to transport, deliver, or provide the end-user experience associated with the
product. In some cases, the underlying technology can create a digital product from a
traditional physical product or service. Some examples of traditional physical products
that have been converted in this manner include:
• Newspapers converted to news Web sites (Krumenaker, 2003)
• Magazines and journals delivered on Web sites (Barsh, Kramer, Maue and
Zuckerman, 2001)
• Computer games presented as online experiences (Moon, 2001)

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