Introduction

Since the beginning of Internet commerce in the early 1990s, we have witnessed the first boom and bust cycles of the Internet economy. Is the Internet economy going anywhere? Is the e-commerce revolution over? The answers are yes and no, respectively. The current correction has forced a more cautious approach that focuses on feasible business models and solid performance. The Internet and e-commerce are here to stay. E-commerce will continue to enhance operational efficiencies and bring new opportunities for growth and competitive advantage.

Most of the failed Internet ventures did not have viable business models and feasible long-term strategies. Their business models failed to ask the two fundamental questions of the Internet economy:

• Does your e-commerce business model follow the fundamental principles or economic logic of the Internet economy?

• Does your e-commerce business model capitalize on the "disruptive attributes" of the Internet economy?

These two questions lead business executives to consider several strategic questions regarding building and implementing a viable e-commerce business model:

• What are the components of a viable business model in the Internet economy?

• What are the disruptive attributes of the Internet, and how do you capitalize on them for competitive advantage and profits?

• How do transaction costs and network effects in the Internet economy change a company's competitive position?

• How do the cost and pricing structures in the Internet economy differ from the traditional industrial economy?

• What are the new economies of scale and scope in the Internet economy?

This chapter first defines and identifies several business models in the digital economy. We then identify and discuss a number of disruptive characters of Internet commerce, and compare and contrast the business transformation process and value creation strategies in both physical and digital economies. The next section presents an analytical method to evaluate and determine a viable business model in the digital economy. The approach takes into account various cost and revenue models from both demand-and supply-side perspectives. Finally, we offer our conclusion.