Thomas L. Mesenbourg
Assistant Director for Economic Programs
Bureau of the Census

The growth, integration, and sophistication of information technology and communications is changing our society and economy. Today, computers and other electronic devices increasingly communicate and interact directly with other devices over a variety of networks, such as the Internet. Consumers and businesses have been particularly quick to recognize the potential and realize the benefits of adopting new computer-enabled networks. Consumers now routinely use computer networks to identify sellers, evaluate products and services, compare prices, and exert market leverage. Businesses use networks even more extensively to conduct and re-engineer production processes, streamline procurement processes, reach new customers, and manage internal operations. This electronic revolution in our economy is spurring additional investments in facilities, hardware, software, services, and human capital. Ultimately, it may change the structure and performance of the American economy as much as the introduction of the computer a generation ago.

While the burgeoning use of electronic devices in our economy is widely acknowledged and discussed, it remains largely undefined and unrecognized in official economic statistics. The terms Internet, electronic commerce, electronic business, and cybertrade are used often. However, they are used interchangeably and with no common understanding of their scope or relationships. Establishing terms that clearly and consistently describe our growing and dynamic networked economy is a critical first step toward developing useful statistics about it. This paper presents definitions and concepts to describe the electronic revolution taking place in our economy. They were developed by the Census Bureau for discussion purposes, are based on reviews of available information and consultations with interested professionals, and are intended to provide a frame of reference for developing useful official statistical measures. The paper also describes Census Bureau related program plans for FY 2000 (October 1999 to September 2000) and concludes with a number of questions seeking interested parties views and comments.

1. ELECTRONIC ECONOMY IN PERSPECTIVE

Whatever definitions are used for the electronic revolution taking place in our economy, we must recognize that these changes take place in a larger economic context. For example, global competition, interest rates, laws and regulations, social concerns, industry traditions, and consumer preferences are all part of the broader "environment" which can affect all business activities. Similarly, electronic and non-electronic businesses share an infrastructure of available economic resources, including natural resources, utilities, structures, equipment, telecommunication and other services, employees, and workforce skills. While keeping this larger economic context in mind, the emphasis in this paper is to describe and encourage understanding of the "electronic" portion of our overall economy.

It is useful to think of the electronic economy as having three primary components--supporting infrastructure, electronic business processes (how business is conducted), and electronic commerce transactions (buying and selling). These components are defined and discussed in the following sections, and pictured in Exhibit 1. In addition, it is important to note that a common feature of both electronic business processes and electronic commerce transactions is reliance on the use of computer-mediated networks. It is reliance on the use of computer networks, and the benefits this can provide, that is the "bottom line" difference between electronic and other kinds of business. This important shared feature is also defined and discussed in following sections of this paper.

2. DEFINITIONS AND CONCEPTS

The three primary components of our electronic economy, and the feature shared by two of them, are defined below. Each definition includes examples of its scope and content. The definitions are intentionally broad to provide an inclusive framework for planning statistical measures, and to allow flexibility to incorporate continuing changes in the electronic economy.

E-business infrastructure is the share of total economic infrastructure used to support electronic business processes and conduct electronic commerce transactions. It includes hardware, software, telecommunication networks, support services, and human capital used in electronic business and commerce. Examples of e-business infrastructure are:

• Computers, routers, and other hardware
• Satellite, wire, and optical communications and network channels
• System and applications software
• Support services, such as web site development and hosting, consulting, electronic payment, and certification services.
• Human capital, such as programmers.

Electronic business (e-business) is any process that a business organization conducts over a computer-mediated network. Business organizations include any for-profit, governmental, or nonprofit entity. Their processes include production-, customer-, and internal or management-focused business processes. Examples of electronic business processes are:

• Production- focused processes include procurement, ordering, automated stock replenishment, payment processing and other electronic links with suppliers, as well as production control and processes more directly related to the production process.
• Customer-focused processes include marketing, electronic selling, processing of customers orders and payments, and customer management and support
• Internal or management-focused processes include automated employee services, training, information sharing, video conferencing, and recruiting.

Electronic commerce (e-commerce) is any transaction completed over a computer-mediated network that involves the transfer of ownership or rights to use goods or services. Transactions occur within selected e-business processes (e.g., selling process) and are "completed" when agreement is reached between the buyer and seller to transfer the ownership or rights to use goods or services. Completed transactions may have a zero price (e.g., a free software download). Examples of both e-commerce and non e-commerce transactions are listed below.

Computer-mediated networks are electronically linked devices that communicate interactively over network channels. Generally, both electronic devices will be computer-enabled, but at a minimum at least one device must be computer-enabled as in the case of a typical telephone linking with an computer-enabled interactive telephone system. Typically, the interactive link involves minimal human intervention though someone activates the electronic devices, accesses the network, and may even assist with the process or transaction. For example, many e-commerce businesses are providing shoppers with the on-line capability of "chatting" with customer support representatives or even speaking with them through the use of internet telephony software. Examples of devices and networks are:

• Linked electronic devices such as computers, personal digital assistants, webTV,
• Internet-enabled cellular phones, and telephones linked with interactive telephone systems.
• Networks such as the Internet, intranets, extranets, Electronic Data Interchange (EDI) networks, and telecommunication networks. Networks may be either open or closed.

3. E-COMMERCE EXAMPLES

Examples of e-commerce transactions are:

• An individual purchases a book on the Internet.
• A government employee reserves a hotel room over the Internet.
• A business calls a toll free number and orders a computer using the seller's interactive telephone system.
• A business buys office supplies on-line or through an electronic auction.
• A retailer orders merchandise using an EDI network or a supplier's extranet.
• A manufacturing plant orders electronic components from another plant within the company using the company's intranet.
• An individual withdraws funds from an automatic teller machine (ATM).

Identifying e-commerce transactions often is not as straight forward as the previous examples may make it appear. Some additional examples that demonstrate the complexity of implementing the proposed definition are provided below.

• A consumer visits a bookstore and inquires about the availability of an out-of-stock book. A bookstore employee downloads a digital copy of the book and prints it along with cover. Not an e-commerce retail transaction since agreement to purchase did not occur over an electronic network. However, the right to access the digital archived copy is an e-commerce service transaction.
• Consumer uses Internet to research the purchase of a computer, but calls a toll free number and places the order with an operator. Not an e-commerce transaction because agreement to transfer ownership did not occur over computer-mediated network; neither telephone was computer-enabled.
• An individual visits a retail store and purchases merchandise not currently in stock from a computer-enabled kiosk located inside the shop. An e-commerce transaction since agreement occurred over computer-mediated networks. In contrast, the purchase of a pre-packaged music CD from a computerized kiosk would not be considered an e-commerce transaction. If the kiosk was network linked, the digital music was downloaded, and the CD was mastered within the kiosk this would be an e-commerce transaction.

4. MEASUREMENT COMPLEXITIES

Identifying and measuring e-commerce transactions is new for statistical agencies and it can be complicated. The simple example of an on-line retail book purchase illustrates some of these complexities and points out some of the measurement issues that remain to be addressed.

• Example--John Doe logs onto his computer, accesses the "Bigbook.com" Internet site, identifies a rather obscure title, and purchases it for $20 plus a $4 delivery charge. John pays with his credit card and is told his book will be delivered in 3-5 days.

This simple example involves Bigbook's use of several additional e-business processes, assuming they are conducted over computer-mediated networks. These processes include electronic marketing to reach John, an electronic search to find the obscure title, electronic procurement and payment to obtain the book from a wholesaler or another dealer, electronic authentication of John's credit card information, electronic processing to obtain payment from a financial institution, electronic shipping arrangements for delivery of the book, and electronic customer support to e-mail John an acknowledgment, order number and expected delivery date. Understanding the effects of these processes on Bigbook's business operations and costs, its supplier and customer relationships, and its competitive industry position are a significant measurement challenge.

This example not only covers many business processes, these processes also involve multiple e-commerce transactions. These transactions include John Doe's purchase of the book from Bigbook and Bigbook's separate transactions with third parties to obtain order fulfillment services, acquire the book for resale, secure credit authentication services, provide payment processing services, and arrange for delivery of the book to John. While comprehensive measures of e-commerce may be wanted to profile all of these transactions, such detailed business statistics coverage would be unprecedented. In addition, the value of e-commerce transactions, like their brick and mortar counterparts, are aggregated and presented by the industry of the business entity selling the goods or services so the industry classification system will impose additional measurement constraints. For example, Bigbook would be classified in North American Industry Classification System (NAICS) retail industry 454110, Electronic Shopping and Mail-Order Houses along with traditional catalog stores. Data on employment, total sales, or e-commerce sales would be provided for the industry as whole; information would not be broken out between electronic shopping and mail order houses. Understanding the industry classification system and its implications for e-commerce and e-business measures is a must for all prospective data users. Moreover, classifying emerging and rapidly evolving businesses engaged in e-commerce activities will remain a challenge for statistical agencies.

An additional complexity is that the transactions relating to John Doe's simple book purchase involve many parties and some play multiple roles. For example, the parties include John, Bigbook, and at least five third party providers of goods or services to Bigbook. Furthermore, several of these parties play multiple roles, such as Bigbook who is both a seller (to John) and buyer (from a supplier) of the book, and Bigbook's third party payment services provider who is a seller of services to both Bigbook and John's credit card company. As in any measurement program, we need to determine from whom to collect needed transaction data, from the buyer or the seller? While we could estimate e-commerce retail sales of books by surveying households (the buyers), this would require a very large sample and be very expensive. Alternatively, we could survey on-line bookstores (the sellers), this would be a much more cost-effective data collection strategy that could provide timely, high quality estimates from a very small sample.

The above example also points out that any given business-to-consumer transaction will involve a larger number of related business-to-business transactions. This transactions multiplier effect is not unique to e-business; however, its expected growth and continued change will add to the challenge of measuring e-business and e-commerce. Growth in transactions is expected because as e-commerce expands related business-to-business transactions will become more fragmented; participants will concentrate on performing their highest valued-activities and rely increasingly on third parties for lower-value added activities. The measurement challenges of this growth include accounting for the increased volumes, identifying the new e-business players, maintaining up-to-date information for the known players, and avoiding double counting the value of related transactions.

Change in the scope and nature of e-commerce transactions is expected because electronic business methods permit the players to change their roles relatively easily and they increasingly will do so. Examples of changes in roles are today seen in manufacturers and wholesalers who now sell directly to consumers, and in the "virtual" integration of firms through informal alliances that link firms electronically. These new arrangements impose additional measurement challenges including identifying the new players and their roles, maintaining up-to-date information on them and how their roles are changing, and updating data collection methods (such as including direct-sale "manufacturers" in an appropriate "retail" sales survey frame).

5. DEFINITION ISSUES

This section of the paper poses some questions associated with the proposed definitions presented earlier in the paper and invites comments.

E-business is any process that a business organization conducts over a computer-mediated network.

• The paper provides examples of e-business processes, but the list is not exhaustive. Do you have suggestions regarding additional processes that should be considered?
• The paper highlighted production-, customer-, and internal or management- focused processes. Are these categories useful? Can you suggest alternative groupings?

E-commerce is any transaction completed over a computer-mediated network that involves the transfer of ownership or rights to use goods or services. The definition includes both monetary and non monetary transactions. Some transactions may have a zero price (for example, the download of free software) while other transactions may be paid in-kind or through barter (portal pays for an e-commerce consulting service by providing banner advertising).

• We do not define transaction. Should we?
• Since any e-commerce measure will focus on the value of transactions, not the quantity, should we exclude free or zero priced e-commerce transactions from the definition?
• Do you think barter or trade-in-kind is more prevalent in e-commerce transactions than in traditional transactions? Is it reportable or measurable?
• Do you find the e-commerce examples useful?

E-business infrastructure is the share of total economic infrastructure used to support processes and conduct e-commerce transactions. The definition includes hardware, software, telecommunication networks, support services, and human capital along with associated examples. Measuring the electronic infrastructure will be a daunting task. Since we have no short term plans to begin measuring e-business infrastructure, we have not focused much attention on it to date, but will begin focusing on it during this coming year.

• Is the e-business infrastructure separable from the broader economic infrastructure?
• What are the priority components of infrastructure that we should focus on?
• Do you have specific examples that would clarify what to include in each component?
• Should human capital be included in the e-business infrastructure? Is it separable?

Computer-mediated networks are electronically linked devices that communicate interactively over network channels. Network channels include the Internet, intranets within organizations, extranets and Electronic Data Interchange networks linking trading partners, and telecommunication networks.

• Do you agree with the decision to include open and closed networks?
• Have we excluded other important examples of networks?

Electronic linked devices include computers, personal digital assistants, webTV, Internet-enabled phones, and interactive telephone systems. While the e-commerce examples also include a computer-enabled kiosk and an ATM as linked electronic devices, in our definition we have chosen to go with a short, rather than a long list of electronic devices to minimize possible reporting confusion.

• Should the list of linked electronic devices include all possible devices or focus only on the most important devices?
• The definition and one of the examples considers a consumer using a telephone linked to an interactive telephone system with no human operator to be a computer-mediated network. Do you agree?
• Fax machines, while clearly electronic devices that can link over network channels, were excluded because they do not communicate interactively. Do you agree with their exclusion and the rationale?
• Electronic gas pumps often are linked interactively over network channels with other electronic devices. The device, the electronic pump, can be activated in a number of different ways. The purchaser may "swipe" a credit card, wave Speed-Pass, go to an outside station or inside the store to pay by cash or credit card. Just as in the case of an ATM machine or a computer-enabled kiosk, once the device is activated the consumer can specify the transaction (regular or premium gasoline) and complete the transaction. The electronic pumps also support a number of E-business processes including tracking sales and gallons sold, with links to automated inventory replenishment systems to name a few. The functionality embedded in pumps is expected to grow. For example, BP Amoco PLC is planning to introduce even more sophisticated pumps that will include Web browsers and Windows CE operating system that will even permit the gas purchaser to order fast food at the pump (WSJ 8/17/99). Would you consider the sales of gasoline through electronic pumps as an e-commerce transaction? Why?
• Are there other electronic devices that should be added to the list?

6. NEXT STEPS

Beginning in the Fall 1999, the Census Bureau is testing these definitions and concepts with businesses as we undertake an incremental program to begin providing official measures of e-commerce activities as well as providing some limited information on e-business process usage. A more ambitious measurement program focusing on understanding and measuring e-business process effects and quantifying e-business infrastructure depends on additional funding being appropriated in the FY 2001 budget (October 2000-September 2001).

Our measurement strategy is multi-faceted, yet purposeful and is tempered by the absence of any additional funding for new statistical measures in our FY 2000 budget (October 1999-September 2000). Nonetheless, we believe we must begin measuring and understanding the electronic economy now, rather than later. Faced with resource constraints, our approach leverages our core competencies by focusing first on measuring e-commerce transactions and by exploiting our existing surveys. Since we also do not have the resources or the time to do a comprehensive record keeping practices study, we fully expect during these first collections to encounter unanticipated reporting problems and identify additional measurement issues and complexities. Given these uncertainties, we characterize several of our collections as experimental in nature, but nonetheless believe our efforts will provide invaluable insights for improvements in future surveys.

In FY 2000, we will take the following actions:

• Conduct a pilot study to measure 4Q 1999 Internet sales by retailers. Beginning with reference month October 1999 we have begun collecting Internet sales from the monthly retail survey businesses (entire survey includes 12,000 retailers) that responded to a September screener indicating that they currently were selling over the Internet or planned to sell on-line by the end of 1999. If the data are reasonable and meet quality standards, we will publish a separate release on 4Q 1999 Internet retail sales in the Spring 2000. A complete evaluation of the study will be completed by the Summer 2000.

• Collect e-commerce and e-business data as a supplement to the 1999 Annual Survey of Manufactures. A supplemental form will be used to collect information on:
• e-commerce sales (portion of total value of shipments sold over computer-mediated networks)
• Cost of materials purchased over computer-mediated networks (proxy measure of e-business procurement)
• Indication of existing or planned use of selected e-business processes
A series of company visits and telephone calls are scheduled for the Fall 1999 to identify test questions, assess data availability, and determine where best to collect the information. Data collection, scheduled for Spring 2000 will be done separately from the ASM. Results will be available in early 2001.
• 1999 Annual Retail Trade Survey. Survey forms have been modified to collect information on e-commerce sales and purchases from the entire sample of 18,200 retailers, with additional information available for several selected industries. Information will be available in early 2001. Specifically industry information includes:
• for all retail industries
  • date firm began selling on-line
  • E-commerce sales for 1999 and 1998
  • E-commerce purchases - indicator of whether retailers are purchasing goods over computer-mediated networks and possibly a percentage of total goods purchased.
• Computer and computer software stores and Office Supply Stores - Questions for all retail industries, plus
  • Breakdown of total sales and e-commerce sales by class of customer - consumer, business, government, reseller (wholesaler or other retailer)
• Electronic Shopping and Mail Order Houses - Questions for all retail industries, plus
  • Retail sales and e-commerce sales for 8-10 merchandise categories

• 1999 Wholesale Trade Survey. Survey forms will collect information on e-commerce sales and some data on e-commerce purchases. Annual wholesale trade survey includes 5,800 merchant wholesalers.

• 1999 Service Annual Survey. This survey has been significantly expanded to provide first time coverage of some 150 new NAICS service industries. We will collect e-commerce sales and possibly some data on e-commerce purchases from almost 60,000 service businesses.

• 1999 Accommodations and Food Service. We will collect 1999 and 1998 e-commerce sales data and possibly some data on e-commerce purchases from 5,100 businesses.

• Develop a measurement framework. The Census Bureau, working in close cooperation with the Bureau of Economic Analysis, is developing a measurement framework for identifying and prioritizing future e-commerce, e-business, and e-business infrastructure measures. An initial framework will be available in the Fall 1999.

• Initiate Research Agenda. During FY 2000, the Census Bureau will contract with several private sector firms with the aim of better understanding how e-business processes are changing the firm and its internal operations, re-engineering the supply chain and changing the relationship between manufacturers, wholesalers, retailers and customers, and effects on industries and economic structure. Specific deliverables include the development of a framework for evaluating e-business processes' impact across different sector's value chains, a blueprint of possible emerging industry configurations, and development of a forward-looking e-commerce taxonomy for supplementing existing industry classification systems.

7. QUESTIONS FOR CONSIDERATION

The Census Bureau invites comments on this paper. Specifically:

• Do you have comments on the definitions and underlying concepts presented in this paper?
• The Definitional Issues section of the paper poses a number of questions related to our proposed definitions. Do you have comments and suggestions?
• What would be your top three measurement priorities associated with measuring e-commerce, e-business processes, or e-business infrastructure?
• Do you have comments and suggestions regarding our FY 2000 initiatives?
• Understanding and quantifying e-business processes effects is not an area where the Census Bureau has much experience. Do you have suggestions regarding survey methods and approaches? Do you have suggestions regarding organizations or individuals that we should consult with? Are you familiar with existing studies that we should review?
• Is measuring the e-business infrastructure a priority? The Census Bureau would argue that it is more important to improve existing measures of the overall economic infrastructure before focusing on the e-business component of the infrastructure, do you agree? What are the most serious gaps in existing measures of the infrastructure? What would be the priorities related to the e-business infrastructure?

Please forward your comments and suggestions to Thomas L. Mesenbourg, Assistant Director for Economic Programs, United States Bureau of the Census at tmesenbo@census.gov.