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CHAPTER I - The Changing Nature of Commerce

The structure and character of commerce has changed dramatically since the arrival of the World Wide Web and various digital technologies, particularly mobile phones and large, interconnected databases. Consumers now have much greater market power and choice. Markets can more easily scale, often globally. Co-production and fluid producer/consumer interactions are routine. Transactions themselves have become far cheaper and more easily consummated.

Twenty years since the popularization of the Web, one could say commerce has not only gone digital and electronic, it is fast becoming “weightless.” The barriers to competition posed by geography, lack of information, transaction costs and other factors are steadily falling as more and more commerce moves to Internet and mobile platforms. The explosion of Big Data is making it easier and cheaper for both consumers and sellers to connect with each other in the marketplace. For better or worse, the “friction” of conventional commerce is dissipating, unleashing both great innovation and social dislocation. New types of products, services and labor are materializing, often to great acclaim, even as old forms of government oversight and public policy are revealed as too slow and inept, and as certain segments of the population, unable to participate, are left behind.

Such developments point to some long-term, structural changes in commerce that deserve deeper exploration. To get a better understanding of emerging trends, the 22nd annual Aspen Institute Roundtable on Information Technology invited twenty-three technology experts, electronic payment and commerce executives, policy advocates, venture capital investors, policy experts and foundation officials, to share and debate the latest trends for three days in Aspen, Colorado. The goal was to develop a more sophisticated, timely understanding of the latest technology innovations affecting commerce.

A particular focus was the existing state of market payment systems and the innovative alternatives that are cropping up. The conference also addressed the growing importance of Big Data in commercial transactions; the rise of “small data,” which is data controlled and shared directly by individuals; the challenge of developing trustworthy privacy protection systems; the implications of new currency systems such as Bitcoin; and the special challenges facing developing countries, as well as the attractive opportunities.

Naturally, many of the transformations in commerce, particularly innovative payment systems, have significant public policy implications. So the conference also spent some time exploring the appropriate roles for government in guiding the development of new technologies and markets. How can valuable new sorts of innovation be encouraged while also assuring competition, citizen privacy, consumer protection and social inclusion?

The conference took place from July 14 to 17, 2013, in Aspen, Colorado. Charles M. Firestone, Executive Director of the Aspen Institute Communications and Society Program, moderated. This report is an interpretive synthesis of the highlights of those conversations.

The Changing Nature of Commerce

Charlie Firestone of the Aspen Institute opened the first set of discussions by showing a short video produced by the New York Times on how retail stores are using Big Data and tracking technologies to monitor consumers as they shop. “Attention, Shoppers: Store Is Tracking Your Cell,” described how Nordstrom, the department store chain, began testing a technology that lets it “track customers’ movements by following the Wi-Fi signals from their smartphones.” The company wanted to learn how many consumers entered its stores, how many were repeat visitors, in which areas of the store they spent their time, and so forth. Reporters Stefanie Clifford and Quentin Hardy wrote:

Nordstrom’s experiment is part of a movement by retailers to gather data about in-store shoppers’ behavior and moods, using video surveillance and signals from their cellphones and apps to learn information as varied as their sex, how many minutes they spend in the candy aisle and how long they look at merchandise before buying it.

All sorts of retailers—including national chains, like Family Dollar, Cabela’s and Mothercare, a British company, and specialty stores like Benetton and Warby Parker—are testing these technologies and using them to decide on matters like changing store layouts and offering customized coupons.

At the store entrance, Nordstrom put up a notice informing shoppers of the tracking, which some reported as “creepy” and objectionable. The complaints were one reason that Nordstrom discontinued the Wi-Fi monitoring, according to the Times. But brick and mortar retailers are likely to continue experiments in this vein because online retailers, with greater access to detailed data about customers, are gaining a competitive advantage that will only grow in the years ahead.

New Trends in Retail Commerce and Labor Markets

Michael Chui, Principal at the McKinsey Global Institute in San Francisco, gave a quick overview of salient trends in online commerce. The standard paradigm of commerce, said Chui, is one in which “manufacturers design and produce products, which are then pushed to people through marketing, primarily advertising. And then buyers—mostly consumers around the world who show up in stores—pay the prices set by the seller through formal payment systems established by financial institutions.”

This classic template of commerce has been transformed by the rise of Internet platforms that not only let consumers do comparison shopping, but which vastly enlarge the scale of markets through website “stores.” According to the research firm Forrester, annual e-commerce revenues in the U.S. are now estimated to be nearly $200 billion—a total of 9 percent of retail sales, up from 5 percent five years ago. As e-commerce becomes ubiquitous, moreover, it is blurring the channels by which customers and sellers can interact to transact a retail sale. Darrell Rigby, writing in the Harvard Business Review, calls it “omnichannel retailing”—the “websites, physical stores, kiosks, direct mail and catalogs, call centers, social media, mobile devices, gaming consoles, televisions, networked appliances, home services and more” that are vehicles for seller/buyer interaction. “Retailers will find [in the future] that the digital and physical arenas complement each other instead of competing, thereby increasing sales and lowering costs,” writes Rigby.

As such trends have proliferated, China went from nearly no e-commerce to the second-largest e-commerce market in 2011 (the year with the most recent accurate statistics), said Michel Chui. “It is probably the largest e-commerce market in the world right now [2013]. Interestingly, the vast majority of sales in China e-commerce come through marketplace platforms, such as Alibaba, that are like eBay and Amazon, as opposed to manufacturers themselves selling goods directly.”

A significant trend is how technology is allowing customers to express far more customized demands, such as NIKEiD shoes, for which people can choose special colors and design images. Some 200 stock-keeping units (SKUs) of Boeing products are now printed through 3D printers, which are expanding the potential range of affordable customized products.

Manufacturers are also inviting consumers to participate in the R&D process through “open innovation” platforms. Open design and manufacturing are a burgeoning new production process that has many non-traditional participants. One example of this is InnoCentive, a Massachusetts-based open innovation company that invites people to solve research and development problems in such domains as engineering, computer science, math and chemistry.

All of these changes mean that in many markets “the seller population is changing,” said Michael Chui. Individuals and smaller organizations can more easily enter markets and grow. Entrepreneur Caterina Fake, Founder and Chief Executive Officer of Findery, a social mobile application, and co-founder of Flickr, the photo sharing website, noted how consumers can often enter into production directly as “manufacturers.” That’s essentially what the websites Etsy, Kickstarter and MakerBot have enabled—a trend that is making many commercial ecosystems more diversified and competitive.

Another trend is for companies to lease or rent access to certain products and services rather than to sell them. For example, it is now possible to rent units of thrust on aircraft rather than a jet engine itself. On-demand taxi services such as Lyft and Uber are making it more attractive to procure transportation via mobile phones on an as-needed basis, than to buy and own an automobile.

This trend has affected labor markets, too, as labor brokers devise new ways to “rent out” specialized consulting expertise. The challenge in this field, explained John Kunzweiler, Chief Executive Officer of M Squared Consulting, Inc., a provider of project consultants to larger enterprises, is to define the work so that it can be done properly. “A clear definition of the work is critical to having a happy outcome, and defining the work is really tough. You’re hiring somebody who shows up and you hope can execute a project under a contract.” InnoCentive, a successful market platform for R&D projects, avoids this problem through “enterprise crowdsourcing.” People are invited to discover and self-select project offerings that are suitable for their talents.

Now that digital technologies allow huge amounts of work to be performed through cross-border transactions, “knowledge process outsourcing,” or KPO, has become very important, said Leila Janah, Founder and Chief Executive Officer of Samasource, a nonprofit working at the less-skilled end of the labor market. Samasource connects large companies with people living in poverty willing to do “microwork”—small, computer-based tasks such as photo-tagging and image identification. Defining work at this less-skilled end of the labor market is not as difficult as it is for sophisticated work projects.

The commoditization of smaller and smaller elements of a good or service—made possible by digital systems—means that a person is increasingly “buying access to something or a service, or some part of the supply chain,” said Esther Dyson, Chairman of EDventure Holdings, which invests in and nurtures startup companies, with a recent focus on health, human capital and aerospace. “A lot of such transactions depend upon trust, because there is no way for a buyer to verify things independently; they are part of what’s being sold.”

In some instances, however, technology is enabling direct verification of performance. In advertising, for example, it is now possible to measure the performance of ads, which means that companies can sell guaranteed performance, not just estimates or vague expectations. The common denominator in so many transactions is the renting rather than the sale of something—creative works, jet engine propulsion, labor of all varieties, computational power—in small, discrete units of time or other measure.

“Everything can now be arbitraged!” exclaimed Peter Vessenes, Chairman and Executive Director of Bitcoin Foundation. “It is a really interesting question who benefits, and who doesn’t, from marketizing all these transactions that previously had a lot more friction.”

Consumers may be one loser, suggested Marc Rotenberg, President and Executive Director of the Electronic Privacy Information Center in Washington, D.C. “In traditional commerce, when someone purchased something, they possessed it. There was a transfer of an item from seller to buyer. Now, even though that is still happening, one of the more remarkable developments is how many things consumers purchase that they don’t actually possess—music, ebooks, video and more. It’s out there in somebody’s cloud, and you may have rights to download it on certain devices and use it. But you may not own it.” However, Shane Green, Co-Founder and Chief Executive Officer of Personal Inc., pointed out that the same model can also be used to empower individuals as they become the “owner” of their own data and can “lease” limited access rights to companies they trust.

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