Appendix 4 Electronic Commerce on PEI

Introduction

This virtual case study was carried out as part of the Knowledge Assessment Methodology Project in Prince Edward Island. As one element of the methodology, virtual case studies are used to explore the weaknesses and strengths of the knowledge economy, employing as a vehicle the planning of a hypothetical, knowledge-based enterprise in an area of comparative advantage that is affected by technical change. It is emphasized that this report is almost entirely drawn from the expertise and experience of the participants, and is not intended to propose that such an enterprise actually be established on PEI.

The virtual case study on electronic commerce was conducted on the campus of the University of Prince Edward Island on May 11, 1998. Participants included representatives of the Information Technology Association of PEI, the Provincial Government, the Federal Department of Veterans Affairs, the University of Prince Edward Island, Holland College, and the private sector. The U.S. National Research Council was represented by Diane Wetherington, president of DRW Associates, which provides new products services to startups focused on IT and consumer applications; Chris Deephouse, Principal Engineer, CyberCash, Inc., responsible for coordinating software and process engineering with software vendors; Phyllis Reuther, of the Heinz School of Public Policy and Management, Carnegie Mellon University, specializing in electronic commerce, business process redesign, and Internet agent technology; and Michael Greene, director of International Development Programs at the National Research Council.



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--> Appendix 4 Electronic Commerce on PEI Introduction This virtual case study was carried out as part of the Knowledge Assessment Methodology Project in Prince Edward Island. As one element of the methodology, virtual case studies are used to explore the weaknesses and strengths of the knowledge economy, employing as a vehicle the planning of a hypothetical, knowledge-based enterprise in an area of comparative advantage that is affected by technical change. It is emphasized that this report is almost entirely drawn from the expertise and experience of the participants, and is not intended to propose that such an enterprise actually be established on PEI. The virtual case study on electronic commerce was conducted on the campus of the University of Prince Edward Island on May 11, 1998. Participants included representatives of the Information Technology Association of PEI, the Provincial Government, the Federal Department of Veterans Affairs, the University of Prince Edward Island, Holland College, and the private sector. The U.S. National Research Council was represented by Diane Wetherington, president of DRW Associates, which provides new products services to startups focused on IT and consumer applications; Chris Deephouse, Principal Engineer, CyberCash, Inc., responsible for coordinating software and process engineering with software vendors; Phyllis Reuther, of the Heinz School of Public Policy and Management, Carnegie Mellon University, specializing in electronic commerce, business process redesign, and Internet agent technology; and Michael Greene, director of International Development Programs at the National Research Council.

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--> Background Advertising and selling through the Internet is called electronic commerce, or E-commerce. The Internet is growing exponentially, with new servers and Web-sites sprouting nearly everywhere in the world. World-wide Web software technologies are enabling any user to become an information provider of one sort or another and providing any business with a low cost advertising and selling medium. Almost no one doubts the power of the Web to enable businesses to reach literally millions of potential customers at a cost which is nearly independent of the size of the customer base, and which is gradually falling with time. The software for creating Web-sites, advertising, and selling is advancing rapidly, and as distance and location are scarcely a factor, the competition from companies and places that were littleor unknown a short time ago is growing. On the other hand, very few companies are making a profit in E-commerce today. The reason for this is not clear. It may be that the nature of the market is not well understood and sales techniques for this new medium have yet to be perfected. It may be that technologies for effecting payments, although quite adequate in technical terms, do not yet have public confidence. It also may be that this is a temporary situation, and Internet commerce may explode across industries and national boundaries. For a variety of reasons, the characteristics of E-commerce seem to favor PEI. For many consumers, PEI is little known and physically hard to reach in a geographical sense, but it is as easy to find on the Web as the largest city or country. The stories of Anne of Green Gables and its place in Atlantic Canada give it a theme and an aura of romance. And in quite another sense, PEI is ready to go. It has a digital broad band backbone across the Island that may be the most advanced in North America, and which could be made accessible to businesses and industries of many kinds. It has a prize-winning official Web-site and a number of private companies with attractive and interesting sites. At a time when Web-based industries are sometimes ''footloose," businesses whose major assets walk out the door every evening at five, and who can relocate to another attractive site with little notice, PEI has a loyal population who appear committed to remaining on the Island if the right jobs are available. Nevertheless, in exploring the advantages of E-commerce in Prince Edward Island in the course of the knowledge assessment, it seemed expedient to base the enterprise on a unique feature of the Island that would not be easy to carry off. The theme selected is Anne of Green Gables. Familiar, and even tiresome, as it is to Islanders, this is clearly an asset or core competency of PEI. Anne is known throughout the world, driving a significant part of the PEI tourist industry, and offering a fertile basis for chat rooms and Web-sites designed around the novels. It could also be a wedge into the incipient IT industry for girls. A world-class Anne site could become the "anchor store" in a "virtual mall," of electronic commerce businesses located on Prince Edward Island. The anchor store in a

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--> mall is generally a known attraction; it reduces risk for other stores since it sets up the infrastructure that is shared by all and draws in customers. With the Anne site as an anchor for E-commerce business on PEI, it can provide the infrastructure for high-volume, secure electronic transactions that new web businesses will need to derive revenues from the Internet. The Anne site could also serve as an incubator of E-businesses by adding expertise to the Island and by helping to bring the electronic commerce skill level on PEI to World Class levels. Several ideas for the content of the Anne Web-site include: develop a magazine based on the story of Anne of Green Gables featuring new Anne adventures written by local writers and illustrated by local artists; market Anne products produced by PEI craftsmen and merchandisers; host chat rooms for "Friends of Anne" to be able to communicate from around the world; sell tour packages to PEI to visit Anne's home or seasonal offerings such as Christmas at Anne's. The site should feature writers, craftsmen, creative artists, tourism, package travel, merchandise, and other businesses found on PEI. Regardless of the content actually developed for the Anne site, the advanced infrastructure developed—Internet and non-Internet marketing, receiving payments, data base management, supply chain management—could also serve the potato, lobster, and livestock industries and any other business on PEI. The Enterprise The virtual case study will describe an enterprise, whimsically called Anne-with-an-"e"-Commerce (after the Anne character who likes to clarify the spelling of her name), or, as the anchor store in a virtual mall, Anne-E-Mall. Statement of Purpose To build on one of PEI's unique attributes, Anne of Green Gables, to create a profitable, diverse "E-mall" on the Internet, which will in turn develop the human and technological capacity for E-commerce. What are the product and services? The product is a linked array of interactive, informative, and retailing Web-sites, as in a mall, with the anchor site providing billing, accounting, shipping, Web-site design, and quality assurance services to the participating merchants and the public.

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--> Who are the customers? Two groups of customers exist: on the supply side, the various providers of retail goods, tourism products, and cultural and literary products and services on PEI and elsewhere, who might wish to use the Anne-E-Mall as a way to reach their target markets; and on the demand side, the "young and young at heart" fans of Anne and of PEI worldwide, including former Islanders "away," who would visit the site, obtain information, subscribe to on-line magazines, purchase products, and interact with each other and with suppliers. Particular emphasis would be placed on a core audience of young girls who are currently underserved by the Internet and by the computer software industry. The Anne-E-Mall stands to realize revenues from both groups. Who are the competitors? Competitors for customers on the supply side include firms on PEI and in the regional market who would compete for the Web business of tourism operators and retailers. On the demand side, the competitors include other Web-sites aimed at the audience of young girls, such as Madeleine, Spice Girls, Disney, etc. In both cases opportunities exist to turn competitors into partners by linking them into the Mall. What technologies will be used? The important technologies are the local IT infrastructure for high volume, interactive, secure transactions and the local human resources with capacity for Web-site design and marketing. The resources and skills required do not depend on the Anne theme, and would serve as well for other products. The broad band network with supply points in PEI at community access (CAP) centers or where businesses originate will make the Mall accessible to a wide range of enterprises. Web-site design, going beyond good HTML, will include creating focused chat rooms, interactivity, publication siting, and secure communications for transactions. What is the core competency that gives PEI a competitive edge? The core competency that gives PEI its competitive edge is the Anne theme, unique to PEI, which enjoys global recognition and offers a host of related commercial opportunities.

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--> Production Requirements High-speed lines would be required for the dynamic interactive content of the site and potentially for the volume of transactions. The broad band network is in place within the province, with ATM enabled technology in the 150 MHz range available at about 14 central "points of presence" (POP), as broad as anywhere in North America. If anything, PEI is over-provisioned in band width. In addition to the broad band network within PEI, there is Canarie, a consortium of universities, research establishments, and businesses funded by Industry Canada and providing a high-speed off-Island link among partners that could be scaled up for commercial use. The PEI broad band network can be switched into a new business for about C$25,000. A T-1 connection in PEI currently costs about $1,000 a month. Small firms may find this cost a burden compared to out-of-province alternatives, and opportunities to share a site with like firms are limited in PEI at present. Most firms in PEI are currently connected at speeds of 64 to 128K. The proposed electronic mall would overcome this barrier by providing a common high-speed infrastructure, realizing economies of scale for participants. The Anne-E-Mall could be sited near any of the POP sites to minimize additional expense. However, a Charlottetown location would maximize access to the skilled labor pool, the post-secondary educational system, and the airport. Each business that wanted to participate would have to work with Island Tel to get the bandwidth it will need for its particular purposes, and could receive at the same time assistance with late generation Web-sites. In many cases, the bandwidth required would be modest, and it might be useful for the purpose of generating Internet commerce activity for Island Tel to consider offering a share in a high bandwidth connection at reduced rates, equivalent to several users sharing the cost of a T-1 connection in places where high-bandwidth Internet users are more numerous than on Prince Edward Island. When the Mall is in operation, the Anne-E-Mall itself can broker the sharing of bandwidth among partners. There should be an attractive rented facility that would provide a pleasant workplace and bring people together. It might also include a fulfillment area or an area where merchandise could be brought by different merchants for combined packing and shipping to customers who purchase products on the Internet from multiple craftsmen. Siting is important in another sense. There is a great deal of competition on the Web among commercial sites for "prime real estate" on Web searches. The Anne-E-Mall Web-site must be designed to appear on the first page of a search by a search engine like Yahoo. A consultant familiar with the algorithms search engines use to locate new Web-sites could be helpful in positioning the Anne site on the first page search results. Typically, Web-sites identified on the first page experience a higher volume of visitors to their sites than sites identified later in

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--> the search process. This work would have to be carried out on an ongoing basis to ensure continued results. Required equipment to launch the Web-site would include a local area network (LAN), with a local server and gateway and a workstation for each worker. Multimedia, video animation equipment and sophisticated software are also recommended. Local subcontractors are available to provide essential support. Packaging and shipping could be outsourced. Customer support by e-mail and phone could be handled by a local call center service bureau, with training of technicians contracted to Holland College. The quality of this training is critical, as customers will not distinguish between the E-mall and the subcontracted customer support. A training program in electronic commerce, using Holland College's skill-set core competency method, could be useful to other participating businesses as well. Another useful subcontractor will be an Internet service provider (ISP). It should ideally be located on the Island in order to take advantage of the high bandwidth available, but a mirror site might be set up in Japan with a separate Japanese company. The core business of Anne-E-Mall is the provision of a highly attractive Website with a secure, high-volume infrastructure for electronic marketing and sales, and in a sense the craft creators, travel agents, hotels, and artists whose wares are sold function as suppliers. The revenue comes from advertising, commissions, and eventually the sale of software packages and games, when the capacity exists within the company to create them. But the Anne-E-Mall is more than a catalog of products and services; it must link all the Anne pieces together and produce a seamless presentation to customers. It is therefore important that the Anne-related craftspeople are engaged as partners who share the rent for space on the site. Other unrelated businesses or events, like a PEI writers' congress, might pay for listing and services as needed. Items produced by partners can be ordered at the Web-site, and the others can be announced and hot-linked. Performance criteria will be required for those businesses that sell products and services on the site to maintain quality and protect the reputation of the site. Special policies will be required for supply chain management; the company must be sure that what is marketed on the Web-site can be delivered. It will be necessary to avoid swamping small suppliers who have limited capacity (or desire) to produce in quantity with orders they can not fill. Devices such as "available in limited quantities" or "each item numbered and signed" can produce an aura of exclusivity and turn a potential liability into an asset. However, there must be an agreement about quality assurance and delivery times with all vendors on the site, possibly by having an on-line inventory that can be drawn down. If Anne-E-Mall accepts payment, in the customers' eyes it is responsible for quality and delivery, and must therefore be prepared to deal with returns and complaints.

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--> It may also have to consolidate shipments from different vendors ordered by each customer. Collection and storage of inventory, with inventory control and measures against pilferage, must be included in agreements with partners. From the customers' perspective, the business must appear unitary. Human Resource Requirements There are several sides to the business: the technical and design aspects of producing and maintaining a late generation, interactive, secure Web-site; the marketing of products to a world-wide audience through the Internet; and the development and management of the supply chain. The first side will involve design and content specialists, able to do Web-site development, using Java as well as HTML, and manage chat rooms, maintain the connections to the ISP, and generally keep the system up. Some knowledge of cultural issues, for example, relating to the acceptability of certain graphics in different countries, would also be useful. The second skill area involves selling to that global market. A mixture of skills is required for accessing market information, using data base management capabilities, and accessing legal expertise for licensing and import/export issues. Some of the regulatory issues relating to intellectual property rights and shipping into different countries might be subcontracted to lawyers or affiliates in PEI. The third skill is assembling the supplier/partners, dealing with quality, delivery, contracting, and transaction management, and assuring that partners are paid for their sales. While such skills have long been required in the retail sector, the shift to E-commerce makes a difference. A multitude of suppliers, varying in their scale, capacity, quality, sophistication, and level of IT automation, must be assisted to move, perhaps very rapidly, to serving a demanding global market. Altogether a core team of 5 or 6 experienced people might be necessary for startup. Such people are hard to find on Prince Edward Island. They are in high demand, and inevitably they will be associated with other organizations. Recruiting from outside the province, perhaps among the large network of "Islanders-away" would be more beneficial to building PEI's IT capacity than would recruiting locally. It might also be possible to have people seconded from suppliers such as Island Tel or the ISP in order to get the company running as permanent staff are recruited. Eventually the skills must be produced on PEI. Holland College is developing a new three-year program in Web design, combining elements of their current long-established programs in Visual Communication and Business Information Processing with a new third year in Multimedia Design. UPEI has recently expanded its Computer Science program from two years to four. The university's Information Technology in Education Center (ITEC), which is designed to assist professors to prepare distance learning materials, could assist with interactive site content on a contract basis. It is notable that ITEC had to recruit off-Island to

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--> obtain those skills. There are also training programs available in the summer linked to Dalhousie University in Nova Scotia, and it would be useful to offer practicals to the students with local Web design companies. Alternatively, ITAP could offer courses on design work with the help of private trainers on the Island. Legal And Regulatory Requirements It has been assumed for the purposes of the case study that intellectual property rights to electronic Anne can be secured. In practice, one of the first tasks of Anne-E-Mall team would be to research the issue and obtain the necessary licenses. There are no regulations that explicitly pertain to the World-wide Web, and many Web-sites use quotes without permission. However, the name Anne of Green Gables and the name of the author, Lucy Maud Montgomery, are trademarked by the Province of PEI for use on-Island. Products based on Anne that are made and sold on the Island are not subject to royalty payments. Products that are made on the Island and exported pay reduced royalties. These payments must be made to the Province; royalties from companies based off the Island are made directly to the family of Lucy Maud Montgomery. The Province has licensing authority, including for depictions of Anne, which must be approved in advance. (This is another service that Anne-E-Mall can do on behalf of the other partners.) All products sold through the Mall must satisfy safety standards of the Canadian Standards Association (CSA), and partners must be asked to provide certification for their products where applicable as a condition for participating. They must each be insured as appropriate to protect themselves, and all processes and procedures of Anne-E-Mall must be clearly documented to limit its liability. All necessary insurance is available in PEI. For exporting, regulations and tax laws of receiving countries must be investigated; Federal Express and Industry Canada can assist. In case of difficulty, it may be necessary to limit the areas to which merchandise can be shipped. Marketing Marketing will be done mainly on the Internet, and this will require, among other things, that the Web-site come up early in searches. It is good practice to keep track of hits, either by asking visitors to sign a guest book or by storing a cookie on their machines, with their permission. Additional advertisements can be placed in magazines serving young girls, and the reach of the sites can be enhanced by crossing links with other sites. Mail campaigns can be mounted using mailing lists from merchants, the Provincial visitors' list, and other PEI sites. While Anne-E-Mall should concentrate on the short term initially, it should always use the most advanced technologies and maintain awareness of advances by participating in conferences and looking for innovative Web-sites on the

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--> Internet. In the longer term, technical staff should develop the technology to create an Anne's World virtual theme park on the Web that would provide a virtual experience of PEI and attract visitors and customers. Implementation Plan For the Anne-E-Mall enterprise, the Provincial Government might provide funding through Enterprise PEI, likely in the form of a loan or equity stake. This would be useful for seed money, to get the project to a point that would attract private investors. However, seeking funding from the government might make the proposal public knowledge, and there is a risk of being scooped. It would be necessary to have in place an experienced management team and a completed Web-site design before seeking private backers. At that point, venture capital could be pursued, although the amount required is small for most venture capitalists. Board members and suppliers may also be interested in an equity stake. The first step should therefore be to seek seed money and develop the Website that can be used to sell the Anne-E-Mall package. Startup costs may perhaps be kept under $500,000, but additional capital will be required when sales start to move. Probably a more realistic minimum is $1 million, and the management team may be given an equity position. The initial team should include a graphic designer, a Web-site designer, a marketing expert, someone to take charge of development of contacts and contracts, and a financial management person. A production manager will be required to choose products, establish prices, and set up processes for payment and delivery and for customer service, making a total of six. An accounting firm and legal advisors can be kept on retainer. It is essential in this kind of business to get clear rights to the electronic use of the Anne of Green Gables theme and image before launching. After that, the main bottleneck will be finding and training the people. In other places, recruits might be offered stock options, but this is not common on PEI, and workers are more likely to seek quarterly bonuses. Effort may be concentrated on recruiting Islanders living away, many of whom seek opportunities to return to the Island. An IT job net, coordinated by ITAP, may be effective, perhaps combined with a governmental campaign declaring PEI a "silicon island," and offering special consideration or tax breaks to IT specialists and entrepreneurs who move there to work.