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Chapter 10 E-commerce: Digital Markets, Digital Goods 421

in 2006, Netflix announced a contest in which it offered to pay $1 million to
the person or team who comes up with a method for improving by 10 percent
Netflix’s prediction of what movies customers would like as measured against
their actual choices. By 2009, Netflix received 44,014 entries from 5,169 teams
in 186 countries. The winning team improved a key part of Netflix’s business:
a recommender system that recommends to its customers what new movies to
order based on their personal past movie choices and the choices of millions
of other customers who are like them (Howe, 2008; Resnick and Varian, 1997).
In 2012, BMW launched a crowdsourcing project to enlist the aid of customers
in designing an urban vehicle for 2025. Kickstarter.com is arguably one of the
most famous e-commerce crowd funding sites where visitors invest in start-up
companies.
Firms can also use the wisdom of crowds in the form of prediction markets.
Prediction markets are established as peer-to-peer betting markets where
participants make bets on specific outcomes of, say, quarterly sales of a new
product, designs for new products, or political elections. The world’s larg-
est commercial prediction market is Betfair, founded in 2000, where you bet
for or against specific outcomes on football games, horse races, and whether
or not the Dow Jones will go up or down in a single day. Iowa Electronic
Markets (IEM) is an academic market focused on elections. You can place
bets on the outcome of local and national elections. In the United States, the
largest prediction market is Intrade.com where users can buy or sell shares in
predictions.

E-COMMERCE MARKETING
While e-commerce and the Internet have changed entire industries and enabled
new business models, no industry has been more affected than marketing and
marketing communications. The Internet provides marketers with new ways of
identifying and communicating with millions of potential customers at costs far
lower than traditional media, including search engine marketing, data mining,
recommender systems, and targeted e-mail. The Internet enables long tail
marketing. Before the Internet, reaching a large audience was very expensive,
and marketers had to focus on attracting the largest number of consumers
with popular hit products, whether music, Hollywood movies, books, or cars.
In contrast, the Internet allows marketers to inexpensively find potential
customers for products where demand is very low. For instance, the Internet
makes it possible to sell independent music profitably to very small audiences.
There’s always some demand for almost any product. Put a string of such long
tail sales together and you have a profitable business.
The Internet also provides new ways—often instantaneous and spontane-
ous—to gather information from customers, adjust product offerings, and
increase customer value. Table 10.6 describes the leading marketing and
advertising formats used in e-commerce.
Many e-commerce marketing firms use behavioral targeting techniques to
increase the effectiveness of banner, rich media, and video ads. Behavioral
targeting refers to tracking the clickstreams (history of clicking behavior) of
individuals on thousands of Web sites for the purpose of understanding their
interests and intentions, and exposing them to advertisements that are uniquely
suited to their behavior. Proponents believe this more precise understanding
of the customer leads to more efficient marketing (the firm pays for ads only
to those shoppers who are most interested in their products) and larger sales
and revenues. Unfortunately, behavioral targeting of millions of Web users also

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