Dotty about dot.commerce?

The e-commerce boom is changing businessfor the better

IS IT a fleeting fancy, or a life-changing love? The question lingers over todays obsession with the Internet. On one side, electronic commerce is exploding, and the stockmarkets dot.com mania seems to be migrating from America to Europe and Japan, and even to emerging economies. On the other, delivery snarl-ups have besmirched the reputation of electronic retailers, and profits from doing business on the World Wide Web are largely non-existent. What is one to conclude?

Our survey this week of business-to-consumer commerce on the web sifts through the sense and nonsense surrounding the e-boom. There is much hype, but there is also a solid base in reality. And this suggests that the second answer to the lingering question is closer to the mark. The Internet is profoundly affecting almost all business and commerce. A common slogan is true: any big firm that fails to grapple with the consequences is putting its future at risk.

Numbers tell only part of the story. In 1999 global e-commerce was worth a little over $150 billion. Around 80% of those transactions were between one business and another. Yet growth of all forms of e-commerce is hectic. Business-to-business web exchanges are mushrooming. In America e-retailing revenues tripled last year; in Europe and Japan they rose faster still. The absolute level of consumer e-commerce is still small, at around 1% of American retail sales. But in some areas its share is far higher: 15% of retail stockbroking and 5% of book sales, for instance.

The influence of the Internet stretches farther than such figures suggest. It is used more as a source of information than as a place to buy. Surveys in America suggest that last year, when less than 3% of new car sales were made over the web, 40% involved it at some stage, usually for price comparisons. And e-commerce often needs to take only a small share of the pie to have a big impact on what is left. Travel agents margins are so flimsy that a loss of 3% of their market to the web would be enough to push many out of business.

One impact is thus to intensify competition, producing benefits to consumers in lower prices and more choice, at the expense of producers and intermediaries. But a more profound effect is a wholesale restructuring of businesses. Thanks to the rise of e-commerce, such giant firms as General Electric, General Motors, Ford and, this week, Unilever (see article), are embracing the Internet for many of their activities. And the giants move means that their suppliers, as well as intermediaries through whom they sell, must take to the Internet too.

The promised land that this ripple effect holds out is one of more transparency, greater efficiency and, yes, higher productivity. Hard macroeconomic evidence of these things is admittedly still elusive. But it is at least conceivable that new technology and the Internet may be partly responsible for Americas unexpectedly strong recent productivity growth, as well as its surprisingly low inflation.

Bubbling under

So is the Internet leading to economic nirvanaand does dot.com mania make sense? Not quite. The Internet may be transforming business; but it is not rewriting economics to enable the American economy to expand at its current rate without dangerously overheating. Nor does the explosion of e-commerce justify the current high prices of many Internet-related shares. On the contrary, all the signs are that the markets remain in the grip of a technology-related bubble. Many equity markets currently look overvalued. But Internet shares are causing particular concern, for two reasons. One is simply that their overvaluation looks so huge. Because few make profits, normal earnings-related measures cannot be used. But even enthusiasts concede that as many as 80% of todays Internet companies may not survivejust as almost all the early railroads, car makers and airlines did not. Behind the hype, investors are reflecting this. Shares in profitable technology providers such as Cisco, Oracle or Sun Microsystems are doing well. But nearly three-quarters of Internet-related initial public offerings in America since mid-1995 now trade below their issue prices. And over the past year the shares of several big American e-commerce firms have crashed: eToys (down 80% from its peak), Priceline (down 69%) and E*Trade (down 66%), for example. The Internet bubble in Europe and Asia seems sure to be followed by similar collapses.

The second concern is one voiced by managers of traditional (non-tech) firms. Their share prices, they say, have been savaged just because investors are, irrationally, redirecting their capital into glamorous technology and Internet firms (see article). Some say they are being punished despite healthy results; several talk of a misallocation of capital from profitable to loss-making activities.

Yet many of these gripes are misplaced. The Internet bubble is clearly distorting the market, and its bursting may well cause pain across the whole economy. Moreover, whenever firms can raise capital virtually free, they are likely to waste much of it, as so many dot.coms are now doing with their marketing expenditure. But there is little evidence that traditional firms shares are undervalued, or that they are finding it hard to raise capital. And the capital going into Internet firms is not all being wastedeven if todays shareholders may not reap the benefits. This is especially true of makers of computers and the Internets infrastructure. But even an e-retailer such as Amazon needs robust computers, software and delivery systemsall of which necessitate investment.

The bigger point is that the markets are sending traditional companies two useful signals. One is that they ignore the Internet at their peril. The second is that merely adding a website on to an existing business is not enough: the whole business needs to be redesigned around the cost-saving, communication-easing properties of the net. Most companies must become Internet firms if they are to survive. Even when the bubble deflates, that signal will be worth heeding.

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-- Egalitarian (egalitarian@mail.com), March 01, 2000