Left to our own devices, let's define the term this way: E-commerce describes in general transactions completed on-line. Sooner or later, the e-commerce arena will encompass not only most domestic commerce but the bulk of the world's commercial activity as well. So e-commerce companies are those that, like Amazon, offer goods or services for sale on-line; like pcOrder.com or Commerce One, sell infrastructure technologies that enable others to sell on-line; or like eBay, simply create marketplaces where third parties can buy and sell with one another. They are companies racing to leverage the power of this new communications link between individuals and businesses, and to bring sweeping changes to the way business is conducted.
It's hard to make predictions about where these companies will take us because we are at the very beginning of this business evolution. It is as if we have just invented the radio and are using it for ship-to-shore transmissions; we haven't yet figured out that it is also an entertainment device. Or we are at the point shortly after the television was invented, when Milton Berle stood with his microphone in front of a camera and performed his radio routines "live." It took time for other appropriate genres, such as the sitcom, docudrama and soap opera, to evolve. Today we have the Internet tiger by the tail. Although we suspect there is something very powerful out in front, we are still learning how to harness it to maximize our advantage.
Even so, we can make a few observations about what lies ahead, and offer some big picture thoughts on e-commerce and the changes it is enabling. In many ways, the leaders of this e-commerce revolution are not unlike the forty-niners, who raced 150 years ago towards an area near what is now Silicon Valley to mine gold. They are all lured by the promise of profit. What really unites these companies, though, are several common realizations: that the Internet will radically change communications as we know it; that customers will become increasingly savvy, and so empowered at the expense of institutions; that this shift can be exploited in any industry; and that these changes mean opportunities.
The Internet--this new, increasingly ubiquitous technology, will forever change the economic landscape in large part because it heralds a major shift in communications: It provides the first "many-to-many" link. Every business hoping to thrive in the next millennium needs to recognize that the Internet is, at the very least, a critical business tool, which can and will enable companies to reach more customers and do so more efficiently and more effectively than ever before.
Once upon a time, only one-to-one communication existed. Individuals could converse with each other but had no way to record or distribute their ideas to people outside the conversation. That changed with the advent of one-to-some communication, enabled by the development of written languages. Once we could write, we could document our ideas for others to learn and teach, making a place in the world for organized education. And when Aldus Manutius (1450-1515) improved upon Gutenberg's printing press by inventing multiple movable typefaces, we could produce many copies of numerous literary works in multiple languages for a diverse group of readers. For the first time, education was no longer just for monks; the common man could access stored knowledge bases and academic learning.
The world changed profoundly again with the invention of broadcast technology--which made possible one-to-many communication. The need to live in clusters became much less critical because information could be transmitted almost instantly to remote locations. Thanks to broadcast, workers could spread out from the cities. Noncontiguous communities and countries could share information on a practically real-time basis.
Now the Internet has brought us one more leap forward, thanks to many-to-many communication. University professors and high-school students have access to the same on-line bulletin boards for posting messages, ideas and opinions. It is far too early to know what the ultimate outcome of this new communication link will be, but we are certain that the businesses where we work, the services we use and the entertainment we seek will all change profoundly in the coming years.
Many-to-many communication means that individuals have access to real-time data from numerous information sources over the Internet. As a result, people can get better information about products, services and competitors than ever before. A well-known dictate in retail and real estate is that only three things matter: location, location and location. Not anymore. Thanks to the Internet, consumers need not pay a premium to avoid heavy traffic, or enjoy the convenience of shopping in a centrally located mall. On the Internet, shoppers make decisions based solely on the right combination of service, price and selection.
If "knowledge is power," then this improved access to it will likely catalyze a significant sociological and political shift: Individuals will be increasingly empowered at the expense of traditional institutions. If you take away only one thought about the power of the Internet, this one should be it--because this power shift changes everything. Need proof? Ask the account reps at the large brokerage houses that have lost business to the on-line trading companies. Ask your local auto dealer, who has lost pricing flexibility thanks to shoppers armed with comparative bids. Ask the shopkeeper, who specializes in commodity items like books or toys. Ask the representatives from Congress, who are bombarded with email on the burning issue of the moment. The Internet is giving the individual a much louder voice.
And there are opportunities to exploit this change in every industry and political arena. Only the laws of nature will be unaffected. Some industries are racing to embrace the Net, while others remain in denial. But just as virtually no business was left unchanged by mass adoption of the telephone, there will be none beyond the Internet's reach. Regulation and other government restrictions may well slow the rate of change for some, but eventually the way most products are bought, distributed and sold will change.
Consider software, now purchased in a box. By way of the Internet, it will ultimately be a subscription service. Autos, once purchased from dealer inventory, will be "designed" by the buyer and built to spec. Music will no longer be sold as an album on preconfigured disks; customers will assemble their own collections on-line. And even worldwide currency structures and payment mechanisms will likely change as the Internet speeds the development of a truly global economy.
All of this change equals opportunities for business. Thousands of small Internet ventures spring up every week in Silicon Valley, alley and gulch, on the silicon prairie, along the digital coast, and for lack of a better term, somewhere out there in the digital hinterlands. Some entrepreneurs have winning ideas. Some don't. But just as the lure of easy money brought thousands of formerly more sensible, rational individuals racing into the hills of eastern California 150 years ago, the stories of rapidly "earned" Internet millions work are drawing the talented and optimistic of today.
The Internet as a Tool One of the questions well worth asking is why, given the laws of inertia, will businesses embrace the Net? What types of businesses should thrive in an on-line environment? First are businesses that will provide real time data to people who previously didn't have access to that information. Equally promising are businesses that will bring services to customers whom they could not economically serve before (e.g., payroll, health plan administration and other services for very small businesses).
Other businesses that should excel are existing ones that recognize the Internet is not a new business but rather a new tool--which they can use to reach more customers more effectively and efficiently. Examples of such businesses are Intuit, Charles Schwab, Dell and Gateway, which all realize that they can use the Internet to increase market share while strengthening the P&L. Smart advertisers too--like Fox and Ford Motor company--have discovered that the Internet can serve as a customer polling device. Ford has agreed to swap advertising dollars for access to surveys of the iVillage customer base. Never before has Ford had such an opportunity to solicit customer suggestions and receive immediate feedback.
And for nearly all businesses, e-commerce offers some advantages over "the old way." For starters, most Internet companies require smaller capital outlays as compared to those in the physical world. Unlike traditional retailers that must open and staff a real store in each geographic area of interest, Amazon was able to reach a worldwide audience instantaneously when it came on-line. The ability to scale with speed--and without the expense of buildings, leasehold improvements, fixtures, shelves or store personnel--is a tremendous economic advantage.
Other benefits for on-line players are reduced inventory requirements and instant feedback loops. On-line retailers, like CDNow or Beyond.com, sell millions of dollars of merchandise without incurring inventory risk. These companies are storefronts without store backs, benefiting from the double bonus of reduced risk and reduced capital requirements. And whereas traditional merchants must wait a considerable amount of time before they get customer feedback on a new product, e-commerce companies get this feedback instantaneously; they can then adjust their product, store or service accordingly on the fly.
Thanks to e-commerce, marketplace inefficiencies are going out of style. Today local merchants in remote locations can set their own price for a given pair of Nikes for lack of competition. Not tomorrow. Although merchants delivering better services will always be able to charge a premium, those relying on market inefficiencies will soon note a rapid erosion of power. As knowledge and purchase options increase, marginal-pricing power will decrease for services, commodities and luxury goods alike.
The opportunities and the business models for these companies are still developing, and will likely remain in flux for some time. The issue is potentially quite complicated, in part because many leaders of this new economy--often engineers--have different motivations from the tycoons of the past. People outside Silicon Valley laugh when wealthy entrepreneurs proclaim "it's not about the money." Outsiders nod politely, then point to the plethora of sports cars and mansions in the region. No question, many of these engineers and managers have found the good life. Yet for many, it really isn't about the money; it's about the challenge. Those who have already struck gold move onto a new mission. E-commerce is a world of serial entrepreneurs, who build new businesses in which the technology is key and the economics are secondary
The emergence of e-commerce creates tremendous opportunity for those able to exploit it. At the same time it presents immense risk for those who fail to grasp its significance. Businesses that hope to thrive in the new millennium need to fundamentally restructure operations to keep pace with emerging competitors, who are unfettered by conventions left over from the unconnected economy. Carpe diem.
LISE BUYER joined CSFB Technology Group as Director and Senior Equity Analyst focusing on companies in the Internet and new media industries. Before joining CSFB, she was the Director and Senior Equity Analyst at DMG Technology Group. Prior to DMG, Ms. Buyer was a Vice President, Equity Analyst and Portfolio Manager for T. Rowe Price Associates, a $130-billion mutual fund complex. Prior to that, she spent several years on Wall Street following both the technology and entertainment industries for Prudential Securities. A frquent speaker and guest columnist, Ms. Buyer has a B.A. from Wellesley College and a M.B.A. in Finance and Quantitative Analysis from Vanderbilt University's Owen School. She has also earned the Chartered Financial Analyst (CPA) accreditation.