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December 7, 1998

Myths And Realities

continued...page 2 of 4

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And guess where the big-ticket systems integrators--IBM Global Services, EDS, Computer Sciences, and the Big Five--are starting to aim their sights? "Web software vendors get all the coverage, but the windfall beneficiaries of E-commerce will be the integrators," says Satterthwaite. "After they finish their year 2000 and ERP engagements, they will throw their efforts into this." And that's not going to bring any price tags down.

Then there are marketing costs and other non-IT infrastructure investments. Amazon.com, the paragon of E-commerce success, lost nearly $25 million on $153.7 million in revenue in the third quarter, and marketing costs were a big reason. Amazon's marketing expenses grew from $11 million in the first quarter to $26.5 million in the second quarter to $37.5 million in the third--more than it spent on technology. The annual cost of a major licensing deal on a high-traffic portal runs well into eight figures, and Amazon has several such deals. Amazon's third-quarter infrastructure costs included more than $550,000 to lease a book warehouse in the United Kingdom and the expense of expanding its main warehouse in Seattle, which now costs more than $450,000 a year.

Is Amazon gaining new customers from its marketing investments? Absolutely. Its revenue for the first nine months of 1998 was $357.1 million, up 337% from the year-ago period, and the company's stock price is up about 1,000% since its initial offering in May 1997. But the company is losing money--lots of it--proving the point that E-commerce isn't cheap.

MYTH NO. 3: Everyone's doing it.
Those living in Silicon Valley, Seattle, or Manhattan can find plenty of evidence to support this myth. And just about every company has a Web site. But brochureware isn't commerce. Dig deeper among multibillion-dollar companies, even among some consumer-focused retailers, and you'll find a different story. Companies on the sidelines of Web commerce include chains Best Buy, Circuit City, and Fry's Electronics.

"Fry's doesn't even post a catalog," notes Vern Keenan, an analyst with research firm Keenan Vision. "It goes along with their conservative management--using merchandising techniques from 50 years ago, like heavy promotion of loss leaders in low-cost ad channels like local newspapers and radio. They still work, and Fry's sees no reason to go on the Web." Fry's doesn't comment on its business strategies.

With a few notable exceptions, such as General Electric, Boeing, and the Big Three U.S. automakers, most old-line manufacturers have yet to move into E-commerce--and may not for quite a while. "In some companies, you almost need the retirement of an entire generation of purchasing and sales staff members before it will happen," says Sam Kinney, co-founder and executive VP of FreeMarkets Online Inc., a company that manages online bidding for industrial requests for quotes. "This is not an overnight thing. There are some massive penetration barriers that will not fall for decades."

Many companies simply don't see a compelling business reason to move to E-commerce. Maytag Corp., for example, finds that electronic data interchange with its suppliers and distributors works fine, and it's playing the Internet commerce card very carefully. "We all should be cautious. There are very few Amazon.com opportunities out there," says Maytag VP of IT Ed Wojciechowski. "We have informational Web sites where we can engage the customer, and we see commerce as an option in the future. But it's not strategic for us yet."

And even if Myth No. 3 were true, that doesn't mean following the pack is a sound strategy.

MYTH NO. 4: It's lucrative.
Despite the online sales success of a handful of E-commerce poster children, for every Dell Computer and Cisco Systems there are dozens of companies like Burlington Coat Factory. The company's Web site sells less merchandise than just one of its 250 retail stores, says CIO Mike Prince. "So far, it just hasn't been a major focus for us," he says.

That's because buyers are less likely to purchase "subjective" items such as coats and dresses over the Web than PCs, routers, and books, says Prince. "When you buy a dress, you want to try it on, see how the fabric feels, check out the color," he says. "There's something very special about that experience that you can't get on the Web."

That said, Burlington Coat Factory is revamping its site to feature more products. Also, the company is considering adding a gift registry that would let shoppers visit its stores, identify the specific articles they like, and then register them on the site so that relatives and others can buy gifts online according to those selections. But even if Burlington increased its online sales to equal the volume of 10 of its stores, "that would be significant for a chain our size--and a surprise," Prince says.

Even by the most generous accounts, online retail sales remain only a tiny fraction of what's sold in physical stores or through mail-order catalogs--even in the Web's most popular product categories. Online book sales will account for less than 5% of all U.S. book sales this year, according to Keenan Vision. Online music sales? Less than 2%. Even online travel sales--which will reach $1.8 billion this year, leading all consumer products (except IT products) sold online--won't even reach 1% of the $488 billion in total U.S. travel spending. Web-based advertising revenue also remains minuscule compared with broadcast and print--just 0.4% of ad agency bookings this year.

What about business-to-business E-commerce, which is projected to leave business-to-consumer cybersales in the dust and soar into the trillions of dollars by 2003? That mostly reflects the fact that business-to-business commerce in the offline world is orders of magnitude larger than sales to consumers.