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SATURDAY APRIL 18 1998ÿÿTechnologyÿ
High streets in hyperspace
The internet is fast becoming the prize location in retail sales, with traffic figures booming. Louise Kehoe reports
Internet commerce always seemed a bit like Brazil or Russia: you constantly expected it to take off and change the world but that never seemed to happen. Now the take-off is starting. Consider:
Almost half of all the trades executed by America's largest discount brokerage house, Charles Schwab, were conducted online during the first three months of the year. That compared with one-third in the same period of 1997. Nearly 5bn people traded stocks via the internet last year and the number is expected to reach 10m-16m by 2000.
In 1996, independent travel agents handled 80 per cent of US airline reservations. Today, their share is down to 52 per cent as airlines deal directly with travellers via the internet or telephone.
Dell Computer has turned itself into one of the top five personal computer companies in the world by concentrating on sales over the net and by telephone. It now generates sales of more than $4m a day from its web site, up from $1m a day less than a year ago. In January, Egghead.com, a $350m computer and software seller, said it would abandon bricks and mortar and sell only online.
Amazon, the first online book seller, had web site sales of $148m last year, up 838 per cent from 1996. Amazon has yet to turn a profit. But the 2m people who visited Amazon's online book store in December - with more than 1.5m placing an order - have traditional booksellers worried. Barnes & Noble, the largest US bookseller, is moving to defend its turf with its own web site. The largest bookshops may carry 150,000 titles. Online you have a choice of 2.5m.
These are straws in what could become a hurricane, though not yet. In the US, consumer purchases made via the internet totalled $2.7bn in 1997 and are expected to rise to $5.8bn this year, according to Jupiter Communications, a research group that uses conservative criteria to measure the trend. That is just a fraction (0.1 per cent) of the $2,500bn total retail sales in the US last year.
But if "foot traffic" is the key to success in retail trade then the internet is now the prize location. With data traffic doubling every 100 days, according to a new report from the US Commerce Department, cyber high-streets are booming. Estimates by two consultancies, Forrester Research and Robertson Stephens, suggest retail sales on the web could double next year and rise by a further 50 per cent in 2000 or 2001.
Business-to-business use of the net is growing even faster. Price Waterhouse suggests it could be more than $400bn by 2002 (it is now around $17bn). It says the volume of business-to-business trade doubled every six months in 1996-97 and is now doubling each three to four months.
Three things have happened to turn disappointment into boom, according to Herb Stephens of Intershop, a software company that builds the programs needed to create an e-commerce web site. First, security concerns have become less of a problem. Encouraged by word-of-mouth stories about internet purchases, consumers have come to accept the maxim that giving your credit card to a waiter is more risky than using it online.
Second, it is easier to enter cyberspace. Technological constraints, especially bandwidth limitations and modem speeds, made "waiting to connect" one of the best-known phrases among internet users. Over the past year, many have upgraded to faster modems. Third and most important, e-commerce appears to have achieved a critical mass. Fewer than 40m people were connected to the internet in 1996. Now, there are more than 100m.
As e-commerce grows, it is developing its own rules. "In the physical world, there is room for millions of shops because there are millions of shopping centres and street corners," says Phil Polishook, vice-president of marketing at etoys, an online toy store. Each has its local customer base to draw upon. "On the internet, you are always one click away from any other web site. Only a few sellers will succeed in each product category."
Evidence of that is the rising cost of running an online store. "The idea that online selling is cheap is a myth", says Mr Polishook. Etoys, for example, has struck deals with several "portal" or gateway web sites that draw large numbers of visitors. The toy retailer pays a 25 per cent slice of revenues for customer referrals from these sites.
Mr Polishook's argument that only a few sites will scoop the pool is borne out by car sellers. Two companies, Microsoft's Carpoint and Auto-by-tel, dominate the field, at least in the US. "There may be [only] three or four players in each category, as internet use grows," says Alex Simons, Carpoint's product manager. The Carpoint web site reflects two other e-commerce trends. The first is the central role of information. Carpoint began as a "research site" providing consumers with copious information about cars they might want to purchase. Online research is the first step towards becoming an online shopper, industry analysts say.
Last June, Carpoint began offering cars for sale. The number of shoppers has more than doubled to above 1m a month and the proportion who make a purchase has grown to almost 3 per cent. "We are seeing a definite increase in the willingness of people to use the internet for their purchasing decisions," says Mr Simons.
The influence of information provision on internet retailing could become even more important. A new development called "personal agent technology" would provide consumers with "software slaves": these would scour the internet seeking the best deal on a car or a rare book. If it lives up to its potential, agent technology could make the internet hugely competitive.
The importance of information could well be a double-edged sword. Customers use the net to hunt for bargains. But internet retailers can use it to gather information about their customers. This is a mounting concern among consumers, according to many in the field. There needs to be an industry- wide agreement on how this information is protected, says Mr Simons.
The second characteristic of e-commerce exemplified by the Carpoint site concerns the role of middlemen. Carpoint has agreements with dealers throughout the US who complete sales generated on the web site. These dealers typically pay about $200 in advertising and fees to "move a car off the lot", versus the $450 average spent on advertising through traditional media.
As the example shows, the internet can cut the cost of doing business considerably. It does so in other areas too. In banking, for example, according to Booz-Allen & Hamilton, it costs just over 1 cent to make a transaction through a bank branch; half a cent by telephone and 0.01 of a cent on the net.
Some have argued that the internet's ability to reduce "transaction costs" will lead eventually to the elimination of middlemen such as distributors. Yet as the Carpoint example shows, reports of the death of the middleman may be exaggerated. Collaborative relationships between established retailers and internet merchants are emerging in several product areas.
The reason is that shipping products direct from manufacturers to the consumer is not economically viable, argues Mr Polishook of etoys. "If a customer orders three products, each from a different manufacturer, we would have to pay three shipping charges." Like most online stores, etoys has created its own central warehouse.
The internet cannot do everything. Some goods sell better online than others. Intangible products such as financial services are especially easy to deliver, simply by downloading them. Last year, some 4.5m US households were banking online. By 2000, as many as 16m are expected to be accessing accounts and paying bills via the internet.
What is less often realised is that, to a significant degree, the success of online sales depends on demographics as much as technology. Web users are predominantly young and male. They are the main consumers of the things that, Jupiter Communications predicts, will show the largest growth over the next few years: electronics products, travel, music, books, software and computers and pornography.
Growth may bring its own problems. In the book industry, for example, titles may be the property of one publisher in Europe and another in North America. The international reach of the internet makes this a big dilemma. Similarly, there are US government export controls on some software products. To ensure it complies with commercial and legal restraints, one seller of software, Software.net, created an elaborate system to identify customers' location.
Even the strongest advocates of online shopping acknowledge traditional forms of retailing are not going to disappear. "People like the experience of shopping," says Mr Stephens of Intershop. Recreating the social elements of a shopping trip by building "online communities" in which consumers can interact is becoming a priority for online stores.
So far, however, no one has tried to simulate queues at check-out counters or frustrating searches for parking spaces. Without these, online shopping will never be quite the same.>>>> |
