Wall Street Journal: Front Page Monday, June 8, 1998
Internet Is Opening Up A
New Era of Pricing.
The Outlook
WASHINGTON
Electronic commerce may be the next "killer" application on the
Internet, but right now it is killing prices.
A whole new world of buying and selling via the Internet is taking
shape, and to venture capitalists, entrepreneurs and purveyors of
technology gear, it looks like the next great thing.
But the immediate reality is this: Many goods and services are cheaper
on the Web than off it. It's cheaper to buy and sell stocks. It's cheaper
to buy books, although shipping costs can gobble up much of the
savings. And, it should be said, many newspapers are cheaper on the
Internet than in print -- about 72% cheaper in the case of The Wall
Street Journal.
But the story of the Internet's role in pricing goods and services is just
beginning to unfold. More than a new way to take orders or delivery,
the Internet is emerging as a paradise for comparison shoppers. The
past couple of years have brought a slew of Web sites and on-line
services that put more information about prices into the hands of
buyers. With vastly better data on prices of golf clubs, airline tickets
and cars, consumers are cutting better deals.
A couple of years ago, the idea of hiring an electronic agent, or
"knowbot," was mostly the wishful thinking of fuzzy futurists. Today,
shopping "bots" are real. At sites such as jango.com and junglee.com,
electronic search engines cruise the Internet and come back with a list
of items, prices and merchants. Most of the items can then be bought
on-line with a few mouse clicks.
"There is nothing more terrifying than a consumer who knows
everything about the pricing of your product," says Kenneth Orton,
president and chief executive of Preview Travel Inc., an on-line travel
agency based in San Francisco. Its services include a Web-based
"bargain finder" that scans for cheap air fares.
To be sure, consumers will spend only $3.3 billion via electronic
commerce this year, predicts Forrester Research Inc. Even the
projected rise to $7 billion or so by the year 2000 is small change in
the $7 trillion U.S. economy.
Business-to-business commerce on the Internet is expected to dwarf
the consumer sector. The on-line transaction business of just three
companies -- Cisco Systems Inc., Dell Computer Corp. and General
Electric Co. -- totaled about $3 billion last year, the Commerce
Department said in an April report. The combined Internet commerce
of these three companies will grow to $17 billion a year within three to
five years, and the U.S. total could top $300 billion.
On the consumer side, the on-line figures exclude cases where
consumers search for the best deals on the Internet and then
complete the actual purchase at traditional brick-and-mortar stores.
The auto business is being rapidly transformed by consumers who use
the Internet to find the lowest prices. J.D. Power & Associates, an
auto-research firm, recently found that 22% of car buyers pay the full
sticker price, but that only 9% of those who obtained information over
the Internet paid that much.
Alyse Terhune of Tuxedo, N.Y., recently went shopping for a $40,000
Volvo the old-fashioned way: She visited a dealer. But when she
couldn't find the right color, she turned to Auto By Tel, an on-line
consortium of car dealers that is racking up sales of $500 million a
month. Ms. Terhune listed her requirements and got back three
detailed bids from Volvo dealers. The best offer was $1,000 below the
first quote she received at the dealer showroom.
Some market analysts doubt that the Internet will always be a price
destroyer, however. What's happening today is just Phase One, in
which buyers use the Internet to widen their choices, thereby
"expanding" the supply and reducing the price.
Resources
Jango.Com
www.jango.com
Junglee.Com
www.junglee.com
Preview Travel
www.previewtravel.com
Auto By Tel
www.autobytel.com
But Internet commerce may well be a two-edged sword. It's true that
consumers can sniff out book bargains on-line, but booksellers can
raise prices at an on-line bookstore faster than in a store, where they
have to reprice every copy of a given book. As buyers rush to get
bargains on the Internet, booksellers can change prices quickly. Airlines
have already become highly sophisticated in manipulating seat prices
to fill planes and maximize profit.
Looking ahead, there could be further price-cutting, of course, as price
wars break out on the Net. But as merchants figure out how to cut
transaction costs, eliminating salespeople, middlemen, delivery charges
and processing costs, they may wind up slashing prices but maintaining
or even increasing profit margins. Believers in the "new economy" of
the Information Age ascribe huge importance to this possibility.
Over time, though, the Internet may turn out to be more of a price
leveler than a price cutter. To economic theorists, perfect market
information tends to make prices converge. Mr. Orton of Preview
Travel says the spread of bargain finders may serve to narrow the
wide gap between similar seats on a given flight.
By similar logic, it could trim the customary markup that many
businesses enjoy outside their home markets. "Companies are going
to have to come to terms with losing the international markup," says
Mary Cronin, a Boston College management professor who expects
the Internet to push sellers toward a single global price.
Perhaps. At a point when 80% of Internet users are in foreign
countries, these pressures could build. Today, though, the Internet is
still 80% American, and the problems it poses for merchants is just
more of what is already going on: a 1990s consumer culture in which
beating down price is becoming a hobby, a sport and almost an art
form.
--BERNARD WYSOCKI JR.
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