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To: OtherChap who wrote (18854)	9/28/1998 8:10:00 PM
From: Glenn D. Rudolph	Respond to of 164684

Article 9 of 200 Business Don't Bet On The Internet As The Golden Goose Of Retail David Walker 09/29/98 The Age Page 4 Copyright of John Fairfax Group Pty Ltd Here's a peculiar contradiction. The Internet was supposed to let businesses sell direct to their customers and cut out the middleman - a process known as ''disintermediation". Yet the two most ballyhooed examples of successful Internet commerce are Jerry Yang's Yahoo! ''Web portal" site and Jeff Bezos's Web bookseller, Amazon.com. Then there's E*Trade, Auto-by-Tel and a hundred other Web middlemen, all grabbing headlines in business magazines by selling everything from job ads to air tickets to second-hand computers. Low-cost middleman companies such as Amazon.com, it is argued, can make profits with far finer margins than conventional retailers - and so carve a huge territory with buyers. Internet retailers are supposed to set out to build that all-important market share - generally by operating at a loss - and wait for the pay-off at the end of their great adventure. Is this the revenge of the middleman? Is Internet retail going to bring riches after all? Perhaps. But don't bet on it. While these loss-makers throw themselves towards a distant, golden-roofed city, a few researchers at places such as IBM have been exploring the economics of Internet retail. It hasn't gathered much attention in electronic commerce circles, probably because the work goes out with titles such as Price-War Dynamics in a Free-Market Economy of Software Agents, and because it's chockful of mathematical economics that even the governor of the Reserve Bank would find heavy going. But it sketches a scenario where Internet commerce delivers very few riches at all, where the adventurers eventually arrive like Rene Caille entering Timbuktu, to find the fabled commercial wealth is nothing but legend. As background, recall how pre-Internet commerce works. Although many people think of free competition as a pretty desirable aim, the non-Internet world has seen surprisingly little of it over the years. Existing suppliers benefit from economies of scale, so new companies find it hard to break into most fields. And customers who go searching for the cheapest deal pretty soon find it's not worth the the trouble. The result: in any given area, most of us end up dealing with the same few big players. On the Internet, though, economies of scale and search costs both shrink quite dramatically. Price brokers of all sorts can gather up product information and send it to consumers, and consumers can quickly seek out the lowest prices in a cyber-competitive frenzy. To see this process at work, go to www.bottomdollar.com and watch its computer program search not just Amazon and Barnes & Noble but a range of other Internet booksellers, for the lowest possible price. You might ask yourself whether, in the face of this sort of technology, Amazon.com is ever going to be able to relax and just rake in the money. In a series of papers (available at www.ibm.com/iac/high.html) the IBM researchers suggest the results of this sort of automated price searching will be a bloody, never-ending commercial war. ''The new filtering economy is extremely prone to unstable limit-cycle price wars ... (which) undermine the tendency of the system to efficiently self-organise itself," they write. This polite language is economists' code for ''commercial horror". From time to time you see price wars entrench themselves in an industry - US airlines in the 1980s, for instance. The results are usually the same: chronic, industry-wide unprofitability. By the early 1990s, the US domestic airline industry was reputed to have eaten every dollar of profit it had ever made, all the way back to Kitty Hawk. The IBM work is only economic modelling, of course, subject to a thousand pre-conditions and possibly just plain wrong. But it offers an intriguing possibility - that for middlemen, the Internet will not merely eat money at the start, but will go on eating money forever. e-mail: dwalker@theage.fairfax.com.au