The Wall Street Journal Interactive Edition -- September 28, 1998
Internet's Relative Economic Impact
Is Played Down in Report by OECD
By KIMBERLEY A. STRASSEL
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- The Internet is a globe-girdling technological giant. It is also
an economic pipsqueak.
That, at least, is the conclusion of a group of economists struggling to
quantify the Internet's place in the global economy. In a report by the
Organization for Economic Cooperation and Development due out
Monday, the authors compare the much-ballyhooed world of electronic
commerce and the traditional world of buying and selling. The comparison
isn't flattering.
Judging from the eye-popping revenue projections bandied about by
market researchers, one might assume that the whole world is rushing to
buy dish-washing detergent and software online. The OECD itself
estimates that total revenue from electronic commerce hit $26 billion last
year and will soar to $1 trillion by 2005.
Comparing Numbers
But those numbers need to be seen in context: The $26 billion, for
example, represented only 0.5% of total retail sales last year for the
OECD's seven-largest economies, according to the report, "The
Economic and Social Impacts of Electronic Commerce." Even at $1
trillion, e-commerce would amount to less than the current annual sales
that flow from direct marketing in the U.S. using mail, telephone and
newspapers.
"There is no other area of technological change with such a discrepancy
between the actual, current phenomenon and what people, policy makers
and businessmen believe and expect from the future," says Luc Soete, an
economics professor at Maastricht University who has read the report. "If
you consider the things that are still necessary to really make e-commerce
work, it is amazing that people are expecting growth anything near what
they are."
Relative to the time the Internet has been a credible force, by most counts
about three years, its growth has been phenomenal, of course. Without
question, the Net has already revolutionized certain niche markets: Online
bookstore Amazon.com Inc., for example, has become America's
fifth-largest bookseller in just four years.
Cautious About Cards
But most economists say it will be a long time, if ever, before the Internet
transforms the way people buy the vast majority of goods and services.
Most consumers, after all, remain skittish about putting their credit-card
numbers online. And nothing will ever replace the pleasure of shopping till
you drop.
Perhaps nowhere is that more certain than in Europe. An estimated 80%
of global e-commerce sales currently come from the U.S., and there is
little to suggest that this figure will change much in the future.
Blocking the growth of e-commerce in Europe are all the usual suspects: a
lack of bandwidth, expensive phone calls, language barriers, multiple
currencies and heavy tax regimes. Some of those factors already inhibit the
growth in Europe of the traditional selling method that most closely
resembles e-commerce, mail-order sales; per-capita sales for mail order
tally less than half those of the U.S.
European politicians also threaten to slow things down in their eagerness to
regulate the new medium and skim it for needed tax revenue. "There is a
greater capacity for growth in Europe, provided politicians don't mess it
up," says Danny Quah, a professor of economics at the London School of
Economics. "They can't look at this as a great danger to their fiscal tax
base; this has to be seen as a great new place for economic exchange."
Even if the politicians resist the urge to interfere, don't expect a big boom
in online buying by consumers. Companies have largely concluded that the
Internet is best used for business-to-business transactions. When
businesses hook up to their suppliers and partners, they save in transaction
costs, improve service and reduce inventory. The business-to-business
segment currently accounts for 80% of all e-commerce, and is likely to fuel
most Internet sales growth in the next five to 10 years.
Consumer buying, meanwhile, could stand still. The business-to-consumer
field is still plagued by questions of security, privacy of personal data, and
the difficulty and expense of accessing e-commerce merchants. The
OECD report estimates that consumer buying won't top 20% of all
e-commerce sales in the near term.
And what about the long term? Just ask Andy Wyckoff, an economist at
the Information, Computer and Communications Policy Division of the
OECD. He wonders whether the Internet may have already reached its
prime for consumer sales.
In the retail trade, he argues, 70% of all sales are generated by 30% of all
customers. The challenge for retailers is to find their optimum 30%. In the
case of the Internet, the current makeup of surfers tends to be wealthy,
upwardly mobile professionals, short on time and likely to buy via the
Internet for convenience.
"You have to ask, just how much more are you going to gain by extending
the Internet to the mass market?" says Mr. Wyckoff. "We've already got
the fat cats online."
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