another take on e-commerce (from WSJ)
There's Little but Fool's Gold In the Internet Boomtown
By Paul Kedrosky, an assistant professor of commerce at the University of British Columbia in Vancouver.
Is there a Santa Claus on the World Wide Web? "This may be the first
e-Christmas," a recent article in this newspaper speculated. The current cover of Fortune depicts the Internet as a rainbow -- with, one must assume, a pot of gold at the end.
Here's a reality check. This summer an Internet trade magazine asked some technically savvy employees to create an Internet store selling baseball books. The result? In two months they had five orders, totaling $76.75. In all, excluding labor but including advertising, the sites cost them $485.
"E-commerce isn't fast and it isn't easy," reported the chastened publication. And these techies did everything right. They knew to register (and reregister) with the right search engines; they knew how to wrestle with service bugs; they knew to link to other sites and how to design banner advertisements; they knew to sell baseball books during baseball season. Still they flopped.
If people who know what they're doing can't make money on the Web, who
can? So far the answer is almost no one. A Morgan Stanley e-commerce
study from last year found that the top 10 Internet sites got 50% of the advertising revenue. The top 100 sites got almost 95% of the revenue.
So who is making money? As in past gold rushes, it is the people who were there first, like Amazon.com, whose stock split 3-to-1 last week. Also doing well are sharpies selling maps and pickaxes. The Internet map makers have various guises, including search engines like Yahoo! and AltaVista, as well as market researchers like Jupiter Communications and Forrester Research.
Many a fanciful business plan has been launched using numbers from Internet market researchers, yet they know little more than anyone else. But without maps, online businesses are nowhere -- thus many map-makers are profitable. "The Internet is a little bit recession proof," opined David C. Peterschmidt recently from his vantage as CEO of Inktomi Corporation, a search company. And he cheerfully added, "Every time somebody hits the search button, our cash register rings."
Once you have a map, you need some tools, and the tool makers are an
equally sharp-eyed bunch. Among them are vendors of online advertising, especially that wonderful only-on-the-Internet Ponzi scheme called "banner exchanges." Cash-strapped online businesses generate advertising credits by running free ads for other cash-strapped sites. As your deadbeat site runs more ads, you generate credits and get free ads on other deadbeat sites. All of which is great for the banner exchanges; they piggyback notices for their
own service on the other ads.
Things aren't much better for traditional advertisers. The Web's dirty little secret is that traffic figures at many, if not most, Web sites are grossly inflated. A site might report that it receives a million "hits" a day. Sounds great, but a million hits might mean as few as 5,000 or 10,000 real visitors. Why? Because hits often are a function of the number of links and graphic images on the site, so that if you read 10 pages on a single Web site, that might count as 10 hits, or even more. It's as if Nielsen measured TV ratings based on the number of electrical outlets in a viewer's house.
New technologies like "autonomous agents" threaten to reduce even further the opportunities to make a profit online. Their function is to hunt down everyone on the Web selling a particular product and sort them by price. Whatever a company may do to establish a brand identity, or improve service, online agents want one thing only: the lowest price. And it gets worse, from the retailers' viewpoint: Researchers are concocting dynamic, coalition-building agents -- software robots that will band together and bang on your electronic door. Soon they'll be at your Web site, loudly demanding volume discounts on 10,000 computers, on behalf of 10,000 buyers who have never met one another.
Yet the agents are necessary, for while the Internet is often advertised as the world's biggest mall, it is more like a variant of Jorge Borges's "Library of Babylon" -- an infinite mall where you need a shopping directory to find the (flawed) shopping directory, where businesses lurk behind pillars and in attic spaces, where stores open and close every second of every day. Most shoppers become familiar with a tiny corner of this mad mall, then hope and pray that nothing happens to destroy what few landmarks they recognize.
Meanwhile frantic dreamers and entrepreneurs are stuffing the mail drops of venture capitalists, hoping for a little munificence before The Last Good Idea Is Gone. In fact, the future may hold many as-yet-unforeseen opportunities for doing business online, but the risks are high and most efforts to transform conventional businesses into online ones are doomed.
While today's Internet entrepreneurs want to be anointed by venture capital, they also want to be kept companies, to be part of a venture capitalist's mini-kereitsu, protected from the cutting winds of the real world of online commerce, until the VC has taken them public in one of the market's periodic paroxysms of undiscerning love for shiny, new, unprofitable Internet companies.
It is, of course, delusionary, but that is the logic of the boomtown. Or, as the songwriters David & David put it in their 1987 hit: "Welcome to the boomtown / All that money makes such a succulent sound." |
