Part of Information Week article
That's why .COM is for "Crazy Overhyped Market-valuation".
Bottomline on this long article - the truth that will be out there is that "not much money is out there"
Also, notice AMZN adding real brick&mortar warehouses. It's a retail low profit merchandising business where simply put in plain under-hyped words "the catalog is viewed through the TV screen like glass tube that may not be as good as paper catalog and bad for older people with poor eyesight; also possibility of electro-magnetic field exposure on your face, eye and front body".
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December 07, 1998, Issue: 712
Section: Cover Story
E-Commerce -- Myths & Realities -- Web Commerce Is
Changing The Way A Lot Of Companies Do Business, But
It's Not Everything It's Pumped Up To Be. We Separate
Fact From Fiction.
Clinton Wilder
Few IT trends have been hyped more than electronic commerce-and
considering the industry's penchant for hyperbole, that's saying a lot. Stock
valuations of E-commerce players defy fundamentals. Predictions of
triple-digit market growth abound.
There's no question that the Internet has emerged as an enormous force for
change over the past four years-in IT, in business relationships, and in the way
millions of people receive and communicate information. But the resulting
gold-rush atmosphere has produced the typical gold-rush side effects:
exaggeration and oversimplification of the real issues.
It's time for a reality check. Following are the eight biggest myths about
E-commerce, debunked by those best qualified to do so-IT and industry
professionals trying to make E-commerce work for them.
AKA: The Barriers To Entry Have Never Been Lower. Yes, putting up a
Web site is easy. And putting up a Web site to handle commerce transactions
is pretty easy, too. But add words like effective, scalable, and successful, and
it gets a lot harder.
For large, established companies, the No. 1 challenge is integration. "A Web
site is like an iceberg," says Delta Air Lines CIO Charles Feld, a longtime IT
executive with stints at Frito-Lay and Burlington Northern. "What you see
looks small and simple, but below it you have infrastructure integration issues
with maybe 40 or 50 databases. So building a Web infrastructure can be a
pretty serious risk for older companies." (For more on the technical intricacies
of Web commerce sites, see story, p. 75.)
The Compumotor division of manufacturer Parker Hannifin Corp. knows that
all too well. Compumotor's extranet for handling orders for industrial
automation system products went live last week-but not until after a one-year
delay to deal with response time, server upgrade, and integration challenges.
"Setting up E-commerce is not easy or fast," says Compumotor IS manager
Bud Parer. "Performance and scalability are the biggest issues. This is the way
we decided to run our business, so we weren't going to do it until we had
acceptable response time and data that is absolutely accurate."
The extranet will handle orders for 12,500 products, warranty and
nonwarranty repair-status queries, and many other transactions from 65
distributors, 35 factory reps, 20 direct customers, and 50 internal employees.
To ensure performance, Compumotor upgraded its Hewlett-Packard server
and moved part of its Oracle database to a Sun Microsystems UltraSparc
server to share the load. The company devoted four worker-months to
designing and integrating the extranet applications' Active Server pages, with
90% of the coding time spent on data availability and accuracy. "We didn't
want to guesstimate anything," says Parer. "Our business depends on this."
For many companies, the business issues of E-commerce are no less daunting.
Changes in business processes, customer and supplier relationships, data
access, data ownership, distribution strategy, and marketing tactics underpin
most Web-commerce efforts.
"The technology integration issues are huge, particularly at the back end, but
we feel we're meeting those," says PG&E Corp. CIO John Keast. "The front
end is a whole other challenge. What are customers going to use this
energy-usage data for, and how do they want to receive it? It's a brave new
world, where users have access to information they've never had before-and
there's no standard for it."
For business-to-consumer online efforts, doing E-commerce well starts with
driving traffic to your site. Many early sites did a good job harnessing Web
technology, but those efforts languished because not enough shoppers came
calling. "Many companies didn't realize that a Web site needs a compelling
marketing program to go with it," says Sheldon Laube, chief technology officer
of Web systems integrator US Web Inc.
US Web has worked with American Airlines and sports-equipment retailer
REI Inc. on marketing tactics, such as American's weekly
E-mails alerting customers to cheap weekend fares and REI's expansion of its
Web presence with targeted links on outdoor-activity Web sites. And equally
if not more important, the companies began to advertise their E-commerce
capabilities in traditional media. "Let's face it: People still watch TV and read
magazines," says Laube. "Building a site is just one piece of the puzzle."
Perhaps E-commerce is cheap when compared with a full-blown enterprise
resource planning implementation or the purchase of a mainframe. But for a
number of reasons, a full-scale online commerce effort is never a low-cost
proposition. Business-oriented commerce server software, such as Microsoft
Site Server Commerce Edition, may start as low as $5,000, but that's just the
first building block in a complex undertaking (see Myth No. 1). Companies
spend an average of $750,000 just for the baseline technology, according to a
Gartner Group survey of 100 commerce sites.
"It's not like what IBM says in their e-business ad campaign: Just extend what
you already have," says Roy Satterthwaite, a research director at Gartner
Group. "E-commerce applications are in their first generation, and they just
don't do everything you need. Open Market's Transact is great for
transactions, for example, but not for content. E-commerce always ends up
costing much more than any one vendor's product."
And guess where the big-ticket systems integrators-IBM Global Services,
EDS, Computer Sciences, and the Big Five-are starting to aim their sights?
"Web software vendors get all the coverage, but the windfall beneficiaries of
E-commerce will be the integrators," says Satterthwaite. "After they finish their
year 2000 and ERP engagements, they will throw their efforts into this." And
that's not going to bring any price tags down.
Then there are marketing costs and other non-IT infrastructure investments.
Amazon.com, the paragon of E-commerce success, lost nearly $25 million on
$153.7 million in revenue in the third quarter, and marketing costs were a big
reason. Amazon's marketing expenses grew from $11 million in the first
quarter to $26.5 million in the second quarter to $37.5 million in the
third-more than it spent on technology. The annual cost of a major licensing
deal on a high-traffic portal runs well into eight figures, and Amazon has
several such deals. Amazon's third-quarter infrastructure costs included more
than $550,000 to lease a book warehouse in the United Kingdom and the
expense of expanding its main warehouse in Seattle, which now costs more
than $450,000 a year.
Is Amazon gaining new customers from its marketing investments? Absolutely.
Its revenue for the first nine months of 1998 was $357.1 million, up 337%
from the year-ago period, and the company's stock price is up about 1,000%
since its initial offering in May 1997. But the company is losing money-lots of
it-proving the point that E-commerce isn't cheap.
Those living in Silicon Valley, Seattle, or Manhattan can find plenty of
evidence to support this myth. And just about every company has a Web site.
But brochureware isn't commerce. Dig deeper among multibillion-dollar
companies, even among some consumer-focused retailers, and you'll find a
different story. Companies on the sidelines of Web commerce include chains
Best Buy, Circuit City, and Fry's Electronics.
"Fry's doesn't even post a catalog," notes Vern Keenan, an analyst with
research firm Keenan Vision. "It goes along with their conservative
management-using merchandising techniques from 50 years ago, like heavy
promotion of loss leaders in low-cost ad channels like local newspapers and
radio. They still work, and Fry's sees no reason to go on the Web." Fry's
doesn't comment on its business strategies.
With a few notable exceptions, such as General Electric, Boeing, and the Big
Three U.S. automakers, most old-line manufacturers have yet to move into
E-commerce-and may not for quite a while. "In some companies, you almost
need the retirement of an entire generation of purchasing and sales staff
members before it will happen," says Sam Kinney, co-founder and executive
VP of FreeMarkets Online Inc., a company that manages online bidding for
industrial requests for quotes. "This is not an overnight thing. There are some
massive penetration barriers that will not fall for decades."
Many companies simply don't see a compelling business reason to move to
E-commerce. Maytag Corp., for example, finds that electronic data
interchange with its suppliers and distributors works fine, and it's playing the
Internet commerce card very carefully. "We all should be cautious. There are
very few Amazon.com opportunities out there," says Maytag VP of IT Ed
Wojciechowski. "We have informational Web sites where we can engage the
customer, and we see commerce as an option in the future. But it's not
strategic for us yet."
And even if Myth No. 3 were true, that doesn't mean following the pack is a
sound strategy.
Despite the online sales success of a handful of E-commerce poster children,
for every Dell Computer and Cisco Systems there are dozens of companies
like Burlington Coat Factory. The company's Web site sells less merchandise
than just one of its 250 retail stores, says CIO Mike Prince. "So far, it just
hasn't been a major focus for us," he says.
That's because buyers are less likely to purchase "subjective" items such as
coats and dresses over the Web than PCs, routers, and books, says Prince.
"When you buy a dress, you want to try it on, see how the fabric feels, check
out the color," he says. "There's something very special about that experience
that you can't get on the Web."
That said, Burlington Coat Factory is revamping its site to feature more
products. Also, the company is considering adding a gift registry that would let
shoppers visit its stores, identify the specific articles they like, and then register
them on the site so that relatives and others can buy gifts online according to
those selections. But even if Burlington increased its online sales to equal the
volume of 10 of its stores, "that would be significant for a chain our size-and a
surprise," Prince says.
Even by the most generous accounts, online retail sales remain only a tiny
fraction of what's sold in physical stores or through mail-order catalogs-even
in the Web's most popular product categories. Online book sales will account
for less than 5% of all U.S. book sales this year, according to Keenan Vision.
Online music sales? Less than 2%. Even online travel sales-which will reach
$1.8 billion this year, leading all consumer products (except IT products) sold
online-won't even reach 1% of the $488 billion in total U.S. travel spending.
Web-based advertising revenue also remains minuscule compared with
broadcast and print-just 0.4% of ad agency bookings this year.
What about business-to-business E-commerce, which is projected to leave
business-to-consumer cybersales in the dust and soar into the trillions of
dollars by 2003? That mostly reflects the fact that business-to-business
commerce in the offline world is orders of magnitude larger than sales to
consumers.
For most established companies, it's still early in the E-commerce game. It's
easy to look at how Amazon.com shook up the book industry in four years
and fly into panic mode, fearing that your company could be put out of
business tomorrow by a Web startup. But books (and music) are the products
best suited to online selling, and Web startups will always get a
disproportionate share of attention simply because they're Web startups.
Remember: Amazon won't be turning a profit any time soon.
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