In February of 2000, The Economist published a study of the state of the e-commerce industry. If not exactly in its infancy at the time, it was certainly not yet a full grown child. Amazon was five years into its life, and the first wave of e-commerce pioneers was having its inevitable and unpredictable failures. The stock market was in the throes of its irrational exuberance

Some excerpts from the study. All citations are related to the Economist e-commerce survey found in issue of February 26th, 2000.

“Electronic commerce may not amount to much at the moment, but it is growing very fast…[business to business] transactions account for as much as 80% of all e-commerce which, according to Forrester Research, an Internet consulting firm, added up to over $150 billion last year.” pp. 5

“In many areas of retailing and commerce, the Internet is unlikely to capture more than a few percentage points of the market for several years to come. But even a small share can quickly start to have a big effect. In the travel business, for instance, margins are so thing that a loss of only 3-5% of the market to the Internet threatens to drive large numbers of traditional travel agents out of business.” pp. 5

“According to Forrester, online business-to-consumer transactions in America were worth some $20 billion last year. Forrester expects that figure to grow to some $184 billion by 2004.” pp. 5-6

“Could these forecasts prove wildly wrong? It is worth recalling that catalogue shopping once started almost as explosively as the Internet. Sears Roebuck published its first catalogue in 1888…for the next five years catalogue shopping grew by leaps and bounds, with the annual rate of increase never falling below 25%…yet after the novelty had worn off, the growth of catalogue shopping slowed sharply…Yet there are good arguments for expecting the net to make much greater inroads into retailing than catalogues have done.” pp. 6

The idea of the Internet as a primary channel was, and remains, controversial in some industries. I never understood how people didn’t get the broader possibilities, but many didn’t. Whether you were selling online or not, e-commerce was changing your business, even if your only distribution method for your product was physical product direct to consumers.

“One estimate suggests that only 2.7% of new-car sales in America last year took place over the Internet, as many as 40% involved the net at some point.” pp. 6

The 2.7% is a stretch in any case. Nobody sold and delivered a car over the Internet. Every one of those transactions ended in the physical world. Regardless, the business was completely transformed in part because of the following:

“John Hagel, a consultant at McKinsey in Palo Alto, points to ease of price comparison and greater choice as [the Internet’s] two biggest pus points compared with the physical world.” pp. 11

That pricing is flat is pretty much universally accepted these days. Companies that don’t realize it are living in a different world, and its not one that’s going to last.

Some things haven’t changed:

“…websites are not much good for replicating the social function of shopping, nor for browsing around, nor for producing the serendipity and impulse purchases that come from visits to a shopping centre.” pp. 11

Amazon.com does recommendations and related items better than anyone else, but I’ve yet to purchase based on them. This is despite the fact that I’ve told them a lot of information about things I own and don’t own. Despite all this, they still emailed me and recommended a Tim McGraw album. Sorry Amazon: epic fail. There’s no Alt in Tim McGraw’s Country.

So, physical shopping experiences remain the choice for many interactions. Nothing beats trying on a shirt with a pair of pants to see if they really go together.

Getting money is still a challenge sometimes, though it dwindles:

“Consumers are often advised against giving their credit-card numbers freely over the Internet, and this remains one of the most-cited reasons for not buying things online… the great credit-card fear has not, so far, proved well founded; there have been very few instances of theft of credit-card numbers..” pp. 11

This continues to this day. Relatively speaking, the risk is very very low. The article goes on to point out what has become the defining factor of mass adoption of Internet commerce:

“The biggest boost to e-commerce over the next few years will come not from snazzier websites or snappier marketing, but from the proliferation of broadband Internet connections to the home as more and more people acquire cable modems of DSL lines…” pp. 11

E-commerce is well established in countries where broadband adoption has been high. The flipside of this is that if you’re looking for growth opportunities, try starting where broadband is still rare. You can grow with the market.

Existing catalogue retailers were early leaders:

“… Eddie Bauer and L.L. Bean suggest that the scope for web retailing may turn out to be a lot bigger than it seems at first sight. Clothes and shoes have both won a place in the catalogues, even though they are high-touch goods. An even more striking example is raw steaks: Omaha Steaks has a strong catalogue business selling steaks by post that it is transferring to the web.” pp. 12

At the time I made note of the fact these were high touch product retailers were established catalogue retailers effectively cannibalizing their existing channels. Eddie Bauer was of particular interest: while a noted catalogue retailer in the U.S., they have never established a significant catalogue business in Canada. Even today, Eddie Bauer doesn’t offer an online store in Canada. They have completely failed to establish the brand in this new retailing space.

Amazon seemed like a threat to everybody at the time, but by 2000 many felt that the threat had subsided.

“A popular line is that the pure [online only] plays have had their four years of fun, but now that the big boys, such as Home Depot, Merrill Lynch, Kmart and Wal-Mart are seriously moving on to the web they are likely to demolish their virtual rivals: Amazon.toast, in the vernacular.” pp. 15

Amazon has, of course, survived although its worth noting that they expanded into pretty much every product category imaginable but haven’t dominated them.While they still sell Black & Decker tools, Home Depot and Loews remain top of mind in those categories.

Barnes and Noble competed directly with Amazon then failed, then partnered with them, then sundered that partnership and now competes directly with them. This is undoubtedly a case of the online book retailing space growing big enough to accommodate more than one players coupled with a reduction in the cost of doing business as tools became easier to use. The book space has matured nicely online, and new niche players such as ABE Books continue to emerge on occasion.

It’s been a most interesting ten years, and it’s interesting to see how these changes have taken hold. Many of the same challenges and questions remain today, despite a rapid growth into adolescence for online retailing. Broadband penetration is extremely high, though there are still rural markets and areas that lack it. The rise of portable devices such as the iPhone has had a huge effect, as has the digitization of products that were once physical such as music (and movies, which are the natural next progression.) Some products can’t be digitized, and challenges remain for those.

The rising cost of fuel has had an effect on transportation costs. This effect has been modest until recently, but seems likely to increase as oil reserves diminish. By 2035 the cost of transporting goods may be prohibitive, leading to a restructuring of the entire economy.

With twenty-five years between now and then, its a fool’s game to guess what tools and technology we’ll be using. I’m personally willing to bet that the underlying issues presented by this ten year old study will be equally relevant, and provide valuable lessons to business owners.

Posted by skooter at 2:34 AM This entry is filed under Technology.
This entry is tagged: E-commerce, Economics, iTunes, Online Marketing