E-Commerce: Where Will the Axe Fall?

The bursting of the high-tech bubble may already have done away with the weakest players in e-commerce, but experts say the sector’s survivors still face tough times in the second half of 2002 and beyond.

With corporate IT budgets tight, revenue down and the stock market ailing, analysts say shakeouts and mergers remain distinct possibilities, especially in crowded markets where several players are vying for position.

“There may be companies that will fall by the wayside, but the most vulnerable ones have already failed,” Giga Information Group vice president Andrew Bartels told the E-Commerce Times.

Brokerage Woes

On the selling side, Bartels said, online stock and mutual fund brokerages have been among the hardest hit in the current climate, and that sector appears ripe for change in the coming months.

The segment already has seen big acquisitions, such as Ameritrade’s purchase of Datek Online earlier this year, and more buyouts could be on the way. There are currently not enough people trading online to make all the existing players profitable, and the situation is likely to continue for the foreseeable future.

“The online brokers have seen a significant collapse in revenues,” Bartels said. “Right now, we don’t see any significant signs of things turning around.”

While experts could not name any major companies in imminent danger of collapse, consolidation could play a major role in a number of online sales areas where there is just one strong player, or no clear leader at all.

PC Sellers Reel

For example, Bartels said, consolidation is a possibility in the hard-hit computer sales arena, where Dell has gained a clear lead at the expense of rivals like Gateway, HP and Apple. Computers have long been among the best-selling products online, and the sector could see more mergers along the lines of the HP-Compaq deal.

Online and mail-order vendors of PCs and peripherals also are facing possible consolidation, according to Bartels. That portion of the PC industry includes a number of tightly bunched players, such as PC Connection, CDW and MicroWarehouse.

Online travel sites also could experience a shakeout. While travel is one of the strongest online sales areas, Bartels noted that travel demand dropped considerably in the wake of last September’s terrorist attacks and has still not rebounded fully.

As the travel sector struggles to recover, the pack of top players remains tight. Expedia appears to be holding up best in the current climate, with Orbitz also maintaining its position, while Travelocity and Pricelineare struggling. If the current situation continues over the long term, consolidations or other types of operating deals are a possibility, Bartels said.

Software Troubles

Commerce software providers face a similar prognosis for the rest of 2002 and beyond.

According to Aberdeen Group senior vice president David Alschuler, even the largest players in this sector have seen license revenue drop 25 percent during the past year. Some smaller players have seen even steeper declines — as much as 50 or 60 percent.

Going forward, the strongest players will be larger firms with a well-established installed base in the enterprise, such as SAP and PeopleSoft. In the current atmosphere, where many companies compete, particularly in business-to-business products, many well-established but smaller players have seen erosion of their market share.

“We are seeing larger players gaining market share against a background of shrinking demand,” Alschuler told the E-Commerce Times. “The pie has gotten smaller.”

In the current market, venture funding has nearly dried up in the commerce sector, and privately traded firms face an especially rough time. Smaller firms will be hard-pressed to land more business while IT spending budgets remain tight, although Alschuler said a thaw could soon be on the way.

When’s the Rebound?

A key problem with predicting the future for commerce software firms — and determining when better times may return — is the unpredictability of the product pipeline. Companies in many industries have not finalized programs to make use of commerce technology, some of which has already been purchased, making it tough for commerce software firms to gauge future demand.

“They’ve sold a lot of software that has not yet been digested,” Alschuler said.

Yankee Group senior analyst Jon Derome said a fall 2001 IT manager survey by his firm projected a 4 percent increase in commerce software license revenue for 2002, but that has not come to pass.

“The uptick that was expected won’t happen or will be less positive than expected,” Derome told the E-Commerce Times.

Specialists Squeezed

With companies looking to keep costs down, there will be less demand for “untested technology segments” that have not already achieved widespread acceptance. “People are looking to make safe bets with their technology dollars,” Derome noted.

He added that although application service providers (ASPs), which offer hosted software programs for clients, may struggle in the next few months, they could prove to be cost-savers for companies over the long term.

He said the current market paints “not a terribly rosy picture” for firms specializing in personalization technologies and free-form Internet tools, such as chat and file-sharing. Indeed, companies that focus on specialty technologies likely will need to partner with other firms that sell more general solutions to business problems.

While commerce technology companies are not likely to go shopping with the stock market in its present state, Derome said there will come a time when the price tag for struggling firms’ technology becomes too good to pass up.

“There may be an opportunity for some of the cash-rich players to acquire some good technology at a discount,” he noted.

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