New Respect for the Internet Bubble-Blowers

It has been a long fall from the top. Back in the late 1990s, Internet companies were the darlings of a starstruck stock market. Pundits proclaimed the Internet would connect everyone and change everything. Consumers would be able to buy any good or service online, at any time, from anywhere. The fact that many companies’ business plans were full of holes did not seem to concern many observers.

In 2000, the world changed. Countless e-tailers imploded when their dependence on a “build it and they will come” strategy failed to bear fruit. Other firms poured too much money into brand-building or tried to grow too fast, and were forced to shut their virtual doors forever.

In the wake of this spectacular collapse, it is easy to shun e-commerce hype altogether — but to do so would be short-sighted. The ideas that drove the initial boom are still valid and in fact have flourished. Customers and businesses really have forged direct connections over the Internet. Convenience has increased exponentially. And a newly profitable e-commerce sector is having a permanent impact on the way business is done.

“Are many e-tailers dead? Yes. Is e-commerce alive and thriving? Yes. That’s thedistinction. You really have to separate the two,” GartnerG2 research director David Schehr told the E-Commerce Times.

Solid Business Models

Whenever Internet pure-play success stories are discussed in media or investment circles, two names always stand out — e-tail giant Amazon.com andauction heavyweight eBay. Both companies have gained a tremendous amount of mindshare through advertising and word-of-mouth. Both have seen traffic to their Web sites soar over the years. Most importantly, both have turned a profit at some point in the past year and seem poised for a repeat performance in 2003.

That is vital because in the post-boom era, the yardstick used to measure a company’s success is its financials. The new business models must be solid, even if the underlying e-commerce ideals are the same as those proclaimed during the dot-com heydey. EBay appears to be the definition of “solid.” The company has reported net profit and revenue increases in its last four quarters, and 10 of 15 Wall Street brokerages covering the company rate it a “buy” or a “strong buy.”

In contrast, Amazon has seen net profits in just one of the last four quarters. Its revenues have been on a roller-coaster track, and only five of the 13 brokerages following the company’s stock rate it a “buy” or “strong buy.” Still, the company seems likely to survive and thrive in the new e-commerce era.

Many Pure-Plays Lag

Amazon and eBay have achieved what few other pure-plays accomplished, AMR research director Paula Rosenblum told the E-Commerce Times, in garnering tremendous name recognition and consumer mindshare.

Although Amazon and eBay are not alone in their success, most pure-play e-tailers still have a long way to go. “The magical question,” said Rosenblum, “is at what point do they start achieving economies of scale and start making money? Sooner or later, they have to reach [that] point … and that’s always going to be harder without brick and mortar.”

Murky Multichannels

Outside the world of pure-plays, the picture grows somewhat murkier. It is no secret that multichannel retailers have greatly expanded their online presence in recent years. “The [companies] that are going gangbusters on the Internet are the JCPenney.coms, the EddieBauer.coms and the J.crews and Williams Sonomas,” GartnerG2’s Schehr said. “[They] are leveraging the fact that they’ve got an ongoing relationship with a client base that trusts them and their name.”

But are they profitable? Although it is fairly obvious to investors whether Amazon or eBay has turned a profit in any given quarter, it is much harder to determine if a multichannel company’s online operations are in the black.

It was easier to glean this data a few years ago, when more businesses spun off their e-commerce operations from their main corporate operations. Now, most firms have reabsorbed their online progeny, and they no longer issue separate profit-and-loss statements for e-commerce divisions. AMR’s Rosenblum said she believes most e-commerce operations are loss-leaders for their parent companies.

Not That Simple

Amid this uncertainty, however, Schehr said it would be a mistake to gauge the success of a multichannel firm’s Web presence based strictly on red or black ink on an earnings statement. That is especially true because more companies are activelyencouraging consumers to cross channels; a Circuit City customer, for example, can buy an item online and then pick it up at one of the company’s retail outlets. Or, a consumer may browse an item online and then buy it in the same company’s brick-and-mortar store. In such a transaction, the online component cannot be said to have played no part. In fact, it likely was integral in spurring the final transaction.

“It really becomes more and more difficult to measure those channels inisolation,” Schehr said.

One huge multichannel company, Bank of America, illustrates this integrated concept. BofA maintains a corporate Web site, along with online banking and bill pay services. The bank allows customers to apply for credit cards and loans online as well. Customers also can conduct business at Bank of America by phone, ATM and in person at brick-and-mortar branches.

Online banking is big for the company. From the beginning of 2002 throughSeptember, the number of customers using the online bill pay system increased 74 percent, Bank of America spokesperson Betty Riess told the E-Commerce Times. The company says it has 1.7 million active online bill payers, and also claims to have the largest online banking service, with more than 4.6 million active subscribers.

Bank of America officials declined to specify whether their online operations achievebottom-line profitability. Such a number is difficult to measure because revenues and costs are spread throughout the entire organization, across business and product lines, they said. Officials do consider the online channel a profitable one, though, because customers who use online banking tend to have higher deposit and loan balances, as well as a lower attrition rate. “It’s a very valuable customer base for us, because ofthe retention and relationship element,” Riess said.

Finally Bearing Fruit

Indeed, even if they lose money, Web sites are increasingly key for any business –especially because customers often use them for research before they buy a productor service. In fact, an online presence should be viewed as an expense that is part of overall operations, rather than an isolated profit or loss center. “The old saying used to be, ‘Let your fingers do the walking through the Yellow Pages,'” Rosenblum said. “Now people tend to let their fingers do the walking through the Internet.”

Although victory came too late for many failed dot-coms, the Internet has become part of mainstream business culture, fulfilling its promise as a medium that connects consumers and enterprises and cuts red tape from transactions. Now, armed with solid business models and financial backing from a parent company, the e-business survivors are ready to move to the next level.

1 Comment

  • There’s no doubt consumers are getting more comfortable with making online purchases. However, the way they find their desired products is largely undocumented – are they using search engines or going directly to reputable e-commerce sites? What is the future for the contribution of search engines to e-commerce?

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