Reality Check: The State of E-Commerce, Part II

In Part I of this special report, the E-Commerce Times probed beyond the hype surrounding the alleged downfall of the dot-coms, to examine the big picture of the new U.S. e-conomy. Part II of this special report on the state of the e-commerce industry examines the burgeoning international market.

Despite the widely-held perception that the rest of the world lags far behind the United States in developing e-business, some analysts predict that more than half of all online sales will take place outside the United States as early as 2004.

As of today, Silicon Valley is still the epicenter of the digital explosion and the United States is the e-commerce world leader by more than a few lengths, but Sweden and other Northern European countries lead all other countries, according to two recent surveys.

The Economist Intelligence Unit (EIU) ranked the top 60 countries in the world in terms of readiness for conducting e-business, examining the “connectivity” factor — which is based on a quantitative and qualitative assessment of a particular country’s communications infrastructure — in combination with various economic factors, including the strength of the economy, political stability, and regulatory, tax and trade policies.

Sweden Is Well Connected

The five countries most prepared for e-commerce, according to the survey, are the United States, Sweden, Finland, Norway and the Netherlands, in that order. The United Kingdom, Canada, Singapore, Hong Kong and Switzerland ranked in the number six through ten slots.

Sweden’s Internet economy also ranked high in a recent study conducted by Wired magazine. In its July issue, the magazine presents a list of the 46 locations “that matter the most in the new digital geography.”

Stockholm, Sweden is ranked the third “most influential high-tech hub” in the world, behind Northern California’s Silicon Valley and Boston, Massachusetts. The magazine used several criteria, including the ability of nearby universities and research centers to train workers and develop new technology, the presence of established companies to provide expertise and economic stability, the population’s “entrepreneurial drive to start new ventures,” and the availability of venture capital in the country.

While the dot-com shakeout is not limited to the United States — some e-commerce companies on the other side of the Atlantic are also running out of the cash needed to keep their virtual doors open — online consumer spending in Britain, Wales and Scotland is expected to soar from $2.6 billion (US$) in 1999 to over $30 billion by 2005, according to Fletcher Research, the UK arm of Forrester Research. Fletcher projects that online sales in the United Kingdom will account for 7.5 percent of the UK retail market in 2005, a significant rise over a 0.25 online market share in 1999.

Latin America Forges Ahead

Latin American electronic commerce is also poised to skyrocket — to $15 billion by 2003, according to a recent study by New York-based research firm eMarketer. The report predicts that there will be about eight million active adult Internet users in Latin America by the end of this year, more than double last year’s figure. That total is expected to grow to more than 19 million, or five percent of the 372 million Internet users worldwide.

While the eMarketer report found that the major barrier to the growth of online shopping and other e-commerce activity in Latin America is the cost of Internet access, a study from the Yankee Group indicates that the problem may soon be alleviated by a new wave of free Internet access for consumers that appears to be sweeping the region.

Japan Leads Asia

E-commerce is set to explode in Japan, from about $4 billion in 1999 to $693 billion in 2003, according to a recent report from Andersen Consulting and Japan’s Ministry of International Trade and Industry (MITI). The study reports that business-to-business (B2B) e-commerce in Japan skyrocketed to $3.2 billion in 1999, a 420 percent increase from the previous year’s $610 million. MITI and Andersen Consulting expect this expansion to continue until B2B e-commerce reaches $651 billion in 2003.

Meanwhile, business-to-consumer (B2C) e-commerce in Japan is steadily climbing. Andersen predicts that B2C e-commerce will reach $42 billion in 2003, up from under $1 billion in 1999.

Some major technology companies have unveiled plans to tackle the world’s largest market, China, following the U.S. move earlier this year to normalize trade relations with the Chinese. For example, U.S.-based domain name registrar Network Solutions announced that it would offer 300 free and thousands of discounted Web domains to the Chinese government.

Not missing a beat, Microsoft said it would sink $90 million into marketing in the country this year, evidently in the hope that expanded sales in China will boost its bottom line and bolster the company’s strength following unfavorable rulings in the antitrust case brought by the U.S. federal government.

According to research firm GartnerGroup, Asian e-commerce will top $340 million by 2003. “There’s a big myth that Asia is light years behind the U.S., but I don’t think we’re behind at all,” said GartnerGroup’s Hong Kong-based research director Joseph Sweeney. “We’re moving in different directions in Asia,” he said.

Investor Disconnect

Indeed, all around the world e-commerce is moving in different directions, but the general drift is not downward.

Take Amazon, for example. Unfavorable analyst reports proved that even the giant among e-commerce names is vulnerable — an observation that was viewed as a shock to the industry. What is baffling, however, is that any knowledgeable industry observer would be shocked by such an obvious fact of e-commerce life.

Amazon may yet have some work to do, but the company’s extraordinary track record of customer base growth has led it to become the household name most symbolic of e-commerce. In fact, the term “e-commerce” often gets blank stares from people who only register understanding when Amazon’s name is supplied by way of definition. But as the company edges ever closer to the profitability corner, it seems that naysayers are determined to supply a frigid gust of wind to push it back.

VC Honeymoon Cut Short

The venture capitalists who sank fortunes into startups in the wild and crazy years surely must have anticipated some bumps in the road ahead. The financiers must have known that their gambles would be multi-year propositions — that the infant e-tailers they backed would need careful and patient nurturing, and that some of them would not survive the harsh climate.

To wave the shakeout flag as though e-commerce is on the point of surrender indicates a deep misunderstanding of the state of the industry today.

The impulse arises, no doubt, out of the desire for instant gratification engendered by the lightning speed of the technological era, but wise observers know that faster is not necessarily better.

Those who yank funding from fledgling dot-coms after giving them just a year or so to succeed, may find themselves on the outside looking in as the slow and steady win the race — and take home the bulging e-commerce purse.