Electronic Commerce Beyond the “Dot Com” Boom Electronic Commerce Beyond the “Dot Com” Boom

Electronic Commerce beyond the “dot com” Boom Electronic Commerce Beyond the “dot com” Boom

Abstract - The explosion of interest in electronic commerce stem- ming from commercial use of the Internet triggered high expecta- tions, and accompanying high stock market value for public companies specializing in the delivery of products and services through this channel. However, the boom in the market value of these so– called “dot com” companies appears to be over. This paper exam- ines the factors underlying the fall off in the value of “dot com” companies, focusing on the manner in which fundamental business principles were violated by these firms. In addition, it explores the manner in which business–to–business and business–to–consumer e–commerce can be expected to evolve even though the “dot com” boom is over.

INTRODUCTION

lectronic commerce, the buying, selling, and exchange Eof information about products and services over public or private communications networks, has captured the attention of business leaders like no other innovation in recent years. Use of the Internet’s World Wide Web as a vehicle for conducting commercial transactions has been particularly ap- pealing, beginning with its introduction in the mid–1990s. It appears that electronic commerce will influence the nature of business, products, and services well into the future. In contrast, the stock market value of public companies specializing in delivery of products and services via electronic commerce has fallen dramatically in recent months. As a result, a growing number of observers are suggesting that the “boom days” of e–commerce companies are over. Others suggest that the fall off is even threatening the belief some investors, executives, and observers have in the viability of elec- James A. Senn tronic commerce. J. Mack Robinson The discussion that follows explores the status of so–called College of Business, boom for e–commerce companies established on the Internet, Georgia State comparing the characteristics of these typically consumer– University, Atlanta, oriented companies to the principles of proven business strat- GA 30303 egy. It also discusses likely developments in e–commerce beyond the boom days of the late 1990s. As will be shown, a new generation of electronic commerce is emerging, in which National Tax Journal the ground rules are dramatically different from the first gen- Vol. LIII, No. 3, Part 1 eration.

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THE “DOT COM” BOOM business schools) in launching Internet startup companies focusing The potential of electronic commerce on e–commerce. first gripped the attention of businesses • Initiatives within most well estab- when the Internet became available for lished, traditional corporations to commercial use in 1994/1995. Seemingly create Web sites on the Internet suit- overnight a substantial number of com- able for e–commerce. panies were formed for the principal pur- • Extensive print and broadcast adver- pose of conducting business over the tising programs by Internet startup Internet. Industry jargon included talk of companies conceived as a vehicle for new business models that promised im- building identity and driving buy- proved value propositions certain to draw ers to their e–commerce sites. customers in the firm and away from tra- • Ever–escalating revenue projections ditional competitors already in the mar- for e–commerce companies. ketplace. Virtually all respected information tech- The capabilities of electronic commerce nology market research firms project im- and the establishment of Internet start–up pressive revenue streams for electronic companies have, unfortunately, been in- commerce in the coming years (Figure 1). tertwined. It will be increasingly impor- Estimates suggest that within the next few tant to separate the advantages of elec- years, aggregate annual revenue levels tronic commerce from the viability of the will reach from $1.3 trillion to $4.0 trillion. start–up firms seeking to participate in e– Widely publicized, these projections fu- commerce. eled great interest among executives, en- “Dot com” has rapidly been ingrained trepreneurs, and researchers regarding the into the language of business as a short– vast potential of electronic commerce as a hand way of identifying companies estab- key driver of business developments in lished to conduct commercial activities on the years ahead. the Internet. To date, the largest array of In the resulting boom, the potential of such companies have focused on con- e–commerce was promoted vigorously. sumer sales. These so–called business–to– The boom has been characterized by: consumer companies are most often as- sociated with “everyday” products and • The formation of a huge number of services, including books and music, Internet companies created for com- travel, entertainment, financial brokerage, mercial purposes, so designated toys, and consumer electronics. with a “.com” designation in their A typical “dot com” firm operates only Internet address (e.g., their URL: from its online Web site, having neither http://www.thecompany.com). physical stores nor locations its custom- • Abundant access to venture capital ers can visit. Its ability to reach customers made available for the purpose of in vast geographic regions, via the launching Internet companies. Internet, and to scale up rapidly while not • High market valuations, often above having to deploy working capital in build- the $1 billion level, established in ing physical facilities, has been among its public exchanges, regardless of most important attributes and a feature whether the company had reached attracting investors and entrepreneurs. profitability. Thousands of new “dot com” companies • Widespread interest by seasoned have been established every month, most executives and entrepreneurs (and with a vision of generating huge market new graduates from the top–tier values after taking the firm public, even 374 Electronic Commerce beyond the “dot com” Boom

Projected Electronic Commerce Sales Volumes Commerce Electronic Projected

Figure 1.

375 NATIONAL TAX JOURNAL before demonstrating durability or matter of basic business school lessons. achieving profitability. The boom under- Surprisingly, these lessons, which would standably generated tremendous excite- not be easily forgotten in successful tra- ment and speculation throughout the ditional businesses, were blatantly dis- business world. carded in the “dot com” world. They It appears that the “dot com” boom is involve business strategy, intellectual now over. For instance, the most widely capital, brand, market size, and business admired Internet companies have lost tre- processes. mendous market value in the past months (see Table 1). Moreover, the initial round Business Strategy of Internet funding has come to an end, as venture capital firms are now scrutiniz- Business begins and ends with strategy. ing more carefully the business plans and No successful company can be built on the potential of entrepreneurs seeking first basis of poor strategy, no matter how well and second round funding. it is executed. Similarly, even a good strategy will surely fail when execution is poor. VIOLATION OF PRINCIPLES The well–established principles of strategy state that a business’ advantage grows As surprising as it is, the adjustment in out of the value it creates for its buyers. “dot com” stocks was predictable from the Superior value occurs when firms offer earliest days of Internet commerce. Yet, lower prices than competitors for equiva- entrepreneurs and e–commerce observers lent benefits, or when they provide unique have apparently had to relearn five prin- benefits that offset higher prices (Porter, ciples that were violated, each the subject 1985, p. 3).

TABLE 1 CHANGE IN MARKET PRICE ($) OF LEADING “DOT COM” FIRMS Change from Category “Dot Com” Firm 1999 high Jan 2000 May 2000 1999 High (%) Content drkoop.com 45.8 14.9 2.53 –94.47 Excite@Home 99.0 40.3 17.375 –82.45 theglobe.com 42.8 7.8 3.1875 –92.54 theStreet.com 70.1 18.5 6.625 –90.55 e–Tailing amazon.com 113.0 62.1 55.06 –51.27 CDnow 24.9 11.9 3.875 –84.46 drugstore.com 69.0 29.1 8.625 –87.50 eToys 86.0 20.9 7 –91.86 Peapod 16.4 10.6 3.25 –80.15 WebVan 34.0 14.6 6.875 –79.78

Service Ameritrade 62.8 17.6 14.734 –76.52 Autobytel 58.0 12.0 6.484 –88.82 E*Trade 72.3 23.6 20 –72.32 eBay 234.0 150.5 136.093 –41.84 EarthWeb 89.0 33.5 14.5 –83.71 Egghead.com 60.0 13.3 4.562 –92.40 E–Loan 74.8 14.6 5.218 –93.02 E–Stamp 44.9 18.0 4.062 –90.95 Expedia 65.9 35.0 18.625 –71.73 Net.B@nk 83.0 18.0 10.062 –87.88 Priceline.com 165.0 63.5 57.9375 –64.89

Software Ariba 211.0 185.8 76.562 –63.71 Commerce One 331.0 198.0 56.25 –83.01 Healtheon 126.2 59.9 19.875 –84.25 Network Assoc. 57.1 27.2 25.0375 –56.17

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The business models that encapsulate transparent environment of the Internet). the strategies of many “dot com” firms are Some companies have developed price, not value, driven. Despite seller extensive customer databases or sophis- claims of online convenience (e.g., 24 hour ticated customization and personalization ordering or “shop from your living technologies, each potentially power- room”) buyers apparently do not deem ful forms of intellectual capital. Unfortu- them to equate with value (or the ranks nately, these are the exceptions, for of online buyers would swell). Many cus- most Internet companies in the consum- tomers do not apparently perceive online er segment have not created intellectual buying at lower product or service prices, property on which to build their busi- with delivery at a later time, as an attrac- ness. tive proposition. Continued operations should not be Furthermore, the potential attraction of confused with the development of intel- discounted pricing often fades when ship- lectual property. Many “dot coms” con- ping costs and estimated delivery times tinue to operate with a sizzling “burn are incorporated into the buyers’ value rate” (Wolf, 1998). In many instances the proposition. During the 1998 and 1999 only advantage they have, other than holiday buying seasons, consumers de- committed people infused with unlimited cided that promised lower prices and energy, is the cash they acquired from ven- other vendor promises did not add the ture capital firms or through initial pub- value they had hoped. Companies left lic stock offerings (IPO). Unless they de- many buyers uncertain about delivery. In velop or acquire intellectual capital, they thousands of instances they did not de- are surely doomed to fail when their fi- liver at all. nancial resources are depleted. The fall- The market has spoken, reminding “dot ing market value of many such compa- com” developers of this most basic prin- nies is an open assessment of this obser- ciple: Poor strategy or poor execution (or vation. both) will doom any attempt to build a business. Market Size

Intellectual Property The size of the market, or niche, in which the firm seeks to compete must be Second, it has been proven in industry capable of sustaining the firm’s business after industry that long–term success model, day after day. Moreover, the po- requires the possession, cultivation, tential size of the online market may be and leveraging of intellectual capital quite independent of the known size of (i.e., knowledge, information, intellectual the traditional market. Traditional buyers property, and experience) (Stewart, will not automatically move online sim- 1997, p. x). This principle has also been ply because of vendor pricing strategies. ignored frequently during the “dot com” At the same time, new customers, who boom. have not been part of the traditional mar- The ownership of a catchy Internet ket, may emerge because of the online Web address (i.e., a “dot com” URL) or vendor’s presence. the employment of committed employees Unfortunately, the market studies of infused with unlimited energy is not a many start–up companies have been substitute for intellectual capital. Neither either poorly conceived or evaluated un- is the offering of commodity–like prod- realistically. In the rush to “dot com” sta- ucts or services via an online storefront tus, boundless optimism has substituted or service center (especially in the price for solid research. 377 NATIONAL TAX JOURNAL

Brand e–commerce sites use white–hot information technology and high–speed servers Fourth, the firm must have an iden- loaded with applications that excel at real– tity—a brand—that creates visibility in time order taking or managing electronic large or unfamiliar markets. Without that shopping carts. Unfortunately, they ig- visibility, a firm will not be able to gener- nored the back office and so their busi- ate adequate revenues or long–term du- ness processes for tracking, filling, and rability. shipping orders break down quickly. In reality, newly formed “dot coms” can’t build a brand on the Internet. Doing so would be counter–intuitive, for start– BEYOND THE BOOM up firms are unknown and generally do Electronic commerce will continue to not enjoy surfing (i.e., location–driven evolve even though the dot–com boom is “walk–by”) traffic. over. The key question is, “How?” Three Amazon, e–Trade, e–Bay, and other well key areas are examined in this section, known online firms did not build their including the future of business–to–con- brands on the Internet. They were created sumer commerce, business–to–business through traditional print and broadcast e–commerce, and the increasing emer- advertising and solid identity building gence of e–commerce strategies within programs. established companies. The need to build brands via traditional means explains why so many “dot com” companies have spent huge sums of BusinessÐtoÐBusiness Commerce money on traditional media advertise- The diminished value of so many busi- ments. Some firms actually spent more on ness–to–consumer “dot coms” is creating advertising, in an effort to build brand, a tendency for analysts and investors to than they acquired from their investors shift their emphasis to firms focusing on (Elliot, 2000). the business–to–business sector. To some Many start–up firms have already extent, this shift is understandable. Re- faded from the e–commerce scene before searcher estimates suggest that potential becoming public firms. They ran out of revenues for this sector are many times cash before they built brand, acquired in- more than for consumer–oriented firms tellectual capital, or stimulated sizeable (see Figure 1). Moreover, businesses will market for themselves. continue to seek e–commerce solutions that will aid in addressing pressures to Business Processes reduce costs, streamline operations, im- prove cycle times, and make other busi- Fifth, business processes must work. ness improvements. The early experiences Otherwise, no business model is sustain- of such “blue chip” firms as General Elec- able. Business processes are efficient and tric (GE) are also influential factors. GE reliable when they meet both internal op- has shown that the savings from Internet erating requirements and customer expec- based procurement and mandated sup- tations, doing so in a manner that ensures plier bidding practices can routinely shave revenues exceed costs. Too often, “dot large cost percentages, totaling millions of com” companies, born in the midst of high dollars in savings, from the every day sup- impact technology, have placed greater ply chain. emphasis on their online front door—their The dominant business model that has Internet commerce site on the World Wide emerged is the online business–to–busi- Web—than their back office. Many of their ness exchange (Figure 2). Each exchange 378 Electronic Commerce beyond the “dot com” Boom

ce Exchanges

Structure of e–Commer

Figure 2.

379 NATIONAL TAX JOURNAL features online buying and selling. Some not require participant investments exchanges assist in the purchase or sale or fees. Defensible strategies and in- of raw materials (e.g., steel) and parts that tellectual capital may be wanting. are used directly in the manufacture of a • Dependence on key participants. product. Others focus on maintenance, The transaction value and volume in repair, and operating (MRO) goods, in- many exchanges is accounted for by cluding computers, office supplies, tem- only a handful of participant com- porary worker hiring, and legal services. panies. In some instances, it appears These online exchanges are distin- that upwards of two–thirds of the guished by (1) a vertical or cross–indus- exchange’s volume is from a single try focus, (2) a buyer or seller focus, and participant, or from firms that are the (3) custom or catalog focus (Table 2). owners of the exchange. At the beginning of 2000, it was esti- • Outside of the legitimate supply mated that there well over 500 online ex- chain. Exchanges frequently are changes operating for the purpose of busi- used for “spot” purchases rather ness–to–business electronic commerce than for ongoing supply require- (Tedeschi, 2000). More are opening ments ordinarily met through the monthly, and still more are in the plan- traditional buyer/supplier channels. ning stages. Many such exchanges will be unable At the same time, there are emerging to develop the systems and relation- signs that business–to–business “dot ships needed to be the supplier of coms” may be violating the same prin- choice for high volume customers. ciples as in the consumer–oriented • Dominant firms establishing ex- segment. The signs include: changes. Increasingly, the dominant firms in an industry (e.g., hospital- • Low barriers to entry. The tools and ity, chemicals, paper, and automo- technologies needed to establish an biles) are establishing exchanges as exchange are well understood and strategic buying or selling vehicles. readily accessible. Linking suppliers Their level of capitalization and or buyers into a market is often rela- likely member driven business vol- tively easy at this early stage, particu- ume are surely a serious threat to ri- larly since exchange developers do val, entrepreneur–driven exchanges.

TABLE 2 COMMON FORMATS OF e–COMMERCE EXCHANGES ¥ Industry Focus Vertical exchanges serve specific industry. Example: hospitality or paper industry exchanges. Cross industry exchanges provide products or services that are useful across multiple industries. Example: Consumer electronics exchanges ¥ Client Focus Buyer focused exchanges represent customers, offering services that assist in finding and negotiating purchase transactions from suppliers. Example: Travel auction exchanges Seller focused exchanges represent vendors, offering services that assist in sale of their products to buyers. Example: Travel booking exchanges ¥ Product/Service Focus Catalog exchanges support transactions involving standard products and services, often listed in online catalogs that describe their characteristics. Example: Hardware exchanges Custom exchanges include tools that enable buyers to specify the unique characteristics desired in a product or service. Example: Steel ordering exchanges

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The principles of business relearned by • Visibility as established and often business–to–consumer firms will prob- well–known companies ably have to also be relearned by busi- • Brand names that can be leveraged ness–to–business exchanges. A shakeout while start–up “dot com” must in- is inevitable. vest precious resources in building their brand Emergence of “Brick and Mortar” • Management talent, usually sea- eÐCommerce Strategy soned in traditional commerce (but not necessarily in Internet based e– While “dot com” firms in both business commerce) and consumer segments have enjoyed the • Deep financial pockets, putting time e–commerce spotlight for past several on their side compared to start–up years, the second generation will refocus firms the attention to established corporations • Infrastructure in the form of chan- (often dubbed the “brick and mortar” nels, distribution systems, and in- firms, so named because they conduct formation technology. their operations from physical facilities). In the first generation, most large corpo- Four different business structures have rations did not publicly treat Internet already emerged (Table 3). Some firms will based e–commerce as an externally ori- integrate the e–commerce business within ented strategic resource (Senn, 1999). Al- the current corporate framework by us- though many initially established a Web ing Internet commerce sites as an addi- site (perhaps only to claim its existence), tional sales channel. The Office Depot, a they have not leveraged its capabilities for nationwide operator of office supply business advantage. Even fewer devel- warehouses, treats its online e–commerce oped strategies to capitalize on the ex- site as a fourth channel (supplementing change capabilities inherent in the its in–store, catalog, and fax channels) for Internet’s World Wide Web. reaching customers. Identical products This will change dramatically in the can be purchased through any of the chan- second generation. E–commerce will in- nels. The online channel is fully integrated creasingly be characterized by the highly into the company’s day–to–day business. visible e–commerce strategies emanating Office Depot’s payoff from creation of the from traditional, established corporations. additional channel, in the form of new These firms will forcefully capitalize on business, has been huge, and continues to their resources and know–how, including: grow.

TABLE 3 e–COMMERCE STRUCTURES OF ESTABLISHED CORPORATIONS ¥ Integrated e–commerce strategy Firm's e–commerce strategy is fully integrated into existing organization. ¥ Independent business unit Firm establishes separate business unit that implements firm's e–commerce strategy. This unit can also interact and cooperate with existing operating units within the organization. ¥ Partnership strategy Firm establishes a cooperative relationship with an independent organization. Responsibility for e–ommerce activities is split between partners. ¥ Joint venture strategy Firm establishes a separate organization, with other partners who invest in the new organization. The joint venture has its own identity, strategy, management team, and operational capabilities.

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In other cases, firms are already estab- distant from the corporate headquarters, lishing separate online commerce organi- draw on venture capital, and position it- zations that can operate both indepen- self for an IPO to generate new funds and dently and yet in cooperation with the build additional market value that might brick and mortar part of the firm. The re- otherwise remain hidden within the cor- tail drug industry is a representative ex- porate parent. Retailing giant Wal*Mart is ample of this structure. The CVS drug- pursuing this strategy. store chain established a full–service It is likely that each of these structures online pharmacy that enables customers will be deployed as brick and mortar firms to initiate immediate and recurring pur- combine physical and online resources chases over the online commerce site. (already dubbed click and mortar struc- Prices are generally 10 to 30 percent lower tures). They are positioned to arise as online compared to those in their tradi- fierce competitors in the next generation tional stores. The online site capitalizes on of e–commerce. the capabilities of information technology to provide additional services (e.g., reor- BusinessÐtoÐConsumer Is Not Doomed der reminders and drug interaction checks) that are more difficult to offer in In spite of the fact that the luster is off the retail stores. Purchases can be deliv- many first generation business–to– ered directly to the buyer’s location with- consumer firms and even though their mar- out their need to visit the retail store. ket values are down sharply, it would be a On the other hand, CVS gives online mistake to conclude that this e–commerce buyers the option of directing that pur- segment will fail or fade away. In fact, the chases be delivered through a local retail additional services and features that can be store. Combining brick and mortar stores offered to consumers buying online (e.g., with online e–commerce sites (i.e., “click broad product selection, online access from and mortar”) promises to be a common anywhere, custom information, etc.) will business format for many established continue to attract a growing number of firms. They will be able to leverage their buyers. Additional innovations will existing facilities and infrastructure, and emerge to further stimulate this segment. their brand name, while expanding their Moreover, contrary to popular belief, a reach to tap new segments of the market significant number of business–to–con- not serviced by their current stores. sumer “dot coms” are already profitable. The third form features a partnership For instance, in the challenging online re- between on online firm (perhaps a start– tailing sector, there are already many suc- up) and a traditional company. The online cess stories. A recently completed Boston e–commerce site (branded with its well– Consulting Group study reports that 38 known name) is linked to a partner that percent of 221 Web retailers studied are handles the transaction and fulfillment ac- profitable and that 72 percent of catalog tivities without visibly displaying its com- companies that have moved onto the pany name. On the other hand, the online Internet have Web operations that are gen- site may be that of a “dot com” which in erating profit (Boston Consulting Group, turn relies on a traditional firm for fulfill- 2000). ment. In the retail drug industry, the well– established Rite–Aid chain supports the SUMMARY new drugstore.com online commerce site. Finally, some firms will spin off their e– The e–commerce projections emanating commerce component as a separate ven- from the various commercial research ture. The new firm may be geographically houses project bright futures in both the 382 Electronic Commerce beyond the “dot com” Boom business–to–consumer and business–to– REFERENCES business segments. These projections are Boston Consulting Group. not in conflict with the falling market The State of Online Retailing. Boston: Boston valuations of the early “dot com” firms. Consulting Group, 2000. Rather, the market re–assessment is both Elliott, Stuart. a result of early, unrealistic speculation “Advertising,” New York Times (February 1, about the ease of generating huge profits 2000): C10. simply by establishing a commerce site on International Data Corp. the Internet from which to reach and sell Internet Commerce Market Model, v5.0. to consumers and poor adherence to busi- Framingham, MA: International Data Cor- ness principles. 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