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Nothing but Net in 1999
by J. K. Riggin
The U.S. House of Representatives impeached the president. The U.S. Air Force bombed Iraq. And what did Americans do this past Christmas?
They logged on to the Internet, pointed, clicked -- and spent money. More than US$3 billion, to be specific -- or nearly three times total online sales of 1997.
After three years of hyperbolic prognostications about friction-free commerce, the Internet has finally begun to deliver on its promise. Just last month, Zona Research polled more than 1,000 people and found that the average holiday Web shopper spent US$629 this year, compared with US$216 in 1997.
Online shoppers in the 24- to 35-year-old age group did 33% of their overall holiday shopping online (ask any marketer: these demographics are to sales what Monica is to dry cleaning!)
Furthermore, 98% of shoppers polled said they plan to shop online again within the next six months. Most of them probably already have. And, just in case you aren’t already fed up with me spouting off statistics, 61% of buyers expect to spend more money online in the coming year.
Through 1998, 8.5 million U.S. households made an online purchase, up from two million in 1997. Forrester Research predicts that growth will continue, soaring from US$21 billion last year to more than US$200 billion by the year 2000. By 2003, Internet-based shopping revenue will account for six percent of total domestic consumer spending.
It’s the Internet, stupid
Whether it’s unbridled enthusiasm or an explosion of electronic trading among run-amuck retail investors, the holiday season’s shop-till-you-drop mentality has been reflected in the market for the leading portal and e-commerce Internet companies.
Amazon.com Inc., Yahoo! Inc., eBay Inc. and Lycos Inc. all have surged to mind-boggling multiples. Investors eager to seek the second wave have run up share prices in just about any company peddling goods on the Internet, including relative lightweights such as Books-a-Million Inc., Egghead.com Inc., Onsale Inc., and CDNow Inc., among others. (Check out Taipan’s 1998 performance round-up for the late Bill Sanders’ Webhead picks!) But before we look forward, let’s take a look at the short and happy life of Internet market mania.
In 1995 and 1996, it was carriage and software, with UUNet, PSINet and Netscape setting records and defining a new business sector. By 1997, infotech stalwarts Microsoft, Sun Microsystems, IBM and Compaq made up for lost ground by rapidly taking Internet-focused strategies straight to market.
The year 1998 brought the rise of a new generation of Internet companies (Amazon.com and Yahoo!) whose success is based largely on the promise of e-commerce. Look for the pattern to repeat itself in 1999, as an even broader cast of infotech and infrastructure stalwarts take their Internet-focused e-commerce strategies to market.
Much more than books, CDs and Christmas cookies
The best news is the reality that business-to-business e-sales already cast a shadow over consumer buying online.
E-commerce between companies is set to explode from the US$43 billion spent last year to well over a trillion dollars by 2003, according to Forrester Research.
Cisco (CSCO-Nasdaq) alone did US$8 billion in Web sales in 1998. Intel (INTC-Nasdaq) took in US$1 billion in sales in its first two weeks of selling to companies online.
The rush for Internet commerce solutions among businesses will stoke the need for dependable Internet carriers, industrial strength software and rock solid infrastructure.
Among Internet carriers, this means a spike in demand for leased lines and complex Web hosting services. Verio (VRIO-NASDAQ) and Exodus (EXDS-NASDAQ) are two Internet service providers who have demonstrated that they are clued in to this strategy.
And don’t forget that all of these shoppers need to get online. America Online Inc. (AOL-NYSE) will expand its double-digit growth. The company reported in early January that US$1.2 billion in sales traversed "its network" over the six-week holiday spending party of 1998. Media Metrix puts AOL’s market share of American home surfers at close to one-third.
Behind the scenes
How about the software behind the Web sites? Mortal enemies Sun Microsystems (SUNW-NASDAQ) and Microsoft (MSFT-NASDAQ) are no-brainers in this space. Sun’s acquisition of Netscape’s server software division in the AOL/Netscape transaction will help diversify Sun’s Java exposure.
Microsoft will be too busy selling copies of its popular NT, IIS and SQL Server products to be impeded by the Department of Justice. Also watch Open Market Inc. (OMKT-NASDAQ), an IT services company offering e-commerce applications and consulting services. According to Dataquest, Open Market already is #1 in the Internet commerce software sector with 29% market share.
The boom in e-commerce underscores the blue chip status of equipment companies like Cisco Systems (CSCO-NASDAQ), Lucent Technologies (LU-NYSE) and Dell Computer (DELL-NASDAQ). Sharply increasing network loads will continue require more and faster routers, switches and computers. Dell’s move to prioritize Web sales has helped build a 340% increase in its stock price in 1998.
Third leg
But killer websites and VISA merchant accounts don’t mean a thing without the ability to ship goods to consumers. Early research is showing that e-tailers are taking more of a bite out of the mid-market retail stores (such as Sears and J.C. Penney) than the mail order catalogs. In fact, several discount store heavyweights, including Wal-Mart and K-Mart, have launched Web stores to cover their bets.
The arrival of e-tailing brings a renaissance in overnight shipping. And this carries over to both consumer and business-to-business shipping. Which is why Federal Express (FDX-NYSE) merged last year with Caliber Systems, owner of RPS Inc., the second-largest ground shipper after UPS in the U.S.
The combination has enabled FedEx to continue to focus on the attractive express-air delivery business, slated to grow 20 percent annually for the next twenty years, leaving RPS to battle UPS on the ground.
Captain’s Log, Stardate 1999, Priceline.com
By the time their IPO gets off later this year, William Shatner won’t be the only one touting this nimble, second-generation e-commerce company. Using patented technology, Priceline.com collects buyer requests and presents them to sellers.
The sellers then decide whether or not to accept the offers, each of which is guaranteed with a credit card. This is not an auction; buyers are not competing with one another. Each purchase offer is presented independently by Priceline.com to sellers. Sellers get to move surplus inventory, like empty airline seats and hotel rooms. Buyers get to name their price. Priceline.com already is in their quiet period and shopping I-banks.
Caveat emptor
Be wary of the eToys of the e-commerce world. The company made a splash this holiday season in taking on Toys R Us (TOY-NYSE) in a race to the Web. Toys R Us, one of the 20 most familiar brands over the past twenty years, already has a Web store up. Although eToy offers a larger inventory and better interface today, these advantages will eventually be subsumed by the clout of Toys R Us. It’s far easier to make up lost ground in inventory and Web site design than overtake twenty years of name recognition. This is not Amazon.com versus Barnes and Noble.
Be wary of these second generation e-tailers as they launch IPOs. The next round of e-commerce superstars won’t look like Amazon.com. The barn-burners will be doing what traditional retailers cannot. Priceline.com challenges the conventional wisdom of pricing. Others will undermine the current status quo of transportation and distribution management and carry the Internet’s revolutionary impact on business into the next century.
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