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The Internet Goes Mainstream
by John Riggin
First a brief nod to the rest of the bandwagon. As it turned out, the horror of Y2K had nothing to do with double-zero computer crashes and everything to do with a strong dose of swift and tough love for the Internet sector. It seems net income and profitability still matter, and the unchecked optimism of one dot-com IPO after another finally gave way to the reality that we are still in the early days of the Internet's impact on mainstream business.
From the top down, the valuations of pure Internet plays crashed into the ceiling and came tumbling back to earth throughout the early spring. King of the portal hill Yahoo (YHOO:NASDAQ) at first gave back half of its obscene market capitalization of over US$100 billion, and now rests at only 22% of its high — amid concerns of its advertiser base that still includes numerous and strained dot-coms. eBay (EBAY:NASDAQ) spiked in the spring as it continued to deliver profits while its Web brethren pumped red ink. But even eBay fans wonder how much hypergrowth lies ahead for the Web's number one auction site; the company's market cap is now 40% off from its inflated 52-week high. Despite the rollback, however, both stocks continue to find favor in lofty P/E ratios: Yahoo is holding steady at 122 and eBay at 467.
The market was far less kind to consumer e-commerce companies. Amazon.com (AMZN:NASDAQ) continued to lose money as it maintained its high wire act as the leading superstore on the Web. But the perception of what it means to be the Web's leading e-commerce destination has changed. Pull back the curtain, and you begin to see a business that is perhaps not as revolutionary as Time's "Man of the Year" hype would have you think. Forces such as seasonal buying cycles, inventory headaches and cutthroat price battles exist on the Web, just as they do in the shopping malls and big box stores. And though it may be less expensive for Amazon.com to serve a customer, it may get more costly for the company to attract customers as the leading traditional retailers soup up their own Web sites and pummel their existing customers with online specials. Thus Amazon.com finds its market cap at barely 30% of its 52-week high, with no firm date by which profitability will be achieved.
Worst off among the high-profile dot-coms is Priceline.com (PCLN:NASDAQ), the Web site that created the innovation (or false expectation, depending on how you look at it) that customers can name their own prices for everything from airline tickets to hotel rooms to groceries to gasoline. The problem is that the company has no control over its inventory. Despite the appealing fact that Priceline has provided airline companies, hoteliers, grocery stores and oil companies with a wonderfully recognizable way to dispose of excess inventory, there are no real barriers to entry — aside from a head start in brand awareness — to prevent the same companies from doing it themselves. Which is exactly what a group of airlines, including United Airlines (:NYSE), American Airlines (:NYSE), and Continental Airlines (:NYSE), are doing through their own recently launched Web site, Hotwire.com. Consequently, Priceline has dropped out of sight and is currently trading at a little less than 6% of its high.
Go through the roll call of similar e-commerce Web sites seeking to sell goods over the Web and the song remains the same. In their haste to achieve "first-mover advantage," many of these companies wildly overspent on marketing and often encountered higher-than-anticipated costs in Web development and customer service. The results have included layoffs, fire sale mergers, acquisitions, and, in some cases, bankruptcy.
Growing within
But just as the wild run-up of Internet valuations exceeded underlying and intrinsic value, the drop-off in the sector — especially among the highly visible consumer e-commerce Web sites — overstates the case. The truth of the matter is that there are plenty of Internet companies that are still in business and continuing to grow revenues at impressive rates. The domestic and global markets of Internet users continue to grow and spend money on the Web. Businesses large and small continue to find new ways to integrate the Web into all facets of operations to cut costs, operate more efficiently, and achieve strategic advantage.
Still, we cannot escape the fact that, within the market of new Internet users, the era of hypergrowth is nearing an end. With about half of the country coming online over the past four years, getting the remaining 50% online requires more than just translating the benefits of Internet usage to those who have resisted it so far. The biggest story that we won't hear a lot about in 2001 will be the bridging of the digital divide, and it won't have a blessed thing to do with some government program.
Although computer literacy and access to the Internet among minorities still lags behind that of whites (blacks and Latinos are 40% less likely than white Americans to have access to computers, according to a study put out last summer by the U.S. Commerce Department), a new survey by PricewaterhouseCoopers indicates that 29% of all Latino shoppers and 23% of black shoppers are now online, and they're shopping on the Internet. The study found that 30% of these "inner city e-shoppers" bought products from online sites over a 12-month period. For the general population, this number was just 27%. While this differential may reflect limited availability of convenient retail outlets in many urban neighborhoods, it also suggests that the most significant growth among online viewing and shopping will be from there.
All of which means that consumer Internet activity will continue to become more mainstream through 2001. This will significantly boost volume, but will also create an environment that is even more sensitive to ease-of-use, customer service and reliability. Despite the intellectual appeal of innovative pricing techniques that are unique to the Web, such schemes have a way of turning away customers who are simply seeking the easiest and fastest way to purchase the goods they want and need. More importantly, now that the rewards are higher, the integration of the Web into traditional consumer and business distribution, communication and retail channels is bound to go forward.
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