Web commerce is changing the way a lot of companies do business, but it's not everything it's pumped up to be. We separate fact from fiction.

Few IT trends have been hyped more than electronic commerce--and considering the industry's penchant for hyperbole, that's saying a lot. Stock valuations of E-commerce players defy fundamentals. Predictions of triple-digit market growth abound.

There's no question that the Internet has emerged as an enormous force for change over the past four years--in IT, in business relationships, and in the way millions of people receive and communicate information. But the resulting gold-rush atmosphere has produced the typical gold-rush side effects: exaggeration and oversimplification of the real issues.


It's time for a reality check. Following are the eight biggest myths about E-commerce, debunked by those best qualified to do so--IT and industry professionals trying to make E-commerce work for them.


MYTH NO. 1: It's Easy.

AKA: The Barriers To Entry Have Never Been Lower. Yes, putting up a Web site is easy. And putting up a Web site to handle commerce transactions is pretty easy, too. But add words like effective, scalable, and successful, and it gets a lot harder.

For large, established companies, the No. 1 challenge is integration. "A Web site is like an iceberg," says Delta Air Lines CIO Charles Feld, a longtime IT executive with stints at Frito-Lay and Burlington Northern. "What you see looks small and simple, but below it you have infrastructure integration issues with maybe 40 or 50 databases. So building a Web infrastructure can be a pretty serious risk for older companies." (For more on the technical intricacies of Web commerce sites, see story, "Mega Web Sites.")


The Compumotor division of manufacturer Parker Hannifin Corp. knows that all too well. Compumotor's extranet for handling orders for industrial automation system products went live last week--but not until after a one-year delay to deal with response time, server upgrade, and integration challenges. "Setting up E-commerce is not easy or fast," says Compumotor IS manager Bud Parer. "Performance and scalability are the biggest issues. This is the way we decided to run our business, so we weren't going to do it until we had acceptable response time and data that is absolutely accurate."


The extranet will handle orders for 12,500 products, warranty and nonwarranty repair-status queries, and many other transactions from 65 distributors, 35 factory reps, 20 direct customers, and 50 internal employees. To ensure performance, Compumotor upgraded its Hewlett-Packard server and moved part of its Oracle database to a Sun Microsystems UltraSparc server to share the load. The company devoted four worker-months to designing and integrating the extranet applications' Active Server pages, with 90% of the coding time spent on data availability and accuracy. "We didn't want to guesstimate anything," says Parer. "Our business depends on this."


For many companies, the business issues of E-commerce are no less daunting. Changes in business processes, customer and supplier relationships, data access, data ownership, distribution strategy, and marketing tactics underpin most Web-commerce efforts.


"The technology integration issues are huge, particularly at the back end, but we feel we're meeting those," says PG&E Corp. CIO John Keast. "The front end is a whole other challenge. What are customers going to use this energy-usage data for, and how do they want to receive it? It's a brave new world, where users have access to information they've never had before--and there's no standard for it."


For business-to-consumer online efforts, doing E-commerce well starts with driving traffic to your site. Many early sites did a good job harnessing Web technology, but those efforts languished because not enough shoppers came calling. "Many companies didn't realize that a Web site needs a compelling marketing program to go with it," says Sheldon Laube, chief technology officer of Web systems integrator US Web Inc.


US Web has worked with American Airlines and sports-equipment retailer REI Inc. on marketing tactics, such as American's weekly E-mails alerting customers to cheap weekend fares and REI's expansion of its Web presence with targeted links on outdoor-activity Web sites. And equally if not more important, the companies began to advertise their E-commerce capabilities in traditional media. "Let's face it: People still watch TV and read magazines," says Laube. "Building a site is just one piece of the puzzle."


MYTH NO. 2: It's cheap.

Perhaps E-commerce is cheap when compared with a full-blown enterprise resource planning implementation or the purchase of a mainframe. But for a number of reasons, a full-scale online commerce effort is never a low-cost proposition. Business-oriented commerce server software, such as Microsoft Site Server Commerce Edition, may start as low as $5,000, but that's just the first building block in a complex undertaking (see Myth No. 1). Companies spend an average of $750,000 just for the baseline technology, according to a Gartner Group survey of 100 commerce sites.


"It's not like what IBM says in their e-business ad campaign: Just extend what you already have," says Roy Satterthwaite, a research director at Gartner Group. "E-commerce applications are in their first generation, and they just don't do everything you need. Open Market's Transact is great for transactions, for example, but not for content. E-commerce always ends up costing much more than any one vendor's product."


And guess where the big-ticket systems integrators--IBM Global Services, EDS, Computer Sciences, and the Big Five--are starting to aim their sights? "Web software vendors get all the coverage, but the windfall beneficiaries of E-commerce will be the integrators," says Satterthwaite. "After they finish their year 2000 and ERP engagements, they will throw their efforts into this." And that's not going to bring any price tags down.


Then there are marketing costs and other non-IT infrastructure investments. Amazon.com, the paragon of E-commerce success, lost nearly $25 million on $153.7 million in revenue in the third quarter, and marketing costs were a big reason. Amazon's marketing expenses grew from $11 million in the first quarter to $26.5 million in the second quarter to $37.5 million in the third--more than it spent on technology. The annual cost of a major licensing deal on a high-traffic portal runs well into eight figures, and Amazon has several such deals. Amazon's third-quarter infrastructure costs included more than $550,000 to lease a book warehouse in the United Kingdom and the expense of expanding its main warehouse in Seattle, which now costs more than $450,000 a year.


Is Amazon gaining new customers from its marketing investments? Absolutely. Its revenue for the first nine months of 1998 was $357.1 million, up 337% from the year-ago period, and the company's stock price is up about 1,000% since its initial offering in May 1997. But the company is losing money--lots of it--proving the point that E-commerce isn't cheap.


MYTH NO. 3: Everyone's doing it.

Those living in Silicon Valley, Seattle, or Manhattan can find plenty of evidence to support this myth. And just about every company has a Web site. But brochureware isn't commerce. Dig deeper among multibillion-dollar companies, even among some consumer-focused retailers, and you'll find a different story. Companies on the sidelines of Web commerce include chains Best Buy, Circuit City, and Fry's Electronics.


"Fry's doesn't even post a catalog," notes Vern Keenan, an analyst with research firm Keenan Vision. "It goes along with their conservative management--using merchandising techniques from 50 years ago, like heavy promotion of loss leaders in low-cost ad channels like local newspapers and radio. They still work, and Fry's sees no reason to go on the Web." Fry's doesn't comment on its business strategies.


With a few notable exceptions, such as General Electric, Boeing, and the Big Three U.S. automakers, most old-line manufacturers have yet to move into E-commerce--and may not for quite a while. "In some companies, you almost need the retirement of an entire generation of purchasing and sales staff members before it will happen," says Sam Kinney, co-founder and executive VP of FreeMarkets Online Inc., a company that manages online bidding for industrial requests for quotes. "This is not an overnight thing. There are some massive penetration barriers that will not fall for decades."


Many companies simply don't see a compelling business reason to move to E-commerce. Maytag Corp., for example, finds that electronic data interchange with its suppliers and distributors works fine, and it's playing the Internet commerce card very carefully. "We all should be cautious. There are very few Amazon.com opportunities out there," says Maytag VP of IT Ed Wojciechowski. "We have informational Web sites where we can engage the customer, and we see commerce as an option in the future. But it's not strategic for us yet."


And even if Myth No. 3 were true, that doesn't mean following the pack is a sound strategy.


MYTH NO. 4: It's lucrative.

Despite the online sales success of a handful of E-commerce poster children, for every Dell Computer and Cisco Systems there are dozens of companies like Burlington Coat Factory. The company's Web site sells less merchandise than just one of its 250 retail stores, says CIO Mike Prince. "So far, it just hasn't been a major focus for us," he says.


That's because buyers are less likely to purchase "subjective" items such as coats and dresses over the Web than PCs, routers, and books, says Prince. "When you buy a dress, you want to try it on, see how the fabric feels, check out the color," he says. "There's something very special about that experience that you can't get on the Web."


That said, Burlington Coat Factory is revamping its site to feature more products. Also, the company is considering adding a gift registry that would let shoppers visit its stores, identify the specific articles they like, and then register them on the site so that relatives and others can buy gifts online according to those selections. But even if Burlington increased its online sales to equal the volume of 10 of its stores, "that would be significant for a chain our size--and a surprise," Prince says.


Even by the most generous accounts, online retail sales remain only a tiny fraction of what's sold in physical stores or through mail-order catalogs--even in the Web's most popular product categories. Online book sales will account for less than 5% of all U.S. book sales this year, according to Keenan Vision. Online music sales? Less than 2%. Even online travel sales--which will reach $1.8 billion this year, leading all consumer products (except IT products) sold online--won't even reach 1% of the $488 billion in total U.S. travel spending. Web-based advertising revenue also remains minuscule compared with broadcast and print--just 0.4% of ad agency bookings this year.


What about business-to-business E-commerce, which is projected to leave business-to-consumer cybersales in the dust and soar into the trillions of dollars by 2003? That mostly reflects the fact that business-to-business commerce in the offline world is orders of magnitude larger than sales to consumers.


For most established companies, it's still early in the E-commerce game. It's easy to look at how Amazon.com shook up the book industry in four years and fly into panic mode, fearing that your company could be put out of business tomorrow by a Web startup. But books (and music) are the products best suited to online selling, and Web startups will always get a disproportionate share of attention simply because they're Web startups. Remember: Amazon won't be turning a profit any time soon.


"E-commerce is like the market in China for U.S. companies," says US Web's Laube. "Most probably aren't making a profit there yet, but they're in China because of huge market potential. The returns will be a few years in coming. You have to have deep pockets and be willing to stay with it."


MYTH NO. 5: The Web levels the playing field.

AKA: Startups Can Instantly Compete On The Same Footing As Long-Established Companies.


With a few notable exceptions, such as Amazon, E-Trade, and online greeting-card maker Blue Mountain Arts, the biggest E-commerce players are big, established companies: Cisco, Disney, Dell, Microsoft, Charles Schwab. Companies that want to be successful at Web commerce need the marketing clout, brand identity, and scale to do back-end fulfillment and customer service--and above all, they need the capital (see Myth No. 2). That's why so many startups are either merging (like music retailers CDNow and N2K) or are being bought by big physical-world competitors (note Reel.com's acquisition by Hollywood Video).


A popular line on the conference circuit is, "On the Internet, no one knows you're a dog." But over time, another one-liner holds more weight: Size does matter.


Size, in most cases, means brand power, trust, and consumer confidence. "In theory, anyone can enter any market in E-commerce," says Paul Gaffney, VP of commercial sales at Office Depot. "But the Internet hasn't changed the way you earn credibility, not one iota. That's through actual performance. It has leveled the playing field for exchanging information only. We're the largest in our industry, so it's a fundamental economic law that no one should be able to beat us on price."


Another aspect of the level playing field myth is the assertion that the Internet gives small companies instant access to global markets. Access is one thing; leveraging it is quite another. "Large physical-world companies have a huge advantage in overseas markets if they leverage their brands online, whether they're Boeing, Eastman Kodak, or Pepsi," says Randy Meyer, VP of financial services and E-commerce at Compaq. Adds Gartner's Satterthwaite, "There's a low barrier to doing E-commerce, but a very high barrier to becoming one of the leading choices."


In business-to-business E-commerce, the Web admittedly does open the door for small companies to bid on contracts and sell to large companies. This truism is usually posited in comparison to EDI, whose prohibitive cost, inflexible formats, and technical complexity locked small suppliers out of relationships with the Boeings and Wal-Marts of the world. There are cases where this maxim holds true. Doing business with more small suppliers is a goal of Los Angeles County's ambitious Web-based procurement initiative, says procurement director Chrys Varnes.


But the Web also makes it easier to do business with the largest suppliers and customers. So E-commerce is actually causing some companies' purchasing departments to reduce their number of suppliers and buy more from the largest ones in order to get bigger discounts and better service.


That's a stated goal of Chevron, one of the largest companies to launch Web-based procurement. Chevron is moving portions of its staggering $10 billion a year in supplies and services procurement to the Web using software from Ariba Technologies. "We have 200 global suppliers, and we want to channel as much business as we can to those companies to drive our costs down," says Jerry Jacobson, manager of purchasing strategy at Chevron. Indeed, the reduction or elimination of "maverick buying" from unauthorized suppliers is a goal of Web-based procurement initiatives at Bristol-Myers Squibb, Ford, GE, and other companies.


MYTH NO. 6: It leads to disintermediation.

The theory was simple: The Web provides an instant global sales channel to all producers of goods and services, so why use conventional distributors, resellers, and other middlemen when you can sell directly? Well, it simply hasn't happened, for three main reasons: the actions of producers, the actions of distributors, and the rise of dozens of new intermediaries on the Web, giving rise to the second-generation buzzword "reintermediation."


The only trend partially validating this myth is the fact that some producers that always bypassed reseller channels, notably Dell, have done very well selling on the Web. (Dell sells $10 million worth of PCs per day on its Web site--triple what it sold online last year.) But most successful E-commerce players are using the Web to enhance their existing distribution channels, not circumvent them. Even Cisco, one of the most successful E-commerce practitioners, makes 70% of its online sales to resellers, not end customers.


Other examples abound. Consumers can't buy a motorcycle on Harley-Davidson's Web site, but the manufacturer's dealers can access a Harley extranet whose features include a repair-parts information database and speedy processing of reimbursements for warranty repair work. General Motors' BuyPower Web site lets customers configure and order cars online, but the sale is directed to a dealer in the customer's area. The only companies that can buy direct from Parker Hannifin's Compumotor unit are the very largest customers, such as Boeing and Universal Instruments, that have already bought direct before. In these cases and countless others, the goal is to aid the channel, not bypass it--at least for now.


Meanwhile, conventional distributors are embracing the Web. W.W. Grainger Inc., the largest business supplies distributor in the United States with revenue of more than $4 billion, is building an electronic catalog to let customers buy online directly from their SAP R/3 applications. In the computer industry, Dell and Gateway aren't the only companies that let customers configure and buy their PCs online; No. 1 distributor Ingram Micro is adding that capability to its extranet for resellers and retailers. Few companies have leveraged the Web earlier and more effectively than semiconductor and electronics distributor Marshall Industries, whose E-commerce site helped boost sales 24% in fiscal 1998.


But perhaps most notable of all is the rise of new, usually industry-specific Web intermediaries. Almost every industry has one: Chemdex for chemicals, MetalSite for steel, pcOrder.com for computers, PlasticsNet for plastics, Instill Corp. for food services. Because the Internet makes it easier to aggregate information and commerce capabilities for an entire business community, these new intermediaries are bringing buyers and sellers together online.


"As long as you have an industry with a fragmentation of suppliers, you will always have middlemen," says Venky Harinarayan, VP of business strategy at Junglee Corp., a content aggregator acquired earlier this year by Amazon.com. Adds Chemdex president David Perry, "If you have only three or four suppliers, you certainly don't need an electronic marketplace. But most industries have a lot more than that."


MYTH NO. 7: It means the end of mass marketing.

Once again, the theory is simple enough: The Web is the first communications channel that enables cost-effective one-to-one marketing on a huge scale. Marketing to a "segment of one" has long been the goal of database marketing, data mining, and telemarketing, but Web technology enables marketing of unprecedented exactitude and low cost.


But how do companies get people to come to their Web sites in the first place? Customization and personalization are fine for customer retention but not so good for customer acquisition. "In the global world of the Internet, what counts is brand," says Compaq's Meyer. That's why Yahoo posted billboards at San Diego's Qualcomm Stadium during the World Series, and why Web shopping site Buy.com kicked off a $25 million mass marketing campaign with ads on Monday Night Football last month.


Can consumers click on a stadium billboard or TV ad to purchase something, which is what the "mass marketing is dead" pundits claim all ads should let buyers do? Of course not. Buy.com founder and CEO Scott Blum knows that it will take conventional marketing channels such as Monday Night Football, as well as low-priced merchandise online, to achieve his company's goal to leapfrog Amazon.com. "We want to be a household name," says Blum, and that won't happen with only targeted Web banner ads. Witness the proliferation of mass-media ads for Web sites during the current holiday shopping season.


Mass marketing is also a necessity for the captains of online industry. Dell isn't the largest online PC seller only because of execution; it also heavily markets its direct-selling approach--on prime-time TV and elsewhere. "In theory, an Internet-only computer company should have surpassed Dell by now," says US Web's Laube. "But there is no 'PCs.com,' at least not one that's been very successful. In E-commerce, branding and mass marketing are more important than ever."

Ultimately, that's just common sense--at least for those who understand there's more to E-commerce than click-throughs. "You can't just build it, because they will not come," says Cliff Conneighton, CEO of Icoms Inc., which has developed commerce sites for Houghton-Mifflin, Hasbro, Fujitsu, and other companies. "Tiger Electronics doesn't expect people to find Furby.com, so they run TV ads. The Net is like TV with 10 million channels. You can't just hope that someone surfs by."


MYTH NO. 8: It leads to product commodization.

Some disciples of this dogma point to Priceline.com, the site where consumers set the price they want to pay, then let airlines and other suppliers compete to meet that price. Certainly, it's an innovative model that wouldn't be possible without the Web. Online auction sites such as OnSale and eBay have also been successful and have their place for some types of products. But price isn't the No. 1 selling point for most companies online.


Amazon.com and Dell have the most online customers in their industries, and they don't always offer the lowest prices. That's because customers also want brands and service they trust. And they're figuring out that searching the Web to save a few bucks can be no less aggravating than driving all over town for a bargain. Online shopping agents, or "bots," such as Excite Product Finder and MySimon, have their fans, but they can still be frustrating and ineffectual (see story, "Call Your Agent For Online Shopping").


"In E-commerce, the quality of the participant is more important than ever," says Office Depot VP Gaffney. "Price information alone is very imperfect information. It tells you nothing about reliability, product availability, merchant behavior, or returns and exchanges policies. You might be able to lure online customers with the lowest price, but it doesn't mean you keep them."

Even in commodity industries, price is only one factor in E-commerce strategies. "Gas and electricity are commodities that we sell online, but there are differentiating things we can do in the E-commerce space," says PG&E's Keast. "We're developing billing information and the ability for a buyer to customize their bill online. Our role is to differentiate the commodity by providing other things around it that add value."


E-commerce is anything but a myth. It's a major trend that's reshaping businesses and the IT that runs them. But there's a common theme that runs through each of the myth dissections above: E-commerce, in almost all cases, doesn't change some fundamental rules of business.


Doing business on the Web successfully takes capital, innovative leadership and execution, marketing savvy, perseverance, and the intelligent application of IT. As the Internet continues to speed the pace of change in the coming years, many aspects of business will be altered and transformed--but those guiding principles will always remain.


--with additional reporting by Marianne Kolbasuk McGee
InformationWeek

 

Source: Internet

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