Why e-commerce does not work

Back in 1998 we were sure that e-commerce would be the next big thing. The World Wide Web would revolutionise business, and make us technical, entrepreneurial types a hell of a lot more wealthy. This revolution would make us all kings of industry. That was the theory anyway…

In 1998 VC firms were optimistically pumping cash into anything that looked vaguely like a dot-com. Stories of teenage entrepreneurs and instant millionaires spurred us on. We were arrogant and cocksure!

Crazy business ideas that would never have withstood scrutiny in the sober world of old business were being hyped out of all proportion. Companies were prepared to invest in the absurd "www.etoothpicks.com" and the utterly meaningless "www.zibzog.com" .

With hindsight, it all seems so crazy; however at the time we felt like it was a gold rush, and the first to grab land in this lucrative new territory would be the winner. This wasn’t just greed: our optimism seems to have been based on a few silly assumptions:

We underestimated how difficult it would be. On the face of it, e-commerce is simple. Pay some programmers and designers to build you a site… Make a catalogue that can accept credit cards.

What we failed to appreciate was that in simplifying the front-end of the organisation we made the back-end far more complex. Retail Dot-coms soon realised that logistics and customer support were tens of times more expensive than for our bricks and mortar rivals.

Although the front-end of the business had changed dramatically, what we failed to appreciate was the overall business was still the same. Most dot-coms were equipped with the wrong sort of people to run a retail business. Academic minds were poorly suited for hours of technical support and tedious retail management.

We overestimated how much customers would care about the dot-com revolution. Since we were geeks on a techno-high, we assumed that everybody else would be just like us in a couple of years. We assumed that the mere novelty of something being online would be enough to tempt customers away from their life-long shopping habits. We were shocked when users failed to flood onto the net, and surprised to see that two years later, e-commerce has had no significant effect on high street profits.

I think we also misunderstood the media; and because of this we moved too soon. The dot-coms invested millions in website and browser based technology. A system that requires hundreds of dollars worth of personal computer and a good deal of computer know-how to operate. We are only now starting to see genuinely consumer friendly internet access machines for less than $100 – its still going to be a long time before these become commonplace.

We arrogantly assumed that everybody else would find the web just as easy to use as we did. Those who didn’t own an “affordable” home computer would soon be flocking to cyber-cafes, and those who didn’t just did not matter because they were the luddites who were holding back progress.

As with any technological development, a period of hype is always followed by a period of questioning. The Internet has been the single most hyped technology developed in our lifetimes, and now that the dot-com bubble has burst we are going through one of the darkest periods of questioning ever.

Ultimately I am optimistic – one-day e-commerce will take off. Untill then, the people who make money out of this gold-rush are the guys that sell the shovels. On the ‘net this translates as the companies that are building the infrastructure that powers the web. Companies like Cisco and Microsoft have grown consistently despite threats of a technology down-turn.

One day the Internet will be a viable consumer medium. Hopefully by then we will have learnt the lessons of the past two years. The recession (if it comes) will be the slap on our face that sobers us up.

It seems a little extreme to write e-commerce off as something that doesn't work. The fact of the matter is that in 2000 total e-commerce revenues, according to most published reports, increased by 100%. This is on top of 100% or greater increases for each of the preceding 5 years and amounted to a little more than $20 billion in sales in 2000. Obviously, any industry that can go from $0 to $20000000000 in annual revenue in 5 years can in no way be regarded as a failure.

Now, just because e-commerce hasn't been a consumer disaster does not mean that it hasn't been an investor disaster. In the 12 months following the Nasdaq's top in March 2000 American investors saw their net worth fall by nearly $3 trillion. In fact, the debacle surrounding shares in electronic retailers does represent a breakdown in portions of the financial system, just not where you'd expect. The real lesson of e-commerce has very little to with consumers and a great deal to do with the psychology of investors and the ability of a new industry to absorb capital.

The fundamental problem revealed by the e-commerce crash is that, at this point in time, our communication media are far more efficient than our financial markets are. With modern communications technology it is easier to convince millions of people of a point (in this case of the viability of electronic retailing) than it is to absorb those millions of individuals' capital and channel it to enterprises that will pay off in the long term. What happened with the e-tailers is that nearly everybody understood how huge the long-term impact of moving sales out of the store would be and they all, almost as a single giant mass, threw every shred of capital they could find at the industry.

In fact, within a short time (by the end of 1997, at the latest) there was far more available capital than there were organizations that could make use of it. But investors, still recognizing the long-term potential of e-tailing, continued to pour additional money into financing the e-tail buildout. The venture capitalists, predictably enough, weren't exactly shy about accepting these bucketfuls of cash, but that didn't mean they all of a sudden had worthwhile companies to pour that money into. Thus, we saw the only result possible: the money had to go somewhere and, for a time, it went to anyone who could find a noun that hadn't already become an e-noun. Of course, most of these weren't viable companies, but at least the capital had been absorbed.

Expect to see this same scenario play out in every industry that spends time as a media darling in the future. It's a result of the speed with which information moves through our society--it doesn't take long before everybody is looking at the same set of ideas. It shouldn't come as a surprise then that most investors, who all have identical information, come to the same conclusions about the right "place" to park their money. But remember that it says very little about the underlying viability of an industry, though it speaks volumes for the current state of financial fashion.