Survival of the Fastest

Just because you're an Internet business in the digital economy doesn't mean you've got it made in the shade. A panel of E-commerce experts warns of treacherous times ahead.

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As they analyze an increasingly tangled Web, E-business gurus see trouble -- even extinction -- ahead for entrepreneurs who aren't on their toes

Once upon a time, there was a happy land called the Web -- a great, open, global, and democratic marketplace where opportunity seemed to be as limitless as real estate. Merchants from around the kingdom scurried to erect virtual shops serving customers who were willing to live with sore typing fingers if it would save them a trip to the mall. The future looked especially bright for the "dot-coms," pure Web companies conceived and executed on-line, and thus lacking the baggage of their terrestrial counterparts. As the millennium approached, Internet entrepreneurs watched annual on-line orders climb to 1 billion. They smiled, patted one another's backs, and took early retirement.

Well, like most stories beginning "once upon a time," this one is a little too good to be true. For many Web-based companies, success, at least in terms of profits, remains elusive. And a number of circumstances are making things harder. First there's the noise: every day, hundreds of new Web shops sprout up, hoping to catch the interest of Joe and Jane Consumer. Second, customers are getting spoiled. Visitors will click off, never to return, if a site isn't clever, easy to navigate, and fulfilling. Meanwhile, established brick-and-mortar businesses with big brand names, solid infrastructures, and legions of employees are muscling in. As those brand-name behemoths -- Nike, Gap, L.L. Bean -- move in, consumer business could grow ever harder for the small Internet-based company to attract. Today small and midsize retailers capture only 9% of Web sales, reports Forrester Research, based in Cambridge, Mass. By 2003, with more large companies dominating the Net, that market share will have dropped to 6%, the research outfit predicts.

Moreover, while start-up dot-coms struggle to attract consumers, they may be missing more-lucrative opportunities -- particularly in selling goods and services to other businesses. Forrester predicts that business-to-business sales over the Internet will have grown from $43 billion in 1998 to a staggering $1.3 trillion by 2003.

What does all that mean to the Internet entrepreneur? To find out, Bronwyn Fryer, a contributing writer at Inc. Technology, asked six of the brightest stars in the E-commerce world to describe the current and future state of Web business. The participants in the following roundtable discussion -- conducted entirely by E-mail -- include author Evan Schwartz; MIT professor Thomas Malone; Dell Computer vice-president Richard Owen; John Briggs, director of E-commerce production for the Yahoo Network; Mark Hoffman, CEO of Commerce One; and Greg McLemore, president and CEO of WebMagic. (Profiles of the participants appear below.)

The Ages of the Internet
Inc.: If you were writing a history of Web commerce that identified different epochs, what age would you say we are in now? What are its defining characteristics?

Briggs: If it were to take God seven days to create a mature Web-commerce universe, I'd say that we are only on the third day so far. On the first day, God created the Internet.

On the second day, God created Web-only companies that really understood the Internet and knew how to leverage it. These were mostly low-overhead businesses that could offer commodity products such as books, music, videos, and computers. While those businesses have managed to sell a lot of product, most haven't figured out how to make a profit.

On the third day, God allowed traditional brick-and-mortar and catalog companies to recognize the opportunity of the Internet, and they began selling merchandise on-line. It was easy for the catalog industry, because its infrastructure is well suited to on-line sales and distribution. Brick-and-mortar retailers have had a tougher time. Not only have they had to educate themselves about the Web, but they have also had to develop the distribution, fulfillment, and inventory-automation mechanisms to enable them to conduct business on the Internet.

But many companies, like the Gap, have overcome those obstacles and are beginning to thrive on-line. They do that by passing on their volume pricing to the Internet shopper and leveraging their brick-and-mortar locations.

Schwartz: John, I'm intrigued by your creationist view of the Web universe. I happen to believe that Darwinian evolution is an appropriate metaphor, but I don't want to turn this into a Kansas school-board meeting.

For my part, I think we have already witnessed something like a Cambrian explosion of life. Since Netscape went public, in 1995, we've seen a big bang of new economic species burst forth, producing thousands of enterprises that couldn't have existed previously. All the necessary elements came together rather suddenly. Software for creating and browsing Web sites flooded the market, making the digital landscape hospitable. And the venture capital started flowing like a river, so there was enough food.

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