The altering face of e-commerce

But this spring, the 57-year-old Gerstner let out what amounted to a big "Yahoo!" when talking about the Internet's impact on the U.S. economy and the company that he runs - International Business Machines Corp.

The Internet has become "the ultimate medium for business," Gerstner told securities analysts. Over the next few years, he predicted, consumers and investors will be dazzled by the ingenious ways that bedrock U.S. companies such as Ford Motor Co., Wal-Mart Stores Inc. and First Union Corp. will harness the Internet to their advantage. IBM itself is getting 25% of its revenue from areas related to electronic business, he said. Silicon Valley upstarts may be attracting the headlines now, he said, but over the next few years, the Internet presents "a gigantic service opportunity" for established companies like IBM.

Getting with the program
In almost every aspect of electronic commerce, 1999 is shaping up as the year that Corporate America gets with the program. No longer are corporate Web sites mainly a haven for product brochures and digitized versions of the annual report. Now, long-entrenched companies are putting millions of dollars into Internet initiatives to make sure that some "dot com" upstart won't steal their customers away. Meanwhile, pure-play Internet companies are expanding rapidly as well, thanks in large part to capital markets that - at least in the first half of this year - showered money on almost anyone with an e-commerce business plan.

David Roddy, an e-commerce specialist in Washington, D.C., with Deloitte & Touche, the accounting and consulting firm, says that growth forecasts he once thought were too aggressive now turn out to have underestimated the speed with which American consumers and corporations are moving business online.

"The Internet fundamentally changes the economics of transactions," he contends, in ways that greatly benefit both consumers and producers. His ebullient conclusion: Online commerce "has become an unstoppable tidal wave."

Business-to-business e-commerce has virtually exploded. Last year, businesses spent $43.1 billion on Internet-based purchases from other corporations, according to Forrester Research Inc., Cambridge, Mass. This year, Forrester estimates, such spending will leap to $109.3 billion. Nearly half of those outlays, it says, will be in the tech-friendly computer and electronics industries. But some non-obvious industries - notably utilities and petrochemicals - each should top $10 billion in online spending, Forrester concludes.

Consumers' online spending is surging nearly as fast, albeit from a much smaller base. According to research firm Jupiter Communications, New York, consumers this year are expected to spend $12 billion shopping online, up from $7.1 billion last year. Travel, personal-computer hardware and books constitute the three largest shopping categories, with each expected to generate more than $1 billion of purchases this year.

The reasons behind this Internet spending spree vary widely. Customers, both big and small, like the convenience of buying online. When cybermarkets are working properly, appointments, lines and surly clerks become a thing of the past. Web sites, at least in theory, always are open and ready to serve. And in many cases, Web sites offer extra choices and product information, taking advantage of the fact that in the online world, extra shelf space can be effortlessly created at hardly any cost.

Manufacturers and merchants, in turn, have found that online connections with consumers on the one hand and corporate customers and suppliers on the other can expand their sales reach, squeeze out costs and shorten reaction times. Some of the most decisive switches are coming in the auto industry, where once-cumbersome supply chains are being streamlined as never before. In the travel industry, airlines and hotels are finding that they can put their wares in front of consumers more quickly and cheaply than ever before, often displacing travel agents in the process.

Even in some much smaller, out-of-the-way markets, the Internet is changing the face of commerce. In Santa Clara, Calif., a medical-supplies distributor, Neoforma Inc., uses its Web site to make wares available to customers, such as the government of Oman, that it couldn't reach otherwise. In Lakeville, Mass., Ocean Spray Cranberries Inc. uses online technology to give its growers faster, more reliable information about its supply needs and pricing policies.

"Today we are preoccupied with Internet companies," says Andy Grove, chairman of the nation's largest semiconductor company, Intel Corp. of Santa Clara, Calif. In five years, he says, that label will be meaningless because "all companies will be Internet companies."

Grove adds that the Internet-based marketplace "is causing a huge re-engineering of business. It is doing to commerce in the 1990s what Japan's quality and just-in-time practices did to the manufacturing industry in the 1980s. It matches buyers and sellers, so that buyers can become infinitely informed without ever talking face to face."

For all the excitement about doing business on the Internet, both sellers and buyers face plenty of jarring surprises.

From the consumer's perspective, the Internet is infested with sites with inadequate customer service, making a mockery of vendors' claims that online buying by its very nature will always be safe, easy and fun. What's more, the profusion of companies with online ambitions means that skilled programmers are in short supply, leaving many companies with Web sites that misfire and crash annoyingly frequently.

In music, the ability to send huge digital files around the world very quickly, free of charge, raises the specter that anyone trying to sell traditional recorded music in a box is stuck in a dying business. And in industries such as computer equipment, retailers are slashing prices in what may be a suicidal battle for market share. Consumers enjoy the resulting bargains, but merchants wonder how long they can afford to slug it out.

Ultimately, many companies doing business online are gambling that it's worth doing almost anything to grab a customer today. In addition to setting rock-bottom prices, they are pumping huge amounts into radio, print and online ad campaigns, spending anywhere from $10 to $200 to acquire each new customer. "Their belief is that the lifetime value of a customer is so great that all-out marketing and dramatically low prices initially may pay off," says James Breyer, a venture capitalist at Accel Partners in Palo Alto, Calif.

In some cases, Breyer says, that belief may be justified. Today's first-time dabbler in electronic commerce may turn into next year's high-volume shopper, remaining loyal to the first Web site that captured his or her business. What's more, merchants that gather detailed data about customers' shopping habits may be able to mine that data for profit, as manufacturers pay handsomely for the chance to reach those shoppers via ads and targeted e-mail.

But in other cases, Breyer says, electronic-commerce companies may have unrealistic hopes that they can someday stanch their losses by sneaking in price increases when customers aren't looking. The stock market's Internet mania of 1998 and early 1999 has made almost any growth strategy - no matter how steep the losses associated with it - seem justifiable, he says.

"That isn't sustainable over a long time," he observes. Still, venture capitalists can't stop themselves from funding more Internet deals. In the first quarter of 1999, $1.8 billion - a record 43% of all venture investment - was channeled into Internet-related companies, according to PricewaterhouseCoopers LLP. Almost every imaginable type of project attracted money: Companies offering free e-mail, online advertising, online access to stock offerings and even online pet supplies all benefited.

For start-ups, the faster things change, the more the market is likely to prize their greatest strengths: an ability to react quickly to new opportunities. Big, established companies are likely to be laggards at spotting fresh ways to do business - and equally ponderous at mobilizing to take advantage of those situations.

Bid edge
But as the Internet becomes more a part of the everyday fabric of business, established companies have "overwhelming advantages," says Jeff Bezos, the founder and chief executive officer of Amazon.com Inc., the Seattle-based online merchant. Their household brand names and larger budgets should help them greatly as they try to become effective competitors in the Internet economy, he says.

After all, Bezos says, look what happened when personal computers first arrived on the scene in the late 1970s. At first IBM didn't take the new market seriously. Then it worried that PC sales would undermine its existing products. Then it launched its own PC, but kept prices high - and was systematically undercut by upstart rivals. Eventually, though, IBM became a major force in the PC market, and a standard-setter for everyone else.

Anders, a senior special writer in The Wall Street Journal's San Francisco bureau, served as contributing editor of the report.