Special Report -- The 21st Century Economy -- How It Will Work
THE NET IS OPEN FOR BUSINESS--BIG TIME
E-commerce is `an absolutely unstoppable force.' In less than a decade, it could account for as much as 6% of GDP
Tim Stojka was just a toddler in 1967 when Benjamin Braddock, Dustin Hoffman's character in The Graduate, was offered the now-classic career tip: "Plastics!" So it's no surprise that Stojka added a '90s cybertwist. Three years ago, he and brother Nick took time off from running their dad's Chicago plastics company to start the Plastics Network, a Web site that connects buyers and sellers of plastic materials and equipment.
Now, a year after Stojka started conducting transactions on the site, 40,000 visitors a month shop for products from 150 sellers. Commerx Inc., Stojka's holding company for PlasticsNet, takes a 5% cut of transactions, far less than existing distributors, who charge up to 50%. The result: Sales are expected to jump over 300% this year, to about $7.5 million. That's just a tiny fraction of the worldwide plastics market, but the Net's potential to electrify commerce is jolting his industry. Says Joseph J. Liccese, who runs a Web site for Bayer Corp.'s Polymers Div., a PlasticsNet partner: "It's becoming an electronic world much faster than anybody in our industry thought."
Less than a decade after it opened for commercial activity in 1991, the Net is poised to turbocharge E-commerce into a blockbuster economic force. Market researcher Forrester Research Inc. figures that by 2002, Internet commerce among U.S. businesses alone will hit $327 billion, equal to 2.3% of gross domestic product. By 2005, Net commerce could jump to as much as 6% of GDP, reckons Forrester CEO George Colony.
Analysts see E-commerce making up a huge portion--20% to 60% or more--of such industries as computers and software, catalogs, energy, and books. As a result, E-commerce seems certain to provide much of the fuel that will power The 21st Century Economy. Says USWeb Chief Executive Joe Firmage, who sets up Web sites for companies such as NBC and Harley-Davidson: "Electronic commerce is an absolutely unstoppable force."
Already, there are glimpses of incredible efficiencies to come. Starting in early 1999, Canadian Imperial Bank of Commerce in Toronto will start aggregating orders among departments for greater discounts and sending them electronically to suppliers using an Internet procurement program from Ariba Technologies Inc. The bank expects to save almost $100 million on its $1.3 billion in annual purchases.
And it's not just big companies that can take advantage of such savings. Now that the Net lets even small manufacturers communicate intimately with outside suppliers and subcontractors, they're eager to farm out more tasks, such as inventory management and customer service--freeing them to focus on what they do best, such as product design or marketing. "Companies are asking: `Do I really need to do that part of the business?"' says Malcolm Frank, senior vice-president at Boston consultant Cambridge Technology Partners.SCALE SAVINGS. One early sign: Some 1,000 food-service operators have turned to Instill Corp. in Palo Alto, Calif., as their virtual order desk. Instill automates and tracks purchases for restaurants, eliminating the time and errors of phone and fax orders. CEO Mack Tilling, ex-operations manager for a brew-pub chain, expects to process some $1 billion in orders this year, from $180 million last year.
Established companies are starting to use the Web to reinvent themselves, too. One pioneer: W.W. Grainger Inc., a 71-year-old supplier of maintenance, repair, and operating supplies from motors to light switches. Since 1995, when it put its entire 80,000-product catalog online, its Web sales have risen 60% to 100% a quarter, with an average transaction of $250, nearly double the offline average. Hoping to capture a broader array of customers, Group President Donald E. Bielinski is designing a site to gather outside suppliers as well.
But the next wave of Internet commerce will present as much of a threat to such middlemen as it offers opportunity for startups. After all, warns Steve Johnson, co-director of Andersen Consulting's global electronic-commerce program: "Your competition is always going to be just a click away." The new wave will not just save money but create new electronic marketplaces--quickly turning business models on their heads.
It's hard to find a more agile somersaulter than online bookseller Amazon.com Inc. Even though it's still losing money during its expansion phase, analysts say it's successfully busting the rules of bookselling. Despite offering 3 million titles, vs. 175,000 for a Barnes & Noble superstore, Amazon carried only $17 million in inventory last quarter--2% of Barnes & Noble's. And while buyers pay Amazon instantly with their credit cards, it doesn't pay publishers for the books until about 46 days later--a tidy float that reverses the economics of physical stores.
The result: $240,000 in sales per employee, vs. $100,000 at Barnes & Noble. "Amazon isn't about technology; it's about changing the business model," says venture capitalist Ann Winblad of Hummer Winblad Venture Partners in San Francisco. Indeed, the Net's unique economics may well allow a host of upstarts to commandeer wide stretches of their industries. Winblad's partner J. William Gurley calls them vortex companies: Once a site gathers a mass of buyers by offering useful product information, in swirl sellers, whose products draw more buyers in a fast-moving cycle that leaves rivals high and dry. Presto: One dominant player emerges. Sound familiar? Think Microsoft. Suddenly, it's software economics all over again, but in every industry. The leaders see increasing, not diminishing, returns as they expand.
It is these kinds of opportunities that help explain why onetime mortgage-brokerage owner Christian A. Larsen started E-Loan Inc. in Palo Alto three years ago. The goal: to enable homebuyers to bypass mortgage agents, who he says do little but add $1,500 to the cost of a mortgage. Last month, Larsen processed $70 million worth of loans, and E-Loan is growing 25% a month. "We take out all the steps in between the buyer and the mortgage-capital markets," he says. "The Internet accelerates this consolidation."
As the Net brings interaction costs to near-zero, experts say there's little reason not to have competitive bidding on almost any product. FreeMarkets OnLine Inc. in Pittsburgh runs an auction for suppliers and buyers of such industrial products as steel parts and printed circuit boards. It doesn't take possession of goods but does everything else: identifies suppliers, finds buyers, and runs the auction. CEO Glen Meakem expects to handle $500 million in deals this year, up fivefold from 1997, and to post gross sales of $7 million.
Just emerging are exchanges such as Energy Marketplace, a site started last year by Southern California Gas Co. to let energy buyers shop for deals among a host of small and midsize gas providers. And in a few years, automated "bots," or programs that search the Net for the best prices on particular products, may even set off rampant price wars. Says Esther Dyson, chairman of EDventure Holdings: "You'll see more real-time pricing."
And maybe even real-time marketing and product design. Amazon.com, for instance, uses software that collects information about consumers' preferences and buying histories to offer instant recommendations on other books. Says Amazon.com CEO Jeffrey P. Bezos: "We want to be like a small-town bookseller who knows your tastes." Book distributor Ingram Book Group, Amazon's chief supplier, is even developing technology to print books one by one as orders come in--potentially changing the economics of publishing.
Given the rapid pace of change, nobody really knows how deep an impact E-commerce will make. But they're about to find out.By Robert D. Hof in San Mateo, Calif.Return to top