The Web Pays: New Market Recasts Industries

 
 
By eweek  |  Posted 2000-11-13
 
 
 

The Web Pays: New Market Recasts Industries


As last years explosive dot-coms turn into this years dot-bombs, theres a growing perception that the Web isnt a place to do business. In this case, perception is not reality.

A new study from Forrester Research found that e-commerce - both business-to-business and business-to-consumer - will continue to grow and will account for 8.6 percent of worldwide sales of goods and services in 2004, with online sales reaching $6.8 trillion.

Forrester also found that the Web will continue to transform entire industries - "from raw materials like timber, all the way to purchases of household items like books and magazines," the report reads.

Nowhere has the Web had more of an impact than in the high-tech industry. Not long ago, computer and electronics equipment makers were the proverbial cobblers, reluctantly doling out only the barest necessities to their soleless information technology departments. Today, the high-tech sectors Internet efforts, among the most forward-thinking initiatives in corporate America, are profoundly changing high-tech manufacturing, squeezing time, inventory and expense out of product design cycles and supply chains.

And because of the Web, its no longer business as usual in the financial and communications services, entertainment, advertising and scores of other industry sectors. Heres a look at some of the industries the Internet continues to remake.

High


-Tech High"> High-Tech High

By Charles Babcock

It should come as no surprise that the top five spots on this years Interactive 500 belong to high-tech manufacturers: Intel, IBM, Cisco Systems, Nortel Networks and Dell Computer.

Dell and its friendly-faced chief executive, Michael Dell, are good examples of todays always-on, always-going techies. Dells factories never keep more than two hours of inventory on hand, because the companys Internet-based supply chain is geared to deliver parts just in time and with great reliability.

"Were trying to squeeze it further," says Matt Boucher, a company spokesman.

Dell constantly projects the needs of its specific factory locations based on customer orders that it captures on its Web site. Suppliers continually check those projections at Dells Value Chain Web site and prepare their shipments accordingly.

"Before the Value Chain Web site, we had a lot of employees creating spreadsheets and printing out reports. With $50 million in orders a day online, it kept getting more complex," says Venancio Figueroa, another Dell spokesman. The Web site gives all suppliers a common place to go to get the information they need, whether the factory to which they ship is in Ireland, Malaysia or the U.S., he says.

Intel - again the No. 1 company on the Interactive 500 - likewise automated exchanges with a key customer group, the motherboard makers in Taiwan, over the last year. In order to do so, the company had to work with the Internet service suppliers in Taiwan to upgrade their service. Now the motherboard manufacturers can get component specifications, submit orders and track order fulfillment online, which replaces 60,000 faxes that Intel formerly received each month from the manufacturers.

"Data is oxygen to all planning systems," says Colin Evans, Intels director of e-business strategy. Intel produces some 25,000 parts. Instead of sending its catalog once every 90 days to distributors, it now "introduces new products every day" and is better able to keep its manufacturing lines synchronized with customer orders, he says.

Intel also is an early implementor of an eXtensible Markup Language dialect for document exchange between electronic component manufacturers and device makers. It implemented XML-based supply chain messages with Compaq Computer in July based on a Partner Interface Process defined by the RosettaNet XML consortium. Intel has since implemented XML-based exchanges with Hitachi Japan, IBM and Pioneer Electronics.

Another top Interactive 500 high-tech company, National Semiconductor, attracts 2,000 visitors per day to its purchasing information Web site and refers them to its distributors or its own purchase site, according to Phil Gibson, director of interactive marketing at National. Instead of making "three or four phone calls or leaving voice-mail," customers learn about the latest products, what other components work with them and how much they cost, he says.

By being able to check a new parts compatibility with other parts, design engineers are taking "weeks and months out of the design process" for product prototypes, Gibson says.

Speed Dial


Speed Dial

By Dana Coffield

Also looking to compress time are the communications services companies.

Russ McGuire, a strategist at TeleChoice, a communications consultancy in Tulsa, Okla., says getting services turned on in a timely manner is among the most critical issues for communications companies today. Because it can take months for some services to be provisioned, worried customers often place orders with several carriers. "When one delivers, all the other orders are canceled. The problem is multifaceted, but e-commerce is at the core of the solution," McGuire says.

"Customers order the service and track the status of the orders through a Web interface. That order is translated into automated provisioning activities within the carriers own network, and usually results in e-commerce orders being placed with other carriers for portions of the service that are off-Net," he says. "Success - resulting in rapid delivery - increases revenue and, perhaps more importantly, speeds up the cycle time between when an order is received and when the customer begins paying."

WorldCom CEO Bernie Ebbers has made the carrier the top communications company on this years Interactive 500 list, with $6 billion in online revenue. Until two years ago, WorldCom focused its e-commerce strategy toward the consumer market. But in April 1998, the telecom giant began rolling out online tools for commercial customers through its WorldCom Interact portal.

WorldCom Interact at first offered online account management, and added electronic billing late last year. Later this fall, the company will begin beta testing an online ordering system that will allow customers to track orders from start to finish and help large operations to decentralize telecom management and order on the fly.

"As customers need to add capacity, they can do it in a proactive, aggressive manner," says Michael Tusa, WorldComs executive manager of product marketing. "We are confident its going to be a big hit.

"I think customers have really turned the corner in their Internet awareness, to the point where a lot of our development is being driven by customer-specific visions," Tusa says. "The number of online IDs within Interact has more than doubled in the last 12 months."

At Qwest Communications International, another top Interactive 500 company, the number of online orders has doubled in 2000, according to Hal Wolf, vice president for e-commerce.

Qwest, which reports a combined $250 million in online sales from "classic Qwest" and its merger partner, U S West, offers services such as ordering, change of service and repair ticket initiation, as well as such basic convenience services as online directory assistance.

Wolf says the issue is customer convenience and the payoff is customer retention. "Its very simple: We provide the services the customer needs on their schedule, at their convenience, using any method practical for them."

Wolf says the merged Qwest is carefully selecting "best-of-class" features from the old Qwest and U S West sites to help improve Web-based services for both residential and commercial customers.

The more difficult part of that effort is to develop effective tools for commercial customers. "Residential customers . . . are easier to undertake than business customers, which may have tens of thousands of lines across many states," Wolf says. "Its not as easy to put them online as you would like."

Indeed, ISPs have complained recently about Qwest services. But dealing with businesses is work worth doing, says Beth Gage, a strategist at TeleChoice. "There is so much room for improvement, and there are a lot of different benefits," Gage says. "Some may result in direct savings on installation; others may generate customer good will, making them feel like a valued customer, not a second-class citizen."

Flying High


Flying High

By Teri Robinson, Special to Interactive Week

Another sector thats really taking off is the online travel market. A whopping "$12.2 billion of consumer leisure travel will be bought online [this year], while $4.7 billion in business travel" will be purchased via the Web, says Henry Harteveldt, an analyst at Forrester. "The Internet will represent 7 [percent] to 8 percent of the total" travel market. And according to an online travel study by Gomez Advisors in Lincoln, Mass., "Thirty million people have bought travel online," says analyst David Provost, with another 18 million new online travelers expected in the next year.

But in the midst of all this fervor and opportunity, some pioneers and past moneymakers are seeing their stars fade or even disappear altogether.

Priceline.com is a perfect example. While travelers initially flocked to the discount supersite seeking the lowest-priced tickets, unfathomable restrictions and poor customer service have conspired to erode the companys stronghold. "Priceline.com is weak. It has lost its edge," Harteveldt says.

The company can attribute its fall in large part to increased competition from the airlines themselves. Now that the transaction processing and site building issues have been sorted out, the airlines and online "travel agencies," such as Expedia and Travelocity.com, have had a chance to take a good look at the Priceline model, take a few pages from its book and make their own discounted offerings, with one major difference - the focus has shifted to the customer. "The [airline] companies are saying, Its my brand, and if anyone is going to discount it, its going to be me," Harteveldt says.

At a time when airlines are trying to boost revenue by filling seats, they need to build the type of loyalty that keeps fliers coming back time and again.

Airlines are also offering more travel and vacation packages, as are travel agencies, which, according to Harteveldt, have seen their ranks diminish as less-value-inducing agencies fold or merge with more stable entities.

As they cater to the customer, airline sites are becoming more sophisticated. "Airlines are increasingly placing traditional customer service capabilities on their Web sites," says Provost, who expects that travelers will soon be able to check themselves in and get boarding passes from airport kiosks, or from their computers at home or in the office. And one day soon, Provost believes, travelers will fill out a series of data fields at a travel site so the system can match their desires with the best travel options.

Harteveldt says travel companies will get closer to a one-to-one marketing model, delivering offers tailored to the individual traveler. Hotels and car rental companies are finally starting to get on board, he says, with only one hotel chain listing online "hotels where rooms are available and letting [you] make reservations for multiple rooms."

Airlines have begun to pool their resources, finding that there is greater strength in numbers. Six of the major airlines, including Delta Air Lines - which, according to Interactive Week research, logged $850 million in online revenue for the year ended June 30 - have joined forces to build a supersite, Hotwire, that promises to deliver the best fares and packages to online travelers. Would-be travelers will be blind to the airline and departure and arrival times, and will simply select their flights based on fares.

While travel and transportation companies will continue to expand offerings to leisure travelers over the Web, "they will also provide the tools to the self-managed business traveler," Provost says. Harteveldt predicts that much of the focus will center on small businesses whose requirements differ from leisure travelers and that dont have a whole travel department doing their bidding as corporate travelers do.

Like other industries, travel and transportation are looking at ways to marry wireless technology to the Internet. Early attempts to join the two in this market have fallen short on the usefulness meter. "There are a lot of neat Dick Tracy things being done, but theyre useless," Harteveldt says.

Despite the shortcomings, Provost expects wireless to play a prominent role in online travel and transportation strategies in the future. "There will be a whole realm of wireless services - [from] checking schedules through a PDA [personal digital assistant] and rebooking a flight [to] receiving proactive pages to alert you when a flight arrives," he says.

While the Web has given rise to many features that were never before offered directly to the customer, the travel and transportation industry has yet to fully tap its online potential. "Next year and in the year after, it will be a whole different world," Provost says.

Money, Money, Money


Money, Money, Money

By John T. Mulqueen

It should come as no surprise that the companies whose business it is to make money have figured out a way to make a buck or two on the Web. Charles Schwab & Co., E*Trade Group, TD Waterhouse Investor Services, Fidelity Investments, Ameritrade, Principal Financial Group, Datek Online Brokerage Services and DLJdirect are all in the top 50 of the Interactive 500.

Aside from the whirligig stock markets themselves, consolidation and mergers are the most conspicuous forces affecting the financial services business, including the online sector.

Credit Suisse Groups $11.5 billion bid for Donaldson Lufkin & Jenrette, including DLJdirect, is the largest transaction directly involving an online service, but E*Trade and Schwab have bought other companies to expand their reach and services.

E*Trade has expanded into France, Germany and Norway through acquisitions or partnerships. The company has set up offshore trading operations in Bermuda to handle its expansion into overseas trading, including Japan. And it has acquired other companies, such as PrivateAccounts.com, to gain access to new customers and to acquire new products.

Once just a high-volume trading machine, E*Trade is emulating Schwab and more traditional full-line firms by offering automated teller machine services, online banking and support for financial advisers. The firms new marketing line - "E*Trade. Its Your Money" - tries to drive home the idea that it is a financial services company.

International markets are especially attractive, since the markets for investing and online trading are just beginning to develop in Europe and elsewhere.

Schwab is expanding across product lines and geographic regions. The company plans, for instance, to add bond trading to its services, which also include equities and mutual funds, and it has begun offering services in Hong Kong, China. Schwab and E*Trade announced Chinese language information services within days of each other. And TD Waterhouse, perhaps the most conservative of the online firms, is trying to develop a business in India.

The major financial firms - such as The Goldman Sachs Group, Merrill Lynch & Co. and Morgan Stanley Dean Witter - so far have not made any attempt to buy a major online firm, or at least no attempts have been made public. They are, however, buying the companies that handle the trading for these firms, and often have their own electronic trading systems.

Goldman Sachs is buying Spear Leeds & Kellogg, a leading market maker and owner of a 20 percent stake in RediBook, the third largest electronic communications network. Goldman Sachs reportedly has been trying to acquire Knight Trading Group, the largest market maker and trader processor for the online firms. Merrill Lynch has acquired Herzog Heine Geduld, another market maker with an electronic trading product, and Deutsche Bank has picked up National Discount Brokers.

These companies are being acquired more for their ability to make markets - trade among themselves in securities - than for their online capabilities, but the capabilities are there for development.

Ads Dont Add Up


Ads Dont Add Up

By Mindy Charski

While computer and communications companies, financial service firms and online travel agents continue to see an online upside, other industries are trying to figure out which way the electronic currents will run next.

Its hard to look at those struggling to survive on Internet advertising and believe the online medium will ever become a serious way to reach consumers. But believe it, analysts say. Even as dot-com revenue started to dry up, overall revenue from Internet advertising surpassed the $2 billion mark for the first six months of this year, giving a boost to information service sites. And market watchers say traditional advertisers are going to lead the sector out of its current gloom and doom.

But it may take a while.

Merrill Lynch analyst Henry Blodget says the hangover that has resulted from the pure-play "dot-com advertising binge" could last for months. The problem is that traditional advertisers arent moving dollars online fast enough to offset the loss of dot-com dollars, Blodget says in an October research report. However, he predicts that by the end of 2001, pure plays will account for only 38 percent of online spending, while traditional advertisers will account for 62 percent.

"Its impossible for mainstream advertisers not to see a lot of people [online] and salivate over the potential to communicate with them more effectively than they can with other media," says Unicast Communications Chairman and CEO Richard Hopple, whose company develops ads, called superstitials, that resemble television commercials. About 78 percent of those using superstitials are traditional advertisers.

Large brick-and-mortar companies have been particularly reluctant to throw big dollars into a medium they cant quite understand. A survey conducted by the Association of National Advertisers found the No. 1 barrier to online advertising is the lack of proof of return on investment; the inability to reliably measure an audience is another.

Miller Brewing is among those diving in, nonetheless. And some of the Internets big content companies stand to benefit.

Miller now sponsors SportsLine.coms fantasy football league, which had previously been a fee-based service. "I think theyve taken a solid step to better understand the interactivity of the Internet," says Mark Mariani, president of sales and marketing at SportsLine. "This is the prototype of what wed like to do moving forward." Today, traditional companies make up 70 percent of SportsLines advertising roster.

The Coca-Cola Co. is among the many advertisers hooking up with America Online. The move to market its brands through AOL is the beverage companys first worldwide interactive marketing initiative. AdZone Interactive estimates that Coca-Cola spent only $89,356 on Net advertising from January to September. Chief rival PepsiCo has spent more than $9.4 million, according to AdZone.

Content providers can only hope theyll still have enough fizz when traditional advertising dollars really come to the medium.

Peering Into The Future


Peering Into The Future

By Max Smetannikov

In addition to the content companies, the portals and other Internet services companies that depend, at least in part, on Internet advertising also face some uncertainty.

Indeed, some of yesterdays favorite Internet companies - AOL and Yahoo! - are undergoing increased scrutiny by investors who fear the worst: online advertising revenue drying up.

Non-Wall Street analysts are taking an even more hawkish look at the whole Internet economy phenomenon. According to Allan Tumolillo, chief operating officer at reputable Probe Research, what is bound to bring a lot of companies to their knees and wreck more than a couple of business models is the expense and sophistication of the new data networks that support most Internet service providers and online services companies.

Indeed, whether it was convenient or not, the telecom industry distributed the cost of making phone calls evenly among its customers based on factors such as the length of the call and the distance between callers, Tumolillo says. But, he says, the Internet economy has thrown a lot of these metrics out the window, propagating flat access, online sales and advertising, without really knowing if these business models would work - and it looks like many dont. So many, AOL and Yahoo! included, will be forced to constantly find new ways of extracting value out of their customers using new concepts and technologies, Tumolillo says.

Consolidation is one of those resources. AOLs merger with Time Warner paved the way for a creating one megaprovider, with a few smaller companies such as EarthLink, Prodigy Communications and Juno Online Services becoming proud, large, second-tier players, and the rest having trouble breaking the glass ceiling of regional growth.

Look for the few companies still standing to launch new services that will create revenue streams, says Charles Ardai, president and CEO of Juno. All bets are off, and free Internet access could fall victim to the times - and possibly even flat-rate Internet access as well.

One of the new technologies that Tumolillo is very bullish on is peer-to-peer networking, the technology that the Napster phenomenon has made a household concept. Industry participants, however, dont see this, or any other technology, as a panacea for the sectors troubles.

Entertainments New Tune


Entertainments New Tune

By Sara Robinson

This year may long be remembered as the year of Shawn Fanning and Napster, the popular music file swapping service thats the subject of a high-profile lawsuit. Napsters significance isnt just its challenge to copyright law, however. To entertainment analysts, what Napster has demonstrated is that the demand for Internet entertainment is not just hot - its scorching.

Look at the numbers: Since Fanning founded Napster, the services base of unique users soared from 1.1 million to 6.7 million from February to August, according to Media Metrix, making Napster the fastest growing application it has ever tracked on the Web.

Given the demand for digital music, its not surprising that company executives and analysts tout Internet entertainment, particularly audio and video, as the next big thing. They envision a world in which brick-and-mortar CD stores and video rental outlets are a thing of the past.

It hasnt happened yet. The Interactive 500 contains only a smattering of entertainment companies.

The barrier, says Phil Leigh, vice president of Internet research at Raymond James Financial, is the reluctance of content companies to release their catalogs for online distribution.

"The latent demand is clearly there," Leigh says. "Its just a question of when the copyright holders give out the keys to the kingdom."

Entertainment companies, however, say that unlocking the gates is harder than it looks. The switch to distributing music and video over the Internet requires secure systems that thwart pirates and track usage information and payments. Such "digital rights management systems" are still being developed and tested, so companies are reluctant to use them for large-scale distribution.

Even more important, the Internet companies want to use radically different business models, such as subscriptions, that require the content companies to have new types of contracts with their stables of artists and customers.

And the content companies fear theyll lose money if they risk everything on a different system for generating revenue.

So, even as Internet entertainment companies are champing at the bit, their most essential partners are moving slowly and cautiously. Too cautiously, Leigh says, noting that a whole generation of kids is used to getting their music for free.

"The public has a huge appetite for getting entertainment over the Net. Its just a question of when it all gets legitimized," Leigh adds.

E


-Tailing Trailings"> E-Tailing Trailings

By Laura Lorek

If you want to talk about pressure, you need only look at the e-tailing space. A number of e-tailers have downsized and some have gone, or are going, out of business. Many online retailers are cutting back on their lavish giveaways and curtailing their TV and print ad campaigns. Meanwhile, offline retail giants such as Kmart, Target and Wal-Mart Stores are making serious Web plays.

Another blow to pure-play Internet retailers is that Internet shoppers in September spent $8 less on average than they did in August, despite an increase in the overall number of online shoppers, according to the National Retail Federation and Forrester Researchs Online Retail Index. Not a good sign as online and offline retailers head into the critical holiday shopping season.

Still, e-tailing king Amazon.com remains undaunted. The company recently released earnings that beat analysts estimates. The online superstore reported revenue of $638 million, a 70 percent increase over the same period a year ago. The company is, however, still losing money. It posted a net loss of more than $240 million.

Amazon CEO Jeff Bezos is optimistic, though. "We expect this will be our best holiday season ever," he says.

Rocket Fuel