Net Biz Hits Wall of Doubt

Slide tempers expectations for Internet commerce

The jury is still out on whether Federal Reserve Chairman Alan Greenspan will be able to guide the U.S. economy in for a smooth landing, but one thing is certain: In the world of business-to-consumer and business-to-business commerce, the landing has been anything but smooth.

Its been more like the kind of landing Wile E. Coyote experiences when he chases the Road Runner off a cliff. One second youre going along at full speed, with a rocket strapped to your back, and the next, youre picking cactus thorns out of your butt.

To be certain, it hasnt been a bad year in all sectors of business-to-consumer (B2C) and business-to-business (B2B) commerce, but it feels that much worse because of the promise with which most of the players entered year 2000. Looking into 2001, most of the analysts and experts interviewed by Interactive Weeks writers predict there will be more failures, more mergers and more reorganizations through the first quarter to six months of the year. But they also believe that once the shakeout is over, the sector will settle in for a long period of solid, steady growth, based on much more realistic expectations.

Here, then, is our take on the coming year in Internet commerce and finance.

B2C: Revenge of the Brick-and-Mortar

In 1999, it seemed as though everyone sang the praises of Internet retailing and how online stores would put traditional brick-and-mortar shops out of business. But during the 2000 holiday shopping season, pure-play Internet companies were the ones that suffered. Their share of online sales decreased, and offline retailers such as Kmart, Target and Wal-Mart Stores became serious players on the Web.

In 1999, Kmart spin-off offered 1,250 products online. During the 2000 holiday season, it offered 200,000 to 300,000, according to Dave Karraker, the companys director of corporate communications. "Its a whole new site," Karraker says.

Meanwhile, continued to sell a record number of items, but suffered on the stock market. It has yet to convince analysts that it can turn a profit or make serious inroads into other markets.

As a result, the trend of brick-and-mortar sites dominating the Internets retail industry is likely to continue throughout the new year, says Heather Dougherty, retail analyst at Jupiter Research. Consumers like brands they can trust, she adds.

B2B: Boom2Bust?

The B2B sector enters 2001 under the shadow of the fall of Chemdex, one of the pioneers of the development of Internet marketplaces. Insiders and analysts predict further consolidation, but the industry will be able to grow alongside those painful closings and mergers.

As a case in point, Zona Research notes that another 189 exchanges popped up in the latter half of 2000, showing that the industry has many believers despite its problems. Customers like the benefits they gain from exchanges, such as decreased costs and good communication, says Zona analyst Charles King. The question is, how will they apply the lessons learned so far.

Vendors such as Ariba even see a way to cast a glow on a possible economic downturn. Ariba Chief Executive Keith Krach says that in a climate where revenue is decreasing, companies will search for ways to cut costs, and Internet technologies offer some of the biggest paybacks.

"Technology spending isnt going to go away," Krach says. "Its going to get more bottom line-focused."

On other fronts, 2001 is expected to be the year when the term "supply chain" is on every vendors lips — and for good reason. While there has been a lot of talk until now, companies are beginning to make real progress in the area of virtual supply chains — where their internal systems are connected over the Internet to the systems of their suppliers and buyers.

ASPs: After the Hangover

The new year begins for the application service provider industry as it does for so many of us: with a hangover. Demand for software as a service has been growing less rapidly than projected, and low stock prices, dwindling cash and the start of a sector shakeout are inducing some queasiness across the young industry. Analysts expect many ASPs will not survive the year ahead as the industry consolidates, but the outlook remains positive for those that do gain traction.

"Over the next 15 months, we expect the ASP model to undergo a dramatic realignment that will shake out many old players and evolve beyond many of the issues plaguing it today," says Bill Dering, managing director for ASP research at C.E. Unterberg Towbin. "The ASP market will continue to grow steadily over the next two years — just not at the explosive pace previously anticipated — eventually becoming a multibillion dollar and healthy industry."

Trends to watch for in 2001 include more focus by ASPs on vertical markets, maturing software and delivery networks, and increasingly complex business services instead of just application hosting.

Finance: How Low Can It Go?

It would be hard for the year ahead to be any worse for the financial markets than the one that just ended. The Nasdaq went from 5,300 to less than 3,000 in the longest and worst plunge it has suffered in almost three decades. Scores of dot-coms were wiped out, and even the blue-chip technology stocks such as Cisco Systems saw their share prices cut almost in half as the year ended.

"The big news about the IPO [initial public offering] market in 2001 will be if there is one," quips Don Luskin, president of, an online financial services fund company. Security analysts are praying that there will be a January effect — the traditional bounce in share prices after Dec. 31 —- but admit that they have been waiting for one for months.

Technology: Datas Lingua Franca

The need for standards is pushing eXtensible Markup Language as the lingua franca for data on the Internet. Where Java delivered program portability, XML will deliver information portability, say advocates such as Jennifer Hamilton, chief executive of RosettaNet.

Likewise, the need for scalability and reliability on the Internet is pushing server hardware in two directions. One is toward a commoditized, usually Intel-based thin server, densely packed with components. When a service provider needs more power, it adds more thin servers to the rack. The other direction is toward massive consolidated servers, such as the 64-processor Sun Microsystems Enterprise 10000 Starfire or the 35-processor central computer module of the IBM Z900.

New languages are appearing on the scene, such as Hewlett-Packards e Speak, which provides e-services on top of Java applications, orMicrosofts C Sharp, which brings Internet capabilities to the C programming community. Many enterprises are using the new technologies to simplify their user interfaces, building wizards and quick acting software "bots" to perform routine tasks at the desktop or over the Net.

But the biggest software trend may be the adoption of open, collaborative development projects, following the open source code model pioneered on such project sites as SourceForge and SourceXchange and resulting in the Apache Web server, the Linux operating system and Sendmail mail transport servers.

Contributors: Charles Babcock, Technology Editor; Mike Cleary, Senior Writer; Edward Cone, Senior Writer; Mel Duvall, Section B Editor; Laura Lorek, Senior Writer; and John T. Mulqueen, Business Editor