|A glance at the market for dotcom shares suggests the world of e-commerceis a topsy-turvy one. Amazon.com, for example, is a giant amonge-commerce ventures, with almost $700m sales in the last quarter of1999.|
Although it made an overall net loss of $323m in the sameperiod, almost everyone seemed surprised and delighted with the news thatAmazon’s US book business had showed a profit – the first time this hadhappened since Amazon began, five years before.
Again, look at Freeserve, the ISP and portal company whose IPO helped toprecipitate dotcom investment fever. Shortly after becoming one of eighthi-tech companies that displaced the likes of Whitbread from the FTSE-100in March, it announced third-quarter losses of $3.5m. But analystsand investors were delighted because revenues and user numbers hadsurpassed predictions.
On 8 March 2000, Howard Davies, chairman of the Financial ServicesAuthority, was moved to warn prospective dotcom investors, via Radio 4’sToday programme: “These companies for the most part have never made aprofit, have never paid a dividend, and have no intention of paying adividend, so the normal basis on which you value a company is no longerrelevant,” he said.
So let’s say you’re FD of a traditional company – a bricks-and-mortarcompany in Internet-speak – that’s thinking of dipping a toe or three intothe waters of e-commerce. Faced with this confusing picture, how can youset about evaluating the proposition?
E-commerce is about business processes, not IT
It’s clear that you can’t expect to see a business case of the typetraditionally associated with IT projects. In fact, you may not be lookingat an IT project at all, but at a potential change to your whole way ofdoing business, as Richard Brown, senior manager, information systemsassurance and advisory services, with Ernst & Young, points out. “First,you have to ask what exactly what it’s going to mean to your business.Designing the correct business process is the most important and difficultjob. After that, using IT to make it happen is comparativelystraightforward.” So e-commerce should be approached as businesstransformation with IT as the enabler.
Brown divides companies contemplating e-commerce into three categories.First, there are those that are out to maintain and nurture what theyalready have, using e-commerce to protect the core business: for example asupermarket setting up an Internet shopping service alongside its existingstores. (Though it might sound relatively simple, this could impactbusiness processes extensively, for example because of the need to providehome delivery) Second, there are those who decide to change the gamethey’re in, like Encyclopedia Britannica which now offers its content freeon the Web and aims to make money from its Web site rather than fromselling encyclopedias. Third, there are those which create a separatedotcom business, as Prudential did with Egg. It’s important to be clearwhich of these things you’re considering doing, Brown says. Only then canyou begin to form an idea of what it will cost and achieve – and how muchthe business will need to change.
What makes a sound e-business proposition?
Mass hysteria apart, what did the punters like so much about glamorousstockmarket entrant lastminute.com, which had never made a profit but wasvalued by the market at over three quarters of a million pounds on themorning it floated? A major consideration in assessing a dotcom is theuniqueness of the idea, but Brown reminds us it’s not enough to start outunique: “You also have to have some relationships or other advantages thatmake the idea difficult for others to copy.”
Often mentioned as a plus-point for lastminute.com was the fact that the19-month-old company had registered 1.1 million potential shoppers. Italso pointed to established relationships with customers (i.e. those withcommodities to sell on the site). The company had quickly managed toestablish a strong brand through a combination of advertising and copiousmedia coverage. All these things were advanced in support oflastminute.com’s claim to a substantial headstart over any imitators. Timewill tell how well-founded that claim is, and how realistic the valuationwas.
The fundamental things apply
However bizarre the behaviour of the e-commerce world, and those whoinvest in it, may appear, the laws of economics still apply in the longrun, points out John Gilligan, partner in charge of the e-Catalyst groupat Deloitte & Touche. “A company is still worth the present value of itsfuture cashflow. But in the case of dotcom startups, the statisticsnormally used in valuations don’t exist, and so the market tries to valuethem relative to other companies – one reason why the market is sounstable.”
Gilligan argues that to get a realistic view, the trick is to take asensible view of risk. “There’s a systematic mis-estimation of risk inparts of the market: everyone thinks they’re buying a winner.” He alsosees merit in an argument put forward by Harvard Business School andothers that e-business enterprises are best spun off as separateenterprises in the way that Dixons has done with Freeserve. “That way youcan float it separately and let the market decide what it’s worth.” Notevery e-commerce activity may be as easy to spin off, but Gilligan claimsit should usually be possible.
There’s no point in trying to do e-commerce on the cheap. If youre-commerce operation doesn’t please, your whole brand is liable to gettarred with the same brush. Recently, for example, toysrus.com was said tohave failed to meet thousands of its US Christmas orders on time, andparent Toys’R’us now faces a lawsuit by disappointed customers, a form ofpublicity that it can probably do without.
Gilligan recommends that e-commerce projects be undertaken for positiverather than negative reasons. “Rather than regard e-commerce as a threatand adopting defensive strategies, it makes sense to try to be the best inyour field.” Even though it may be a long time before some of thesebusinesses become profitable, the best stand to make vast amounts of moneyeventually, he suggests. Having a strong vision and sticking to it couldpay off handsomely.
Bricks-and-mortar companies have a ready-made advantage over startups inthat they already have an established brand and customer base as afoundation for any e-commerce foray. However, if the e-commerceproposition doesn’t look strong enough to stand on its own, it doesn’tmean sitting back and doing nothing. Major automotive companies in the US,normally aggressive competitors, have set up a joint e-commerce venture tomanage the supply chain electronically. Lateral thinking is the order ofthe day in e-commerce wonderland.
Deloitte & Touche on e-business: www.deloitte.co.uk/ebusiness/home.htm
Information on the class action against ToysRus:www.endfraud.com/classactions.html
Encyclopedia Britannica: www.britannica.com
Financial Services Authority: www.fsa.gov.uk
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