Although the web start-ups grab the headlines and magazine covers, it’s the bellwether bricks-and-mortars that represent the real internet revolution. These are the companies that have been shaken by internet business models and have the most to gain – and lose – in the new economy.
The early e-business pioneers who successfully integrated the web into their businesses reaped massive rewards. AOL is generating more than $1bn (#0.6bn) of free cashflow a quarter, while Oracle says it has saved as much in a year by moving core business processes online. Federal Express handles 70% of all customer enquiries online; its goal is 100%. The average saving is $10 per query.
While some companies are racing ahead, other bricks-and-mortar giants have been slow to react to the internet – and who can blame them? The web is a risky business. More than 200 start-ups went down in flames last year, 75% of them in the final quarter of 2000, according to internet research company Webmergers. A further 200 firms closed their doors in the first two months of 2001.
Not all of these companies were flaky start-ups staffed by 22-year-old graduates riding scooters. Some were solid business-to-business ventures backed by the world’s most respected companies. Dell’s B2B marketplace closed shop last month, following anaemic sales. News International, IBM, Time Warner, Morgan Stanley and MTV have all closed or stripped down their web ventures in the last 18 months.
These closures followed one of the most memorable years in business history.
Through 2000, venture capitalists invested $2.2bn into UK start-ups, up 70% from the previous year. It was a golden age of entrepreneurialism, comments Robin Tye, UK e-business partner with PricewaterhouseCoopers.
‘Technical innovation pushed back the boundaries of what was seen as possible, and investment increased dramatically as a result,’ he says.
Somewhere around April, though, the vision went terribly wrong. PwC reported most UK dotcoms would run out of cash within a year and, with the world’s stock markets in free fall, the venture capitalists cut off the lifeline for loss-making companies. The fallout wasn’t far behind – beginning with boo.com and continuing with CDNow, Boxman, Dressmart, Clickmango, Wetnose.com, netimperative and dozens of others.
The bloodletting isn’t over yet, warns Matthew Nordan, director of European research with Forrester. ‘We’re going to see the trickle of failures become a flood,’ he says. ‘The climate today is much tougher, so companies have to offer something that isn’t just good, but unique.’
Given such apparently poor odds, it’s hardly surprising that many businesses simply withdrew from the e-business game. According to consulting group Rubus, fewer than 15% of the UK’s top 100 companies have a formal e-business strategy in place for 2001. Only 46% of those surveyed had a dedicated e-business director, and 35% of companies says they expected other issues to take priority over e-business this year.
In truth, while the web is a risky business, watching the shakeout from the sidelines could be even more dangerous. ‘While today might not seem like a good time to invest in e-business, the companies that get the models right now will fly in the upturn,’ says Tye.
Take consumer e-commerce, pronounced dead sometime between the closure of boo.com and the collapse of Amazon.com’s stock price. ‘We’re still very much in the infancy and there’s time for plenty more good ideas to emerge,’ explains Tye. ‘The difference is that people are more realistic about what you need for e-commerce. You need brand, liquidity and fulfilment – and a bricks-and-mortar firm has all of these.
‘Businesses must also look at how to repackage products as, for example, Prudential did with Egg,’ added Andrew Pinder, the UK’s e-envoy. ‘The biggest challenge is for companies to explore alternative channels to those already in existence, so that the consumer is offered more choice.’
Still not convinced? It’s worth noting that while 210 internet companies closed last year, a further 900 were rescued by old economy buyers. Take Bright Station, the offline consulting and technology group that bought the e-commerce systems and associated intellectual property rights of boo.com and which later invested in netimperative.
‘By buying the infrastructure, we gained access to multiple European markets and gained new local relationships,’ says Dan Wagner, Bright Station’s chief executive. ‘It let us side-step a lot of issues, from tax and legislation to localisation of content.’
As dotcoms continue to struggle under financial pressures, all that remains is for bricks-and-mortars to pick up the pieces, explains Nigel Montgomery, research director with AMR Research. ‘We will see a lot of dotcoms try to sell their functionality as a service or product to bricks-and-mortars,’ he says. ‘But I don’t think it will work long-term, and it could cause many to fail even faster.’
Certainly, 2001 has seen a number of companies follow Bright Station’s lead and buy out struggling or dead dotcoms. Kingfisher bought into CD retailer Streets Online and health retailer Thinknatural.com, while Great Universal Stores bought defunct internet service provider Breathe.com and computer retailer Jungle.com.
Bricks-and-mortar businesses have far more to gain from e-business than a new channel to market. ‘The business-to-consumer market always seemed high risk, but B2B is a technological solution to a real business problem, which is why that market will thrive,’ says Tye. ‘We’re also seeing a real growth in business-to-employee e-business, where companies create customised portals for work, finance and hobbies. Businesses are now realising that the internet is an important element in how they operate.’
When Bright Station bought boo.com’s systems it got far more than another channel to market, explains Wagner. ‘Yes, we had an e-commerce platform, but we could also use that to support an internet-based supply chain and to create a new business model,’ he says.
Boo’s technology now forms the basis of Bright Station’s international business, and has also been integrated into Sparza.com, the company’s core e-commerce product. ‘The web has allowed us to do things in 18 months that, as a small business, might have taken us years to achieve,’ says Wagner.
That’s where the real potential of e-business lies, according to Zag Ashgar, vice president of business development with consulting group MarchFirst.
‘Technology should only be viewed in the context of the business process that it will support.
‘If you aren’t crystal clear about that, then e-business will just be pot luck,’ he says. ‘Looking at processes means that you can exploit technology to create anything from new routes to market or revived brands to new supply chain partners.’
Businesses must avoid the mistake of equating e-business with consumer e-commerce, says Pinder. ‘The internet isn’t just for e-tail. It offers massive scope for business dealings, buying in products and services for non-retail organisations,’ he pointed out. Even so, the government accepts that there’s some way to go before business can truly exploit the potential of the web.
‘Lack of confidence is a major barrier to getting people and businesses online,’ says Pinder. ‘This is why we are taking steps to boost confidence in online trading such as Trust UK.’ That means the e-business story is far from over. ‘We are still bullish about e-business,’ says Nordan. ‘But the view on who will be long-term winners has changed.’
Forrester predicts that traditional businesses will dominate B2B e-commerce, establishing online trading platforms that will account for 6% of all trade in the European Union by 2005.
The key to this success lies in the bricks-and-mortar companies that are creating value through web initiatives, says Andrew Bartels, senior research analyst with Giga Information Group.
Bartels argues e-business creates four types of value: assets such as cash and computers; employee skills and knowledge; consumer revenues; and improved processes.
Of the four, processes create the most value, explains Bartels. ‘People can leave for other jobs, physical assets depreciate and consumers go elsewhere. Get the processes right, and value will directly affect the bottom line,’ he says.
– Sally Whittle writes for Computing
FORGET POPS, THINK RETURNS
Through the stream of headlines chronicling the mood swings in international markets, it is easy to lose sight of the real internet story, writes Adair Turner.
For business the fundamental drivers behind the internet remain as attractive as ever. At its heart is the promise of new markets, reduced costs and increased competitiveness. But many feel it promised much and delivered little. There is disappointment now hindering internet development.
The reality for most companies is that use of the web has been limited.
Apart from e-mail, their web presence is passive. Most sites are online brochures. E-commerce is being held back by three problems: cost of implementation, the IT skills shortage and an immature internet industry.
Reliability is central to the future of the internet. Conversations on e-commerce turn to complaints about slow response times and websites that go down. It adds to a drain on management time.
This frustration is compounded by the shortage of IT professionals. For companies with their own in-house email or web hosting solution, the challenge of running a watertight e-commerce strategy becomes more daunting.
Lastly, the internet industry has failed to help itself. It has not communicated with companies in a language they understand. Companies don’t want to know about routers and POPs, but investment returns and profit.
The real economy is relying on the internet to deliver on promises, whatever the volatility of markets. Costs, skill shortages and IT technobabble have acted as a brake on realising the full benefits of the net, but as the web begins to mature, business-friendly solutions are increasingly emerging.
– Adair Turner is a former director-general of the Confederation of British Industry and a director of Netscalibur. ?:
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