Internet business news and analysis by Dylan Tweney

Realism rising

A NEW WAVE OF REALISM, or perhaps even pessimism, seems to be sweeping over the Internet industry. Could the gold rush be over? I don't think so -- but I do think there is a pending shift in the way Internet companies get evaluated and valued.

One thing precipitating this incipient backlash (though that's probably too strong of a word) is the recent stumbling of two prominent, publicly-traded e-commerce companies. This week, it was online software retailer Beyond.com (you know, the one with the naked guy in its TV commercials). Beyond's CEO Mark Breier resigned, they laid off about 75 people (that's 20% of their staff), and the company says it's refocusing on business-to-business software sales, rather than consumer-oriented sales [1].

Beyond.com's move follows on the heels of a very similar late-December announcement by e-commerce pioneer Value America. That company cut its workforce in half, eliminated many product offerings, and announced plans to refocus on B-to-B and government sales. Stock prices for both companies are, of course, in the tank, trading near their 52-week lows.

These two events have led at least one commentator to wonder whether a shakeout is on the way [2]. Lots of online retailers have been spending like crazy to capture market share, by buying lots of advertising, underwriting customers' shipping costs, selling products at below cost, and giving away valuable services for free. The idea is to build a large base of customers as rapidly as possible, squeeze out the competition, and then figure out how to make money off your customer base once you've locked them in.

The only problem is, how do you start charging consumers for something when they're used to getting it for free? If online merchants lose the ability to absorb those costs, they'll be forced to pass them on to their customers -- and in the process, they'll doubtless lose a lot of those customers.

But then, traditional retailers shouldn't be particularly smug about their own prospects in an Internet shakeout. A new Deloitte & Touche report shows that many retailers are completely unprepared for the Internet [3]. D&T surveyed 400 offline retailers and found that only two-thirds of them have Web sites at all -- and of those, 31% said their sites served "no strategic purpose." (Why do you even have a Web site, then?) Only a quarter of the stores surveyed have e-commerce-enabled sites.

Bottom line: Many companies (and their investors) are beginning to look for serious revenues and reasonable prospects of profits. Yet, Internet commerce is still very much an emerging market. Particularly in the consumer space, the pressure to establish defensible market share is going to keep profitability in the distant future for most companies. If sources of capital start to dry up (there's no indication that this is happening, but that could change) then the long-term advantage in the consumer space will go to the biggest companies. In other words, those with the deepest pockets will win.

Meanwhile, companies that need to show revenues and profits are increasingly turning their attention to B-to-B, where -- for now, anyhow -- it seems to be easier to make money.

[1] Beyond.com is wake-up call for the valley

[2] Can Amazon Save Industry from Shakeout?

[3] Study: retailers remain unready for online sales

See the future:
Next week's Tweney Report, now in progress at my new weblog.

One B-to-B category that is particularly promising is that of VERTICAL INDUSTRY MARKETPLACES. In the six months or so since I first wrote about this category, it seems that hundreds of new B2B marketplaces have appeared. Now the folks who brought you the Universal Product Code (UPC) bar code system are getting into the Internet act with a marketplace of their own. The nonprofit Uniform Code Council recently announced that it would be building a B-to-B marketplace, together with consulting company AppNet, to help faciliate transactions between manufacturers, distributors, and retailers [4].

Despite the profusion of B2B marketplaces, building sales volume has been a slow process, because companies tend to act conservatively when it comes to modifying such critical aspects of their business as the supply chain or distribution infrastructure. But volume is growing, thanks to the efficiencies that an online marketplace can offer. Distributors and resellers in particular, for whom profit margins are typically razor-thin, will lead the charge to online marketplaces, if those marketplaces can save them even a few percent on their costs. (John Dodge's recent column on the subject shows how this works for three specific B2B marketplaces [5].)

The UCC aims to help that process along by building industry-specific "super-communities" of marketplace sites, which they hope will make it easier for buyers and sellers to find their way to the right markets. UCC will also work with member companies on standardization -- for example, by coming up with a common procedure for updating product descriptions, so that information can easily be shared over the Internet.

[4] Creating Marketplaces for Business-to-Business Transactions

[5] Business-to-Business on the Web Embraces Fish, Steel and Circuits

CompUSA, RIP? Mexican retail billionaire Carlos Slim Helu and his Grupo Sanborns is buying out CompUSA, in hopes of turning it around [7,8]. Slim (that's what the newspapers call him, honest) made his billions as a turnaround artist in Mexico, buying retail companies that had fallen on hard times and restoring them to profitability by cutting costs. In recent years he's tried to do the same to Prodigy, with mixed results -- and now he's going to try it on CompUSA.

I can only hope this begins to restore some sense to CompUSA's Internet strategy, which centers on a new site called Cozone.com that is completely unconnected to CompUSA's physical retail network. See [8,9] for my earlier rants on the subject.

[6] Mexican Retail Conglomerate Buying Rest of CompUSA

[7] Slim Family to Take Over CompUSA; Microsoft Will Get a Stake in Deal
(paid subscription required)

[8] Killing itself on purpose (Dec. 3, 1999)

[9] Stupid, stupid: CompUSA launches Cozone.com (Oct. 18, 1999)

~ Back issues ~

Megamergerville: AOL and Time Warner hook up; broadband Net access and security concerns; online merchandising; Net business models investigated; entrepreneur's notebook (1.11.2000).

Welcome to the future: Top Net trends of 2000; holiday e-commerce wrap-up; battle over Time itself; Linux and the online gift economy (1.3.2000).

Just in time: Logistical challenges of holiday e-commerce and online-offline partnerships; the quietness of customer-driven marketplaces; questionable legal actions (12.17.1999).

The whole dang archive...