When Marco Polo returned from his travels he was asked what he had to show for his years away. All he could offer in reply was noodles. The rewards from e-commerce today seem equally intangible, but the longer term implications could be as profound as Marco Polo's opening of new trading routes.
According to a survey by KPMG management consultancy firm, the UK's top 100 companies believe that 20 per cent of their revenue, or #170 billion, will come from e-commerce by the year 2000. But for such expectations to be realised, companies will have to invest time and money in developing Web sites that can handle e-commerce reliably and securely.
Building a commerce site from scratch can cost anywhere from #100,000 to #1 million, and the initial investment is just the tip of the iceberg. The immaturity of today's commerce software and the lack of standards in key areas such as security and payment handling mean e-commerce pioneers must continually upgrade their sites.
Integration with existing IT systems is a weak point of many of today's online stores. This is most visible in sites that accept orders for out-of-stock goods simply because there is no live link between the company's commerce server and its stock control system.
Companies must have a definite technology strategy for their commerce site and a clear idea of which products can and cannot be sold over the Internet.
THE SURVEY SAYS...
According to a report by JCP Computer Services, consumers are most likely to buy office products, software, music, film and books on the Web. Least popular buys are insurance and mortgages. Not surprisingly, the report found that consumers are more likely to buy online if the goods cost less than those sold through shops. Selling off a Web page is cheaper than going through a traditional distribution chain, and consumers clearly want a share of the cost savings.
Companies that think e-commerce means easy profits are likely to be disappointed. A survey for the Wall Street Journal found that while 29 per cent of UK firms using the Internet had increased sales, only 15 per cent had managed to increase profits.
Fashion is one of the more developed online markets, but a review of Web sites by the Interactive Media in Retail Group found buying clothes online was a frustrating process. Choice was limited to casual styles, many sites were graphics-intensive or hard to navigate, emailed queries took days to answer and ordered items were frequently out of stock.
The success of Amazon.com, the US online bookseller, and Tesco's Internet Superstore demonstrate that Web sites can be used to sell mainstream consumer products, but spotting a winning e-commerce formula is not as easy as it seems.
IBM thought it had surefire success with its online shopping mall, World Avenue, which it launched in August 1996. But the 16 stores hosted in the mall found that traffic was sparse and complained that their brands were being drowned out by Big Blue's. In June, IBM pulled the plug.
"Our strength is the technology business, not retailing, and we do not want to go into areas where we can potentially conflict with our customers," says Bill Etherington, general manager of IBM Europe.
E-commerce is likely to produce more surprises for today's pioneers. Few, for example, would have expected car-selling to find success on the Web. But US car dealers are using the Web to reach a larger market, both geographically and demographically. Cadillac, for example, has rejuvenated its aging customer base by advertising its cars on the Web.
THE NET - NO THREAT
For some car buyers, a visit to a showroom can be intimidating, especially when dealing with pushy salespeople. On the Internet, potential buyers can browse at their leisure, comparing model specifications and prices at different dealers. "Over 80 per cent of buyers choose a car by comparing information rather than comparing how well it drives," says Sanjaya Addanki, general manager for network computing at IBM Europe. "For these buyers, the Internet is ideal."
IT vendors see a big potential market in the merchant server software needed to run commerce sites. But despite the enthusiasm of IT vendors, e-commerce is more promise than reality. A UK study of 80 regular Internet users, conducted by the Internet Research Company, found that none had bought anything on the Net.
The typical explanation offered was the Net's poor security, but Mike Bloxham, IRC chairman, believes this is not the real reason: "People hide behind the security excuse to mask their unfamiliarity. With a conventional point-of-sale transaction, people can visualise what is happening behind the scenes, with e-commerce they can't." Bloxham believes online retailers must work harder to conquer this suspicion.
Maplin Electronics has had a Web site for the past year, hosted by Planet Online. It publishes a paper catalogue of 17,000 components and its business had traditionally been done via mail-order and phone, though now it also takes orders via email.
The Web site provides basic information and, while most of its customers are familiar with the Net, Maplin is hesitant to expand to a commerce-enabled site with online catalogue and ordering. "We'd like to have a fully transactional site, but it's a big job and we're waiting to see proof that you can make money on the Net," says John Attfield, Maplin Webmaster. The firm has tried several catalogue-based sites on the Web, but has yet to find one that works well. "We have seen a lot of sites which fall down if you use a different browser," says Attfield.
Maplin has looked at commercial software for building online stores, but has found weaknesses in their catalogue and shopping basket facilities. Maplin customers may order a hundred or more different items at a time and need to have an online catalogue that is as quick and easy to use as today's paper version. "It has got to have the right look and feel," says Attfield, who says Maplin will probably opt for a CD-Rom-based catalogue before attempting an online version.
Selling components is perhaps not the most glamourous of Net commerce applications, but it could be a lucrative one. Forrester Research predicts this business-to-business commerce will soar from $600 million in 1996 to $66 billion by the year 2000 and take a third of the total e-commerce market.
"Business-to-business commerce will arrive much faster than the business-to-consumer market," says Etherington. Business-to-business trading allows manufacturers to deal directly with buyers and so cut out the middlemen - the wholesalers, distributors and retailers who bump up the price of goods as they pass down the distribution chain.
By ordering direct from the manufacturer, businesses can buy bolts or modems at factory-gate prices. Cisco Systems claims it sells $5 million of networking products over the Internet every day and claims that its strategy has been copied by UK firm Online Networks.
Business-to-business commerce is attractive because it is simpler and cheaper than building a consumer-oriented commerce site. Fancy graphics are largely wasted on business buyers, while credit card processing software and complex security are not needed as most business transactions involve known parties with payment handled off the Net.
READY, EDI, GO
Electronic data interchange (EDI) has long been used by large firms to take the paper out of humdrum transactions between suppliers, buyers and banks. "If you have 200 orders to get out this evening you won't want to be sitting in front of a screen. You will want your system to squirt them out automatically and that's where EDI comes in," says Alan Gray, MD of Atlas Products International, a supplier of EDI software.
Using the Internet, the benefits of EDI could be brought to smaller firms that cannot afford the high charges of private EDI networks. API is the first UK firm to join a pilot study of EDI over the Net run by Commerce-Net, a US e-commerce consortium. The group is developing a standard so EDI can be handled securely over the Internet, but Gray believes the security problem is overplayed. "Security on the Net is a red herring. The real issue is, for example, the lack of service agreements between ISPs and business users. But these things are starting to change."
SETTING UP SHOP
Online Networks was set up in February to sell networking hardware "off-the-page" to UK businesses and undercut the prices of traditional channels by an average of 30 per cent. The site, which achieves 4,500 hits a month, has sold #500,000 of products in its first four months and quoted for #2 million.
"A lot of companies do not have the authority to buy electronically, so they still have to phone up for a quote and send a purchase order," says John Mills, founder of Online Networks. "It will take time for the culture to change."
The site offers 800 networking products, from vendors like Cisco and 3-Com, and 95 per cent can be delivered within 24 hours. The firm hopes to increase its product range to 2,500 items by the end of 1997.
The site uses Intershop Online catalogue software from German company Netconsult, which Nettec, the parent company of Online Networks, distributes in the UK.
"At the start of the year, there were a lot of people talking about e-commerce in the UK, but not many sites. So we set up Online Networks as a reference site for the Intershop Online software," says Mills.
What started as a demonstration has turned into a viable business in its own right and Mills predicts sales of #2 million in its first 12 months of trading.
E-commerce pioneers have often had to write their software from scratch because, until recently, commercial merchant server software was basic and lacking in key areas like security, payment handling and back office integration.
Today, the situation is improving and Microsoft, IBM, Lotus and Oracle have all developed e-commerce products. MS recently announced Commerce Server, which is bundled with Site Server enterprise edition. It comes with catalogue tools and applications for taking customers' orders and supports the emerging secure electronic transaction standard for processing credit cards as well as the established secure socket layer security built into today's browsers.
Most merchant server software costs from $5,000 to $20,000, but the licence fee is just the tip of the iceberg. Up to 70 per cent of the cost of building an online store can be spent on back office integration.
Other vendors of e-commerce software include iCat, Connect, Broad-Vision, OpenMarket and Actra. Netscape took an early lead in e-commerce in 1996 and hopes to recapture the ground it lost when it launches a new merchant server product later this year.
Geoff Nairn writes for the Financial Times.
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