A glance at the market for dotcom shares suggests that the world of ecommerce is a topsy-turvy one. Amazon.com, for example, is a giant among ecommerce ventures, with almost $700m sales in the last quarter of 1999.
Although it made an overall net loss of $323m in the same period, almost everyone seemed surprised and delighted with the news that Amazon's US book business had showed a profit - the first time this had happened since Amazon began, five years before.
Again, look at Freeserve, the ISP and portal company whose initial public offering helped to precipitate dotcom investment fever. Shortly after becoming one of eight hi-tech companies that displaced the likes of Whitbread from the FTSE-100in March, Freeserve announced third-quarter losses of $3.5m. But analysts and investors were delighted because revenues and user numbers had surpassed predictions.
On 8 March 2000, Howard Davies, chairman of the Financial Services Authority, was moved to warn prospective dotcom investors, through Radio 4's Today programme. "These companies for the most part have never made a profit, have never paid a dividend, and have no intention of paying a dividend, so the normal basis on which you value a company is no longer relevant," he said.
The trouble with ecommerce
So let's say you're financial director of a traditional company - a bricks and mortar company in internet-speak - that's thinking of dipping a toe or three into the waters of ecommerce. Faced with this confusing picture, how can you set about evaluating the proposition?
It's clear that you can't expect to see a business case of the type traditionally associated with IT projects. In fact, you may not be looking at an IT project at all, but at a potential change to your whole way of doing business, as Richard Brown, senior manager of information systems assurance and advisory services at 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 difficult job. After that, using IT to make it happen is comparatively straightforward," he says. So ecommerce should be approached as business transformation with IT as the enabler.
Brown divides companies contemplating ecommerce into three categories. First, there are those that are out to maintain and nurture what they already have, using ecommerce to protect the core business. For example, a supermarket setting up an internet shopping service alongside its existing stores. Although it might sound relatively simple, this could hit business processes extensively, because of the need to provide home delivery.
Second, there are those who decide to change the game they are in, like Encyclopedia Britannica, which now offers its content free on the web and aims to make money from its website rather than from selling encyclopedias.
Third, there are those that create a separate dotcom business, as Prudential did with Egg. It's important to be clear which of these things you're considering doing, says Brown. Only then can you begin to form an idea of what it will cost and achieve - and how much the business will need to change.
Sound ebusiness propositions
Mass hysteria apart, what did the punters like so much about glamorous stock market entrant lastminute.com, which had never made a profit but was valued by the market at more than three quarters of a million pounds on the morning it floated? A major consideration in assessing a dotcom is the uniqueness of the idea, but Brown reminds us it's not enough to start out unique. "You also have to have some relationships or other advantages that make the idea difficult for others to copy," he says.
Often mentioned as a plus-point for lastminute.com was the fact that the 19-month-old company had registered 1.1 million potential shoppers. It also pointed to established relationships with customers. For example, those with commodities to sell on the website. The company had quickly managed to establish a strong brand through a combination of advertising and copious media coverage. All these things were advanced in support of lastminute.com's claim to a substantial headstart over any imitators. Time will tell how well-founded that claim is, and how realistic the valuation was.
The fundamental things apply
However bizarre the behaviour of the ecommerce world, and those who invest in it, may appear, the laws of economics still apply in the long run, says John Gilligan, partner in charge of the e-Catalyst group at Deloitte & Touche. "A company is still worth the present value of its future cashflow. But in the case of dotcom startups, the statistics normally used in valuations don't exist, and so the market tries to value them relative to other companies - one reason why the market is so unstable," he says.
Gilligan argues that to get a realistic view, the trick is to take a sensible view of risk. "There's a systematic mis-estimation of risk in parts of the market; everyone thinks they're buying a winner," he says. He also sees merit in an argument put forward by Harvard Business School and others that ebusinesses are best spun off as separate enterprises in the way that Dixons has done with Freeserve. "That way you can float it separately and let the market decide what it's worth," he says. Not every ecommerce activity may be as easy to spin off, but Gilligan claims it should usually be possible.
There's no point in trying to do ecommerce on the cheap. If your ecommerce operation doesn't please, your whole brand is liable to get tarred with the same brush. Recently, for example, toysrus.com was said to have failed to meet thousands of its US Christmas orders on time, and parent Toys'R'Us now faces a lawsuit by disappointed customers, a form of publicity that it can probably do without.
Gilligan says ecommerce projects should be undertaken for positive rather than negative reasons. "Rather than regard ecommerce as a threat and adopting defensive strategies, it makes sense to try to be the best in your field," he says. Even though it may be a long time before some of these businesses become profitable, the best stand to make vast amounts of money eventually, he suggests. Having a strong vision and sticking to it could pay off handsomely.
Bricks and mortar companies have a ready-made advantage over startups in that they already have an established brand and customer base as a foundation for any ecommerce foray. However, if the ecommerce proposition doesn't look strong enough to stand on its own, it doesn't mean sitting back and doing nothing. Major car companies in the US, normally aggressive competitors, have set up a joint ecommerce venture to manage the supply chain electronically. Lateral thinking is the order of the day in ecommerce wonderland.
This article first appeared on AccountancyAge.com on 23 March 2000
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