One of the most disconcerting aspects of the Internet for business users is that it changes all the rules. Old certainties about what to do ? even what is doable ? are no longer immutable.
For example, until recently, the accepted wisdom has been that market leaders can only be matched and ultimately toppled by competitors with comparable economic clout. Such battles for dominance tend to be long-drawn-out and considerable resources are necessary to sustain the onslaught. A great deal of money is needed to build up brand awareness and customer loyalty and to set up large-scale distribution networks to service and retain buyers.
On the Internet, by contrast, even the smallest players potentially have access to global markets. Similarly, brand awareness can be built up in an extremely short time through the Internet?s electronic grapevine.
As a result, the entry barriers are much lower than in conventional markets. Further, the pace of change on the Internet means that smaller players may well be better-suited to responding quickly to changed market conditions, thereby placing the larger, traditional companies at a disadvantage.
One of the major unanswered questions is whether these dynamics are just part of a transitional phase. Do the traditional corporate heavyweights simply need a little time to adapt to the Internet?s rules before asserting their dominance there as elsewhere, or are new commercial empires being staked out by the future leaders of the ultimate global marketplace?
Net advantage A battle has been shaping up between two online players in the book-retailing sector in what is probably the most representative test case of these issues so far.
Books have many advantages as online commodities. Prices are low so the perceived risk for first-time online buyers is small (the first online purchase is always, psychologically, the hardest). Distribution, even on a worldwide scale, is relatively straightforward ? since books are not perishable, it is possible to offer slower and cheaper delivery options. What?s more, eliminating the retail outlet means that savings can be passed on to purchasers, so online book prices can be significantly lower than in conventional shops.
And the advantages don?t stop there. The ability to use online search engines allows users to find books in a way that is not possible in bookshops. As well as straight searches for titles and authors, more general searches for subject areas or even ?books like this? are possible. In this way buyers may well find, and buy, titles that they never knew existed.
So, not only is there a happy marriage between the goods sold and the selling medium, there is the added advantage of demographics, which have shown that an online audience tends to be better educated and have a higher income than average.
It is against this background that Amazon.com (at www.amazon.com), one of the first companies to conduct commerce over the Internet, has done so well. In the six months ending 30 June, its sales were $3m in 1996 and $44m in 1997 ? an impressive increase in turnover.
However, as with many online operations, profits have proved more elusive than sales growth. For the six months ending June 30, Amazon.com made a loss of $1m in 1996 and $10m in 1997. These fairly staggering sums stemmed not from any gross incompetence on the part of the company?s management, or from any basic flaws in the online model, but rather from the necessity for Amazon to bolster its position online.
Battle of the books Initially, this was a largely theoretical concern, but earlier this year the potential threat became a reality. Barnes & Noble, which claims to be the world?s biggest bookseller, employing 25,000 people in more than 1,000 shops in the US, announced that it would set up its own online sales service (at www.barnesandnoble.com) in direct competition with Amazon.com.
At first sight, Amazon.com?s position might seem hopeless. A company founded only a couple of years ago, with little in the way of assets aside from a large and growing customer base, and with huge debts incurred in the running of its operation, could hardly hope to fight off the entrance of a company like Barnes & Noble. Well-known and well-funded, it comes with more than 20 years? experience in the bookselling business, huge stocks and unparalleled contacts in the industry.
The fight would have been short-lived had it not been for Amazon.com?s first public offering of shares, which took place in May this year. Despite past losses, and predictions of more for some time to come, the shares sold well and the company raised about $50m ? a very considerable war-chest. It would seem that, in the context of the Internet, many investors were willing to gamble on future gains and discount the heavy losses inevitable with Net start-ups.
Amazon.com has since spent large amounts of its cash reserves in perhaps the only way it could: buying visibility on the Internet. It has done this through deals with Yahoo, Excite (no terms revealed) and America Online ? for an astonishing minimum of $19m spread over three years with performance-related additions. All three deals offer Amazon.com prime positions at the respective sites: on the opening page in the case of AOL, and against search engine results for the other two. Barnes & Noble has responded with a similar deal with The New York Times and is reportedly finalising others.
Amazon.com has decided to spend so much of its new resources in this way because, on the Internet, standing out from the crowd is vital. The company has also revealed that repeat customers represented more than 50 per cent of its business for the quarter ending 30 June 1997 ? a clear signal that getting people to the site in the first place is the company?s prime marketing concern.
Indeed, getting people to try Amazon. com rather than Barnes & Noble is crucial, not least because the sites are almost identical. Both offer the same kinds of search engines and the same level of discounts on books ? 20 to 30 per cent. Both, too, are starting to create communities of visitors with online magazines, chat areas, live interviews and so on. These are still rather basic ? and quiet ? but will doubtless be one of the main areas where money is spent other than on marketing.
Amazon.com is undoubtedly ahead in this game, but whether it wins will depend on the depth of its pockets. The two sites will never diverge that much: if either introduces a successful innovation, the other can copy it within days. The only differentiator between the two will be the exclusive deals each sews up for links on other sites.
Who ultimately triumphs comes down in part to which camp gives up first: the traditional and presumably rather conservative Barnes & Noble shareholders, or the more adventurous, but potentially fickle, investors in Amazon.com.
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