October 10, 1999
 

        In E-Commerce Frenzy, Brave
        New World Meets Old

        By STEVE LOHR

              When Amazon.com declared two weeks ago that it
              was beginning a bold campaign to become an
        Internet shopping bazaar, Wall Street applauded. And
        why not? Amazon, a corporate poster child of the New
        Economy and pioneer of on-line retailing, would be
        collecting money from any business, large or small, that
        wanted to set up shop under its cyber-tent.

        Besides,
        Amazon really
        needs the cash.
        Its losses are
        mounting, as
        they are for
        most Internet
        merchants. But,
        Amazon
        explains, the
        red ink merely
        underlines the
        scale of its
        ambitious
        investment for future growth.

        And what is Amazon spending so lavishly on these
        days? Building a high-tech bunker of supercomputers or
        hiring battalions of software wizards? No, Amazon is
        spending much of its money on a half-dozen huge
        warehouses across the country.

        The New Economy is increasingly coming face-to-face
        with the old: Net code hackers and money hustlers meet
        the members of Bricklayers Local 247. The hot, new
        fields of the Internet economy suddenly include
        distribution and logistics, the humdrum backstage of
        business. Indeed, as electronic commerce moves into
        the mainstream -- an estimated 17 million American
        households will purchase on line this year -- it has
        prompted a new appreciation for the business skills of
        the old bricks-and-mortar world.

        Customers, it seems, still have decidedly off-line
        standards of service. They demand timely delivery of
        goods and the ability to easily return merchandise that
        proves disappointing, for example.

        The on-line retailers who come up short on those
        fronts, industry analysts predict, will be casualties in
        the coming consolidation among on-line retailers -- a
        Darwinian winnowing expected to begin during this
        year's Christmas shopping season as winners are sorted
        from losers.

        "A lot of the dot-com retailers are going to fold after
        their venture capital money runs out," observed David
        Pecaut, a senior vice president of the Boston Consulting
        Group.

        Curiously, the biggest winners in on-line retailing could
        well be today's department stores, discount chains and
        specialty stores.

        In fact, 62 percent of E-commerce sales are accounted
        for by bricks-and-mortar and catalog companies that
        also have begun on-line ventures. Within five years,
        Mr. Pecaut expects that share to rise to 85 percent as
        companies like Wal-Mart, Nordstrom and Sears
        improve their performance on the World Wide Web.

            The reason, he says, is that their assets from the
            "legacy world" -- well-known brands, distribution
        networks, stores and purchasing power -- will prove to
        be advantages, and increasingly so in electronic
        commerce. The leading on-line brands like Amazon and
        Ebay, for example, came onto the marketplace a few
        years ago as innovative newcomers, when cyberspace
        was far less crowded and Internet brand-building was
        far less costly. The chance of an Internet start-up
        gaining that kind of brand recognition today, Mr. Pecaut
        says, is slim.

        "For marketers, the superior economics in the future are
        going to come from the old standards of business -- and
        not just being on line," he said.

        The new catch phrases of modern retailing have
        embraced that notion: multi-channel retailers,
        integrated shopping and 360-degree marketing. All are
        meant to convey the concept of servicing -- or
        assaulting -- the consumer on many fronts, on line and
        off.

        Some Internet companies are even using their
        high-priced shares as currency to buy
        bricks-and-mortar counterparts. For example, the
        on-line auctioneer Ebay purchased Butterfield &
        Butterfield, a San Francisco-based auction house
        founded in 1865, for $260 million in stock earlier this
        year.

        The statistics for on-line retail sales, and projections of
        future revenue, show meteoric growth. Yet a closer
        look at the numbers suggests how much traditional
        retailing retains its hold, despite the rapid,
        up-from-zero growth of E-commerce. On-line sales in
        the United States will rise sharply this year to $20
        billion and jump to $185 billion by 2004, according to
        Forrester Research Inc., a technology research firm in
        Cambridge, Mass.

        Still, the $185 billion figure, even if it proves accurate,
        would represent only 7 percent of the nation's retail
        sales in 2004, the firm maintains.

        The rise of the Internet has clearly created not only new
        wealth but a new sense of economic opportunity.

        "The essence of the new Internet economy is its
        ferocious speed, the faith that this is a big deal and the
        uncertainty that it will pay off," said Thomas
        Eisenmann, an E-commerce expert at the Harvard
        Business School.

        The economic payoff from Internet technology will
        almost surely come first in an area that gets the least
        attention: its use as a low-cost communications
        technology to automate all kinds of business
        transactions. "The Amazons of the world get all the
        press, but the real growth in electronic commerce in the
        next five years is going to be in the
        business-to-business market," said Peter Schwartz,
        chairman of the Global Business Network, a consulting
        firm.

            ueling that growth will be companies using the
            Web instead of faxes, telephones and face-to-face
        meetings to handle the "back office" tasks involved in
        trading with their corporate customers and suppliers.
        Forrester Research projects that the
        business-to-business market could reach $1.5 trillion
        by 2003.

        But even the Internet-assisted overhaul of dealings
        among businesses in the next few years represents an
        evolutionary instead of a revolutionary step. Much of
        the anticipated transformation amounts to doing the
        same chores more efficiently because of new
        technology -- as was true with the telephone and,
        before that, the telegraph, which has been called "The
        Victorian Internet," in a book published last year
        (Walker & Company) by Tom Standage.

        And if the past is any guide, the surest corporate
        winners in the E-commerce business may be the
        suppliers of basic tools and services for the Internet:
        computers, software and technical know-how. That, at
        least, seemed to be the lesson of the last great gold rush
        in California. It was the general stores and saloons, not
        the miners, that pocketed the steady money.