Communications of the ACM

Communications of the ACM

Viewpoint: Challenging the New Conventional Wisdom of Net Commerce Strategies

By John Gallaugher
Communications of the ACM, July 1999, Vol. 42 No. 7, Pages 27-29
10.1145/306549.306558
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After years of hype, significant confusion exists among scholars and practitioners regarding expectations for e-commerce market development and the selection of effective Internet commerce strategies. Adding to this confusion is the realization that several assertions in the early stages of Internet commerce have not materialized as predicted. Lessons from the several billion dollars in Internet commerce that have taken place provide the hindsight necessary to challenge a number of popular assertions—the new conventional wisdom—regarding business strategy and its relationship to e-commerce.

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Brand Strength Is Less Important for Online Firms

Early work has suggested that with the advent of the Internet, brand loyalty would be weaker than ever before [6]. Search engines and agent technologies would dramatically reduce search costs and prices would plummet, particularly among commodity products and services [8]. Although deep discounting is prevalent online, brands remain critically important to Internet firms. Brands supply three important functions vital for Internet businesses: (1) brands lower search costs, (2) brands build trust, and (3) brands communicate quality. Research has shown that users have great difficulty using online search engines to locate product information [9], and as such consumers continue to turn first to recognized brands. Despite little feature differentiation from competitors, Yahoo continues dominance in part because of the strength of its brand. Agents that can search out the best music deals have been available for years, yet consumers continue to flock to trusted entities like CD-Now. And despite offering a high-quality product, brand-weak, Miami-based FlowerNet found that its lower prices caused consumer suspicion over quality when compared with higher priced but better known online floral giants.

Drawing customers to an unseen storefront is challenging—timing, innovation, and deep pockets help. Early branding turned E*Trade into a leading and profitable discount brokerage firm while newcomers like Mr. Stock undoubtedly face an uphill struggle. Innovative consulting firms like Nua, Network Wizards, and Netcraft have increased awareness at a relatively low cost by giving away surveys that are highly subscribed and regularly quoted in the press. Guerilla tactics such as viral marketing and revenue-sharing affiliate programs can help firms gain needed distribution and exposure at a potentially low cost. However, second-stage brand building has become extremely expensive. BusinessWeek reported that traditional discount brokerages spend 4%–7% of revenues on online advertising, while online brokerages have spent 15%–20% or more, and at one point, Amazon.com was spending roughly $36 in marketing for every $100 in sales [10].

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Scale Economies Are Less Important for Online Firms

Esther Dyson, one of the industry's leading thinkers, has suggested that online firms will face less pressure to grow and achieve scale economies [2, 4]. However, scale economies continue to be critical to the success and viability of many of the Web's new business models. By moving early, Amazon.com has been able to garner nine-digit quarterly sales figures, but the firm is scrambling to "get big fast," building warehouses on both coasts so it can buy direct from publishers and eliminate reliance on Ingram and other book wholesalers. And scale isn't only important to businesses that carry physical inventory (those that Nicholas Negroponte would refer to as "atoms-based" businesses). Brokerage firms provide a product entirely bits-based, yet large players like E*Trade are also leveraging the scale provided by a large customer base to offer small investors access to initial public offerings. This effort adds value that further differentiates larger brokerages from smaller competition and may create a barrier to entry that is difficult for small new entrants to replicate.

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The Silicon Valley axiom "speed is God, time is the Devil" has never been more important than on the Internet.

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Size is Less Important for Online Firms

"What's the difference between a little kid with a Web site and a major corporation with a Web site? Nothing—that's the problem." Or so trumpeted advertisements by the industry's leading proponent of e-business. Despite this statement, size remains critically important to online firms. Bigness pays off in brand awareness and scale economies and allows a firm to take advantage of network externalities [7] (popularly referred to as Metcalfe's Law [3]), switching costs, and consumers' fear of being stranded with a loser. And information technology users recognized fear of stranding (see [5]) also applies to Internet users. Consumers want to join sites with the largest communities because they benefit from more exchange, and consumers also want to buy from the most viable stores and stick with the strongest content providers because these sites are actively learning their preferences and are better able to serve them. Consumers have a stake in the success of the firm they choose because if their choice fails, they lose the benefit of the increased service they've received as a "known" customer of the site, in addition to the lost sunk cost of learning.

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Disintermediation Will be Widespread, Middlemen Are Most at Risk

The Internet, when coupled with the package delivery business, does make it easier for consumers to interface directly with suppliers [1]. However, despite predictions of the widespread demise of intermediaries, some of the most rapidly growing Internet businesses are essentially middlemen. Amazon, CD-Now, Egghead.com, and E*Trade, can all be thought of as middlemen—resellers of products provided by some other source. Intermediaries are favored when consumers prefer a selection of goods and they provide a number of benefits to producers including specialized distribution, coverage, and expertise [11]. And retailers still hold power. Production-side firms such as record labels and Microsoft don't offer discounts online, in part because these firms do not want to antagonize a still (and likely always) vital physical distribution channel. Intermediaries will continue to remain important in buying situations where consumers demand choice and selection at the point of purchase.

The type of disintermediation that is taking place more broadly may be appropriately referred to as internal disintermediation—the removal of employees who add limited or even negative value to the distribution channel. Order-taking sales representatives are most vulnerable, with Dell, Cisco, and the discount brokerage businesses providing prime examples of select service and savings improvements achieved while eliminating staff. Furthermore, some of the most noteworthy examples of e-commerce actually expand the distribution chain. Auto-By-Tel and Charles Schwab's OneSource mutual funds network are among many successful efforts that have created market makers by displacing an existing weak point in the distribution chain with a technology-driven value enhancement. The tradeoff for participating suppliers in such new, longer distribution channels is the potential for increased sales volume at the sacrifice of the further business commoditization and the displacement of the firm's role as the primary customer interface.

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Timing and Experimentation

It should also be acknowledged that perhaps the most critical success factor for early online pioneers has been timing. The Silicon Valley axiom "speed is God, time is the Devil" has never been more important than on the Internet. Early movers can experiment and grow, generating time- and size-related benefits such as brand awareness, scale economies, benefits from network externalities, and switching costs.

Continued opportunities exist for innovators that recognize where technology adds value and reduces cost in the distribution chain. Despite dramatic success, we are still in the nascent stages of e-commerce technology development and adoption. Some of the assertions of the new conventional wisdom may one day be realized, but the disjoint between expectations and reality adds to management confusion and creates opportunities for research opportunities. Effective planners will have a portfolio of approaches and will be prepared to retool their approaches as the environment changes.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 1999 ACM, Inc.

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