The benefits to the economy of E-commerce are boundless

OVERVIEW Click for June 22, 1998 issue

President Calvin Coolidge would have appreciated the frenzied buying, selling, browsing, bidding, dickering, and dealing that have broken out on the Internet in the twilight of the 20th century. It was Coolidge, after all, who said in 1925: ''The chief business of the American people is business.''

Now, 73 years after Silent Cal's speech, the Internet is stimulating business transactions by making them easier and cheaper to conduct than ever before. Indeed, it may be as a transaction machine--rather than as a typewriter, file drawer, or calculator--that the computer has found its highest calling.

Commerce on the Internet is still young, but its eventual impact on the economy will be huge. Compare it to the early days of the telephone in 1900. Internet commerce is not a product but a force--a powerful agent that will transform the way nearly every product and service is created and sold. Says Peter Clemente, vice-president at market researcher Cyber Dialogue Inc.: ''The Net completely changes the rules of the game.''

TRICKLE-DOWN BENEFITS. You can get a foretaste of how the Net will eventually pay off by examining its impact over the next few years. BUSINESS WEEK estimates that doing business on the Internet could pump up the nation's gross domestic product by $10 billion to $20 billion annually by 2002.

Start with Forrester Research Inc.'s (FORR) projection that electronic commerce will reach about $350 billion by 2002, from an estimated $22 billion this year, including direct sales to consumers and transactions between businesses. Figure that doing business via the Net results in cost savings of about 5% to 10% of sales (a rough average based on the experience of a wide variety of early adopters). Now assume that half of those savings are passed along to consumers in lower prices, and that for the typical product, consumers increase their consumption by about the same proportion as prices fall. Do the math and you're in the range of a $10 billion to $20 billion increase in GDP.

And that's just the start. Over time, more companies will grasp the benefits of a lightning-fast, global network. Gains will be amplified as Net-savvy companies go a step further and adapt all their internal processes to take advantage of the Information Highway. Ernst & Young estimates that inventories eventually could be shaved by $350 billion if companies used the Net to share such information as promotional plans, point-of-sale data, and sales forecasts. Redeploying that amount of capital at a 10% return would give the economy a $35 billion kick.

The experience of already wired companies suggests that it's entirely possible for the production cost of a good or service to decline by 5% to 10% when it's created and sold with the help of the Internet. Managers at Xylan Corp. (XYLN), for example, used to spend an hour every Friday on a paper-strewn confirmation of the past week's design changes. Now they whip through it in 15 minutes using software that connects Xylan with its parts suppliers via the Net. ''Before, it was a zoo. Now, everybody is discussing the same thing at the same time,'' says Alan J. Pullen, engineering services manager for the Calabasas (Calif.)-based switchmaker. And Xylan's suppliers can retool immediately rather than wait days or weeks for written confirmation of changes.

Even Luddites will enjoy trickle-down benefits from Net efficiencies. That's because nearly 80% of business on the Net today is conducted between companies rather than in sales to consumers--and when industry costs decline, companies are eventually forced to cut their prices to meet the competition.

Just as competition holds down prices in conventional commerce, it will restrain them on the Internet as well. Sure, some companies are charging top dollar today on Web sales. But that won't last once cybernauts learn to shop around--as they already have for airline tickets, stockbroking, cars, books, calendars, and compact disks.

And price isn't all that matters. For a nation of shoppers, there's real value in being able to shop at any hour, for almost anything, anywhere in the world. The long-term gains from doing business on the Net are, in a word, unimaginable. ''It's like asking Christopher Columbus to extrapolate his initial thoughts to what we have today,'' says Paul Rudolph, president of electronic business for EDS Corp. (EDCS) in Dallas. Expect big things.

By Peter Coy


The 'Click Here' Economy
COVER IMAGE: Doing Business in the Internet Age

GRAPHIC: Online Sales Are Soaring

TABLE: How the Internet Changes (Almost) Everything

Supply Chain
Customer Service
BW/Harris Poll
FedEx: An Internet Stock?
Online Merchants
Cyber Prices
Next: Smart Cards
Net Tax Commentary
Knowledge Management


Updated June 11, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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