Business on the Net is booming. And from retailers to brokers to suppliers, it is destroying old habits and creating opportunities

OVERVIEW Click for June 22, 1998 issue

Mike Dobres knew something was up two years ago, when prospective buyers started walking into his car dealership with printouts of dealer invoice prices. Dobres, general sales manager of Royal Motor Sales in San Francisco, quickly realized that car-buying services on the Internet, such as Auto-By-Tel Corp., were giving customers a frightening new edge on his salespeople. Since then, his profits have sunk by as much as 25%. ''People know what you pay for your car,'' he sighs, ''and they don't let you make the big profits.''

Some 2,000 miles east, car dealer Jeff Peters is downright chipper about the Internet. The sales manager of Byers Chrysler Plymouth Dodge in Columbus, Ohio, hooked up four months ago with Autoweb.com, a Net car-buying service, and is now selling 12 additional cars per month on top of his usual 160--and paying just $29 per Internet referral. His biggest surprise: A wired buyer in Kentucky, hundreds of miles away, struck a deal with him. Says Peters: ''There's no way I could've gotten that guy without the Internet.''

Big threats and fresh opportunities--that's the Web. Think spiderweb: Is it a dandy way to catch dinner, or a deadly trap? The answer depends entirely on whether you're the spider or the fly. The companies embracing the Web and weaving it to their own ends--whether they're using it to sell products, streamline operations, or automate customer service--are thriving. For the rest, blithely buzzing along in real space, things are getting very sticky very fast. ''This is fundamentally a new economy that will displace and rebuild the existing economy,'' says analyst Clay Ryder of Zona Research Inc. in Redwood City, Calif.

Without a doubt, the Internet is ushering in an era of sweeping change that will leave no business or industry untouched. In just three years, the Net has gone from a playground for nerds into a vast communications and trading center where some 90 million people swap information or do deals around the world. Imagine: It took radio more than 30 years to reach 60 million people, and television 15 years. Never has a technology caught fire so fast.

SELLING EVERYWHERE. But then, few have made this much sense. Like a central nervous system, the Information Highway courses around the globe, making all manner of commerce instantly possible. More than 400,000 companies have hung www.shingle.com atop their digital doorways with the notion that being anywhere on the Net means they can sell virtually everywhere. And sure enough, sales are picking up: Goods and services sold online to U.S. and European consumers this year will top $5.1 billion--more than double the 1997 figure, according to Forrester Research Inc.

While that's still small in the grand scheme of business, the numbers don't come close to capturing the real wallop of the Net. Beyond the glitzy Web sites, well past the buzz about Web-zines and chat rooms, businesses are adopting the Internet to get serious work done. By using the Internet to link directly to suppliers, factories, distributors, and customers, these companies are electrifying their usually time-consuming and tedious tasks.

It is nothing less than the collapse of time and space between partners. With the help of the Web, businesses are wringing time out of product design, speeding up the order and delivery of components, tracking sales by the hour, and getting instant feedback from customers--all the while keeping inventories to a bare minimum. It is reengineering all over again, only this time geared to getting every nanosecond of advantage out of the Internet. ''If companies can learn to get the slop out of the system--and the Internet is absolutely crucial for this--prices come down,'' says Bryan Stolle, chief executive officer at Agile Software Corp. in San Jose, Calif.

SAVINGS AND SPEED. Indeed, behind this blinding speed shimmers the promise of incredible efficiency. Companies have barely begun to realize how potent the Net can be. But consider the vanguard already wired. At Boeing Co., there are 75 projects for using the Net to connect to contractors and customers--everything from zapping documents to the government to tracking the history of every plane Boeing sells. The expected savings will reach into the millions of dollars. And at Adaptec Inc. in Milpitas, Calif., the maker of computer storage products has sped up communications with its Taiwanese chip suppliers by way of links over the Net. The results have been marked: Adaptec has reduced its time from order to delivery by more than half, to just 55 days, and the company has saved more than $1 million in costs.

Saving money is just the start. The ultimate prize is the creation of new wealth: As the Net tears down the walls of geography, companies are creating entirely new businesses and tapping markets they never could have reached before. Network Associates in Santa Clara, Calif., for instance, doesn't market its antivirus software in many countries outside the U.S. because it's too expensive. But recently its first sale of a new help-desk software product came from a bank in Spain, which downloaded it and ordered a 30-seat license. ''That's the marketing power you get online,'' says division manager Zach Nelson. ''Instant sale. No cost.''

''KITTY HAWK ERA.'' It's the promise of frictionless capitalism. And there are signs that it is gaining speed. U.S. businesses will exchange an estimated $17 billion in goods and services this year over the Net, more than double the amount in 1997, according to Forrester. By 2002, that's expected to explode to $327 billion. Combine that with cost savings to business and online consumer buying and the Internet could add an estimated $10 billion to $20 billion to gross domestic product in four years, BUSINESS WEEK estimates (page 130). Says Jeff Bezos, chief executive of Web bookseller Amazon.com: ''This is the Kitty Hawk era of electronic commerce.''

That's the upside. With the emergence of a new era also comes upheaval across nearly every industry, often with frightening results. The flip side of squeezing inefficiencies out of business transactions, after all, is that it sometimes squeezes out entire businesses along the way. In coming years, thousands of employees could find their jobs turned topsy-turvy as human tasks, such as selling airline tickets or tending to customer complaints over the phone, are taken over by the one-to-one, buyer-to-seller, nature of the Net.

One of the first to feel the pinch: the travel industry. When you can bone up on vacation destinations, compare flights, and purchase an airline ticket on the Net, what's left for the travel agent? Some travel sites offer an option to have an agent issue the ticket, but ''customers see no added value'' in that, says

Rich Barton, general manager of Microsoft Travel Services, which runs the Expedia travel Web site. Just ask Vanita Louie, president of San Francisco-based South Pacific Express Travels, a $25 million agency. ''We've lost at least 10% to 15% of our sales to the Internet over the past year,'' she laments.

From travel agents to stockbrokers to retailers, businesses are feeling the force of the Net. The threat goes by the unwieldy name ''disintermediation''--the process of cutting out middlemen. But whatever you call it, it's already taking a big bite out of companies that have been slow to adapt to the massive changes the Net has wrought. Online brokerages, for example, are quickly gaining converts, with more than 5 million accounts. E*Trade Group Inc. trumpets savings over traditional brokers in TV ads and billboards that declare: ''Someday, everyone will trade this way.'' It also offers a free book punningly titled Boot Your Broker. Cracks E*Trade CEO Christos M. Cotsakos: ''The brokerage branch network will be a great place to have fast-food franchises.''

BLURRING ROLES. Indeed, the Net is deconstructing the fundamental nature of business transactions. As every link in the supply chain is wired, the traditional roles of manufacturers, distributors, and suppliers are blurring--and buyers will be the ultimate winners. Why? Because on the Web, buyers can quickly compare products and prices from a wide range of suppliers faster and more easily than ever before--putting them in a better bargaining position. They can even share information among themselves. ''The balance of power shifts away from business and to the consumer,'' says Amazon.com's Bezos.

The same goes for corporate buyers. The Web makes it easier to deal with multiple suppliers, which is often too cumbersome and time-consuming to do offline. Wired corporations find themselves armed to play suppliers off one another and get lower prices or better service. General Electric Co. bought $1 billion worth of supplies via the Net last year. That saved the company 20% on materials costs because its divisions were able to reach a wider base of suppliers to hammer out better deals. By 2000, GE expects to be buying $5 billion over the Net.

PROFITABLE WEB SITES. The upshot: ''It's a huge sea change for all businesses,'' says Tim Koogle, CEO of Internet portal Yahoo! Inc. Koogle should know: Yahoo! started as a commercial operation in 1995 with a simple, if humongous, list of Web sites to help people navigate the Web. But like the Web itself, Yahoo! is changing fast. The once amazing ability to search the entire World Wide Web became prosaic in a Net instant, so Yahoo!, at the tender age of two years, began reinventing itself as a place to trade stocks, make travel reservations, and conduct commerce. It's even profitable, valued by investors at an almost unthinkable $5.5 billion--more than Apple, Circuit City, Dow Jones, or Maytag.

Yahoo! isn't the only Net pioneer taking wing. From stodgy industries such as utilities and insurance to fast-moving businesses such as computers and stock trading, companies are taking advantage of the Net to revamp their businesses--or build brand-new ones.

And they're no longer black holes for investment. By the close of 1997, the number of profitable Web sites--both for consumers and for interbusiness transactions--jumped to 46%, ending three years of stagnation at 30%, according to a survey by market researcher ActivMedia of Peterborough, N.H. And some 81% of the remainder expect to be profitable in a year or two (page 154). ''We're being transformed into a 'click here' economy,'' says Renee Cantu, marketing promotions program manager for SportSite.com, an online sports-equipment retailer.

No company has grasped that better than Dell Computer, a direct seller of personal computers. Its famed build-to-order model was initially based on telephone orders by customers, and on the weekly blizzards of purchase orders it faxed to parts suppliers. Even before the birth of the public Internet, Dell's supply chain was efficient, its inventories lean, and its profits lush.

CLONING. Then the Internet happened, and Dell began minting money. Today, instead of daily fax alerts to warehouses telling everyone what supplies are needed, Dell sends messages out every two hours over the Net. Dell's suppliers also get an inside view of the company's inventories and production plans, and they receive constant feedback on how well they are meeting shipping cri-teria. Now, its speed in customizing and delivering products is unmatched. Inventory on hand is down to eight days--vs. Compaq's 26--and revenue growth is about 55%.

The Internet, is helping Dell shatter conventional wisdom about how computers are best bought and sold. Compaq, HP, and IBM have tried to clone Dell's direct-sales model. And they've all snatched up similar electronic tools to streamline dealings with retailers. But the new supply-chain logic demands revolutionary tactics and a rethinking of every business process, which for now elude Dell's competitors, who still rely heavily on dealers. The PC prices you will find on IBM's direct-to-consumer Web pages aren't any lower than what's already available in retail stores, and they don't match Dell's.

For all the ruckus Net-age wizards like Dell may be causing, the result long-term likely will be an explosion of brand-new business. Even as some businesses see their prospects dim, new digital middlemen--call them cybermediaries--are cropping up to fill opportunities spawned by E-commerce.

NEW WAVE. Experts see a big role for sites that bring together buyers and sellers and provide value by offering trusted advice, personal service, or other benefits. This, says Zona's Ryder, is the start of the third wave of Internet commerce: not just saving money, not just selling existing products online, but generating new wealth. Says Paul Saffo, director of the Institute for the Future, a think tank in Menlo Park, Calif.: ''At the end of the day, you end up with more intermediaries, not fewer.''

These new cybermediaries range from portals such as Yahoo! to Net startups that are creating unique markets on the Net--such as FastParts Inc., a site where electronics companies around the world buy and sell surplus parts. ''If the Internet hadn't come along,'' says FastParts Chairman Gerry Haller, ''this business wouldn't have worked.''

The business models these upstarts are employing are as diverse as they are inventive. Some, such as Instill Corp.--which serves as a virtual order desk for restaurants and food-service operators--streamline an inefficient buying process. Others are consumer magnets, drawing buyers with useful info or services and steering them to manufacturers and service providers, in return for a fee or a cut of transactions. These services include sites such as Auto-By-Tel and Autoweb.com, credit companies such as Get-Smart.com and E-Loan, and insurance services such as InsWeb Corp.

Some of the greatest opportunities lie in using the Net to simplify complex and costly transactions. Realtor.com, a site for home buyers, is streamlining the harrowing task of purchasing a home. Stuart Wolff, CEO of the startup in Westlake Village, Calif., figures there are up to a dozen middlemen involved in a typical home sale, from Realtors to title agents. Realtor.com, which is affiliated with the National Association of Realtors, directs shoppers to one of its realtors--no surprise. But it hopes to automate many other aspects of home sales, such as loans and title searches.

These digital middlemen aim to be the nexus of large numbers of buyers and sellers. The key dynamic: Once the cybermediary gathers a critical mass of buyers and sellers, more keep flocking there, because that's where the action is. ''Do you want to be where there're 800 Beanie Babies or 8,000 Beanie Babies?'' asks Meg Whitman, CEO of eBay, a Web site that lets individuals auction off products to each other.

By continuing to gather buying power, digital go-betweens will soon be able to flex some muscle up the supply chain. Ask Payam Zamani, co-founder and executive vice-president of Autoweb.com. He believes his site offers such an economical way to reach car buyers that it will spur consolidation among dealers, and Autoweb will take on more of the customer relationship. ''The business model is not complete until we control 100% of the buying process,'' says Zamani. What does the auto-sales business of the future look like? ''Ultimately, there will be virtual dealerships. It will be more cost-effective to send cars to homes to test-drive than to have 300 cars sitting in a lot.''

Naturally, traditional dealers and manufacturers don't relish the idea of these upstarts gaining all the clout, so they, too, are jockeying for position. Early starters such as Cisco are already selling $11 million in networking gear a day on the Net, and Dell is selling $5 million a day in PCs.

Yet most existing businesses must walk a fine line on the Net. They risk upsetting partnerships with distributors and retailers. Conflict with an existing sales channel was the biggest impediment to selling online cited by respondents to a recent BUSINESS WEEK/Harris poll. That's hard to justify when Net commerce is still so small relative to their overall businesses, and returns far from certain.

And it explains why firms such as Goldman, Sachs & Co. and Merrill Lynch & Co. are deliberating over how to go online, where discount brokers proliferate. ''On the Internet, there's no shortage of information, but wisdom is a valued commodity,'' says Randal Langdon, director of interactive-sales technologies for Merrill Lynch, which is cautiously moving its business--and its 14,000 financial consultants--onto the Net.

No wonder the Net is keeping a lot of executives and business owners up at night. Liz Heller, executive vice-president at Capitol Records Inc., for instance, is worried that unauthorized Net-based music sites could soon take a big bite out of CD sales. ''It's all happening faster than we thought,'' she frets. ''How do you stop a moving train?''

Make that a speeding bullet.

To read a letter to the editor about this story, click here

By Robert D. Hof in San Mateo, Calif., with Gary McWilliams in Houston and Gabrielle Saveri in San Francisco


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

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Updated June 11, 1998 by bwwebmaster
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