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Commentary: A New Race Of Giants?


Business Week e.biz -- Cutting Edge

Commentary: A New Race of Giants?

The pioneers of E-commerce could wind up dominating their markets

Almost since its start, the Internet has been a great democratizing force, and Internet commerce is no exception. Just a little over four years ago, Amazon.com, eBay, and Yahoo! didn't even exist. Now worth a combined $69 billion, they're threatening to topple commercial and media giants. The clear message: The little guy has a chance once again. Get on the Web first with a compelling proposition, and the sky's the limit.

But this same get-big-fast opportunity may soon create big--no, make that really big--companies. Indeed, that potential dominance is why investors are betting so much on the leading Web companies. So it's a fair question to ask: Will the Net, which threw open the doors to new competition, wind up ushering in a new era of megamonopolies? Go ahead and laugh. After all, E-commerce is still a mere fraction of overall commercial activity, and competition is so fierce that a dozen companies compete in every segment. The biggest E-merchants, such as Amazon and eBay, are duking it out the old-fashioned way--by doing a great job, offering real value, and attacking inefficiencies.

But there's a funny thing about those inefficiencies that the Net will wipe out. Traditionally, inefficiencies in cost and price structure have provided an umbrella for new competition, says Jeanne G. Terrile, a first vice-president at Merrill Lynch & Co., in a recent report on E-commerce. No more umbrella means no more room for rivals to get a toehold.

That could prove all the more true thanks to a rapidly emerging new class of Net middlemen in a wide range of consumer and industrial markets. Online, with few limitations of time and geography, these new marketmakers can quickly generate a virtuous loop of buyers and sellers, whose very presence attracts yet more buyers and sellers. For that reason, they're expected to dominate many industries, from chemical supplies to rolled steel. Analyst Charles H. Finnie of investment banker Volpe Brown Whelan predicts these companies, such as Chemdex Corp. and e-Steel, have an opportunity to build a "near-monopoly position."

Just look at the online auction house eBay. Despite scads of competition and glaring glitches in service, eBay retains more than 80% market share, according to Dain Rauscher Wessels, simply because buyers and sellers want to be where the action is. Says McKinsey & Co. principal and Internet business author John Hagel III: "If you thought Microsoft was a monopoly, just wait."CONSUMER ADVOCATES. And maybe not for long. Consolidation already is underway. Consider Amazon.com Inc.: After two years of jousting with Barnes & Noble's online book site, it's still out in front in sales by a factor of eight--a beachhead that helped it grab the lead in music after its first three months selling CDs. Flush with investment capital, Amazon.com keeps buying all or parts of companies, from HomeGrocer.com to Pets.com. Once players such as Amazon.com achieve a dominant position, what is to stop them from raising prices?

It may be too early to write off the Net's power to bring big guys to their knees--even big E-merchants. Someone else with a radical new idea can still come in and suddenly redefine a market. Besides, the Net gives buyers unprecedented power, because they can get much more information about products and, with little trouble, join online to become buying forces. That's why Hagel thinks these new middlemen could well turn the tables and become customer advocates, putting pressure on suppliers for lower prices.

Maybe so. My big worry is that, pricing aside, these Wal-Mart Stores on steroids could stifle competition--which is the only reliable way of ensuring continued innovation. Years ago, policymakers and industry leaders both badly punted an opportunity to keep Microsoft from becoming a near-monopoly. This time, I hope they think hard about what to do about E-commerce before it's too late. It would be tragic if the Web's biggest successes ended up stifling the very wide-open opportunity that made it such a revolutionary force.By Robert D. Hof


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