In the wake of a stock-market meltdown in the dot-com world, one
expert suggests that the downturn makes perfect sense, given the
realities of doing business on the Internet.
“I think that we are now coming to a position where people
are realizing that much of what has previously been put forward,
as far as understanding the Internet, was wrong, said Stan Liebowitz,
professor of managerial economics, School of Management, University
of Texas at Dallas. “But it is not clear we yet have an understanding
of what’s right.”
Internet companies that started out strong are seeing a decline
as competition and network effects set in, officials said at the
Association For Enterprise Integration (AFEI) 21st Century Commerce
International Expo2000, in Albuquerque, N.M.
Pure dot-coms, those companies that are solely based on the Internet,
are struggling, compared to the brick-and-mortar companies that
are now dabbling in the online sales market.
The pure dot-coms should expect their profit margins to be low,
Liebowitz told the conference. “It has been a controversial
issue how profitable firms will be that use the Internet as a primary
basis for their business,” he said. “And certainly that
is because many firms were not making profits at all.”
A case in point, said Liebowitz, is Amazon.com, which stormed out
of the gates in the early days of electronic commerce. Liebowitz
said that many people would assume that Amazon has similar profits
to the brick-and-mortar booksellers, such as Barnes & Noble.
But that would not be the case.
“The problem with that is that there is a general belief
that doing business on the Internet should lower your costs,”
he explained. “And if it does lower your costs, it should
actually turn out, in very simply arithmetic, that the margins that
you should earn on sales will actually be lower than the long-run
equilibrium. And the reason is what determines profit margins for
industries is essentially the value added that firms generate relative
to their sales.”
Since Amazon’s main presence is on the Internet, it is able
to lower costs, but so are its competitors, said Liebowitz. Amazon
does not have much value added compared to its brick-and-mortar
counterparts that offer in-store browsing, coffee, refreshments
and person-to-person communications, in addition to e-commerce sites
of their own.
“Traditional brick-and-mortar companies are better at making
the transition,” to e-commerce, as opposed to pure dot-coms,
Gary DiOrio, chief executive officer of Americas Plaut Group, told
Liebowitz used an analogy regarding supermarkets. “Supermarkets
have very low profit margins,” he said.
“And of course the CEOs of the grocery stores will tell you
that it’s because it’s such a competitive industry.
Well, it is quite competitive, but it’s not all that competitive.
... The reason the margins are so low for supermarkets is because
they don’t provide a lot of value added relative to the quantity
of sales that they produce. They basically take products that are
already complete, put them on shelves, let you put them in your
shopping cart, and then check you out and take your money.”
It’s the same way on the Internet, he said. Most e-commerce
Web sites involve clicking to move a pre-packaged product to your
shopping cart, transmitting credit card information, checking out
and waiting for the product to arrive in the mail.
“So when you’re trying to value the dot-com or some
component of your business to figure out what it might be worth
on the stock market,” said Liebowitz, “you should expect
that margins for a company like Amazon should actually be lower
than its brick-and-mortar counterparts.”