TCS Daily


The Future of E-commerce

By Sonia Arrison - August 29, 2002 12:00 AM

Many are gloomy about the economy these days, especially concerning the prospects of e-commerce. After the dot com bust, reports of executives cooking the books, and insider trading scandals, it's hard to be upbeat. But a recent technology summit in Aspen, Colo., offered reason for optimism.

The future holds good news for consumers, but not necessarily for all producers,
explained Michael Cox, senior vice president and chief economist for the Federal Reserve Bank of Dallas.

There are still too many players in the e-commerce space, Cox said, which means that some producers will be forced out of business. He predicted more job cuts as the economy evolves to become more efficient and innovates to improve standards of living. Telecom and electronics will be subject to a good deal of the necessary changes and consumers will reap the benefits in the form of new products and lower prices.

Economist Joseph Schumpeter called this process of innovation and market
disruption "creative destruction"; Cox calls it "churn." Whatever the name, it affects every sector and e-commerce is no exception. Some companies will evolve and others will go out of business.

"E-commerce has to live with this, " said Cox, who compared the 1920s auto industry with the state of the telecom industry today. In 1920, there were 262 U.S. auto companies, but that number eventually shrank, eliminating the most inefficient and inflexible operations. Today, there are 728 telecom companies and according to Cox, "that's too many."

Indeed, e-commerce is still young and will face many changes. But almost every speaker agreed that it still has a future -- as long as policy makers don't erect barriers to growth.

Bruce Mehlman, assistant secretary of Commerce for Technology Policy, said that the Bush administration wants to "restore stability and growth" to the economy. But that didn't stop Jeff Bezos, CEO of Amazon.com, from making fun of nonsensical government policies.

Bezos pointed out examples of the chaotic U.S. tax system: in one jurisdiction a Snickers candy bar is subject to tax, but a Twix is not. States are now trying to transfer these arbitrary and burdensome rules to Internet commerce, and unfortunately these schemes are not limited to the domestic sphere.

In Germany and Japan it is illegal for businesses to discount books and the European Union recently considered outlawing cookies (these small files placed on a user's hard drive by web sites they visit are necessary for customer recognition) in a misguided effort to protect privacy.

Strict privacy laws cause many e-retailers to worry because the ability to identify customers is such a big part of customer relationship management. "E-commerce is about more than making the sale," said Geoff Ramsay, CEO of eMarketer. Service and support can be improved through the use of the Net.

Indeed, retailers have a better memory in the online sphere even though, as Bezos contends, there's more privacy online because no one can see what you look like. Memory is just one of the reasons many believe e-commerce will continue to grow.

Other reasons are obvious: a Department of Commerce report this year showed that a larger swath of society is now online. The more time people spend online, the more likely this familiarity will make them a "regular buyer." And according to Ramsay, businesses are increasing their use of the Net to make commercial purchases. This is perhaps no surprise given that the Net frequently offers value for both buyer and seller in terms of convenience and efficiencies.

Purchasing flowers, travel, and even automobiles has become more efficient because the Net allows for the elimination of middlemen. That makes everyone happy except the middlemen, some of whom are trying to leverage the government. For instance, traditional travel agent middlemen are trying to convince regulators that Orbitz, the airline-owned online travel agent, is violating antitrust laws with a service that sells direct to consumers.

Such political roadblocks will add to the competitive struggles of those engaged in e-commerce, and not every company will survive. But for consumers, the future should be rosy.

Sonia Arrison is director of the Center for Technology Studies at the California-based Pacific Research Institute.
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