Internet business going through major transformations

With the advent of any new technology, the prospects for business innovation can seem almost limitless. Over the last couple of years, the Internet has become a powerful market that many entrepreneurs have expanded into, ready to take advantage of its possibilities.

Some of the businesses have become ubiquitous, such as Yahoo! and Amazon.com. Countless others have fallen by the wayside, even ones with high profile advertising campaigns, like pets.com.

Now that reality has seemed to catch up with the e-commerce boom, many investors are wondering what the future holds for Internet business. And as the recent economic pause had indicated, much is riding on these prospects.

According to a news release Roger Ferguson spoke on this very topic at the Owen Graduate School of Management at Vanderbilt University this past February. He was quick to point out that electronics have been used for business purposes for over a century. Telegraphs, and then telephone networks, allowed companies to communicate with greater ease than ever before, and thus broadened the markets considerably.

Computers have allowed the opportunity to transmit vast quantities of data over these existing networks, expanding the range and scope of business transactions. To an eager businessman, such opportunity promises to fix the problems of the existing business world, and usher in a new Age of Enlightenment. But just as existing scenarios are altered, new concerns present themselves.

Ferguson said that the world of e-commerce is currently in this phase of "adjustment," where the flaws and risks of the market are fully apparent and businesses must deal with new problems. The most common myth perpetuated by the Internet revolution was that standard economic laws somehow didn't apply to new e-businesses, and many extinct companies will attest to the absurdity of that assumption.

He said that the biggest difference for an e-business as opposed to a traditional land-based company, is in its cost breakdown.

A typical electronic company will have very high fixed costs but very low operating costs, meaning that the initial purchase and setup can be exorbitant, but the costs will diminish greatly once the structure is in place.

Many investors waited eagerly for businesses to "turn the corner," but very few have. This cost model holds true for information vendors and search engines, but as Ferguson noted, a company that sells real goods like books and toys, is faced with a much more difficult scenario.

Such a company has two business models to deal with. First, they have the high startup costs of establishing the network, and then they have to cover materials, storage, distribution, and other after-sales services that a traditional business deals with. With so many costs to cover, few have been able to stay afloat. Ferguson cited the example of one Internet-based retailer that had costs of $40 million annually to cover the construction and maintenance of their Web site, and another $60 million to maintain the proprietary distribution network. This equaled about 100 percent of their 1999 revenues, whereas a comparable number for a land-based retailer would be 20 percent, and 12 percent to 13 percent for a catalog retailer. Plus, with so much available at a customer's fingertips through the Internet, e-businesses have a far more difficult task of retaining customers.

If Amazon.com doesn't have the CD you want, you can check CDNow, Borders, Barnes and Noble, and other smaller retailers within minutes. With such a troublesome scenario, no wonder investors are fleeing the area.

Despite these concerns, there is no need to quarantine the market. Internet business has produced a number of useful contributions, even from companies that failed. Hard-to-find merchandise is available again through sites like Powells.com, which links used bookstores together and pools the resources so that a customer has a much better chance of finding a book that has been out-of-print for 15 years.

Ferguson also pointed out that the new technology has produced useful innovations, such as a service which enables individuals to accept credit card payments, an option previously only available to businesses.

Many challenges still loom. Security of payment through the Internet remains a concern, and easy payment options still are not available for some services like Internet stock trading. But with a long list of successes and failures compiled, the boundaries are clearer, and the opportunities are more realistic today.

A high volume of productivity remains in place, suggesting that once the adjustment phase is complete, the market will attract investors again and act as a catalyst for the economy.

Many users are confounded by new-fangled technologies, but take heart; the market is learning with you.

(Andy Thomas is a music and English student at William Jewel College in Liberty who is interning with the Business Journal for the summer.)