SPECIAL REPORT -- THE E-BIZ SURPRISE
MAY 12, 2003 Business Week
It wasn't all hype. For companies as well as consumers, e-commerce is
Since mid-2000, when the stock market slump began turning
into dot-goners, the popular perception of the Internet has spiraled
downward. By last year, Internet bankers and analysts, those onetime
of the business universe, were targets of government investigations. A
titled dot.con, deriding the Net as "the greatest
ever sold," became a best-seller. One academic even claimed that porn,
drug-dealing, and the like comprised more than 70% of e-commerce. The
and transforming vision of the Net, it seemed, had dissolved into a
Now, though, the Internet crowd may well have a response to the
a loud Bronx cheer. To the surprise of many, the Net is actually
on many of its supposedly discredited promises. Granted, they didn't
pan out as fast as the hypesters predicted. Public online exchanges,
example, withered as quickly as they sprouted up.
Still, it's now apparent the Internet is connecting farflung people and
more tightly than ever. It is helping companies slash costs. It is
the pace of innovation and jacking up productivity. And even some of
seemingly harebrained business models are working. Says Andrew S.
chairman of chipmaker Intel Corp. (INTC ): "Everything we ever said
the Internet is happening."
And more. Remember those starry-eyed projections in 1999 that had U.S.
between businesses reaching a staggering $1.3 trillion by 2003? Turns
they were too low. Networked business-to-business transactions now
at $2.4 trillion, says Forrester Research Inc (FORR ) . That means that
as investors were reeling from the collapse of Internet stocks, the
was taking off. And Forrester's bold 1999 prediction that U.S. consumer
would reach $108 billion by 2003 wasn't so far off. Despite recession,
and war, the number is expected to come close, at a projected $95
this year. Says Gartner Inc. analyst Avivah Litan: "The hype is gone,
the numbers are in."
And how about those Brookings Institution claims a couple of years ago
productivity gains from e-commerce would pump as much as $250 billion a
into the economy by 2005? Again, too low. With
productivity running higher than expected last year, gains from
using the Net to sharpen forecasting, keep inventories lean, and
instantaneously with suppliers could reach $450 billion a year by 2005.
Spread across the economy in lower prices, that would add $4,500
to the average U.S. household's income -- more than three times the
of President Bush's 2001 tax cut. Says former Federal Reserve
Alice M. Rivlin, now a senior fellow at Brookings: "We know it's a real
transformation because it survived the economic downturn."
Even Internet companies themselves -- poster children for business
during the boom -- are finally turning the corner. Of the publicly held
companies that survived the shakeout, some 40% were profitable in the fourth quarter of
the latest for which consolidated figures are available. Meanwhile,
advertising is staging a comeback, boosting the fortunes of everyone
Web pioneer Yahoo! Inc. (YHOO ) to search startup Google Inc. If Wall
forecasts hold, fully half of the publicly held Internet companies will
profitable by the end of this year. That's spawning a new rush on Net
-- along with fears that a second bubble is taking shape.
How the heck did all this happen? As it turns out, many consumers and
never mistook the overinflated Internet stocks for the underlying value
the Internet. They kept going online, and didn't pull back just because
(AMZN ) shares dropped or the fallen highflier Webvan Group
delivering groceries. "E-commerce continues to broaden its appeal,"
Margaret C. Whitman, chief executive of online auction juggernaut eBay
Inc. "More consumers are coming online every day."
That's not to say that a lot didn't go wrong. Eager venture capitalists
more than $100 billion into nearly 6,000 high-tech and Net startups
the past decade. Of those, 2,000 have gone under or merged with other
Investors' wild ride with the 450 Internet companies that went public
with more pain, as many saw their stocks fall by 90% or more. And about
third of the economy -- including agriculture, construction, and health
-- has barely been touched by the Net-driven productivity boom, says
York Federal Reserve Bank economist Kevin J. Stiroh.
Still, in the eight years since the Web went commercial, it already has
up many industries. Music fans sharing 35 billion song files
are battering the recording industry. Predation by dot-coms such as
Inc. (EXPE ) -- now the top leisure-travel agency, online or
helped shutter 13% of traditional travel-agency locations last year.
Dell Computer Corp. has muscled its way to industry dominance by
its sales and manufacturing around the Internet. The choice facing
rivals, from Gateway Inc. (GTW ) to Hewlett-Packard Co. (HPQ ) , is
adopt many of Dell's Net-efficient methods or exit the business.
And much more change is coming. Winning Net strategies have sent a
to companies around the world. Businesses are responding by focusing
diminished tech budgets on the Internet. Even as spending on technology
fallen 6.2% since 2001, management consultant A.T. Kearney Inc. says
budgets rose 11% in 2002. They comprise 27% of total tech spending. And
the growth in e-business spending has slipped to 4% this year amid war
that's still double the growth of overall estimated tech spending. Dan
a Kearney (EDS ) principal, thinks e-business will continue to outpace
outlays for at least two years.
So what lies ahead? For the next year, don't expect to see many of the
brassy e-business schemes of old. These have been flushed away, along
the other excesses of the dot-com boom. Instead, companies have spent
last three years figuring out what really works and what delivers a
-- quickly. Now, they're breaking up e-business tasks into bite-size
Kinko's Inc., for example, is boosting spending this year, but focusing
on targeted projects that pay off in six months or less. One deal with
Corp. (MSFT ) will let people send documents from Microsoft programs
the Web to Kinko's for professional-quality printing. Says venture
Vinod Khosla of Silicon Valley's Kleiner Perkins Caufield & Byers:
tech projects don't work. You need the revolution by 1,000 small cuts,
one big dramatic change."
Further out, bold new projects will unfold, providing a glimpse of the
generation of e-business. The range is every bit as vast as the
itself. It extends from drug researchers collaborating in virtual labs
computers monitoring thousands of diagnostic machines on three
It features gobs of wireless systems for tracking inventory, reading
meters, and connecting with customers. And on the far fringes of this
Net are tiny silicon chips, so-called "smart dust," that may well be
right into roads and bridges, ready to send Web alerts if the wind
hard or a pylon pries loose.
Plenty of obstacles, though, could darken this dazzling vision.
policies on the use of broadcast spectrum could well stifle innovations
as the wireless networking technology known as Wi-Fi. Court decisions
music-file sharing could squelch the growth of online entertainment.
views on privacy and free speech threaten to interfere with
business. French courts, for instance, briefly threatened to take
against Yahoo two years ago after Nazi memorabilia appeared on the
auction site. As the Net takes root in conservative societies in Asia
the Middle East, such conflicts could grow.
The biggest challenge, though, is cultural. Corporations learned in the
days of e-business that costly new systems by themselves accomplish
They can sow confusion and resentment among employees who figure they
just fine the old way. To get a true e-bang for the buck, companies must redesign their business processes
-- a fancy way to describe teaching old dogs new tricks -- to take
of the new capabilities.
General Motors Corp. (GM ) learned this lesson in 1999 when the auto
briefly set out to follow Dell Computer's lead, offering tire-kickers
cars. It was a captivating vision, with shoppers clicking the mouse on
upholstery and V8 motor options. But when the executives realized that
had to drag parts makers into this new networked world and retrain
across the nation, they put the project in deep freeze.
In the intervening years, pharmaceutical giant Eli Lilly & Co. (LLY
has figured out how to break through old habits and hidebound routines.
years ago, Lilly had 7,500 employees in its research and development
Today, it has nearly triple that number -- except they don't show up on
payroll. How's that? Lilly created an online scientific forum in
called InnoCentive Inc., where the company posts thorny chemical
such as the best way to come up with a specific molecule, and offers
to anyone who can solve them. By making the site open to anyone and
in numerous languages, it spurs solutions to problems that have stumped
own researchers. And Lilly pays for their time and effort only if they
the right answer. These purses run up to $100,000, although most carry
of $2,000 or so. To date, engineers from New Jersey to Russia have
problems and been awarded $420,000. Now Procter & Gamble Co. (PG )
Dow Chemical Co. (DOW ) are using InnoCentive to cut down R&D costs
charm more people onto their own Web sites.
It's not always so easy. Adjusting to e-business is often a wrenching
and we're still in the early days. Dell President Kevin B. Rollins
that his company, the leader in Web-powered business, is merely halfway
using the Net's potential. And the rest of the pack? Rollins estimates
they're barely a fifth of the way.
For now, businesses are focusing on gains in productivity. The
message from industry leaders such as Dell (DELL ) and Cisco Systems
(CSCO ) is that productivity gains speed up with the years, as
adjust their processes to new technology. Cisco Systems CEO John T.
says that productivity payoffs accelerate fully four to six years after
new systems. "It shocked us," he says. "But we're one of the few
that is beyond year three of the process." Chambers, the Net's leading
before and after the crash, predicts that as the U.S. progresses toward
productivity will rise from the current 1% to 3% annually, to as high
5% -- potentially doubling the U.S. standard of living within 14 years.
Sound like gilded promises from the late '90s? No doubt. But in 2003,
and consumers alike are far better positioned than they were a
ago to profit from the Internet. Why? The Net is far more powerful,
largely to broadband -- the Internet on steroids. In the past year, broadband
usage in the U.S. has shot up to 19 million households,
since 2001, and is expected to reach 40 million by the end of 2004,
Forrester. Rates are even higher in Canada, Japan, and Korea,
growing fast. Already, speedy connections are transforming behavior, as
treat the Web like phone service or electric power -- always there.
subscribers spend 58% more time online, according to a Forrester
and spend 37% more on e-commerce.
While broadband speeds up the Net, the wireless radio-based networks
as Wi-Fi untether it. For corporations and e-merchants alike, Wi-Fi
broadband nearly everywhere a laptop can go, from meeting rooms to the
The payoff is productivity. GM may have fallen flat with its Internet
to customize cars. But the auto maker is faring much better with a
project. In more than 90 GM plants, Wi-Fi devices are mounted on
and placed in the hands of employees, who use them to track engine
and car seats, helping to speed production. And some execs, including
CEO G. Richard "Rick" Wagoner, keep tabs on operations in Asia and
by logging on to the corporate network from secure Wi-Fi connections at
"It helps us compete in a world where everything is moving faster,"
GM Chief Technology Officer Anthony E. Scott.
At the other extreme are machine-to-machine systems. That's the
on automatic pilot. The idea is to give machines the smarts to tell
other what to do -- while humans, presumably, are free to carry out
important work. Some companies, such as Ford Motor Co. (F ) and Italy's
are using the Web to allow machines to monitor each other, track
as they move through warehouses, and even make decisions without human
Beckman Coulter Inc. (BEC ), of Fullerton, Calif., which makes blood
and other medical equipment, links the machines it sells to a computer
in its factory. The computer, unlike humans, works every minute of the
to monitor that everything is running smoothly. When a problem crops
the computer alerts a Beckman technician, who can often make repairs
the machine breaks down. Beckman expects this system to save it as much
$1 million annually. But the far larger benefit is customer
for a company that fixes the machines it sells before they show signs
Computer scientists envision a day when there are vast networks of
machines, each one no bigger than a grain of rice. Researchers at the
of California at Berkeley and Palo Alto Research Center Inc. are
tiny chips, equipped with microscopic antennas, called smart dust. The
of silicon could be embedded in materials or products to sense problems
relay data wirelessly to a computer network. For now, the first
hints of this vision are surfacing in a project sponsored by Wal-Mart
(WMT ), Gillette (G ) , Procter & Gamble, and 84 other companies
could dramatically change supply chains. These are next-generation
bar codes, which communicate to the network with every move.
Now in the pilot stage, the Auto-ID Center project involves slapping
with identification numbers on individual packages of razors and
of shampoo. As the merchandise winds its way from warehouse loading
to stores, electronic readers automatically track its progress and pass
data to a network. Everyone in the chain, from the manufacturer to the
can see where each shipment is. The payoff should be just-in-time
and stocked shelves. The challenge? The radio tags
pricey. But in the past four years they've gone down from $2 to 10
-- and they're heading to a fraction of a penny within three years,
These are the visions drawing companies toward the next generation of
It's already starting to turn into a different scene, one where the Web
are fast, untethered, on automatic pilot, everywhere. For many, the
will be to hold back. But while tight budgets call for restraint, a
race for productivity will push them to take the leap. "It will take
leadership to keep investing in this environment," says Krishna
CEO of networking-equipment startup Neoteris Inc. "But if you're
still, you're losing a step every day."
Many will find themselves plunked, Oz-like, into new markets and
The journey, after all, is just beginning. At eight years, the Web is
same age color TV was when it turned profitable in 1962. And when color
really got TV rolling, we all know what happened: New industries
from it that were a complete and utter surprise. BusinessWeek's 1962
telling readers "Why Color TV Makes Money Now" contains nary a word
cable, pro sports, or Presidential campaigns, and not much about
No doubt e-business has many more surprises in store.
By Timothy J. Mullaney, with Heather Green in New York, Michael
in Chicago, and Robert D. Hof and Linda Himelstein in San Mateo, Calif.
Copyright 2000-2003, by The McGraw-Hill Companies Inc. All rights