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E-BIZ STRIKES AGAIN!Source: Business WeekPosted on May 5, 2004 As the Internet boom turned into bust, corporate America could be forgiven for allowing itself a small sigh of relief. When all was giddy, and the stock market giddiest of all, big companies feared the disruptive power of the Net. Look what happened to Barnes & Noble, they fretted, as Amazon.com changed the game of bookselling. Or how Expedia Inc. overran travel agents. No one wanted to be the next to get "Amazoned." So when the NASDAQ buckled in 2000, the corporate giants relaxed -- relieved that things weren't going to change as radically or as rapidly as they had feared. Uh-oh -- the threat is back. Net companies have survived their nuclear winter, and throughout the economy, big companies are again under assault. Again, the Web is threatening to force down the prices charged by traditional players, squeeze their margins, and even put some out of business. New technology, new ways of doing business, and new approaches to cutting out the middleman mean the old pricing power is collapsing in a series of industries -- and existing leaders will be forced to find new ways to make money. The pressing question is: How many more industries will be transformed by the Net? "How high is the sky?" answers Barry Diller, CEO of InterActiveCorp , which owns Expedia and other Net properties. In the first wave of disruption, Amazon, Expedia, and others rewrote the rules for books, music, and air travel. Now the Web is poised to remake at least six more major industries: jewelry, bill payments, telecom, hotels, real estate, and software. In the jewelry business, online players are set to wreak havoc on traditional players. Amazon CEO Jeffrey P. Bezos, who jumped into the business on Apr. 22, says he can buy a diamond wholesale for $500 and resell it for $575. Never mind that Tiffany, Zale, and neighborhood stores are used to getting $1,000 for the same stone. Five-year-old Blue Nile Inc. has proved that this strategy can be very profitable. The online jeweler made $27 million on $129 million in sales last year. The upstarts "are going to kill everyone," says analyst Ken Gassman of New York-based Rapaport, which publishes a diamond industry newsletter. Brave talk like that is surfacing again because this show turned out to star more than just eBay and the Failures. Companies that made it through the dot-com bust worked hard to get their houses in order. Nearly 60% of the remaining public Internet companies made money in the fourth quarter of last year, based on standard accounting measurements. Those profits are luring investors back to the market. Venture-capital investments topped $5 billion in the first quarter for the first time in nearly two years, while 14 Net companies are registered to go public. That's not to say this is 1996 redux. The Net is no secret, and most established players know exactly what's coming. Instead of burying their heads in the sand, they're devising strategies to strike back against Net insurgents. In some cases, the incumbents simply plan to co-opt the upstarts' technology. Consider Verizon Communications Inc. Once CEO Ivan G. Seidenberg saw Vonage Holdings Corp. and other newcomers start using Net technology to offer phone services for a third less than existing rates, he played his trump card: He said the New York phone giant would invest $2 billion in Net technology over the next two years. "It's a dynamic process, where you get new players, but old players also can reinvent themselves," says Paul Saffo, research director at Institute for the Future, a Silicon Valley think tank. "Only the dumbest players die in this process." Still, some incumbents are bent on fighting the digital evolution. Hotel chains are cracking down on franchisees that get too cozy with Web travel agencies. InterContinental Hotels Group is slapping hotel owners with fines and threatening to pull their franchise licenses if they offer special discounts through Net partners. At the same time, real estate giant Cendant Corp. pressed the National Association of Realtors to make it harder for Net upstarts to get home-sale listings. "The time for being scared was 1998. It's not today," says Richard A. Smith, CEO of Cendant's real estate division. The tactics may prove ineffective, however. Hotel owners barred from giving Web players discounts may see travelers book rooms across the street at rival hoteliers. And Cendant's parry in real estate is on hold while the Justice Dept. conducts an antitrust probe. As the battle is joined, expect another round of productivity gains to cascade through the economy. Many economists have been predicting productivity will slow from its torrid pace of the past few years. But the Web's impact on more industries suggests that productivity growth may continue over 3% a year, near its 3.6% average clip of the past five years. Moving to digital check writing is just one example. Write a paper check, and it costs your bank about 30 cents to process. Pay the same bill online, and it's a dime. Online bill payment is exploding: Gartner Inc. estimates that 65 million people paid at least one bill online last year, up 97% from the year before. "The Internet economy is in full swing again," says Mark M. Zandi, chief economist at Economy.com Inc. As e-biz strikes again, key questions arise: Why these industries? And why now? In the first round of Net disruption, the online players were selling commodities: books, music, or stock trades. Customers didn't need to see, squeeze, or sniff the stuff -- all they cared about was price. Today's Net upstarts are pulling together more complex information and boiling it down so consumers can become smarter purchasers of a broader array of products and services. In real estate, for instance, zipRealty and others have learned how to use software to show potential home buyers photos and floor plans for scores of potential houses. Because that reduces the agent's work, zipRealty can save consumers 20% to 25% off standard commissions. In the jewelry biz, Blue Nile offers loads of educational information on diamonds so lovestruck men feel comfortable buying gems based on a collection of independent ratings on color, cut, clarity, and carat size. Broadband has been instrumental in the Net's advance, too. A critical mass of people around the world now have high-speed Net access, including 27 million U.S. households. That means consumers can handle the huge loads of information dished up by the second wave of online players. Lickety-split Net links let them browse through dozens of photos of hotel rooms, check out a variety of gold necklaces, or take virtual tours of scores of homes for sale. Speedy Net connections also have made it easier for programmers around the world to cooperate in developing new open-source software, which is changing the economics of the $200 billion software market. The industries under assault have other more subtle characteristics in common, as well. Several, including jewelry and hotels, have long supply chains with many middlemen, each of whom takes a cut of the profits, driving up retail prices. A South African white diamond can pass through five different hands, including rough-diamond brokers, cutters, and jewelry and diamond wholesalers. Blue Nile connects over the Internet to its key suppliers, who buy their stones directly from South Africa's powerful DeBeers Consolidated Mines Ltd. That eliminates three middlemen or more. "Businesses are learning to drive process change by combining it with technology," says John T. Chambers, CEO of networking giant Cisco Systems Inc. So, who will win, the upstarts or the established companies? This time, with incumbents attuned to the advantages of the Net, there will be victors on both sides. A Blue Nile here, a Verizon there. More important, though, is that the Internet will continue to have sweeping impact on the economy, giving consumers more choices and making everyone more efficient. "It's going to be a wonderful mess," says Al Lill, a fellow at tech-research firm Gartner. In these six industries, and more.
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