Profits rule in the new internet economy

It's time to get real about the digital economy, as the days when it was acceptable not to make a profit doing business on the web are at an end. Welcome to the internet version 2.0.

That was the message to delegates at the IDC eCommerce Forum in Paris this week as the US research company declared that the dress rehearsal was now over and companies that wished to compete in the online world needed to wake up to a new set of commercial realities.

Gigi Wang, IDC's senior vice president of communications and internet research, said: "You're competing at a whole new scale. The first phase of ecommerce was all about building the infrastructure and getting the eyeballs and the stickiness. You didn't look at the revenues that were being generated."

"In the second phase, we don't expect to see vast numbers of new people coming to the internet, but we do expect that we have to see a vast upturn in the levels of revenues," she added.

Wang identified a number of defining issues for the next-generation internet economy, which were based on findings from a poll of 600 executives with responsibility for online business at US dotcoms and bricks and mortar companies.

Experience and expertise
First was the need to have someone at the top of the organisation who actually had a modicum of business acumen and commercial experience. The initial phase of the internet economy saw almost anyone setting up a dotcom company, but the high profile failure of ventures such as boo.com has now caused investors to think again.

"There have been a lot of dotcoms in the US which have been started up, gone public and then failed," said Wang. "If you look at the situation, one of the characteristics of the survivor companies is that they have all had someone in charge with solid business experience. You don't put a 20-year-old with long hair in charge of the company. In the internet economy, [second generation internet] people are measuring the profit and loss and the margins."

This new factor leads to the need for a healthy income statement. Red is definitely not the in colour for the internet economy at the moment. At the very least, dotcoms need to be aware of when they genuinely expect to move into the black.

On this point, Wang produced some worrying statistics. Of a polled base of 600 companies in 1999, only 27 per cent had profitable internet related operations. A further 19 per cent expected to reach that status this year, while another 13 per cent hoped to become profitable next year.

But a staggering 34 per cent either did not know when, if ever, they were likely to generate profits, or claimed to have no method of evaluating how profitable they were.

Wang delivered a pessimistic verdict on the prospects for such companies. "These firms are not going to be in business in a few years' time," she said. "Theirs is not a new economy business model."

With ever increasing numbers of bricks and mortar companies looking to expand onto the internet to become so-called clicks and mortar companies, it is becoming more and more important for organisations to recognise how their online operations can integrate with their traditional businesses.

"When the online business is launched, companies find that it is very different to the older, traditional businesses," said Wang. "After a company has defined an online model of business, it must know how to integrate or reintegrate it with the rest of the business."

Security concerns
Such 'old world' thinking is also demonstrated when companies are asked about the major factors they need to consider when designing ebusiness sites. Security came top of the pile for 80.5 per cent of the companies surveyed, with ease of navigation next at 64.1 per cent.

"These are first economy aspects," said Wang, however. "They don't act as competitive differentiators. They are the things that ought to be there. The differentiators are service orientations and integration."

Given this fact, it is perhaps not surprising to discover that none of the companies in the IDC survey group believe they live up to the ideal of a second economy company. One of the problems is that they are still applying first economy principles when it comes to building their ebusiness websites.

Over half of them - 56 per cent - rely entirely on their own website for making sales rather than adopting an affiliate marketing approach and developing alternative sales channels using other people's sites. Another 55 per cent showed no attempt to embrace the possibilities of globalisation, even though the internet offers them the prospect of a worldwide sales platform.

This is likely to cause particular problems in Europe, which further IDC research indicates is completely divided in terms of its internet usage and willingness to adopt ecommerce.

While hailing 1999 as a breakthrough year, which saw 21 per cent of Europe's population going online, Per Anderson, IDC Nordic's managing director, said that there were such enormous differences in behaviour across the European countries that it was impossible to think in terms of a single online Europe.

The four Nordic countries of Sweden, Finland, Denmark and Norway are at least two years ahead of the European average in terms of internet access. The UK follows behind with a one year head start on countries such as Germany, France, Belgium, Austria and the Netherlands, which make up the average. Lagging behind by anything up to four years are Spain, Italy, Portugal and Greece.

But there are some interesting contradictions and anomalies in the data. Although the Nordic populations use the web the most, a good third of them are not interested in buying goods and services online. This contrasts favourably with France, however, where two thirds do not want to make online purchases, but the figure is still seen as disturbingly high.

However, the UK comes out worst in a number of respects. It is the country that most regards the internet as too expensive to use despite pioneering free internet access from many internet service providers. It is also the country that most declares its distrust of the net as a medium for doing business.

Cultural differences
As a result, Anderson suggested that national issues should no longer be considered in terms of country borders alone. "When you look at the research, the four Nordic countries have roughly the same attitudes and responses, while the likes of Spain, Italy and Portugal are typically bundled together as well. It's time to drop the notions of countries and start thinking about cultures instead in ebusiness terms," he said.

The conclusion reached by IDC is that the UK and Germany are currently dominating ecommerce in Europe, being responsible for 31 per cent and 28 per cent respectively of revenues being generated in 1999. But this is likely to change, with both France and Italy expected to account for 15 per cent and 10 per cent respectively of total sales within four years.

The final gloomy prediction from IDC, however, is not to get too carried away by ecommerce at the moment. By 2003, European ecommerce revenues will amount to 125bn euros, up from 26.2bn this year. But that will still be less than 1.5 per cent of the total European gross domestic product.

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