eBusiness: The Hope, the Hype, the Power, the Pain
|
(© Jack M. Wilson,
1999, 2000, 2003) |
Introduction
In the beginning there was the net. –the Author
The secret of success is changing the way you think. –Jack Welch
An introduction to eBusiness begins
with a description of the sweeping changes that technology has brought to the
way that the world does business. We
will look at the markers and metrics for change and begin to identify the roots
of those changes in the technology that has both enabled and compelled that
change.
A revolution led by entrepreneurship in information technology and radical innovation in established corporations has led to an Internet Tsunami that has overturned the old business models and created the world's largest (legal) creation of wealth ever! The Internet Tsunami will continue to roll forward for several decades, but it has already left in its wake upended enterprises, smashed assumptions, instant millionaires (billionaires?), destroyed careers, overheated securities markets, radically altered Dow indices, and unheard of consumer behavior.
Beginning in 2000 and continuing throughout 2001, 2002, and
2003, the crash of the dot-com capital market and the failure of many eCommerce
businesses turned hype into pain and dimmed the hopes for an eBusiness
revolution. The crushing collapse of the
NASDAQ and Dow was followed by a business recession that has dimmed the hopes
for eBusiness and chastened those who thought that IT investments could lead to
competitive advantage. A Harvard
Business Review Article might even assert that “IT Doesn't Matter.[1]” A
closer look reveals that the power of eBusiness remains undiminished, but that
the existing rules of investment and economics have not been repealed, as some
had thought.
In spite of the consolidation and change in the investment climate that we saw in 2000 and afterward, the eBusiness revolution will continue to make sweeping changes in the way business is done by both established enterprises and new businesses. In fact, the shakeout of eBusinesses and the resulting consolidation can be viewed as part of the reason that these sweeping changes will continue. Because, in the end, eBusiness is just business, and the rules of economics and business still apply. Companies need to have revenues and those revenues must yield earnings. In the first half of 2000, those established principles reasserted themselves on the market and by the end of the year the effects were devastating.[2] These inflexible truths do not in any way invalidate or reverse the sweeping changes that eBusiness has brought to business. The value chain has been fundamentally re-engineered, the speed of business accelerated, and new business models developed. Information management is now viewed as a double edged sword that can give one a competitive advantage if properly used or be a tremendous handicap when improperly managed.
It "ain't over till the fat lady sings," and she is not even entering the hall as yet.
Executives in older established businesses may feel that this text slights the efforts of the established enterprises and overstates the role of entrepreneurship. With all due respect to that point of view, the application of information technology has been accompanied by and driven by the formation of new enterprises. “Living on internet time” is a practice pioneered by the new economy upstarts and adopted by the established businesses. New methods of financing, accounting, valuation, marketing, customer relations, and nearly every area of business were pioneered by the upstarts. The established enterprises can console themselves with the knowledge that they have now gained the upper hand and have huge advantages as the scale of eBusiness continues to increase and as the upstarts consolidate, die, or become part of the business establishment themselves. Companies like AOL, eBay, Yahoo, and Amazon.com have defined their own genre.
Certainly the roots of many of the new business practices can be traced to actions of established enterprises, but the new economy businesses have made them common practice. It is also clear that the technologies enabling these practices came out of the research laboratories of the universities and established company’s research groups such as Xerox PARC, Lucent Bell Laboratories, IBM Research, General Electric R&D, and so on, but the pervasive and revolutionary business use of the technology first came through the upstarts. The established companies created their own Frankenstein and then had to learn to live with it. Most have them have managed to do that quite well, but not always until they had taken a few missteps. David Komansky, Chairman and CEO of Merrill Lynch could have spoken for many of the old economy executives when he said: “It took us a long time to get over our denial and accept the fact that the Internet is not a temporary phenomena but a true change in the market place.”
In the seventh Chapter “The Dinosaur’s strike back,” we will examine the responses of established enterprises and identify the advantages and disadvantages of those enterprises. The term “dinosaur” is not meant to be a pejorative term at all. It is used because that is how these companies have been perceived and dismissed by the upstarts. As we shall see, many established enterprises have crafted a new economy strategy that takes advantage of their strengths while co-opting the practices of the upstarts. In many cases, they had to overcome the obstacles of corporate cultures, established business practices, or even legal and contractual restrictions. We will consider Ford’s ambitious plan to drive to the net and see how law and political action by dealers made and makes this all the more difficult. We will see how IBM transformed itself into a new economy company with a focus on services and the Internet. We will watch Enron create one of the world’s most successful online trading markets and then founder amid scandals in financing and corporate ethics.
The struggle between the new enterprises (the bricks and clicks) and the upstarts is far from over, and the established enterprises have important advantages of scale and brand identity that will be difficult to overcome. Nevertheless, the upstart dot-com companies have irreversibly changed the world.
The term eCommerce came into general use in the late 1990’s to describe the application of Internet technologies and the World Wide Web to the marketing, buying, and selling of goods and services. eCommerce can refer to both transactions between businesses and consumers (B2C) and those done business to business (B2B). We use eBusiness to describe the much broader application of network, computing, and communication technologies to enable business functions. Successful eBusiness require successful management of information technology. eBusiness includes supply chain management, customer relationship management (CRM), human resources, customer support, training and development, investor relations, financial management, and essentially every other aspect of business. eBusiness includes eCommerce but it goes well beyond eCommerce. Because eCommerce has been the visible point of attack in eBusiness, emphasis will be given to the development of eCommerce business models, but the full range of eBusiness opportunities will be considered.
In 1998, eCommerce was barely beginning, but by the time the Christmas shopping season had ended there was no doubt that there was a new force to be reckoned with in retailing. Consumer eCommerce was off and running. All projections call for exponential growth for the next few years. There is little reason to doubt those projections.
Investors became convinced that something dramatic was afoot. Such high market valuations were given to the new "dot com," or eBusinesses, that investment bankers had to invent new ways to explain the evaluations! Amazon.com was a spectacular case in point. In 1998, one had to assume a growth of over 59% per year for ten years just to explain the future growth value embedded in the market capitalization. While once assets, earning, and revenues were the key variables in determining value, investment bankers now began to look at "eyeball-hours," dwell time," “stickiness,” and "click through." By mid 2000 the investment community was beginning to be a bit more hardheaded about valuations and began to look at earnings growth more carefully. Amazon.com paid the price for the previous high valuations in the new climate as the stock lost 80% of its market value between December 1999 and December 2000.
Although consumer driven eCommerce had originally received the lion's share of the media attention, the most spectacular opportunities almost certainly lie in the other areas of eBusiness. These include business-to-business eCommerce (B2B), supply chain management, enterprise resource planning, human resources, customer relationship management (CRM), employee training, help desk support, and many other areas.
For example, in 1997 eMarketer estimated that B2B was about 3 times larger than consumer eCommerce. By 2002, they estimate that B2B will have grown by 48 times (4700 percent!) and will then be over 7 times as large as the Consumer side (which will still have grown by almost 20 times!). In mid 2000, eMarketer was estimating that B2B revenues would reach $851 billion by 2003. Estimates from other sources range from a low of $633 billion (IDC) to a high of 3,161 billion (Computer Economics).
The rapid pace was driven and enabled by the rapid pace of development of computing, communication, and content. In order to understand where the future might take us, we need to understand how technology has driven the recent changes and how technology will continue to change. Three laws underlie the changes.
· Moore’s Law tells us that the power of computing doubles every 18 months.
· The bandwidth law tells us that communication bandwidth (unit communication capacity) doubles in about 12 months.
· Metcalf’s law tells us that the value of a network increases with the square of the number connected.
These three laws combine to change the world in dramatic ways on a time scale that is so much faster than the usual human responses, that it is not surprising that the effects are disconcerting to everyone.
Communications technologies are developing even faster! The bandwidth density in fiber is doubling every two years, but that is only half the story. Fiber is being laid and wireless deployed so quickly that bandwidth is doubling in less than a year! These two doubling laws tell us that we will see more change in technology in the next two years than we have seen in the last few decades. The exponential increase in bandwidth deployment is sometimes called “Gilder’s law after George Gilder, an IT writer who first
The convergence of computing and communication has led to the development of massive networks. Metcalf’s Law tells us that the value (economic and otherwise) of a network scales as n2 where n is the number of persons connected. This helps to explain the amazing values that Wall Street has assigned those companies that appeared to have locked the most customers into their networks. Companies like America On-line (AOL), Amazon.com, and eBay have established networks of users that are so much larger than their competitors that the value comparison is overwhelming. The merger of AOL and Time Warner demonstrates graphically the value assigned by Metcalf’s law. In the resulting company AOL shareholders held 55% of the merged company to Time Warner’s 45%. This is in spite of the fact that Time Warner had four times the revenues of AOL and has its roots in one of our oldest and largest publishing empires. The market assigned (rightly or wrongly!) greater values to AOL’s network than it did to Time Warner’s revenues!
At one time you would have to look no farther than the Dow Jones Industrial Average to find those companies that mattered in global commerce. In the 90’s that was no longer true as upstart young companies had muscled their way into the worlds largest industry: information technology broadly construed.
The table below compared the largest components of the Dow average (the "Blue Chip" companies) in mid 1999 against those companies that are equally large, often quite young, but not in the Dow average. (This data was taken from a Wall Street Journal article on August 30,1999 (page C1) entitled "Does Tech 'Explosion' Alter Market's Nature?")
|
Dow Largest |
Market Value |
Founded |
|
Non-Dow Largest |
Market Value |
Founded |
|
GE |
389 |
1892 |
|
Microsoft |
483 |
1981 |
|
IBM |
223 |
1911 |
|
Intel |
269 |
1968 |
|
Wal-mart |
211 |
1969 |
|
Cisco |
220 |
1984 |
|
Exxon |
195 |
1882 |
|
Lucent |
202 |
1995 |
|
Merck |
162 |
1934 |
|
Pfizer |
154 |
1942 |
|
Citigroup |
161 |
1968 |
|
AIG |
153 |
1967 |
|
AT&T |
159 |
1885 |
|
MCI WorldCom |
146 |
1983 |
|
Coca-Cola |
152 |
1919 |
|
Bristol Myers Squibb |
145 |
1933 |
|
Johnson&Johnson |
140 |
1887 |
|
Dell Computer |
122 |
1987 |
|
Proctor&Gamble |
133 |
1905 |
|
Bank of America |
111 |
1968 |
|
|
192.5 |
|
|
|
200.5 |
|
This illustrates very dramatically that newer companies were the fuel for the revolution in Information Technology Entrepreneurship. Gary Hamel, in a Harvard Business Review article has suggested that this is simply a new business mode, a model of resource attraction rather than resource allocation. This forced Dow Jones to completely redo its index in 1999 to incorporate the upstarts.
There is another way to look at this phenomenon. Let’s look
at the top 40 largest companies by market capitalization as of the spring of
1999. The values given are the market capitalization on April 9, 1999 for each
of the companies in billions of dollars ($B). Those 27 (the majority) companies
in red and marked with an asterisk are companies that are the result of an IPO
since 1980. (Source: Frank Quattrone, Credit Suisse/ First
|
* Microsoft |
469.7 |
|
* TSMC |
32.1 |
|
Intel |
204.8 |
|
* SAP |
31.1 |
|
* Cisco Systems |
189.7 |
|
* Amazon.com |
30.1 |
|
IBM |
167.5 |
|
EDS |
26.1 |
|
* America Online |
159.2 |
|
* Auto. Data Processing |
25.9 |
|
* Lucent Tech. |
158.6 |
|
Applied Materials |
23.8 |
|
* Dell |
105.8 |
|
* eBay Inc. |
23.0 |
|
Nokia |
80.4 |
|
* Tellabs |
21.4 |
|
Hewlett-Packard |
69.0 |
|
* Ascend Comm. |
20.6 |
|
* EMC |
66.1 |
|
* At Home Corp. |
20.3 |
|
* Sun Microsystems |
53.2 |
|
* Computer Associates |
18.9 |
|
Motorola |
49.5 |
|
* First Data Corp. |
18.2 |
|
Northern Telecom |
49.0 |
|
* STMicroelectronics |
16.1 |
|
Ericsson |
45.5 |
|
* Micron Technology |
11.3 |
|
Texas Instruments |
42.1 |
|
* Priceline.com |
11.1 |
|
* Compaq |
40.9 |
|
* Gateway 2000 |
10.9 |
|
* Yahoo! |
40.8 |
|
* E*Trade Group |
10.8 |
|
Siemens |
40.6 |
|
Computer Sci. Corp. |
9.3 |
|
Xerox |
39.0 |
|
* Linear Technology |
8.7 |
|
* Oracle |
37.8 |
|
* 3Com |
7.8 |
The Internet Tsunami
Consider the Internet Tsunami of new companies (Source: Frank Quattrone, Credit Suisse/ First Boston; Values are In $ Billions). In less than five years, the market value of public Internet companies had increased by over 200 times! During this time, revenues have increased by less than ten times. Clearly the market was betting on the future growth
|
|
1/1/95 |
1/1/96 |
1/1/97 |
1/1/98 |
1/31/99 |
Apr 99 |
|
Number of Public Internet Co.'s |
4 |
14 |
33 |
49 |
100 |
162 |
|
Combined market value |
$1.9 |
$10.2 |
$16.8 |
$45.5 |
$231.1 |
$451.3 |
|
Combined trailing revenues |
$1.3 |
$2.1 |
$3.8 |
$5.6 |
$10.0 |
$11.4 |
|
Combined trailing losses |
$0.0 |
($0.1) |
($1.1) |
($1.2) |
($1.9) |
($2.0) |
Looking at the overall growth in market value of the technology based companies identifies the major technological eras: Beginning with the invention of the microprocessor and development of the personal computer a period of exponential growth began that was fed by the rapid development of networking or data communications and new architectures for interactions between people and computers. First there was client-server in which a two tier architecture prevailed and then the internet world wide web led to a distributed approach which some describe as multi-tier, but I would describe as diverse peer to peer in which most systems on the network interact as peers, but each has a different role, taking on different characteristics. This exponential rise was followed by the inevitable correction that has brought the market capitalization of the technology companies back to those of 1996-97. Perhaps we should call the 2000-2003 period, the post-internet era!
Another way to look at this is to label the eras against the background of the NASDAQ index as a proxy for the market capitalization of technology stocks. This clearly shows the disillusionment that occurred in the wake of the financial collapse of technology stocks.
Consider what this has done to change the face of American industry. In 1964 technology was the smallest of the major sectors, with the three largest all about the same size. Today technology is the largest of the sectors with the former largest all in single digits.
|
Sector |
1964 |
1998 |
|
Utilities |
19.2% |
3.1% |
|
Energy |
17.8% |
5.7% |
|
Basic Materials |
16.5% |
3.1% |
|
Technology |
5.5% |
19.4% |
Internet Valuations
Some would say that the valuations given to these new companies were akin to the famous "Tulip Hysteria" and other examples of the "Madness of Men." Alan Greenspan termed the valuations given to the stock market an irrational exuberance.[3] In the four years following his pronouncement, the Dow Jones industrial average climbed another 70% before the spring of 2000 brought a dramatic correction focusing on the technology stocks but involving nearly every sector. During the same period the NASDAQ climbed 292% from 1300 to 5100! When the break in the market came in early spring it dropped the NASDAQ by 29% from March 10 to June 1 while the Dow Jones slipped by 14% from January 3 to March 7, 2000. It is interesting to note that the technology heavy NASDAQ continued to climb during the early spring even while the Dow was retrenching. By March the roles reversed and the NASDAQ retrenched while the Dow held its ground. By mid 2003, the NASDAQ had given back everything that it had gained since the Greenspan statement as investors came to doubt the entire rationale behind the “new economy,” and the world endured economic stagnation.
The adjustments in the market were the markets attempt to rationalize valuations of companies and find a reasonable method of valuing the companies of the new economy.
How does one value a company?
· Assets?
· Earnings?
· Revenues?
· Intellectual Capital?
· Customers?
Wealth is often equated with assets. How much do you own? How much money do you have? For corporations, the more important issue is how those assets are used. An investor can only get value out of assets if they are used to create earnings or if they are liquidated. Since liquidation of an enterprise generally occurs after failure, this is not the best way to establish value. It is earnings that enrich the investors directly either through dividends or through capital gains in the stock price.
In this regard, note that investment bankers in the spring of 1999 were using the rule of thumb that eCommerce companies were worth $25 per eyeball pair - hour. This refers to the amount of time that each customer visits an eCommerce site and spends looking at the content on that site.
The last approach to valuation assumes that "loyal" customers who visit a site regularly are doing so in anticipation of purchases and that each hour spent will result in some average revenue to the site. This is a plausible, but largely untested premise. As events since 2000 have demonstrated only too cruelly, it was a long way from “eyeballs” to earnings!
Technology and human resources have presented two of the largest challenges and two of the largest opportunities to corporations over the last decade. While human resource departments were struggling with issues of diversity, harassment, retention, and other timeless issues, other parts of the business were struggling to adapt to technologies that were changing the rules faster than anyone could discover the rules. While the former are attempts to finally come to grips with issues that have been with us for centuries, the issue of technology is trying to cope with circumstances that change faster than anyone can possibly accommodate. There is an important message there. Technology will undergo 100% change roughly every two years or less. People, individually or collectively, change very slowly.
The development and application of Internet technologies to business has been no exception. The first large scale applications of Internet technologies to commerce were made to facilitate the sale of access to sexually related materials – pornography. Many of the technologies (banner ads, “sticky sites,” pay for referrals, etc.) that are now deployed in eCommerce, were first developed by the pornography sites. Once the Internet was opened to the general public by organizations like America On-line (AOL), one of the most popular uses was to access people for romance and materials for pornography!
It is the constancy of human nature contrasted against the rapid and relentless change of technology that characterizes information technology today and will define the future course of eBusiness. As Shapiro and Varian have shown, the laws of economics have not been repealed.[4] Economics remains largely unchanged, but technology has allowed these rules to be used in ways that few had imagined prior to the advent of the Internet. How can rapidly changing technology be used to meet eternal human needs? How can slowly changing human beings adapt to the relentless forces of technology?
Out three laws tell us that what is hard today is easy tomorrow. They also contribute to the relentless nature of these technologies. They are relentless, because they will indeed change everything whether we want them to or not, whether we engage or not, and whether we like the result or not. We have no choice in this matter. We will change. The issue is: how will we change?
This is not the first time that society has been faced with adapting to relentless technological change. It happened during the industrial revolution and it happened as we adapted to television and the automobile. In the early part of this century, the automobile was the relentless technology. It changed irreversibly the way we live our lives. It changed the way we work, changed the way we live, and changed the way we court. It led to the rise of the suburbs, the cr