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The eBusiness bad rap

eBusiness is booming, just not with pure plays. 6/21 ReleVents hed: The eBusiness bad rap dek: eBusiness is booming, and just not with pure plays. By James Mathewson

One of the most surprising things about covering Wall Street is how slavish investors are to fads. Before we started covering the investment community in more depth, my stereotype of an investor was a Harvard MBA who revels in sophisticated due diligence and never lets emotional attitudes color her investing decisions. While I’m sure those folks must be out there, what I have found is a lot of irrational investing based on fads and very little research. That goes for buying as well as selling.

This has never been more apparent than in the recent highs and lows related to anything Internet. As John Ellis in Fast Company’s June issue very eloquently points out, “Irrational despair replaces irrational exuberance.” It seemed everyone knew the New Economy hype was mostly hot air, except Wall Street. Now it seems everyone knows information technology is changing the face of business faster than it was when dot-com stocks were booming, except Wall Street.

While Wall Street may be surprised by a news story on our site today, I am not. The story shows that e-business is quickly making up nearly 50 percent of all business. Though it still has a ways to go, it appears to be well on its way to making up 90 percent of all business.

One of the tenets of the New Economy that filled a lot of dot-com stock balloons is the “prime mover” argument. Namely, if a dot-com is first in a given e-commerce space, once it acquires a certain percentage of users, it would quickly begin to pay off all the losses it had incurred in brand building and infrastructure investments. The pin for this balloon stuck in quickly: Prime mover or no, even if you give customers free introductory offers, they will not develop loyalty unless you can deliver, support, and accept returns after the introductory period is over. Because pure-play dot-coms could never figure out the fulfillment part of the game (save for Amazon and a few others), they were doomed to lose most of the customers they acquired. Thus, customer acquisition caused them to drown in red ink.

I remember being called a Philistine by a dot-com CEO for suggesting that the prime mover principle was flawed. I argued that even though many retailers like Wal-Mart were late to the game, they had the fulfillment infrastructure to win. What Wall Street has failed to see is that the business model would have worked if dot-coms had spent a portion of their inflated marketing budgets on fulfillment and customer service. Online e-commerce spending has continued to increase at astronomical rates despite the dot-bombs, and the retailers with warehouses, 800-phone banks, shipping infrastructures, and a lot of back-end integration technology are raking it in.

Wall Street is beginning to recognize that companies like Wal-Mart are much stronger than they were five years ago because they have made strategic information technology investments. The next step is for Wall Street to recognize that the same vendors who supplied the dot-coms with their infrastructures are building out back-end systems for traditional retailers who, unlike their pure-play counterparts, will pay their bills. It stands to reason that a lot of deflated infotech stocks like Sun and Oracle will eventually get noticed. Baby steps, I know. But it is only a matter of time before irrational despair is replaced by rational optimism.

James Mathewson is editorial director of ComputerUser magazine and

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