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Red ink seen for e-commerce firms

Spending heavily on marketing, almost none will show profit in coming year, Giga predicts.

January 8, 1999
Web posted at: 12:03 p.m. EDT (1203 GMT)

by Nancy Weil

(IDG) -- Fewer than 5 percent of electronic-commerce sites on the World Wide Web will show a profit during the next 12 to 18 months, according to the Giga Information Group.

The holiday shopping season just passed will leave some e-commerce companies at the break-even point, but generally businesses should not set e-commerce goals that involve making money in the near term, says Erica Rugullies, a Giga senior e-commerce analyst.

Using one of the leading examples of e-commerce success, Rugullies says, "Amazon.com could be profitable today and so could many others out there if they weren't spending so much money on sales and marketing. All they've got to do is turn down the spigot."

Public companies like bookseller Amazon.com are driven by shareholders who have shown time and again that current profit isn't what is spurring them to invest. These companies are spending hefty advertising budgets to spread the word via radio, television, and print. Eventually, shareholders will insist the marketing spigot be turned down, Rugullies says.

Although shareholders aren't currently fussy about profitability, Wall Street craziness associated with e-commerce stocks flared again on Tuesday, despite warnings from some financial analysts that Internet stocks are due for a serious correction.

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Standard-bearer Amazon.com once again set off the market maelstrom when it said that its fourth-quarter revenue is likely to be about $250 million. But speculation -- "whisper numbers" in Wall Street parlance -- had placed the anticipated revenues at $300 million, according to the Dow Jones News Service, which closely follows stock dips and swoops throughout each trading day.

On the heels of the quarterly revenue forecast, investors brutalized Amazon.com and stock prices plunged. Then investors changed their minds and by late morning Wednesday the stock hit 129 3/4 per share for a 52-week high, the Dow reported.

"It is wilder and more out of whack because no one knows what to expect yet," Rugullies says of the frequent news from Wall Street related to e-commerce stocks.

Focus on the basics

While investors seem intent on keeping the wild Internet-stock ride going like an out-of-control roller coaster, Rugullies says in a recent report on e-commerce that companies should focus on how to smooth relationships with customers and suppliers rather than fretting over making money.

Sites that allow consumers to order items, check on accounts, make reservations, and provide contact information, as well as e-commerce companies that provide Web sites so that suppliers can track purchases, invoices, and deliveries, can go a long way toward improving relationships with customers and partners, Rugullies says in a statement announcing her report.

E-commerce also can allow companies to cut costs on both the sell side and the buy side. In the former case, Web sites can decrease marketing, payment, billing, customer service and similar costs, and in the latter, costs associated with supply-chain management, operating resources procurement and expense management all can be reduced, she says.

Companies that are among the first to use Internet-based order management have found that processing orders online decreases costs from $8 to $25 per order and runs between 3 cents to $1.

Likewise, paying bills online can decrease costs, although Rugullies noted that the objective of most billers is to improve customer relationships rather than to trim expenses. By 2000, Giga estimates that 5 percent of all U.S. households will be paying bills electronically. Assuming each household pays 10 to 12 monthly bills, from 619 million to 743 million bills will be paid online next year, the firm estimates.

Customer service also is a key offering from many Web-based companies, but they shouldn't expect to see costs drop immediately. Savings are usually tallied in the third year and amount to anywhere from 10 percent to 40 percent.

And even though the vast majority of e-commerce ventures should not expect to see a profit for another year or longer, Rugullies says that it behooves companies to develop an online presence.