E-Commerce Industry Trends

A complete analysis of the E-Commerce & Internet Business, including trends, statistics and profiles of the 450 most successful E-Commerce & Internet firms, is available in the E-Commerce & Internet Business Almanac.

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Introduction to the E-Commerce & Internet Industry

The e-commerce and Internet sector has evolved, going through several distinct stages since its beginnings in the 1970s.

The Internet is Born: First, there were the early days, when the Net was seen by many as a realm for techies only, one that would produce few, if any, commercial enterprises. Initially designed in 1973, the Internet was a series of communication protocols written by Vinton Cerf as part of a project sponsored by the U.S. Department of Defense’s “Defense Advanced Research Projects Agency” (DARPA). The first demonstration of a three-network Internet protocol-based connection occurred in November 1977. Eventually, a well-enabled Internet was rolled out in 1983, primarily as a failsafe method of defense communications and as a means for researchers at various universities to communicate.

The Web is Created: Next, the World Wide Web and the coding language of HTML were conceived in 1989 and implemented between 1990 and 1993 by Tim Berners-Lee, enabling a never ending hyperlinked cyberworld where sharing unlimited data became user-friendly thanks to the magic of linked pages.

The Boom Ensues: Starting in 1993 to 1994, entrepreneurs and financiers realized that hyperlinked, electronically posted data could be commercialized. A dramatic revolution in retailing, publishing and entertainment was visualized, one in which consumers and business people alike would eagerly pay for the convenience of online shopping, trading and viewing of published data. An economic boom ensued, the likes of which hadn’t been seen since the beginnings of earlier technological breakthroughs: electricity, the railroad, the telephone, the automobile and the passenger-carrying airliner.

Thousands of hopeful new businesses were launched. Capitalization for these new Internet-enabled companies ranged from cash-strapped ventures launched with Visa card credit lines, to companies like WebVan, Questia and netLibrary that received vast sums from professionally managed venture capital firms. Roughly 6,000 new firms of significant size raised a cumulative total of more than $100 billion in venture capital in the boom period. About 450 of these companies sold their stock to the public via IPOs (initial public offerings). Stock markets soared and instant billionaires were made. Individuals and families from all walks of life bet their savings on technology stocks and watched their wealth rise quickly. Venture funds that cashed out early reaped phenomenal gains, and financiers easily found additional investors for new venture capital pools. Companies with little or no sales and profits, led by the success of Netscape’s IPO, found eager buyers for their newly-issued stocks. The NASDAQ rose to 5,000 by early 2000, and the Chairman of the Federal Reserve Bank warned of “exuberant optimism.” Some said this boom couldn’t last—others said it was the beginning of a “new economy” that would last forever.

The Bust: In mid-2000 the Internet industry entered a bleak and dreary phase after the NASDAQ collapsed in March, bringing the entire sector to its knees. Hundreds of thousands of people lost their jobs. Stock portfolio values plummeted. Thousands of firms closed their doors, filed bankruptcy, downsized or were scooped up at bargain prices by competitors. Sellers of hardware, software, consulting and telecommunications services suffered mightily. Entrepreneurs found it nearly impossible to raise funds to launch or sustain their businesses. The dream of a “new economy” became a nightmare for some—profits still matter; business cycles still happen.

The Reality Phase: By early 2003, this sector’s dark clouds were abating, and a “reality phase” was taking shape. Well-conceived, Internet-based businesses were proving their value. Amazon.com’s revenues for 2003 reached $5.2 billion. Consumers had become devoted fans of buying over the Internet, and online retail sales rose to about $71 billion in 2004. Businesses of all types were finding that the Internet creates true operating efficiencies and drives profitability. For example, while most of the airline industry suffered terribly in 2001-2002, value-based discount airlines Southwest and JetBlue enjoyed enviable financial performance, in no small part because of their use of e-commerce to efficiently book reservations and sell tickets online. “Efficiency” is the most important factor in the e-commerce and Internet sector’s new-found success. Consumers find the Internet to be a terrific way to efficiently expend their shopping and banking efforts. Travelers find the Internet to be an efficient way to book hotels rooms and airplane seats. Corporate procurement managers find the Internet to be the most efficient way to purchase needed goods and inventory. Hundreds of millions of people worldwide find e-mail to be the most efficient way to communicate.

Convergence Arrives: The Internet is about saving time, and therefore saving money, and the potential of the Internet has barely been tapped. New methods of taking advantage of efficiencies are become widely accepted as access to high-speed broadband Internet connections become commonplace. Users of the Internet (both business and consumer) are multiplying around the globe, and many companies are earning terrific profits in the process of serving those users. The number of American homes with broadband access capabilities tops 34 million, and a plethora of new services, entertainment options and time-saving solutions have become widely available. The long awaited phenomenon of “convergence” of entertainment, computing and communications has arrived. The most exciting example of such convergence is the phenomenal success of Apple’s iTunes online music service which has sold hundreds of millions of songs. (Meanwhile, by the end of 2004, Apple’s iPod digital music player had sold 10 million units.) Microsoft’s investments in digital entertainment and the growing popularity of Internet-enabled telephony via voice over IP (VOIP) are more great examples of the arrival of convergence. Stay tuned—the next seven years are going to be extremely exciting, both for consumers and for firms that provide Internet-based services.

The U.S. population is becoming more tech-savvy, with at least 62% of American adults surfing the net on a regular basis. Confidence in security for online transactions is on the rise, as is the ease of use of most retail web sites.

Top sellers online include travel, books, music, videos, electronics and toys. In these markets, online shopping amounts to a significant share of sales. (For a complete picture of leading consumer purchases on the Internet, add gambling, games, pornography and information leading to automobile purchases to this list.).

Booking Travel Over the Internet Becomes Commonplace

A rapidly growing number of people are purchasing travel tickets and making reservations through online sources. U.S. online travel revenue was expected to hit $54 billion by the end of 2004, and is further expected to rise to $62 billion in 2005, a significant share of the entire travel market. Expedia, Travelocity, Orbitz, Hotwire and Priceline are among the largest firms offering online travel booking services, and many are earning significant profits. There is a large difference between the methods and goals of the independent online sites and those operated directly by travel providers such as hotel chains and airlines: sites like Expedia may reserve airline seats in bulk from the airlines at a wholesale price, and then resell that inventory via their web sites at a profit. The airlines, in contrast, see their own web sites as a cost-cutting extension of their entire reservation system. Southwest was one of the first to make online reservations available to customers through its web site; its flights are not for sale on other online travel sites. In fact, successful discount airlines, including Southwest and JetBlue, sell the majority of their tickets online, thus saving millions of dollars in annual operating costs. Other airlines are attempting to follow Southwest’s lead.

Another trend contributing to the growth in online travel booking is “dynamic packaging.” Dynamic packaging allows customers to package hotels, cars and flights together in any manner they choose for one price, rather than being forced to accept package deals arranged by airlines with their own hotel vendors. Expedia has been the pioneer in this venture.

Just as online air travel bookings have soared, so too have online hotel bookings, thanks to the many web sites that now offer pictures and virtual tours of rooms and amenities. But some hotels, eager to recuperate heavy losses incurred in the aftermath of 9/11, are actively trying to undercut hotel discounters using various strategies. Expedia, Orbitz and Travelocity are able to offer cut-rate prices on hotels by buying large blocks of rooms from hoteliers at a discount and then reselling them to consumers. While this arrangement was tolerated by hotels during the economic slump, the rebound in leisure and business travel is prompting many hotels to reclaim their business by selling rooms at their own sites exclusively. Marriott instituted a program in which it not only agreed to match the best deals on its rooms posted at other web sites, but also to offer customers a discount if they made their reservations through Marriott’s site. Many hotels have adopted aggressive online tactics and are denying awards points to customers who book their rooms through third party sites.

Online travel bookings continue to gain market share. By 2008, an estimated 30% of all travel will be booked online, nearly double the figure reported in 2002. What is particularly notable, however, is the increase in online business travel bookings. During the economic slowdown of the early 2000s, companies began to search for cheaper ways to fly their employees to meetings. The traditional bricks-and-mortar travel agencies that they had relied on for so long often couldn’t match the deals that business travelers found on the Internet. Now, online services have gained significant market share in one of the traditional agencies’ core services: business travel. Orbitz, Travelocity and Expedia have all established business travel web sites. The sites look similar to their leisure travel sites, with the exception that the business travel sites, called Orbitz for Business, Travelocity Business and Expedia Corporate Travel, contain client profiles with information such as a company’s list of preferred hotel vendors, airlines and rental cars. Priceline is another popular venue for business travel booking.

Traditional travel agencies have endured vast changes in the past 10 years, including the growing trend among corporate travelers to use online booking services. In 2000, traditional agencies in the U.S. numbered more than 30,000; by 2003 that number had dropped by more than 30%, to slightly more than 20,000. Some travel agents have successfully repositioned themselves as “consultants,” charging hourly fees for their expertise. Others specialize in providing unique knowledge about travel to out-of-the-way places such as Cambodia, French Polynesia or Africa.

The largest, national travel agencies run sophisticated web sites of their own. They act as outsourced travel departments for their major corporate clients and arrange discounts for clients who purchase massive amounts of travel. Those agencies that focus on leisure travelers buy hotel and aircraft space at wholesale and then create highly profitable tour packages to popular tourist destinations such as Cancun, Jamaica and Orlando. Regardless of these efforts, Internet travel booking is here to stay, and forward-looking companies both large and small are joining the party.

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