E-commerce takes off. The internet economy

Internet commerce is empowering consumers and entrepreneurs alike

BACK in 1999, at the height of the internet frenzy, Forrester, a research company, forecast that online retail sales in America could reach $100 billion by 2002. When the bubble burst a year later, lots of crazy predictions went the same way as many dotcom firms. But if online sales of cars, food and travel are added to the official figures, then Forrester's forecast, which once looked so wild, has turned out to be only about a year late. The growth continues. The 200m Americans who now have web access are likely to spend more than $120 billion online this year. And that is only part of the story. E-commerce has not only grown into a huge thing in its own right, it has done so in a way that will change every kind of business, offline as well as online, as our survey (after page 58) explains.

Online, offline - what's the difference?

In America, women now outnumber men online; the average age of all web surfers is increasing; their level of education is decreasing; and their average spending is growing. In short, online consumers are rapidly becoming just like offline consumers. So it should come as no surprise that, just as it was on the high street, clothing was the biggest category of goods sold online in America last Christmas. Similar trends are already evident in Europe and will no doubt spread to Asia.

But e-commerce involves a lot more than retail sales and services such as travel, in which more than half of all bookings are expected to move online within a few years. For instance, billions of dollars of used goods are now sold on internet auction sites, notably on the hugely successful eBay. Second-hand cars are now eBay's biggest category, sales that many once thought would be impossible to conduct on the internet. Some of the big American dotcoms are now finding that growth is accelerating even faster overseas: eBay's Chinese service, for instance, is already the biggest e-commerce site in that country. Then there are the billions spent on everything from pornography to financial services - and this does not include business-to-business (B2B) services, already worth more than $1 trillion a year according to some estimates. Wal-Mart, for one, now conducts all its business with suppliers over a proprietary B2B network.

Consumers clearly love to shop on the internet. So they should: leading websites, after early teething problems, now provide a superb service. Certain sites, such as Amazon, have won some of the highest customer-satisfaction scores ever seen in the retail industry. In fact, websites have had little choice but to raise service levels, often far above those of offline retailers. Competition on the web is fierce. Price transparency is the rule. With shopping-comparison services, it is possible to check the price offered by hundreds of merchants with a couple of mouse clicks. Consumers also have access to an unprecedented amount of product information, not just from manufacturers' websites but also from online reviews written by previous customers.

The growth of internet shopping is producing a profound change in consumer behaviour. People are not just becoming more confident about buying goods and services online, they are also increasingly adept at using the internet to decide where and how to spend their money offline. As yet, very few new cars are sold online. But in America three out of four customers walking into a car showroom have already researched their choice online, down to what colour and accessories they want. And most will know exactly what they need to pay. Some will even have armed themselves with competing quotes from different dealers, often by using specialist websites. Much the same thing is happening with other goods and services, from domestic appliances to holidays.

No company can any longer afford to ignore the internet, even if it does not itself sell much or anything at all online. Consumers are behaving as if they see no great distinction between online and offline shopping. They do both. For most consumers, the internet is just another sales channel, and a convenient tool for browsing and research, and they make their purchase in whatever way happens to suit them best. To reach these customers, companies have had to look at new and different advertising and marketing strategies. This is why firms are finding that paying for sponsored links to appear on search sites like Google and Yahoo! has become one of the most effective marketing tools, especially for categories of consumers who spend as much time on the internet as they do watching television, such as teenagers.

Safety at speed

The spread of fast, broadband internet connections has been a key factor in fuelling the growth of e-commerce. It has had an even more profound effect on the associated growth of new internet businesses. Already in America and Europe hundreds of thousands of people have used e-commerce services to build new businesses, many of them tiny but lucrative. The internet has shrunk the cost of going into business. For the price of a personal computer, a fast connection and a good website, anyone with an entrepreneurial flair now has the potential to reach customers worldwide. In many rural communities, even in America and Europe, the arrival of broadband has given a big boost to the creation of new jobs. Because of the now-proven benefits of broadband internet access - the empowerment of both consumers and entrepreneurs (sometimes the same people) - governments ought to remove obstacles to the spread of broadband wherever they find them.

The ease of getting on the internet has attracted plenty of rogues. Gartner, another research company, estimates that the use of “phishing”, in which fraudulent emails are used to trick people into parting with credit-card and other personal details, cost American banks and credit-card companies $1.2 billion last year. The software firms, website designers and service providers that have helped build the internet urgently need to make it a safer place to do business. If they can manage to do this, and the spread of broadband can be sustained, the potential of e-commerce is bound to be even greater than in the past few years. A golden opportunity beckons.

Editorial looks at the huge growth of e-commerce. This issue of The Economist also contains a special report on e-commerce.

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