The ongoing stock-market frenzy aside, less than 5% 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 US 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, said Erica Rugullies, a Giga senior e-commerce analyst.
Using one of the leading examples of e-commerce success, if not profit, Rugullies said, "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 Inc. are driven by shareholders who have shown time and again that profit isn't what is spurring them to invest in e-commerce stocks, at least not now. Instead, the push is to let consumers know that the Web sites exist and that requires hefty advertising budgets to spread the word via radio, television and print, particularly given that only about a quarter to one-third of US homes have Internet access.
Eventually, shareholders will insist the marketing spigot be turned down, Rugullies said.
Although shareholders aren't currently fussy about profitability, Wall Street craziness associated with e-commerce stocks flared again this week, despite warnings from some financial analysts that Internet stocks are due for a serious correction.
Standard-bearer Amazon.com once again set off the market maelstrom when it said today that its fourth-quarter revenue is likely to be about US$250 million. For those who believe that's a fine revenue figure, 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 brutalised Amazon.com and stock prices plunged. Then, investors changed their minds and by late morning today 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, said of the frequent news from Wall Street related to e-commerce stocks. She noted carefully that she's a technology analyst and not a financial analyst.
Some analysts opined that $300 million in quarterly revenue never was a reasonable forecast given that the company chalked up $154 million in the third quarter. One analyst told the Dow that Amazon.com's news "on the surface" isn't so woeful and amounted to "not that big a deal," but went on to note that the lower-than-rumored projection, which the Dow termed "disappointing," might be an indication of the future prospect for e-commerce stocks generally.
While investors seem intent on keeping the wild Internet-stock ride going like an out-of-control roller coaster, Rugullies said 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 and 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 said 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 said.
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% of all US households will be paying bills electronically. Assuming each household pays 10 to 12 monthly bills, from 619.2 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%.
And even though the vast majority of e-commerce ventures should not expect to see a profit for another year or longer, Rugullies said that it behooves companies to develop an online presence. She also predicted that name-brand businesses will continue to flock to cyberspace to stay competitive.
Some companies that would like to do just that are spending resources instead to deal with possible year 2000 computer problems. The year 2000 bug is an issue because most older software was written with a two-digit date field that won't be able to correctly interpret the "00" in 2000 and will instead revert to 1900.
"I think Y2K is going to throw everything out of whack," Rugullies said. "We'll see some wild things" in the third and fourth quarters of this year.
However, while year 2000 concerns will slow the rush toward e-commerce for some companies, that will abate as the year progresses and businesses bring critical systems into millennium-date compliance.
Giga Information Group, in Norwell, Massachusetts, can be reached at +1-781-982-9500 or at http://www.gigaweb.com/.