E-Biz Strikes Again!

The Internet has rewritten the rules for books, music, and travel. Which
industries are next? Here are six

As the Internet boom turned into bust, corporate America could be forgiven
for allowing itself a small sigh of relief. When all was giddy, and the stock
market giddiest of all, big companies feared the disruptive power of the Net.
Look what happened to Barnes & Noble, they fretted, as Amazon.com changed
the game of bookselling. Or how Expedia Inc. overran travel agents. No one
wanted to be the next to get "Amazoned." So when the NASDAQ buckled in
2000, the corporate giants relaxed-relieved that things weren't going to
change as radically or as rapidly as they had feared.

Uh-oh-the threat is back. Net companies have survived their nuclear winter,
and throughout the economy, big companies are again under assault. Again, the
Web is threatening to force down the prices charged by traditional players,
squeeze their margins, and even put some out of business. New technology, new
ways of doing business, and new approaches to cutting out the middleman mean the
old pricing power is collapsing in a series of industries - and existing
leaders will be forced to find new ways to make money. The pressing question is:
How many more industries will be transformed by the Net? "How high is the
sky?" answers Barry Diller, CEO of InterActiveCorp , which owns Expedia and
other Net properties.

In the first wave of disruption, Amazon, Expedia, and others rewrote the
rules for books, music, and air travel. Now the Web is poised to remake at least
six more major industries: jewelry, bill payments, telecom, hotels, real estate,
and software. In the jewelry business, online players are set to wreak havoc on
traditional players. Amazon CEO Jeffrey P Bezos, who jumped into the business on
Apr. 22, says he can buy a diamond wholesale for $500 and resell it for $575.
Never mind that Tiffany , Zale, and neighborhood stores are used to getting
$1,000 for the same stone. Five-year-old Blue Nile Inc. has proved that this
strategy can be very profitable. The online jeweler made $27 million on $129
million in sales last year. The upstarts "are going to kill everyone,"
says analyst Ken Gassman of New York-based Rapaport, which publishes a diamond
industry newsletter.

Brave talk like that is surfacing again because this show turned out to star
more than just eBay and the Failures. Companies that made it through the dot-com
bust worked hard to get their houses in order. Nearly 60% of the remaining
public Internet companies made money in the fourth quarter of last year, based
on standard accounting measurements. Those profits are luring investors back to
the market. Venture-capital investments topped $5 billion in the first quarter
for the first time in nearly two years, while 14 Net companies are registered to
go public.

That's not to say this is 1996 redux. The Net is no secret, and most
established players know exactly what's coming. Instead of burying their heads
in the sand, they're devising strategies to strike back against Net
insurgents. In some cases, the incumbents simply plan to co-opt the upstarts'
technology. Consider Verizon Communications Inc. Once CEO Ivan G. Seidenberg saw
Vonage Holdings Corp. and other newcomers start using Net technology to offer
phone services for a third less than existing rates, he played his trump card:
He said the New York phone giant would invest $2 billion in Net technology over
the next two years. "It's a dynamic process, where you get new players,
but old players also can reinvent themselves," says Paul Saffo, research
director at Institute for the Future, a Silicon Valley think tank. "Only
the dumbest players die in this process."

Still, some incumbents are bent on fighting the digital evolution. Hotel
chains are cracking down on franchisees that get too cozy with Web travel
agencies. InterContinental Hotels Group is slapping hotel owners with fines and
threatening to pull their franchise licenses if they offer special discounts
through Net partners. At the same time, real estate giant Cendant Corp. (CD)
pressed the National Association of Realtors to make it harder for Net upstarts
to get home-sale listings. "The time for being scared was 1998. It's not
today," says Richard A. Smith, CEO of Cendant's real estate division.

The tactics may prove ineffective, however. Hotel owners barred from giving
Web players discounts may see travelers book rooms across the street at rival
hoteliers. And Cendant's parry in real estate is on hold while the Justice
Dept. conducts an antitrust probe.

As the battle is joined, expect another round of productivity gains to
cascade through the economy. Many economists have been predicting that
productivity will slow from its torrid pace of the past few years. But the Web's
impact on more industries suggests that productivity growth may continue over 3%
a year, near its 3.6% average clip of the past five years. Moving to digital
check writing is just one example. Write a paper check, and it costs your bank
about 30 cents to process. Pay the same bill online, and it's a dime. Online
bill payment is exploding: Gartner Inc. estimates that 65 million people paid at
least one bill online last year, up 97% from the year before. "The Internet
economy is in full swing again," says Mark M. Zandi, chief economist at
Economy.com Inc.

As e-biz strikes again, key questions arise: Why these industries? And why
now? In the first round of Net disruption, the online players were selling
commodities: books, music, or stock trades. Customers didn't need to see,
squeeze, or sniff the stuff - all they cared about was price. Today's Net
upstarts are pulling together more complex information and boiling it down so
consumers can become smarter purchasers of a broader array of products and
services. In real estate, for instance, zipRealty and others have learned how to
use software to show potential home buyers photos and floor plans for scores of
potential houses. Because that reduces the agent's work, zipRealty can save
consumers 20% to 25% off standard commissions. In the jewelry biz, Blue Nile
offers loads of educational information on diamonds so lovestruck men feel
comfortable buying gems based on a collection of independent ratings on color,
cut, clarity, and carat size.

Broadband has been instrumental in the Net's advance, too. A critical mass
of people around the world now have high-speed Net access, including 27 million
U.S. households. That means consumers can handle the huge loads of information
dished up by the second wave of online players. Lickety-split Net links let them
browse through dozens of photos of hotel rooms, check out a variety of gold
necklaces, or take virtual tours of scores of homes for sale. Speedy Net
connections also have made it easier for programmers around the world to
cooperate in developing new open-source software, which is changing the
economics of the $200 billion software market.

The industries under assault have other more subtle characteristics in
common, as well. Several, including jewelry and hotels, have long supply chains
with many middlemen, each of whom takes a cut of the profits, driving up retail
prices. A South African white diamond can pass through five different hands,
including rough-diamond brokers, cutters, and jewelry and diamond wholesalers.
Blue Nile connects over the Internet to its key suppliers, who buy their stones
directly from South Africa's powerful DeBeers Consolidated Mines Ltd. That
eliminates three middlemen or more. "Businesses are learning to drive
process change by combining it with technology," says John T Chambers, CEO
of networking giant Cisco Systems Inc.

So, who will win, the upstarts or the established companies? This time, with
incumbents attuned to the advantages of the Net, there will be victors on both
sides. A Blue Nile here, a Verizon there. More important, though, is that the
Internet will continue to have sweeping impact on the economy, giving consumers
more choices and making everyone more efficient. "It's going to be a
wonderful mess," says Al Lill, a fellow at tech-research firm Gartner. In
these six industries, and more.

By Timothy J. Mullaney in BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc