I am not sure there will ever be a profitable model in some of these B2C categories

An entrepreneur, a consultant and a researcher, Bob Hayward has seen the
various aspects of the IT industry. Catching the dotcom mania at the right time,
Hayward had quit GartnerGroup in early 1999 to set up his own consultancy firm
providing advice to IT start-ups in Australia. Prior to the first stint with
Gartner, he was running his own company called Qualix for about a year or so.
He rejoined GartnerGroup for a second stint as Senior VP, Operations,
Asia Pacific in late 1999 and is currently based in Australia. He has been
associated with the IT industry for the past 21 years. In India recently to meet
top industry people, he gave his and GartnerGroup’s views to DATAQUEST on the
dotcom phenomena, B2B, B2C, brick and mortar and other issues of the internet
world. Excerpts:

How
do you view the dotcom phenomena?

First of all there is too much
generalization. Though any company in the internet domain is considered a dotcom
company, there are lot of different business models in this segment.

The dotcom companies are not
similar to a big wave going up or down together. So even when the stock market
fell by 500 points, some technology stocks went up. We have always been of the
opinion that there has been too much heat in the market when it comes to some of
the internet startups. At the same time there have been other technology stocks
which have been overlooked or undervalued because they are building the next
generation infrastructure. For example, players in providing WAP-enabled
infrastructure or companies doing speech recognition software. So overall it is
going to be hard not to generalize, but we need to take care not to club all the
players in the same dotcom category.

Do you think that the current
correction in Nasdaq is temporary and a majority of dotcom companies will regain
their old valuations?

It is fairly obvious that most of
the B2C segment has been dramatically overprized by the stock market. For
example, retail even at the best of times has low margins and is a hard business
to be in. So why should a company suddenly have such a compelling and better
business model just because it is selling online? It is hard to justify
valuations of such dotcom companies. The high valuations of such companies have
been really based on high expectations of growth and flawless execution without
expecting any competition in the next 4-5 years, which is really an unrealistic
scenario. With reality setting in even before the big fall, most of the online
retail segment was already down by about 50%-60% from their all time highs.

People and investors are
realizing that there is actually going to be lot of hard work before they can
see some profits. Moreover it is going to take longer and cost more to acquire
customers, and consequently revenues. There seems to be little loyalty toward
etailers.

So where is the investment
flowing?

In the next hot thing, B2B. We
are witnessing enormous amounts of money pouring into this segment. Again it is
going to be the same story. The money is going in with the assumption that these
small little companies, which started early and have already assembled their
management team, will gain great value in the next five years. The basic premise
is that they will be absolutely world dominant in the coming future, they would
not have made a single mistake and encountered any competition. This is just not
realistic specially when you have low entry barriers.

What are the key dynamics of the
dotcom business model?

In the B2C segment, we are
witnessing the removal of middlemen in the supply chain. So people who acted as
intermediates, had information and kept it to themselves are being thrown out in
the online world. However, the high threat can also translate into high business
opportunities.

Do you see a similar scenario in
the B2B segment?

In the B2B world, we are seeing
not the removal but introduction of new intermediaries, or cybermediaries–people
who only exist in the virtual world and make possible a dynamic net marketplace.
The net is helping buyers and sellers in various industries to come together at
one place, irrespective of the geographies, to trade. They can gather in the
online world in a way that they just cannot do in the physical world and
exchange information. It is interesting dynamics. Within the last 2-3 years,
about 500 such exchanges around the world have emerged, about 80 being in the
Asia-Pacific, and we predict that by 2003-04, there could be as many as 10,000
sites across the globe.

Considering the numbers you are
predicting, do you see consolidation in this segment?

Instead of numbers, look at it
from the potential aspect. For example, we could have a global steel site, then
there could be a site for Indian or US steel and then there could be sub-sectors
within the steel segment. So there could be multiple sites within the same
segment. We have to see how this shakes out and the winners will be those who
can gather the hearts and minds of the buyers and the sellers and do a good job
of acting as a conduit to trade. It could be an interesting shakeout but for the
moment, we are going to see it multiply dramatically. Probably by 2003-04, there
could be a slight consolidation but it is going to take some 3-4 years before
the shakeout takes place.

What about
consolidation and shakeout in B2C?

The shakeout is already
happening.

Is it true that in B2C, there is
a high inverse correlation between spending and rates of return on investments
made on the web strategy?

That’s true. Site owners need
to spend more money than ever before and incur more expense in media in an
effort to have their brand heard above the cacophony of thousands of sites.
Compounding the problem is the ever-increasing number of people going online and
spending more and more to create the brand. But the ratio doesn’t fit because
with so many websites, your ability to grab a piece of the growing pie is
becoming harder. So you are spending more money and even if you do get clients
to come to your site, there is no guarantee that they will stay. It does not
take much but a click to switch over to another site.

The segment is becoming price
driven and this is fast eroding margins. People are discovering that even though
you are spending a small fortune to create an online presence your pricing is
absolutely low margin. This is a sure recipe for disaster.

Is this the same case with the
B2B segment?

In B2B there is lot more loyalty.
In this segment online capabilities of the supply chain become embedded in the
business processes. These are much harder to reengineer to change than in the
consumer space. If a company has invested in a supply chain solution, it is
quite unlikely that they are going to change it easily. There has been a lot of
investment and training involved. This is the reason why B2B is attracting much
more attention and investments.

Why should brick and mortar companies move online?

Why should brick and mortar
companies move online?

They don’t have much of an
option but to move online. However, as of now, B2B is the primary goal. B2B
linkages can iron out and improve the efficiency and effectiveness of the
business quickly and specially in areas of procurement, supply chains and other
activities related to suppliers and distributors. This is an unbelievable
win-win situation as the net is cutting down support cost and improving customer
satisfaction. Companies are spending less money and the customers are happy as
they have online status of their order.

What are the risks involved in
the transition of a brick and mortar to the web?

First is the basic issue of
competition. They may not be as fast on their feet as many of the nimble dotcom
players. The smaller dotcom players are not yet burdened by cost structures and
hierarchy as in legacy companies. A bigger problem is they are finding it hard
to retain the talent they need because they are not able to offer attractive
reward systems. Finally and importantly, they also have an established
relationship with distributors, retailers and others partners in the sales
channel. Upsetting this apple cart may result in upsetting them, facing legal
court cases or product boycotts.

What are the advantages of a
brick and mortar over its online counterpart?

These companies bring in some
basic advantages to their online strategy, like brand loyalty, brand equity and
knowledge of the product. The biggest advantage is that companies can use its
channel to increase its marketshare by leveraging on its existing physical
points of presence. Brick and mortar players wanting to have a virtual presence
have two of the biggest issues with online selling to its advantage–immediacy
and return. Immediacy means that you can buy something from the net without
waiting for 3-4 days to see the product. And if you have any problem with the
product you can return it without trying to figure out how to ship it back. From
the customer perspective, security, privacy or other issues are not the problem
but immediacy and return are.

Are you of the view that the net
is going to lead to localization rather than globalization?

The first wave of the internet
has had the American look and feel. They have been English sites and more tuned
to the American culture in terms of news and content displayed on the sites. Now
as we move these business models globally, they have to be more attuned to local
market situations, traditions, cultural issues, language issues and local
delivery issues, and fit into the local environment better with local content
partners. So what may happen in the near future is you might have a global
business but with varieties of versions depending on locations. The same concept
of think local, act global.

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