Web Economics 101

So, what exactly did Alan Greenspan tell Congress about the economy during
the first of his two appearances last month? Was he "upbeat," as The
New York Times reported? Or was he only "mildly optimistic," as The
Washington Post said? The front-page tease in The Wall Street Journal had
Greenspan warning that "downside risks predominate." Clear? Like mud.
No wonder they call economics the dismal science.

Dismal it may be, but we can’t ignore this stuff. People need to understand
economics to decide whether to buy stock, take a new job, or purchase that dream
home. A job that looked golden yesterday might be leaden tomorrow if tech keeps
tanking. Or that new SUV may seem superfluous if your job goes sayonara.

Unfortunately, it’s hard to get clear guidance about the economy–and
especially on what you should do about it. Government economic statistics are
complicated, and there are too many of them. You’d need to master a half-dozen
government Web sites to put together a comprehensive overview. Most leading
business media are too scattershot: One source says one thing, and the next says
the opposite. That’s noise, not insight. Brokerage Web sites can be great, but
most require accounts to get detailed research. As Goldilocks discovered, there’s
little that’s just right.

A couple of lesser-known sites are worth exploring, however. The best place
for regular people to learn enough economics to handle tough times is The Dismal
Scientist, a.k.a. Dismal.com. For some purposes, I also recommend Dr Ed Yardeni’s
Economics Networks, an economics mini-portal named for Deutsche Bank.

First, Dismal. The site covers 65 different government economics reports from
the perspective of real economists, rather than journalists. Dismal’s parent,
Economy.com, is a consulting firm that sells research to corporations and state
governments. Their depth of data and expertise pays off on this free site, where
you can count on seeing smart takes on the government data announcement du jour
and two or so fresh interpretations of hot issues daily. Comparing Dismal.com to
the analysis pouring out of most crummy stock sites is like comparing Chateau
Mouton Rothschild to Ripple.

The best things about Dismal.com are that it’s quick on the uptake and easy
to understand. Dismal’s team tends to spot trends early and write them fast.
Analysis of regular economics announcements hits the site the same day, often
well

before noon.

After Greenspan’s mid-February testimony, Mark Zandi, Dismal’s chief
economist, wrote that the Fed chief had laid the groundwork for spring and
summer rate cuts. Zandi argued that Greenspan’s real message was that he’ll
do what it takes to keep confidence from eroding–the one thing that could
really turn this slowdown into a recession. Zandi looked farther ahead than the
newspapers and took a much bolder stance than the he-said, she-said of dueling
economists, or, worse, politicians.

Dismal reads the crystal ball well, too. Its economists are confident enough
to project trend lines for vital metrics going out months into the future–such
as labor shortages in health care and what interest rates will be this summer.
Dismal predicted in mid-February that the federal funds rate will be 5% in July,
down another half-percent, with a 24% chance of falling to 4.75%, based on
signals from the futures market.

What does this have to do with you? Plenty. Lower rates usually mean cheaper
mortgages and more. It’s a fair argument that people would be smart to wait
until midyear to make big purchases–which could retard growth during the first
half of the year. If you’re working for a homebuilder or a car company, that
may mean the bounce back is going to come gradually rather than suddenly.

Dismal has two big weaknesses, though. The first is that it covers the
economy from the top down by watching national and regional statistics. Why does
this hurt? Knowing companies and industries inside out let top business
journalists figure out sooner than economists just what a big deal the Net would
become–long before it showed up in economic stats. Dismal makes a stab at
covering the technology industry as a primary New Economy growth engine, but it
should do better.

The other weakness is that Dismal generally isn’t explicit about giving
advice. Its excellent-as-far-as-they-go analyses of business inventories or the
Philadelphia Fed’s manufacturing survey don’t directly say which industries
should back off investment for awhile (or which are prone to layoffs or profit
shortfalls). And its analysis of which states have large rainy-day funds doesn’t
tell policymakers or voters much about policy options. Zandi told me Dismal
doesn’t want to give advice without knowing people’s circumstances. But if
the goal is to guide people through the economic wilderness, Dismal should
understand people need help with decisions, not just sharp analysis.

Investors can make up for that weakness, in part, by using Dr Ed Yardeni’s
Economics Network. Dr Ed’s covers a lot–though not all–of the ground that
Dismal does. It’s not written as well, and its staff is far smaller than
Dismal’s. Instead, it relies more than Dismal on links to other Web resources.
Dr Ed’s gives clear guidance about investment decisions. Both Dismal and Dr Ed’s
have analyzed OPEC machinations, but only Yardeni told me to overweight energy
stocks. Most of Dr Ed’s is available to the public for free, and Yardeni is
smart. Yes, he hurt his rep by predicting a recession caused by the Y2K bug. But
he was also an early seer of the New Economy.

My respect for Economy.com is based on more than a quick review. In 1997, a
partner and I tried to start a company to compete with it–but we failed. I’ve
known for years how well they do what they do. My entrepreneurial career is,
alas, a tale of fortune much bleaker than what’s awaiting savvy users of
either Dismal or Dr Ed’s.

By Timothy J Mullaney
in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Size matters

Now, these mini-dots are proving they’re an online force to be reckoned
with. Indeed, they’re teaching their bigger rivals a thing or two–including
the value of common sense. Unlike some dot-coms with inexperienced executives,
the mini-dots are succeeding by employing the same strategies that
small-business owners have relied on for centuries: They’re sticking to niches
they know well. They scrimp on expenses, forgoing expensive portal deals and
using Net resources, from e-mail to customer-sharing arrangements, to save
money. And they’re banding together on the Web, presenting a bigger face to
the online world.

So far, it seems to be working–so well that small businesses appear poised
to play a greater role in the growth of e-commerce than anyone expected. Small
companies will see their online sales grow 336% from 2000, to $120 billion by
the end of 2002, predicts ami-Partners, a New York consultant to small and
medium-size businesses. That will outpace overall e-commerce revenue growth of
249%.

Of course, size matters, even in the New Economy. But in some crucial ways,
the Net helps level the playing field for small outfits. For one thing, the cost
savings of selling online and dispensing with store rents or direct-mail costs
makes some businesses viable that otherwise wouldn’t be–say, a home-based
collectibles business.

Moreover, the global nature of the Web goes a long way toward negating one
key disadvantage of the small fry: geographic reach. Now, even a niche seller of
specialty pet supplies can amass enough customers to be viable. Finally, the
easy communications afforded by the Net may make more small businesses,
especially services such as graphic design, attractive to larger businesses
seeking to outsource jobs.

The impact of a mini-dot explosion could have big implications beyond the
Web. By 2004, even the tiniest of these e-merchants–those with fewer than 10
employees and $3 million in annual sales–could account for as much as 10% of
the US gross domestic product, according to e-commerce researcher Keenan Vision.

Maybe so, but big questions remain about how much the Net will boost the
number of small businesses and what impact they’ll truly have on the economy.
For one thing, says William Dunkelberg, chief economist for the National
Federation of Independent Business, it’s possible the Net is simply shifting
existing sales online, not expanding markets enough to support many new
businesses. He adds, it’s likely that the most successful online businesses
will put the other mom-and-pops out of business, lessening the net gain. Most
traditional small businesses fail, and the same may well be true online.

And for all its advantages, the Internet presents a lot of challenges to the
little guys, too. In many parts of the country, pokey Net connections limit how
many visitors these sites can handle. And it can be tough for traditional
businesses coming online to handle both channels at once. Those factors may
explain why, for all the small businesses that have launched online, many more
have not yet moved beyond sites that are nothing more than online brochures.
According to ami-Partners, 22% of small businesses had Web sites in 2000, but
only 8% were engaging in e-commerce.

Still, none of these challenges has stopped a growing number of small
businesses from embracing the Web as a new sales channel and productivity tool.
Many of the online newbies are longtime Main Street merchants or
industrial-goods manufacturers. There’s also a raft of service providers–computer
programmers, graphic designers, lawyers, and such–who have left Corporate
America to hang a shingle on the Internet.

The Web is spawning new breeds of small companies, too. They include tens of
thousands of people who never ran a business before but now make a living
selling collectible ornaments, antique toys, and other odds and ends on sites
such as eBay. About 13,000 stores have sprouted on the Yahoo! Stores section
alone since June, 1998.

What these disparate businesses have discovered is that the Net is less a
magic carpet to a newfound land of riches than a tool to turbocharge an already
sound business model. "The Internet is what the telephone was when it was
invented–a way to further our reach," says Wendy Haig, founder of
Washington (DC)-based Global Strategy, which counsels troubled dot-coms.
"With its vast reach, the Internet will enhance any small business that
uses it properly."

How so? First, they’re using the Net’s access to a global customer base
to zero in on defensible niches, instead of offering all things to all Web
surfers. Pets.com, for instance, went bust in December partly because it tried
to sell all kinds of pet supplies–even huge bags of inexpensive dog food with
high shipping costs and margins under 10%. By contrast, Massachusetts based
Waggin’ Tails sells scarce items such as Provi-Tabs dog vitamins and Hi-Tor
prescription cat food. That allows the Web store to charge high enough prices to
turn a 30% profit margin on well under $5 million in annual sales.

In some cases, the Web’s global reach has allowed entrepreneurs to offer
entirely new types of narrowly focused services. Patti Glick, a San Francisco
nurse trained in podiatry, makes a living speaking at companies on foot health
and safety. Before, she had to do a lot of personal networking, such as mingling
at Toastmasters meetings. Now, by participating in various online podiatric
sites and women’s portals, Glick has drawn corporate customers intrigued by
her screen name, "footnurse." She expects to earn $30,000 this year
working part-time hours that allow her to spend time with her 10-year-old twins.

Small businesses also are using the Net to save big bucks–enough, in many
cases, to make a pipe dream a going business. Selling Beanie Babies and other
collectibles online out of a bedroom in his Oklahoma home, Perry Calton is
grossing annual sales in the low six figures.

Besides saving money, the Net also provides mini-dots a wealth of new
marketing channels. E-mail and discussion newsgroups can be far less expensive
and more effective than direct mail and print or TV advertising. Carrie Hardy,
founder of Colorado based scrapbook-supply site Scrappin’ Happy, sends
newsletters to 1,100 past customers and posts messages on scrapbooking
newsgroups. Instead of buying $80, three-line ads in trade magazines that never
drove any traffic anyway, she spends nothing and gets a far better response:
After mailing her February newsletter, sales doubled the next day.

No online marketing channel has proved more effective than online auctions,
pioneered by eBay in 1996. Besides spurring the formation of thousands of new
small businesses online, they have prompted existing businesses to branch out.
Some wholesalers are using eBay to go retail:

Andrew Waites took his Mississippi retail overstock business, Inventory
Procurement Services, directly to consumers over eBay–leading to what he hopes
will be a twofold-plus jump in sales this year, to $7 million, and a gross
profit margin online of 50%, 10 times the original business.

Finally, the Net has allowed far-flung small businesses to gang up and pool
their resources against their bigger and louder competition in ways they can’t
do in the physical world. The American Booksellers Association, which promotes
independent bookstores, runs a program called BookSense.com that allows members
to offer amenities only big chains could offer before, such as gift certificates
good at any member store. Moreover, their online customers can order any book in
print from their site, even if they don’t stock it themselves. Kerry Slattery,
owner of Skylight Books in Los Angeles, partly credits the program for a
higher-than-expected 15% rise in her store’s sales in 2000, to $1 million.

Daunting prospect

All that’s not to say the Web can turn any small business into a raging
success. Most entrepreneurs are running into obstacles on the Web that are hard
to overcome with limited staff and resources. One of the toughest jobs:
providing superior customer service. After all, to make up for what they may
lack in product breadth–not to mention customers’ ability to click instantly
to another site–they have to offer much more personal service.

Another challenge is Internet technology itself. Fast broadband connections
are still largely unavailable, especially in rural areas, leaving many small
businesses stuck with snail-like modem connections. And many worry that they
could lose a lot of customers if their connection goes down. Says Deepinder
Sahni, vice-president at researcher ami-Partners: "What we are hearing is
that they are hesitant to put their crown jewels–their companies–on the
Internet."

For many small businesses, the prospect of competing with the online
behemoths is daunting–for good reason. It may be only a matter of time before
the big guys notice how well they’re doing and jump onto their turf. So they
must stay vigilant, even paranoid, about differentiating their offerings.

That, however, is not the main worry of most small businesses that have moved
online. Their problem: too much business. When Jordan Dossett posted her
graphic-design portfolio a year ago on eLance.com, a Web marketplace for
freelance workers, she was buried under an avalanche of work offers from
companies as far away as Russia. So she quit her job as art director for a law
firm and opened The Design Studio in her Washington (DC) home. After hiring
three employees, she expects to rake in $350,000 in sales–and a tidy gross
profit of $250,000. "I had no idea the amount of demand out there,"
she says. "Suddenly, I’m slammed." Now, that’s a problem a lot of
dead dot-coms would love to have had.

Arlene Weintraub–BusinessWeek