E-Commerce Growth Surprising Even True Believers

When Egghead Computer launched its World Wide Web site in 1996, company officials had no idea how soon it would turn their world upside down.

The 14-year-old software retailer announced last month that it would close its 80 stores, relying instead on the egghead.com site and two subsidiary sites, surplusdirect.com and surplusauction.com.

"The Web was meant to be a supplemental business, but it turned out to be the main focus," said John Hough, spokesman for the Spokane, Wash., company now officially called Egghead.com.

Stories like this are still anecdotal, but the anecdotes are mounting up to the point where bankers and other observers are more and more convinced of the reality of electronic commerce.

Some are even wondering if the often-quoted research estimates of on- line transactions are too conservative-an attitude that might translate into more serious attempts to establish and support business presences on the Web.

"We were hearing (Internet commerce) estimates over the Christmas season of $500 million to $1 billion," said Daniel Eitingon, president of global support services for Visa International. "I wouldn't be surprised if it was double that."

"I have yet to speak to an on-line merchant who did not meet Christmas expectations," said Nicole Vanderbilt of the Jupiter Communications research firm. She now believes Jupiter's $1 billion holiday season forecast was probably surpassed. Final tabulations are not yet in.

A recent Ernst & Young survey of consumers with on-line access showed that 32% had purchased something over the Internet.

"People are more comfortable" with electronic shopping, Mr. Eitingon said. SET, the MasterCard-Visa Secure Electronic Transactions credit card protocol, "will only help. Given all the people out there developing software and Web sites, there is a huge perceived opportunity. I am looking for substantial Internet commerce growth, at least from a U.S. perspective."

Cisco Systems and Dell Computer get hundreds of millions of dollars of orders on-line. Amazon.com may not yet be making money, but its stock trades at 10 times sales, and its success spurred conventional booksellers to hit back with Web strategies of their own.

Thousands of car shoppers survey the Web before closing a deal at a showroom. In the Ernst & Young survey, 64% said they researched products on-line before buying via traditional channels.

Statistical assumptions and conclusions can vary, and Internet commerce is still a small blip in the United States' $8 trillion gross domestic product. But the research numbers are big enough to constitute a very big, potential market for buying and selling. Skeptics have had to take notice.

International Data Corp. of Framingham, Mass., said last October that 53 million people were using the Internet worldwide. IDC sees Web users approaching 100 million this year, a certifiably "mass market" proportion.

A CommerceNet/Nielsen Media Research survey in December said the number was 58 million in North America alone. Half of those were believed to be on the Web in a given 24-hour period.

Computer Intelligence of La Jolla, Calif., said in December that "36.9 million PCs are regularly accessing the Internet in the United States."

Jupiter Communications of New York published a study two years ago that said consumer electronic commerce would generate $7.3 billion of revenue in 2000. Today's projection for 2000 is $15.6 billion, said Ms. Vanderbilt, digital commerce director.

International Data's Internet Commerce Market Model forecast last summer that Web transactions of all kinds would total $220 billion in 2001, up from $2.6 billion in 1996.

Early assumptions were that electronic commerce would gain the kind of gradual acceptance that automated teller machines attained in consumer banking over the 1970s and 1980s, Ms. Vanderbilt said. But consumer Internet shopping caught on much faster.

She attributed the acceleration to marketing and educational advertising by companies like International Business Machines Corp. and AT&T Corp. These advertisements have helped overcome concerns about the difficulty and lack of security in electronic transactions, she said.

Security and user-friendliness concerns still need to be addressed, said David Readerman, an analyst who is not quite ready to get carried away by the excitement in the electronic commerce community.

"Authentication becomes really important on the Internet because the buyers and sellers can't physically see or talk to each other," said Mr. Readerman, who looks at the software industry for NationsBanc Montgomery Securities.

Despite its growing popularity, Internet shopping remains a novelty. Only one out of eight of the on-line purchasers in the Ernst & Young survey made more than 10 such purchases a year.

Successful sellers, Mr. Readerman said, work hard to make it worth a person's while to shop on-line. Amazon.com and music stores like CDnow have led the way with deep discounts and large selections, Ms. Vanderbilt pointed out.

"With so many technology companies and on-line merchants having such a large stake in the Web as a commerce channel, they have put forth a lot of effort in advertising, marketing, and educational campaigns, as well as a lot of dollars," she said.

For all the attention to the consumer market, business trade-the source of Cisco Systems' high-tech sales-may be taking off faster.

International Data estimates business-to-business transactions will total $97 billion in 2000. (The company's consumer commerce revenue estimate is $37 billion in 2000, considerably higher than the one from Jupiter Communications.)

Like other market trackers, IDC has had to revise its growth figures, said research analyst Paul Johnson. IDC underestimated some revenue because the Asian and European on-line markets have grown faster than initially projected, he said.

Visa U.S.A. and Thomas Publishing Co., operator of the thomasregister.com corporate purchasing Web site, reported results of a survey last week showing that 21% of 2,000 business respondents expect to make more than half of their purchases via the Internet by yearend.

That would double the current 10%.

Seven out of 10 not making Web purchases said they were deterred by security concerns. Even so, "purchasing professionals appear optimistic that the issue will be resolved in the near future," said Julianne Garry, director of Internet marketing for Thomas Register.

Expedia.com, Microsoft Corp.'s on-line travel agency, saw its business rise during the fall as people set their holiday itineraries, said Erik Blachford, product manager in Microsoft's travel business unit.

In 1997, Expedia pulled in just under $100 million in sales-at the high end of its projections, Mr. Blachford said. He declined to release 1998 expectations.

According to a 1997 Jupiter Communications study, travel sales will bring in $1.8 billion electronically this year. Expedia is hoping for more.

"We think the analysts' projections are conservative," Mr. Blachford said.

"We are watching closely to see if the Internet is up to the task of taking on true electronic commerce," Mr. Readerman said at a NationsBanc Montgomery Securities conference last month. He defined that as an "on-line exchange of payments" rather than just the exchange of data.

But if the challenges are met, he said, the opportunities are vast for cutting into the $16 trillion worth of payment flows annually in the U.S., including $351 billion in consumer transactions.

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