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June 07, 2002
The New New Economy

There are two axioms I hear being bandied about in the vast wasteland of post .com boom America.

1. Being first and spending big was a massive failure.

2.The only real impact the Internet has on the enterprise is to shrink profits by removing channel friction and thus has little reward for investors.

Business 2.0 runs through Point 1 and Point 2 is laid out here.

The problem with both of these is that I think they are patently wrong. I hold up Amazon and Ebay as posterchildren.

Amazon was first, focused on their consumers, outspent everyone, and is the defacto brand in online retail. Is there anyone else? The offline stores just can�t play and truly good marketing explains the pitfalls of trying to take an offline brand and successfully extend it online. Its not about the website or the features or the functionality, it�s the brand (I however do not mean to discount features and functionality, however that is not where the barrier to entry exists.) What makes Intel better than AMD? Brand. In that case they are on a level playing field by being in the same market. Last I checked, Amazon is looking like it just might survive and maybe even thrive. I'm not the only person thinking along these lines.

As to the idea that all the net does is drive lower margins for all, I do think there is some truth to that thought. However, Ebay shows that that is fine and dandy. Ebay makes about 3% on the sale of goods. Of course from a revenue perspective they did the right thing and ignore the actual value of the auction and book only the revenue from their part. They�ve focused on their consumers, ignored the �common knowledge� that Yahoo, AOL, et al. were going to take away what they had. They built a high margin business on a low margin one. It has no barriers to entry � other than the fact that it is better to use Ebay because everyone else does. They even have pricing power as is shown by their recent rate increase.

There are tremendous opportunities out there to make gobs of profit. The next logical area that this will occur in is Entertainment, once the current management gives in or leaves. Of course the key in all of this is giving consumers a valuable service in exactly the form and function they want while trying to cater even more to them.

�Me Too� retail is going to have a problem (Pets.com anyone?) in the online world and much as Wal-Mart took all the profit out of retail for everyone but Wal-Mart, Amazon and a few others are going to do the same online. However, innovative models that actually offer the customer something new or in a better fashion are going to be hard to beat. Blockbuster is going to be bedeviled by Netflix. Paypal is going to start causing banks and credit card companies to loose sleep � though in that space I think First Data and others are smart enough to just pull out the war chest and stay in the game.

It is awfully bleak in the marketplace of ideas right now. Luckily its not the likelihood of new Internet based ideas succeeding that is where the bleakness is coming from. Now if I could only figure out which sector of the market is going to recover first...

Posted by hoffmang | June 07, 2002 01:15 AM


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