The Internet, IP and New Market Opportunities: A Strategic Analysis
Executive Summary
The phenomenal growth and commercialization of the Internet since the mid-1990s has
sparked debate, ignited the imagination and fueled speculation on the potential effect the Internet
and its underlying technology would have on the social and business environment. Meteoric
projections have been made for the growth in Internet-based sales and the death knell has
sounded for brick and mortar establishments. Epitaphs have been written for the Public Switched
Telephone Network, just as they had been for the condor, and the incumbent
Telecommunications Service Providers have been caricaturized as dinosaurs in the new age of
the Internet. The soaring prices of Internet-based stocks and surreal market capitalization of these
companies, amidst mounting corporate losses, had led many to call for the obsolescence of the
traditional measures of business performance.
But is human society on the precipice of this IP revolution and will a somber analysis of
the potential effects of the Internet on the social and economic environment support the argument
for a dramatic and revolutionary alteration in human lifestyles? And what will be the social,
economic and political factors driving this change, since after all, at its core, the Internet is a
technology. Will the ever-increasing globalization of businesses and their concomitant demands
for reliable, secure and relatively inexpensive means of communication be the catalyst driving
the growth in IP networks? What applications will these new hybrid networks support and how
will business and residential customers utilize these applications to improve their productivity or
their quality of life?
Figure E-1
Time It Took to Reach 50 Million Users1
74
Telephone
38
Radio
16
PC
13
Television
4
World Wide Web
0
10
20
30
40
50
60
70
80
Years
1
International Telecommunications Union, Challenges to the Network: Internet for Development, February 1999.
E- 1
Figure E-2
Growth of Internet Hosts and Countries Connected
50
240
217
45
Hosts
192
Countries Connected
40
43.5
174
190
29.7
129
30
25
140
21.8
83
20
60
15
90
No of Countries
Hosts (millions)
35
14.4
48
35
10
40
22
5.8
5
0.04
0.7
1.4
2.3
0
-10
1990
1991
1992
1993
1994
1995
1996
1997
1998
This study examines the co-evolution and integration of the Internet and the PSTN to
establish how technology, business and social factors are interacting and how these interactions
will affect the wide-scale deployment of IP networks. Specifically, this report examines how the
Internet and IP technology are reshaping the workplace and the prospects for greater business
efficiencies and re-defined business models. This report also examines the residential uses of the
Internet to assess consumer benefits and to identify market opportunities for new services. Four
general conclusions about IP-based applications and market opportunities are supported by this
study:
 A New Sheriff in Town
In the new telecommunications and IP environment, competition will shift from price
differentiation of similar products and services to the provisioning of value-added services, and
the ability of telecommunications service providers to bundle these services. Hence value-added
services and applications will represent key sectors of growth and present immense market
opportunities. Several telecommunications service providers have already formed alliances with
content and software developers, such as Microsoft, to compete in this new market. AT&T’s
recent mergers, acquisitions and alliances also suggest that the incumbents have also recognized
the growth and revenue potentials of this new segment.
 Darwin and the Residential Markets
E- 2
The growth of Internet-based sales will be relatively slow for the residential market, in
general, as habits, norms and mores will have to evolve to match the new technological
environment. Furthermore, the value to the average residential consumer of using the Internet for
commerce in the everyday aspect of life has yet to be established, and many see internet-based
sales as a complement to and not a substitute for traditional means of shopping. However, certain
sectors will sustain rapid growth. Growth sectors will be those that provide goods and services
that match the profile of Internet users, specifically households or individuals who are relatively
young with relatively high income and education. As such, tremendous market opportunities
exist for companies whose products and services fit the current consumer demographics.
Products such as computer software and hardware, financial investment services and books are
well-suited both to online selling and the online consumer. This accounts for the meteoric rise of
companies like Amazon.Com and E*Trade. Furthermore, as the case of Dell Computer shows,
direct marketing companies are well positioned to capture the emerging market share.
Figure E-3
U.S. Consumer Spending On-line in 1998 (millions of dollars)
636
Gifts & Flowers
518
Books/Others
414
Grocery Foods
316
Clothing
562
Entertainment
44
Content
1085
PC Hardware/Software
1355
Travel
0
200
400
600
800
1000
1200
1400
1600
Against this backdrop, however, companies should take heed that the overall cost
structure of an on-line store may be higher than a physical one. Currently, only a few of the
multitude of on-line stores are profitable while the vast majority does not expect to be profitable
in the near future. Ultimately, though, for companies operating in this market, financial success
will depend on their ability to retain customers to whom they must be able to provide bundled
services or offer products across multiple categories because the cost of acquiring on-line
customers is high.
 Business-to-Business Mitosis
E- 3
The existences of business efficiencies, particularly in an era of heightened competition
and globalization, will be a powerful and irresistible driver for the adoption of IP-based
applications. Hence, the use of IP-based applications, and e-commerce in general, will
experience rapid growth in the business-to-business sector as more companies realize the
business efficiencies that can be generated from the use of these applications. Such business
efficiencies include reduced transaction costs, increased global reach, improved customer
support and increased productivity. Web-based customer support and on-line product
information are applications that most companies will have in place within the next 3-5 years.
This presents outsourcing opportunities for companies and systems integrators that can provide
these and other services to the small and medium size companies who cannot afford their own IT
staff. More large companies will also begin deploying more advanced IP-based applications to
achieve supply chain integration and just-in-time inventory, although deployment across all
sectors in the economy will be considerably slower.
However, these business efficiencies will only be fully realized by companies with determined
leadership and who completely understand their core business processes so as to be able to
deploy IP-based applications judiciously.
Figure E-4
Cost Advantage of On-line Financial Transactions (U.S. Dollars)2
Business Cost of a Brokerage Transaction
Business Costs of a Typical Banking Transaction
160
1.4
140
1.2
150
1.27
120
1
100
0.8
80
0.6
60
0.4
69
40
0.27
0.2
0.01
10
20
0
0
Branch
ATM
Internet
Full Service
Discount Broker On-Line Broker
 Carpe Diem: The New Telecommunications Service Providers
2
International Telecommunications Union, Challenges to the Network: Internet For Development, Geneva, 1999.
E- 4
Although many of the new telecommunications service providers will continue to grow in
terms of revenues and through acquisitions, and will continue to deploy their own networks, they
will still be small relative to the incumbents. As such, the pace and success of wide-scale
adoption of IP-based applications still will depend principally on the speed at which incumbent
telecommunications service providers deploy networks capable of supporting such applications.
Nonetheless, the new telecommunications service providers will continue to compete with the
incumbents in the lucrative business market. Realizing the revenue potential for value-added
services as opposed to transmission, several new service providers have begun to offer valueadded services such as web-hosting, Internet co-location and e-commerce solutions through
alliances with software and content providers, such as Microsoft and Netscape. They have begun
to deploy IP networks not so much to reduce operating costs as to position themselves to be able
to offer merged voice and data value-added services.
The view that the use of IP allows service providers to lower network operating costs or
overall costs has yet to be substantiated. A significant portion of the costs for
telecommunications service providers, though, accrue to depreciation and amortization, customer
operating expense and general administration and support, with the major component of these
categories being wages and salaries. Thus, the use of IP-based applications has the potential for
reducing costs in some of these areas, principally customer support and general administration.
Specific conclusions supported by this study are presented at the end of each chapter.
The remainder of this executive summary highlights some of the key findings from the following
chapters with abbreviated presentations of the analysis supporting them.
IP and Business Efficiencies
In many organizations, the use of IP in core business processes has generated greater
economic efficiencies and productivity. In cases where IP has clearly generated cost and
productivity benefits for companies, substantial organizational restructuring preceded the
effective deployment of IP-based applications. The clearest case in point is Marshall Industries,
an electronics distributor that continues to garner recognition and awards from industry
professionals for its innovative use of the Web and intranets. 3 The context for Marshall’s
innovations was a complete organizational restructuring carried out over a five-year period.
Without this, it is doubtful that the technology would have made much difference. More
significantly, however, its gains have been impressive.
Increased Productivity and Efficiency: Marshall Industries
Although many observers have credited Marshall Industries’ growth and performance to its
implementation of Information Technology (IT) systems, it is important to note that several
significant changes preceded the implementation of IT. First, beginning in 1991, Marshall
Industries re-organized its corporate structure and adopted a “very flat” organizational structure
3
Other cases analyzed in this study include Cisco Systems, Boeing, Chase Manhattan Bank, Lockheed Martin, the
Automotive Network Exchange (ANX) and Rosettanet.
E- 5
to speed up decision making and direct contact with customers. The IT department at Marshall
was eliminated in 1993. Since many IT projects were late or had failed to meet user expectations,
Marshall sought to integrate IT into the business units as a way to overcome these problems.
These measures supported Marshall’s transformation from a catalog-based electronics parts
distributor to an Internet-based enterprise.4
Secondly, in response to growing competition in the industry, the company abolished the
Management by Objective System and adopted a customer-oriented global performance
measure. It scrapped all sales commissions and management incentives based on specific
objectives in favor of one criteria: overall corporate profits. This was done to prevent friction
between traditional sales processes and the new sales channel of cyberspace. Marshall Industries
made the customer the primary focus with the object of delivering the lowest possible price, with
the highest quality and service, and in the fastest possible time, as captured by its impossible
mantra, “Free, Perfect, Now.”
Figure E-5
Marshall Industries’ GlobalNet
PARTNERNET
Electronic Design
Center
Net Seminar
Internet EDI
Ordering
Windows NT
IBM 3090 400J
DB2
Oracle
AS/RS
QOBRA
DATAWAREHOUSE
MAP
DRP
Secure Socket Layer
& Encryption
FIELD SALES EMPLOYEES
MARSHALLNET
Compass Marketing DataBase
Lotus Notes Messaging
Sales Automation Software
WorkFlow Management
Marshall Industries has been able to achieve increased productivity and cost reductions with the
use of IP in several key areas:

4
24 hr Web-based customer support, including pricing and availability of products, customer
purchase history and customized pages for suppliers
Caldwell, Bruce, “Senior Managers Get IT-Enlightenment,” Information Week March 23, 1998.
E- 6

Real time or near real time price quotes and inventory status from customer premises

Virtual interaction between potential customers and suppliers to design new products through
use of web-casting technology
Marshall’s intranet, known as GlobalNet, was commissioned on July 24, 1995 at an
undisclosed cost, although analysts estimate it at $50 million. Marshall’s intranet is part of a
global WAN upon which 13 client/server platforms sit, along with an IBM 3090 400J mainframe
running a DB2 relational database, Oracle, and other relational databases. The company has been
deliberately vague about the specific technical aspects of its intranet for proprietary reasons.
Mobile workers use Lotus Notes when they are on the road. A systems integrator DPI Services
coordinated the project of automating of the sales force. Marshall opted early on to go with the
Windows NT platform.
As shown in Figure E-5, key features of Marshall Industries’ systems include MarshallNet and
PartnerNet. MarshallNet supports about 400 field sales employees with instantaneous access to
2,500 different documents about suppliers and their product lines, while PartnerNet is a secured
site for registered customers and suppliers which provides access to information about their
purchase history, and consolidates and breakdowns orders for multiple order points.5
As a result of the use of these IP-based applications in their business processes, Marshall
Industries has been able to accommodate a doubling in net sales between 1990 and 1997 while
reducing sales, general and administrative costs and maintaining essentially the same number of
employees. Since its web efforts began in 1994, Marshall has gained nearly 200,000 new distinct
customers through a network that handles nearly 700,000 transactions per day. This has resulted
in annual productivity per employee increasing from $360,000 in 1991 to some $635,375 in
1998. However, this represents a decline from $846,150 in 1997 caused by the increased staff
resulting from Marshall’s acquisition of Sterling Electronics Corporation.6 Similarly, sales,
general and administrative costs have decreased from 16.3% of net sales in 1993 to some 10.9%
in 1997.
5
6
Description of Marshall’s IT infrastructure is based on El Sawy et. al, op.cit., p.10
Securities and Exchange Commission, Marshall Industries Form 10K,1998.
E- 7
Figure E-6
Marshall Industries: Net Sales and SG&A
1,600,000
20
18
1,400,000
1,000,000
Net Sales
SG&A
12
800,000
10
8
600,000
6
400,000
4
200,000
2
0
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
Figure E-7
Net sales Per Employee for Select Electronics Distributors
900
800
Net sales per Employee (thousands of dollars)
Net Sales (Thousands of Dollars)
14
700
600
500
400
300
Marshall Industries
Bell Industries
Kent Electronics
Arrow Industries
Pioneer Standard
200
100
0
1993
1994
1995
E- 8
1996
1997
SG& A as Percentage of Net Sales
16
1,200,000
Inventory Management: Wal-Mart
Wal-Mart is moving aggressively into electronic business, with a strategy reflecting a
growing reliance on technology to forge collaborative business environments. They are
considered a leader in quick-response merchandise replenishment, using massive parallel
processing, and supply-chain management. Overall, they are at the forefront of a general trend in
retailing towards more intensive investments in IT to streamline communications and to gather
information about customers. The retail giant shares inventory data with 4,000 merchandise
suppliers on a private network, and has a private network for freight haulers. Tightly knit
relationships have been formed with business partners in order to streamline the supply chain.7
Wal-Mart’s biggest IT advancements have come in data warehousing and data mining.
They have built a multi-million dollar data warehouse; one of the world's largest.8 Data
warehousing has essential streamlined the “information supply chain”9 and provided Wal-Mart
with detailed analyses of what's going on by product, by store, and by day, with rapid response to
these dynamic conditions. This affords Wal-Mart a major advantage over most of its
competitors. Since information from the individual operational databases is copied into the data
warehouse at regular intervals, any company that is a part of the retailer's organization can access
information from the data warehouse without disrupting the often critical applications the donor
databases were designed to support. Thus, Wal-Mart's success stems from its ability to get the
right product on the appropriate shelf at the lowest price.
Wal-Mart’s cost of sales as percentage of net sales for fiscal year 1998 was 79.2% as compared
to 79.6% for its 1997 fiscal year, as shown in Figure 5. The company attributes the 0.4%
decrease to improvements in the mix of merchandise sold and to better inventory management.10
This translates to a savings of some $456.56 million.
The apparent success of Wal-Mart has raised awareness and interest in the retailing industry, and
possibly points to sweeping change in industry organization, and in business operations in the
near future. Besides Wal-Mart and Sears Roebuck, firms such as the clothing retailer Eddie
Bauer, and food companies like Motts, Frito-Lay, and computer companies like Hewlett-Packard
utilize IP networks to increase efficiency, cut costs, and to enhance relationships with customers
and suppliers.
7
Denise Power, “Executives Taking New Look at Role of Technology Retail Systems ’98 show Focus on the
Shifting Strategies,” Daily News Record, March 4,1998.
8
Chain Store Age, “Data Warehousing: Turning Information into Action,” September, 1996.
9
Aileen Crowley, “Delivering a Healthy Dose of Sales Data,” PC Week, November 24, 1997.
10
Securities and Exchange Commission, “Wal-Mart, Form 10-K” January 1998.
E- 9
Figure E-8
Net sales and Cost of Sales for Wal-Mart, 1991-1998
140,000
80
Net Sales
Cost of Sales
120,000
100,000
79
80,000
60,000
78.5
40,000
78
20,000
0
77.5
1991
1992
1993
1994
E-10
1995
1996
1997
1998
Cost of Sales as percentage of Net Sales
Net Sales (Millions of Dollars)
79.5
Lower Communications Cost: ANX
The Automotive Network Exchange (ANX) represents an unprecedented collaboration by the
Big Three automakers, Chrysler, Ford and General Motors and their top suppliers. ANX is an
extranet that will establish a standard way for parts suppliers to communicate with
manufacturers. The system is owned by the Automotive Industry Action Group, (AIAG). It has
been under development since 1996, and began full operation at the end of 1998. ANX could
ultimately link as many as 40,000 automakers, parts suppliers, dealerships, and financial-service
companies to share everything from CAD files and groupware applications to e-mail and EDI
over a single IP network, replacing a complex and costly network system of multiple connections
formerly existing in the automotive supply industry.
ANX uses TCP/IP and download overviews of X.509.11 Although private TCP/IP networks are
currently well-established and reliable in the automotive industry, they fall short of industrywide connectivity, which is the aim of ANX. Because ANX combines industry-wide
connectivity with a protocol that is application-independent, it will encourage higher speed
connections among trading partners.
ANX believes that the suppliers furthest downstream in the supply chain will stand to benefit the
most from ANX. Smaller partners may not be able to justify a high-speed connection just for
CAD, but other benefits like communication capabilities across the industry make a single
connection an attractive option.12 Figure E-9 juxtaposes the cost savings from the new network
compared to traditional telecommunications connections. Similarly, Chrysler expect to save
millions by consolidating communications links onto ANX, through fewer T1 and satellite
connections, and also through the use of a standardized IP protocol in infrastructure support.13
Similarly, LucasVarity plc., another participant in ANX, hopes to save at least 20% of the $6
million that they spend on private networks. LucasVarity is a $7 billion company based in
London whose Detroit division supplies brake systems to automakers in 20 countries. In
addition, UT Automotive, the $3 billion auto parts subsidiary of United Technologies, asserts
that ANX relieves it financially from having to build a telecommunications infrastructure.14
Currently, 50-60% of a car’s cost is due to the supply chain. If ANX is successful in cutting the
time it takes for information to move through layers of the supply chain to 4 days from the 4-6
weeks that is normally spent, cost savings will be enormous. Since substantial cost is embedded
in the supply chain, the challenge of redesign lies outside of each company rather than
internally.15 Overall, estimates of annual cost savings for the auto industry range from $1 billion
to $2 billion, with savings per car estimated at $70 to $76.16
11
PR Newswire, April 9, 1998
Roberto Michel, “A Common Network,” Manufacturing Systems, Vol. 15, no.3, March 1997, p 178.
13
Information Week, Sept.1, 1997
14
Clinton Wilder, “Global Links,” Information Week, March 23, 1998. pg. 19.
15
Tom Stundza, op.cit.
16
PR Newswire, April 9, 1998.
12
E-11
Figure E-9
Telecommunications Connections Cost Comparison for Company
With Annual Revenues of $1.7 Billion
Existing Connections
Purpose/Applications
Customer and Supplier
engineering data transfer
Customer and supplier EDI
Ford CAD file transfer
Ford DDL
Types of Service
56 kbps X.25 Leased Line
9.6 kbps Dial
56 kbps IP VAN
19.6 kbps SNI Leased
Line
TOTAL
New Connections
Subscription Assessment
IPSec Software
Training
Systems Integration
TOTAL
Digital Certificates
Registration
Subscription
Connection
56 kbps Leased Line
TOTAL
Payback Period (years)
Annual Costs($)
30,000
18,000
24,000
6,000
78,000
One-Time Costs ($)
600
5,000
5,000
3,000
13,600
Annual Costs ($)
250
400
1,200
24,000
25,850
0.38
IP and Service Provider Network Operating Costs
Much current interest in IP networks has focused on their potential to undermine the cost
structure of circuit-switched networks. However the cost savings from operating a router-based
as opposed to switched-based network, either for network providers or user organizations, has
yet to be substantiated. Utilization of a router-based network will not be able to significantly alter
service provider costs. A large percentage of the operating costs incurred by telecommunications
service providers, as shown in Figure E-9, stems from customer operating activities and general
and administrative functions.
Some have argued that the deployment of an IP-Network would lead to a substantial
reduction in network operating costs, in some cases, as much as 60%. However, as Figure E-10
illustrates, many of the new telecommunications service providers have incurred and are
expected to continue to incur higher depreciation and amortization costs as a result of the
deployment of their networks. Furthermore, the cost structures of the new telecommunications
service providers resemble those of the incumbents. For telecommunications service providers,
E-12
however, IP-based applications have the potential to reduce costs in customer support operations
just as they have for companies such as Marshall Industries.
Figure E-10
Cost Structure for All Reporting Local Exchange Carriers
Costs as Percentage of Total Operating Expenses
RBOCs
Bell Atlantic
All LECs
(New York)
Network Support Expenses
0.22
0.20
0.18
General Support
6.57
6.20
6.79
Central Office Switching
4.28
4.24
4.78
Central Office Transmission
1.52
1.64
1.73
Information Origin/Item
4.61
4.00
4.52
Cable/Wire Facilities
9.41
9.82
12.47
Network Operating Expenses
9.38
9.65
11.14
Depreciation and Amortization
28.43
28.06
22.85
Customer Operating Expenses
18.67
19.08
18.06
Executive Planning
0.86
0.85
0.71
General Administration and Support
13.83
14.14
14.31
Total Operating Expenses
75.49
59.73
6.29
(Billions of Dollars)
SBC
0.08
6.16
4.23
1.80
6.86
9.86
9.72
27.65
19.12
0.85
10.97
7.80
Figure E-11
Depreciation and Amortization as Percentage of Total Operating Expenses
Depreciation & Amortization as Percentage of Total Expenses
25
MCI WorldCom
Qwest
IXC
AT & T
Sprint (Long Distance)
20
15
10
5
0
1995
1996
1997
E-13
1998
Citizens
Telco
0
5.89
4.11
1.34
4.30
8.98
6.64
25.93
11.96
1.15
29.60
0.18
IP and Redefinition of Service Provider Portfolio
The clearest path to reduced service provider network operating costs is the adoption of a
single advanced IP network, as shown in Figure E-12. Such a network would achieve cost
reductions through single-stack and simplified operational support systems, rationalized
processes and remote provisioning and configuration. Such a network would also offer flexible
service offerings for customers. Service providers would be offering security services and VPS,
advanced applications and service platforms off such a network.
Figure E-12
Architecture for Single Advance IP Network
SONET/SDH
Voice
ATM/Frame Relay
1Gb/s Ethernet
2.4Gb/s IP Backbone
Customer Premise
Network
Although there are no indications that any of the incumbent or new service providers (with
the possible exception of Level 3) will be extensively deploying this architecture in the
immediate future, there are indications that Qwest may be offering services based on this
model in a limited area.17 Furthermore, Qwest intends to begin offering several Internet and
multimedia services in 1999 and hopes to be able to offer all these services in all markets by
the end of 1999. These include dedicated Internet access, web-hosting, Internet protocol colocation and remote access for its business customers. This strategy is similarly being
advocated by IXC and exemplified by its acquisition of four Internet related businesses in
1998.
17
Qwest as well as several of the new service providers, including Level 3, IXC and Worldcom, are examined in
detail in chapter 4.
E-14
IP Applications and Prospects of Wide-Scale Adoption
The above corporate case studies in this report demonstrate the ability of IP-based
applications to lower costs. However, there are no comprehensive studies done to establish the
extent of adoption of IP-based applications by firms in the economy at large. CTM’s survey of
some 70 firms, across different industrial sectors, is meant to gauge the extent of penetration of
some of these IP-based applications. Fifty-one percent of the sample are large firms with over
$100 million in revenues in 1997, and 61% of the firms employed over 500 people.
CTM’s survey has also found that some 80% of companies in 1997 and 1998 used their
web-sites to provide product information. The extent to which companies have adopted other
types of IP-based applications is shown in Figure E-13. Currently, only 34% of companies allow
their customers to order products on-line while only 15% of companies offer their customers the
ability to access technical support, make payments or attain real-time pricing and inventory
information through their web-sites. Furthermore, less than 10% of companies currently provide
their customers with real-time customer support, order status and checking and purchase history
through their web-sites. These are services that Cisco and Marshall Industries currently offer
their customers on-line. The growth potential of these applications, however, is shown by the
significant increases in the percentage of companies that intend to offer these applications to
their customers within the next year.
Figure E-13
Types of On-Line Services Available to Customers
Other
Within the Next Year
Currently
Customer Purchase History
Order Status and Checking
Real-time Customer Support
Real-time Inventory and Pricing
Technical Support
Payments
Ordering of Products
0
5
10
15
20
25
30
Percentage of Companies
E-15
35
40
45
50
The lessons and economic benefits of supply chain integration experienced by Marshall,
Wal-Mart and ANX, may take a longer time to disseminate through the economy, as shown in
Figure E-14. Currently, nearly 50% of companies don’t offer suppliers any business applications
through their web-sites, and most of these companies have no plans to offer any of these
applications within the next year. However, although less than 10% of companies currently offer
their suppliers account payment, inventory management or procurement services options on-line,
Figure 4 shows that a dramatic increase in the percentage of firms that will offer these services
within the next year.
Figure E-14
Types of On-line Services Available to Suppliers
Other
Within the Next Year
Currently
Accounts Receivable
Product Design
Procurement
Inventory Management
Accounts Payable
None
0
5
10
15
20
25
30
Percentage of Companies
E-16
35
40
45
50
IP and the Consumer Market
Although the advent of the Internet heralds the dawn of true and ubiquitous electronic
commerce, it is important to note that the growth of the Internet has not been uniform across all
sectors of the economy. An examination of the current growth sectors of the Internet, and the
profile of the current users of the Internet, will be crucial to understanding the growth path of
electronic commerce and how it will leaven through the economy.
The growth potential of e-commerce is best reflected by cybershopping over the 1998
Christmas holidays. Sales were estimated at $3.5 billion, and represent a tripling of 1997’s total
dollar amount.18 Several factors may account for the growth in online spending. First, this boom
can be attributed, in part, to the increase in confidence levels and comfort with electronic
shopping. Consumers have grown accustomed to the Internet and thus psychological barriers
and fears have been reduced. Secondly, web sites have improved significantly in the last year.
Interactivity and personalization tools have distinguished the shopping experience online from
the past when web sites were akin to print advertising. Also, there are a greater variety of goods
and services now available through the Internet. Finally, the convenience factor remains a strong
motivator for consumers to buy online. This is acknowledged by companies like Amazon, which
aggressively pushed to provide a high level of customer service, and willingly incurred higher
than expected expenses for fulfilling orders.
Despite the apparent increase in online commerce revenue streams, there remains
uncertainty as to whether this momentum and strength in e-commerce sales can be maintained.
As a cautionary note, holiday spending typically comprises about 10% of retail’s yearly
revenues, while Christmas online buying accounted for 45% of total online sales for the year.
Ongoing surveys of 15,000 Internet users at Georgia Institute of Technology’s Graphics,
Visualization and Usability Center suggests, that although electronic commerce is growing, it is
growing slowly and unevenly across different sectors. The analysis of current consumer behavior
on the Web suggests that the Web will still be used primarily for information gathering over the
next 3 to 5 years. The Christmas 1998 sales notwithstanding, the growth of electronic commerce,
defined to include on-line ordering and payments, will not be as stellar in the business to
consumer market as it will be in the business to business sector.
Primary Use of the Web
Figure E-15 shows that a browsing is a predominant activity for a significant portion of
Internet users over the past three years. Other uses of the Web have been for educational
activities, work, and entertainment. Shopping was not a predominant activity between April 1995
and April 1998. However, when the definition of shopping was expanded to include “gathering
of information,” some 41% of Internet users stated they had used the Web for shopping. Thus,
information gathering is still one of the main uses of the Internet and there has not been a
significant change in web usage activities.
18
Heather Green, “’Twas the Season for E-Splurging,” Business Week, January 19, 1999, p.40.
E-17
Figure E-15
Primary Uses of the Web, 1995-1998
90
80
Apr-95
Apr-96
Apr-97
Apr-98
Oct-98
Percentage of Respondents
70
60
50
40
30
20
10
0
Work
Education
Entertainment
Shopping
Browsing
Other
Primary Use of Web
Source: Georgia Institute of Technology, Graphics, Visualization and Usability Center, World Wide Web Surveys,
1995-1998.
Searching and Purchasing Behavior
The use of the Web primarily for information gathering is dramatically shown in Figure
E-16, which juxtaposes the searching and purchasing behavior of users in April 1998. Although
over 60% of respondents utilize the Web to obtain information about books and magazines,
music CDs and tapes, computer software and hardware, and travel arrangements, a significantly
lower percentage, on average less than 40% of respondents, actually purchase these items on the
Web. The notable exceptions are for books, and for computer software costing less than $50
where over 50% of respondents indicated they had purchased these items over the Web. This is
perhaps due to the fairly standardized nature of these products, and suggests that sectors retailing
such products will be experiencing rapid growth in the next few years. This is perhaps best
exemplified by Amazon.com and E*Trade.19 Online book sales are predicted to continue to
grow rapidly. One report estimates Internet book sales of more than $2 billion by 2002. This
would be about 6 to 7% of a $30 billion plus total market, roughly doubling today’s 3% market
share.20
19
20
CTM’s study also examined extensively several other cases including Dell Computers.
Veronis Suhler, 12th Annual, “Communications Industry Forecast,” Oct. 1998.
E-18
FIGURE E-16
Searching and Purchasing Behavior of Web-Users, April 1998.
Books/ Magazines
Music CD/Tapes
Product Category
Software (greater than $50)
Software (less than $50)
Travel Arrangements
Hardware (greater than $50)
Hardware (less than $50)
Purchase
Search
Investments
0
10
20
30
40
50
60
70
80
90
Percentage of Respondents
Source: Georgia Institute of Technology, op. cit.
On-line Book Retailing: Amazon.com
The continued rapid growth of online commerce is critical to the viability of
Amazon.com. At the close of 1998, Amazon.com remained dominant as the leading online
retailer of books, claiming 85% of online book sales. Profitability however, was offset by
growing operating expenses. The key factors affecting Amazon’s fortunes include:
 new competitors entering the market
 the level of Internet usage and growth in the acceptance of the Internet for purchasing
products
 the company’s ability to upgrade and develop its infrastructure to achieve economies of scale
 the amount and timing of operating costs and other expenditures needed to expand business
Amazon’s strategy has remained consistent: high visibility on the Internet, close contact
with customers, and acquisitions and strategic partnerships. Innovative marketing and continual
expansion have positioned Amazon as a player in the competitive retail book-selling arena. A
current interest of Amazon is comparison shopping technology, evidenced by the acquisition of
E-19
Junglee Corporation.21 The intent is to make Amazon a central clearing house that directs
customers to goods and services. Merchants will share revenues with Amazon and pay
commissions when customers are directed to sites. In addition, Amazon has intensified its efforts
overseas, setting up web sites in the UK and Germany, and has expanded the product line into
CDs, gift items, electronics, and auction-based sales. International sales accounted for 20%,
25% and 33% of net sales for the fiscal year ended December 31, 1998, 1997 and 1996
respectively.22
Amazon’s acquisitions reflect an aggressive strategy to gain online visibility and new
customers by moving beyond the book selling industry. In 1998, the company purchased 5 web
companies, including Internet Movie Database, the largest electronic repository of information
about movies, and Bookpages Limited, and Telebook, Inc. both online booksellers.23 The
purchase of PlanetAll, a Web-based address book, calendar and reminder service gives Amazon
access to 1.5 million people who organize their addresses and calendars on the Internet. 24 All of
these acquisitions, however, are currently incurring operating losses.
Amazon's "Associates" program remains integral to its strategic marketing. In August
1998, Amazon signed up its 100,000th affiliated Web site.25 Associates are organizations that
form agreements with Amazon, and in return receive a commission of up to 15% on sales of
books or CDs they have helped generate.26 Jupiter Communications estimate that affiliate
programs account for 11% of the $5.8 billion in consumer transactions in 1998, and that this
figure should grow by 24% by the 2002.
Barnes and Noble, Amazon’s chief competitor, established their online bookstore over a
year and one-half ago, yet their online sales remain only 1/10 that of Amazon’s.27
Barnes&noble.com reported a loss of $12.1 million for the third quarter ending October 31,
1998, on an operating loss of $20.5 million.
It is Amazon, however, that has captured the online book-selling space through the firstmover advantage. They have carefully cultivated a reputation and brand image centered on
responsive customer-service, unparalleled inventory, and discounted prices. These features
along with the interactivity of the site, which allows customers to comment on books, and read
the press reviews and comments by other book buyers all have supported Amazon's rapid gain in
Junglee created the software behind the shopping features of Yahoo Inc., and Lycos Inc.’s HotBot.
Securities and Exchange Commission, Amazon Form 10K
23
Each of the 5 acquisitions was accounted for under the purchase method of accounting. The aggregate purchase
price of Internet Movie Database, Bookpages, and Telebook was approximately $55 million. An aggregate of 1.1
million shares of common stock was issued by Amazon to effect these transactions. (Amazon 10K)
24
Amazon acquired 100% of outstanding capital stock of PlanetAll. Amazon issued approximately 800,000 shares
of common stock and assumed all outstanding options in connection with the acquisition of PlanetAll. (Amazon
10K)
25
Evan Schwartz, “Industry View: O.K. retailers, why do your own marketing when you can make 100,000 other
Web sites do it for you?” New York Times, August 10, 1998, Sec.D, p.3.
26
Prominent Associates include Netscape Developer’s Bookstore, The Village Voice and Upside.com.
27
Richard Waters and John Labate, “Brought to Book: the internet retailing war is turning into struggle over
distribution,” Financial Times, November 10, 1998, p.22.
21
22
E-20
customers and retention of past customers. Repeat customers account for 64% of all orders for
in the third quarter of 199828 and 60% for the fiscal year ended December 31, 1998.29
In its first year of operation in 1996, Amazon posted sales of $16 million, although the
company incurred a net loss of $5.8 million. Net sales in 1997 amounted to some $147 million
and increased to some $610 million at the end of fiscal 1998 sales, (including music sales, which
began in June 1998, and totaled $14.4 million). Overall, sales and number of registered
customers quadrupled.
Net losses, however, continue to outpace sales, reaching $125 million for fiscal year
ended December 31, 1998.30 Operating losses accounted for $112 million of this total, while a
$50 million expenditure for mergers and acquisitions comprised the remainder.31 Amazon has
grown from 256 employees in 1997 to 1,600, indicating perhaps that the original assumption that
Internet-based sales models are less costly than traditional business models is not valid. The idea
that high levels of sales can be maintained without expensive retail real estate and personnel
requirements is changing. In addition, continued losses indicate a business plan that may be
difficult to sustain. As losses continue to increase dramatically, it remains to be seen if Amazon
will succeed in addressing the multitude of challenges that it must overcome to become
profitable.
Figure E-17
Cost of Sales as Percentage of Revenue for Select Book Retailers
Cost of Sales ( Percentage of Revenues)
90
85
80
75
70
Amazon.Com
Barnes & Noble
65
Borders
Crown Books
60
1993
1994
1995
1996
1997
1998
Simba Information Inc., “Amazon.com Marches on: $139.3 Million in Book Sales for 3Q’98,” No.43, Vol.23,
November 2, 1998.
29
Securities and Exchange Commission, Form 10K of Amazon.Com, 1998.
30
“Amazon.com reports earnings for 3rd qtr. to Sept 30,” New York Times, October 29, 1998, Sec.C, pg.21,
31
ibid.
28
E-21
Table E-18 illustrates that Amazon’s success in building a customer base and increasing
sales volume has been offset by operating expenses which are expected to increase significantly
in absolute dollars from 1998 onwards. Financial data for the fiscal year ended December 31,
1998 indicate that marketing and sales costs increased 229%, general and administrative costs
increased 125%, and product development costs were up 236% compared to fiscal 1997.
Table E-1832
Select Financial Indicators for Amazon.Com
(in thousands of dollars)
Net Sales
Cost of Sales
Gross Profit
Operating Expenses
Marketing and Sales
Product Development
General and Administrative
Total Operating Expenses
Loss from Operations
Net Loss
Fiscal Year Ended December 31
1998
1997
1996
609,996
147,758
15,746
476,155
118,945
12,287
133,841
28,813
3,459
1995
511
409
102
133,023
46,807
15,799
245,801
111,960
124,546
200
171
35
406
304
303
38,964
12,485
58,022
58,022
29,209
27,590
6,090
2,313
1,035
9,438
5,979
5,777
On-line Trading: E*Trade
E*Trade is the second largest online investing service on the Web, surpassed only by
Charles Schwab.33 Services offered include automated order placement and execution, as well as
other personalized products and services such as portfolio tracking, real-time market
commentary and analysis, and Java-based charting and quote applications. E*Trade uses
proprietary transaction-enabling technology to support a service that empowers customers
through easy to use and cost effective services. Customers can take control of their investments
and financial decisions and purchase stock, option, fixed income and mutual funds. As of
September 30, 1998, E*Trade had 676,000 accounts with assets under management totaling
more than $11.2 billion.34
Offering brokerage services to serve the needs of self-directed investors, E*Trade is one of
several online brokerages (out of approximately 100 total) that are growing rapidly in terms of
daily transaction volumes and growth rate of new accounts. E*Trade’s growth demonstrates that
32
Securities and Exchange Commission, 10K for Amazon.com, various years.
Charles Schwab also serves customers through branch offices, and regional customer telephone service centers.
Their online channels handled 37% of the companies total trades in 1997.
34
Securities and Exchange Commission, E*Trade, form 10K.
33
E-22
online stock trading is an activity that is particularly well suited to the Web. CTM’s research
attributes this growth to several key factors:





Low Cost – E*Trade fees for most stock trades and option contracts are lower than that of
many discount brokerages, and are substantially less than full service brokerage’s charges.
Speed – investors have access to real time stock quotes and breaking news.
Convenience – some transactions, such as limit orders (which constitute 80% of orders) are
completed easily online; customers have 24-hour access to their accounts. Detailed account
balance and transaction information, brokerage history, and tax records.
Information Resources – E*Trade, like many of its competitors, provides financial market
news and information, real-time stock quotes, and the ability to customize information (up to
300 variables can be entered to filter searches). Customers can also create shadow portfolios
that include the financial instruments the customer would like to track, such as assets held at
another brokerage firm.
Control – online trading shifts control from the broker to the investor; for active investors
willing to invest the time in managing their investments, this is a big plus. Investor portfolios
are maintained online, and are updated automatically after each transaction, including tax
implications.
Online trading delivers convenience, control and low cost for self-sufficient investors,
willing to put the time into managing their own portfolios. Developments over the last year
suggest that online trading and associated financial services have the potential to define a new
and growing market of individual investors. The core of this model are the benefits described
above, and specifically, low transaction costs which have encouraged new customers interested
in investing smaller amounts of money than would be required by full commission brokerage
houses. Furthermore, the greater customer benefits achieved when financial institutions
eventually integrate on-line trading services with other financial services on a single platform
will further propel growth in this sector.
E*Trade’s revenue has risen tenfold in the last three years, reflecting the growth in awareness
and enthusiasm for online trading. Overall, the number of Internet trading providers has been
increasing quickly, and the volume of online customer trading increased by 30% in the fourth
quarter of 1998.35 Vanguard, the second largest mutual fund company in terms of assets, plans to
launch online trading soon, and Fidelity, the world’s largest mutual fund company, has the
fourth-largest online brokerage.
Charles Schwab has about 1.9 million online accounts, Suretrade has about 135,000
accounts, and Ameritrade has 267,000.36 Forrester Research projects that by the year 2001, the
total number of accounts will increase to 10 million, and will account for some 8.5% of total
Bloomberg News, “E-Trade Shares Rise 19% After Announcing 2-f0r-1 Stock Split,” Los Angeles Times, Jan. 5,
1999, p. C-2.
36
Jim Rasmussen, “Bustling Trading Plagues Ameritrade Online Brokerage Service Breaks Down as High volume
Overwhelms Software,” World Herald, September 11, 1998, p.22, Mark Egan, “Online Brokers Handle Crush;
Added Computer Capacity Prevents Repeat of Trading Tie-Ups,” The Washington Post, p.C15.
35
E-23
commercial investment assets.37 The recent boom in Internet stocks is seen by many as partly
resulting from online trading.38
As shown in Figure E-19, E*Trade’s customer base has grown rapidly. By April of 1997,
E*Trade was adding 500 new accounts per day,39 and it has reported that their customer accounts
have grown to 676,000 in the quarter ended Dec. 31, 1998. Customer assets grew during this
quarter to $15.2 billion, and customer trades rose to 43,000 from the 30,500 of the third
quarter.40
Figure E-1941
Select Indicators for E*Trade
Number of Accounts
Average Daily Volume of
Transactions
Transaction Revenues
(Commission revenues and
payments based on order flow)
Year Ended September 30
1998
1997
1996
544,000
-91,000
30,500
24,100
6,100
$162.1
million
$109.7
million
$44.2
million
Strategic Positioning and Market Opportunities
The rapid growth of the Internet and adoption of many IP-based applications suggest, on
the one hand, a re-definition in the product portfolio of many telecommunication companies, and
on the other, immense market opportunities for many new firms. In a broad sense, the new
telecommunications landscape, as depicted in Figure E-20, will be populated mostly by two
broad categories of companies; those who would deliver bandwidth and those who deliver valueadded services. Although these service categories will probably be profitable, the most
successful companies are likely to be those that operate in both sectors. Indeed, as shown in
Figure E-21, several companies, notably Qwest, are currently striving to do exactly that. AT&T’s
acquisition of Media One and other value-added service providers indicate a movement into this
arena.
Thomas Hoffman, “Online Brokers Drive Industry Changes,” Computer World, April 14, 1997, p.77.
E*Trade tracks the top ten stocks traded through its brokerage, and E*Trade shares are always on the list
39
Hoffman, op. cit.
40
Bloomberg News, “E*Trade Says Results Better Than Expected,” Los Angeles Times, January 12, 1999, p.C2.
41
Securities and Exchange Commission, 10K for E*Trade, various years.
37
38
E-24
Figure E-20
The Future Telecommunications Service Landscape

Value
Added
Service
Building Platforms
E-Trading
Mobility
Portability
Integrated Business
Applications
Multimedia Fusion
Reducing Costs
Global LAN
Basic e-Commerce
Intranet Services
ISDN Bandwidth
IP Voice standard
Big Bandwidth IP
Over Frame, native IP
ATM, satellite
Global Supply Chains
Global High Street
Pay –iTV
Electronic Cinema
Bulk Bandwidth Supply 
Figure E-21
Current Positioning of Key Players
Building Platforms
Quality End-to-End
Service for Corporations

Value
Added
Service
IBM
UUNET
EDS
Microsoft
Multimedia Fusion
Competitive Quality End to
End
Level 3
Reducing Costs
Global LAN
Incumbents
Bulk, Cheap Bandwidth for
Big Buyers
Worldcom
Qwest
Bulk Bandwidth Supply 
E-25
Although the new telecommunications industry landscape, and the changing role of old and new
players in the world of merged data and voice applications may be reasonably clear, there
remains much uncertainty for executives in companies faced with the challenge of
technologically adapting their companies in this dynamic environment. On the one hand, the
potential of IP-based applications to generate increased business efficiencies, better customer
reach and other business advantages has been realized in some of the cases reviewed here. On
the other hand, this study demonstrates that there are as many cases where these efficiencies have
yet to be realized. This suggests that the traditional elements for a successful business—a sound
business plan, effective recruitment, management and retention of personnel, and the right
combination of aggressiveness and patience—remain unaltered by and in fact have become more
crucial in this new era of rapidly changing technology. Thus in a larger sense, though the
Internet and its related technology and applications may have profoundly changed some aspects
of business and society, it has hardly altered others.
One thing is however certain for the future: The accelerating speed of technological change will
generate even greater levels of uncertainty for executives. Amidst this sea of uncertainty, this
study offers four beacons to guide managers and executives through the turbulent waters of
technological change.
1. The limits of technology. The new networks may be technological phenomena, but
the key issues precipitating change will not revolve around technology but how new
technology effectively allows business and social needs to be realized more
efficiently. At times, the sheer challenge of keeping abreast with the changing
technology blinds companies to this truth.
2. Importance of leadership. In an era of accelerated technological change, rapid
adoption of new technology by corporations must not be confused with effective and
judicious adoption of new technology. Companies and corporate leaders must fully
understand their business processes so as to be able to apply technology judiciously to
enhance these processes. The evidence from CTM’s survey shows that many firms
are not doing this. In addition to aligning change with strategic objectives, good
leaders will articulate the purposes to be served by changes. This is necessary to
secure the enthusiasm and dedication of employees, and is a pre-requisite for success.
Marshall Industries is an illustrative case here: the vision espoused by the CEO was a
new way of doing business; the new networks and organizational restructuring were
the means of accomplishing this vision, not ends in themselves.
3. Change takes time. The results of this study ascribe the successful adoption of IPbased applications by companies to a relatively longer-term adjustment to and
adoption of digital information, rather than a quick response to the deployment of
new networks based on the Internet and its underlying technologies. A corporate
culture of innovation and enlightened organizational decision-making are more
important than a lightning-quick response to the latest technological change.
Effective decision-making is developed through persistence and patience. The
evidence in this study not only supports a relatively longer gestation period for the
successful adoption of IP-based applications.
E-26
4. Building on strength. The major strengths of the traditional telecommunications
service providers —high reliability, scalability, quality of service, and trusted
brand— will be even more important in this new environment. The key to success
resides in exploiting these capabilities, built up over decades of experience garnered
generally in bulk bandwidth supply, and applying them to the new areas of growth,
characterized by a demand for more customized and customer-driven value-added
services. As noted above, since most players have been focusing on the corporate
market for new value-added services, competition will be intense in this market.
Thus, a more lucrative and challenging proposition would be the provisioning of
value-added services to the small and medium enterprises (SMEs). Will the SMEs be
forced to adopt these new applications by the large enterprises as a condition for
doing business with them, or will they be driven by their own desire to achieve
business efficiencies? In either case, SMEs may prove the catalyst accelerating the
adoption of IP-based applications in and the development of new applications for the
residential markets. Reliable “mass-customization” may seem a contradiction in
objectives, but will prove to be the challenging business mantra for
telecommunications service providers in the new global information industry.
E-27