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Making the most of the Net medium

Somewhere along the way I heard someone compare the current stage of the Internet's evolution to the early days of television. And although I wasn't around to see the early days of television, the analogy seems to be a good one.

Somewhere along the way I heard someone compare the current stage of the Internet's evolution to the early days of television. And although I wasn't around to see the early days of television, the analogy seems to be a good one.

Television programming initially consisted of someone reading a radio script in front of a camera; basically, it was nothing more than a radio show with video. In hindsight, we know that this was the wrong use of this incredible new medium, but it took some time before programming optimized for television began to proliferate.

Fast-forward to the end of the millennium, and we find ourselves in a similar situation: trying to figure out how best to use this new medium called the Internet.

The Internet is unique because it is interactive, and as a medium for interaction, it is unparalleled. One of the early principal benefits of the Internet has been more efficient interaction between corporations and their customers regarding the distribution of marketing information as well as sales and customer support.

Although there are still a lot of kinks to smooth out, online retailing is taking off. Sales over the Internet are already significant and growing rapidly. Online retailing represented only 1 percent of total retail sales last year, yet early indications show that online retailing will reach 3 percent this year.

Not every online merchant will be successful, but commerce over the Internet and direct interaction with customers over the Web will certainly succeed. With nearly 150 million Internet users, no one can afford to ignore the Net for long.

In these early days, merchants are still working to find the right combination for success online. And interestingly, consumers seem to be attracted to a hybrid of virtual and actual, combining the convenience of online shopping with a little traditional service.

For example, online sales spike at Nordstrom.com when a new catalog is shipped. Customers like to look through a tangible paper catalog and then purchase online. They also like being able to return items to a local store rather than having to ship a product back to a retailer.

Consumers want convenience on the Internet, and often this includes a little hand-holding. Yet most merchants are only now beginning to figure this out. From buying books to purchasing hardware on the Web, competition is only a click away. So what will attract a visitor to one site over another?

Only 1 percent of all Web merchants offer personal service, such as Web chat or real-time customer support. But sites offering personalized content and enhanced customer support differentiate themselves by engaging the customer and facilitating the buying experience. Recent statistics indicate that online consumers abort 70 percent of all transactions before completing an online purchase and that only 3 percent of e-commerce Web site visitors actually complete a purchase.

Content personalization, targeted marketing, email campaign management and effective customer support can significantly increase Web site revenue. To maximize revenue, sites are incorporating complex content management and customer support software into the online store.

The business units, not IT, are driving most e-business software purchases today, and they are looking for customer-focused technologies. When opening a new retail store, sales and marketing departments are concerned with attracting traffic from the street and merchandising (content), as well as with the number of trained salespeople (customer support) necessary to maximize revenue. These same priorities are emerging in the selection of an e-business software platform.

Currently available are software solutions that address either content management or customer support. In our opinion, no one effectively manages both. The leading content management providers include Vignette, Interwoven, Inso, Open Market and Documentum. This is a highly fragmented but rapidly emerging market, with Vignette leading the charge.

Emerging as a category of its own is the customer support software segment, which is rapidly gaining prominence as merchants attempt to reduce the number of abandoned shopping carts and retain hard-won customers. A few of the early players in the customer support category are Silknet, Primus, Kana, eGain and WebLine (acquired by Cisco). We believe Primus is an emerging leader in this area, enabling customers to better service themselves over the Internet.

Also emerging are a new breed of Web-centric customer relationship software sellers that are helping organizations to better manage customer relationships by providing browser-based, highly integrated systems to do everything from sales force automation to customer support. Youcentric is an emerging private company to watch that is using Java-based standards to provide a scalable and flexible solution.

We expect consolidation within and across these segments as the market matures and online merchants look for more comprehensive solutions. For now, online merchants are buying the best-of-breed solutions in each category. Content management is necessary to make the site engaging, and customer support is necessary to facilitate a customer's needs. Don't discount the importance of either of these technologies.

Competition for online retailers is fierce, and the economics involved in retaining a few more customers or closing a few more transactions per customer are significant. It is estimated that retailers can improve profits 25 to 85 percent by decreasing customer deflections by even 5 percent.

Online retailers are beginning to learn from early leaders such as Amazon.com, which has been able to distance itself from the pack by providing a strong level of service. As a result of its superior customer service, Amazon is realizing higher conversion rates than every one of its competitors, according to our Internet retail analyst, Tom Courtney.

E-tailing pioneers spent millions of dollars developing the software that runs their sites. The new Internet arrivals are purchasing solutions from software vendors, realizing a faster time-to-market and a greater return on investment. Investors looking to cash in on the Internet retail craze ought to own more than just the Internet retailers themselves. Invest in the companies that provide the increasingly essential software infrastructure: content management and customer support software.

The preceding comments are not a complete analysis of every material fact respecting any company, industry or security. The opinions here expressed reflect the judgment of the author at this date and are subject to change. Facts have been obtained from sources considered reliable but are not guaranteed. Banc of America Securities (or its affiliates), its partners and/or employees may have an interest in the securities and options on securities of the issuer described herein and may make purchases or sales as principal or agent in securities or options on securities of the issuer described herein and may make purchases or sales as principal or agent in securities mentioned while this article is in circulation. Neither the information nor any opinion expressed herein constitutes a solicitation by us of the purchase or sales of any securities or options thereon. Banc of America Securities may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this article. The securities discussed herein are not FDIC insured, are not bank guaranteed, and may lose value.