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Christmas Gift Guide
Tech Industry

E-commerce: a hard sell

The state of online shopping today illustrates a classic Catch-22: Consumers won't buy if there's nothing to buy, and merchants won't sell if nobody's buying. But that doesn't mean e-commerce won't take off--eventually.

This Christmas won't be a big shopping season on the Internet.

Citing the growing number of people online, pundits had declared that 1996 would be the year when consumers would turn to their browsers rather than their BMWs for a shopping trip. But consumers have proved them wrong. Why? Simple: Right now there just isn't much to buy on the Web.


 
"Maybe a window of opportunity has been missed," said Scott Smith, director of Jupiter Communications' online commerce group. "People thought this would get going a lot faster."

The state of shopping on the Net today illustrates a classic vicious cycle: Consumers won't buy online if there's nothing to buy, and merchants don't want to sell online if nobody's buying.

But that doesn't mean that e-commerce won't take off, eventually. Analyst estimates for revenue from online retailing earned this year vary from $350 million to an admittedly optimistic $1.2 billion. Real-world retail sales add up to $1 trillion yearly. But International Data Corporation, Forrester Research, and ever-upbeat Jupiter all expect online retailing--encompassing both the Web and commercial online services--to gain ground. By the year 2000, they expect sales to cluster from $6 billion to $7.3 billion.

Consumer Spending Online
Analyst 1996 2000
Forrester
Research
$518 million $7.1 billion
Link/IDC $350 million $6 billion
Jupiter
Communications
$1.246 billion $7.3 billion

To break the cycle, there are three challenges that must be overcome: the lack of a compelling online shopping experience, consumers' skittishness about Net security, and the complexity of merchant back-end systems.

Proponents of e-commerce had assumed that catalog or mail-order businesses would succeed online, but the transition to the Web has been anything but simple. Online merchandising remains insipid rather than tantalizing. Web merchants, even in online malls, have had trouble duplicating the serendipity of the real-world shopping experience--especially when consumers are using 14.4-kbps modems to get on the Web. "Consumers don't know where to go to get what they want," said Karen Epper, an analyst with Forrester Research. "When I go shopping, I don't know exactly what I want. I want to shop around."


Because of this, only certain products are selling successfully online. Computer hardware and software, flowers, CDs, books, travel services, and commodity items are popular because they have unique features that make them suitable for online selling.

Jeff Bezos, president and CEO of Amazon.com, says he looked at a number of products before launching his online bookstore. Bezos says that, unlike a real-world bookstore, his operation is able to offer the ability to buy almost any book in print in the English language at any time--and cheaply. "We [picked] the perfect product to sell online," he said in an interview. "We are doing something that can't be done any other way. That's not true of most online, interactive retailing right now."

He's right. Other products where feel, fit, and style are all-important--such as cars, appliances, and clothing--translate poorly onto the Web.

"You can't just take a paper catalog and throw it on the Web. It doesn't work," said Erin Dubois, an analyst with the market research firm Dataquest. "Initially, Land's End threw their catalog on the Web without the capability of ordering online. Where was the unique compelling shopping experience?"

Although any products that can be illustrated on paper can also be depicted online, photos and other graphic represenations on the Web are still grainy and often less clear than expensively produced catalogs. For that reason, many shoppers are reluctant to make online purchases of items such as clothing and jewelry, whose appeal is so dependent on detail.

There is a psychological difference as well. The experience of browsing with a computer is very different from holding and perusing a beautifully designed catalog from Neiman Marcus or Saks Fifth Avenue.

The second problem is that paying for purchases online is still iffy. While many Web stores today allow users to send payment information over the Net, they often prefer shoppers to use the phone or fax to send sensitive credit card data.

This is in large part because trusted names such as MasterCard are advising customers to hold off on Net purchases until the Secure Electronic Transactions protocol, a security protocol engineered specifically to protect credit card numbers traveling online, is finalized. SET should have been a done deal by now, but the final specification has now been pushed into 1997.

And even if SET had been finished, the new protocol would have required time for shoppers to apply for digital certificates through certification authorities such as VeriSign, GTE, or the Postal Service. These certificates, like online driver's licenses, would prove that the connected computer is being used by the real owner and not a hacker with an assumed identity.

Other forms of online payment won't be available until even further in the future. Digital cash, which lets companies fund and debit an online account linked to a real bank account, is still in a nascent stage. Electronic checks that let users debit their checking accounts with online payment slips won't be possible until next year.

There are also the logistical and administrative problems that merchants face. Opening a Web storefront isn't an easy technological trick. Tying a Web store to real-world retailers' existing back-end systems--including inventory control, billing, shipping, and marketing--remains tough.

Solving these problems will take time. For now, companies are working on the psychological barriers to online shopping. AT&T and America Online already guarantee shoppers who buy from their sites that they won't be charged for unauthorized online purchases. It is a move that despite extremely low liability risk for the companies nets an extremely high credibility factor with consumers.

"It's the least costly marketing program I've ever been associated with," said Michael Minigan, vice president of marketing for AOL Interactive Marketing.


Other companies are taking the "scout's honor" approach to Web marketing by pledging to protect consumers' security and privacy. eTrust, administered by the Electronic Freedom Foundation, is developing a logo program to assure consumers that their privacy is protected on sites sporting the eTrust logo.

"It's important to build trust on the Internet if it's going to become a marketplace," said Charles Jennings, chairman of Portland Software and an eTrust backer. "Privacy is one of the main barriers in the road to the success of electronic commerce."

But it may not be the only one. This week, Garden Escape, GolfWeb, Internet Shopping Network, iVillage, Virtual Vineyards, and other Internet retailers formed shop.org, another group that will give a seal of approval to Web sites. Unlike eTrust, which focuses exclusively on privacy issues, shop.org hopes to boost consumer confidence in shopping on the Web by lending its seal to sites that meet minimum requirements for security, as well as product quality and merchandise guarantees.

Such emblems won't hurt, but they aren't going to attract the customers who aren't there to start with. Web storefronts must continue with old-fashioned merchandising programs that promote strong customer service, frequently changing offers and products, an atmosphere buyers enjoy, and ease of finding items.

"All these companies should provide incentives to get consumers to make that first purchase," said Mary Doyle, an IDC analyst. She suggests sweeteners such as free shipping and first-purchase discounts. To keep them coming back requires more tricks such as online-only offers, best-price guarantees, one-day specials, and frequent-buyer programs.


"Technologies that makes shopping more personalized, like Firefly, can increase the choices presented to consumers and help them make wise purchase decisions," Doyle said. Firefly technology aggregates consumer preferences and suggests appropriate content.

For merchants, cheaper and easier ways to open Web stores also are emerging. Microsoft's October release of its Merchant Server software for online storefronts brings a brand name to a market full of start-ups and lesser-known vendors. Even rivals concede Microsoft's arrival helps legitimize the market.

Merchant's Server pricing--$18,490 for a standalone store--compares favorably with high-end offerings from Open Market, Connect, and BroadVision that can run easily into six figures. iCat anchors the low end of the market with a $1,495 product that uses templates to get merchants online quickly. Lotus also announced this week that it's jumping into the merchant server market with Domino Merchant.

As significant as cheaper software are new service offerings. Internet service providers such as AT&T, BBN, PSINet, and Best Internet Communications in recent weeks have announced turnkey services for getting merchants onto the Web; they help the retailer build their site and then offer to host it on their Web servers. All gain, with relatively little pain, ISPs say. USWeb franchisees have similar programs.

IBM similarly will sell merchants' tools to build their own Web sites or rent them a storefront in its World Avenue shopping mall.

If these vendors gets enough retailers to invest in setting up e-commerce stores, customers just may follow, breaking the Catch-22 of Web retailing. But only time will tell if it'll be 1997 that makes the pundits' Christmas wishes come true.

"It does make sense for catalog retailers to translate their business to the Web," said Joshua Tretakoff, Sharper Image's manager of alternative media. "The problem is that they're not prepared to do so. Most of my colleagues are viewing the Web as another form of paper." How electronic transactions will work


Wallet Sam Shopper decides to buy a gift for a friend. Using his software wallet on his PC, he chooses how to pay: credit card, debit card, electronic check, electronic cash, etc. His wallet software, activated by a password, encrypts his transaction (item, color, method of payment, shipping location, etc.), generates a digital signature so the order can't be altered, and sends it across the Net to the Web storefront.
Merchant Server Acme Retail receives Sam's order, checks on availability, and waits for its bank to check Sam's credit. His payment data goes directly to the bank, so Acme never sees it.
Gateway The gateway keeps hackers out of the secure financial networks that handle electronic purchases, decrypts Sam's charge, and puts it into the bank network's format.
Merchant's Bank Big Bancorp checks Sam's credit with his card issuer, then sends the purchase authorization to Acme and Sam.
Merchant Server Acme tells Sam that his purchase is authorized, when it will ship, and instructs its warehouse to send Sam's gift.
Back Office Sam's order is shipped, his preferences noted in a marketing database, the sale recorded in accounting, and the money collected through treasury.

Go back Who's hot and who's not
The promise of e-commerce has attracted a flood of technology vendors hoping to help merchants sell on the Net. Some draw on strengths in related markets to push their wares. Others count on superior technology or marketing extravaganzas to win over retailers. Some specialize; others have a menu of offerings. Regardless of their strategy, each hopes to grab a piece of e-commerce market for itself. This chart identifies leading vendors in key market segments and gives you a heads up on the ones to watch.

 
Wallets: Software that contains payment methods, digital IDs and receipts. Most browsers and banks will have one.
CyberCash First to market
Netscape Coming in next browser
Microsoft Coming in next browser
Sun/JavaSoft A secure Java Wallet?
VeriFone Private labeler for banks
 
Payment services: How money will be transferred on the Net. (Bank cards, electronic cash, electronic checks, smart cards, etc.)
Visa Thinks Net could cut fraud
MasterCard Can Number 2 do better on Net?
CyberCash Most versatile to date
First Virtual If Net is secure, must find new purpose
DigiCash Not just e-cash, but anonymous e-cash
 
Cash register: Software on Merchant Server to handle transactions.
VeriFone Retailers, banks know it well
CyberCash Cultivating Web server farmers, ISPs
 
Certification authority: Trusted issuer of digital IDs for buyers, merchants.
VeriSign Potential powerhouse
U.S. Postal Service A trusted third party?
GTE SpyTech goes commercial
IBM Big Blue sounds solid
Nortel Strictly back-office
 
Merchant Server: The Web storefront's brains
Apache Who'll bet store on hugely popular freeware?
iCat Simple, cheap, so what's not to like?
Netscape Distracted by intranets
Microsoft Making a big play, but can it scale?
Oracle When will it ship?
Open Market Can this plodder step up?
BroadVision Marketer's best friend, but no server
Connect If it's easy, don't bother us
 
Gateways: Keep hackers out of secure bank networks. Translate Internet requests to format of bank networks.
Netscape Aren't there higher priorities?
VeriFone Wannabe or true bankers' best friends?
IBM Big banker buddies trust it
CyberCash What's the core business?

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