By SIMON AVERY
Toronto Globe and Mail
August 03, 2005
The founders of Amazon.com Inc., Yahoo Inc., eBay Inc. and Netscape Communications Corp. each had a vision of what could be done with the Internet, but none knew in those early days the true size of the revolution they had sparked.
David Filo and Jerry Yang, for example, two PhD candidates in electrical engineering at Stanford University, started a guide to their favorite links on the Internet in a campus trailer. A few months later, when 100,000 people visited the guide in a single day, they knew they had a business opportunity they couldn't ignore. They abandoned their electrical engineering studies for a round of venture capital funding. Today, Yahoo serves more than 345 million individuals around the world every month.
Some of these young companies are now household names and part of the foundations of the 21st century economy. Online sales in the United States reached $141-billion, or 6.5 percent of all retail sales, last year. By 2010, the online channel will account for 13 percent of total U.S. retail sales, or $331 billion, according to Forrester Research.
Many of the decade's Internet startups, however, never progressed beyond a Web site and expensive marketing campaign. After burning through billions of dollars of startup capital, their fates were brutish and short. One notorious example was Pixelon.com, which raised $35 million by promising TV over the Internet, then promptly spent $11 million on a launch party in Las Vegas in October 1999.
In the five years between Netscape's public offering and the peak of the Nasdaq Stock Market in March 2000, more than 800 startups went public, most with connections to the Internet, raising almost $50 billion.
The differentiating factors between success and failure in the first decade of e-commerce are still not entirely clear, even as the Internet economy moves into its next phase of rapid change and development. But survivors of the early generation point to some common winning traits, including using the new technology to improve the way they interact with customers, manage costs and respond to changes in the marketplace.
One of the ideas that fascinated eBay founder Pierre Omidyar was creating trust between users thousands of miles apart, who would never meet face to face. An early creation at eBay that helped distinguish it from other online trading companies was an electronic feedback forum where buyers and sellers could establish reputations. The concept has become one of the cornerstones of the eBay trading community, which today numbers 157 million people around the world.
Similar communication channels play a key role in formulating the company's strategy. EBay established a system of message boards to which users send their ideas for improving the trading community. Employees pore over thousands of messages each day and use customer resource management software to help sort the ideas into categories that eventually form the basis of the company's product planning sessions each quarter.
"In some respect, we are a communications company," says Jordan Banks, managing director of eBay Canada, a five-year-old subsidiary of San Jose, Calif.-based eBay Inc. "Since day one, the customer has been the guiding voice. We gave them the avenue and forums to communicate. It means that we don't have to hope what we introduce will be well adopted."
Some of eBay's most recent initiatives include the $620-million purchase of Shopping.com, a comparison shopping service, and the introduction of Prostores, a program under which eBay runs customized e-commerce storefronts for merchants so they can sell their products outside the eBay marketplace.
"There really was no way to predict where the successful strands would come in the e-world," says John Challenger, of Challenger Gray & Christmas, Inc., an outplacement consultancy based in Chicago that works with executives in the industry. "If you take a company like Yahoo, they got there early, with a lot of money, and were able to go out and hire the very best people."
The winners also bet on the right kind of business models. Amazon.com, for example, still gets about 70 percent of its revenue from selling books, movies and music. The formula has proven successful because it matches low-cost shipping with items that have high value for customers, says David Pecaut, a senior vice-president with Boston Consulting Group in Toronto.
Amazon says its model also benefits from a quick turnover of inventory, which means the company usually manages to collect money owed from customers before its payments to suppliers come due.
The successful Internet businesses figured out how to use the technology to improve customer care. They also realized the importance of getting market share early. Pay Pal Inc., for instance, which enables transactions online, was criticized for "buying customers" when it offered them $10 to open an account. But the strategy worked, and the company built up such a large account base in such a short period of time, that no one was able to catch up, Pecaut says. (eBay purchased PayPal in July, 2002, for $1.4-billion in stock).
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