Yahoo, the flagship company of internet trading, is laying off staff. So is Amazon. So is EToys. The share value of internet stocks has halved over the past three months. Is this the end, or does the internet still have a business future? Reflecting on the mania of the past two years, it is clear that the fault rests not with the technology but with management: the internet entrepreneurs and their venture capital allies who, in their impatience to become overnight millionaires, chose to ignore a number of age-old basic business principles.
One of their biggest mistakes was to expect clever software to change customers' lifetime shopping habits. The dotcom revolution was driven by the psychology and assumptions of internet service providers rather than knowledge of customer shopping patterns. A first-year university lecture in sociology would have told them that for most of the US and UK adult population shopping is not a chore but a shared family activity - as the outstanding success of giant out-of-town shopping centres amply testify.
Elementary market research would have told them that online shopping would never be anything more than a niche market. Certainly, there will be demand among high-earning, time-poor professionals who prefer to buy commodities such as holidays, travel tickets and financial services online. These, of course, are exactly the same people as the dotcom founders themselves. Erroneously, they assumed that all consumers would be like them.
Another elementary principle ignored was that even dotcom start-ups need basic management structures and procedures and business plans - boring things like future earnings projections, breakeven analyses and income and expenditure budgets. They also require salary structures which bear some relation to employees' value creation. It remains true that to make a success of the new conditions it helps to have solid business experience of the old. As every ex-employee of the late Boo.com now laments, 'It was such a great company to work for'. You bet. But setting up a viable business requires more of its leaders than good looks and a talent for poetry. Nightly champagne parties and weekly Concorde flights, although fun, unfortunately generate no revenue.
Has this neglect of basic business principles destroyed the credibility of all online business ventures? It will take the dotcoms some time before they regain investor confidence. It is not surprising that many online trading companies have re-invented themselves as 'clicks-and-mortar' ventures, or even as entirely offline high-street retailers. Where internet trading will continue to expand rapidly is in business-to-business transactions. Eighty per cent of internet use will probably be in B2B, which has the capacity to revolutionise global supply chains and inventory management, and rationalise relations between retailers and manufacturers.
In some sectors, B2B is putting smaller manufacturers on a more equal footing with larger businesses in their dealings with retailers. For instance, in the furniture industry, which consists of a great many small manufacturers and retailers, online platforms are emerging as the basis of much more efficient delivery systems.
Thus, Corridor, a platform recently launched by parent United Business Media, aims to give retailers (and customers) access to a far greater range of manufacturers' products which they will be able to view, compare and order online. Corridor's platform will allow retailers to inform their customers of precise delivery dates through online links to manufacturers and distributors.
For the time being the cost of investment in technologies and accompanying skills makes it unrealistic to expect small retailers and manufacturers in any economic sector to trade with each other directly online. Instead, online brokers will emerge as intermediaries. Opportunities exist in most areas of niche retailing, from childrens' toys to office stationery. These will be the real drivers of 'clicks and mortar'. In the near future it is not difficult to envisage online brokers such as Corridor giving small retailers access to manufactures on a global basis.
At the same time, the internet will allow companies to move many of their back-office activities to low-wage economies. In the near future UK financial institutions will outsource their data-processing functions to operations in India and other English-speaking parts of the world.
Many back-office activities that have been the drivers of job creation in the South East over the past 30 years could be eliminated over the next 10. The internet will let employees do more of their work from home, breaking away from the work patterns imposed by the requirements of the industrial economy. For large numbers of 'knowledge employees' the daily commute is redundant.
It is in the internal and external trading relations of companies that the internet will have its major impact. Reflecting on events of the past 12 months, it is unfortunate that those with neither business knowledge nor experience have undermined the credibility of a technology that is truly revolutionary in its impact. But as with the dotcom entrepreneurs of only last year, there is the risk that the advocates of B2B may promise too much too soon. There are still technological and organisational challenges to be overcome before we reach the promised land.
Richard Scase is a Professor at Kent University and author of Britain in 2010: the Changing Business Landscape (Capstone Publishing. £9-99)
