Internet Retailing

▪ 1999

      In 1998 consumers could purchase virtually anything over the Internet. Books, compact discs, computers, stocks, and even new and used automobiles were widely available from World Wide Web sites that seemed to spring up almost daily. A few years earlier, skeptics had predicted that consumers accustomed to shopping in stores would be reluctant to buy items that they could not see or touch in person. For a growing number of time-starved consumers, however, shopping from their home computer was proving to be a convenient, cost-effective alternative to driving to the store.

      The Massachusetts-based Forrester Research estimated that in 1998 U.S. consumers would purchase $7.3 billion of goods over the Internet, double the 1997 total, and the firm expected on-line sales to increase an additional 65% in 1999 to about $12 billion. Computers and software were the most frequent purchases, accounting for about one-third of all sales; travel services, compact discs, and books were also popular. Finding a bargain was getting easier, owing to the rise of on-line auctions, such as the increasingly popular eBay, and Web sites that did comparison shopping on the Internet for the best deal.

      For all the consumer interest, retailing in cyberspace was still a largely unprofitable business, however. Internet pioneer Amazon.com, which began selling books in 1995 and later branched into recorded music and videos, posted revenue of $153.7 million in the third quarter, up from $37.9 million in the same period of 1997. Overall, however, the company's loss widened to $45.2 million from $9.6 million, and analysts did not expect the company to turn a profit until 2001. Despite gushing red ink, Amazon.com had a stock market value of many billions, reflecting investors' unbridled optimism about the future of the industry.

      Internet retailing appealed to investors because it provided an efficient means for reaching millions of consumers without incurring the cost of operating brick-and-mortar stores with their armies of salespeople. Selling on-line carried its own risks, however. With so many companies vying for consumers' attention, price competition was intense and profit margins thin or nonexistent. In a demonstration of just how cutthroat the business had become, video retailer Reel.com sold the hit movie Titanic for $9.99, undercutting the $19.99 suggested retail price and losing about $6 on each copy sold. With Internet retailing still in its infancy, companies seemed willing to absorb such losses in a bid to establish a dominant market position.

      Mergers and acquisitions were also common as competitors girded for the future. CDnow Inc. and N2K Inc., two of the largest on-line music retailers, agreed to merge, creating a formidable opponent to Amazon.com's compact disc business. Meanwhile, German media giant Bertelsmann AG agreed to buy 50% of Barnes & Noble Inc.'s on-line book business, providing yet another threat to Amazon.com. (See MEDIA AND PUBLISHING: Book Publishing: Sidebar.)

JOHN HEINZL

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