For the Week of August 25, 2003

These should be the best of times for e-commerce merchants. The recession has knocked out a ton of competitors. Forrester has another one of its "hockey stick" charts out showing a rich, growing industry. Revenues will hit nearly $100 billion this year and could reach nearly $230 billion in 2008.

But the recent eTail 2003 East conference in Boston showed that all this has a darker side. Barriers to entry are rising. Companies like Target, Nike and Lands End are reporting e-profits, taking the dais space from the pure plays.

Everywhere you look there is more discouragement for small e-commerce shops, more reasons to either close or not open. This should alarm everyone. It's small businesses that make a marketplace vibrant. It's entrepreneurial businesses that bring a market change.

The evidence of rising barriers to entry are everywhere:

Start with government. The drive to require taxes on Internet sales is stalled (for now) , but it will pick up again, and as I've said for years now, where is the store? If your store is in Portland, Oregon but you sell to Washington, that state expects you to collect its taxes, something that's not true in the real world. The burden of collecting taxes for multiple jurisdictions is enormous, not just the direct costs but the indirect costs of proving compliance.

Then there's regulation. The fact is that small businesses, especially small merchants (called "High Street" merchants in England, a term I admire) find it difficult to understand, let alone comply with, detailed regulations. It's no surprise most have problems. The surprise is that governments, especially in Europe, expect the same bureaucratic compliance from a three-person shop as from a giant conglomerate . But they do.

Bigger merchants have also found new tools, beyond simple scale, to use against smaller merchants. Big tech tools which allow for price discrimination among buyers bring the concept of "yield management" to retail, and are a hurdle small merchants can't jump. Sure, you can use eBay or Amazon to try and figure out your best market-clearing price, but you're always going to be several steps behind.

The cost of designing a site that works on the bottom line keeps going up, too. This is a problem familiar to any small retailer. Design doesn't just mean the shop window and the lay-out. It also includes the process by which customers find merchandise, how they buy it, and quick return turn-around. They are all hard to replicate on a small scale, and they are becoming standard requirements in e-commerce.

No offense to IBM, but small merchants can't afford both your technology and your consultant . The requirement of such folks raises the cost of entry still further.

To an extent this is inevitable. It has happened nearly everywhere, it's still happening. A century ago there were dozens of car makers, more opening all the time. Now, in the U.S., there are three, and in the world fewer than a dozen viable outfits. Agri-business has replaced agriculture, and Wal-Mart has replaced the small town square.

And there are some countervailing forces. The cost of Enterprise Resource Planning (ERP), a vital cog in keeping bureaucracy low with rising sales, is going down . New supply chain databases let big buyers find small sellers more economically. There are even new integrated e-commerce offerings coming to some markets, with nifty features standard.

On the whole, however, big means scaled and scaled means bargains. The mass production leads to the mass consumption. What's my problem?

I have several problems, actually. With standard templates, standardized cash registers, and standardized shipping from FedEx and UPS, barriers to entry should naturally be falling. Geographic specialization should be moving ahead more rapidly, not just by nation but, especially in the U.S., by region and state. The small business engines of growth are doing great in India and China.

In general, recessions are still harder on small businesses than large ones, which can dip into retained earnings and keep going. Never mind the rhetoric, the recession that started in early 2001 is still continuing, and the so-called recovery is not only jobless, it's virtually entrepreneur-less. Small producers and retailers on every front are being squeezed continually, as business increasingly becomes a zero-sum game.

What can be done? For what it is worth, some suggestions: