by Dana Blankenhorn
  Volume VII, No. XXXIV

This Week's Clue: E-Commerce Barriers To Entry

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This Week's Clue: E-Commerce Barriers To Entry
SSP (Shameless Self Promotion)
SP (Shameless Promotion)
The MSBlast War
Neither Snow Nor Rain Nor Blackout
The Failed Vivendi Auction
Clued-in, Clueless
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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:

  • Cooperate locally. Get your local chamber of commerce to build, not an e-commerce directory, but a little sticker every e-merchant in the area can use, both online and offline, to attract consumers. Look for co-op deals on infrastructure that all members of such an organization can share in. Even a shared digest list for merchants in your area, for those with the sticker, will bring you valuable pointers.
  • Have one product or service no one else does, and concentrate on it. Find out what you can offer e-commerce buyers that is truly unique, either across the Web or just in your area, and concentrate everything on that. Your Unique Selling Proposition (USP) must be more narrow online, so find it.
  • Steal every idea you can from bigger stores. While many things are protected by patent and copyright (too many things in my view) you can always find some look-and-feel items worth copying. Shop the big guys (without buying) for a few hours each week, looking for ideas you can afford to implement.
  • Consider Google. Google's AdSense is reducing the design cost of Internet advertising. Find a keyword you can afford to buy, and try it. Experiment, keep changing. Overture works, too.
  • Question your leaders. Small business lobbyists have been among the most loyal of any interest group to the present anti-small business governments on every level. It's past time you started asking these bozos some sharp questions, and stopped taking knee-jerk rhetoric for an answer.

    We can get this started with a little exchange of ideas among ourselves. What is it that you have done in the last year that worked, that brought in more business, despite the big guns? If you show us yours, others will show you theirs. That's what the Internet brings you - use it.

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    SSP (Shameless Self-Promotion)

    I currently work as a business analyst with Progressive Strategies , a New York research firm that has the ear of the world's top technology companies.

    My last book, "The Blankenhorn Effect" won the Computer/Internet category in the 2003 Independent Publisher (IPPY) awards .

    You have my permission to forward this newsletter widely. And if you have trouble subscribing let me know . Remember: it's journalism that keeps the Clues coming...

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    Shameless Promotion

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    If you're serious about Internet Commerce, you need Whitehat Interactive . Get it today.

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    Takes on the News

    The MSBlast War

    What do Microsoft's problems with the MSBlast worm say about the future?

    Nothing good.

    All of Microsoft's users are dependent upon Microsoft to fix this problem. If a bug fix doesn't work we have to wait again. The fact that this worm attacks Window's update feature is doubly troubling. It's not just that you have one point to look to for a solution, but one point of vulnerability. Every builder knows you don't put the load on one point.

    Now it's true that Linux suffers from attacks as well. In some cases the people in charge have been na´ve, and slow to respond. But because you can look at your own source code, everyone (including you) can work on a fix. And there is no single point of vulnerability - even if the GNU code were compromised (which it apparently wasn't) there are many other sources for Linux code.

    The Clue is as old as the hills. Don't keep all your eggs in one basket.

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    Neither Snow Nor Rain Nor Blackout

    The Internet itself did well through the "Great Blackout of 2003." The Internet's grid didn't go down, even as the Northeast's electrical grid went down. There were some problems with sites dependent on power from that area, but most of them were resolved fairly quickly.

    This is yet another illustration of how global the Internet has become, without becoming interdependent. That's an important design feature. That is something to be proud of. When there is a problem, the Internet Protocol tends to route around it.

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    The Failed Vivendi Auction

    Vivendi's apparent failure to find a buyer for its entertainment assets at a price it could accept is an important event.

    In the past buyers were always willing to pay more than the market value of entertainment assets, knowing that their copyrights were virtually forever and that the world's governments would assure they be respected.

    But moving to a digital environment changes the equation. Once you sell a movie on DVD it's hard to sell it again to the same customer. The DVD doesn't wear out as a tape does. Even if you don't count the use of online resources to share such files, you limit your upside when you can only sell something once to each customer.

    Of course the story isn't over yet. There could still be a mystery buyer out there. I have suggested one, , one with $43 billion in cash (or equivalents) on hand . All Carly Fiorina needs to do is learn the French for "let's do lunch."

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    Clued-in, Clueless

    Clued-in is the idea of extending the life of the Hubble Space Telescope, if practical. Even if there's a second one up there, the Hubble can still be enormously valuable. As a great man once said, in a different context, "Let's play two."

    Clueless is the over-reaction to a University of Washington study showing that, in today's high unemployment economy, using only the Internet to look for a job may be ineffective. Like, d'uh.

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