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Welcome To Zero Gravity: The E-commerce Model Of The Future

John Glenn prepares to blast off into space again some 25 years or so after he first experienced weightlessness when he crossed the heavenly divide, between the Earth's constant tug and the less than feather feel of space. Coincidentally, some 25 years after the Internet first launched a new era it experiences something I have come to call "zero gravity." It may very well be the future of e-commerce.

In a few words, what is "zero gravity?" I define it as a purely digital way of doing business, without the encumberment of moving real goods and services over land, sea and air.

The key slots for capitalizing on this concept lay at the "zero G" stage of (forgive me for another new term here, "Webline," the Web as continuum, like time or space).

For example, the browser itself, chatting, e-mail, Web page communities and such, all represent the tools that enable zero G (which is another way of saying the best spot for e-commerce to happen, scale, and leverage a global information network). A basic sketch of how firms stack up in a zero G environment, with a constant pull, one way or another:

Steve Harmon's Zero Gravity E-commerce Model

Category

Heavy G

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Mid G

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Almost Zero G

Zero G

Books/music

Barnes & Noble

barnesandnoble.com

Amazon.com

Media

Gannet Co.

USAToday.com

Yahoo/Excite/Lycos/Infoseek/AOL

Entertainment

Disney/NBC

Disney.com/MSNBC.com

Go Network/SNAP!/AOL

Trading

Charles Schwab

eSchwab

Etrade

Auctions

Sotheby's

Egghead auctions

Onsale.com/eBay

Discount clubs

Cendant

Costco/Price Club

Netmarket

Xoom.com

AOL

Investment banking

Goldman Sachs

Wit Capital

Music/recording

Warner Records

MTV

CDnow

Sports

ESPN

Fox Sports

ESPNSportszone

Sportsline

Fantasy sports league sites

Travel

travel agents

travel clubs

Expedia/Preview Travel

Priceline.com

Weather

CNN/WeatherChannel

Accuweather

(c) 1998 Mecklermedia, Internet.com. The Internet Stock Report http://www.isdex.com

As soon as you introduce gravity, literally with buildings, warehouses, shipping by petro-based vehicles, into any e-commerce scenario, it costs net income margin and tilts the scale toward losses or high costs of doing business.

For example, if we take Barnes & Noble (NYSE:BKS), the land-based chain of stores, they are heavy G, bricks and mortar, lease obligations, tens of thousands of sales clerks, logistical shipping problems, and a lot of elbow grease at the buying and selling point, where a customer plops the book on the counter and the sales associate rings it up, wraps it in paper or plastic and repeats the process.

At every point in the overall scenario (which is much more complicated than I outline), real Earth gravity takes its toll: net income margin. Pay for fuel, shipping, buildings, people, lights, flooring, painting, maintenance, and more, all to get to one moment: the buyer buying a book.

To be fair, advantages exist in having gravity at times, one reason why Barnes generates billions in revenue annually. The "experience" has a tangible value, being in a book store, having a coffee, undergoing a "social" moment with a "community" of like-minded book worms.

That level of human interaction will not be replaced with a few icons on a Web page.

What could likely occur if the theory of zero G proves true is that digital enterprises, I believe, have the ability to scale to levels never before seen in the gravity-bound environment of buildings, cars, stores, freeways and parking spots.

A Disney, for example, makes plans to open only a limited number of Disney stores (or ESPN sports stores). Times Square in New York City or London. Gravity takes its' cut of the effort immediately: the mall or storefront space must be leased, merchandise ordered, stocked, sales associates trained, managers to oversee each store. The store may do phenomenally well when evaluated against peers in the same street or mall.

Meanwhile, in zero G, a Disney store is as endless as the company wants it to be, and 24/7/365.25 (open always). Everything Disney makes or sells or wants to sell can be stocked. It may require about as many people to operate this zero G store as it does to operate five heavy G stores. But sales for the zero G store could surpass the entire land-based Disney store chain.

The purely Web-based enterprises in all areas know or are coming to realize the benefits of not being land-based. That's e-commerce today. But that's like a kid jumping up and for a few seconds imagining he or she is Buck Rogers.

Inklings of more zero G-like e-commerce emerge but that doesn't mean they are developed or successful--yet. Looking at the Wright Brothers fumbling with a bi-plane in corn fields, you would never imagine walking on the moon. But truly one led to the other while everyone else in the "transportation" business was betting on railroads.

Pure zero G requires purely digital products. Our showing Priceline.com, for example, isn't an endorsement of it. You can be free floating and think you're doing it, like astronauts going on the Shuttle just for the view. In zero G, things must be set up properly also in order for mission accomplishment. In this case that means profits.

The challenge is to create a value chain so that these as-yet undetermined products and services generate profits for those who do them (otherwise it won't support itself).

That explains why most things on the Internet today are free. Not because they lack value but because the value of them is difficult to determine. The Wright Brothers didn't invent the airline ticketing industry directly or the abominable food airlines serve. These services and value systems emerged after the industry got wings.

Similarly, content of every flavor, services of every nature, haven't been able to price themselves for any long-term haul when there are so few passengers today for e-commerce.

The music industry, for example, struggles with college kids who are copying CDs and distributing them all over the Internet for free. Copyrights, pirating and other terms describe this unlawful behavior.

Take something like ICQ, on the other hand, the instant chat and message software. AOL paid more than $287 million with another $120 million based on performance over the next 3 years for ICQ-Mirabilis. That's $407 million valuation.

AOL based that on the ability or promise of ICQ to be a channel to reach people to sell them things or sell those people to marketers who want to reach them.

October 28, AOL reported ICQ registrations surpassed 20 million, up nearly double vs. when it was acquired in June, because people are encouraged to pass it around.

Similarly, what the music industry doesn't understand is that its business model is out of step with a digital era. The music industry doesn't realize that it's in the community industry and that artists represent community leaders or distribution enablers. You can pay $15 and listen to Sting or The London Philharmonic on something called a "CD" as many times as you wish.

To "zero G " the music industry, you could sell concerts, merchandising, memberships to users to join the artists' community, which includes chat, custom e-mail services, personal Web-based calendaring featuring the artist/band, audio birthday greetings, etc. And sell the whole community to marketers and manufacturers from whom they may wish to buy from.

>From an investment perspective I encourage you to use this metric, hold it up against any Internet stock and ask yourself how much gravity they have sucking away net margin.

Several Internet firms that we all know and love are close to zero G and moving that way. But old-world business models zap their thinking because those are the models most familiar. Gravity.