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Competitors sharpen weapons for the digital contest

Competitors sharpen weapons for the digital contest

Wednesday, March 24, 1999

FINANCIAL TIMES
Business Solutions


In the age of e-business and the Internet, companies around the world must be ever more watchful of the online strategies being followed by their fleet-footed rivals, writes Tom Foremski

The Internet is changing the face of business around the world so rapidly that many companies find it hard to keep up.

The implications of this electronic upheaval are enormous, though the impact is not yet evenly distributed. But it is certainly true in the US – and to a lesser extent in Europe – that if a company of any size is not thinking of how the Internet can be used to make its business more efficient, its competitors undoubtedly are.

Since the Internet is a global network, those companies that establish their online brands most rapidly will be able to reach the customers of their competitors in other countries more easily than ever before.

This global communications medium with its standard protocols and applications, supporting virtually any type of computer system and operating system, has the potential to revolutionise the entire business process. While many claim the Internet has been over-hyped, the reverse is closer to the truth when it comes to business applications.

Electronic commerce, or e-commerce, is the most visible aspect of e-business, but it is just one segment of a larger whole. E-business means: better procurement and supply chain management; making sales teams in the field more effective; the ability to easily outsource functions such as accounting; remote access to mission critical systems; linking management teams in different locations; being able to quickly locate the lowest cost suppliers; improved customer services; unprecedented collection of customer information; and more effective management of remote manufacturing sites.

With a future Internet offering much higher bandwidth, capable of running across power lines to reach embedded systems and stretching out through wireless connections to billions of electronics devices, applications that have yet to be invented will mine new areas of business efficiency.

With previous investments in information technology, the core problem has always been to justify the cost. The rate of return on IT investment was difficult to calculate; if a 10 or 20 per cent return was achieved, a company was doing very well.

But applying Internet technologies to business processes yields astounding returns. Companies building intranets, for example, are finding that their investments are being paid back in months. Similar results are reported for many other applications.

The big IT groups are striving to build a powerful presence in this fast evolving market. IBM has established a strong image as a provider of electronic business solutions through its “e-business” campaign.Its lead is being challenged, however, by new products from Microsoft, Hewlett-Packard, Oracle and others.

Microsoft recently announced new server software and related products to simplify the setting up of e-commerce systems. Hewlett-Packard is putting a big effort behind its “e-services” focus with new products and online e-commerce services.

But there is more to e-business than just selling over the Internet. John Parker, vice-president of Internet Technology at IBM, says: “Companies can have real-time input into their central database from remote locations, monitor production lines with full-screen streaming video, allow executives to engage in video-conferencing, and use full-screen multimedia communications for distance learning.”

But producing the e-business applications that corporations need requires more bandwidth and new types of applications. “Bandwidth is being added all the time, but what is really needed is the ability to discriminate between the packets of information carried on the Internet,” says Mr Patrick.

The Internet carries packets of information defined by the Internet Protocol. These IP packets are created and treated as equal. But there is currently no way to discriminate between different IP packets.

This is why using the Internet to place telephone calls or for video-conferencing produces a poor quality effect with garbled sound and jerky video images. Those real-time packets of information have to jostle for bandwidth with less time-sensitive packets such as those carrying e-mail.

IBM, along with other computer and networking companies such as Cisco Systems, is working on what is called Quality of Service technology that will guarantee specific levels of quality on the Internet. Soon,companies will be able to pay more money to ensure their packets arrive at their destination first. QoS technology is being tested on the high speed private Internet2 network, part of which went live recently, linking major research centres in the US.

The bandwidth problem continues to be a limiting factor in many e-business applications. But US-based Akamai Techno-logies believes it may have a solution by adding what it calls an extra communications layer on top of the Internet. Founded last year by top mathematicians from the Massachusetts Institute of Technology (MIT), Akamai has installed hundreds of servers worldwide connected to the Internet in a service it calls FreeFlow. The idea is to dynamically distribute the content of a client web site closer to where its users are located. So instead of a user receiving a web page from a company web server located thousands of miles away, FreeFlow will replicate the web page closer to large groups of users; they will thus receive the web page from a local server and avoid traversing larger portions of the congested Internet. Using special mathematical formulae, FreeFlow calculates the fastest route across the Internet.

“With FreeFlow, corporations can use our network to deliver content-heavy pages to customers at a faster rate, while the return e-commerce transaction goes through their own secure web servers,” says Paul Sagan, Akamai’s chief operating officer.

FreeFlow also offers an additional e-business benefit. It protects web sites from shutting or slowing down if they have too many visitors. If a company offers a special online promotion, for example, and is flooded with more visitors than expected, it risks alienating millions of customers with a slow response. FreeFlow can detect a sudden spike in visitors and dynamically replicate web site content among its servers, thereby spreading the load.

With the spreading global interest in e-commerce, barely a week goes by without yet another study from a market research or consulting firm predicting ever higher e-commerce revenues. Yet this aspect of e-business is not only the most high-profile, but also the riskiest, simply because the business models have yet to be proven profitable in the consumer area.

Business-to-business e-commerce is profitable, with companies such as Dell Computer, Apple Computer, Cisco Systems, Intel and others moving billions of dollars in products through their e-commerce sites.

But in the consumer area, the business model needs more work. Amazon.com, the online book seller, for example, continues to report larger losses each quarter on ever larger sales and does not expect to produce aprofit for at least another two or three years.

According to Giga Information Systems, the US IT consultancy, companies setting up e-commerce systems will not see much pay-off in the short term. It predicts that the number of profitable e-commerce ventures over the next 18 months will be just 5 per cent of the total. This means that companies will have to refocus their efforts on goals other than revenue generation.

E-commerce will play an increasing role in business, “but even the best known start-ups aren’t profitable yet and only a few Fortune 100 companies have profitable Internet commerce operations,” says Giga analyst Erica Rugullies. “In the meantime, early adopters of electronic commerce have an opportunity to build an infrastructure that dramatically reduces the costs of doing business while improving relationships with customers and suppliers.”

Even though it is difficult to make money through e-commerce, many companies try. UK based Gifthouse, for example, recently set up a web site to sell gifts such as candlestick holders and related items online. Despite an attractive web site, it has had few online sales.

“It’s one thing having a functioning web site – the problem is in attracting people to the site. It takes a considerable amount of money to promote the site and also handle all the other operations,” says Gifthouse co-founder Debra Nottage.

Many companies do not realise that setting up an e-commerce web site is effectively the same aslaunching a mail-order catalogue operation. The web site becomes the printing press, albeit a very agile one, that can respond in real-time to inventory levels, pricing, and customer preferences. But the back-end operations are essentially the same as those of a conventional mail-order company, requiring a warehouse, shipping department, customer service representatives and other facilities.

Some observers believe that e-commerce will truly take off when it can reach larger numbers of Internet users; nor should these have to be personal computer users. In the US, about half of households have PCs, but inEurope and other parts of the world, PC penetration is at lower levels.

“I think that it makes much more sense for e-commerce to occur over cellular phones, especially in Europe where there are many more cellular phone users than there arePC users,” says David Birch, director of UK-based consultancy Hyperion.

US and European communications companies are already developing the wireless Internet technologies that will soon make this possible. Thus the future for successful mass market e-commerce may well lie in the future smart phone device, able to order goods and services at the touch of a button – without a PC in sight.

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