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The Real Lessons of e-Commerce
In a new book, economist Deak explodes some popular dot.com myths
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Business New Haven
9/01/2003
By: BNH
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Edward Deak is an economics professor at Fairfield University and one of the state’s most respected economists. He’s also author of the just published The Economics of e-Commerce and the Internet (Southwestern Thomson Learning), which tackles a number of misconceptions about the economics of the Internet. For example, contrary to popular belief, the fall of the dot.coms in 2001 did not drive a majority of Web businesses to an early grave: About 3,500 of 5,000 dot.com startups have survived. Early this summer, in his forecast of the state’s economic outlook for the New England Economic Project (NEEP), Deak concluded that Connecticut’s higher income and property taxes, budget cuts and local and state job reductions will dampen the state’s rebound, lagging the nation’s economic by perhaps two quarters. BNH spoke to the economist from his Fairfield home on August 21.
What did you expect to discover when you began to research e-commerce, and how did your actual findings vary from your preconceptions?
One thing that came to the forefront very quickly is the effect that the Internet has had on business by compressing market space. Previously, [consumer choice] was limited by geography if, say, they wanted to buy a big-ticket item like an automobile. Now they can solicit prices and information from dealers virtually anywhere. So in that sense it’s been a big boon to consumers in opening up the size of the market and the number of sellers, [thereby] introducing more competition. On the other hand, the idea that ‘Distance is dead’ has also been a big benefit to sellers, because if you are a niche seller of a particular product, you market [used] to be limited by geography. Now, if you get up on the Web, you can literally be selling your product worldwide.
Three years ago plenty of people were predicting the imminent death of bricks-and-mortar retail. Today that seems farfetched.
I would be surprised if in my lifetime or your lifetime bricks-and-mortar stores disappeared entirely. The Internet has evolved as another way of reaching a segment of the buying public. And the companies that have done particularly well the quickest are those who were familiar with catalogue operations — companies like Land’s End or L.L. Bean — and who saw this as merely another vehicle for [reaching existing markets]. There are some people who don’t like shopping and who for time or distance reasons find the Web to be an ideal place to shop. Others enjoy shopping and like to be able to look and touch and get direct information from a customer sales representative.
You have a chapter on the failure of online grocery retailer Webvan. What’s the lesson that company’s experience?
Webvan had more than $1 billion in startup capital invested in them because the retail grocery market is so large, even if you capture just a small fraction of it — two, three, four percent — you’re going to be able to make money. The problem was that they had a highly sophisticated and automated image of the grocery business conducted over the Web. What they found out was a couple of things: First, delivery was a problem, particularly in urban areas where traffic congestion delayed delivery. Then you got into the suburbs where the stops were few and far between. Also, when they started Webvan, they thought they were going to be dealing with busy urban professionals [as customers] who didn’t have time to grocery-shop. As it turned out, their most loyal customers were the housewives or househusbands with children at home [for whom it was a hassle] to pack everyone up to go grocery shopping.
Are any online grocers making it?
Peapod is still operating. But they have a store-based model as opposed to a warehouse-based model, and they seem to be able — on a smaller scale — be able to serve that segment of the market that’s interested in buying groceries over the Internet.
Moving to the economy, the state lost more than 12,000 jobs in July, and unemployment jumped three-tenths of a point in one month. What do you make of that?
The state is going through a financial upheaval associated with the budget process. The state laid off 2,800 people, while 4,650 took early retirement — why those numbers showed up in July instead of June is a good question, but much of the job losses are in the government sector. Many are also in the retail sector, which is beginning to reflect the competitive pressures that the big box stores — especially with the entry of Wal-Mart into the area, along with Target — are having on some of the other discounters. Caldor’s is gone, Bradlees, Ames is gone [and this impacts employment]. There are also concerns that seasonal-adjustment factors were not properly calculated [resulting in the monthly unemployment spike]. But every sector across the board showed job losses except for leisure and hospitality.
You wrote that Connecticut’s recovery will lag the nation’s by about six months. Why is that?
The one or two quarters [lag] reflects state government’s removing more funds from the pockets of individuals [thereby] cutting back on private spending, but also cutting the amount of state aid to education and other activities at the local level. There are already cuts in local government expenditures and increased taxes that will be needed to compensate for [reductions] at the state level. The budget deficit is a serious problem and it has a lot of ripple effects that [contribute to] the slowness of the recovery here in Connecticut. On the other hand, lagging three months or six months is not that unusual.
What are some of the buttons that ought to be pushed in Hartford that are not being pushed to speed the state’s recovery?
In terms of the situation right now, there’s not a whole lot that can be done at the state level. But as we get into the next cycle, in which economy activity picks up and money flows into the state coffers. We’ve seen two of these now: The cycle of the late 1990s, which dumped hundreds of millions of dollars in extra revenue into the [state’s budget coffers], and [previously] the cycle of the late 1980s, which dumped hundreds of millions of dollars of extra revenue in there. What we did, instead of recognizing that this was the product of an exceptionally prosperous short-term period, we introduced cuts in taxes and increases in spending that all of a sudden when the revenue sources dry up become the source of the burden that we have here in Connecticut. [In reaction,] last time we imposed a state income tax, and this time we’ve had to cut a considerable number of state employees. It’s very difficult [to be disciplined] when you have a lot of revenue coming in: The rhetoric ramps up and says, ‘It’s the people’s money — give it back to the people.’ A little bit more prudent [financial management, e.g.] building up of rainy-day funds can help to smooth these things out better than we’ve been able to. Because in both cases [the ‘80s and ‘90s] the rainy-day fu
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