Global E-Commerce: North America

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GLOBAL E-COMMERCE: NORTH AMERICA

The development of e-commerce varies widely in different regions across the globe. Factors that impact e-commerce include the technological expertise of residents, which affects both the ability of e-commerce companies to find qualified workers and the ability of citizens to engage in Internet-related transactions; funding available for e-commerce ventures; and the technological infrastructure of an area. In the late 1990s, e-commerce grew most quickly in North America, particularly in the U.S., due to the increasing number of Internet savvy shoppers there, as well as the world's largest base of technical experts, who not only were available to work for e-commerce ventures, but who also, in many cases, launched their own firms. Also fueling the North American e-commerce boom was the unprecedented level of funding available from a variety of sources. Moreover, many analysts believed that the time savings afforded by shopping online appealed to U.S. residents, who were considered more time conscious than individuals in other parts of the world, such as Europe or Asia.

EARLY HISTORY

The rise of e-commerce in North America has at its roots the founding of several key companies, including online services provider America Online Inc. (AOL), online retailing giant Amazon.com, online auction powerhouse eBay, Internet portal Yahoo!, and World Wide Web browser developer Netscape Communications Corp. The success of each of these firms played a pivotal role in the North American Internet revolution and the subsequent growth of e-commerce across the continent.

The first of these firms was founded in May of 1985, when 26-year-old Steven Case partnered with Jim Kimsey to establish the predecessor to AOL, Quantum Computer Services, in conjunction with Commodore International, Ltd. At first, Quantum offered Q-Link, its modem-based online service, to Commodore personal computer (PC) users only. Owners of PCs made by Tandy Corp. and other companies were able to link in to the service starting in 1987, and owners of IBM-compatible PCs, as well as Macintosh machines, were granted access shortly thereafter. Believing that a mass market for interactive online services and content existed, Case put together a nationwide online network for PC owners called America Online in 1989, and eventually changed Quantum's name to America Online, Inc. The new AOL service included games, e-mail, and real-time chat capabilities.

Case spent the early 1990s honing AOL's focus to IBM-compatible and Macintosh computer markets and growing its subscribers by doing things like giving AOL software away for free. To expand its content, AOL began seeking partnerships with media firms. The firm completed its initial public offering (IPO) in 1992, and rejected a buyout offer from Microsoft Corp. the following year. Deals with media firms like Knight-Ridder and CNN further expanded AOL's content. When Microsoft's Windows platform began to grow in popularity, AOL developed a Windows-based version of its online service, and when analysts began forecasting that the fledgling World Wide Web would render proprietary online services like AOL obsolete, the firm created a gateway, known as AOL.com, to offer subscribers a link to the Internet. AOL members exceeded one million for the first time in 1994.

AOL became available in Canada in 1996. That year, Microsoft agreed to include AOL software on its Windows 95 platform in exchange for AOL's inclusion of Microsoft's Internet Explorer Web browser in its software. Determined to position his firm as the leader in online services, Case reached similar cross marketing deals with AT&T, Apple, Sun Microsystems, Hewlett-Packard, and Netscape Communications. In October of 1996, Robert Pittman was hired as president and chief operating officer and charged with the task of developing AOL's e-commerce strategy. Shortly thereafter, Pittman began forging alliances with online retailing giants like Amazon.com, which agreed to sell its merchandise on AOL. Revenues exceeded $1 billion in 1997, and membership grew to more than ten million subscribers. Despite highly publicized technical problems surrounding the firm's inability to handle traffic surges resulting from a new $19.95 per month unlimited access program launched in 1997, the flat fee pushed AOL's subscriber base even higher. By then, AOL had solidified its position as a leading Internet player. According to BusinessWeek Online writer Catherine Yang, "more than any other leader in e-business, the 41-year-old chairman of America Online Inc. is responsible for bringing the Internet revolution to the masses."

At roughly the same time as AOL was developing its portal to the Web, Silicon Graphics co-founder Jim Clark partnered with 22-year-old Marc Andreessen, one of the developers of the Mosaic graphic user interface (GUI) program for the Web, to create Mosaic Corp. Officially established in April of 1994, the predecessor to Netscape was funded with $3 million of Clark's personal savings and additional venture capital from investor John Doerr. In October, Clark and Andreessen offered Jim Barksdale, an executive for AT&T Corp., a seat on Netscape's board; three months later, they convinced him to leave his post at AT&T to take the helm at Netscape. Although the firm wasn't yet profitable, Clark convinced Andreessen and Barksdale to conduct Netscape's initial public offering (IPO) in 1995. The IPO turned out to be one of the most lucrative in the technology indus-try's history, setting the stage for the multitude of up-starts, also not yet profitable, that conducted IPOs later in the decade. Clark and Andreessen's launch of Netscape's free Web browser, Navigator, is viewed by many industry analysts as a key reason for the advent of the Internet revolution. According to Charlotte Dunlap in Computer Reseller News, "Clark helped launch the Internet craze by commercializing the government-based network's first GUI." Less than a year after Netscape's IPO, Navigator had secured roughly 80 percent of the Web browser market. This success attracted the attention of Microsoft Corp., which decided to include a version of its own browser, Internet Explorer, with its Windows 95 platform. By giving this software away for free, both Netscape and Microsoft made Internet access even easier for PC users to obtain.

Less than a year after Netscape's inception, Stanford University doctoral students David Filo and Jerry Yang co-founded Yahoo! Inc. In the early 1990s, the two began using Mosaic to browse the Web. After having difficulty keeping track of his growing list of favorite sites, Filo sought Yang's help to develop a program that would allow him to group Web sites into subject categories. The partners named the resulting list of sites "Jerry's Guide to the World Wide Web" and posted it on the Web. When Web surfers across the globe e-mailed positive feedback regarding Jerry's Guide, Yang and Filo decided to begin indexing all Web sites. They set a goal of cataloging 1,000 sites per day; when subject categories became unwieldy, they added layers of subcategories to improve organization. The site's popularity grew rapidly, and Stanford's server began struggling under the increased traffic load. As a result, the university asked Yang and Filo to find another organization to host what they renamed Yahoo!, an acronym for "Yet Another Hierarchical Officious Oracle." Buyout offers emerged from executives at Netscape, AOL, and what would become other leading Internet firms, but Yang and Filo turned them down. Instead, they agreed to take a leave of absence from their studies to co-found Yahoo Inc. in March of 1995. After securing financial backing from Sequoia Capital, Yang and Filo hired Tim Koogle to run their business. When the company went public in 1996, Yang and Filo became overnight millionaires.

Within months of Yahoo!'s official launch, Amazon.com appeared on the Web. Amazon's founder, 30-year-old Jeff Bezos, resigned as a Wall Street executive in 1994 to pursue his dream of creating an Internet retailer. After deciding to focus on the book market, he hired four employees and began working in the garage of his new home in Seattle, Washington, to build the retail site. Bezos chose the Amazon, believing the title of the largest river in the world expressed his site's ability to reach vast numbers of customers. When Amazon.com went online in July of 1995, the site allowed visitors to search for books by author or title, as well as subject or keyword. Book prices, considerably lower than those of traditional book retailers, coupled with free shipping, attracted many users to the site. In fact, in just three months Amazon achieved its first 100-order day.

During Amazon's second year of operation, Bezos began focusing on increasing the firm's growth. One of his most lauded moves, the creation of the "associates" program in July 1996, allowed individual Web site owners and operators to offer links to Amazon from their site. The associate then received a commission any time a visitor clicked on that link and bought a book. Bezos also forged alliances with America Online Inc. and Yahoo Inc., securing Amazon's promotion on those high-traffic sites. Although it had not yet earned a profit, Amazon conducted its IPO in May of 1997. In October of that year, Amazon became the Internet's first retail operation with one million customers. Amazon's success left traditional book retailers scrambling to retain customers. Many chains began staying open later, offering entertainment, hosting book clubs, selling coffee and pastries, and even opening up their own retail Web sites, which Barnes & Noble did in May of 1997. According to a September 1997 Chain Store Age Executive article, Amazon.com permanently altered book retailing. "Bezos redefined book and information merchandising and distribution. He has changed the way some customers shop and purchase books, and continues to challenge the definition of the traditional book store."Amazon also helped fuel the e-commerce boom in North America by prompting many Web surfers to make their first online purchase.

eBay.com also emerged on the Web scene in 1995 when Pierre Omidyar's girlfriend, a Pez candy dispenser collector, began looking to contact other nearby collectors. Omidyar—a Tufts University computer science graduate who worked for communications software maker General Magic Inc.—realized that the Internet could help make this possible. He created Auction Web, an online auction site that let sellers post items for sale by describing the merchandise, setting a minimum bid, and choosing the length of the auction, which could range anywhere from three to ten days. Buyers could then bid on an object, and the highest bidder at the end of the auction was able to purchase the object for the bid price. Payment and delivery were handled by the buyer and seller. Site traffic grew well beyond Omidyar's expectations in 1996, prompting his resignation from General Magic. Seeing the potential to make money, Omidyar decided that Auction Web—renamed eBay in September 1997—would start charging a small fee, including a commission based on the final price, for each item listed for sale. Because the entire auctioning process was automated, overhead costs remained minimal; as a result, Omidyar's business became profitable very quickly, setting it apart from other Internet ventures and validating the Internet as a viable business medium.

EXPLOSIVE GROWTH

As the number of North American Internet users began to climb and e-commerce sales continued to grow, the stock prices of Internet-based firms began to soar. Amazon's shares, which originally listed on NASDAQ for $18 apiece, rose in value to nearly $100 in less than a year, leaving founder Bezos near billion-aire status. Yahoo's stock prices also skyrocketed in the late 1990s, and both Yang and Filo also became billionaires. In September of 1997, eBay conducted its IPO; eBay stock jumped from $18 to $50 in a matter of minutes, and within two months, share prices reached $100.

eBay's registered users reached 1.2 million by the end of 1998, and sales soared 724 percent to $47.4 million. In December of that year, more than one million new customers shopped online at Amazon for holiday gifts. Total customers exceeded 6.2 million, securing Amazon's position as the number three U.S. bookseller, behind Barnes & Noble and Borders. In addition, Yahoo! became one of the few Web-based ventures to make money via online advertising. In fact, the only one of the five major Internet pioneer firms facing difficulty was Netscape, which struggled to hang onto its browser market share in the face of stiff competition from Microsoft. In November of 1998, Netscape agreed to be purchased by American Online for roughly $4.2 billion. Stock prices soared on news of the deal, and by the buyout's completion in March of 1999, the price tag exceeded $10 billion. These success stories prompted venture capital firms to fund hordes of e-commerce startups, including business-to-consumer B2C ventures like Pets.com and X.com, as well as business-to-business (B2B) ventures like Internet consultancy Scient. At the end of 1999, despite significant e-commerce growth across both Europe and Asia, North America accounted for 67 percent of the worldwide B2B e-commerce market and 76 percent of the worldwide B2C market.

DOT.COM FALLOUT

Total North American online consumer sales in 2000, according to eMarketer, reached an unprecedented $38.3 billion. However, concerns regarding the performance of many Internet-based firms, including leaders like Amazon, caused stock prices to plummet during the second half of the year. In June, Lehman Brothers analyst Ravi Suria publicly criticized Amazon's financial status, prompting a share price drop of 19 percent. Suria pointed out that although Amazon had experienced incredible sales growth in the late 1990s, its $2 billion debt was costing about $125 million in interest each year and competition was heating up from the likes of Wal-Mart and other major retailers who were opening their own online stores. In fact, Amazon lost $720 million on sales of $1.6 billion in 1999. By August 2000, Amazon's stock prices plummeted to $28 per share.

Dot.com funding started to dry up when stock prices began to fall, leaving many upstarts short of cash. When dot.com like Pets.com and X.com began closing their doors, Yahoo! found itself scrambling to find advertising customers to take their place. As a result, Yahoo!'s stock also took a drastic nosedive. By the end of 2000, it was clear to even the most bullish analysts that the North American "Net craze" had come to an abrupt halt. As stated in an April 2001 article in BusinessWeek Online, "Of the 367 Internet outfits taken public since 1997 that are still trading, the stocks of 316 are below their offering prices, according to Thomson Financial. Only 55 companies, or 15 percent, have made money for public investors. And a staggering 224 have tumbled 75 percent or more since their IPOs. A total of $2.5 trillion has disappeared from Net company market caps since the peak last year."

The dot.com debacle was further exacerbated by recessionary economic conditions in North America. Despite the downturn, however, companies like AOL and eBay continued to thrive. And although the rate of e-commerce growth slowed, many analysts predicted that North American e-commerce sales in the early and mid-2000s, both B2C and B2B, would out-pace 2000 figures. With an estimated 180.68 million Internet users in 2001—compared to 154.63 million users in Europe and 143.99 million users in Asia—North America remained the e-commerce leader of the world.