September 11, 2001 Terrorist Attacks: Impact on E-Commerce

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SEPTEMBER 11, 2001 TERRORIST ATTACKS: IMPACT ON E-COMMERCE

In the wake of the September 11, 2001 terrorist attacks on the World Trade Center in New York and the Pentagon in Washington, D.C., it was common for social and political commentators to proclaim that "everything has changed." While the geopolitical and domestic landscape transformed in accordance with this pronouncement, the business world weighed up the implications of this changed environment for the future of e-commerce. Situating the terrorist attacks in the midst of a global economy heading into recession and an Internet economy still dusting itself off from the dot.com shakeout of 2000, analysts saw several different short-term and long-term scenarios for e-commerce. The very novelty of the situation—an attack on U.S. soil, the subsequent anthrax attacks and the fear and uncertainty they created—contributed to the problem facing analysts in trying to sketch out a clear forecast for the impact of the attacks. Since these kinds of horrors had never before visited the American public, it was difficult to gauge exactly how people would react.

IMMEDIATE EFFECTS

The immediate impact of the terrorist attacks on e-commerce was profound, if only for the technical ramifications. Due to the veritable phone-line block-out in New York, along with the sharply increased phone and Internet usage throughout the country in the hours after the attacks, Web and Internet traffic worked slowly for a while, causing slow download times and thus curtailed sales opportunities.

According to the comparison-shopping site BizRate.com, online retailing sales fell to 85 percent of their normal volume in the immediate aftermath of the attacks, and analysts and companies alike lowered their estimates for overall annual growth for 2001. Online retail sales the day before the attacks totaled $92.4 million; by September 17, sales were down to $82.5 million—a respectable total, considering the gravity of the situation and the broader fears about recession that the attacks helped fuel. The biggest culprit, according to most analysts, wasn't e-commerce in particular, but simply damaged consumer confidence in general. The attacks certainly had a dramatic impact on an economy already in a precarious situation, seriously damaging the airline, tourism, and insurance industries and carrying consequences throughout the economy.

Online revenue for the month of September fell 15 percent from the month before, although that was largely due to the downfall of the largest e-commerce sector: the travel industry. On the other hand, Nielsen/NetRatings and Harris Interactive reported that online retail sales in September 2001 totaled $4.7 billion, compared with $3.1 billion the previous September. BizRate.com figures indicated that, overall, consumers hadn't lost their taste for e-commerce, and online shopping performed relatively well over the 2001 holiday season, particularly in light of continuingly poor economic news. With heightened tensions throughout society and bolstered security at travel locations—particularly at airports—consumers were far less likely to feel comfortable hauling around large packages, and thus relied more heavily on home shopping via the Internet and delivery straight to the house. Broader fears of large, public places, such as central shopping districts in major cities and elsewhere, were also expected to have a positive net effect of e-commerce. With consumers more hesitant to leave the security of their homes, and with shopping resources still at their disposal via the Internet, many business analysts expected e-commerce to undergo a resurgence.

TRANSFORMING E-COMMERCE

Many analysts looked to the Internet as a source of hope in a difficult economic and social climate. As companies tried to cut costs to maintain profit margins, those firms that had invested heavily in successful e-commerce infrastructures were in a particularly good position, since the Internet afforded companies the ability to trim inventory and other costs while generating new revenue streams.

According to Business Week, the attacks bolstered the new, post-shakeout mood of Internet commerce and initiatives. Plans for e-commerce operations were more than ever calculated specifically with a profit-based focus, rather than simply to build a brand online. E-commerce schemes were evaluated and pursued in accordance with their ability to generate short-term cost savings and profits. AMR Research Inc. predicted that, in the year following the attacks, investment in e-commerce initiatives would rise 9 percent, below the pace of the previous few years but still relatively healthy, particularly in light of the receding economy. That projection was below the 11 percent that was forecast shortly before September 11. AMR reported that the most common initiatives being funded included supply-chain management projects, customer-service schemes, and Internet-based product-development programs.

On the other hand, one of the Internet's key advantages in the world of commerce proved a handicap in the immediate wake of September 11. A central feature of e-commerce is that it diminishes the importance of geography, so that physical distance and international borders are rendered less prohibitive in the shopping and trading processes. However, following the terrorist attacks, borders were fortified and tightened, severely slowing international trade and rendering it more costly. The dramatically heightened fears over international terrorism following September 11 were expected to have a lasting impact on security measures at borders, so that e-commerce that trades in physical products (rather than digital products) requiring international shipping will be hampered both by slower delivery times and higher delivery costs. In turn, though, this trend played into the hands of larger firms with their own production and storage facilities abroad, diminishing the need for international shipping.

As the economy reeled and the e-commerce world was shaken up, the time seemed right to many investors and analysts for e-commerce firms to take the time to re-evaluate their e-business practices in the hope of finding a winning strategy into which companies could put more of their faith. As a result, firms were expected to closely examine their existing Web business practices and take the time to implement quality systems as the climate straightened itself out. Companies seemed more willing to accept changes to their fundamental business practices, particularly in the realm of e-commerce.

E-COMMERCE VS. SECURITY?

The heightened concern for security also threatened to renew the recently cooled battle between commercial interests and governments over computer encryption. Encryption is among the primary means by which companies are able to utilize an open network like the Internet to conduct secure and private transactions. In the late 1990s, the U.S. government finally bowed to pressure from businesses demanding the free dissemination of strong encryption schemes designed to fortify electronic transmissions from hackers or other cybercriminals, thereby protecting consumers and business information. Governments had long resisted the proliferation of strong encryption, fearing that it would compromise the efforts of intelligence agencies to conduct investigations into crime and international espionage and terrorism. In the wake of September 11, governments began making moves to put greater checks on encryption schemes, fearing that international terrorist networks could use state-of-the-art encryption to transmit plans across electronic networks. As governments assumed greater powers for monitoring electronic communications, encryption was likely to find its way back into contested territory. Business analysts feared that the mandated use of weakened encryption schemes could have severe consequences for e-commerce, given that consumer and business fears over the security of their transactions was perhaps the primary impediment to the growth of e-commerce in the 1990s and early 2000s.

One prominent call was for all encryption schemes to come with a backdoor through which authorized government agencies could pass. U.S. Senator Judd Gregg of New Hampshire proposed such legislation, insisting that encryption software makers "should understand that as a matter of citizenship, they have an obligation" to allow government the means to crack into any encryption code deemed necessary by a court order. This means that vendors must build all codes in a way that allows government to break through them. However, these key-escrow systems, as they're called, generated controversy, since the keys given to governments to unlock the encryption codes, while kept securely hidden, could potentially be compromised, leading to a security nightmare. Alternatively, civil liberties groups worried that governments with such keys could potentially abuse their powers.