E-commerce: The truth behind the web

Directorate for Science, Technology and Industry

E-commerce is the buzzword of the new century. Much of the talk about it is hype, but not all. How big is e-commerce really? 

Electronic commerce has been a much used and abused term. A lot of hopes have been placed in it, a lot of promises made of it, and yet its precise meaning has not always been easy to pin down. One thing is clear: in terms of transactions e-commerce is large – equivalent to the total value of industries such as pharmaceuticals and computer hardware – and growing.

Current estimates put the value of e-commerce at around US$650 billion worldwide in 2000. This amount covers transactions between businesses (b-to-b), and sales from businesses to consumers (b-to-c), though it does not include government transactions or those between consumers. Estimates of the value of b-to-b e-commerce in the United States in 2000 vary widely, ranging between US$100 billion (IDC) to US$1.2 trillion (Boston Consulting Group). Many such estimates have often been accompanied by very rosy projections of up to ten-fold growth over the next few years.

Official data from national statistical offices appear more realistic. The US Department of Commerce measures online retail sales (b-to-c), which were US$6.4 billion in the third quarter of 2000, or around 0.8% of total retail sales. Figures from the Australian Bureau of Statistics show that around 0.4% of total sales/orders were received in Australia via the Internet by businesses across the whole economy for 1999-2000. And Statistics Canada’s data indicate that around 0.2% of the value of customer orders there were received over the Internet in 1999, again across the whole economy.

The US still accounts for more than three-quarters of all e-commerce transactions, although growth has been very strong in Europe, particularly in Sweden and Finland. But despite the promise of “borderless” trade, most e-commerce is still national or within continents. However, cross-border trade is expected to grow, and some say it will grow faster than national e-commerce trade.

This brings us back to the question of what e-commerce actually is and why it is important. To define e-commerce it is essential to identify the transactions on the one hand and the electronic networks being used on the other. Most definitions refer to the sale or purchase of goods or services over the Internet. This is the OECD’s preferred narrow definition. However, an accurate estimate of the value of e-commerce may have to include activities such as gathering information, payment, online delivery, and other processes related to development, production and delivery of goods and services.

The volume of b-to-c e-commerce transactions is generally small. One reason is consumer confidence, since many users are still hesitant to embrace e-commerce because of worries about delivery problems, reliability, fraud, and so on (see article by Taizo Nakatomi in the Science and Technology section). But perhaps a more important reason is Internet access, which remains uneven. By late 2000, more than half of the population of North America had used the Internet recently, compared to fewer than one in thirty in Latin America, one in forty in Asia, and less than 0.5% of the population in Africa.

It would be wrong to think that all non-OECD countries have low access rates. Take the United Arab Emirates, which according to data from the International Telecommunication Union had relatively more Internet users in 1999 (1,668 per 10,000 inhabitants) than Japan (1,447). Although figures are hard to compare, Dubai’s Internet penetration is probably now comparable to that of many OECD countries, but still lower than Singapore’s for instance (2,946 per 10,000, according to the ITU).

In the United States, data from the National Retail Federation and Forrester, a market research firm, show that in October 2000 the main consumer items purchased were air tickets, computer hardware, hotel reservations, apparel and consumer electronics. The table below shows how usage varies by country. For example, while nearly half of Australians used the Internet recently, only a tenth of those users made an online purchase. Perhaps the most intriguing figure is for Hong Kong, where most online purchases were for food, rather than the usual diet of books, music and software.

So, with all these high values, what should we read into the dot.com craze, or more recently, crunch? The roller-coaster fortunes of Internet-related and e-commerce stocks have been impressive: there has been a 50% drop of the Nasdaq composite index between March and December 2000. Highly publicised failures of many e-retailers such as boo.com and pets.com, and the sharp drop in value of stars like Lastminute.com, have led many experts to revise their perceptions of the likely success of these companies. This is normal in business. And some valuations will no doubt rise again. But in the meantime stock value drops have made it much harder for new and existing firms to raise venture capital. Capital raised in the United States for Internet-related firms dropped to US$18.3 billion during the third quarter of 2000, down from US$22.7 billion in the second. Although the fall reflects declines across the whole venture capital sector, Internet firms still account for more than two-thirds of all VC investment.

Essentially the majority of dot.com failures have been in the e-retailing sector (i.e. b-to-c). Here, new business models have proved difficult to develop successfully in the face of established retailers and their highly developed logistics. Moreover, online sales in areas where “feel” and personal presence are important, like fashion and expensive durable goods, have been slower to develop than many expected. Still, the Internet remains an important complement for offline purchases, often acting as a “shop window” for consumers to browse before purchasing in the traditional way. This appears to be true of cars and home appliances.

Business-to-business models have been much more successful. In fact, they have been part of the development and evolution of established firms in “old” industries. For this reason they are likely to be more durable. The impact of b-to-b has been steadily to improve process efficiency, reduce production costs, accelerate information flows, and streamline supply chains.

In many ways the new economy is the “old” economy transformed by the application of information and communications technologies. Some of the boldest claims about e-commerce will not materialise.

Another successful feature of b-to-b e-commerce has been the rapid growth of electronic marketplaces and exchanges such as Covisint for automobiles, e-Steel, and Chemdex for chemicals. In some sectors, such as utilities, electronics, shipping and office supplies, it is expected that the majority of e-commerce will take place through such marketplaces. Nonetheless, these are costly to set up and out of the hundreds which now exist, consolidation will be rapid and only a few are likely to survive in each sector.

What rules for a new economy? 

Stars will of course emerge from the e-commerce revolution, not just relatively new firms like Yahoo!, but established companies too, like IBM, which has successfully transferred its business processes to the Internet environment. But in many ways the new economy is the “old” economy transformed by the application of information and communications technologies. Although there will be changes in transactions and market structures, some of the boldest claims about e-commerce will not materialise. Perfect competition, the disappearance of many intermediaries, zero transaction costs, a frictionless global marketplace, etc: all these will probably be elusive. In other words, many of the established rules still apply, although in updated and adapted form.

So where does all this leave e-commerce? More changes are afoot: the further integration of ICT into all business processes within firms and across whole sectors will improve information exchange and increase transparency.

The tools of ICT are developing rapidly. Change is constant in terms of increasing the speed and capabilities of computing, improving the quality of network infrastructures, and lowering the cost of access. The more people that use the Internet the more valuable it will become for all: this is what economists call network effects. New access devices have great potential in areas such as third generation mobile commerce (see article by Joanne Taaffe), digital TV (“t-commerce”?) and wireless communications. New business models will be able to build on these. So, while few of the early dot.com entrants will survive after this year’s shakeout, those that do can look forward to taking part in an energetic business scene.

Governments have an important role to play too, by encouraging competition in infrastructure markets; assuring consumers and businesses that those networks are secure, reliable and verifiable; and ensuring that legal and commercial frameworks for online operations are transparent and predictable. These are important (and by no means easy) challenges. But addressing them will pay dividends for consumers and producers alike. And that means governments too.


• “Business-to-Consumer E-Commerce Statistics” (DSTI/CP(2000)10), OECD, 2000.

• “Defining and Measuring Electronic Commerce: A Provisional Framework and a Follow-up Strategy”. (DSTI/ICCP/IE/IIS(2000)3/REV1), OECD, 2000.

• E-commerce Business Impacts Project (EBIP), (DSTI/ICCP/IE(2000)5/REV2) OECD, 2000.

• Global Electronic Commerce: A Policy Primer, by Catherine L. Mann, Institute for International Economics, Washington D.C., July 2000. 

• Information Technology Outlook 2000, OECD, 2000. 

©OECD Observer No 224, January 2001

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