With the recent failure of so many dot-coms, it's easy to lose faith in the investment viability of the World Wide Web.
But technology research company
IDC recently issued a report predicting that Internet commerce in particular will continue to grow at extremely rapid rates.The company's current forecast calls for Internet commerce to grow at an average annual compound rate of 70% to reach $5 trillion by 2005, up from $354 billion last year.
This traffic will mean profits for some Internet companies, says John Gantz, IDC's chief research officer, but not necessarily for the pure-play dot-coms. The prime beneficiaries of this growth will likely be the infrastructure providers and the companies that have both clicks and bricks.
Regarding the crash of Internet stocks, Gantz notes that the PC industry continued to grow after it suffered a rapid decline in stock valuations in 1983, as did the mainframe computer industry following its own setbacks in 1970. According to Gantz, the Internet/technology bubble has been similar to those run-ups, and he expects Internet stocks to eventually rise again.
TSC: It was very surprising to read about IDC's projections for the growth of Internet commerce. What do you base these projections on and what form is this commerce likely to take? Gantz: There are two basic fundamentals behind our forecast. One is our deep knowledge of the installed base of devices that could connect to the Internet. Then we do extensive surveys of consumers and business executives and purchasing managers to find out how much they are buying or selling if they are on the Net. We define Internet commerce as the purchase of goods and services over the Net, where the commitment has to be made over the Internet.
In our latest survey, we spoke with 15,000 businesses in 27 countries about their e-business adoption, including online revenue expectations and how many sites they have that do commerce. We also interviewed 60,000 consumers in 15 geographies. We asked these 15,000 businesses what percentage of their IT budget they spent on e-business in 2000 and what percentage they plan to spend on it in 2001. They indicated a 28% growth in spending on their IT e-business budgets this year. This sector continues to grow fast.
The biggest growth in commerce will come from business-to-business, which should grow by 17 times between 2001 and 2005. [Business-to-consumer] will grow 10 times. It's a function of mathematics of the number of new users coming online, that the number of people online who begin to shop [will increase].
TSC: So, if there will be more people making money on the Internet, which Internet companies or Internet sectors are likely to be profitable? Gantz: There will be people
spending on the Internet. Making money on the Internet -- that's different. Whether or not the merchants make money on the Internet, that's a different story. We think that fundamentally most of the retailers that will be successful are those that have bricks
and clicks -- a physical presence.
We still have to get through a bad 2001, financially, because of inventories that were overbuilt, and business plans that expected more growth than there actually is. When that clears out, the companies that sell infrastructure -- switches, storage, servers, Web hosting, design, bandwidth or management of the infrastructure -- will do fine.
We even looked at jobs. We will need one million new people to be running these new e-businesses in the U.S. in the next year alone. So there's still plenty of room for dot-commers to find jobs.
TSC: If there is going to be all of this increasing traffic on the Internet, does that mean that Internet advertising will grow as well? Gantz: Yes, but I think most companies will advertise through a mixture of media -- print, television, billboards and the Internet. For a Web site to try and make its money solely through Internet advertising will be difficult.
TSC: Is it hard to be optimistic right about the Internet sector when it's so downtrodden? Gantz: We see pretty strong indications that the economic downturn in the U.S. and the dot-com crash are largely irrelevant to the ongoing and growing demand for the Internet. The dot-com companies accounted for less than 10% of all e-business spending. If you omit the leading-edge, stand-alone Internet start-ups, we still have all of this other investment going on.
The companies that are driving e-business are in it for the long haul and they are essentially doing it to stay alive. The brick-and-mortar companies have continued to spend big bucks to buy the servers, the cataloging software, the e-commerce software and the supply chain automation software.
Companies like
Barnes & Noble(BKS Quote),
Borders(BPG Quote),
Wal-Mart(WMT Quote) and
Kmart(KM Quote) -- that's where all of the big money is coming from.
For those out in Silicon Valley, it's so easy to focus only on the devastation of Internet companies and assume it's the end of the world. In 1983, the exact same thing happened to the PC market. I covered it as a stock market columnist for
InfoWorld. I had a database of at least 50 PC companies that were public, including
Atari,
Coleco,
Texas Instruments(TXN Quote) and
Victor Technology. All of these companies just crashed.
Apple(AAPL Quote) stock dropped to a fifth of what it was, and they laid off a fifth of their workforce. Since that crash, the value of PC stocks has grown by a factor of 10.
Not only that, but I researched this and learned that the same thing happened in 1969-1970 with mainframe computers.
TSC: So do you think the Internet as an investment sector might eventually regain favor, and if so, do you think we could still see some new Internet start-ups? Gantz: I think it will regain favor as an investment sector, but slowly, and I do think we'll see some more start-ups. After the PC crash in 1983, the companies that were successful --
Compaq(CPQ Quote),
Gateway(GTW Quote),
Microsoft(MSFT Quote),
3Com(COMS Quote) -- all these companies either formed or went public after that crash. That's pretty interesting. Apple and
Seagate(SEG Quote) were two companies that made it through. It took them a long time to come back, but they made it into the next wave.
I do think we will see more Internet start-ups, but at reduced valuations, and based on business plans that rely on future revenues and earnings rather than future appreciation of stock price, and those are the companies that will carry us forward. I think
Amazon(AMZN Quote) and
Yahoo!(YHOO Quote) will survive. I don't think
Priceline(PCLN Quote) will.
TSC: Your projections also indicate that 1 billion people, or 15% of an estimated world population of 6.5 billion, will be using the Internet in 2005. Does that mean there is still room for enormous growth of this medium? Gantz: Right now, in the developed countries -- including Europe, the U.S., Japan, New Zealand and Australia -- about 30% of the people are online. But in the undeveloped countries -- places like India, China and Africa -- only 1% of the people are online. By 2005, 60% of the developed world will be online, and about 3.5% to 4% of the undeveloped world will be online, and that's primarily because of India and China.
We looked at what effect the 1991 recession had on IT spending, and it dropped, but when it came back, it came back almost twice what it had been before the crash. So I am telling my clients -- high-tech vendors, dot-coms and buy- and sell-side companies on Wall Street that yes, there's a tight squeeze right now, but it's more or less temporary. A year from now, call me back, and you'll see the change.
TSC: How important will wireless connectivity be? Gantz: It will be quite important outside the U.S. and in these developing economies. In Africa, for instance, there are terrible phone lines and very few Internet users using PCs. The availability of phones capable of communicating SMS, short message service, will boost Internet usage there greatly. By 2005, we expect that 60% of the people on the Internet will be mobile some of the time.
