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Kenneth C. Laudon is professor of information systems at Stern. A graduate of Stanford University and Columbia University, he joined Stern’s faculty in 1982. Since then, he has taught courses on e-commerce, managing the digital firm, IT and corporate strategy, and the links between technological developments and society. Laudon is the author, or co-author, of a dozen books, including the most widely adopted textbook on Management Information Systems in the world. His latest volume, E-Commerce: Business, Technology, Society (co-authored with Carol G. Traver) was published in January by Addison-Wesley. In this book, Laudon uses case studies to chart the development and spread of digital commerce in the global economy, primarily by examining cases of U.S.-based Internet firms. Two years after the Internet bubble burst, Laudon believes that the information technologies that inspired the .com mania of the late 1990s continue to influence businesses large and small. And while the seeming obsession with e-commerce may have subsided somewhat, he believes the trends and forces that underlie it are as potent as they were when the NASDAQ soared above 5000. In an interview with Sternbusiness, Laudon discussed these and other provocative issues raised in his book. Sternbusiness: Why did you decide to write this textbook? Ken Laudon: I taught an e-commerce course for three years at Stern. It’s a difficult course for most professors because there is no single discipline behind it. E-commerce is a technology story, it’s a marketing channel story, it’s obviously about finance, and it is also obviously about management and entrepreneurship, not to mention legal and social issues. When a publisher asked if I would like to write a book about this material, I thought it would be a good way for me to deepen my knowledge of the field and help my students understand a very complicated story. SB: Did you believe there was a dearth of good material? KL: There were no solid textbooks, and materials were spread all over the Web. And much of what had been written about e-commerce was not well grounded in empirical fact. Many proponents of e-commerce seemed to be speaking a private language, filled with hype. Writing this book was an effort to clarify the discussion of e-commerce for myself, my own students, business professionals and, ideally, for other professors. As it ended up, the book is a critical but sympathetic essay on the recent past of e-commerce, and a hopeful but well-grounded description of the near term future of e-commerce. SB: Many textbooks rely on case studies. So does this one. Was that a difficult approach given the short history of e-commerce companies, and the failures of many prominent e-commerce companies? KL: The book is extraordinarily case driven. There are 14 chapters, and there are five cases in each chapter, and an additional 16 “e-commerce in action” cases that provide detailed financial and strategic analysis of e-commerce firms. For our case studies, we only chose publicly held companies and relied heavily on SEC data to analyze the operating results and balance sheets over a three-year period. We use a very commonsensical, straight-forward analysis with these companies SB: Do you differentiate between stages of development in e-commerce? KL: Yes. The book identifies two periods: E-commerce I and E-commerce II. Our book is about E-commerce II. E-commerce I covers the period from 1995 to March 2000. It was characterized by explosive growth of Web sites, the formation of thousands of e-commerce companies, the spread of new technologies, new business models and strategies. There was also new corporate and financial behavior that challenged existing legal and social norms, especially in the areas of intellectual property, privacy and financial reporting. For economists, this period was very exciting. They saw these developments as the harbinger of nearly perfect markets. And we began to hear the now familiar buzzwords like “friction-free markets,” “perfect information,” “price transparency,” “disintermediation,” and “first-mover advantages.” SB: These predictions seemed to break down first with the online, pure-play retailers. What went wrong? KL: There were basically two reasons why it didn’t work in retail. The first was that the costs of building a national brand and the information technology infrastructure were just so much higher than what everybody figured. On the revenue side, the numbers of customers willing to pay reasonable prices was greatly overestimated. So these companies ended up with costs that far exceeded revenues. And the whole thing ran for five years because of one of the largest investments of venture capital in American history. Much of that investment – about $200-300 billion – is now gone. SB: Is all the news from E-commerce I bad? KL: No. It was a tremendous technological
tour de force, and the e part, the electronic or digital part, really
did work, and continues to work. There’s a lot of long-haul fiber-optic
cable installed, a lot of computing horsepower deployed, and a huge
global network. These are lasting legacies, and E-commerce II will
use these assets to great advantage. Secondly, this first period represented
a tremendous outpouring of entrepreneurial and innovative behavior.
This period created entirely new distribution channels. In the retail
area, it is worth about $60 to $70 billion a year. And on the industrial
side, it’s worth about $900 billion annually. Taken together,
that’s about 10% of the GNP that courses over the Internet each
year, and it continues to grow. Recent studies put the impact of the
Internet on productivity at about 1/4 to 1/2 a percent that in a decade
will translate into several thousand dollars in additional income
for the average American. SB: And what defines E-commerce II? KL: E-commerce II starts in January 2001. It is being defined by existing name brand companies who have the brand, the customer lists, the business relationships, and the supply chain and fulfillment infrastructure to operate successfully in a digital environment. These firms using the Internet infrastructure in combination with their existing expertise stand a chance to make real money in e-commerce. In retail, we’re talking about Land’s End, L.L. Bean, Victoria’s Secret, Wal-Mart, Sears and J.C. Penney. SB: What did they learn from the early period? KL: Well, at first many of them were just fearful that if they didn’t move quickly, they would be left behind. Some of them then tried to get into it directly and failed. Wal-Mart had a series of failures. But by 2000 they became convinced that this was a fast-growing channel, and that they should make substantial investments. When they saw the dot-coms fail a lot of senior executives became more and more confident that they could move some of their catalog operations and other direct sales lines onto the Web. Wal-Mart and Sears were advantaged because they had warehousing and distribution systems that could be leveraged to the Web. Lands End and L.L. Bean were advantaged because they had an existing order entry and fulfillment operation. In other words, established firms could leverage their existing businesses to the Web for a much lower cost than a startup could build a parallel infrastructure. SB: So far we’ve spoken mostly about retail. What other sectors are important and have survived E-commerce I? KL: Services will be strong on the Web. Travel services, like Travelocity and Expedia are both in the book, and they both either break even or turn small profits. These businesses are beginning to scale – as traffic picks up revenue grows faster than costs. That has proven to be a very successful business model. Another area is career services like Monster.com and Hotjobs.com. Finally, financial services companies like E-Trade are likely to be profitable. And there’s always E-Bay. SB: Are investors and analysts still valuing the surviving e-commerce companies using different criteria? KL: Yes. Yahoo! comes to mind.
Now there’s a company that was profitable, then experienced some
losses, and its price-to-earnings (P/E) ratio is still pretty high.
But people are willing to pay that high price. For many of these companies,
the stock prices have fallen sharply, there are still no earnings,
but the companies have consolidated their positions in the market,
acquired competitors, and are developing strong brands. WebMD comes
to mind. There is still a significant growth premium that people are
willing to pay for these companies. SB: So what comes after E-commerce II? KL: There is no doubt there will be an E-commerce III, but for now until 2005 E-commerce II will focus on making the technologies and business models developed in E-commerce I into profitable enterprises. We have to get on with the fact that our economy is becoming a digital economy with digital firms and digital marketplaces, and we will spend the rest of this century working that out. There will be spurts of growth driven by new technologies, and there will be contractions. For now we can safely say that we have a better understanding of digital technologies, we understand better the business risks and opportunities, and we have begun to focus more on how to make these online ventures profitable. We did learn from E-commerce I, admittedly at great cost. SB: Many have argued that the delays in rolling out broadband Internet connections to homes and offices has stunted the development of e-commerce firms. Do you agree? KL: I think that that argument doesn’t hold any water. That would presume that the failure of many online retail and service firms was caused by absence of bandwidth, especially in the last mile. But for the most part, the technology worked. That was one of the beauties of the Web that it could scale so easily by adding bigger servers and bigger pipes. But in certain sectors where bandwidth demands are particularly high, you could make that argument – in content for instance. For example, we might have seen an earlier rollout of Hollywood feature films available through pay-per-view over cable modems or even DSL. AOL Time Warner, Disney, and Vivendi are building alliances with cable firms for Internet delivery of feature films and they are currently held back by the slow growth of home broadband connections. But outside of the content and entertainment areas the solution to the problems of many e-commerce companies isn’t more bandwidth. The solution is to charge people more money for what they buy on the Web so companies can cover their costs, and to keep reducing costs by building infrastructure for supply chain and fulfillment operations. SB: Has student interest in e-commerce declined? KL: I’ve been here for 20 years, and I’ve always taught digital commerce and e-business. We just didn’t call it that. In the IS Department we have always taught about how digital technologies were going to change the way people run companies and markets. We had an explosion in demand in 1998 and 1999, and business schools responded by rapidly expanding courses and whole new programs. Enrollments at some schools may be lower now than these early, unusually high enrollments of the last two years, but from what I’ve seen around the country, enrollments in e-business, e-commerce, and management information systems courses are stable, or perhaps slightly up because student populations are up. Look, if you want to talk about what’s happening in the next century, you have to talk to students about digital technology – especially if they want to work for a Fortune 1000 company. It is those companies that are building E-commerce II, and they want to hire managers who know what this is all about. SB: What do you want people to take away from this book? KL: They learn that we just lived through the first 30 seconds of the e-commerce revolution. It was a hell of a ride! There’s more to come, a lot more, but probably along a more reasonable development path of fast growth but not speculative growth. People learn there are many successful (i.e. profitable) e-commerce firms, and many more that are close. Significant permanent structural changes have occurred in some industries, and more industry change will occur in the next five years. And people learn once again that it can be better to be a follower – even a slow follower – rather than an entrepreneur. People learn to look at the numbers when evaluating the long-erm survivability of firms. And as Enron taught us, our book also teaches people to look at the accounting rules and business practices that generate the numbers. Kenneth Laudon is professor of information systems at NYU Stern.
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