In time, new and old technologies can thrive together

BY HAIM MENDELSON

THE new economy's fall from grace has been spectacular, but e-commerce is not dead -- not by a long shot.

Hype drove too many players too fast, and they lost sight of basic management principles. The e-commerce infrastructure is there. Now we have to build on it.

Let's review the facts. The Bay Area has been a technology and venture capital center for many years. With the rise of e-commerce, it has become a hype center as well. The ``new economy'' was going to replace the old economy at Internet speed, changing everything. Technology and money followed the hype: Venture capital financing of e-commerce and content ventures rose from $650 million in the first quarter of 1998 to almost $2.4 billion in the last quarter of 1999. The NASDAQ index more than doubled, and the Bloomberg Silicon Valley Index almost tripled in the 15 months since the beginning of 1999.

With dot-coms failing in an increasingly tight funding environment, the last nine months of 2000 saw the NASDAQ index lose half of its value. This year, the NASDAQ lost another 18 percent, and venture capital financing of e-commerce and content ventures fell to $320 million in the first quarter of 2001.

Just as the meteoric rise of e-commerce was grossly exaggerated, so is the news of its death. Internet technology is alive and well, helping companies to interact with customers, provide better solutions and improve operational efficiencies. As with the adoption of any new technology, this is a slow and error-prone process. Making technology work is more than slick marketing, and consumers are loathe to change their habits -- even when the benefits seem obvious to technology enthusiasts. And, more often than not, new technology augments rather than replaces the existing one.

Consider the transition from AM radio to the technologically-superior FM. After World War II, it was clear to industry participants that FM represented the future of radio. The number of FM radio stations tripled between 1946 and 1948, and the industry was bracing for a quick transition into FM. And yet, consumers were unwilling to give up their favorite AM stations -- or pay an extra $15 for a dual AM-FM receiver. Consumers were also unsure which standard would prevail. And while FM was technically superior, its advantages were not meaningful for most people. By 1949, the FM radio hype lost steam and the number of FM stations started to decline while AM continued to rise.

Ten years later, the development of higher-quality recording made the advantages of FM apparent to the average consumer, increasing its adoption rate. It took FM radio 40 years to overtake AM. The superior technology was ultimately adopted, but the process was long and treacherous. And, in spite of the victory of FM, AM radio has not vanished, operating alongside FM.

The lesson? E-commerce will prevail where it has a clear edge or where it can evolve along with existing technologies. While technology can change at ``Internet time,'' people don't change their habits as fast, and they require a compelling reason to do so.

CONSIDER online grocery. Ordering groceries online requires advance planning and waiting at home for delivery. Pure-play online grocers like Webvan got ahead of their market. At the heart of Silicon Valley, it seemed obvious that there would be sufficient demand for its friendly, time-saving service. Yet, adoption was slow, and the company -- locked into huge infrastructure investments, driven by the assumption of fast adoption -- had to shut down.

The demise of Webvan does not mean online grocery is forever doomed. Ordering groceries online is the right solution for some people, for some products, some of the time. The solution has to match the adoption rate, with a gradual increase in the number of people changing their behavior. A younger generation, seeking convenience, will be met by customer-serving grocers in a decades-long dance of service meeting needs, as online and offline options evolve side-by-side.

When the benefits are compelling and the service is targeted to the right customers, people do switch. For example, online trading has forever changed the brokerage industry. Because the entire trading process can be completed online, it provides compelling benefits to consumers. The combination of fast execution, low-cost and rich information increased the speed of adoption of online trading. The service was targeted to technology-savvy, self-directed individuals and became a tremendous success. The percentage of individual trades submitted online rose from 8 percent in 1996 to over 30 percent in 1999 and 2000. In spite of the market decline and reduced trading volumes in technology stocks (which are often traded online), more than a quarter of individual trades still took place online in 2001.

Along with the adoption of online trading, many investors will insist on having multiple ways to trade. Charles Schwab's ``Clicks and Mortar'' strategy recognized early on that the combination of branch offices, telephone and online trading is more powerful than either online or offline alone. Branches reinforce the brand, breed trust and enable customers to reach Schwab on their own terms.

For all the hype, e-commerce still accounts for just above 1 percent of retail trade in the United States. That's not bad for a technology that is just being commercialized. The foundations have been laid; Webvan taught us a useful lesson. Clearly, e-commerce has plenty of room to grow -- with or without the hype.