A friend recently asked me this question in an email to help him with a project for school. I thought my reply was worthy of a blog post and will hopefully warrant some discussion in the comments
This is a really interesting question. I may be a bit biased considering that I own an e-commerce company, but I see a huge amount of growth ahead for e-commerce businesses. In particular, I see the growth potential in e-commerce as very high relative to the growth in other online and offline businesses.
In fact, I think we’re already starting to see evidence of this now. The economy – particularly in the US – is struggling with jobless rates and foreclosures at all time highs, and major financial institutions and automotive manufacturers struggling to survive. Despite all of this, e-commerce sales this past holiday season dropped only 3% compared to last year. I say “only” because many physical retailers saw drops in the 20% – 30% range (see Mike’s post and this Reuters article for specific numbers). We’re a little unique because we’re only just entering our third year, but we grew approximately 120% last year! I don’t think very many offline retailers experienced this type of growth.
When you factor out offline businesses and just compare e-commerce to other online business models, I think it looks even more promising. Why? Simply because I believe it’s the best way to make money online. While all of the social networks and ad companies struggle to find revenue models and become profitable, an e-commerce company has a relatively simple formula: buy a product for X and sell it for 2X. Scaling is relatively easy and a large part of the workforce in any region in the world can handle packing/shipping, customer service, inventory management, etc (which is why I give e-commerce the slight advantage over a service industry like web design, but it’s very close and can certainly be argued either way).
But when it comes to the “web 2.0” companies, I see the funding drying up and there’s definitely some potential for another internet bubble. How it ever became customary to fund companies with no plan for monetization is beyond me. For every Facebook or MySpace (which are still having trouble being monetized by the way) there are thousands of sites that get seed money from Angels or VCs and never ever return a dime. According to Crunchbase, Twitter has raised a total of $20M in Series A and Series B Venture Captial. And to the best of my knowledge (and Wikipedia’s), Twitter has never earned a penny of revenue! Think about how absurd that is for a second. Yes, users do have value, but only if there is a plan to utilize those users to bring in revenue…and obviously said revenue should exceed the expenses for programmers and servers and any other expense, or you have a problem. For the most part, I don’t see the struggles to monetize social sites changing any time soon. If Facebook can’t figure it out, I don’t give much hope to the rest of us. Consumers don’t particularly like getting slammed with ads or having their demographic information sold to ad companies, nor have they really embraced pay-per-use subscription models for the most part (I’d actually argue that web 2.0 has conditioned everyone to expect everything on the web for free, which further hurts future businesses that do try to charge).
But pretty much everyone shops online. It has become accepted by the majority of the population as a perfectly normal way to buy things. This is an immense advantage. I don’t know of many e-commerce sites that have received large sums of outside VC or Angel funding, but that may change. Or at least, they will have the opportunity for that to change (whether they want or need the money is another story). I think that because of this, you’ll see a lot of the web’s innovation come from e-commerce companies, simply because they are the ones who can afford it. They have profits that they can re-invest. Developers from failed social networking companies will find homes within the e-commerce world and see opportunities to bring those social features to shopping. Used in conjunction with a profitable e-commerce site, all of a sudden the social web becomes super profitable.
Then there’s just the natural growth irrespective of the economy and the competition. E-commerce is still a relatively new industry. Over time, as the technology gets better and the companies improve their business processes, people will become even more comfortable shopping for things like clothes and groceries that are currently still mostly purchased offline.
Now, I also think that along with this you’ll start to see some of the “old-school” e-commerce companies really struggle (again, my personal opinion is that this has already started). The ones who have dominated B-list and C-list industries since 1999 will all of a sudden face new competition as the opportunities in e-commerce become clearer. Like in any competitive industry, if they aren’t willing to invest in staying on the cutting edge, they will fall behind and eventually go out of business.
In short, while the economy as a whole may be struggling, I think the e-commerce world is one of the places you’ll continue to see high growth and opportunity.