By CHRIS NUTTALL and RICHARD WATERS  
10 June 2004
Financial Times

Richard Waters and Chris Nuttall ask whether this is more than merely dotcom bluster. Broadband pushes the buttons. Executives at eBay, the internet auction site, have taken to displaying a provocative chart when they speak at public events. It shows a Dollars 1,900bn global market of goods that do not fit well into the traditional retail system, because the items are secondhand, represent the end of a product line or are in scarce supply.

"In a sense, we think that entire market could be available on eBay," says Bill Dobb, head of the US company's international operations.

A similar outsized ambition is brewing at Yahoo, the internet portal company. "We're a global network, we have a great brand globally," Terry Semel, the former Hollywood mogul who has presided over a resurgence of the dotcom pioneer, told analysts last month. Yahoo's strategy "is about taking a bigger share globally", he said.

Yahoo now measures itself against the worldwide online advertising market. It says it accounts for about 15 per cent of the market - and aims to raise that share.

Is another bout of American dotcom hubris in the works? If so, any internet bust would play out on a much bigger international stage than the 2000 collapse that brought an end to the first burst of growth of dotcom companies.

There are good reasons, though, to think that this latest flourish of US dotcom ambition will prove more resilient.

That should ring alarm bells at rivals around the world, whether they are fledgling e-commerce companies or traditional retailers, which are turning increasingly to the internet.

For one thing, the claims of companies such as Yahoo and eBay are more than mere bluster. Recent experience bears out some of the grandiose promises of the late 1990s about the global potential of selling to consumers over the internet.

At eBay and Amazon, the US online retailer, international revenues are on track to eclipse domestic sales soon and the international businesses of all the leading US internet companies are booming (see chart). eBay already claims to be the biggest e-commerce site - measured by the value of goods sold - in a dozen countries, from the UK and Germany to Argentina and South Korea.

US companies now stand on the verge of the next big online market, and one that is poised to become global even faster. Google and Yahoo - with Microsoft in hot pursuit - dominate the internet search business. Google distributes its search results in 97 languages, often through partnerships with local internet companies, and gets more than half its traffic from outside the US.


The contextual advertising, which is displayed alongside the results of internet searches, is in some ways closer to e-commerce than it is to traditional branded advertising. By charging only when users click on the advertisements, the search companies are really selling business leads. It is not a big step for the search companies from this "per click" pricing to sharing in the actual transactions that result.

Barry Diller, chief executive of InterActive and one of the US's most successful entrepreneurs, has assembled a conglomerate with a big foothold in the biggest e-commerce market of all - online travel.

According to Forrester, the research group, selling travel packages and tickets to events will remain among the biggest online businesses for some time. Given Mr Diller's appetite for acquisitions and avowed intent to have an international presence, it is no surprise that the imminent purchase of foreign travel sites is rumoured almost daily.

Behind all of these international ambitions lies a belief that the internet is a scale business. If retailing has been a local affair, selling over the internet turns the old rules on their head. Because they do not need to open bricks-and-mortar stores, e-commerce companies do not face the high costs that come with expansion for ordinary retailers. Instead, much of the investment in a centrally run e-commerce company is fixed.

For Amazon, that has been a central part of its business model: it uses its scale to drive down prices and offers free shipping on its five non-US sites just as it does at home. In its more developed categories, such as books, Amazon already buys globally.

The ability to invest heavily in the technology platform on which businesses such as Amazon are founded is another benefit of scale.

"One of the great myths of the 1990s was that there are no barriers to entry in e-commerce," says Robin Terrell, head of Amazon's UK operations. "But actually building scale is incredibly complex and hard."

The internet search business could turn out to be the ultimate scale business on the internet. Yahoo, for instance, now has 500 engineers working on its search engine. Apart from Google and Microsoft, that is the sort of effort that few others could match.

"The (search) technology is very extensible across languages," says John Marcom, head of Yahoo's international operations. "This definitely is one area where scale is an advantage. Without a big distribution network, it's difficult to invest and expand."

The advertising business that has grown up alongside the search engines could also turn into a common international market. "The value of a click has not at all evolved into a global standard," says Mr Marcom. "But there is no reason to think it won't in the end." eBay and Amazon are competing to use their technology platforms to attract local retailers to their sites. Nearly a quarter of the sales on Amazon's websites is now conducted on behalf of these third-party sellers.

For pure e-commerce companies outside the US, the power of these increasingly global platforms is hard to match. Few have been able to reach the same scale in their own domestic markets or to succeed in building multinational businesses of their own. Those that do are quickly becoming acquisition targets for US companies. eBay has just purchased Germany's largest online classified advertising site for cars, and Yahoo this year snapped up Kelcoo, the French company that was on the way to building a Europe-wide service that allowed consumers to compare the prices of rival vendors.

If similar deals remain scarce, it is largely because of the lack of sizeable companies to buy. "There are very, very few that have broken through to an international scale, where it's worth us thinking about" making an acquisition, says Mr Marcom.

What, then, could go wrong? The ambitions of the US e-commerce multinationals are built on the belief that e-commerce in the rest of the world will unfold in the way it has in the US. "In the last year and a half, we took the business model we have in the US and really started to enforce it" elsewhere, says Jerry Yang, a Yahoo founder.

So far, according to the leading e-commerce companies, it has proved straightforward to export these business ideas. The spectacular overseas growth of companies such as Amazon and eBay suggests they are right.

Hellen Omwando, European e-commerce analyst for Forrester, says the US companies are right to think international e-commerce markets will develop in the same way as the US - but with a time lag of two or three years. "When it comes to e-commerce, there are really no fundamental differences in people's appetite online," she says.

While that may apply to the most straightforward online shopping or auction sites, this "same size fits all" approach does not apply to all aspects of e-commerce. Danny Rimer, a Silicon Valley venture capitalist who has moved to London to back European internet start-ups, says that expansionist US companies have often misjudged the European market.

"Rumsfeld economics doesn't work here," he says. "You can't use overwhelming firepower with a limited number of troops on the ground and no understanding of the locals or the culture and then expect you're going to win and be the market leader."

Mr Rimer's Index Ventures has backed original European internet ventures such as Betfair, the online betting exchange, and Voice over internet protocol (VoIP) service Skype, both of which have turned heads back in Silicon Valley.

It has also invested in Video Island, one of numerous online DVD rental companies that have appeared in the UK, copying Netflix of the US.

"With Video Island, we have tweaked the Netflix model so it is much more effective in a European context. We are leveraging European brands such as Tesco and Comet rather than using our own brand," Mr Rimer says.

"This is what US companies face abroad: educated entrepreneurs who have adapted (US ideas) to the local market in a more resourceful manner and with better-suited local partners."

There is also a question whether new e-commerce markets will continue to develop as they have in the past. The online auction business, for instance, has all the hallmarks of a winner-takes-all market. The largest marketplace enjoys the network effects of having the highest number of buyers, which in turn attracts the largest number of sellers. eBay has ridden that logic to a dominant position in many markets, though Yahoo won out in Japan, the world's second biggest internet economy.

Mr Marcom at Yahoo warns, though: "Just because it has evolved into a winner-takes-all market in developed countries doesn't mean it will in developing countries as well." China, where eBay and Yahoo are battling against local newcomers, could be a case in point.

Given the size of the country and its under-developed infrastructure, China could see a series of regional auction and other e-commerce markets coexist, says Mr Marcom. The US e-commerce companies have yet to show how adaptable their businesses can be.

Another danger is that the companies themselves will make mistakes. There is no guarantee that the US companies' management will have the focus and discipline to follow through on their business plans.

Even eBay, which generally has a successful record in exporting well- honed operating plans, is not infallible. Its withdrawal from Japan, having failed to make inroads against Yahoo Japan, is a case in point. "We weren't as disciplined as we are now in rolling out our marketplace" in other countries, says Mr Dobb of eBay. He says eBay will re-enter Japan and will not make the mistake of "cutting and running" from a key market again.

The lure of fast-growing international markets and slowing growth at home may add to the risk of ill-judged expansion. The number of internet users in non-US markets is likely to grow by about 13 per cent a year over the next five years, twice the rate of US growth, according to Mr Semel of Yahoo.

"There is no question that, as US companies mature in their own market, they have to look for growth outside the US and one of the quickest and easiest markets to enter is Europe," says Mr Rimer. The pursuit of the seemingly quick and easy European expansion, though, has been the undoing of many US companies in the past.

Films, music, television, video games - the multimedia riches of the entertainment industry are all coming to the newer medium of broadband and testing the relationships between content developers and internet service providers.

Yahoo has been trying to persuade ISPs to separate their access and portal functions, and outsource the latter to Yahoo, arguing that ISPs need to subcontract more of the work and concentrate on what they are good at. Only BT in the UK and SBC in the US have bitten so far, but Terry Semel, Yahoo chairman, says: "We intend to do more."

"A lot of these companies are running 1999-style business models, with flashy content and shopping mall-type things," says John Marcom, head of Yahoo's international operations. What they really need, says Yahoo, are really good services in areas such as search, music videos and e-mail and instant messaging - the two most-used internet activities - all things that Yahoo thinks it can provide better than the ISPs.

The Yahoo argument may sway some big telecommunications companies that are not focusing on their internet arms and smaller ISPs that lack the resources to develop their own premium services. But established operators - challenging the likes of Yahoo and MSN - have already developed more sophisticated strategies for broadband that go beyond the advertising-dependent portal model.

Richard Ayers, UK portal director for Tiscali, the pan-European ISP, says: "Portals have mutated into having a much wider scope of relationship with the customer. Our strategy is that we have to provide things to do, not things to read. People want games to play, applications to use, messenger and community services - and the portal is at the hub of that online relationship."

Broadband is taking the relationship to another level. Video-on-demand, music download services and online gaming are a few of the premium services being developed. Screen Digest, a media research firm, predicts that European online entertainment spending will increase from Euros 24m (Pounds 16m, Dollars 29m) in 2003 to more than Euros 1.8bn in 2007.

The promise of a huge leap in revenues is setting the stage for a battle royal. Guy Bisson, Screen Digest's television and broadband analyst, says: "The key is finding a business model. At the moment, the parallels are with the cable and satellite industries where cable is basically a distribution platform that buys in content and satellite is both a distributor and a content creator."

Paul Lee of Deloitte Research believes there is another way to generate revenue separate from content and access: "When you buy a car, a lot of the high-margin stuff comes with the accessories. With internet access, it's the accessories - the add-ons such as anti-virus and spam-protection software - that are generating the high margins for ISPs."

The industry is still in an experimental stage, says one leading ISP financial analyst, with services such as music downloads and digital photo-processing showing promise, while others try and fail to gain traction. "(Germany's) T-Online has tried a service to make you quit smoking and an online diet management application, neither of which was that successful," he says.

Roger Lynch, chief executive of Video Networks of the UK, a 12-year-old video-on-demand company that has just been relaunched with a pay-TV package and a broadband internet access offering, says: "Prices and margins are coming down for access, so the focus is going to be increasingly on competing on the range of services offered over broadband."