The Electronic Commerce, or e-commerce, industry is one of the
fastest moving sectors of the economy. The industry is evolving
very rapidly, so data collection and evaluation are particularly
difficult. Consequently, one has to rely largely on surveys by both
government and private agencies.
According to the U.S. Census Bureau, the manufacturing sector is
the largest contributor to e-commerce sales (42% of their total
shipments), followed by merchant wholesalers (23.4% of their total
sales). These two segments make up the business-to-business
Retailers and service providers generated just 4.0% and 2.3%,
respectively, of their revenues online, a slightly higher
percentage than they were in the prior year. The Bureau categorizes
these two segments as business-to-consumer.
The business-to-business category makes up 91% of total e-commerce
sales, with the balance coming from the business-to-consumer
category. The fastest-growing segments were manufacturing and
[All the above data from the U.S. Census Bureau relate to 2009,
as published in May 2011.]
Since the industry is in evolution, the drivers are varying, or
changing flavor. For instance, the initial push came from the time
savings and convenience of online transactions. To this were added
the benefits of comparison shopping and personal recommendations.
As technology required for personalized recommendations developed,
became more available and its benefits more evident, most
"e-tailers" started adding the feature until it is now considered a
Today, the biggest driver of growth in the industry is the adoption
of smartphones, tablets and other mobile Internet devices.
Smartphones continue to lead the way all over the world, although
tablets are growing very fast, followed by other devices.
comScore estimates that non-computer Internet traffic in the U.S.
was 6.8% in August 2011, with smartphones accounting for two-thirds
and tablets accounting for most of the rest. Other countries with
significant Internet traffic through non-computing devices include
Singapore, the U.K., Japan, Australia, Canada, Spain, India, France
and Brazil, in that order.
In the fourth quarter of 2011, over 47% of U.S. mobile phone
subscribers used smartphones to connect to the Internet, compared
to 31% at the start of 2011. Recent market research indicates that
price comparisons, product reviews and product availability are
checked online through mobile phones roughly a third of the time.
Around 20% of consumers even check prices at rival websites while
they are in a store, and a third of these shoppers are diverted.
While smartphones are extremely convenient when on the move,
tablets have several advantages of their own. In fact they are a
boon to the e-commerce industry, since the larger screens offer
better visibility of online stores and merchandise, thus
facilitating purchases. In an earlier study, the Etailing Group
determined that 68% of tablet owners surveyed made an online
purchase, compared to 48% of smartphone users. Given the unique
advantages of the devices, it appears that they are working in
conjunction to boost total online retail sales.
The popularity of the iOS-based devices has given the OS the
largest market share, although Android is hot on its heels.
Digital content and subscriptions, jewelry and watches, consumer
electronics, toys and hobbies, and consumer software were the
hottest-selling items in the fourth quarter of 2011, with each
category growing at least 18% from the year-ago quarter.
Another area moving very rapidly to an online model is
entertainment (in the form of books, music, video and games). Since
reading books, listening to music, watching video and playing games
can be done using the device connecting to the Internet, the
barriers to direct consumption are rapidly evaporating. Therefore,
previously unconnected electronic goods, such as TVs and game
consoles, are now being modified to enable connectivity.
On the other side of the fence, online versions of books, music,
video and games that can be downloaded and consumed on a
traditional computer or any other connected device are becoming
available. Since the shift in consumption patterns is resulting in
multi-functional electronic gadgets that are no longer optimized
for a particular activity, there is a great drive to develop
technologies that could improve the quality of each experience.
The changing environment where consumers are increasingly connected
have prompted retailers to develop new sales strategies. While many
of the big traditional retailers and companies with well-known
brands have opened their own online stores, others (including many
smaller players) are increasingly tying up with websites like
Amazon has for some time depended on the Kindle platform to boost
book sales. But considering the growing competition from tablets,
) iPad, the company decided to broaden the scope of the device.
Therefore, the recently launched Kindle Fire will not only help
sales of books, but also all kinds of other digital content,
including songs and movies. Future versions of the device may even
be on par with the iPad.
Another recent development includes the sale of discount coupons,
) appears to be the forerunner. Groupon and its closest rival
LivingSocial offer discount coupons with a very low shelf life from
local players looking for sales. The company offers huge discounts
to attract buyers and collects a percentage of the sales thus
generated. This kind of business is very competitive, since it has
very low barriers to entry.
As a result, not just Amazon and
), but also a host of other much smaller parties have started doing
business in this format. Technology investments are also required
in order to serve customer needs effectively. It is expected that
Groupon's recent IPO would enable the company to invest in
much-needed technology and thereby differentiate itself.
Another concept that has come up recently can best be termed social
marketing. This is a concept being tried out by Facebook, the most
popular social networking site in the world. Currently, around half
of the U.S. population has a Facebook account and this is the
potential that the platform will initially address.
SocialStore, as it is called uses MarketLive's Intelligent Commerce
Platform that enables marketers to display product information,
promotions/discounts, shopping carts and check-out options. Both
comparative shopping and comparative pricing are possible. The
basic advantages of the system that are currently being touted are
that it allows easy brand building, creates meaningful commercial
relationships and makes use of account-holders' social connections
to attract new buyers.
A recent study by the E-tailing Group reveals that of 100 U.S.
consumer product merchants with e-commerce websites surveyed, 98
had a Facebook account. Around 90% of these redirected the user to
the merchant's own page, 96% had loaded brand-building videos, 56%
had product-oriented videos, 44% had store locators and 38% had
ComScore has provided fourth quarter 2011 retail ecommerce sales
numbers. The firm estimates that sales increased 14% from the
fourth quarter of 2010, representing the fifth straight quarter of
Moreover, total retail sales in the fourth quarter were 68.2%
higher than the third quarter of 2009 (the bottom) and 62.5% higher
than the second quarter of 2008 (pre-recession).
The rapid growth in online retail sales in the U.S. will continue
to come at the expense of brick-and-mortar outfits. ComScore adds
that this increase is mainly on account of the lower prices and
convenience of online transactions.
Free shipping remains a major lure, with an e-tailing group survey
showing that 73% of customers wanted unconditional free shipping,
with 42% agreeing that free shipping would be welcome when they
reached a certain spending level. Overall, 52% of purchases in the
last quarter included free shipping, compared to 49% in the
Total retail e-commerce is currently 4.6% of total retail sales,
according to the monthly retail trade survey by the U.S. Census
Bureau. Forrester Research estimates that this share will go up to
11% by 2015.
The U.S. Commerce Department expects international travel to the
U.S. to continue over the next few years. Visitor volume is
currently expected to increase 6-8% a year from 2012 to 2016,
leading to a 49% increase in the number of users during the period.
Visitors from the Middle East are expected to be the
slowest-growing (29%). South America, Asia and Oceania growth rates
are expected to be comparable at 83%, 82% and 82%, respectively.
The fastest growth is expected to come from China (232%), South
Korea (200%), Brazil (150%), Russian Federation (139%) and India
(94%). Travel and tourism is one of the country's strongest
industries, contributing a trade surplus in each of the last 20
According to a report by PricewaterhouseCoopers, the improving
economy will result in a 1.8% increase in demand for hotel
reservations this year, which along with a 0.5% increase in hotel
supply will lead to higher occupancy rates (60.9% expected in 2012
compared to 60.1% in 2011). This will also raise hotel rates by
eMarketer estimates that online sales of leisure and unmanaged
business travel in the U.S. increased 8.5% in 2011 (2012 estimates
not available yet). eMarketer believes that the increase in
spending was mainly on account of higher airfares, hotel rates and
ancillary fees, which increase the aggregate dollar amount of
online bookings. Booking through mobile devices was expected to
grow significantly, with 11.8 million new users.
However, another report by PhocusWright mentioned that when online
penetration of the travel market reaches 35% in any country, growth
rates are likely to slow to single-digits. The research firm
mentioned that only the U.S., U.K. and Scandinavia had reached this
level of penetration and most other markets across Europe, Asia and
Latin America would continue to show good growth rates.
With practically all market research indicating solid growth in
e-commerce sales over the next few years, online players are vying
with each other to come out with convenient and secure payment
solutions. Perhaps the most recent was the FIS Mobile Wallet from
Fidelity National Information Services Inc.
). The solution is basically a bar code reader that feeds
information related to the purchase into the user's smartphone and
uses it as a medium to transfer the information to the cloud.
Online purchase of merchandise is also possible. The solution
provides maximum security, since the transaction is carried out
entirely in the cloud through the retailer's and banker's
applications, and personal information is not shared at the time of
Google's digital wallet allows a customer to make a payment by
waving a mobile phone over a POS terminal. While the near field
) technology used in the system is already in use in some parts of
Europe, the concept is relatively new to the U.S.
Other than convenience, the main attraction being highlighted is
the security of the payment channel, since neither the customer nor
the retailer would be recording the personal information related to
the customer. Adoption of the device, although it is some way off,
will have a remarkable effect on the volume and value of mobile
transactions, since it should increase the percentage of
higher-value sales through the mobile platform. However, cost of
POS terminals could turn some merchants away, particularly if the
FIS solution catches on. However, this is an evolving area and
customer relationships will be key to success going forward.
The digital wallet was a great improvement over eBay's existing
payment system, Paypal, which takes away a significant percentage
of earnings from the retailer or person providing the service.
Moreover, although the system is itself secure, there is always a
security risk for a buyer not used to dealing with Paypal, since it
requires that you provide personal information.
Traditional payment systems (from banks) are also being adapted due
to the realization that people are now spending more time online.
Banks therefore have stepped up their investments in related IT.
The results of a survey by the American Bankers Association (ABA)
show that U.S. consumers are increasingly going online. More than
36% of consumers questioned in the middle of 2011 felt that the
Internet method of banking was their most-preferred, a significant
increase from 2009, when 25% felt that the Internet was their
Moreover, Internet banking is the most preferred for age groups
below 55 and the second most preferred for age groups above that.
Preference for ATMs continues to decline.
eMarketer reported that a Novantas study showed a similar shift in
customer preferences. According to that study, the percentage of
customers transferring funds online went from 34% in 2005 to 67% in
2010; product research through the Internet went from 46% to 77%,
while balance checking went from 44% to 76%.
According to an Emphatica study, mobile banking has not picked up
sufficiently in either the U.S. or Canada due to security-related
concerns. However, an analysis by Deloitte shows that mobile
banking could become the most-preferred banking method by 2020. The
study estimates that 20-25 million "Gen Y" consumers will become
new banking customers by 2015.
It is believed that high smartphone penetration, higher income
within this group and greater digital sophistication will drive
increased demand for mobile banking services. Since mobile banking
is expected to be the most cost-efficient for banks, investment in
technology to improve and expand mobile banking services is likely
With online transactions expected to boom over the next few years,
the top-most concern remains security. While banks will spend
significantly on secure payment systems, hackers are expected to
have a field day, largely targeting the flood of customers going
online. Last year saw a huge increase in security breaches,
something that may be expected to continue.
Alternative payment systems will continue to gain popularity. While
some of these payment systems, such as eBay's PayPal have been
around for a while, other systems, such as Google's digital wallet
and the FIS Mobile Wallet, are still in the making. Alternative
payment systems never really gained momentum in the past because of
the low volume of transactions. However, as online transactions
continue to increase, many more such systems could suddenly become
We expect mobile security to become a major focus area for
technology companies, since this is the stumbling block to payments
through the mobile platform (currently just 2% of U.S. online
spending). Additionally, hackers continue to multiply and data
breaching has become commonplace.
The U.S. online advertising market has seen some very strong growth
in the past few years, despite the recession that impacted the
entire economy. This year, the market will benefit from the major
national election and the summer Olympics. eMarketer estimates that
the market will grow 23.3% in 2012 to $33.8 billion, compared to
the 23.0% growth in 2011. However, growth rates are expected to
drop over the next few years: 17.7% in 2013, 13.5% in 2014, 8.9% in
2015 and 7.8% in 2015.
Falling growth rates notwithstanding, the share of online ad
spending in total ad spending is expected to increase from 20% in
2011 to 31% in 2016. By contrast, TV ad spending is expected to
drop slightly from around 38% of total ad spending in 2011 to less
than 37% in 2016. Print is expected to decline even more
significantly, from 22.6% in 2011 to 16.4% in 2016.
The current strength in online advertising is coming primarily from
the growing popularity of the display format. Of all the forms of
online advertising, display (including video, banner ads, rich
media and sponsorships) is expected to see the strongest growth
over the next few years. Also, of all the forms of display
advertising, video and banner ads are expected to grow the
strongest from 2011 to 2016.
Contrary to previous expectations, it now appears that search will
remain supreme throughout, although its share will give way
slightly to video ad spending which will nearly double. The lower
pricing of video and banner ads has made them popular with brand
advertisers, so ad inventories are solid. Another factor favoring
display ads is the proliferation of smartphones, where the smaller
screens make display ads more effective than text ads.
Facebook, which is soon to have its IPO, is the largest player in
the display ad segment with a 28% share.
) is in second position with 11%, followed by
), Google and
) with less than 5% each (comScore estimates).
[There is some controversy in market share numbers provided by
IDC and comScore; we are going with comScore.]
The underlying drivers of growth of the display format are the
continued increase in the number of users, greater propensity of
users to consume online, a growing inventory of advertisements that
serve to lower advertisement prices and the push into display
Search advertising is expected to remain popular, because results
are measurable, and therefore more predictable than other media.
This also makes the market more resilient in recessionary
conditions, since advertisers are more confident about the results
of their spending.
We can strongly recommend very few stocks in the sector at this
point. However, longer-term opportunities abound, as have been
Online travel company
) is in a strong growth market. Consequently, it should continue to
benefit from international expansion and customers moving online.
Domestic growth will likely be slower and mainly driven by the
continued improvement in the economy.
) is a much smaller player with more limited resources, it too
should benefit from these trends. However, expansion in China will
be disappointing, as local players and the government continue to
make operation difficult for U.S. players. Occupancy tax issues are
likely to remain a point of contention and online travel agents
have recently scored a few wins.
The search market is dominated by
), which has seen phenomenal growth rates over the last five years.
The company is a leading innovator, using its engineering talent to
extend its position in the computing platform to the mobile
platform. The company has a huge cash balance that we were
concerned was not being put to the best use. However, it remains
acquisitive, which should further round out its product portfolio,
build on current strengths and help expansion into new areas.
Google's main challenge is the increasing competition from not just
archrival Yahoo, but also challenger Microsoft, who's Bing search
engine continues to gain ground.
A much smaller provider of Internet advertising solutions and
online marketing services,
) should also benefit from the strength in the online advertising
market (particularly display), the recently acquired Dotomi,
international expansion, restructuring actions and strong cash
flows. However, as firms with larger advertising budgets increase
spending on Internet advertising, many of the services performed by
ValueClick could be done in-house. This is a risk of investing in
As far as e-tailers go, the foremost remain
). Amazon's opex has been on the rise and is likely to remain high
through the year, as the company invests to take growth to the next
level. Although we expect the strong revenue growth to continue,
the continued addition to its operating leverage will keep earnings
depressed for some time.
As international sales gain momentum and the shift from offline to
online purchasing continue, margins should respond and trickle down
to the bottom line. However, we don't see this happening in
the next 6 months (which is our long-term investment horizon).
eBay continues to play catch-up with Amazon. The company is
undergoing a metamorphosis, with a new image, new strategies and
technology investments. We expect eBay's results to improve going
forward, driven by its Paypal payment platform. However, Amazon
remains the better play, in our opinion.
Online travel company
) is not likely to do as well as Priceline, as the company will
feel the impact of the TripAdvisor spinoff. Moreover, it has
exposure to the air ticket segment, where competition is on the
rise and airline policies are raising ticket prices. The resultant
decline in air ticket sales is negatively impacting its results.
Meanwhile, competition continues to intensify for
Akamai Technologies, Inc.
), which provides distributed e-business infrastructure services
and solutions. The low barriers to entry are also a concern, since
this is a market adjacency that any large Internet or networking
company, such as Google, Yahoo!, AT&T, Verizon, Cisco or Lucent
could venture into.
Falling bandwidth prices are a pressure on margins, while rising
bandwidth costs are attracting new players. However, broadband
penetration and momentum in online media and entertainment remain
) is second only to Google in the search market, although the
company has not seen much gain in market share. Management remains
focused on the display segment, which should pay dividends if
projections for that market hold good. Yahoo has a leading position
in email applications and is building on this position through
acquisitions and upgrades, which should ultimately help it turn
around. However, monetization of the search alliance with Microsoft
remains behind schedule and there is some controversy related to
its Asian assets, which are the main attraction in the shares.
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