The Electronic Commerce, or e-Commerce, industry is one of the
most dynamic 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 (46.4% of their total
shipments), followed by merchant wholesalers (24.6% of their total
sales). These two segments make up the business-to-business
Retailers and service providers generated just 4.4% 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 90% 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 2010,
as published in May 2012.]
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. It is now considered a must-have.
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. Moreover,
trends indicate that consumers prefer mobile browsers when
shopping, searching and entertaining themselves, while preferring
apps for navigation and acquiring information.
comScore sees global mobile Internet users increasing very rapidly
and surpassing desktop Internet users by 2014. U.S. smartphone
users were up 47% from March 2011 to March 2012 and multi-device
ownership (of smartphones, tablets and so forth) was up 308% during
the same time period. Other countries with significant Internet
traffic through non-computing devices include Singapore, the U.K.,
Japan, Australia, Canada, Spain, India, France and Brazil.
Therefore, this estimate looks reasonable.
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 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. This is the reason that although 79% of
smartphones and tablets were used for shopping-related activities
in the first quarter, 42% of tablet users actually purchased
something using their devices versus just 29% for smartphones
However, smartphones were the preferred device for store location,
coupon redemption and such other "ön-the-go" activities. Given the
unique advantages of smartphones and tablets, it appears that they
are working in conjunction to boost total online retail sales.
The Android OS currently leads the U.S. mobile segment, according
to comScore, with a 51% market share. The iOS is second with around
26%, followed by BlackBerry with around 12%. Going by new purchase
trends in the first quarter (Android 58%, Apple 26% and Blackberry
10%), it looks like iOS will hold its own position (or grow
slightly) in a growing market, with Windows also growing slightly
and Android gaining hugely at the expense of Blackberry and smaller
Another area moving very rapidly to an online model is
entertainment (in the form of books, music, videos and games).
Since reading books, listening to music, watching videos and
playing games can be done using any 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
On the other side of the fence, online versions of books, music,
videos 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, such as Levis, 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 Kindle Fire was built to help not only book sales,
but also sales of all kinds of other digital content, including
songs and movies.
It is hard to tell exactly how this market will shape up given the
recent launch of
) Nexus 7 and
) Surface. We are inclined to think that all these players will
continue focusing on what they do best, so we do not see Amazon in
any danger right now.
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
This kind of business is very competitive, since it has very low
barriers to entry. As a result, not just Amazon and Google, 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. Considering the
prospects, we don't see the platform as a major contributor to
e-Commerce sales in the near term.
Another concept that has come up recently can best be termed social
marketing. This is a concept popularized by
), 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.
Facebook's 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
Another social networking site that has seen phenomenal growth
since its launch in 2009 is Pinterest. According to comScore,
Pinterest is currently the third largest social networking site in
the U.S. (behind Facebook and Twitter), having attracted 10 million
monthly unique visitors by February 2012. Forbes says the monthly
unique visitors touched 20 million this month (from 1 million a
year ago). While the company has yet to get into the advertising
business, its users are already making money and engagement
compares favorably with Facebook.
ComScore has provided first quarter 2012 retail ecommerce sales
numbers. The firm estimates that sales increased 17% from the first
quarter of 2011, representing the sixth straight quarter of
double-digit growth. Moreover, it estimates that total retail sales
are up 10% from the first quarter of 2008 (pre-recession), compared
to a 42% increase in e-Commerce sales.
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. There is also another emerging
trend called "showrooming," where consumers look at products in
brick and mortar outlets and then complete the purchase online.
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 4.9% of total retail sales in
the first quarter, according to the quarterly retail trade survey
by the U.S. Census Bureau. Forrester Research estimates that this
share will go up to 11% by 2015.
Amazon remains the leader by far based on average monthly unique
visitors (UVs). The e-Commerce giant, leveraging on its Prime and
Kindle platforms, saw a 29% increase in UVs according to comScore.
Although Apple remains a distant second, its UVs were up 25%,
), which saw UVs up 18% and
), which saw UVs up 9%.
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. 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 is expected to grow significantly, with 11.8 million new
However, another report by PhocusWright mentioned that when online
penetration of the travel market reached 35% in any country, growth
rates were likely to slow down 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. The FIS Mobile Wallet from
Fidelity National Information Services Inc.
) 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 purchase. While QR code payments (as the technology is
called) have already been made by half the smartphone users in the
U.S. (report compiled by eMarketer), the usage was mainly out of
curiosity. It appears that the safety of the system comes at a
price, which is the time it takes to complete a transaction. This
is the reason that Google is still betting on its digital wallet.
Google digital wallet allows a customer to make a payment by waving
his mobile phone over a POS terminal. While the near field
communication (NFC) 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
Adoption of the device, although it is some ways 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, the cost of POS terminals is
a downside to the system that could easily turn away retail
partners. But this is an evolving area, and much could change over
the next few years.
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.
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 "Generation Y" (Gen Y) consumers
will become new banking customers by 2015.
A study on banking.com shows that 48% of Gen Y consumers are
already using online banking services. Moreover, their preference
for online banking is so high that around 30% said they would
consider switching financial institutions if they did not provide
the service. Both online and mobile banking by Gen Y largely
consists of checking account balances and transferring funds,
although they also like to pay bills on the platform.
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 topmost 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 U.S.
General 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 recently had its IPO, is the largest player in the
display ad segment with a 14% share in 2011. Google is close on its
heels with 13.8%. eMarketer estimates that Facebook and Google will
remain neck-to-neck this year, with Google pulling ahead in 2013
and widening the gap in 2014. Yahoo, which was in third position
with 10.8% share in 2011, is expected to see a steady decline in
sales and market position. Microsoft and AOL, while growing
revenues are expected to maintain market share.
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. While
) 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
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
The company has a huge cash balance that we were concerned was not
being put to the best use. However, Google 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 Corp, whose 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.com and eBay.
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).
) 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
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 pressuring 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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