The Electronic Commerce, or e-commerce, industry is one of the
most progressive 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.
This places the business-to-business category at 90% of total
ecommerce sales, with the balance coming from the
business-to-consumer category. The latest numbers from the Bureau
suggest that the fastest-growing segments were manufacturing and
retail. [All the above data from the U.S. Census Bureau relate to
2010, as published in May 2012]
Total retail e-commerce was 5.1% of total retail sales in the
second quarter of 2012, up slightly from 4.9% 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.
Recent data from comScore (as compiled in the table below)
indicates that this segment recovered much faster from the
economic downturn and continued to grow at an accelerated rate
over the last few years.
Since the industry is in evolution, the drivers are changing. 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
. In fact, 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. A June
2012 study by comScore on behalf of Paypal revealed that mobile
ecommerce tripled from 3% in the fourth quarter of 2010 to 9% in
the fourth quarter of 2011. The trend is likely to continue since
4 out of 5 smartphone owners used the devices for shopping and
related activities in July (September 2012 study by comScore).
Men and women in the 25 to 44-year age group are doing most of
the shopping on both Android and iOS devices.
While smartphones are extremely convenient when on the move,
tablets have several advantages of their own. In fact they are a
boon to the ecommerce industry, since the larger screens offer
better visibility of online stores and merchandise, thus
facilitating purchases. This is the reason that tablets remain
the device of choice for making online purchases while
smartphones are the preferred devices 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
Around 37% of customers in the third quarter were comparison
shopping on their mobile devices while in retail stores,
something the industry now calls "showrooming." Because of the
resultant cost savings and convenience, this trend is likely to
continue (comScore, November 2012).
advancements in technology
are improving navigation and customer experience on ecommerce
sites, which is improving reviews and thus drawing more traffic
to the sites.
The digital consumption of books, music, video and games all over
the world is extending the reach of these goods and thereby
boosting sales. 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.
remains a major lure, as seen from the recent e-tailing group
survey, where 85% of surveyed consumers said they intended to
make use of it this holiday season.
A July 2012 study by Forrester Research points to the most
popular products being sold online. The 10 hottest individual
product categories are women's apparel, books, computer hardware,
computer software, apparel, toys/video games, video DVDs, health
and beauty, consumer electronics and music.
is a huge market and although online sales are currently under
10% of total apparel sales, the category already generates the
most dollars. Selling tools, such as zoom, color swatching and
configurators are helping the process. Even primarily
brick-and-mortar outfits like
) sees that consumers purchasing through multiple channels
(online and offline stores) tend to spend more. This is
encouraging traditional retailers to offer an online store to
supplement sales. Online sales also show better conversions since
searches usually draw consumers with a prior intention to
The increase in technology purchases over the Internet is driven
by not only individual consumers, but also companies and
governments. The efficient and timely processing of orders,
choice of payment options, subscription-selling and sales under
the SaaS model are all facilitators.
The Association of American Publishers says that
sales in the U.S. continue at a steady rate and are likely to
touch $1.5 billion this year. What is more encouraging is however
the growth U.S. players are seeing in international markets
(sales up 333% in 2011).
) are the primary channels facilitating international expansion,
Barnes & Noble
), other smaller players and local companies in international
markets are also playing a part.
) Youtube remains the forerunner facilitating online
consumption, with significantly higher unique viewers (UVs) and
unique streams. VEVO and AOL Media Network are in second and
fourth positions, respectively in both respects. While
) managed to steal the third position in terms of UVs, Hulu took
its place with respect to the number of streams. Highest hours of
viewership however went to
), which pushed Youtube and Hulu to numbers two and three,
respectively. [Nielsen estimates, September 2012]
The digital consumption of
has grown greatly since Apple announced its first iPod. Amazon
and others are also seeing their business grow. Nielsen estimates
that in the first three quarters of 2012, U.S. digital album
sales increased 15% from the comparable period last year, with
shipments on track to set a new record in 2012.
segment has suffered over the last few quarters, impacted by the
economic slowdown that affected consumer spending. However, while
this affected total gaming spend, it did not affect the online
segment, which gained from the increasing digitization of games,
the desire to play across multiple platforms and the availability
of free-to-play games to draw customers. As a result, sales
through online channels continue to grow at the expense of
Since video, games and music are often social activities, they
are increasingly being marketed on social platforms such as
) and Pinterest.
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%
According to comScore, Pinterest is currently the third largest
social networking site. While the company is yet to get into the
advertising business, its users are already making money and
engagement compares favorably with Facebook.
is also helping retail.
) is the leader here, which along with 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 Google, but also a host of other
much smaller parties have started doing some 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.
comScore estimates that Amazon remains the leading Internet
retailer based unique visitors (UVs), followed by
), in that order. The top 3 have a much higher penetration on
both Android and iOS platforms.
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%,
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 research from eTrack, eMarketer and Alexa.com
compiled in September 2012, Internet-based travel booking revenue
has grown 73% over the last five years, with 57% of all travel
reservations being made online. The bookings and revenue
generated by source and category (latest estimates) are
represented in the following graphs.
The top travel booking sites are Booking.com, Expedia.com,
Hotels.com, Priceline.com, Kayak.com (recently acquired by
Priceline), Travelocity.com, Orbitz.com and Hotwire.com. Since
Booking.com and now Kayak are part of
) and both Hotels.com and Hotwire.com part of
), this narrows down the top companies in the segment to
) and Travelocity.
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
Smartphones are playing a key role in travel purchases,
especially for last minute purchases. eMarketer expects
smartphone travel researchers to grow from 23.7% of total online
travel researchers in 2011 to 53.9% in 2016. Similarly,
smartphone travel purchasers are expected to grow from 12.6% in
2011 to 32.5% in 2016.
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
C. Payment Systems
With practically all market research indicating solid growth in
ecommerce 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's 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 the convenience of the whole thing, 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.
However, the cost of POS terminals is a downside to the system
that could easily turn away retail partners. This is an evolving
area and much could change over the next few years.
The greatest success however is currently being enjoyed by eBay's
Paypal, which has seen some success at traditional retailers such
The Home Depot
). One drawback that remains is that although the system is
itself secure, there is always a security risk for a buyer not
used to dealing with Paypal, since it requires personal
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.
A study on banking.com shows that 48% of "Generation Y" (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
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 to increase.
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 more available.
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.
E. Online Advertising
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. 2012 numbers will benefit from the 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 was the largest player in the display ad segment with a
14% share in 2011. Google was 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.
), 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
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.
As evident from the above table, online travel companies are the
picks for the sector, particularly Priceline and Expedia.
International expansion is a key factor driving growth for these
companies and collaborative agreements with local players are
helping. The ADR is something to watch here, as lower-value
inventories are on the rise.
Of the retail companies, we recommend
), which has an attractive growth rate and has shown solid
execution over the last few quarters. Moreover, eBay's turnaround
story continues and its many initiatives to drive growth are
likely to pay off. Another stock that looks attractive for
longer-term investors is
), which has a history of beating estimates and is also seeing
upward revision in estimates.
) is currently in the investment phase and there is a great deal
of uncertainty as to how long it will continue in this phase. The
uncertainty is leading to repeated downward revisions to
estimates, which in turn is pushing down the Zacks Rank. The
largest online retailer is by no means a write-off, but
short-term investors would gain little from its solid revenue
growth and international investments.
We also have reservations about
), which operates in a highly competitive segment with low
barriers to entry.
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