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
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 must-have.
Today, the biggest driver of growth in the industry is the
adoption of smartphones, tablets and other mobile Internet
. 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 sales.
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 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
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 purchase.
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
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 traditional
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% had
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
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%, 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 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
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 Priceline,
) 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 by
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 growth rates.
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 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 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 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.
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 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.
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
), 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
We also have reservations about
), which operates in a highly competitive segment with low barriers
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