E-tailers and Space Invaders

Some thought Internet startups would wipe out whole sectors of traditional bricks-and-mortar firms. But old-economy companies are carving out their own presence, and some may become the biggest winners on the Web.

But managers at traditional businesses are starting to wise up. When Wal-Mart launched a vastly enhanced E-commerce Web site in January, the company announced that the site would be run by a newly formed company, Wal-Mart.com Inc., based in Palo Alto, California. Wal-Mart Stores owns a majority stake in the new enterprise. By separating the operations, Wal-Mart can take advantage of the moratorium on E-commerce sales tax. What’s more, a separate dot-com business will be a far easier story to sell to Wall Street than a clicks-and-mortar operation.

Pricey Neighborhood

Christopher Dodds knows firsthand just how fickle investors can be when a traditional company embraces the Internet. Dodds is CFO at Charles Schwab (www.schwab.com), which rolled out Internet trading capabilities for investors back in 1996. At the time, the company got little adverse reaction from the stock market for its bold move. Mostly, that was because Schwab made the service available only to consumers who opened a separate “eSchwab” account. Customers who wished to continue using Schwab’s telephone or branch office services had to do so through their regular accounts — which carried higher commission rates. But in January 1998, Schwab began offering online trading — lower commissions and all — to every customer.

Investors, worried that Schwab’s revenue growth would slow, started selling. A yearlong rally in Schwab stock came to an abrupt halt. For the next eight months, Schwab’s share price went virtually nowhere, even though the brokerage sector as a whole continued to post solid gains. But as it became apparent that Schwab’s Internet business wasn’t dragging down revenues, investors sent the brokerage’s share price tracking upward. Today, Schwab processes about three-quarters of its customers’ trades over the Net.

For Dodds, the whole E-commerce initiative was instructive. “Even if a company has a well-thought-out strategy, it sometimes takes a little time for the market to digest it,” he notes.

While managers at traditional businesses like Charles Schwab have learned they can compete in cyberspace, they’ve also discovered it’s a high-rent district. Web launches, particularly for large companies with broad product mixes, can be costly. “It’s proved to be much more expensive than anybody initially thought,” says Vogtle. “For a viable, world-class site, it can easily run into the tens of millions of dollars.”

And the price tag keeps going up. When Schwab built the first iteration of its Web site in early 1996, company management kept the project in-house. The cost was thought to be a meager $1 million, although Schwab wouldn’t confirm the figure. Last year, Walgreen spent a whopping $20 million to launch its online store.

Moreover, getting a site up and running is only the beginning. “Often, you have to count on spending every year what you spent in the first year,” says Seybold. Dodd’s experience certainly bears that out. Initial demand for Schwab’s online services was so great the company had to add hardware — from 3 servers in April 1996 to 160 by May 1998. By mid-1999, barely three years after launching the virtual service, Schwab was running 800-plus Web servers. In 1999, Dodds says Schwab spent 15 percent of its $4 billion annual revenues on information technology.


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