Extensive Changes in Business Philosophies,
Macroeconomic Performance Already Evident
NEW YORK, April 20 /PRNewswire/ -- Electronic commerce is a far-reaching
business concept, not just a unique technology, according to an extensive
Merrill Lynch special research study, "e-Commerce: Virtually Here."
In a 150-page special report, Merrill Lynch analysts examine how
e-commerce is altering the ways of doing business in 15 industries, from
advertising to telecommunication services. The report also discusses
e-commerce's implications for accounting practices as well as government
regulation worldwide.
"It has already altered, and in many cases continues to significantly
change, traditional business philosophies across a broad spectrum of
industries, commerce and finance," said Rosemary T. Berkery and Andrew J.
Melnick, co-directors of Global Securities Research and Economics.
The revolutionary changes prompted by e-commerce could also increase
outsourcing, encourage divestiture of corporate business, and motivate
companies in non-Internet industries to re-engineer themselves in order to
take advantage of the new technology, the report showed.
"The e-commerce era is here," said Jeanne G. Terrile, coordinator of the
project and author of the study's overview. "You can see it sometimes in
expected, and at other times in surprising, guises."
E-Commerce Contributing To U.S. Macroeconomic Performance
The study also explains that information technology, which includes
e-commerce, has shown exponential growth and already contributes meaningfully
to the macroeconomic performance of the United States. "This includes the
gradual disappearance of inflation, strong productivity gains and continued
growth in employment," Jack W. Lavery, a Merrill Lynch senior vice president
and director added in a discussion of public policy and economic
considerations.
Overall, the Internet has the power to democratize, to break the link
between quality and best content and to do it at decreased cost and increased
effectiveness, the study said.
Information-Based Companies Already Most Affected
Companies in information-oriented industries such as banking, brokerage
and publishing, already have been profoundly affected by e-commerce, the study
found. Other industries, such as freight forwarding and insurance, are now
re-defining themselves. And, still others, such as real estate, should expect
to feel e-commerce's influence as the Internet tends to "cannibalize" retail
sales away from store-based retailers, reducing in some cases the underlying
value of retail real estate, the study suggested.
Further, the study notes that, while very few ventures are making money on
the Internet, companies and investors are left to cope with the extraordinary
changes that e-commerce is delivering today to virtually every aspect of
business.
"We view the growth of the Internet and e-commerce as a global mega-trend,
along the lines of the printing press, the telephone, the computer and
electricity," said Henry Blodget, Merrill Lynch's Internet analyst. "We
believe it will affect dozens of industry sectors in the world economy over
the next decade."
Internet Companies Avoid Penalties in Stock Market
As a result, the study found a "valuation paradox" in which new Internet
companies don't currently pay a penalty in the stock market for the losses
they incur in building their e-commerce business.
High-valuations, in fact, give them an unusually low cost of capital,
enabling them to return frequently to the market to obtain inexpensive funds
to invest faster in new portals, technologies or ventures. They can also use
stock to buy other companies.
"Traditional companies, however, are penalized with shrinking multiples
for their losses in starting e-commerce businesses," Ms. Terille explained.
"The practical effect is that these companies' cost of capital has therefore
risen, making it more expensive for them to pursue. Internet strategies and
that, in turn, could ultimately result in less competition in the Internet
world."
E-Commerce Eliminates The Middleman, Creates "Info-mediaries"
Exploring various broad consequences, Merrill Lynch found e-commerce
results in disintermediation, by eliminating the traditional middleman,
usually the distributor, simultaneously giving rise to a new class of
"info-mediaries" who find products for buyers, and buyers -- or a potential
community of buyers -- for sellers.
The Internet also creates a conflict between the need for scale and the
need to be narrow. Because overhead doesn't increase in the e-commerce model
when volume rises, "companies may wish to consider mega-mergers," the study
showed. This is a path followed by many companies in pharmaceuticals,
financial services and Internet commerce itself.
The goal of these mergers is to create a richer product line to sell an
existing customer base, the Merrill Lynch study showed. In an effort to find
the most efficient producers, companies may make greater use of outsourcing to
the most-efficient, and in the process "Produce a wave of divestitures."
A Borderless Marketplace
Currently, the Internet is borderless and the opportunity to sell via the
Internet in a standardized way eliminates many natural barriers to entry in
foreign markets, such as the high cost of retail space in London, or the extra
security needed in Moscow. But, some barriers to entry in foreign markets are
political, and fast-growing e-commerce may eventually attract more attention
from tax and customs authorities here and abroad.
Further, governments differ on how regulated the Internet should be and
whether officials can get access to data in the interest of national security.
The U.S. government's attitude toward Internet regulation has been one of
laissez-faire, highlighted by a three-year state sales tax moratorium, started
in 1998, on net sales. Europe has been more restrictive.
The prevention of cyberspace fraud, false advertising claims and
inappropriate business practices are only some of the legislative issues which
must be resolved in the near future. Further, the protection of privacy,
copyright laws and intellectual property will need to be addressed.
However, Merrill Lynch analysts caution "not everything that can happen
will happen. The need for capital spending won't disappear." In essence, they
believe "real life has boundaries even if the net doesn't."
Copies of the study, the fourth in a series of special reports on
important topics for investors, are available in traditional form and on the
Internet at http://www.e-commerce.research.ml.com
SOURCE Merrill Lynch & Co., Inc.
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