Rudelle Blogging

Following the take-over of YouTube by Google last fall, we have seen many comments on the return of the Internet bubble. This 1.6 billion dollar deal for a company with virtually no revenues was illustration that irrational thinking was infecting us again.
Well, 6 months later, it does not look at such a bad deal for Google. On the contrary, the fast growing on-line advertising market shows that it should not be such an issue for Google to monetize this extra inventory.
On-line advertising growth is very much connected to the growth of Internet itself, especially of broadband access. And this broadband access is accelerating in all major countries. As a result, e-commerce is also growing at a nice 30% rate per year with no sign to cool down.
This strong and steady e-commerce growth is financing portals, media and community sites with profitable advertising budgets. This makes the whole picture much healthier than in 1999 & 2000. This is why there is not much to worry about a bubble bust as so far, there is no bubble at all, just plain fast growing market.
Remember all those crazy IPOs in 99. Anything similar today? Not really. Not only companies are getting profitable much quicker, but investors are also much more selective. It looks like for the first time they show some memories of the past to keep the market at a reasonable and healthy level. Not bad at all. ;-)

Despite the fact that traditional e-commerce assets are becoming a commodity, it does not mean necessarily that all large e-retailers will be excluded from the game. As a matter of fact, it might be quite the opposite. In this new web 2.0 ecosystem, mainstream large e-retailers will have a key role: to become the trusted third party for a given category.
In any case, this is the fascinating bet of Amazon which is reinventing its business with at an impressive pace (still badly understood by the vast majority of financial analysts).
The underlying idea is the following: in two or three clicks, I almost always manage to find a certain Joe who will offer me a book $3 lower than my usual e-bookseller. The only thing which retains me to deal with this Joe (unknown to me), it’s the fear (perfectly justified) that Joe will badly perform (or worse will cheat on me) this very transaction.
Now if Joe is registered on Amazon market place, the picture is very different. Amazon’s brand should guarantee transparency, effectiveness and reliability of the transaction. As a result, I can now buy Joe’s book with very little to worry about. And of course, Amazon prefers to gain a 5% commission on the transaction between me and Joe that nothing at all.
The idea of Amazon is simple: better to integrate all the Joes in Amazon’s ecosystem rather than let them develop out of control in the cyberspace. With this trusted third party role, Amazon hopes to stay in the financial transaction loop. Eventually, it is the only important thing for Amazon.
In this frame, Amazon took two years ago an amazing decision: to offer free of charge of its entire product catalogue (through Web services) to the developers’ community. When one knows that for a retailer, its product catalogue is supposed to be one of its main assets, one measures how radical this decision was.
But the logic is always the same: better to have all the Joes developing their revolutionary merchandising concepts using Amazon catalogue, rather than with others. This open API concept opened to all kinds of mashups is clearly one of the main features of these new Web 2.0 sites. Still, it remains extremely rare for e-commerce sites.
This shows that e-commerce 2.0 is still lagging well behind Web 2.0 in general. For this reason, 2007 is likely to be a crucial year where the most dynamic e-retailers will widen the gap with their followers.

The Wal-Mart type large big retailers built up their amazing success mastering three key functions: sourcing, merchandising and logistics. This combination of factors allowed them to crush down traditional mum and dad retailers and to impose a new model.
The first generation of e-commerce sites adapted this wining model on line. After a difficult start in the late 90’s learning the specificities of the Internet channel, large on line retailers today successfully master the three key area of expertise: sourcing, logistics and merchandising. Thanks to a critical mass of increasingly mature buyers, most of them now experience high volumes and attractive profitability. With a 30% growth per annum which does not seem to slow down, e-commerce has a bright future.
However, this nice picture is likely to break into pieces in the coming years. First of all, in the flat world of the Internet, the fortress of sourcing is disaggregating with an amazing speed. The most obscure manufacturers are increasingly easy to spot on line. With little work and a good vertical specialization, almost anyone can source the best product in the most remote place of the virtual world.
Regarding logistics, the growth of Fedex, UPS and other large shipping companies also makes it easy for any individual to send anything anywhere, being as reliable as any big corporation.
Furthermore, the growing maturity of many Internet technologies (which belongs to the Web 2.0 wave) is combining with the collapse of band-width and storage costs. This opens the door to an exponential growth of innovative e-merchandising concepts. New tools make it possible to create on line shops are indeed becoming so simple and powerful. Any single individual entrepreneur can unleash his marketing creativity for a very low investment. As a result, new innovative merchandising concepts are launched every day on the web at a extremely rapid pace.
Without saying that price comparisons are so easy on Internet. This makes it is much more difficult for an e-merchant to replicate a classical tactic of brick and mortar retailers: lure customers with some huge discounts on a couple of very visible products, and generate fat margins derived from impulse purchases.
The combination of these strong trends has a crucial consequence: selling on the Internet has become a commodity. We see the rise of a huge world ecosystem of small entrepreneurs who invest into all possible e-commerce niches. This army of anonymous Joes whose cost structures are close to zero, represents a very serious threat for the large e-retailers. This had made the fortune of an eBay, but the phenomenon goes today well beyond auctions.
Nevertheless, in this second e-commerce revolution, the large e-retailers have a very smart card to play. I will get back to this in my next post.

The secret of Wal-Mart profitability lies into impulse purchases. I visit Wal-Mart to buy some butter and rice. After a dozen of minutes hanging in their premises, my cart is quickly filling up. While browsing around, I am visually strongly encouraged to add a whole bunch of various articles. And it works!
Wal-Mart marketing tactics rely on a complex of blend of products and its associated merchandising (put beers next to pampers). These tactics became so important that a whole marketing research domain has been growing under the name of category management.
On Internet, category management seems of lower interest. Thanks to the magic of Long Tail, e-merchants offer an almost infinite range of products. With a good search engine indexing its catalogue, e-merchants manage indeed to achieve spectacular results. As an example, more than 60% of all books sold by Amazon are rare books, which are not available in traditional bookstores.
The paradox of this Long Tail strategy is that it kills impulse shopping. To browse around these giant catalogues, users are required to enter very precise key words. As a result, they only buy only they were seeking for.
To combine (at last!) Long Tail and impulse purchases, e-merchants need to promote products that users would not have thought spontaneously.
The problem is that in most of the cases, these promotions are not relevant. This translate into very low rates of impulse purchases (on average, less than 2% of visitors). Tomorrow’s challenge thus consists in personalizing for each user specific products.
These techniques require very sophisticated mathematical tools. But they will have a crucial impact on bottom line of the industry. Amazon which understood this trend ahead of the pack, has invested a huge amount of money in this field.
“One fits all” easy strategy will be soon dead. Within the next two years, e-commerce sites which will continue to promote the same products to all their visitors are likely to be out of the game.

Welcome in the marvellous world of “Long Tail”. Long Tail is supposed to make gold with loosy back catalogue. I mean a magic way to make business without relying on blockbusters (for details on this buzz word, check the excellent article of Wikipedia on the subject).
For instance, it is common knowledge that Amazon.com generates more sales on unknown books than on best sellers. The classical brick and mortar rule which states that 10% of all existing products account for 90% of sales is no more valid on the Web. In a digital store, to a physical store, zero storage cost offers the option to present an almost infinite number of products. In theory, e-commercial sites have no more limits on their inventory size. In particular, no more need to focus on a specific niche like in the old physical world. You just need to plug a fast and efficient key word search tool on your huge digital catalogue and you can serve the entire universe.
This looks too good to be true. Indeed, offering millions of products implies that customers know… what they are looking for! Indeed, it is impossible to browse around all the catalogue. Moreover, very often, the customer has a very vague idea of what he is looking for. He wants “a new cool shirt”, not “a yellow pink shirt with a rasta logo on its back”. Traditional search tools are unable to look for a “cool shirt”. Cool is not only a vague notion, it is specific to each of us!
All of us have been stuck one day in the 10th sub menu of a site “where there is all”. That is to say, in order to maximize potential of this famous Long Tail, it is necessary to invent new tools to browse within those giant catalogues.
For instance, take blogs. I love to learn that there are more than 30 millions blogs in the cyberspace. What an incredible Long Tail! But these blogs are confronted with the same problem of relevance. In all this enormous sea of posts, how can I spot those which are of real interest for me? I mean, without wasting hours browsing randomly?
Intelligent personalized filtering is definitely the next frontier of Long Tail.