Just as the Internet replaced mass communications with communication by the masses, the Internet is now beginning a phase of replacing mass marketing with marketing by the masses. Marketing on the Web is becoming commodity priced. The effect of this e-com "downward migration" on the economy will be profound.
Most of the revenue generated by American businesses comes from smaller to mid-sized businesses, not the Fortune 500, where the attention has recently been focused. These smaller businesses will be coming online by the million over the next few years, and like the Fortune 500 companies, they will begin to increase savings, profits, and market share by going digital.
Wallstreet's overvaluation of businesses in general, and e-com businesses in particular, has been based on the assumption that recent consolidations would leave only a few, if that many, extremely large competitors in each industry, and monopolies are always good for profits. However, in reality, most of the mergers have just been between larger players. There are still approximately 16,000 smaller businesses for every member of the Fortune 500, and over the next decade, they will have an increasing array of Internet based marketing tools enabling them to compete quite effectively with the "big guys."
Even now, e-com is an affordable option for most businesses. A number of online services already offer the backend to support e-commerce sales for non-technically adept businesses. In effect, they rent e-com stores on the Internet. These services, like bigstep.com, storesense.com, and freemerchant.com, offer integrated database and billing services, frequently for under $50 dollars a month. Within a few years, nearly every business in the US will have high bandwidth access to the Internet, and the option to buy an off the shelf e-com system, including Web server, database, billing software, and computer, for under $3,000. The only thing missing will be the ad campaign.
The reason these costs are so low, especially considering the millions of dollars some companies are spending on their Websites, has to do with an interesting quality of computers. As one reaches the limits of a digital technology, performance rises on a linear slope, but costs rise exponentially.
With most businesses, costs fall as volume increases. With e-com Websites, the reverse is true. Maintaining a Website which gets a hundred thousand consumer visits per day is exponentially more expensive than maintaining a Website which gets under ten thousand visits a day. In practice, this means that smaller businesses will pay considerably less to maintain their Websites, on a per customer basis, than will Fortune 500 companies.
Long term, it looks even better for them. Over the next decade, the costs for smaller businesses selling online will drop even faster than the costs for the Fortune 500. Historically speaking, performance improvements happen faster for personal computers than for mainframes, and for that matter, even workstations. (This is why Silicon Graphics lost so much market share to the Mac in the video production field during the last decade. Once digital video could only be produced on a $25,000+ workstation. Now, it's a standard feature on some Mac's selling for less than $2000.)
Smaller businesses also have another inherent advantage over the Fortune 500 in the world of e-commerce. The Internet will allow small businesses to collectively compete against the Fortune 500, rather than individually compete, and collectively they have greater resources than the 500. For example, a chain of independent hardware stores might become a serious rival to a large national chain by jointly funding a central Website with a database of all of their collective merchandise and prices. Together, the independents could offer a greater variety than the chain store, and competitive prices, with comparison shopping, would be built into the system.
The expense of a collectively sponsored industry Website could be kept to a minimum by using a decentralized architecture like the Napster, the MP3 based system designed to help people find and share MP3 music files on the Internet. Users download a small application which allows them to list, and make available for download, any MP3 files on their hard disk. The main Napster Website collects song lists from individual Napster users and stores them in an online database. Napster's users can access this database and instantly search for their favorite songs, anywhere on the net. Since no songs are stored on the Napster Website, just the information on where to get them, the load on the Web server is relatively light. The actual file transfer is done by the user's computer (to the deep regret of many college network administrators).
With minor variations, the Napster architecture could be very effective for marketing any number of goods and services, making life difficult for companies like eBay, whose online sales system is based on storing all the information on their server. With over three and a half million items for sale, eBay has to maintain a large and complex Website. A decentralized system, like Napster, would be far cheaper to maintain than eBay's, and could be priced well under eBay's rates, or for that matter, the $50 a month many e-store rental services charge.
Given the resources of the eight million businesses that are not in the Fortune 500, innovations in affordable e-commerce will likely come fast and frequently in the next decade. The Fortune 500 may find themselves like an elephant in a sea of army ants (the analogy of the German army invading Russia in WWII comes to mind). It's a little hard to imagine, but it's getting more likely all the time.
By moving the economy to a digital medium, the economics of computers themselves have become a key element of the economy. In a digital-based world, the economics of scale favor the smaller business, not the larger one. This is contrary to conventional economic theory, but it's a fundamental law of the digital economy.