E-commerce Still Overcoming Old Economy

By Eric Nee  |  Posted 07-05-2005

Entrenched business cartels have, in all too many instances, effectively blocked entrepreneurs and consumers from using the Internet to develop competitive alternatives.

Online sales of automobiles, wine, real estate, prescription drugs, even burial caskets, have been artificially restricted thanks to antiquated laws designed for an earlier era in which there was no such thing as e-commerce.

But now, 11 years after Netscape launched the first commercial Web browser, the dam is finally breaking. Recent court decisions and government actions are beginning to allow competition in parts of the economy where it has long been lacking. Most notably, the U.S. Supreme Court's May 16 decision in Granholm v. Heald struck down some state laws that prohibited consumers from purchasing wine online from out-of-state wineries.

Eight states allowed in-state wineries to ship directly to consumers, but prohibited out-of-state wineries from doing the same.

The Court struck down the laws treating out-of-state wineries differently from in-state wineries as a violation of the Commerce Clause of the U.S. Constitution, which prohibits states from discriminating against interstate commerce.

The Supreme Court's decision opens the door for wine lovers to buy wine directly from the more than 3,000 U.S. wineries, and have the bounty shipped right to their door. The case was fought by liquor distributors, who wanted to protect their decades-old hold over the distribution of wine, claiming that Internet sales encouraged underage drinking and tax evasion. But buying wine over the Internet just makes too much sense.

Ultimately, consumers and wineries demanded, and obtained, change.

"There has been a big push to change those laws," said Steve Simpson, senior attorney for the Institute for Justice, a Washington, D.C., libertarian advocacy group that represented one of the wineries before the Supreme Court. "Justice [Anthony] Kennedy mentioned the growth of e-commerce and the growth of small wineries in his decision. Any time you have a . . . public debate like this it has an impact on the justices."

Michael Dorf, professor of law and constitutional scholar at Columbia University, agreed. "Judicial decisions are part of the society from which they emanate," explains Dorf.

In its ruling "the Court began by saying that the Commerce Clause is there to facilitate a national market with as few trade barriers as possible. And in today's world of e-commerce that means that the rules have to be changed."

But the significance of the Supreme Court ruling goes well beyond reducing the power of middlemen. It is also a wake-up call to CIOs of all kinds that the e-commerce revolution is alive and well. Today, an estimated one-third of U.S. households shop online, according to Forrester Research. And they are spending lots of money—an average of $1,000 per household during just the first three months of this year.

With all of that money comes growing social power. These consumers are increasingly demanding about the quality of their online experience.

Wine isn't the only business that is feeling these seismic shifts. Real estate listings are another area where the government is actively trying to bring more competition to the market. Anyone who has shopped for a new house in the past couple of years has probably wondered why the number of houses listed for sale online is so scant compared to what's available in the multiple listings book that real estate agents guard so closely.

That's because real estate agents, like wine distributors, want to keep their lucrative business to themselves. And why not?

Real estate prices have jumped 42 percent over the last five years, while broker fees have remained the same, at a shade over 5 percent of the sales price. As a result, real estate brokers have pocketed billions in added profit. (Real estate commissions climbed from an estimated $42 billion in 2000, to $61 billion in 2004, according to real estate researcher Real Trends.)

Now the Department of Justice is threatening to sue the National Association of Realtors over NAR bylaws proposed in 2003 that allow full-service agents to withhold listings of homes for sale from discount brokers and online listing services.

The Federal Trade Commission is also challenging proposed laws in Missouri, Texas, Alabama and Oklahoma that would benefit old-line real estate agents by restricting competition from online and discount real estate brokers. Alabama, for example, is considering a law that would dictate a minimum amount of services that real estate brokers must provide. Presently, consumers can purchase real estate services à la carte.

"I give the FTC a lot of credit for taking on the realtors," says Robert Atkinson, vice president and director of the Technology & New Economy Project at the Progressive Policy Institute, a liberal think tank. "I think we're going to see a rapid ramping up of these wars. As e-commerce continues to grow, it is posing more and more of a threat to brick-and-mortar providers, who are more scared and more willing to fight back."

Consider the emerging battle between eBay and its more than 7,000 affiliated drop-off resellers on the one hand, and pawnbrokers and secondhand store owners on the other.

California, Louisiana, Florida and other states are considering new laws and regulations that would treat stores where consumers drop off goods to be sold on eBay the same as pawn shops and secondhand stores. These regulations, which are designed to thwart criminals trying to sell stolen goods, could force eBay drop-off dealers to hold items for 30 days, and to fingerprint customers.

The changes are being pushed by organizations such as the Collateral Loan and Secondhand Dealers Association of California, who argue that drop-off dealers should be treated the same as they are.

Pawnbrokers, real estate agents, wine distributors, new car dealers and other entrenched business interests feel threatened by consumers' embrace of e-commerce, which typically enjoys less regulation and, in many cases, pays no sales tax. As a result, the dot-com boom may have gone bust, but online sales have kept on growing. In the first quarter of 2005, U.S. online sales totaled $37 billion, up an impressive 18 percent over the same quarter last year, according to Forrester.

By 2010 Forrester estimates that U.S. e-commerce sales will total $331 billion a year, or 13 percent of all retail sales, more than double the $145 billion sold in 2004, which was just 7 percent of retail sales.

As the ranks, power and expectations of online consumers grow, CIOs must add new and more sophisticated features to their e-commerce platforms to keep abreast of consumer demand.Many of the consumers who have recently started buying online are not as tech-savvy as the early adopters, and probably never will be.

These consumers need more intuitive shopping interfaces that are simpler and faster to use. They also want more assistance while shopping, such as better onsite search, greater personalization, more complete product guides and information, and improved cross marketing of products.

Sadly, many CIOs are still not aware of the urgent need to make these changes.

"Most CIOs have been in maintenance mode the last few years," says Carrie Johnson, a senior analyst at Forrester. "The systems CIOs put in place for phase one of e-commerce are aging," forcing many IT organizations to spend much of their time fixing routine problems, such as faulty virtual shopping carts. It's now time for CIOs to move forward and join the ranks of consumers and entrepreneurs at the forefront of the e-commerce revolution, or risk being left behind. n

Eric Nee, a longtime observer of Silicon Valley, has served in a variety of editorial positions at Forbes, Fortune and Upside magazines. His next column will appear in September.