Dot coza boom revisited
Tipsters are predicting that of the surviving listed Internet companies in the US around a half will be profitable by the end of this year. B2C (business-to-consumer) revenues are rising and many traditional businesses are realising the benefits of B2B (business-to-business) e-commerce. All very encouraging, but does it hold water for South Africa?Long-time local IT commentator Duarte da Silva of the J&J Group is cautious, pointing out that many of the inhibitors that stifled Internet commercial success, particularly in the B2C space, in South Africa are still present – most importantly a lack of volume and access.He has a point. Accurate figures on Internet users in this country are hard to come by, but it would not be unreasonable to suggest they stand at around the three million mark – hardly enough to get pulses racing.“The successful examples have been retailers like Woolworths and Pick `n Pay and the banks that have identified the Internet as just another business channel,” Da Silva says. Companies transacting through the Internet in isolation, he believes, have little chance of success. Reversal of fortuneM-Web, South Africa`s largest Internet service provider (ISP) and dot com company, would probably disagree. As a listed entity, the company achieved headlines more for the amount of cash it burned each month than the services it offered. However, since it delisted from the JSE Securities Exchange in July 2001 and dived under the substantial cover of the Naspers Group, its fortunes appear to have turned.In its latest financial results (year-end March 2003), Naspers cites the Internet as its fastest growing business area, with revenues up 63 percent, and operating losses before amortisation almost halved to R244 million.Also, last month M-Web reported record traffic to its new portal in the month of July: 814 834 unique users. According to Russel Yeo, general manager of M-Web Studios, the record is a firm indication that the company`s new focus on providing a wide range of exclusive services, tools, products and “premium” content to members is successful. The Internet, and the M-Web brand in particular, Yeo says, are becoming “an integral part of South African people`s everyday lives”. The company has also made what appear to be successful inroads into the Far East.But Da Silva, for one, remains sceptical. “The main reason that M-Web is still around is because of ‘Big Daddy` [Naspers]. The company has yet to prove whether it is viable or not,” he says.It`s arguable whether ISPs qualify as pure dot coms or should rather be categorised as an offshoot of the telecoms industry. But Naspers` Internet offerings run far deeper than ISP services.On the retail side, subsidiary Nasboek`s e-commerce platform Kalahari.net doubled its revenues to R32 million this year. The company is confident it will continue this trend going forward and says it is following a strict roadmap to profitability. Kalahari.net benefited from the collapse of rival e-tailer The Shopping Matrix earlier this year; but, even if it reaches profitability, it is hard to see it ever becoming a significant earner for the media giant. A tale of small earnersMore about M-Web and Naspers later, but it appears the real story of stand-alone South African B2C e-commerce is a tale of small earners. Pick of the bunch could very well be NetFlorist, the sole dot com survivor within contact centre outsourcing company CCN Holdings (formerly the ISP NetActive).MD Ryan Bacher says the online flower retailer turns over around R10 million, with profits in the region of five percent of that princely sum. He believes the key reason NetFlorist has remained afloat is that it exists in a market that has no dominant player.“Secondly, there are a number of recognised consumer brands out there selling flowers and what we have succeeded in is building partnerships with them. These relationships give us access to our partners` customers and account for nearly half of our business,” he says.This partner programme has enabled NetFlorist to eliminate marketing and stock holding costs that have rung the death knell for so many dot coms, and reach profitability after just three years.“It`s not about above-the-line marketing: the returns are still too small. If we had relied on above-the-line, we wouldn`t have survived,” Bacher says. “Partnerships do not drain the income statement, although the challenge is you`re always going to be the smaller company. We play a role in our partners` businesses, but we`re a blip on their radar screens.“We`ve been building partnerships for around four years and while there`s often a bit of scepticism at first, our reputation is good and we`ve established a name for reliability. Currently 80 percent of our orders are made online and the balance through our call centre,” he saysNetFlorist is probably as close to a true e-tailer as you`re going to find in South Africa. It holds no stock, relying on florists throughout the country and, importantly, does not look to differentiate itself on pricing.“Our product lends itself to the `Net. Customers were accustomed to using the phone to order flowers and the shift to the Internet has been easy. If you`re looking to sell a big screen TV online, for instance, your only selling point is that it is cheaper. That`s a business model that just can`t work,” Bacher says.He estimates the current “flower sending” market at around R200 million a year and has no reason to assume NetFlorist cannot continue to achieve growth rates of between 60 and 100 percent in the medium term.Another success story is the online flight-booking agent kulula.com. While kulula.com is not independent – it falls under the Comair Group – it`s worth looking at as it`s something of an anomaly: a dot com that claims to have been profitable from day one.At least that`s according to executive IT director Carl Scholtz, who was unable to give exact financial figures as JSE-listed Comair was in a closed period at the time of writing.Kulula.com follows a mixed business model in that it does not rely on the Internet alone for distribution. Comments Scholtz: “We understand that transacting on the Internet is not everyone`s cup of tea so we have catered for a number of options.“While around 60 percent of our clients book and pay online, others make use of the option of paying for their flights at First National Bank branches around the country, while those who are not Internet-active can make use of our call centre.” Keep it simple – and cheapKulula.com is also active in B2B e-commerce in that it interacts with travel agents online. Agents can make use of a separate travel agent website that allows them to make bookings and keep tabs on their travel spend and commission earned.There`s no doubt that air travel lends itself to the online business – it is, according to Scholtz, the second largest market wordwide in terms of transactions. This said, the main reason for kulula.com`s success is, unlike NetFlorist, probably its price competitiveness – flights can be up to 42 percent cheaper and the company recently added a further R50 discount on return tickets booked online.“We learnt quickly that customers disappear if they encounter any problems online, you simply have to offer the simplest and quickest deal around,” adds Scholtz.The learning process must have been intensified by the server-crashing response to a recent special offer, in which R400 return tickets between Johannesburg and Cape Town left the website unavailable for nearly a day.Kulula.com, Scholtz says, is working towards providing an “integrated travel experience”. The company currently offers both flight and car rental services and is investigating the possibilities of adding accommodation to its bundle of services.Da Silva has pinpointed Woolworths and Pick ‘n Pay as traditional retailers that have successfully employed the Internet as an extension of their existing business channels. However, according to Alison Vorster of Internet infrastructure provider Internet Solutions (IS), clothing retailer and consumer credit pioneer Edcon is a far more interesting example.Edcon, she says, was one of the original customers and first casualties of the dot com craze. The company invested a considerable amount in its online venture edgars.co.za (almost R3 million in software alone) and severely burnt its fingers.How this situation has been turned around is, according to Vorster, an e-commerce success story that spans both the B2B and B2C spaces.“Edcon changed its strategy to one which identified areas within the organisation that could realise significant value from an e-commerce initiative and where success could be measured,” she says. The new model at Edcon focuses on operating expenditure and capital expenditure, ensuring investment in technology is both justified and yields a return.“Edcon immediately saw the economies of scale and value it could realise through the IS infrastructure model and migrated from its existing B2C vendor`s software to ours, hoping to be in time for last year`s Christmas rush. Delivering real value“We went live on time and, within the first week, significantly increased the ratio of customers returning to the site. This was a major turnaround. The company moved from a situation where neither it nor its customers were seeing any value to implementing a fully interactive, continuously enhancing site that`s delivering real value to customers,” Vorster says.Edcon, she adds, is now in the process of adapting its B2B processes to the IS model.“The way our infrastructure model is structured means the more functionality you add, the more cost effective it becomes. The total cost of ownership for the B2C solution stood at around 50 percent of revenue, but once B2B was added this dropped to around a quarter.”The secret, according to Vorster, is to focus on the actual business processes and areas that add value. “At Edcon, in B2C the company has focused on improving the status of statements and payment procedures, the things that really affect the bottom line. The B2B side is very process driven – streamlining internal processes with suppliers for instance – and that`s where Edcon is seeing its return on investment,” she says.Victoria Vaksman, MD of software solutions company Tilos, agrees that a focus on business processes is the route to follow.“The take-up of e-business will be accelerated through the deployment by companies of three basic components that fulfil the base requirements of any organisation wishing to e-enable its existing processes. They are the corporate portal, integrated workflow and document management,” she says.“Together, these three components, along with a shared knowledge base, provide a solid foundation for e-business, allowing companies of any size to e-enable their processes and gain the clear benefits to be had from the new paradigm.“But,” Vaksman cautions, “their implementation must be accompanied by a holistic review of the business and change in core processes, or you`re simply putting lipstick on the pig.”One of the most hyped phenomena of B2B e-commerce has been e-marketplaces. Unfortunately they`ve also accounted for some of the most spectacular failures, both globally and in South Africa.Commerce One South Africa – Distributor Operations` MarketSite is perhaps the most well known locally due to its high profile customer and partner Sasol, which has, by all accounts, benefited greatly from taking the e-procurement route.More recently, M-Web launched CommerceZone and claims transaction volumes totalling over R9 billion in its two-year existence. CE Andreij Horn ascribes its success to the fact that customers on the buy and supply side are seeing real bottom-line returns each day.“Deriving value from procurement is not rocket science – it is not even new. But, integrating all the elements for a successful e-business exchange is much more complicated than could be imagined. By enabling even the most complex of our customers to feel the benefits of e-procurement within 12 weeks of implementation, they see a real return on investment in the same year of moving to a new system,” he says. Maturation processAt present, M-Web CommerceZone claims to process transactions worth more than R450 million per month (although it must be pointed out that many of its clients fall, like M-Web itself, within the Naspers stable).Horn believes the nature of B2B e-procurement has changed substantially during the last two years, maturing into an accepted practice used by leading organisations worldwide.A recent international poll indicated that almost 80 percent of respondent companies were using e-procurement to some extent – an increase of more than 50 percent over the previous year. However, 70 percent of the companies using e-procurement use it for less than 10 percent of their purchases, pointing to the fact that a large number of companies have failed to see real benefits.Horn, however, sees the biggest obstacles to e-procurement growth not as being IT-related, but as the result of flawed business cases associated with these projects. “M-Web CommerceZone combined our e-procurement offering with a strategic sourcing project for each client.“By adding a new client`s indirect procurement volumes to the billions we already manage on behalf of our existing clients, we can offer our clients an immediate reduction in procurement costs and a contract management service that ensures that the requirements of the new client are met,” he says.Tjaart Kruger, executive consultant for Strategic Solutions at Comparex Africa, adds that while the Marketsite solution has been a reasonable success, it must be remembered that, like most other marketplaces in South Africa, it is a horizontal marketplace serving indirect goods procurement.“Furnex has a hosted catalogue environment that allows independent [small] retailers to purchase household goods from larger suppliers, and Collaborative Exchange and Gateway Communications provide electronic forms management services to the automotive and FMCG markets. These are, however, very basic forms of managed environments and do not yet fulfil the dot com promise,” he says.“Technology is certainly improving, but business models will have to change if we are to see sustained business improvement based on a real value proposition in this space.” Beyond technologyKruger says despite the negativity of the past, the benefit of online business is mainly that it can enable a new level of value chain management that was never possible before.“Just as ERP enables the internal functional integration of a business, electronic business can integrate value chains across company borders and enable real value chain management.“The technology on its own, however, will not bring about the improvements. The business practices and processes have to be changed to exploit the power of the technology and this is the challenge for local companies,“ he says.One of the most disappointing Internet performers has been online publishing, which has suffered locally and globally from the unwillingness of users to pay for content and slow take-up by advertisers.Here, the major media houses like Independent Newspapers, Johncom and Naspers have enjoyed limited success by using the Internet as a medium to disseminate repackaged content from their existing traditional publications.Two small companies that do stand out, however, are MoneyWeb and (Brainstorm publisher) ITWeb. Both have survived torrid market conditions and negative sentiment and have firmly established themselves as the dominant players in their respective niches.MoneyWeb, the brainchild of financial journalist Alec Hogg, is listed, though not heavily traded, on the JSE. The site provides high quality, up-to-date financial and business news and commentary and is given further impetus by Hogg`s radio show on Classic FM (also a MoneyWeb project).While MoneyWeb reported a minor loss on revenues of around R15 million for the past financial year, this can credibly be explained by the tough conditions experienced by the media industry in general. The company has been proactive in identifying additional revenue streams, in print and television, and is ambitiously eyeing expansion into the rest of Africa. Not into temptationMoneyWeb has taken a mature approach to its top-level management structure, appointing a number of non-executive, independent directors and an operations specialist as CEO. (One wonders how many of the dot bombs would still be around today if they had had the sense to follow a similar route?)Specialist IT portal ITWeb was launched in 1996, apparently as the first online news service in the country, and has, so far, fended off feeble challenges to its dominant position in its chosen market.CEO Jovan Regasek, who, quite wisely as it turns out, resisted the lure of going public, says the company has been nominally profitable since inception and enjoyed revenue growth of 36 percent to more than R20 million last year. ITWeb earns the majority of its revenues through its so-called company “press offices” which are utilised by a large percentage of local IT companies to disseminate their news releases.Regasek believes the main reason for success has been ITWeb`s basic business premise, which differs from many of the failed content providers.“Their main thrust has been that ‘content is king` where, in reality, the amount of free information available on the `Net has turned content into a commodity. ITWeb, on the other hand, works at creating communities of interest, drawing readers in and then transacting with them.”The paucity of online advertising revenue has also, however, forced Regasek to explore other revenue possibilities, most notably through Brainstorm magazine.Both Regasek and Hogg have hailed the recent formation of the Online Publishers Association (OPA), an organisation whose main aims are to standardise online advertising metrics and educate advertisers about the advantages of Internet advertising. Don`t get too excited“All the major online players have joined,” says Regasek. “We hope it will serve as a vehicle to raise the profile of online publishing and restore trust in our industry.”The probability of a South African dot com renaissance rivalling that which is now being detected in the US remains slim.There will, no doubt, be a measurable increase in B2B activities – especially with adoption of standards such as web services. However, small volumes will probably continue to relegate B2C to its position as an add-on to the banks and the traditional retailers, and as the domain of a few, small independent niche players.But, never mind, there`s always the mobile telephone – and people are used to paying for that!
