According to eMarketer Inc., global ecommerce passed the one trillion dollar mark in 2012. The United States is the single country with the largest volume of ecommerce, but the Asia Pacific region is likely to soon pass North America as the most active ecommerce region on the planet. The statistics used for these ecommerce measurements were business to consumer sales. Reaching a trillion dollar volume per year of online sales in twenty years is impressive and bodes well for the expansion of online sales volumes. But let’s not lose sight of the most important question: Out of that trillion dollars who’s making the bulk of profits?
There are two models for the way internet commerce works. The first is commerce that arises around large centralized servers that control their market and the other model is of digital catchments arranged by local companies who do not use there own servers. The internet is such a new part of global commerce that most people are aware of the large server based companies that dominate markets. Google is the largest of these companies, but Amazon is the most commonly recognized. After all, Google is a search engine and thought of as such far more than they are thought of as an advertising firm, even though advertising is the source of their revenue.
So of the two, server based online sales and local catchment based online sales which is getting the largest share? It’s pretty obvious that several dozen large server based companies are raking in the largest portion of ecommerce dollars. Emarketer says, this year “…more consumers shifted spending from physical stores to retail and travel websites thanks [for] lower prices, greater convenience, broader selection and richer product information.” In North America 364 billion dollars were spent at online sites. More than a third of this money was generated by travel and flight booking sites. Seven or eight travel booking websites account for the bulk of that money, with Hotwire, Orbitz and Travelocity leading the pack.
The remaining 64% of online sales in the US was mostly generated by retail. The biggest player in online retail is Amazon, who earned slightly over 61 billion dollars of sales volume in 2012 worldwide. The bulk of that was earned in North America. Ebay was the third largest online retail site and Google was the tenth largest online retail site. Among the other top fifty US online retail sales companies in 2012, many were brick and mortar stores that have also turned to online sales. While some of them have earned substantial online revenues, many of them do this at a cost. For example Sears, which is the ninth largest online US retailer of 2012, has had years of profit loss due to an old retail model that isn’t standing up to the new digital circumstances in their marketplace.
Walmart, which is the second largest U.S. online retailer earned approximately nine billion dollars online globally. Target, Macys, Kohls, JSPenny, and BestBuy are all in the top ten of US online retail sites and, of course, all have brick and mortar businesses that are suffering from online competition.
The point is that there are a small number of online servers controlling the bulk of US online ecommerce. In his most recent book, Who Owns The Future, Jaron Lanier, calls these online sales sites, “siren servers.” What he means is they are servers that attract large buying audiences by offering low prices and free services and then coerce loyalty by making it difficult to discontinue using the servers offerings. He is also very concerned that a high concentration of online commerce (ecommerce) accrues to a very small number of companies who own their own servers and control their market niches, which seems to be accurate from the survey of above sites.
Off To A Slower Start
Having looked at the control a small number of servers are experiencing over US online retail markets, we are left to look at how local based catchments are helping or hurting local business. Small local business has been the backbone of the US economy since the country began. US Commerce Department statistics state that small businesses are responsible for 39% of GNP. Small businesses employ 54.4 million people, about 57.3 percent of the private workforce. How small business is affected by ecommerce is important. It’s much more difficult to know how much online sales are coming to small local businesses due to the digital properties those businesses have set up than to a large server-based company. After all, a catchment is a collection of online properties that work together to funnel customers towards a business. Those properties are, for the most part, not on servers owned by the businesses. But the problem isn’t usually who owns the server so much as it is how well structured is the small business online sales funnel. Most small businesses don’t have the time or money to endlessly experiment with their online presence.
According to US census information, the average annual sales for the nations 21 million smallest businesses, that’s sole proprietorship businesses, the average annual sales is about 43 thousand dollars a year per company. For the next larger size small businesses, that’s businesses with one to four employees and there are 3.7 million of them, the Census Bureau figures show average annual sales of about 390 thousand dollars. These are sales volume numbers and don’t indicate what level of profits are being accrued, but the point is that sales levels are small. That means that an online presence is a notable expense and many of these companies are careful about allotting their dollar resources. Small sales levels, however, also mean that a very modest boost in sales coming from online marketing methods can be substantial for these businesses.
Here’s the real and present danger of online sales for the two models of online commerce. As server control businesses gain control of their niches they have a consistent tendency to destroy jobs. When you buy at Amazon there isn’t a sales staff. At the same time, the second model, local small business online catchments offer an opportunity to expand local small businesses and maybe to produce jobs. At this point the internet is new enough that it is still in its first development cycle. The larger server based online companies have not yet crashed into technology shifts and competition methods that have undermined their dominance. In traditional business cycles this is what happens. It remains to be seen exactly how that will shake out, but it’s likely some of them will fall by the way side as ecommerce develops and it’s likely that small business catchment methods will also improve offering better sales support for local small businesses. Exactly how this happens will be watched carefully here at The Digital Cycle.