Internet boom - the sequel

Amid the evidence of a global slump – the world economy now declining faster than at any time since the 1970s oil crisis – hardly anyone is paying attention to last year's hot issue: e-commerce. So has the internet boom vanished? Not at all. Business use of the net was always growing fast but the slump is giving it a new impetus.

Amid the evidence of a global slump – the world economy now declining faster than at any time since the 1970s oil crisis – hardly anyone is paying attention to last year's hot issue: e-commerce. So has the internet boom vanished? Not at all. Business use of the net was always growing fast but the slump is giving it a new impetus.

At the moment just about every business in the land is hunting for ways to cut costs. Sadly the first way is to shed labour; but as they do so, they still find they have to meet demand. Simplifying how companies work by substituting the new communications technologies for the old is one way of servicing customers more cheaply. Indeed, saving costs is cited as the second most important reason for selling through e-commerce in a new Office of National Statistics survey. Other advantages include reaching customers, expanding the geographical area of a market, speed, simplicity, better service and, more ominously, avoiding loss of market share.

Unsurprisingly, larger companies are much better at plunging into the new medium. Only about 59 per cent of smaller firms are using the web, in contrast to virtually all larger ones, as the graph on the left (taken from the ONS survey) shows. But big companies are a catalyst: if small firms wants to do business with larger ones, as virtually all do, they are pushed into setting up an e-commerce system and then aligning it with big firms' procedures. This ripple effect has been spreading through the business world almost unnoticed.

The big disappointment, by contrast, is B2C (business to consumer) and that has stolen the headlines. Why? Well, it is more interesting. It is much easier to sell a story about the relatively slow growth of, say, Lastminute.com after all the hype of 18 months ago than it is to sell one on the growth of, say, online component auctions. It is also easier to illustrate because you just stick in a picture of Martha Lane Fox. But the B2B story is much more important.

In any case, we should not be surprised that B2C has been a disappointment. There are three big forces that determine commercial use of the internet: cost, convenience and culture. For businesses, cost is paramount: a couple of percentage points either way may be the difference between a profit and a loss. They can also throw resources at problems of convenience and culture. You buy in the technical help to make the online transaction convenient and you employ people for whom there are no cultural barriers to the new technologies.

For individuals, cost is less important and culture and convenience much more so. Where it is more convenient to buy online – airline tickets, say – people do so. But for most purchases it is less convenient, particularly if you have to hang around waiting for something to be delivered.

In the UK, convenience has also been restricted by the slow adoption of broad-band, the slowest of any large developed country in the world. This has particular reasons: the weakness of the cable TV industry and the dominant position of BT, which is only now making a real effort to offer ADSL technology to the home. (And not to every home: an acquaintance in Kensington was told the technology was not available there and it was not an area where there was much demand for it.)

Whether posh people are more or less likely to want broadband is, I suppose, also a cultural matter. A more concrete example of a cultural barrier is mail order: in the UK this is much less established than it is in the US, which explains why B2C has growth faster there. The contrary example, Tesco's online supermarket shopping, basically harks back to the time when local grocers delivered a weekly order.

Even in the US, where there are fewer cultural barriers, B2C has met resistance. Dell Computer, which developed the build-to-order manufacturing system, finds that only 25 per cent of its purchasers place a fully electronic order. Most ring up to check details or fax in the order.

But we are moving. The right-hand graph shows the proportion of adults who have used the net for various purposes. There is a yawning gap between those who use it for finding information and email, and those who use it to complete transactions. But between January and April this year the latter rose from 30 to 35 per cent. If that rate of growth has been sustained, the proportion must be near to 40 per cent now.

Bolting down examples of the growth in B2B internet use after the events of 11 September is near-impossible. What seems to be happening is an intensification of a process that was already going on. But there are two areas where things are bubbling.

One is that mobile internet access is booming, often through people connecting laptops to their GSM phones. As speeds race up, the hunt for commercial applications of the mobile will intensify. Saving employee time by using mobile tech- nology is one of the areas where companies can make immediate savings on labour.

A second area of growth is saving on travel. It is a bit crass to point out that video-conferencing is doing well following the travel restrictions that many companies have imposed. Of course that is bound to happen but video-conferencing is a poor substitute for face-to-face meetings. But there may be long-term consequences, where other technologies are developed to cut travel needs. There are enormous potential cost savings here.

The key point is that we are going through a period of tremendous improvisation: companies have a known but newish technology that they are throwing at new and unknown problems. We know from the experience of 11 September that the internet is very tough. The result will be both greater efficiency and tougher systems – but in ways that will only become apparent in several months.