Magazine article Marketing

Andrew Walmsley on Digital: The Credit Crunch Won't Pain Online

Magazine article Marketing

Andrew Walmsley on Digital: The Credit Crunch Won't Pain Online

Article excerpt

News from the sharp end of the financial sector informs us that UK bankers' lunch budgets have been slashed to pounds 54 a head, while their German counterparts have been barred from putting trips to brothels on expenses. There are probably no more indicative measures of the climate in the City, so it's safe to assume that it's tough out there.

Everybody is still avoiding using the 'r' word, but there's no doubt that retailers are getting worried as the credit crunch starts to bite Many major high-street retailers' share prices have halved over the past year as the City factors in expected consumer belt-tightening, and retail sales have been propped up on the high street only by deep discounting, with non-food prices falling at their fastest rate for 20 years.

Last time there was a recession, the internet bore the full brunt of it. There was carnage as the dotcom bust ripped through the economy, taking hundreds of flaky web firms (and some good ones) with it. This time around, is the internet recession-proof, or will the stock market woes hit digital too?

Back in 2001, many internet businesses were in the pre-profit stages of development. Their markets lacked scale, many management teams lacked the experience to weather a storm, and the online advertising market (a key revenue stream for many businesses today) was worth just pounds 166m that year.

Online retail has been the key driver of growth in online advertising; it is a capital-intensive business, requiring heavy upfront investment to create a service. Scale is therefore critical to businesses online, whether they are selling airline tickets or insurance policies, because there's a very low marginal cost of sales.

As the business scales, volume efficiencies develop much faster than in traditional retail, where staff numbers and premises are forced to grow in line with expansion.

The pre-profit phase of an online business is scary. You could be down a lot of money and still waiting to hit that tipping point. No wonder many investors pulled the plug in 2001 - it looked like the world had lost confidence in the web, and there were real concerns about whether that tipping point could ever be reached.

But a lot has changed. For a start, the audience is bigger: more than 32m Britons are now online, compared with 18m in 2001. …

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