Magazine article The Journal of Lending & Credit Risk Management

Internet Mania

Magazine article The Journal of Lending & Credit Risk Management

Internet Mania

Article excerpt

The stock market is in love with the Internet. Well, maybe not the Internet as it is but certainly the promise that it holds. This year, for example, the Hambrecht and Quist Internet Stock Index soared from 140.6 on June 1 to 196.47 on July 8. Internet companies that actually make a real (cash) operating profit are scarcer than hen's teeth. Even online bookseller giant Amazon.com has seen its losses widen as it has pumped big bucks into advertising, but the market loved it when its losses were less than expected. And in just three years, Amazon.com has become the nation's third largest bookseller! These wacky valuations would appear to be discounting the hereafter, not just one or two years ahead.

Or are they? The promise of the Internet as a major revolution in retailing is beyond easy calculation. But like any emerging technology industry, it can turn sour in an instant because of a competing technology or a chip revolution, leaving today's promise and sparkling business plan looking like yesterday's lunch. At this point, the promise does seem to be creeping toward reality. There were 528 million web sites in May 1998, up from 170 million in May 1997. There are 12,000 World Wide Web servers currently, with at least 10 added to the Internet daily. Web sites are clearly a growth business, but to what purpose?

Banks have embraced this promise, seeing the Internet as the future low-cost delivery channel they need so badly in the world of virtual financial services to come. There were 425 North American bank web sites in 1996 and there will be easily 1,500 by the year 2000. Again, putting up web sites is a growth business, but to what purpose?

Life Cycle Immunity?

Both investors and bankers are acting as if Internet usage is immune to the product life cycles that have governed technology, new businesses, and new products from time immemorial. This "build it and they will come" mentality has been dangerous to wealth in the past, and it's time to sober up and ask how Internet usage is faring and what is its life cycle outlook.

The concept of product life cycles is very old and well proven. The basic concept is that it takes time for humans to adopt new ideas, technology, products, or processes. This is expressed in terms of adoption stages - introduction, growth, maturity, and decline - that can be portrayed by sales growth over time (see Exhibit A). An important key to understanding whether one has made a good business bet on a new product or technology is to understand where it is in its life cycle and what must happen to speed up adoption.

A good example of a product life cycle is ATM deployment and usage. Exhibits B and C plot the growth of ATM deployment and use (transactions) in product adoption cycle (S-curve) format. ATM deployment prior to 1982 was slow and based on using ATMs as a proprietary bank product - "I have them, my competitor doesn't, so switch to my bank." This is not an idea that resonated with consumers, and usage growth was even slower. These were the days of mythical limits on ATM usage, when only 35% of customers would use them and machines could not get above 5,000 transactions per month.

All this changed with the decisions in the early 1980s to share terminals and form networks that all banks could use. This decision helped propel terminal deployment into the growth stage of the S-curve. By 1992, nearly all terminals were shared and deployment propelled further because of fee income opportunity and the notion of ATM deployment as a "business." Although ATM usage still lagged, as consumers learned the benefits of shared terminal, transactions soared into a growth phase that has yet to heel over into maturity.

Barriers

In other words, the secret to understanding where a new product is in its life cycle and how quickly it will reach takeoff (growth) requires careful thought about the barriers to deployment and usage. There appear to be no barriers other than programming talent and cost (relatively minor) to creating more and more web sites. …

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