The past year has seen some rather dramatic changes in the way the World Wide Web is perceived and used. E-Commerce is now a household word, and certain ‘Internet stocks’ are literally going through the roof as investors scramble to ‘get in early’ on the Internet boom. While on the surface, things are looking very rosy for Internet based computer businesses, the underlying currents appear to me to actually be moving in a direction that might be a bit surprising, if they turn out to be true.
Computer Hardware Sales Sites – While a number of new vendors have appeared in the last year, an equal number (or perhaps more) have either closed shop or substantially changed their focus to corporate, government and educational sales. This is because margins are getting worse and competition is getting fiercer. The newer Internet hardware companies are well financed, and are willing to take losses just to gain market share. Some of these companies are selling for no more than 2% over cost and use ‘virtual warehousing’ where large distributors, such as Ingram-Micro and Tech Data, become the shipping department for these vendors. This has put very intense downward pressure on prices that are already too low, which is not only pinching the resellers, but also the distributors and manufacturers.
In today’s market, the name of the game is high volume and low overhead. It won’t take too long before manufacturers recognize that their profits are being eaten up with all of the middlemen between they and the customer. Eventually, the traditional hardware sales companies may be facing extinction. Due to the low profit margins, the vast majority of hardware companies are offering little or no tech support – usually only 30 days at best. This means that manufacturers either must bear the costs of customer support for a large percentage of their product sales, or face the possibility of gaining a very bad reputation.
The web has allowed companies like Dell, Micron and others to sell directly to end users, and more manufacturers are expected to follow suit as soon as they can develop a good business model for it. By having a division specifically geared towards end-user sales and support, manufacturers are able to have better control on pricing and support. Eventually I expect to see most of the larger manufacturers and distributors selling directly to the public.
Price Comparison Sites – These continue to be very popular services, with more users visiting every day. Unfortunately, the criticisms are also growing because of the lack of accountability about the accuracy of prices and product availability. Too many unscrupulous vendors get exposure from these sites, which causes problems for honest vendors and manufacturers.
Assuming my predictions are correct regarding manufacturers selling direct to the end user, these price comparison sites will become much less useful. With only the manufacturer and a few large distributors to purchase from, pricing will become more standardized and there will only be a few sites to investigate.
Some of these sites do have additional information, such as product comparisons, reviews and user feedback. If their worth as pricing guides falls, these will most likely evolve into strictly product review and comparison sites. Since they already have wide popularity, users will likely continue to visit for recommendations and user feedback.
Hardware Review Sites – The proliferation of hardware review sites continues, with new ones popping up all the time. If my prediction about some price comparison sites entering into this arena is true, there will be even more competition soon. In order to appear to have more content, many of the new ‘review’ sites rely mostly on links to other news and review sites, with only minimal original content. Even many of the traditional sites are adding news links in order to compete.
Just as with hardware sales companies, some very well respected (and some not-so-respected) sites have closed down in the past year because there is only so much advertising revenue available and the work is extremely time consuming. In order to compete effectively with the well-established sites, such as Tom’s Hardware Guide and AnandTech, new and original material must be posted very frequently – which typically requires more than just a single person. Unless lucky enough to find some enthusiasts willing to work for free and manufacturers willing to send free product, most of these sites need substantial revenues. Even then, the difficulty is in finding people who are both knowledgeable about highly technical subjects, but are also good writers.
While studies show that Internet advertising revenues are expected to increase, most of that money is being directed at the very popular sites, such as those run by ‘traditional publications’ (i.e., ZDNET, CMP Net) or a few web-specific sites (e.g., Tom’s Hardware Guide). Many vendors are finding it difficult to justify spending the large amounts of money required to advertise on multiple sites (with relatively little effect) and cannot afford the larger ones. The result is that many review sites have only one or two advertisers, limiting their ability to grow and improve.
What used to be entirely individuals with a strong interest in computer hardware, this sector is evolving into businesses with the primary objective of getting traffic and generating advertising revenues. In the end, those who are maintaining sites primarily for the purpose of making money or getting free product will fall by the wayside and only the very large sites and pure hobbyist sites will remain.
Though all of these observations are focused upon computer hardware related sites, the same direction can be seen for other markets as well, and in some cases they are already well on their way. Amazon has captured the imaginations of stock investors, yet they still struggle to make a profit. In order to keep the traditional booksellers from invading their territory, Amazon must keep their margins very low and hope that volume eventually makes up for it. Now there are sites focused on MP3, which are putting pressure on the traditional music companies. This will become a major battle in the coming year as well.
All in all, this looks to be a tough uphill battle for those hoping to cash in on the e-commerce phenomenon, and only the strong and well-financed companies will survive (with a few lucky and/or ingenious ones thrown in). One thing is certain, however – the consumer will definitely be the major beneficiary.
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