e-Commerce: An e-Book Special Report

ONE

A Head Start

BY DAVID PRINGLE

April 17, 2000

When department-store company Karstadt-Quelle AG started an online shopping mall back in October 1996, Germany’s retail industry raised a collective eyebrow.

After all, at that time, fewer than 750,000 German households had access to the World Wide Web, and the Internet was widely regarded as being only for teenage technology enthusiasts.

But things changed quickly, and by the end of 1997, five million Germans were online, according to Jupiter Communications, a New York–based research group, giving Karstadt a promising prospective market.

What was it that prompted the retail giant to rush into e-commerce so early—six weeks before it even got around to putting up a basic corporate Web site? Credit a combination of foresight and fear.

It was very early for Germany, but we had known about the scenario in the U.S., says Holger Pleines, manager of e-commerce at Karstadt. And we had seen that we could have a problem in the future through Internet technology: The producer of items could sell direct to the customer, and we could lose revenue in our department stores.

That’s been the good news for Karstadt and several other European retailers: Because Europe was about two years behind the U.S. in adopting the Internet as a retail channel, European retailers had a chance to see beforehand where things were headed. And with that glimpse of the future, they could try to steer it in their direction.

What’s more, because there wasn’t a lot of interest in Europe in 1997 in funding Internet start-ups, conventional retailers had a golden opportunity to lock out the start-ups before they could get going. Venture-capital money was still relatively scarce, says Joe Sawyer, a senior analyst with Forrester Research Inc. in Cambridge, Mass., and it was hard to conjure up a lot of excitement about Internet pure plays.

So, how well have these high-street retailers fared? Well, that’s the bad-news part of the story: It seems many haven’t been able to capitalize on the early start. Surveys conducted in January by London-based research firm MMXI Europe show that brick-and-mortar retailers own none of the 10 most-visited retail sites in the U.K. In Germany, two conventional retailers ranked in the top 10, and in France, three made the top tier. (Two of the top 10 online merchants in the U.S. are owned by conventional retailers, according to MMXI.)

Most of the leading retail sites in Europe either are owned by American Internet companies, notably Amazon.com Inc., or are run by local mail-order firms such as the U.K.’s Software Warehouse PLC, which founded the popular site Jungle.com.

Karstadt started early but had to relaunch its online mall, My-World.de., at the end of 1997 after consumers complained that its initial version was difficult to navigate. Karstadt sunk a ton of money into doing their site over and over again, says Mr. Sawyer at Forrester.

My-World is only the 26th most-visited retail site in Germany, according to MMXI. Mr. Pleines won’t disclose what proportion of Karstadt’s sales currently come through My-World.de, which now stocks 1.2 million product lines. He says only, It is rising fast from a small base.

Another retailer found that starting early was no guarantee of success. Nick Jones, a London-based analyst with Jupiter, says that U.K. retailer Argos Ltd. was selling online in early 1996, but the company’s Web site offered only 12 product lines and sales were very slow. Argos has since increased its product range significantly, and sales have picked up.

Still, analysts say the brick-and-mortar companies in Europe are in a relatively strong position compared with their U.S. counterparts. Mr. Sawyer at Forrester says that traditional European retailers are neck-and-neck with the local dot-coms in terms of the quality of their online stores—though they trail the international dot-coms and local mail-order firms—while American retailers are still generally trying to catch up with the Internet start-ups.

What’s more, a handful of European brick-and-mortar companies did benefit from getting onto the Web early. Book, video and computer retailer FNAC, owned by Pinault Printemps Redoute SA, made its Internet debut in 1997. It now has the 10th most popular retail site in France, according to MMXI Europe. Jean-Christophe Hermann, chief executive officer of FNAC.com, says the company sold $7 million of products through the Internet in 1999. Although this is a relatively small figure compared with sales by Web sites in other countries, only 16% of French adults use the Internet, according to International Data Corp., Framingham, Mass.

And U.K. grocer Tesco PLC, which started e-commerce trials over the Internet in 1996, says it sells more than $3 million of groceries a week online in the U.K. Orders average about $140, and Tesco, which levies an $8 delivery charge, says the profit margin on each delivery is 7% to 8%.

One drawback for Tesco is its service is still very limited in geographic terms. U.K. consumers can buy Tesco groceries online only if they live near one of the 145 stores from which the orders are fulfilled. More than 450 Tesco stores have yet to be brought into the scope of the service.

And Russell Craig, spokesman for Tesco, says it can take a year to persuade people to buy fresh food online. One of the problems that we face is that in the beginning people will buy soap powder . . . but they won’t buy fresh food such as meat and produce, which they like to touch and feel, he says. It takes a lot of trust.

Mr. Pringle is a staff reporter with The Wall Street Journal’s London bureau.

TWO

Choice and Trust

BY JOHN BUSKIN

April 17, 2000

Perhaps the keenest observer of public attitudes toward privacy in the 20th century is Alan Westin. Among his credentials: professor emeritus of public law and government at Columbia University; publisher of the journal Privacy & American Business; author of numerous books on privacy; member of many federal and state privacy commissions; and designer of more than 40 privacy surveys.

In all, Mr. Westin has spent more than four decades studying the public’s attitude toward privacy. His conclusion about data collection online? Tell people you’re doing it, and they won’t mind.

In his research into privacy, Mr. Westin divides society into three camps whose membership he analyzes and measures. On the extremes are the Privacy Fundamentalists (25%) on one side and the Privacy Unconcerned (20%) at the other. He calls the 55% in the middle Privacy Pragmatists. They volunteer their personal data, but only after answering four basic questions: What’s the benefit to me? What are the risks? What are the safeguards? Do I trust you?

When isolating Internet users, the 25% number for Privacy Fundamentalists rises to between 30% and 35%. In addition, Net users are more activist in their refusals.

And as a result of media attention on stories like the DoubleClick situation, there is movement from the Pragmatist camp to the Fundamentalists.

Last November, however, Mr. Westin and Privacy & American Business completed a survey on Internet users’ attitudes toward privacy for DoubleClick. A key conclusion the survey reached: Give people a choice, and they’re not so fundamentalist. More than two-thirds of Internet users (68%) say they would provide personal information in order to receive tailored banner ads, if notice and opt out are provided, the study concluded.

Mr. Westin stresses that notice and choice were critical to user agreement. In light of the survey’s revelation, why did DoubleClick forge ahead independent of those conditions? Mr. Westin suggests, They didn’t understand the implications of the results.

Indeed, another poll designed by Mr. Westin confirms that consumers are more than willing to give up some personal data—as long as they have the choice to do so.

The poll, conducted by Harris Interactive and BusinessWeek, found an interesting schism. Consumers think there’s more data collection going on than there actually is, says Harris Interactive Senior Vice President David Krane, but a low percentage of people feel victimized.

In another Westin-designed Harris poll, a minority of consumers in three countries [the U.S., Germany and the U.K.] say they are interested in receiving marketing material, says Mr. Krane. Yet, in far greater numbers, consumers view personalized marketing [for which cookies are essential] as ‘a good thing.’

As for the future, Mr. Westin says, I don’t believe pseudonymous transactions are where things are going. Trusted brands will begin to dominate the transactional landscape. But that will only result from companies engaging in a set of activities that earn that trust.

One action he singles out as crucial is the corporate-wide hiring of high-level privacy officers. (The Double-Click editorial also publicized their recent hiring of a privacy officer.) And though Mr. Westin doesn’t see eye to eye with most of those whom he labels Fundamentalists, he feels strongly that you need impassioned people to alert society to dangerous trends. If the privacy activist did not exist, I would want to invent him.

He defines the pro-privacy forces as bipartisan and multi-ideological, and foresees a roar of legislation coming up.

Mr. Buskin is editor of dowjones.net, the intranet for Dow Jones & Company, publisher of The Wall Street Journal.

THREE

Setting an Example

BY LEE GOMES

April 17, 2000

The technology industry, that fountainhead of buzz phrases, has an expression to describe what happens when a company uses its own products. It’s called, poetically enough, eating your own dog food.

Most of the biggest names in the computer world are avid puppy-chow chompers. At Microsoft Corp., for example, software developers working on the next version of an operating system are required to use the product they are developing for their day-to-day computing needs. Cisco Systems Inc., which sells computer-networking equipment, is moving many of its business processes—and even some of its telephone system—onto its own in-house network.

Software maker Oracle Corp. is one of the latest companies to embrace doggie dining—and, like the other companies, it has good reason to do so. Oracle sells the software that big businesses, including Web sites, use to store their in-house business data; it also provides the consulting services used to get that software operational, an area that provides the bulk of its income. Over the past 18 months, Oracle has been trying to move customers to redesigned versions of its main products, allowing users access to information through standard Internet-style browsers rather than specially written software.

But if Oracle’s customers should upgrade to the new software, shouldn’t Oracle be using it, too? More significantly, if Oracle’s customers should be using the software to dot-com themselves and exploit the Internet and e-commerce—a constant theme of Oracle’s marketing—why wouldn’t Oracle do the same?

Well, Larry Ellison, chief executive of the Redwood Shores, Calif., company, wants the world to know something: We are eating our own dog food, he says, and it tastes great!

Over the past year, Oracle has undertaken a major effort to rework all of its computing operations—in the process changing much of the way it does business. The process is bringing new efficiencies to Oracle, but has not been without some bumps along the way.

Previously, Oracle had scores of computers all over the world storing its data in a system known as client-server computing—an approach that, just a few years ago, represented conventional wisdom about the kind of computer system a state-of-the-art company ought to have. In a typical client-server setup, computers were decentralized; each geographic region, for example, would have its own computer department running programs tailored to it. More often than not, these scattered operations didn’t talk to each other, making it difficult to get a company-wide view of things.

Client-server evolved because companies wanted to take advantage of low-cost desktop personal computers and workstations to move away from their expensive mainframes. Now, things are coming full circle: As part of its big redesign, Oracle, for instance, is replacing dozens of its in-house computer systems with just two or three.

To make that happen, the company first had to build a data-communications network that would connect all of its scattered operations around the world. Mr. Ellison himself had a big hand in that project. It then had to move all of its record keeping to the latest versions of Oracle’s software, which work in connection with browsers.

The overall goal was to put as much of the company’s internal software as possible on a single internal corporate network, so that each of the company’s 43,000 employees in more than 100 countries could ask a question and all get the same answer. In other words, Oracle itself should operate as much as possible like the Internet, whose very growth is fueling a huge increase in Oracle’s own sales and stock price.

We are doing this to gain all the benefits of moving to an e-business model, says Gary Roberts, who as Oracle’s senior vice president for global information technology has responsibility for much of the effort. The project will also help prove to the world that our products work, he says.

Mr. Roberts says that a big part of Oracle’s drive involved paring back the number of disparate inhouse computer systems. The company once had nearly 100 different kinds of machines handling e-mail. Soon, it will just have two. And where Oracle had more than 80 programs to track the work of its sales force, it will soon just have five.

That means substantial savings. Simplifying the e-mail system alone, for example, slashes the number of trouble calls his technicians have to make to 300 a month from 3,500. And rather than requiring a staff of 60 to keep e-mail running, Oracle now gets by with just a dozen. Mr. Ellison says Oracle is trying to squeeze as much as $500 million in costs out of its operations through the cutbacks.

There are other benefits, among them easier access to information. In the past, simple questions, such as How many people work at Oracle? were surprisingly difficult to answer. Someone would, by hand, have to query dozens of databases all around the world, enter the results in a spreadsheet, then add the numbers up. Now, there is a single human-resources database that has an up-to-date employee count at all times.

Another benefit involves basic financial reporting. The company once spent a week or two after each quarter figuring out what its sales had been. Now, it expects to be able to close its books within a few days after each quarter. Mr. Roberts says it will be much easier for managers to know about sales levels even while a quarter is under way.

It takes a lot of stress out of knowing how well we are doing while the quarter is under way, he says.

Little wonder many of the changes are popular with Oracle employees. Consider expense statements. In the old system, an employee returning from a business trip would submit a traditional expense report on paper, along with all the accompanying receipts. The form would be reviewed by the employee’s supervisors, and then by a series of people in various accounting departments. Reimbursements could take six weeks.

Now, the report is written on the employee’s computer using a form accessed through a browser and then submitted via the company’s intranet. Supervisors review it on their own browsers, and send it along electronically to accounts payable. Reimbursement checks arrive within five days.

To be sure, Oracle’s effort hit some snags along the way, not least its own bureaucratic resistance to the new way of doing things. And the company had to be sensitive to national-sovereignty issues when closing data centers overseas—it didn’t want anyone to think it was reducing its commitment to foreign markets. To show that this was a company-wide effort, the first data centers to be shuttered were all in the U.S.

But none of this was enough to derail the project, which Mr. Roberts says is on track to be finished in the next few months.

We are completely reinventing how we do business as a company, he says. In the Oracle of a few years ago, if I was an executive vice president of a region, I was like the CEO of my own company. Everyone was reporting to me. Now, we have changed the entire model, and that always brings difficulty.

Of course, many people would find it ironic that a company like Oracle, which is in the database business, would have been itself so badly organized that it couldn’t until now easily say what its headcount was.

Yeah, I know, says Mr. Roberts. It’s ridiculous.

Mr. Gomes is a staff reporter in The Wall Street Journal’s San Francisco bureau.

FOUR

At Your Service

BY GEORGE ANDERS

April 17, 2000

Every day, Amazon.com Inc. hears from more than 20,000 customers with a problem. Books that were ordered online haven’t shown up yet. A cute new toy didn’t turn out to be so cute after all. Meanwhile, some first-time visitors to Amazon’s Web site can’t figure out how to place an order.

On the fourth floor of the Decatur Building in downtown Seattle, more than 200 customer-service representatives try to put things right. They deal with a nonstop stream of e-mails, calls and letters, tracking down warehouse glitches and coaching new users on the basics of online shopping.

The trusty phrases Thank you and We apologize are invoked again and again. When things get ugly, Amazon’s customer-service reps are authorized to waive shipping charges and placate shoppers with gift certificates of $10 or more.

Even in traditional industries, getting customer service right is a tricky task. That’s doubly true in the world of electronic commerce, where merchants and customers never see each other and end up doing business linked only by a computer connection. That increases the odds of communications mix-ups and angry outbursts. What’s more, many e-commerce companies are growing so fast that customer traffic far outstrips their ability to handle shipping, payment and related issues reliably every time.

Yet Amazon founder Jeff Bezos gambled several years ago that if his company could deliver standout customer service, it could become the leading Internet merchant without offering the lowest prices. As a result, Amazon has rapidly expanded its customer-service department, hiring even in January when other parts of the company endured layoffs for the first time in Amazon’s five-year history.

So far, that bet has paid off. Amazon has more than 17 million customers, the most of any consumer-oriented Internet merchant. Amazon’s prices for books are only the sixth-lowest among 14 major online merchants, according to Gomez Advisors Inc., Lincoln, Mass., which publishes Internet shopping guides. But Gomez rates Amazon as the best overall online bookstore, mostly because of its strong showing in service-oriented categories such as customer confidence and ease of use.

In a company as automated as Amazon, the customer-service department is a curious mix of modern technology, traditional factory methods and old-fashioned hand-holding. Bill Price, Amazon’s head of customer service, is a former Navy officer who talks a lot about metrics and rigorous evaluation criteria. Yet as much as he tries to turn customer service into a series of simple routines, he acknowledges that the most important parts of the job can’t be mechanized at all.

To do this job right, you need a real passion for the consumer, Mr. Price says. At a company like this, we’re the only heartbeat that customers ever hear. Some of his most successful hires, he says, are former teachers and social workers, who empathize well with frustrated consumers. That helps head off what otherwise could be nasty disputes.

Inside the Decatur building, Amazon runs the New Economy’s equivalent of an auto-plant production line. Long rows of gray cubicles stretch across a vast open floor. Inside the cubicles, service representatives perch before computer terminals, writing one e-mail after another. (While some customers do contact Amazon by phone, the vast majority of complaints come in electronically.) New recruits in Seattle earn about $10.50 an hour. Experienced representatives who take on low-level management tasks may make as much as $16 an hour.

As customers’ complaints come up on representatives’ screens, routine responses are rapidly assembled from a library of 1,400 pre-scripted remarks, or blurbs. These are customized with the customer’s name and a few other details, and then sent out electronically so that the next problem can be dealt with. There are blurbs to address almost every conceivable issue, from the most common complaint of Where’s my stuff? to such unusual gripes as: There’s a hostile [or obscene] book review posted on the Amazon Web site and I want it purged.

In fact, says Amazon representative Marisa Cameja, there are two pre-set responses for the obscene-review complaint. One form thanks the customer for writing and promises to expunge the offensive review in a hurry. The other thanks the customer for writing and explains that Amazon is committed to letting users post a wide range of reviews, even ones that other customers might not agree with. Service representatives are supposed to use their own good judgment in deciding how offensive the review really is—and then pick the appropriate form.

Two seats down from Ms. Cameja, service rep Ben Morgan deals with a slightly offbeat version of the classic Where’s my stuff? complaint. An English customer ordered The Texas Chainsaw Massacre a month ago and is indignant because she still hasn’t received the cult video. Such delays are unusually long, Mr. Morgan tells a visitor. But he isn’t quite ready to decide that the order has been lost.

He sends the customer a form note saying that waits of up to 21 days are customary (and thanking her for writing). Later he says that if she still doesn’t have her video in a week, Amazon will probably send her a replacement, free of charge.

Many of the e-mails reaching Mr. Morgan’s screen are packed full of testy or even abusive comments. But Mr. Morgan says he has learned not to take such vitriol personally. If people want to vent, so be it, he says. It’s not my place to argue about how people feel about something. It’s my job to educate them so they won’t feel that way next time.

Besides, Mr. Morgan says, even the bad days at Amazon are an improvement from his previous job as a grocery-store stock clerk lugging heavy loads and opening boxes with a razor. This is more fun, and it pays better, he says. Plus, it’s less dangerous.

Amazon says many of its customer-service workers are promoted to other jobs at the company, but it says the department’s overall turnover rate is well below the 50% to 120% a year that’s typical for telemarketing and comparable customer-service jobs in traditional industries.

The current turnover level, Mr. Price says, is about what he wants. You can have too low an attrition rate, he explains, where you don’t change the work force and reps become complacent. At other companies, some of the customer-service units with the lowest turnover have become strong union shops. Amazon’s customer-service department, like all the rest of the company, is nonunionized.

When service representatives solve especially messy problems, they get a CPR certificate from the quality-assurance department, acknowledging a customer permanently retained.

In a similar form of recognition last year, Amazon management handed out hundreds of tiny green ceramic turtles to top service representatives. Unhappy customers are like upside-down turtles, explains Susan Robinson, an Amazon service manager: They want to get back on their feet, but they don’t know how to do it. That’s where we come in.

Recently, for example, service representative Ursula Schweiger got an e-mail complaining that shopping at Amazon wasn’t fun anymore. When you were young, fresh and only into books, deliveries were rapid, the customer wrote. Now I’m selling my stock, because I can see your new future: slow, cumbersome and less agile because of size.

Ms. Schweiger wrote back, apologizing for a shipping delay and offering a refund of $5.85 in shipping charges. For once, there wasn’t an in-house blurb to address the customer’s indignation. Improvising her own response, Ms. Schweiger wrote, Yes, we are getting bigger, but the commitment of this company to customer service is the best I’ve ever seen. Your feedback is extremely important to us. The customer wrote back to say thanks—and Ms. Schweiger got a CPR certificate.

Not all problems can be fixed. We have a lot of stuff at our disposal, says Andrew Cavanaugh, an Amazon service manager, but time is the one thing we don’t have. If something happened so that a present didn’t arrive for Christmas, there’s very little we can do to fix that.

And in some cases, customer-service goals succumb to other Amazon priorities. Last year, service representatives noticed they were getting complaints from people who had used the company’s one-click ordering option—and inadvertently bought items they didn’t want.

Service agents helped arrange free returns of those items, but they wondered whether the one-click service could be reworked to avoid those problems. The answer was: No. Senior Amazon officials believed that the extra revenue and convenience of one-click were too valuable to be undermined.

But in other cases, a simple apology or a rebate gets things back on track. Mr. Morgan, the customer-service representative, smiles as he opens an e-mail from a New York City woman who had been indignant a few weeks earlier when her order for a $5.99 paperback was saddled with $3.99 in shipping charges. Another Amazon representative had waived the shipping charges—and the woman wrote a follow-up note saying that she now liked Amazon and had placed three more orders.

Look at that, Mr. Morgan tells a visitor. Waiving a $3.99 charge is nothing to us. But to a customer, it makes things right again. She comes away happy. And she may even allow us another mistake in the future.

Mr. Anders, a former reporter in The Wall Street Journal’s San Francisco bureau, is now a senior editor at Fast Company magazine.

FIVE

Talk Big; Win Big

BY KARA SWISHER

April 17, 2000

It was somewhere between the Web site that raised $20 million in cash to tell you how to carve a turkey and the one that gives you a glorified online message inbox—that sold for $850 million in stock—that I began to suspect that I am in the wrong business.

Nice ideas both, but this is a lot to pay for information that, in the first instance, I have been able to get from my uncle at almost every major holiday. And his advice is free—indeed, he foists it upon anyone near the bird with a knife in hand and expects not a cent for the effort. He’ll also volunteer—just as eHow.com does—how to remove oil and grease stains from clothes. Nobody’s throwing money at him yet.

Same thing for Onebox.com, which is worth a fortune presumably because it gives people voice mail, e-mail and faxes in one convenient place. The receptionist at my office does that too, at a fraction of the cost.

How did they do it, I wondered, these two Internet companies and so many others—so newborn that if they were babies you might have to slap their bottoms to get them breathing? Was it the genius of their ideas? Was it their persistence and tenacity as entrepreneurs? Was it alchemy that allowed them to turn seemingly simple-minded ideas into giants of Wall Street?

Or was it simply their ability to talk a good game? Noodling on their sites, I noticed their deftness with the way they described their businesses.

Onebox, for instance, wasn’t simply an under-whelming little online inbox, but the communications application service provider (CASP) meeting the global demand for wireless and Internet-based messaging. And more: "With a highly scalable, highly reliable pure IP infrastructure, Onebox.com provides services for phone carriers, ISPs and Internet portals to provide