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Online editors enjoy profitless prosperity

Online editors enjoy profitless prosperity

It has taken only about two years for online shopping to morph from a geeky way of buying books and software into a business phenomenon that's shaking the structure of the entire retailing industry - and changing the buying habits of millions of people.

Although online sales still account for well under 1 per cent of total retail spending, the possibility that they might soon account for a lot more has produced a veritable plethora of dot-com retailing ventures. Not only can most items now be bought online, they can be bought online at dozens of different places.

For the time being, Internet retailers have abandoned any short-term plans for profitability in favour of an all-out spendathon aimed at establishing position for the long term. A lot of the spending is on advertising. But as consumer options increase, retailers also face greater pressure to improve customer service, broaden product offerings and reduce prices. In established categories such as books, the competition from entrenched players is ferocious. In big-ticket areas like furniture, online retailers still face the task of convincing consumers that buying online is worthwhile.

Across the retailing landscape, traditional bricks-and-mortar stores are waking up to the Web challenge, sometimes even enlisting venture capitalists to help them vanquish the dot-com pretenders.

And there is little evidence of the viability of the Web retail model as it is constructed today. Consider that in the September quarter, Amazon.com, the very icon of Internet retailing, the envy of the industry, lost $US197.1 million. And the outlook for its fourth quarter suggests even greater losses. Amazon produces red ink in the most impressive volume - but almost every online retailer reports losses.

Exceptions to the rule? They're hard to find. But for most of its short history, online retailing has an element of the old line about losing money on every transaction, and trying to make it up on volume.

It's silly to say there's no profit to be made in online retailing. At least theoretically, margins online should be higher than those offline. No doubt, some people (in addition to venture capitalists and Web site builders) will eventually find e-commerce to be immensely profitable.

Do not be surprised, though, if some of the winners in the end turn out be companies other than the industry pioneers. The real giants of online retailing may turn out to be the big offline retailers. They've got deeper pockets and better established brands.

And at the end of the month, they've generally got a few bucks left over, which is more than Amazon can say.

By Eric Savitz


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