2.4 History of the Internet

The Internet began with research of a peculiarly theoretical nature: how to send information efficiently over networks so the information got to its destination without being scrambled, attenuated or lost. That achievement is the fruit of communications science: a highly technical field needing a good grasp of advanced mathematical procedures. {1} {2}

The long road to success needs to be emphasized. No one envisaged the Internet in its first phase of development. 1961 to 1974 was a period of innovation, driven by pure and applied research, and the need to link mainframe computers on separate university campuses.

Security drove the next development phase. A simple circuit of information centers was vulnerable to terrorist or nuclear attack. Knock out one section, and whole circuit goes down, leaving battle commanders literally in the dark. Much better would be a diffuse network of circuits, with inbuilt redundancies continually offering different pathways for information. {3} The period 1975 to 1995 was therefore one of institutionalization. Funded by the US Department of Defense and the National Science Foundation, development was directed towards a military communications system robust enough to survive a nuclear war. In 1986, the NSF assumed responsibility for the resulting ARPANET (Advanced Research Projects Agency Network), and spent $200 million over the following ten years to create a civilian equivalent.

1995 onwards saw the commercialization phase in which government agencies encouraged private corporations to expand the Internet backbone and extend services to PC owners: individuals, private institutions and business. Profit and market share were the driving forces.

USA eCommerce from 1995

The USA forged the ecommerce revolution, and still leads in ecommerce services, software and entrepreneurial skills. Phenomenal successes have been mixed with spectacular failures, and if the overall picture is complicated, there is much in the American experience to provide lessons and pointers. {4} Ecommerce started in the mid-nineties, accelerating rapidly through 1999, when large sums could be raised for nebulous and untested notions. Shares traded at unsustainable levels {5}, making fortunes for ecompany bosses and cannier investors. {6}

The bubble burst in early 2000, when shares tumbled to a fraction of their previous values and funding ended. The eighteen months to late 2001 were tough for most concerned, whether emarketers, investors or financial institutions, and were exacerbated by the US recession. Of the estimated 7-10 thousand Internet companies receiving funding to 2000, some 501 were shut down in 2001, and another 1283 taken over. {7} Nonetheless, online revenues increased {8}, even if profit did not. Gradually, in one group or another, it became apparent ecommerce was surviving {9}, even picking up. {10}

Then came September 11th and corporate accounting scandals. The ecommerce recovery continued, but with patchier results in the business to customer sector. {11} Marketing reports continued to be optimistic, with Forrester predicting worldwide online revenues of 3.2 trillion US dollars by 2004 {12}, for example, but these were reigned back to the sensible: to $105 billion by Jupiter Research in 2003. {13} The hype was over, but ecommerce remained an essential and growing part of the US economy.

USA Lessons Learned

Successful ecompanies fell into several categories. There were those who became market leaders — Amazon, Cisco — by starting big at the right time, and by continuing to invest heavily in technology. There were those with forward-looking managements that have brought in customer relationship management and supply chain management technologies, with corresponding staff reorganization and training: their reward was better-run enterprises, with cost savings and increased competitiveness. There were companies, large and small, that have moved their business online, building on existing supply relationships and customer services. And there were those who have brought new businesses online by exploiting market niches and local trading situations. Few of these developments were without difficulties, and some are still learning to adapt to a new and ever-changing environment.

For an unhappy majority of larger companies, however, ecommerce was a frustrating affair. If their websites had not actually lost money, they hadn't fulfilled expectations either, nor repaid the considerable money and effort expended. Lessons were hard earned, and perhaps were obvious from the beginning, {14} but the experience was not being thrown away. Ecommerce continued, but with phased objectives, and sounder notions of costs and benefits.

That left the smaller companies. Some followed the herd and were swept up in the 1998-2000 dotcom land-rush. Some simply thought they'd 'have a go', unaware that ecommerce is anything but easy money. They underestimated the expertise and management effort needed to get the website right, not to mention maintaining and developing it. Capital was cheap, and financial control never caught up. The websites usually achieved orders, but the fulfillment process was painful for everyone. Some ebusinesses were developed for sale, but the dotcom era ended before they could be brought to market. And software houses that were light-years ahead woke up to find themselves suddenly dead when orders and financing evaporated. {15}

But once ecommerce had been shown to work for some, debate turned to how, to what areas, and with what success. {16} Gradually the obvious truth emerged that ecommerce is a business like any other business. {17} Amazon notwithstanding, ecommerce companies had to watch the bottom line. Success came slowly. Effort, planning, knowledge, experience, commitment and resources were all essential. {18} The one advantage ecommerce possessed was its supporting medium, the Internet, which provided information, case histories and guidance for those who had the sense to use them.

Largely unreported outside specialist websites was the growth in business to business ecommerce, which went through many painful developments, but eventually paid its way, its revenues coming to dwarf those of B2C ecommerce. {19}

European eCommerce from 1999

Europe started slowly. Though the area had the potential to reach $1.6 trillion in online trade by 2004, Forrester {20} estimated in 1999, the region had been slow to adopt the necessary site personalization, channel integration and technology. The best of European ecommerce sites were as good as their American counterparts, but many — probably the majority — were losing money in the period 2000-02. Indeed, a survey by the British Chamber of Commerce {21} suggested that three-quarters of smaller firms and more than half of medium-sized ones surveyed had seen no return on the £1,000 to £100,000 spent on their ecommerce site. Only a tiny fraction of retail sales were made online, and many visitors were only window-shoppers. {22}

Problems included:

1. Language barriers.
2. Multiple currencies, somewhat eased by adoption of the Euro.
3. Differing tax and VAT regimes.
4. Uncertainty over and pending legislation on ecommerce taxation.
5. Lack of cross-border logistical support.
6. Poor IT infrastructure.
7. Conservative banking attitudes.
8. Restricted choice of software, payment service providers and merchant account providers.

Much of that changed in the following few years, but the July 2002 Economist Information Unit {23} could still rank preparedness for ecommerce in Europe as follows (USA scoring 8.41)

Europeans spent an average of €430 online between August and October 2002, only slightly less than the €543 per head spent by Americans over the same period. {24} The three years following saw the UK and Germany emerge as ecommerce leaders in Europe, the larger companies lagging a year behind those in America. {25} {26} Outsourcing continued to accelerate, with the level of deal activity rivaling that in the US. The UK still stands out as Europe's dominant market, but outsourcing has gained ground in Germany, Spain, and France. {27}

The Economist Information Unit updated their rankings in 2005 to include such matters as broadband access, innovation and the penetration of mobiles and public-access wireless 'hotspots'. Preparedness for ecommerce in Europe then stood as follows (USA scoring 8.73): {28}

The average UK online shopper would spend €1,744 online in 2006 and €2,410 in 2011, driving UK eCommerce from €43bn in 2006 to €76bn in 2011, a Computing report predicted, {29} and a RNCOS report entitled UK Supermarket Analysis (2007-2010) found that online sales in UK were expected to account for more than 19% of the combined retail sales by 2012, exceeding £62 billion. {30} In general, however, European ecommerce lagged behind its retail counterparts in the US. {31}

Then came the recession, which threw most forecasts into the melting pot. Nonetheless, a Forrester Research report noted that European online retail sales grew 18% in 2010, and would grow 13% in 2011, reaching €92bn. Some 72% of the British online population shopped the web in 2010, amounting to €30bn, a €5bn increase from 2009. {32}

eCommerce in Other Countries

Each country and political block has seen its own pattern of Internet and ecommerce growth. Generalizations are difficult, much depending on legislation, government initiatives and local enterprise. Any western company entering these markets will need to purchase specific marketing reports (which do not generally provide free summaries now, and/or maintain them long online), undertake detailed studies in their own market sector, and find local representation.

US Development Phases: Summary

Questions

1. Briefly describe the three phases in the development of the Internet.
2. Provide a brief history of American ebusiness over its last, commercial stage.
3. How does the European history of the Internet differ from that of America?
4. What are the difficulties in predicting Internet use in different countries? Give some examples.
5. What, in your view, are the most important Internet developments of the last five years?

Sources and Further Reading

1. Network Protocols Handbook by 'Javvin Technologies'. Javvin Press. May 2007.
2. Packet Guide to Core Network Protocols by Bruce Hartpence. O'Reilly Media. June 2011.
3. Histories of the Internet. Internet Society. A very full site, with many accounts and some guesses at the future.
4. The Dot.Bomb Survival Guide by S. Carton and C. Locke. McGraw-Hill Educational. December 2001.
5. E-Trends: Making Sense of the Electronic Communications Revolution by Tanya Linch and the 'Economist'. Bloomberg Press. February 2001.
6. e-Valuation by S. Kerr. Business Marketing Consultants. Various valuation approaches.
7. Internet Companies Three Years After the Height of the Bubble. WebMergers. December 2000. (Not now available).
8. 2002 E-Trading and E-Services Markets. Mindbranch. May 2002. (Not now available).
9. Good News for Ecommerce. 11 January 2001. Iconoclast. (Not now available).
10. The Internet Commerce Briefing. MarketResearch.Com. December 2001.
11. Is the Dot Com Bust Coming to an End? by M. Chait. CyberAtlas. July 2002.
12. Europe will deliver 22% of the $6.8 trillion global Internet economy in 2004. Forrester. April 2000.
13. Online retail spending to soar in the US. Nua Internet Surveys. January 2003. (Not now available).
14. F'd Companies: Spectacular Dot Com Flame Outs by P. Kaplan. Simon and Schuster. 2001.
15. Economic Doldrums Shake Identity of California's Silicon Valley by M. Quinn and K. Dunlap. 31 July 2002. Ecommerce Times. July 2002. (Not now available).
16. Futureconsumer.Com: The Webolution of Shopping to 2010 by F. Feather. Capstone Publishing. April 2001.
17. Customers Rule! Why the Ecommerce Honeymoon is Over and where Winning Businesses Go from Here by R. Blackwell and K. Stephan. Crown Business. June 2001.
18. Operating an E-Business by A. MacAfee. McGraw-Hill. September 2004.
19. Fundamentals of E-Commerce Technologies, edited by Christopher C. Yan. Center for Logistics Technologies and Supply Chain Optimization. Undated slide presentation. (Not now available).
20. The Sleeping Giant Awakens.. Market Research.Com. 1999. (Not now available.)
21. How bright websites will win more sales. Financial Mail 28 July 2002.
22. European E-commerce. NetStatistica. June 2002. (Not now available.)
23. E-readiness Rankings. Economist Intelligence Unit. July 2002.
24. Europeans spending more online. Nua Internet Surveys. March 2003.
25. Britain leads Europe in online shopping by W. McAuliffe. NCTNews.Com. January 2002.
26. UK consumers on track to grow online spending by 64%, trade group reports. Internet Retailer. December 2004.
27. Trends 2005. Forrester. December 2006.
28. E-readiness Rankings. Economist Intelligence Unit. July 2005.
29. European online retail hits €100bn and set to rise. July 2006.  Computing. (Not now available).
30. RNCOS: Online Retail Sales Hit Century, Poised to Grow in Future. Macroworld Investor. June 2007. (Not now available).
31. The effect of ICT and E-Business on EU Trade: A Retail Business Perspective by Maria Woerndl. Slideshare. 2008. A factual study.
32. UK will lead ecommerce sales in Europe for next five years says Forrester. Internet Retailer. March 2011.