April 21, 2012

One Click: Part Two

I couldn't help but notice the irony in the title. Something which was intended to be simple and fast, has got a second post on it. Anyways, this one is not about the book, but on e-commerce and internet as a whole.

The fastest way to become a millionaire these days seems to be via technology based start ups. They may be pure plays like Instagrams of the world, or can be a web enabled real businesses like Flipkart (more on flipkart on some later date). People are investing like crazy into tech start ups, and valuations are reaching close to bubble zones. So what is it which makes an e-company more attractive than a brick and mortar one? Is this just the premium on betting on future or there are other real tangible present reasons?

For one, they are more nimble. Compared with a company on ground which may have locked a long term lease, have inventory, and old information systems, an e-commerce company would be much more nimble. It would be much quicker to adapt to changes, and can completely re-invent itself at lower costs.

Another reason I think is the efficiency - compare the music selling models for Apple and a CD store. While the actual store would place orders for CDs, wait for shipment, pay for transportation costs, pay rental for the store, and then be left with unsold inventory. Apple on the other hand just sells a digital file, gets a hefty cut on each song sold, doesn't carry any inventory risk, and has almost no capital deployed. Little wonder Apple has a margin in 40s, compared with single digit margins at say Walmart.

And lastly, I think its a huge monopoly of scale potential. On internet, its just one or two guys who control each markets - be it google in search and mail, microsoft in OS, Apple in products you didn't knew you needed. So, no wonder when someone opens a flipkart, it gets a much higher valuation than if he had opened a store of even twice the scale.

It may all be a big lie, and ten years from now mankind may return to real brick and mortar businesses. But whats the harm in trying to understand a few things, and try to rationalize the same.

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