Strategic Vision: Giga Information Group on the economics of ecommerce

Over the past six months, the trade press and finance experts have repeatedly stated that business-to-business ecommerce (B2B) will dwarf business-to-consumer ecommerce (B2C) by a rate of five to one.

While this is a statement about the flow of goods through ecommerce channels, it has been used to make the case to line-of-business decision makers for spending significantly more on B2B infrastructure (e.g. integrated supply chain) than they already have on B2C infrastructure (e.g. Web-based customer service).

Despite the near universal consensus surrounding the five-to-one ratio, one has to look hard for any kind of justification. Journalists cite experts, who in turn cite other experts until, in the end, one comes to suspect an almost circular chain of support that if followed around enough times will, like a perpetual motion machine, start generating the fulfilment of its own prophecy - at least in the short term.

While the five-to-one ratio feels like common sense (after all, businesses are so much 'bigger' than individual consumers) and there is no question that a shift from B2C spending to B2B spending would forward the interests of the established IT vendor community, there are some good economic arguments suggesting that, in the long run, the five-to-one ratio is all wrong. In fact, if these arguments are correct, then the value of the flow of goods through B2C channels will not only be greater than the value of the flow of goods through B2B channels, but greater by several orders of magnitude.

Traditionally, economic theory has regarded the economy as a whole as a vast, single value chain with raw materials and labour serving as input at one end, and consumer goods emerging as output at the other end. More recently, however, as the result of the belated influence of economists like Schumpeter, Kalecki, and Lonergan, economists are beginning to view the economy as stack of assembly lines, each layered on top of the other, generating output at a given rate continuously throughout any given period time.

Furthermore, each assembly line feeds the assembly line directly below it until one arrives at the bottom assembly line, which is responsible for feeding consumer goods directly to the standard of living. The key insight delivered by this stacked assembly line point of view is that a short-term acceleration in one of the higher assembly lines generates a succession of long-term accelerations in all of the assembly lines below it, eventually increasing the final flow of consumer goods by many orders of magnitude.

Now, if one assumes first that implementation of ecommerce-related technology will accelerate any of the assembly lines to which it is being applied and second that, in the long run, the value of goods flowing through ecommerce channels is a function of the overall rate at which goods are generated, then the stacked assembly line model predicts that, in the long run, the ecommerce channel for consumer goods will be many orders of magnitude larger than the ecommerce channel for capital goods.

Of course, these arguments apply to the long run and to another great economist, Keynes - famous for his quip, 'In the long run, we are all dead.' However, we are talking about ecommerce here and given the velocity of Internet time, the long run may not be all that far away.

* Will Cappelli is one of Giga's most experienced analysts, and specialises in the areas of outsourcing, service management, and network and systems management technologies. Will has 16 years of experience in the IT industry, serving in research, management and business development positions in a number of major IT consultancies and research houses, including Ovum, Meta Group and Gartner Group. He has published articles and books on a wide range of IT subjects, ranging from charge-back architectures to parallel processing.