INSIDE OUT: Robert Peston - For most big firms the internet has increased the cost of doing business. They are stuck with two expensive ways of selling instead of just one

INSIDE OUT: Robert Peston - For most big firms the internet has increased the cost of doing business. They are stuck with two expensive ways of selling instead of just one - Two years ago, a national Sunday newspaper splashed my name over its front page i

by ROBERT PESTON, editorial director of QUEST,;e-mail:
Last Updated: 31 Aug 2010

Two years ago, a national Sunday newspaper splashed my name over its front page in a breathless report that I and a pal were setting up an online financial news and comment service. On the day it broke, I was with my teenage son at V99, an open-air rock festival. Shouting 'Don't quote me' to assorted journalists over a mobile phone, against the cacophony of Suede's wailing guitars, seemed in keeping with the internet madness of the time.

Back in the mud this summer for V2001, everything has changed. Simon is now old enough to go on his own, so my being there was an indulgence on his part. And the internet is no longer sexy front-page news.

I am becoming inured to the looks of pity I receive when I disclose that most of my time is spent developing an online business. The presumption is that all internet businesses will go bust. Interlocutors assume I am in denial when I explain that ours has a robust business model and is doing very nicely.

Our company is less rare than you might think. There are some proper online commercial enterprises out there, but they are not many and they are small.

We are a world away from the mantras of 1999, when first-mover advantage was supposed to count for everything. No-one doubted that early entrants to an online market would wipe the floor with boring, sleepy, old-economy rivals. Amazon would decimate WH Smith, would become the colossus of the travel industry, and Freeserve would end up bigger than BT. Yes, lots of serious people actually believed this.

This form of the mania was replaced by an obsession with clicks-and-mortar.

For about a year till the end of 2000, more traditional companies were scraping together every last penny to move their mainstream operations online.

Every self-respecting FTSE-100 business screamed from the rooftops that it was spending millions on developing new electronic ways of distributing products. And many millions more were disbursed in de facto venture capital, buying or backing the first-movers that no longer enjoyed the pioneering experience quite so much.

Almost every FTSE-100 company announcement of the time goes on at length about its substantial e-expenditure. And the stock market rewarded companies that were spending the most by pushing up their share prices, and punished those that stuck to their knitting.

Which brings us neatly to the present day. Big businesses are taking a hatchet to online expenditure. Huge e-spending is now seen by shareholders as a virtue only in that some of it can be eliminated to the benefit of margins and profits.

Even so, thoughtful firms have not been panicked into abandoning all new investment in the internet. They recognise that many of their customers want to be able to buy goods and services online. But they are also reconciled to the painful fact that the benefits are not shared evenly between providers and users: almost all the spoils go to consumers.

Of course, I exclude from this analysis e-procurement systems or business-to-business marketplaces. Most of these have yielded significant savings to companies, by bringing down the cost of materials, components and processes.

There have also been tremendous advances in the distribution of information within companies.

But of those hundreds of thousands of online businesses aimed at consumers, few have proved they can turn a profit, let alone generate an acceptable cash return on investment.

What has happened to Tesco, the FT, the Halifax and others is that the net has created a new distribution channel for food, for information and for financial services. They dare not close down these channels, for fear of alienating the many customers who like using them, even though they are years away from persuading punters to pay the going rate. And they dare not shut down supermarkets, close newspapers, or give up on high street banking.

They are stuck with two expensive ways of selling the same product, where once they made do with one. The internet has actually increased the cost of doing business for most big firms, not cut it, as its prophets predicted.

And competition created by the internet has reduced selling prices for many good and services, from loans to motor cars.

How amusing that the boring old farts who warned us of the risks in 1999 were right all along. Warren Buffett, the superannuated sage of Omaha, was spot-on when he bored for America with his constant carping that the internet would destroy value for shareholders.

He used an apt image in one of his homilies on the evils of investing badly. He likened the competitive advantage offered to business by the internet as akin to a person watching a spectacle in a crowd who suddenly discovers that he has a better view on tiptoes. The advantage lasts a millisecond, until everyone else is on tiptoes.

Well, pretty much every big business is on tiptoes now. And as someone who has just spent eight hours stretching up to see guitar-playing matchstick men on a distant stage, I know how uncomfortable that is.

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