Is it true that there are no barriers to entry in etail?(Written February 9, 2000.)"No barriers to entry" is a misnomer. If there were literally no barriers to entry, I would own my own online bookseller and so would you. Nobody believes that. What people really mean is that barriers to entry in the etailing business are quite low. Low compared to what? Well, low compared to the costs of entering other businesses, specifically the brick & mortar retail business. If this were true, we would expect that competition would be tougher and profits would be smaller in etail than in brick & mortar retail. I think the evidence is that this is true, since there is vicious competition in etail and no major etailers are making a profit (not counting eBay, Yahoo, or AOL as etailers). Also, low compared to the value assigned to etailers by the stock market. If this were true, we would expect to see a stampede of people starting etailers and then bringing them public, because the costs of starting one are small compared to the rewards of the IPO. Needless to say, this prediction has also come true. I find it amazing that David Gardner would claim that it is difficult for companies to enter Amazon's business, and in the same breath report that Buy.com had a $170 million IPO. (This, by the way, was the point of the Nile.com thought experiment. If you really believe that a popular etailer should be worth tens of billions of dollars, then you should be willing to spend at least a few billion starting one. Whatever barriers to entry there may be, a few billion dollars batters down a lot of barriers.) "Entering the market" does not mean "dominating the market." Even if BN.com only has a fraction of Amazon's market share, its presence still has a big impact on Amazon's profits if Amazon feels it has to match BN's prices. Even if a corner bookshop with a website will never be more than a little gnat compared to Amazon, it is still an annoying little gnat. The presence of 5000 little gnats makes a difference. Barriers to entry are lower for some people than others. If I decided to start an online bookseller out of my garage, I would need to buy a few things first, starting with a garage. Obviously, if I already owned a corner bookshop, that would be a big head start. If I owned Borders, that would be even better. If I owned Bertelsmann, the world's largest book publishing group, that would be even better. So when people argue about barriers to entry they should be clear on whose barriers they are talking about. Bottom line: What do high barriers of entry mean? They mean that new competitors are unable to make a profit, so they are either discouraged from even trying to compete, or if they try anyway, they go broke. Have we seen any evidence of discouragement? No, there are etailers IPO'ing left and right, and practically every company you can think of is trying some website/etail angle. Okay, how about competitors going broke? I am not aware of a single high-profile Amazon competitor going broke so far. When it seems like they might go broke, they generally get acquired by some big company that wants to try its hand at the etail thing. I do expect we will see some bankruptcies in the future, but I think these are as likely or more likely to be the first movers rather than the new competitors. I think eToys is more likely to go bankrupt than Toys 'я' Us. I think Amazon is more likely to go bankrupt than Barnes & Noble. If there are high barriers to entry, so far we have not seen a scrap of evidence that they are operating. |