The Analyst's Corner: The great exchange

During a hiatus from telecom, I once spend some time working my way up the ranks at a hallowed name in New York retailing. A major lesson I learned from this experience was the fleeting nature of brand. The company was a 50+ year dominant force in the New York area under its original name, the last names of its two founders. In less than three years, it over expanded, changed its name to the hip contraction of the first two letters of these names, was bought by a conglomerate, and faded into history as the Macy’s name went up on the stores deemed profitable. Goodbye Abraham & Straus.

The reasons for this rapid fall from grace are intriguing--and strikingly similar to what has happened to the RBOCs, GTE and MCI. AT&T and Sprint, take note. When companies get complacent about their brand image, they can quickly go from the hunter to the hunted.

Another lesson I learned was why many big retailers have unconditional exchange and/or refund policies. It’s all about economics. Here is the logic:

Big buyers have so much clout they force suppliers to eat returns. It costs much more to acquire a new customer than it does to please an old one. Because there is choice, the likelihood of an angry customer coming back is remote, and multiplier effect of bad word of mouth (intensified now by the Web) is devastating. 

Hence, stores don’t like to drive away customers who will spend at least $50,000 in their lifetimes over “trivial matters.” Dot.coms still don’t get this lesson in basic business. Fulfillment, i.e. great customer service, is everything.

By orders of magnitude, more profits and revenues are lost by messed up markups and markdowns of inventory than through shoplifting and returns. This speaks volumes as to why the best retailers are the ones with great customer management relationship capabilities and terrific back offices. Look at the valuation gap between Wal-Mart and Sears.

In retailing it is thus increasingly important that your IT is as state of the art as your location and fashion sense. However, it should never be viewed as a substitute for the latter two. Carriers are having trouble adjusting to the reality that they are not utility services companies, but just another retail service segment with a lot of competitors. They are learning the hard way that location (how one’s domain sits, including one’s name, in cyberspace), and fashion sense (how to create compelling experiences that change with the times), still involve a lot of human touch.

Another retailing revelation was that running an exchange--that is, being a fair arbiter of value--seems to be an activity that usually is best part of some bigger construct. Exchanges, including financial exchanges, succeed on their ability to deliver value to their members and the customers of those members. Hence, it is almost wonderful to watch the evolution of the more 1000 online exchanges that have developed in the past year.

Yes, the first-to-market auction sites, particularly eBay, have been “successful,” but for the most part profits for those running exchanges have been elusive. The reason for failure thus far appears to be that the operators have yet to stumble on what the true value of participation is for everyone in the community--and whether the willingness to pay for this value outweighs the alternative of bilateral “cozy” strategic relationships.

Throughout history, those running exchanges have not been able to capture and grow their own value without offering enhanced capabilities–the functions that make participants trust the operator. Creating perfect pricing environments, especially in today’s hi-tech world, is the equivalent of telling buyers that they have the opportunity for the electronic equivalent of a free lunch. 

No free lunches is one paradigm that is not going to shift easily. The successful middleman, in an era where technology is breaking down the barriers that created the need for middlemen in the first place (witness Napster), has to offer something more.

Putting aside the difficult issues that vertical online exchanges have with governance and the ability to protect sensitive information, it is worth reflecting on where the exchange movement, which is at the heart of the supposed shift in the fundamentals of B2B transactions, is going.

It appears to be forcing a dagger straight into the heart of that other hot market, the horizontally focused applications service providers. If I am a vertical exchange and have created a good enough value proposition so that I have almost complete participation from my “community,” isn’t it logical to leverage the connectivity and interaction of that community into something more valuable?

To clean up one of Lyndon Johnson's favorite sayings, “When you have them by the short hairs, pull.” Put another way, “When you have them by the wallet, their hearts and minds will follow.” This is the ultimate expansion on the notion of community involvement. It draws on the secrets of Yahoo! and AOL. If you give them a compelling experience, they will pay a premium for the privilege and won’t want to go somewhere else.

Communications service providers must look at this scenario of exchange evolution and understand the outsourcing opportunities. If you are in an exchange, run an exchange, are contemplating forming an exchange or are an application service provider who thinks these things are fads that will fall apart because they look like just a more intense way for buyers to beat up sellers, beware. The time has come for everyone to get exchange policies in place.
Peter Bernstein is President of infonautics Consulting, Ramsey, N.J. His e-mail address is pabernstein@worldnet.att.net.
This column originally appeared on the internetTelephony.com website.

RETURN TO TOP