MYTH NO. 2: It's cheap. (Myths And Realities of Web commerce Part two)

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Perhaps E-commerce is cheap when compared with a full-blown enterprise resource planning implementation or the purchase of a mainframe. But for a number of reasons, a full-scale online commerce effort is never a low-cost proposition. Business-oriented commerce server software, such as Microsoft Site Server Commerce Edition, may start as low as $5,000, but that's just the first building block in a complex undertaking (see Myth No. 1). Companies spend an average of $750,000 just for the baseline technology, according to a Gartner Group survey of 100 commerce sites.

"It's not like what IBM says in their e-business ad campaign: Just extend what you already have," says Roy Satterthwaite, a research director at Gartner Group. "E-commerce applications are in their first generation, and they just don't do everything you need. Open Market's Transact is great for transactions, for example, but not for content. E-commerce always ends up costing much more than any one vendor's productAnd guess where the big-ticket systems integrators--IBM Global Services, EDS, Computer Sciences, and the Big Five--are starting to aim their sights? "Web software vendors get all the coverage, but the windfall beneficiaries of E-commerce will be the integrators," says Satterthwaite. "After they finish their year 2000 and ERP engagements, they will throw their efforts into this." And that's not going to bring any price tags down.
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Then there are marketing costs and other non-IT infrastructure investments. Amazon.com, the paragon of E-commerce success, lost nearly $25 million on $153.7 million in revenue in the third quarter, and marketing costs were a big reason. Amazon's marketing expenses grew from $11 million in the first quarter to $26.5 million in the second quarter to $37.5 million in the third--more than it spent on technology. The annual cost of a major licensing deal on a high-traffic portal runs well into eight figures, and Amazon has several such deals. Amazon's third-quarter infrastructure costs included more than $550,000 to lease a book warehouse in the United Kingdom and the expense of expanding its main warehouse in Seattle, which now costs more than $450,000 a year.

Is Amazon gaining new customers from its marketing investments? Absolutely. Its revenue for the first nine months of 1998 was $357.1 million, up 337% from the year-ago period, and the company's stock price is up about 1,000% since its initial offering in May 1997. But the company is losing money--lots of it--proving the point that E-commerce isn't cheap.