The Business World: The way to prophesy profit on the Internet

Media companies, and the big `branded' retailers, leisure companies and hotels will tend to be winners. The `non-branded' retailers, secondary retail property and the financial sector look like being the losers

A CD DROPPED through our door yesterday offering 100 hours of free access to the Internet. Great idea. Only problem is that no-one told the company offering this deal, AOL, that lots of companies are offering free access to the Internet with no time limit. Suddenly Britain is becoming the first country in the world where Internet access is free.

Now as we all know there is no such thing in the world of economics as a free lunch. We still have to pay for the phone call to connect to the Internet, and more important perhaps, by accepting the "free" access we are giving away information about ourselves, together with access to our computer screen, which otherwise would cost money to assemble. The companies involved are gaining brand recognition as well as access to potential customers.

But the word "free" still carries clout, and this development will power a new explosion of growth in homes that have gone on-line. There is disagreement about the figures, but if you include access both at home and in the workplace roughly one-third of adults here have some access to the Net. Within three years more than half will. Whether the main entry point remains the computer, or whether this is supplemented by the digital TV or the mobile phone, is irrelevant. This is still a revolution.

But all revolutions have winners and losers, and some are becoming possible to discern.

The financial markets have adopted a grapeshot approach, blasting any business with their attention. Since these companies don't make money, Internet stocks have been selling heady multiples not of their earnings but of their sales. Anyone who has looked at past financial manias, from Dutch tulips and the South Sea Bubble to the Japanese market boom of the late 1980s and early 1990s, can predict the inevitable outcome.

Yet there is a more sensible way of observing the Internet boom, which is to examine only established businesses and determine which are likely to win and which to lose. Some are obvious. Most firms in IT or in telecommunications are going to do well, though the former telecommunications monopolies will continue to be under pressure from tougher regulation and a collapse of profitability on international business.

But when you look at other sectors, such as financial services, the outcome is harder to call. Banks and insurance groups can gain an additional and very cheap way of reaching their customers. But they also face potential new competitors who can use the same technology to attack them. To some extent bank margins have been protected by the high barriers to entry; if these come down, then the squeeze on margins might more than offset any fall in costs.

The London investment banking arm of ABN-AMRO has done a useful categorisation of the various industrial sectors. Aside from IT and telecommunications, it reckons transport will be a winner, because many people see the new technologies as a way of cutting transport costs. Media companies will tend to prosper; so will "branded" retailers, leisure companies and hotels, and industrial property. "Non-branded" retailers, secondary retail property and the financial sector will tend to lose.

This is all sensible stuff. We have a lot of experience of how technology changes industrial structure: the rise and fall of the textile industry and now of the oil companies; the explosion of the personal computer manufacturers and of the software houses, which will be followed, in perhaps ten or 20 years, by a similar decline.

For investors it is good to have a clear idea of the areas of the commercial forest likely to grow, even if markets are inevitably going to mis-price the results. But it is tough stuff for an individual company. What do you do if you are in an area which you can see is going to be squeezed? Do you try to merely manage decline. If so, how? Or do you try to nudge the business to more promising areas, even if you face competition from firms that know more than you?

The toughest question business leaders have to ask is - what constitutes comparative advantage in a world where there is infinite (but crude) information?

Clearly, strong brands will tend to prosper because if a brand is well- known it can catch attention amidst the cacophony of sounds all about it. Clearly, being adept at using the new technologies is important too. And, clearly, quality of service will matter more and more, because that will be the only way to earn a premium price for products, which increasingly, like commodities, would otherwise be sold solely on the basis of price.

That is common sense. Are there any other general principles businesses can apply when trying to position themselves more adeptly in the e-commerce revolution?

Here are two suggestions. The first is to look at e-commerce as just one more aspect of an ordinary business. Some customers will want to deal with the firm on the phone. Fine, you need a good call centre, with well- trained people. Others will want to use the fax. Fine, you examine your fax response system. Others will use the Net. Fine, you need well-designed web pages and an efficient way of responding to requests. (It is astounding how companies set up web pages with no clear idea of what they want to put on them, still less what their customers might want.) The key is to regard the Net as nothing special and apply normal good practice to it.

The second suggestion is to use the "bottom-up" aspect of the Net positively. Remember, the Internet was not the creation of some large company, which pushed it onto the market. It developed from the bottom upwards, with ordinary people (well, ordinary nerdish people) finding a means of using a technology developed for something else in new and imaginative ways. Thus the Net enables companies to listen to customers in a very direct and detailed way. In the "market research" you simply ask them directly what they want.

The Net will require firms to be far more nimble. In a world of infinite information, shouting louder is pointless, for you will not be heard. Instead, you must listen harder.