Small businesses: are they ready for e-commerce?

Computer Industry Report, August 1, 1998

Want to make an Internet commerce solutions vendor's eyes go starry? Mention the small business segment. In 1997, while many of the United States' corporate behemoths were spending hundreds of thousands of dollars each to build storefronts on the World Wide Web, many small businesses were plugging in their modems for the first time.

But if time heals all wounds, the Internet is Neosporin for the small business segment's IT acceptance. Although the small business segment has not displayed a fear of IT (more than 75% own PCs), its hunger for conducting commerce on the 'Net - and the opportunity for solutions providers - is remarkable. This segment sees Internet commerce as an equalizer with larger competitors, and buying, selling, and promoting products are primary motivating factors behind small business's Internet acceptance.

Only about 16% of current Internet-using small businesses have the ability to take transactions through the World Wide Web, and IDC expects this to grow to 25% by next year, based on survey results. However, 36% of prospective small business Internet users plan to use the medium for commerce, and if these prospective Internet users get wired and get a commerce site up and running, the installed base of small businesses that conduct e-commerce will be significantly larger.

Internet commerce vendors and ISPs have picked up on this trend. Open Market began offering a Windows NT version of its successful Transact software earlier this year, and iCat began offering its popular e-commerce software through a service model - in the same manner as many ISPs and Web hosting services. The theories behind these moves are simple: Open Market, through the NT channel, hopes to penetrate smaller businesses that likely don't have expensive Unix platforms. iCat thinks an equipment-free service model is an even more appealing choice for small businesses.

Even traditional IT vendors are seeing an entree to the Internet commerce market through the low-end small business segment. Compaq released its Club Web offering earlier this year, which packages offerings from a variety of vendors and aims to take the complexity out of buying an end-to-end Internet commerce solution.

IDC recently undertook an extensive survey of small businesses to determine what role the Internet played in their IS and business strategies (see U.S. Small Businesses on the Internet, IDC #16319, June 1998). This issue of The Gray Sheet examines some of the findings and illuminates small business trends toward e-commerce.

Important findings include the following:

* The percentage of small businesses that use the Internet doubled in 1997.

* Home page adoption grew more than 200% from yearend 1996 to yearend 1997 in the small business market.

* Nearly one-fourth of small businesses that used the Internet purchased a product through it in 1997.

* Only 16% of online small businesses have sold a product on the Internet, but significantly more plan to do so.

GETTING TO KNOW THE SMALL BUSINESS

What are the characteristics of small businesses in the United States?

IDC defines the small business market as the group of enterprises employing fewer than 100 people and excluding home offices. For research purposes, only the primary location qualifies to answer questions about IT acceptance. IDC surveys only owners, presidents, or office managers to ensure qualified responses.

There were 7.2 million small businesses in the United States in 1997 (given the qualifications above), and the number of small businesses is growing slightly (2% per year) through the IDC forecast period, which ends in 2001. In 1997, 78% of small businesses owned at least one PC, and 39% had access to the Internet (see Table 1).

Small businesses jumped on the Internet bandwagon with aplomb in 1997. The raw number of wired small businesses more than doubled, and the percentage of all small businesses with Internet connectivity nearly doubled. (Growth in the raw number does not match the growth in penetration because of the 2% growth in the overall number of small businesses.)

Small businesses that have adopted the Internet enjoy higher revenues and faster growth than their counterparts that have not adopted the Internet. The average yearly revenue for all small businesses was about $2.7 million. Small businesses that used the Internet averaged about $3.8 million in annual revenue in 1997.

Internet-using small businesses are generally larger than the average small business. Not surprisingly, the telecommunications needs for Internet-using small businesses are greater than the average small business, as well. Part of this increased demand is because Internet-using small businesses have more employees, but also because Internet use puts a greater demand on telecommunications resources.

Internet-using small businesses averaged more than seven phone lines per business and spent more than $700 per month on telephone services. The total small-business population averaged about five lines per business and $500 per month in phone charges (see Tables 2 and 3).