The IDC Internet Commerce Market Model

Computer Industry Report, Feb 15, 1996

The model is based on IDC's vast global research base, more than 40,000 interviews with homes and business in over 15 countries each year, 15 years' experience monitoring business and consumer online markets, and a series of specially tailored quarterly multinational surveys of Web user behavior.

IDC believes that this new model offers a one-of-a-kind view of the Internet market that includes both the industry's deepest, most granular understanding of Internet and Web demographics and behavior and the industry's most comprehensive and granular knowledge of the total available market. Using this tool, IDC clients and the industry as a whole can begin to distinguish realizable market opportunity from hype and hysteria.

At the same time, using the output of its model, IDC has developed an index to represent the current and forecasted opportunity for commerce on the Web. Called the IDC Web Index[TM], the basic equation of this model is simple:

IDC Web Index = Web Hours / Web Pages x Transaction Activity

The IDC Web Index[TM]

Web hours are the aggregate hours per month Web users spend cruising the Web; Web pages are the total numbers of URLs in the Web; transaction activity is the number of users conducting business on the Web times a coefficient representing the average size of a transaction. An index value of 100 was set for December 31, 1994.

IDC believes that the IDC Web Index is the single best shortcut to understanding the key dynamics of commerce over the Web. For Web page developers - most companies in business today - it offers a measure for estimating return on investment (ROI) for development. For vendors, it offers a gauge of potential market demand for tools in support of Internet commerce. For instance:

* If the number of Web users grows faster than the number of pages, the ROI of developing a Web pages goes up. There are more eyes to view each page.

* If the number of Web pages grows faster than the number of users, the ROI of a page goes down. There's increasing competition for user mindshare.

* If the number of pages keeps pace with the number of users, the key determinant of Web page ROI is transaction intensity. Each user buys more off the Web.

For vendors selling into the Web market, customers include both Web users (shoppers) and Web page developers (merchants). Ultimately, a down index means a down market for all sorts of tools and services for commerce over the Web. This is particularly true for those sold to Web page developers, such as servers and development tools. An up index means market opportunity will grow (along with competition).

Internet Commerce in 1995

Using the IDC Internet Commerce Market Model, IDC has developed both current and future views of the market. Driving the forecasts are separate forecasts of the number of future Web users, the number of future Web pages, and the size of the average transaction.

Note the following:

* Driven by the jump in Web users coming from online service subscribers, the number of Web users jumped from 1 million at the beginning of the year to 8.3 million at the end. The index jumped from 100 to 773.

* The number of URLs, as measured by Lycos Inc., grew by a factor of 2.7 to 14.0 million.

* The average number of hours per user per month spent on the Web doubled from 8.7 to 17.3, enough to compensate for the increase in URLs.

* A spike in the index occurred in August and September, primarily as a result of America Online giving users Web access last summer; in October the index flattened as a result of growth in Web pages. The rebound in November and December is the result of the seasonal spike in computer shipments and the availability of Internet access via Windows 95.

Because each Web site may support (and each home page link to) multitudes of URLs, there are more URLs than users. Although the ratio dropped in 1995, IDC believes it will rise again as Web page development efforts bear fruit and as the Web becomes the universal electronic catalog. Perhaps the term "junk page" will come into vogue.

Scenario to the Year 2000

Using the IDC Internet Commerce Market Model, IDC has also developed a scenario for future commerce over the Web as follows:

* There is a dip in the index at the end of 1996 as the number of URLs begins to grow faster than the number of users. This is the classic scenario of a start-up market, where pent-up demand generates investment in capacity that comes on line just as early market growth cools. There is a short-term glut of Web pages.

* A rebound in growth starts in 1997 and runs through 1998 as the ratio of Web pages to users stabilizes and as transaction activity begins to increase. The number of URLs is still growing, however.

* Growth again flattens in 1999 as the number of users saturates at near universal access.

* A final rebound takes place by the end of the decade as the number of URLs reaches equilibrium with the number of users and transaction activity. Commerce over the Web becomes commonplace.

The Implications

The fundamental scenario offered by the IDC Internet Commerce Market Model is of rapid growth in Internet commerce activity punctuated by two major market corrections, the first within 12 to 18 months, the second several years later.