Valuation of the E-Commerce and Internet Services Industry

Weekly Corporate Growth Report, Oct 25, 2004 by Dolbeck, Andrew

The population of Internet users in China has reached 87 million and is still growing. Yahoo has partnered with Sina.com, China's largest Internet portal, to enter the Chinese online auction market. In July, Amazon paid $72 million for Joyo.com, one of China's top online retailers. eBay moved into China by buying a startup firm called EachNet. China is now eBay's fastest growing market. EBay has also recently acquired Baazee.com, the largest online trading company in India.

The competition to enter the Asian markets is fierce. It's important to move in quickly, getting ahead of any competition. EBay learned this lesson in Japan, where it arrived in the online auction market five months after Yahoo. eBay eventually quit the Japanese market, unable to compete with the established buyers and sellers on the Japanese Yahoo site.

Digital Rights Management

In addition to goods and services, the e-commerce industry also sells data and digital products that only exist in electronic format. The digital nature of such products makes them easy to reproduce, making it difficult for sellers to control the distribution of such products and protect their copyrights. In order to prevent misuse of electronic products, e-commerce companies are experimenting with applications that will help them maintain a measure of security after making a sale.

Digital Rights Management (DRM) systems are designed to restrict what legitimate purchasers of online data content can do with the product after receiving it. Without DRM controls in place, the purchaser of an online book, music file, or movie file can easily duplicate the purchased product and distribute it freely.

DRM systems are more complex than the standard cryptography used to protect products from unauthorized users. DRM has to deal with limiting the use of the product after access has been granted to a user. DRM restrictions can be specific and complex. Such restrictions might include "no forwarding," "no duplicating," or even "do not open until Christmas."

So far, DRM programs have been of limited value. Once downloaded, the product is under the user's control. A dedicated attacker with access to a paid copy of the product will have an easier time hacking the content on his or her home computer than on a secured site.

Existing DRM security technologies are proving more useful within the corporate sector. A number of laws, including the Health Insurance Portability and Accountability Act and the Sarbanes-Oxley Act, require that the confidentiality and integrity of certain documents be protected. DRM technologies are being developed and deployed to preserve sensitive corporate documents in electronic form. A number of companies, including Adobe and Authentica, are providing DRM services to the corporate sector.

Outlook

The e-commerce and Internet services industry is seeing a decline in US profits, but it is too early to determine if this is a long-term trend. A rise in profits for the fourth quarter is likely. The industry is responding to current declines by expanding into the international marketplace, which should provide an additional source of sales over the long-term. The online sector has developed in a relatively short time into a profitable industry that includes a range of business models. As long as companies in the industry continue to explore the potential of the Internet, it is likely that e-commerce will continue in some form.