What Makes Dell and Amazon Click? They Work at Relationships

Michael Dell was in town the other day, and though the purpose of his visit was to review just how brilliantly his personal computer company is performing these days, I was hoping he might shed some light on a seemingly unrelated question: Just what is it that books and computers have in common?

Actually, I already knew part of the answer: Both are products that have been selling exceptionally well on the Internet. Dell Computer is doing a million dollars a day in sales on its Web site. Amazon.com, the online bookseller that went public last month, is routinely cited as the prime example of how the Internet is changing the retailing business.

But the real question remains: Why books and computers? One is cheap, simple, comes in virtually infinite variety and never needs service. The other is expensive, complicated, relatively standardized and requires all manner of hand holding. One is often associated with technophobia; the other is all but a yardstick of technophilia. What gives?

The explanation, it turns out, is the obvious one. When it comes to selling on the Internet, the characteristics of the product itself aren’t all that important; what’s critical is the dynamics of the relationship between buyer and seller. And those two facts contain a series of important lessons about how electronic commerce is likely to evolve.

First, consider the Dell case. The company, which Michael Dell launched from his college dorm room in 1983, pioneered direct marketing in the PC business, proving that people would indeed buy a pricey and complicated product over the telephone. Dell’s sales leaped a remarkable 57% in its most recent quarter to more than $2.5 billion, far exceeding the growth rate of the industry as a whole.

Dell’s success lies in its ability to eliminate both the profit margin that would normally flow to the computer store and the costs and delays associated with keeping machines in dealer stock. The company can offer customers the latest technology, custom-configured. And with just-in-time manufacturing, inventory costs--and the risks associated with rapid obsolescence--can be sliced to the bone.

Now, if ever there were a business tailor-made for sales over the Internet, this would seem to be it. The customers are mostly businesses or sophisticated consumers who are already online; what could be simpler than urging them to go to a Web site rather than call on the telephone? Any company that does a lot of phone sales, it would seem, could convert at least its computer-savvy customers to the Web without a problem.

What’s interesting here, though, is the nature of the opportunity that the Web presents. Moving phone customers to an online ordering system would seem to offer a big opportunity for cost reductions. But that isn’t what interests Michael Dell.

“Our real goal is to get our commercial customers to buy using an EDI system,” says Dell. EDI, or electronic data interchange, is a means of automating relationships between companies and their suppliers, but it has traditionally required specialized computer systems and was too costly for any but the largest companies.

Dell in effect wants the Web to serve as a 24-hour order-entry system. Big customers--such as Boeing, which Dell says buys about 1,000 PCs a week--get their own Web sites. All kinds of information about their preferences and needs is built into their electronic systems. It can be used worldwide by any company subsidiary. It enables Dell to build a whole new level of relationship with its customers.

All of which, of course, has nothing whatsoever to do with the book business. Amazon.com was a start-up with no established direct-sales business, and its target was consumers. Its big advantage, allegedly, was its ability to provide instant access to far more books than a store could carry in its inventory. And it wouldn’t have all the costs of storefronts and warehouses.

Yet this is actually something of an illusion. Amazon gets its books from the same distributors that bookstores use and in fact can’t really procure titles more quickly or cheaply than an efficient bookstore. It gets a boost from the fact that incumbent booksellers haven’t placed much of a premium on speed, but its real advantage lies elsewhere.

What Amazon does provide that bookstores don’t is easy access to countless book reviews, customer comments on books, discussion forums about books and automatic notification about books that might interest a particular customer. It has used the technology to bring together a community of book lovers. The fact that it might offer a book a little cheaper and a little more quickly than the next guy is ultimately secondary--as will become obvious shortly when Barnes & Noble, Borders and others get their own online ordering systems in place.

In both cases, then, the idea that online shopping is a good opportunity because it reduces transaction costs and cuts out the middleman misses the point. Dell had already cut out the middleman--or, to look at it another way, it is actually a very high-value-added middleman between PC buyers and PC component manufacturers. The Web enables it to further enhance that function.

Similarly, Amazon is nothing if not a middleman between book distributors and customers, but it brings a whole new level of value to the job. For both Dell and Amazon, the issue of transaction costs is beside the point.

Viewing the Web not as a cost-cutting tool but as a way to add unique new services helps explain a lot of what’s happening--or not happening--in the online commerce arena these days.

Consider, for example, the much-discussed lawsuit Ticketmaster has filed against Microsoft for linking to its site. Microsoft, and many outside observers, have said they’re baffled by the move, since Microsoft would be sending customers to Ticketmaster.

From the ticket seller’s point of view, though, there’s no advantage there, since if the customer wants to attend the event they’ll have to buy from Ticketmaster one way or another. The Web might seem to offer a good way to reduce costs by replacing telephone operators with computers. But the real opportunity is in selling--via advertising--additional information related to the event, such as concert news and reviews and stadium seating plans. Microsoft’s link undercuts that by sending users directly to the ticket-buying page, bypassing the rest of the content.

Why hasn’t the Web caught on in a bigger way among catalog clothing vendors? Again, because it doesn’t offer any advantages except reduced transaction costs for the vendor. The same goes for online travel agencies; for the moment, in fact, they remain middlemen who provide less than their human-based counterparts, not more.

Broadly speaking, then, Web commerce is likely to be important first and foremost in enhancing relatively complex customer relationships among businesses.

On the consumer side, it will likely take much longer to develop and will excel initially in areas where the shopping experience is problematic or can be dramatically enhanced by technology. Cars and financial services come to mind--two products that are about as similar as books and computer.

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Jonathan Weber ([email protected]) is editor of The Cutting Edge.