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Perspective

Fortnightly Magazine - January 15 1999

companies that are viewed as mastering the new model. In mid-November, one of the best-known cyber-merchants, Amazon.com, was sporting a market capitalization of approximately $9 billion. The online auction company, eBay Inc., was valued at a little less than $6 billion. To put these numbers into perspective, consider that Amazon would be valued considerably higher than all of the gas distribution utilities in the Commonwealth of Massachusetts, combined. The market values of Amazon and eBay together would exceed the market capitalization of Pacific Gas & Electric Company. Consider further that the online merchants have been in business for, at most, about three years - while the gas distribution business began operating in Massachusetts in the 1820s, which is to say, during Thomas Jefferson's retirement.

It would be foolish to try to predict exactly how these changes will play out in the coming decades. What already is clear, however, is that the ability to exchange and transfer information in the new ways is working radical changes in the way ordinary business transactions are carried out. These changes have clear implications for commission policy involving the natural gas and electric power industries.

One simple example may help illustrate how electronic communication can revolutionize something as simple as "inventory."

It used to be that a merchant kept available in the store (typically on the premises) a certain quantity of the goods to be sold. This practice allowed the customer to view the goods as well as to take possession upon sale. In the 19th century, Sears, Roebuck and Co. pioneered a revolution in marketing by putting drawings of its goods in a catalog and distributing the catalog widely via the mail. This business model (updated to substitute the hand-drawn sketches with photographs) is still used commonly by a great many specialized merchants.

In the years after World War II, the "discounter" appeared. The discounter took advantage of the radical change created by the automobile, which brought distant suburbs - and cheap, undeveloped land - into easy reach. Relying on these changes, the discounters began constructing ever-larger stores at ever-greater distances from established population centers. This development reached a reductio ad nauseum in the "category killer" store, one that sought to have on hand an extraordinary inventory of nearly all goods of a certain kind. During the last 50 years, these trends (reinforced, of course, by zoning, tax and various other policy incentives) have brought us cheap prices with expanded consumer choice - plus unrelenting suburban sprawl.

The cyber-merchants are preparing to send a multi-ton wrecking ball swinging through this business model. Under the Amazon business model, the bulk of the inventory cost is carried by the producer or distributor of the good, not the retail merchant. The concepts of "warehouse" and "inventory" fall under attack. The need for cheap land and plentiful parking must be profoundly re-thought.

This shift was made exceptionally concrete to this author when, one quiet midnight in 1997, he listed a self-published adventure novel with Amazon's online catalog - thereby integrating the unsold books in his attic inventory into Amazon's worldwide