As appeared in U.S.News and World Report, May 24, 1999 (735 words)

Online malls move closer to home

New software is needed to make buying on the Internet a rival to mail-order retailing

BY WARREN COHEN

Business on the Internet is starting to grow profitable. In less than three years, more than a quarter of Internet users have purchased an item or service online. Nearly a third of commercial Web sites today are profitable, according to market researcher ActivMedia, and an additional quarter expect to make money within the coming year. The optimistic forecasters, like Jupiter Communications, say that Internet shopping, which now stands at $ 2.6 billion, could increase to $ 37.5 billion in the next five years, approaching the size of today's $ 46 billion mail-order business.

They believe in that exponential growth because they see technology coming that may finally make the Internet useful to more than ardent technophiles. Most are counting on a future desktop device that will integrate television's video, the telephone's two-way conversation, and the computer's information-processing power. Consumers could view three-dimensional pictures of items and talk with on-screen salespeople at the same time. Digital dollars. But the greater acceptance of Internet commerce in the near term will depend on the shift in electronic currency from credit cards to some form of "digital dollars." Though credit cards are the most common payment system on the Internet today, most vendors won't accept them for items less than $ 10 because of high processing costs. That and concerns about security have meant that 86 percent of all Internet transactions are completed offline. That's why companies like CyberCash, Digital Equipment (through a service called Millicent), and DigiCash are all trying to promote new proprietary standards of electronic cash, where digital money is purchased online and then stored on a computer's hard drive.

Another payment option is smart cards. Though physically resembling credit cards, smart cards contain a microchip instead of a magnetic strip, which enables the cards to store 500 times more information. In practice, they will act like debit cards, which store a specific amount of money before they need to be reloaded. Their other key advantage is that they will turn a person's computer into an automatic teller machine. Indeed, VeriFone, an electronic payments company, already sells through banks a product called Personal ATM, which attaches to a PC or phone. It allows consumers to download cash directly to their smart cards via a phone line. All of the WebTVs made by Sony, Phillips, and Mitsubishi now come with a similar smart card reader. Next year, many PC makers plan to include such a device. If a consumer wants to purchase a product online, he inserts his smart card into the reader and the proper amount will be deducted. Several companies are testing a system in which digital postage stamps can be purchased online and printed from a desktop printer.

But finding desired items will remain a challenge because of the vast amount of information on the Internet. There are nearly 400,000 commercial sites now hawking products online. "Shopping intelligent agents" will find us the good ones. These small programs will be designed to find stores and compare prices. A forthcoming service from Excite, known for its popular search engine, will scour the Web to find a variety of cyberstores listing prices of a desired product. So consumers could comparison shop without spending all day online. In the future, such agents will be able to purchase the product directly with electronic cash, after the user sets a range of acceptable prices to pay.

Consumers also could specify the features they desire in a product and for not much more money than a mass-market product. This concept, dubbed "mass customization," is already evident in the computer industry. Mail-order pioneer Dell Computers, for instance, won't assemble a computer until a consumer selects the features, such as size of hard drive and memory and processor speed. Via its Internet site, customers select their options, then receive a price based on their choices. Dell's Internet site has been open since July 1996 and processes about 10 percent of the company's total PC sales. Levi's will soon customize jeans in an online fitting room. Custom Foot, a shoe retailer, has a similar plan.

The result could be a back-to-the-future twist. Electronic commerce would be bringing retailing back from the mass merchandising of the past 50 years.