The Economy of Cyberspace

U.S. retail Internet sales are expected to reach $146 billion in 2008, a 14.3% rise from 2007—and yes, that reckoning takes into account the economic downturn, which has actually boosted online sales because of high gas prices and reduced driving. While U.S. retail sales rose by 2.8% between the first quarter of 2007 and the first quarter of 2008, online sales rose by 13.6% during the same period. As for the shoppers who insist on buying from a brick-and-mortar establishment, eight out of ten first kick tires online.

In France, e-commerce is expected to reach US$32.4 billion this year, a 30% jump. In Brazil, the online retail market expanded by 43% in 2007, and 79% of all Brazilian Internet users have shopped online. In the UK, grocery shopping has moved online and 44% of the country’s Internet users have given it a go. In China, online shopping surged to US$8.2 billion in 2007, up 90% on the previous year.

If You’re Not Online . . .

These are staggering (and for retailers, mouthwatering) statistics. An even more astonishing one, however, comes from a January 2008 press release from The Nielsen Company: of the world’s population with Internet access, more than 85% have shopped online—approximately 40% of the total global population—and more than half of those online shoppers have made a purchase within the last month.

The fastest-growing segment of the global online marketplace is clothing, accessories and shoes with 36% of sales, but the most popular online purchase remains books with 41%. Other common purchases are movies, games, music, airline tickets and electronic equipment. Merchant trustworthiness is important to online shoppers, and many seek recommendations from friends or rating services or find a few sellers they trust and stick with them. The most popular payment method is a credit card (60%), with Visa the most often utilized, although 25% of buyers prefer Paypal, which may effect payment through a credit or debit card or through a direct bank transfer.

Many new buyers live within developing nations such as India, Brazil, Egypt and China and have such online payment services to thank for opening these new shopping horizons before them. When the goods these shoppers want can’t be found on the shelves of their local stores, they turn to the Internet and its international marketplace to fill that gap, and they’re often willing to pay a little more to a reliable seller or for shipment tracking.

The largest online retailer in 2007 wasn’t actually a single retailer but eBay, with a membership of over 83 million active buyers and sellers moving $60 billion worth of merchandise on website platforms in 28 countries around the world. As a comparison, Amazon.com had sales of $14.8 billion (both figures from 2007 annual reports). Because eBay sales are generally from individual to individual, international shipments are often marked as gifts to avoid customs duties, and the collection of state sales taxes on the Internet is notoriously difficult, leaving open the issue of lost governmental revenues worldwide. So are such individual purchases tracked as part of a nation’s balance of trade? If so, how?

. . . You’re Nowhere

A largely misunderstood aspect of the virtual marketplace is the foreign exchange, called the forex trading market. Although many people are only familiar with foreign exchange from traveling (or those money-making schemes advertised everywhere), the fact remains that sales across international borders generally involve crossing currencies as well. While credit cards and Paypal will exchange currencies for individuals for a fee, larger transactions must change through brokerages, which buy and sell currencies against each other on the open market.

The forex trading market is therefore comparable to those for stocks or commodities with one catch: it’s utterly virtual. There is no centralized exchange where brokers meet and bid against each other. Historically these deals were arranged via telephone, but often now they’re executed online with dedicated software trading platforms that track the prices of various currencies against each other to the fourth decimal place and graph the changes on a real-time basis. This increased efficiency has caused, well, a virtual explosion in forex trading, which by April 2007 had surged to an average daily turnover of $3.2 trillion dollars as tracked by the Bank for International Settlements.

There is much not yet understood about the economy of cyberspace, but it’s clear this is no longer a niche market, and retailers—and governments—will ignore it at their peril.

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