E-commerce in its first generation has been a land grab. A great rush to get a retail space on the Internet by creating dot-coms. Speed and willingness to experiment in the cyber space were the input factors needed to join the e-commerce rush. But then came a time when companies deploying the Internet technology became confused by distorted market signals, often of their own creation. Well-established companies that had performed brilliantly in traditional settings seemed totally lost in cyber business. As we know, profit in any organisation is always an outcome of two forces-costs and revenues. It is seen that in the current context, systematic distortions have taken place in both. Let us first consider the revenue side of the profit equation in dot.coms. Sales figures have been unrealistic at least for three reasons. First, prices of products and services had been kept artificially low so as to create a customer base. Buyers were able to purchase goods at heavy discounts, or even free, rather than pay prices that reflect true costs. Second, many customers got indulged in buying on the Internet just out of curiosity: Will they continue? Third, some portion of the revenue from online commerce has been received not in cash but in the form of stock. Much of the revenue that Amazon has recognised from its corporate partners has come as stock. The sustainability of such revenue is questionable, and its true value depends on market valuations. If revenue is an elusive concept on the Internet-based business, cost is equally fuzzy. Many companies, doing online business, have been enjoying subsidisd inputs in the form of products, services being provided by eager suppliers who want affiliation with dot.coms. Costs have also been distorted by the systematic understatement of the need for capital. Large number of companies touted the low asset intensity of doing business online, only to find that inventory, warehouse, and other investments were necessary to provide value to customers. Signals from stock market have been even more distorted therefore unreliable. In fact, achieving profits, or even breaking-even, during the land grab was viewed less important than the stock price valuations. Investors were cheering the market appreciation of their shares in dot.coms. Responding to investor enthusiasm over the Internet's explosive growth, stock valuations became decoupled from business fundamentals. These distortions have also been accompanied by the unreliability of financial metrics that companies have adopted. Creative accounting approaches have been used to downplay traditional measures of profitability and economic value. It has been reported that stock market had reported a higher valuation for Amazon.com than for the entire traditional book retailing and publishing industries combined, even though Amazon was yet to record profit. This was because the company had to spend so heavily on marketing, brand awareness and technology. There were large numbers of dot.coms, wondering as to how will they ever make a profit. They have, of necessity, concentrated on growth and experimentation had taken place of strategy. Does the popularity of a site necessarily translate into higher stock market valuation and also higher profitability? A site may be highly popular because it offers gifts, free services or bargain prices to new customers. Therefore, it is quite possible that the traffic into the site might dwindle or evaporate after it starts charging full prices, stops gifts and replace free service with a paid one. It will be interesting to watch the popularity graphs of sites like usa.net or 123India.com that have recently withdrawn free e-mail service. Situation relating to costs, revenues and market valuations of Indian dot.coms is no different. In order to help bring fairness in accounting and reporting by dot.coms. The Institute of Chartered Accountants of India recently issued a guidance note titled "Accounting by Dot-com companies." Realising that dot.coms are experimenting and following newer business models, thereby raising certain issues relating to recognition of revenues and expenses, appropriate accounting treatment for booking revenues from sources like membership and subscription fee, merchandising activities, advertising services, Web-hosting and content selling etc. have been recommended. How to recognise, measure and account for costs associated with carrying out business by these companies have been explained. Elaborate accounting treatment for costs like Website development expenses, rebates, discounts and other sales incentives, point and loyalty programmes have been suggested to find out what to 'capitalise' and what to 'expense'

Land grab phase is ending and the Internet stock bubble has lost considerable buoyancy. One should not view the success of technology providers as evidence of the Internet's economic valve. The Internet is merely a tool and 'tool making' as a business has to be differentiated from the business that makes use of the tool.

The economic value for a company is nothing more than the gap between the cost of the product and its selling price and it is reliably measured only by sustained profitability. In order to have a competitive advantage for creation of value, a company has to strive for cost leadership or achieve strategic positioning. The biggest advantage that the Internet technology has provided is the drastic reduction in search costs - consumer's search cost to locate the most appropriate supplier and the manufacturer's search cost to locate vendors, sources of technology, materials, finance and manpower. There is a strong likelihood that navigation will emerge as a separate business where electronic retailers will concentrate on navigation and outsource 'fulfillment.' Pure navigators like Yahoo! organise information in a manner so that navigation as a separate business gets unbundled from production, marketing and distribution of products. Thus a realisation is emerging that e-commerce is another kind of business. As with businesses that have come before it, the success of e-commerce business will hinge largely on the art of management even as it is enabled by the science of technology.

This entire happening still may not sound to be something absolutely new. In fact dot.coms are rediscovering old economic wisdom. Prof.Ronald Coase, 1991 Nobel prize winner for economics, wrote a theory titled "The value of firm" way back in 1937, where he explained why our industrial giants came into being at the first place. The reason why these giants tended to do everything from soups-to-nuts was simple: "transaction costs" drove them to do so.

His insightful theory has a direct bearing on the difference between the industrial age and the information age. Transaction costs are plunging down —Thanks to the Internet.