No matter how it’s pitched by the big boys of technology, the vision of self-healing computers—networks that monitor themselves, sense problems, and fix them automatically—is quite far from today’s reality.

The ultimate goal is to remove humans from the equation and have computers fix themselves. These so-called autonomic or self-healing systems could, for example, isolate a faulty line of code, retrieve a patch for it, and then fine-tune the application for optimal performance. IT administrators would be liberated from the tedium of system maintenance and repair, and self-configuring, self-optimizing computers and networks would automatically run at peak performance all the time.

But keeping networks and applications up and running still causes major headaches for companies with two complaints—not enough technicians and staggering costs. Just ask Victor Kellan, who has spent most of the last 15 years looking for a network management product that lives up to its name. According to Mr. Kellan, many of the problems that occur on a network result from the interplay among devices and software, but that interaction remains an enormous blind spot to all of these “intelligent” management products.

It’s like a roomful of relatives all talking about the same set of problems at the same time, but in different languages with no one listening, and no structure for finding solutions to their common afflictions.

“We were getting flooded with information, with no filtering, no ability to provide any proactive services and no ability to have any kind of escalation procedures or response criteria,” says Mr. Kellan. Corporations are expected to spend more than $21 billion worldwide next year on managing their applications, according to IDC.

Solving this problem was a full-time occupation for Mr. Kellan, the founder and president of LAN Solutions, a network administration company based in McLean, Virginia. Mr. Kellan’s company monitors and manages IT resources for companies in the Washington, D.C., area. A year ago, Mr. Kellan finally found what he was looking for in a product called Unity from Seattle’s SingleStep Technologies.

Unity did something that none of the other products—even the very expensive ones— could do. It extracted massive amounts of performance information from the existing device and systems managers on the network, collected it in a common database, and manipulated the data for clues as to the health of the entire network. It was like getting all the chattering neurotic relatives to take turns talking to a group therapist in a common language.

SingleStep’s Unity is a software suite based on an IBM engine that uses adapters to extract management information from the enterprise network. That information becomes the raw material that forms the basis of an emerging technology IBM calls autonomic computing.

Last year IBM began distributing a free “autonomic computing toolkit” that helps its partner companies build products that fit into IBM’s emerging autonomic computing architecture. IBM already claims to sell 50 different hardware and software products that offer a total of more than 400 features with autonomic computing capabilities.

“Suddenly we had the material to automate responses to errors. If an engineer has a systematic way of fixing a problem, we could automate that process,” says Mr. Kellan. “There could be three or four repair options before the most expensive one of dispatching a human to fix it.”

Automating the Future

Like most grand technology visions, this one has always been a little out of focus. Despite the visions of self-healing systems spun out by big technology players, the industry has seen little evidence that the vision is becoming reality.

But a new crop of startup companies is also starting to make advances. If successful, they’ll save corporations perhaps billions of dollars in IT repair, maintenance, and staffing costs, not to mention countless headaches. And in turn, they may spark a new wave of mergers, acquisitions, and IPOs.  

SingleStep, with its Unity product, is one of this new breed. CEO Chris Noble says the company’s network management system automatically analyzes information, checks network settings based on policies, and performs certain tasks, such as shutting down access points if necessary. “We’re automating what a network operator would be doing,” says Mr. Noble. SingleStep, which has partnered with IBM, raised $11 million in venture capital, including $5.3 million in a Series B round in March 2004.

“There’s a good possibility some of the first movers will be acquired,” says Bob Locklear, managing director of Agave Capital, which invested in SingleStep. “As the technology matures, eventually some companies may have IPOs.”

Healing Visions

While large technology vendors such as IBM will supply the engines underneath any future autonomic system, smaller companies such as SingleStep will develop supporting technology and customization around it. Venture capital investors, like Tom Clancy, managing director of Enterprise Partners Venture Capital (EPVC), see opportunity in those smaller companies. “It’s a very complex and big company game,” says Mr. Clancy. “You can make more targeted investments in companies with autonomic computing as a theme.”

EPVC’s investments include Breach Security, which closed a $7.5-million Series A funding round in August. The Carlsbad, California, Internet security firm is developing a technology that automatically learns the profiles of attackers and adapts its defenses accordingly. Netsift, another early-stage company backed by EPVC, touts an Internet security system that automatically generates unique signatures used in combating worm attacks.

Symbium, a two-year-old Ottawa-based company, is developing autonomic technology that monitors and corrects Windows-based servers. In the event of a worm attack, for example, the technology will extract the intruder and automatically reboot the system. According to Pat DiPietro, managing general partner at VenGrowth Capital Partners, which invested in Symbium, the firm’s autonomic technology will analyze a “dead” server, determine what’s wrong, fix the problem, and bring the system back to life automatically. Last June Symbium announced it raised $6.75 million in first-round venture funding, for a total of $7.75 million, including a round of angel investors.

Pipe Dreams

Broadband networks are expected to play an important role in deploying self-healing technologies in lieu of sending technicians to perform onsite repairs. For example, SupportSoft’s technology helps corporations manage IT systems by automating the updating, management, and service of software.

Cadir Lee, SupportSoft co-founder and vice president of engineering, estimates that 60 percent of the company’s revenue now comes from autonomic computing. For the nine months ending September 30, SupportSoft, based in Redwood City, California, posted total revenue of $46 million. Mr. Lee envisions such technology will play an important role in managing a wide range of devices, including digital televisions, PDAs, smart phones, and home networks.

At Network Physics in Mountain View, California, CEO David Jones sees opportunity in one area of autonomic computing. Founded in 1999, Network Physics developed a network-sensing appliance that can collect and analyze performance and service data across a complex, enterprise-wide network. A few months ago, the company began selling a version of its device that’s compatible with IBM’s autonomic computing architecture.

Mr. Jones believes such devices eventually will become essential in helping autonomic systems function. In September, Network Physics announced it raised $13 million in a third round of funding led by Trinity Ventures, bringing its total funding to $24 million. “Autonomic is a big word, but it’s not an all or nothing proposition,” says Mr. Jones. “There will be phases of adoption.”

The first phase, as with most new technologies, will involve some skepticism and resistance. Corporate IT executives may not be willing to trust a machine or a technology they can’t see to make decisions for them. After all, the idea of leaving control of fixing and maintaining expensive IT infrastructure in the grasp of an automated computer program makes some CIOs shudder.

“Self-discover, self-manage, and self-healing scares the hell out of customers,” says Mark Sigal, chief executive of UXComm. Mr. Sigal’s company, based in Beaverton, Oregon, sells what it calls an adaptive management system for Intel-based servers. UXComm touts autonomic computing technology as an important feature in its product.

But if the technology is truly self-healing, it’s hard to argue with something that could automate tasks now performed by expensive IT staff.

Big Company Maneuvers

Meanwhile, big computer manufacturers are jockeying for position among self-healing technologies. In addition to adding new self-correcting features to its products, Microsoft continues to lead an industry-wide campaign to get hardware manufacturers and software developers to follow standards, such as XML, and Windows architecture guidelines to promote compatibility—and to drive down the costs of maintenance and ownership of its own products. Microsoft wants to reverse a trend where corporations spend more on maintaining existing systems than on buying new ones.

HP is firing its own salvo with new products for measuring system and network performance. The company will engineer its network management solutions to react to those metrics. The new systems and software products are modular, so they are easier to deploy and self-adjust to changing workloads.

But products based on autonomic capabilities are only as good as their ability to access the millions of bits of information that the average network generates. Many vendors use proprietary formats for storing and manipulating that information. So two years ago, IBM and Cisco submitted a specification to the OASIS standards body, called the Common Base Event format, which they hope will become a standard for accessing, analyzing, and fixing problems using self-healing technologies.

With the emergence of new buzzwords like autonomic computing, a certain caveat emptor must be considered, says Karsten Schwann, professor and director of the Center for Experimental Research at Georgia Institute of Technology. A battery of products already exist—network devices, computer systems, and software—that self-manage to some degree. But that’s a lot different from “autonomic,” although some manufacturers may make that claim.

“Some systems already are self-managing, so many people can claim they are delivering systems that are autonomic,” says Mr. Schwann.

For true autonomic computing to become a reality, the technology industry must work together to build products that fit together, communicate with each other, and collaborate to find and fix problems. “Today you’ve got pieces,” says Audrey Rasmussen, vice president of Enterprise Management Associates, an IT consulting firm in Boulder, Colorado. “Going across the infrastructure is where the groundbreaking will be.”

Future Remedies

More hurdles lie ahead. For example, who decides which applications shut down and which remain running whenever problems arise? What databases and servers take priority? Asking those questions will surely prompt conflicts between employees and customers, business partners, corporate departments, and executives and staff.

In its position papers, IBM cites how the technology, in order to progress, will need the input of psychologists, “human factor researchers,” mathematicians, accountants, economists, scientists, and others to sort out the tangle of organizational, economic, and commercial priorities.

“This is as challenging as it gets,” says Alan Ganek, IBM’s vice president of autonomic computing. “Improving individual products alone won’t get you over the goal line.”

According to venture capitalist Mr. Clancy, “There are hundreds of millions of addresses connected to the Internet, going to billions and perhaps trillions…. Human intervention will not allow us to scale to that level. For humans to go in and intervene manually won’t work.”

Armando Fox, assistant professor of computer science at StanfordUniversity, adds: “Our ability to build complex systems is much better than our ability to fix them.” At Stanford, Mr. Fox is exploring how rebooting systems, which he considers a basic autonomic technique, may play a role in an autonomic computing milieu. The downside of rebooting can mean loss of data, corrupt files, and downtime. Stanford researchers are considering the possibility of “micro” rebooting—resetting part of a system while continuing to run other operations.  

Meanwhile, the complexity of IT continues to grow. Given the seemingly infinite problems that could occur when different hardware, software, applications, users, and other elements intersect, opportunity certainly abounds for any company with a true solution.

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At a time when a lot of e-commerce companies are coming apart at the seams, apparel companies are doing surprisingly well on the Web. The online units of clothing retailers like J. Crew, Lands' End (NYSE: LE), and J.C. Penney (NYSE: JCP) are posting respectable results. U.S. online clothing sales are likely to soar to $22.2 billion in 2003 from $8.9 billion this year, according to Forrester Research, a market research firm.

Though it's just a small piece of the $207 billion apparel market, such growth is impressive, especially for this inherently quirky business. Consumer products like software, books, and CDs are well-suited to online sales, but clothing -- which customers like to try on before buying -- is more difficult to sell on the Web.

The question is whether apparel sites can grow out of their role as mere extensions of direct-mail catalogs and home-shopping channels and become high-volume, profitable outlets in their own right. The answer may say a lot about the future of online retail, because if new technologies can solve the hitches confronting clothing sellers -- inaccurate sizing, costly returns, a bland shopping experience -- perhaps it can solve problems in other e-commerce sectors as well.

RAG DOLLS Driving the online rag trade is a burgeoning customer base that's becoming more female and more at ease with Internet shopping. According to the IT consulting firm Cap Gemini Ernst & Young, women now comprise 60 percent of those online buyers in the United States and 50 percent of online buyers in Canada and Australia. Men still dominate Web purchasing worldwide, thanks to countries like Spain, Germany, and France, where 80 percent of online buyers are men. But women buy more clothing, a product that is typically high-margin. For instance, according to Forrester Research, last year Federated Department Stores (NYSE: FD), the parent of Macy's, posted gross margins of 41 percent; Wal-Mart (NYSE: WMT) posted margins of 21 percent.

Consumers say the main drawback to buying apparel online is that they can't try on the clothes. One of the most innovative attempts to fix the problem comes from Lands' End. For the past few months the Dodgeville, Wisconsin, catalog retailer has been offering an online personal shopper tool on Landsend.com. It's based on a methodology called "conjoint analysis," whereby shoppers view a series of pairs -- say, a plaid flannel shirt and a solid button-down -- and select the one they prefer. Based on their choices and some complex mathematical computations, the site generates product recommendations.

"We ask the minimum number of questions that we can," says Bill Bass, senior vice president of e-commerce and international operations for Lands' End. "Personalization sucks if you have to go through and ask people a bunch of questions."

The Lands' End system, developed in-house, works well enough that the company recently sold the rights to the technology to QuickDog in exchange for a minority stake in the San Francisco startup. QuickDog will use it to develop new Web-based marketing tools for retailers.

MODELING PLAY Landsend.com also helped pioneer the use of virtual models in online retail. Using technology developed by My Virtual Model, a Montreal firm, Landsend.com shoppers can select choices like narrow or wide shoulders, and other variables, to create a computer image that approximates their body shape. Then the shopper can use the model to "try on" clothing at the site. My Virtual Model, which has raised $25 million in venture funding, next year plans to implement models that are truer to life.

Landsend.com is now collaborating with ImageTwin, of Cary, North Carolina, to push virtual models further. ImageTwin, a joint venture of TC2, an apparel industry consortium, and Konover Property Trust, lets shoppers input exact measurements taken by a full-body scanner. Next year, TC2 hopes to place dozens of its scanners in malls, stores, and health clubs throughout the United States (see "The perfect form").

Current virtual models look cartoonish. Clothes look painted on, providing only a rudimentary sense of what the real garment will look like. But according to Lands' End and My Virtual Model, recent data shows that online shoppers who used a virtual model were 19 percent more likely to make a purchase than ones who didn't and the average purchase amount by shoppers who used a model was 16 percent larger than that of shoppers who didn't.

JCPenney.com also has implemented virtual models, although Paul Pappajohn, president of e-commerce, acknowledges that "fit is very challenging for online retailers."

Macys.com has eschewed virtual models as ineffective, instead opting to invest in zoom technology developed by TrueSpectra. It enables shoppers to zoom in on pictures of clothing to examine details like fabrics, zippers, and collars. Macys.com CEO Kent Anderson says that basics like jeans and khakis will sell well online but that more tailored, expensive garments won't. "A man's suit will never be big on the Web," he says.

So far, the best-selling apparel categories online are odd sizes -- big-and-tall for men, petite and plus sizes for women -- along with hard-to-find and specialty items. Frederick's of Hollywood says its site does a brisk business selling sexy lingerie. Fredericks.com president and CEO Gary Landry attributes this to shoppers' reticence to shop for revealing undergarments in public.

Figleaves.com, a London-based underwear retailer, is taking a stab at the online sizing challenge with old-fashioned technology: plastic breast cups and a chest-sizing band. Figleaves mails the sizing kit to women, who take their own measurements, then use them to order bras from the company's Web site or catalog, or to make a purchase at a Figleaves store. Underwear-industry lore has it that 80 percent of all bras women wear don't fit.

DIMINISHING RETURNS Retail sites want to get sizes right the first time to minimize the costly returns process. The hassle of sending back merchandise bought online remains a major hurdle for beginning Web shoppers, studies show. Even in the brick-and-mortar world, stemming returns is important. According to Forrester Research, the return rate for all apparel sales is 14 percent; for high-fashion items, the rate is a whopping 40 percent.

Returns are one reason that online retailers lean on major brands like Levi's and Nike: consumers feel more comfortable buying names they know. Brand power has also helped propel online sales for click-and-mortar retailers. "If we couldn't leverage the millions of dollars our stores spend on their marketing, we wouldn't be nearly as far along as we are," says Melanie Angermann, vice president of marketing at JCPenney.com.

But when big-name manufacturers do make deals with online retailers, one of the first problems they need to work out is who will run the Web store. Retailers hate it when manufacturers compete with them, online or off. Such "channel conflict" in the real world can provoke retailers to push offending goods to the back shelves or discontinue them altogether. Cyberspace is no different. That's why clicking on the Buy button at Levi.com takes shoppers to Macys.com or JCPenney.com. But there are renegades: Ralph Lauren, for instance, is risking retailers' wrath by selling clothes through Polo.com.

BACK TO BASICS In these days of tightening budgets, retailers are refocusing on the nuts and bolts of their Web sites, avoiding unproven, expensive features, no matter how cutting-edge they are. Fredericks.com and Estyle, a Los Angeles-based online women's retailer, are concentrating on improving basics like site layout, category listings, and search engines.

"What I see is a slowdown in the movement to get all this done. There was a time when the mantra was, 'Christmas is coming!'" says Charles Philippin, CEO of the Web consultancy Accordia, formerly called Online Retail Partners. The company changed its name partly to broaden its clientele beyond retailers.

"Most of our investments have been on the back end," says John Kim, vice president of creative services at Estyle, which has raised $85 million in venture capital. "That kind of investment ultimately creates a rewarding experience in a more credible way" than money spent on a lavish visual environment on the front end.

Another popular strategy among surviving online retailers is to keep the staff small and rely on outsourcers -- Anntaylor.com has just two dozen employees. Companies once criticized as slow to embrace e-commerce are now considered fashionably late, especially after the flame-outs of so many dot-com pioneers. The online fashion retailer Boo.com burned through more than $120 million in venture capital in six months. Dan Nordstrom, CEO of Nordstrom.com, says he'd rather be a follower than a leader: "You don't get paid for innovation in retail. You get paid for execution."

Barrett Ladd, an analyst at the online retail analyst firm Gomez Advisors, says retailers should be more open to advances down the road. "They've just been focused on getting the basics running," she says. "In the future, you'll see a focus more on advanced technologies."

A San Francisco startup called E-Color is developing technology it says will render true colors on computer monitors, personal digital assistants, and cell phones, though so far it's been a tough sell. Pulse, also based in San Francisco, envisions its Web-based computer animation and 3D graphics technology juicing up retail sites. The company says a shopper can use its 3D technology to inspect, say, a pair of shoes from every angle, flipping them sideways and upside down.

The online arms of traditional retailers won't be holding IPOs anytime soon, although a few -- notably, Nordstrom.com -- still say IPOs are a possibility in the future.

Meanwhile, online retailers forge ahead with the basics. Mr. Bass of Lands' End pooh-poohs the notion that the arrival of technologies like broadband or interactive TV will propel e-commerce in the future. And he calls 3D "worthless," saying, "Selling is not about being entertained."

Additional reporting by Jennifer Lewis and Paul Elias. Write to letters@redherring.com.

The company, which specialized in providing Web technology, marketing, and e-commerce development to corporations, plans to liquidate under a Chapter 7 bankruptcy filing obtained late last month. At its peak, MarchFirst employed more than 9,000 people in offices scattered throughout the country.

The troubles of MarchFirst, and those at other Web consultancies including Scient (Nasdaq: SCNT), Viant (Nasdaq: VIAN), Razorfish (Nasdaq: RAZF), and Proxicom (Nasdaq: PXCM), are blamed mostly on the drop in technology spending because of the softening economy. But other factors played a role as well, and these effects are rippling across corporate boardrooms and information technology departments nationwide.

In conversations over the past several months with various Fortune 1,000 executives, I repeatedly hear about their concern for seeing a return on investment for any new technology. These days they haven't seen much ROI, if any, on Web technology, and their patience and willingness to spend have been exhausted.

Compounding the problem is the fact that Web strategies early on came under the purview of corporate marketing departments, which allowed consultants to make their pitches directly to nontechnical managers, thereby sidestepping the folks in IT departments who traditionally recommended technology purchases, and presumably did so with a more critical eye. Now those decisions, in many cases, are being handed back to the techies.

Questionable also was the expertise of the experts themselves. When the first big wave of Web consultants appeared about four years ago, I interviewed many of them and wrote about their companies. Granted, I met many smart, competent people, who indeed provided beneficial services to clients. But I also was struck by the industry's youth and inexperience. No one seemed to have evidence that their ideas for doing business on the Internet were anything more than pie-in-the-sky dreams.

MARCHING TO A NEW DRUMMER Yet a certain arrogance and false sense of entitlement enveloped legions of these newbie consultants. Many of them thought their theories replaced age-old business practices, that technology was king, and that no matter what they were paid, they deserved more.

Young entrepreneurs such as Razorfish founders Jeffrey Dachis and Craig Kanarick wound up advising big companies such as Charles Schwab, Ford, and IBM, because they convinced people they understood how a new business world was unfolding. Two years ago, another Razorfish executive in San Francisco bragged to me how his office was composed of smart, high-energy employees, "all under 30." Last week (May 3), Mr. Dachis, CEO, and Mr. Kanarick, chief strategy officer, resigned from their positions. (They became co-chairmen of the company's board.)

MarchFirst should be the poster child for those Internet-crazy days. Founder Joe Firmage, while still in his twenties, helped found USWeb in the mid-1990s, creating a company that eventually would go public, grow to 2,000 employees, generate $230 million in revenue, and merge with marketing firm CKS. USWeb was a "roll-up," a company that grew quickly by acquiring small consulting and computer service firms, many of them attracted to the idea of becoming a public company.

Mr. Firmage eventually left the company to pursue, among other things, his belief in space aliens and flying saucers. "I have every conceivable career disincentive for pursuing this research," he once wrote on a Web site publicizing his views. "However, this line of discovery in my opinion is more important than any individual's career, and I am putting my money where my mouth is to do this."

In March 2000, USWeb/CKS merged with Whittman-Hart, a Chicago-based computer services firm, and became MarchFirst. The new company's CEO, Robert Bernard, had spent 17 years building Whittman-Hart into a respected midsize company. He had emphasized relationships and loyalty, reportedly dedicating an entire wall at his company's headquarters to pictures of employees and their families. But with rocketing costs and sinking revenues, MarchFirst fell quickly into trouble. In March, many of its assets were acquired by Divine Interventures (Nasdaq: DVIN).

These days, I'm meeting a lot of corporate executives who tell me they rely less on outside technology consultants and more on in-house staff. Of course, their projects are a lot more modest than they were a year ago. For them, the shining promise of new technology has dimmed.

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Possible? Not quite, but the Issaquah, Washington-based company is trying. Last month, Costco expanded its Web presence with a new service in hopes of attracting more business customers. Curious about such plans, I spoke to David Sinegal, the company's vice president of business centers and e-commerce.

Mr. Sinegal claims the Web offers a way for Costco to reach new customers and spur existing ones to spend more money. "If we can harness our 34 million members and get a greater share of their wallets, I think that's a great opportunity for us," he tells me.

The new service is accessible by clicking on a tab designated for business users on the Costco.com Web site. Essentially, commercial customers may set up shopping lists, keep order information on file, check if inventory is in stock, and request delivery via UPS. In areas around San Francisco, Los Angeles, and Seattle, customers may receive orders via one of Costco's 100 delivery trucks (the company will only deliver direct to commercial addresses).

SPREE MENTALITY Competition for business customers both online and offline is fierce, particularly in the market for small to medium-sized companies. Costco competes with Wal-Mart (NYSE: WMT), Office Depot (NYSE: ODP), Staples (Nasdaq: SPLS), office-supply catalogers, and a myriad of other merchants.

Costco's great blessing and perhaps its biggest curse is its network of 352 warehouse stores, which includes 253 in the U.S., 60 in Canada, 19 in Mexico, 11 in the United Kingdom, 4 in Korea, 3 in Taiwan, and 2 in Japan. (The company plans to open an additional 12 to 14 new warehouses by fall.) Those locations serve as paragons of American consumerism, where a Saturday shopping spree may yield a six-month supply of tissue, a year's worth of pancake syrup, and a notebook computer. Unfortunately, that spree mentality doesn't translate well online.

Personally, I'm not a Costco shopper and generally am against the idea of such mass consumption, but many of my friends swear by the company. For them, a single trip to Costco saves several trips to a variety of other stores. There lies Costco's Internet challenge. Selling a wide range of general merchandise on the Web hasn't been proven viable. Today, Wal-Mart still struggles with its Web strategy and determining what to stock on its cyberspace shelves, for not all items offered in stores are cost-effective when bought online.

Mr. Sinegal acknowledges this difficulty, explaining how it doesn't make sense to sell items, for example cola or frozen foods, in which shipping nationally may account for 35 percent or more of the cost. There's more flexibility for customers who receive orders via Costco's own trucks, although they must pay an 8 percent premium for products directly delivered and minimum orders must be $250. About 110 Costco employees are dedicated to e-commerce. Orders shipped via UPS are fulfilled at the company's Lynnwood, Washington, location.

CRUCIAL CHANNEL? Still, if e-commerce can generate increased sales or margins, it'll be an important channel for Costco, whose business has recently been pummeled by lower-than-expected sales, rising energy costs, and higher gas prices.

Mr. Sinegal wouldn't discuss sales figures for Costco's Web site. In the future, he envisions expanding local delivery for Web business orders through other warehouse locations, which would mean acquiring more trucks.

Jeffrey Feiner, a managing director at Lehman Brothers, believes Costco's new Web strategy will be a plus. It'll "allow Costco to gain market and grow its demographic base," he says.

I'm less optimistic. Costco may have successfully taken the bricks-and-mortar idea to the extreme, but the Web is proving to be a different world, especially for commoditized products.

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Since launching its new Web site just two months ago, the Newton, Iowa, manufacturer claims it already has racked up impressive e-commerce figures. Over 70 percent of its units purchased online sell for more than $600; average ticket prices run well over $1,000. And 43 percent of orders are taken outside of normal business hours. Orders are processed and fulfilled by local retailers and independent Maytag dealers.

Results have been so encouraging that Maytag officials hope this summer to begin referring online orders to its national retail partners, including Sears, Best Buy, and Home Depot. "I think this is the model of the future," says Maytag Internet business development manager Colin Bain.

The appliance maker finally seems to have locked onto an Internet strategy that makes sense. Only a year ago, such old-industry companies struggled with the Web amid a dot-com boom that threatened to overcome them and render many of their practices obsolete.

THE DELICATE CYCLE Back in autumn of 1999, when newly appointed Maytag CEO Lloyd Ward announced plans to develop an Internet strategy, I called him requesting an interview. But his public relations handler told me that Mr. Ward wasn't ready to talk, which led me to believe the company didn't have a viable plan. Mr. Ward left the company after 15 months at the helm, eventually becoming CEO of iMotors.

In those days of Internet hysteria, so called "business-to-consumer" startups jumped on the Web, hoping to sell everything from automobiles to dog food. For old-line manufacturers, the opportunity wasn't nearly as apparent because they faced the age-old problem of "channel conflict."

Mr. Bain explains that an initial proposal had Maytag selling direct to consumers. "We had a huge push-back from our retail partners," he says. "They felt they were going into direct competition for Maytag products."

Still, Maytag executives knew the Web represented an untapped opportunity. The company had one of the most recognizable brands in America -- studies showed that consumers had a 47 percent preference for Maytag products -- but only a 14 percent market share. The studies also found that many people researched products on the Web, even bringing printouts with them to stores. Yet, somewhere in the process, consumers were diverted from buying Maytag products, perhaps by seeing other product displays while in a store.

"All manufacturers wrestle with this same issue," Mr. Bain tells me. "How do I not alienate all the retailers I've spent years cultivating?"

IRONED OUT So Maytag decided to build a Web site that allows customers to shop for Maytag washers and dryers, but that ultimately sends filled shopping carts to retail partners' Web sites for transaction completion and fulfillment. Buyers pay local retailers an extra fee for delivery, or they may pick up purchases themselves.

Maytag refers to its e-commerce model as business-to-consumer-to-business, or "B2C2B." Other manufacturers have adopted similar strategies: Levi Strauss refers its jeans shoppers to Macys.com and JCPenney.com.

Maytag charges a "nominal" transaction fee to retailers, which officials refuse to disclose. Although the company doesn't directly log the sale, Mr. Bain says his Web site has helped increase sales of Maytag washers. He classifies about 30 percent of online sales as "incremental," meaning that they represent new customers. The Web site attracts about half a million visitors per month.

Ken Boyle is vice president of Maytag's 11-person e-commerce group and a former consultant at iXL Enterprises. He believes manufacturers will increasingly leverage the Web to drive sales, especially as retail channels shrink. Maytag recently lost two big outlets when Circuit City abandoned major appliance sales and Montgomery Ward closed its stores.

Washing machines on the Web? I guess so.

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On a recent visit to Chevron's downtown San Francisco headquarters, I learned of Mr. Paul's plans to start the company's second venture fund. Late last month he received approval to invest $100 million in more technology startups.

Mr. Paul certainly has a full plate this year. In addition to overseeing the Chevron Technology Ventures group, he's also responsible for integrating the technology infrastructures of Chevron and Texaco (NYSE: TX), with the merger of the two companies expected sometime this summer. He's been named chief technology officer and technology vice president of the combined company, tentatively called ChevronTexaco.

At the height of Internet mania a year ago, I interviewed Mr. Paul, who talked about a new business-to-business Web exchange cofounded by Chevron called PetroCosm, his new e-business group, and the company's first VC fund of $60 million. In our latest meeting he explained how PetroCosm was still on track, and how the economic downturn was an opportune time to invest in technology. "I don't think there's been any change in emphasis on technology," he says. "People are pushing ahead because it's such a fundamental part of our business."

Earlier this year, Chevron announced a $6 billion capital and exploratory spending program, of which $650 million is earmarked for technology, power, and natural gas facilities and distribution.

Chevron's first venture fund invested in nine startup companies, including Inviso, which creates wearable computers and micro-displays for mobile devices; Frictionless Commerce, a maker of software for automating purchasing; Outerlink, a satellite-based tracking equipment company; Illumina (Nasdaq: ILMN), whose optical device evaluates chemical compositions; and Xenogen, a biotechnology firm.

Chevron looks for companies whose technologies may eventually be applied to its own operations. Mr. Paul says the second fund will invest in smaller companies at an earlier stage than the first group of investments. He expects a focus on companies developing "convergence" technologies -- combining capabilities such as test, measurement, and intelligence with increased computing power. For example, Mr. Paul envisions a technology he referred to as "smart dust," miniature devices that may be injected into oil refinery pipelines for measuring temperature and pressure. "You have to be very diligent in venture capital, but the good companies are getting money," he says.

Still operating are PetroCosm, which Chevron founded with Texaco, Crosspoint Venture Partners, and Ariba; and RetailersMarketXchange, an exchange for convenience store and small business retailers and suppliers, cofounded by Oracle, McLane, and Philip Morris. Mr. Paul admits that the value of those exchanges has shifted over the past year to their participants and away from exchange owners.

In other words, exchanges provide great benefits to their users, but there won't be an IPO payoff for marketplace owners, as initially envisioned a year ago.

E-business is just a piece of the puzzle for a global company like Chevron. Its research-and-development efforts cover a wide range of interests, including software for simulating fluid dynamics, advanced physics, and geology. And since last spring, executives have been mapping out new IT infrastructure that will help integrate a newly merged company.

Mr. Paul insists that now is a good time to invest in technology, and with a fresh $100 million in hand to explore emerging technologies, he's putting Chevron's money to the test. We only hope he's right.

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The Dallas-based operation is a unit of Momentx, formed in December through the merger of Inc2inc and Dairy.com, a dairy industry consortium. The Dairy.com site officially launched March 27.

Momentx president Scott Sexton admits investment in B2B has cooled, but insists his market holds great promise. "I wish it were a year and a half ago," he tells me, but adds: "Even though B2B marketplaces aren't investments of choice now, we have enough reason to show that we're different."

Indeed, Mr. Sexton's challenge is much greater than just filling jugs with milk, especially when the dairy industry is so heavily regulated. For example, dairy products are divided into various classes, including milk, butter and powder, yogurt, and cheese. Those classes are priced differently across different geographic zones. Consequently, pricing cream involves five separate steps. Often, milk is priced only after it's manufactured into a product.

The exchange's promise has attracted several participants, including ConAgra Foods (NYSE: CAG), Dairy Farmers of America, Dreyer's Grand Ice Cream (Nasdaq: DRYR), Marigold Foods, and Groupe Danone (NYSE: DA) (which makes Dannon yogurt). In an early trial, the exchange transacted trades valued at more than $30 million, involving about 100 dairy processing plants over a seven-week period, according to Momentx.

Currently, most dairy trading is done the old-fashioned way, by brokers with "little black books," Mr. Sexton says. Producers work with brokers or dairy co-ops, although some trading of dairy commodities is conducted through the Chicago Mercantile Exchange. So the process is inefficient now, but that may be Dairy.com's greatest challenge: convincing this market to change its behavior -- a challenge many new businesses face and never overcome.

MILK MONEY Dairy.com, whose founders include Kraft Foods, Dreyer's, Groupe Danone, Leprino Foods, and Schreiber Foods, decided it would be more efficient to collaborate with Inc2inc, a company Mr. Sexton formed two years ago to develop procurement technology. Dairy.com's latest funding round was $19.5 million in July 2000, bringing its funding total to $27 million. Momentx currently has 53 employees. The company hopes to make money by charging subscription fees as well as transaction fees, which average about 1 percent. Dairy.com is based on technology from Art Technology Group (Nasdaq: ARTG), Interwoven (Nasdaq: IWOV), and Moai Technologies, and is hosted by Digex (Nasdaq: DIGX).

Dairy.com already faces formidable competition from a giant food industry exchange under development called Transora. That exchange will help consumer packaged-goods manufacturers, but falls short of targeting the more specialized dairy industry, Mr. Sexton claims. Dairy.com offers more value to its market, he says, which is important considering how companies like to follow the leader. "There's a herd mentality with some of the things going on," he notes.

Some of that value comes from offering subscribers Web tools such as "Dairysuite Herd Manager," a database for ranchers; "Feedstor," which tracks rations and identifies feeding patterns; and "Dairystor," described as an "on-the-farm dairy management package." These features may allow Dairy.com to gradually recruit participants as they discover the value of the tools, but the company will still have to convince producers and manufacturers to switch to a new system. Mr. Sexton, despite major industry backing, acknowledges the hurdle. "I won't kid you," he says. "Even with these companies committing, we've got our hands full getting our industry to go along."

Nathaniel Palmer, chief analyst at the Delphi Group, agrees. "Fundamentally, it's a change-management issue," he says. But Dairy.com has targeted such a specialty, it may eventually carve out a place for itself. "It's really the little sleepers like this that are providing some value," he adds.

Whether the exchange succeeds or fails, one thing is certain: Internet technology continues to inspire change in age-old processes for all kinds of industries. Mr. Sexton, despite B2B's current bad rap, is optimistic. "Our hope," he says, "is that we'll be one of the very rare niche markets."

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By dinosaurs I mean those aging, old-economy companies that were supposed to be headed for extinction, overcome by the Internet explosion, and dot-com predators.

A good example is J.C. Penney (NYSE: JCP), the 98-year-old retail discounter. Its JCPenney.com unit is supposed to become profitable over the next several months, fueled by a company-forecasted 36 percent rise in sales this year to $400 million. 'We expect to achieve that goal sometime this year,' J.C. Penney e-commerce unit president Paul Pappajohn tells me.

During the past holiday season, the company's Web site ranked among the 15 most-visited sites, as counted by Nielsen/Netratings, along with other dinosaurs including Wal-Mart (NYSE: WMT), Kmart (NYSE: KM), Sears (NYSE: S), Target (NYSE: TGT), and Hallmark.

Moreover, the Web has become a key driver for J.C. Penney, helping to increase overall dollars spent per customer. Mr. Pappajohn says customers who shop via all three of the company's channels -- Web, catalog, and stores -- spent on average $1,000 last year, about four times more than customers who shop through only one channel.

A PENNEY FOR YOUR MUUMUU/SIZE ZERO The Web site also has become a hot spot for selling specialty clothes and sizes. Clothes fitting tall, petite, and plus-size women, in addition to clothes for tall or husky men, comprise about half of all online apparel sales.

The company last week officially launched a redesigned Web site, with relatively simple improvements, such as more intuitive categories, better graphics, a better search engine, and a 'two-click' checkout process. Only recently has J.C. Penney begun to capitalize on the advantages Internet commerce can provide. Now the Plano, Texas-based behemoth mines customer research and data, cross-sells across the online product lines, and categorizes promotional emails by customer segment. 'We won't send an email for children's clothing to a customer who has never bought children's clothes,' Mr. Pappajohn says.

Of course, J.C. Penney and other brick-and-mortar retailers have tremendous advantages over pure-play Internet startups. J.C. Penney, for example, generates total annual sales of $32 billion, mostly through its 1,000 stores in North America. About $4 billion in sales are generated by the company's catalog division, which distributes 300 million catalogs annually.

The catalog operations process and fill all Web orders. 'Once an order gets into the system, it's not distinguishable from a catalog order,' Mr. Pappajohn says. JCPenney.com counts all Web transactions as sales from catalog customers, that is, using catalog order numbers. The Web group claims 2 million Internet customers, about 23 percent of whom have never shopped through J.C. Penney catalogs or stores.

JCPenney.com, which hasn't received any venture capital funding, won't spin off with an IPO, but will remain an integral part of its corporate parent, Mr. Pappajohn says.

J.C. Penney's story isn't sexy, at least not like last year's tales of instant wealth. There won't be any IPO, no overnight millionaires, nor any new capitalist powerhouse. It's just another big company getting bigger through the Web.

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Mr. Demone is chairman of SeafoodAlliance, a consortium of major seafood companies. The alliance recently agreed to collaborate with Gofish.com to help create an online trading exchange for buying and selling -- but not fish. Instead, the focus will be on nets, marine insurance, packaging, breading, batters, and other related goods and services. A first trial is expected to begin later this month.

What makes Mr. Demone think his plan will float where others have drowned? He tells me: 'The emotions on this thing have been far too euphoric six months ago, and they're far too pessimistic now.'

The well-publicized ills of B2B companies already have hit the seafood industry like a hurricane, causing several seafood-bent Web startups -- like Fishmonger.com, Worldcatch, Seafood.com, and GoTradeSeafood.com -- to either fold, merge, or change course. Survivors include Globalfoodexchange.com.

Mr. Demone, who also is president and CEO of Nova Scotia-based High Liner Foods, helped found the alliance last spring, eventually enlisting a crew of CEOs and other executives from companies including: American Seafoods of Seattle; Newfoundland's The Barry Group and Fishery Products International; Iceland's SIF Group; New Zealand's Sanford Limited; Sweden's Scandsea International; and the United Kingdom's Youngs Bluecrest Seafood. After considering how to pursue e-commerce and debating whether to build or buy technology, the group decided to collaborate with Gofish.com, announcing an agreement last week.

Seafood is a $350 billion industry, according to Mr. Demone, but it remains largely fragmented, with operations scattered across the globe. For example, Mr. Demone's company, with annual sales of $275 million Canadian ($177 million U.S.), employs 1,500 people in the United States and Canada. The company's fleet of eight deep-sea trawlers and six draggers catch perch, pollock, cod, haddock, and scallops. But the majority of fish processed by High Liner comes from Europe, Asia, South America, and Alaska.

ANGLING FOR COST SAVINGS The alliance will test the B2B waters by using Gofish.com for 'non-seafood procurement' and items related to 'maintenance, repairs, and operations,' like air travel, computers, packaging, and insurance. Mr. Demone envisions companies realizing cost savings of 5 percent to 20 percent through use of the planned exchange. 'We are doing this to build better companies and a better industry,' he says. Transactions involving the industry's most precious goods -- fish -- will largely flow through older, existing electronic data interchange (EDI) systems.

Gofish.com, based in Portland, Maine, has been operating a Web exchange since November 1999. The exchange has 450 registered member companies, and each day lists about $40 million worth of seafood, says Neal Workman, Gofish.com's founder and CEO.

Gofish.com was spawned from Seafax, a seafood industry credit-reporting service that Mr. Workman started in 1987. In 1999, the company changed its name to Gofish.com, launched its Web site, and raised two rounds of venture capital totaling $41 million. The second round closed a year ago. Investors include CMGI, GE Equity, and Bedrock Capital Partners. Gofish.com started this year with 'a little less than $20 million' remaining, says David Weatherbie, the company's chief financial officer.

'There's nothing sexy about the seafood industry,' Mr. Workman aptly says, but it's a sprawling business in need of efficiencies. Backing by SeafoodAlliance gives his Web exchange 'a certain magnitude of critical mass,' he says. But, he emphasizes: 'There's no silver bullet. There's no magic wand that will solve all the challenges we face in B2B.'

In December, Gofish.com slashed 20 people from its staff, which now stands at 110. The cuts were prompted by the planned collaboration with SeafoodAlliance, according to Mr. Workman. 'We found we didn't need the sales and service force that went out to try and secure market share,' he says.

Mr. Workman adds that the Gofish.com exchange is making steady progress and is on track to book $100 million in transactions this year, which should mean reaching profitability late in the fourth quarter.

But as he astutely notes, and I agree: 'The alliance is not the finish line but the starting line.'

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During the past week alone, three big names on the Internet disclosed dismal news: Disney Internet Group (NYSE: DIG) fired 135 people, in addition to shutting down its Go.com portal; eToys (Nasdaq: ETYS) filed for bankruptcy; and Walmart.com cut 24 employees and eliminated certain product lines. Meanwhile, the Nasdaq has sunk to its lowest level in two years. But just a few weeks ago, Merrill Lynch analyst Henry Blodget, the perennial Internet cheerleader, proclaimed the Net soon will settle into 10 to 15 years of strong growth that will create trillions of dollars of value. Now, who's fooling whom?

What we're really witnessing is not the collapse of e-commerce, but the collapse of a business management strategy. Internet-based businesses aren't inherently faulty, they're merely the victims of poor planning, poor execution, and dumb money; all of which doesn't mean that e-commerce is doomed, but rather, that the contrary is true.

LOGIC 101 In the rush to Internet riches, basic business principles were discarded in the belief that somehow the rules had changed. It was thought that national brands could be built overnight if fueled by enough capital; that technology, almost by itself, could change market dynamics; and that youth could conquer experience.

Executives at Webvan (Nasdaq: WBVN), for example, thought they could create a new way to sell and deliver groceries, investing nearly a billion dollars in a system they've replicated in different cities across the country. The now-apparent problem is that they were unable to perfect the system before expanding. Consequently, they continued to incur tremendous costs for research and development and were unable to realize efficiencies through economies of scale. If CEO George Shaheen had recommended such a strategy when he was chief consultant at Andersen Consulting (now Accenture), his client probably would've fired him.

Contrast this with the old-fashioned way of growing a business: open a store, figure out how it works, and then start another store. Sounds logical, doesn't it?

But starting a successful business and growing it methodically isn't what e-commerce has been about ... until now. The practicality of using the Web to conduct commerce got lost in visions of grandeur, the comfort of easy capital, youthful exuberance, and, more importantly, the hysteria of greed.

IT WAS WEB DELIRIUM Just a year ago, the Web seemed so new and full of opportunity. Almost any 20-something-year-old with an M.B.A. and a business plan could raise venture capital funding, start a company, and become CEO. A lucky few took their companies public, and they, and many of their employees, became millionaires overnight.

Alarmed by the seemingly new market dynamics, big corporations responded in kind, rushing out with their own Web operations, investing millions of dollars without quite knowing what they were doing. Granted, hardly anyone did.

What happened next seems oh-so-obvious now, but back then, the business world seemed to defy logic, making the suspension of common sense an easy exercise. Losing money meant investing in the future, and eventually gaining world dominance.

It was a grand conspiracy involving entrepreneurs, Wall Street, Silicon Valley VCs, high-tech firms, consultants, institutional investors, day traders, and everybody else who thought they could make a quick fortune and retire early.

I'm ashamed to admit that during those days, I dreamed of my fortune, inspired by stock options. As the mantra went: grab-all-you-can-right-now. Before our eyes, a new class system of rich and poor seemed to be evolving. I remember walking into my neighborhood supermarket, looking at the checkers and bag clerks,яthinking: 'These poor schmucks are being left behind.'

The world has changed. Today, fired dot-commers are the ones anxious about the future, and it looks like I'll be working until I'm 65. Suddenly awakened, we're reminded of the virtues of business fundamentals: don't spend more than you make. Learn from mistakes, make adjustments, move on. Growing a business takes time; be patient.

Controlling costs is no fun, but it's an important ingredient to success. That's really the new economy, baby.

Understand these principles and you'll understand why companies like Wal-Mart (NYSE: WMT) are cutting staff, trimming product lines, and regrouping for the long haul. Wal-Mart stores need Walmart.com.яThe company can't afford not to keepяit alive. After all, e-commerce is growing, and the Internet is here to stay.

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Bingo conjures up images of hot summer days, church bazaars, and grandparents fanning themselves while a caller yells out 'B-7' -- it's not exactly the stuff of a new economy. But Bingo.com (Nasdaq BB: BIGR), a small online gaming site, has been in operation since 1999 and has created a nice niche business for itself -- one with quite a dedicated audience.

Fans of Bingo.com tend to be female, aged 30 to 50, and with one child, although lots of elderly and retired people come to play, according to the company. A fair number have high-bandwidth lines. And some visitors allegedly stay, amazingly enough, for four to eight hours a day.

The tiny startup in Marina Del Rey, California, currently is in the process of merging with privately held The Lottery Channel, operators of Lottery.com. The deal, which is expected to close at the end of March, is a bet that the merged company will get a big boost from online lottery ticket sales, when and if they're ever allowed by state regulators. Company executives hope it happens this year.

The merged company will get a new name, which hasn't been announced, and a new chairman and CEO: Roger Ach, currently The Lottery Channel's chairman and CEO.

Heck, the merger is worth a try. After all, currently, Bingo.com's over-the-counter-traded stock languishes in the 30-cents-a-share range. The company sells banner advertisements and licenses its gaming technology to other companies.

The revenue they expect from the merger is not in the least bit guaranteed, but Bingo.com execs seem realistic in their expectations. 'The additive that will blow the lid off our growth is lottery sales,' Bingo.com CEO Shane Murphy tells me. Although lottery ticket sales represent a great future hope, Mr. Murphy is careful to explain that in the meantime he's tightly managing costs with his 12 employees and growing sales so that Bingo.com by itself will turn a profit next month, although the merger will keep them in the red.

Mr. Murphy expects sales for the combined company to reach $15 million this year. Last year, by itself, Bingo.com's revenue was just $1.5 million, mostly generated in the third and fourth quarters.

BINGO MANIAThe Bingo.com Web site attracts 60,000 visitors a day, according to Mr. Murphy, and each visitor stays an average of 70 minutes per session and nine hours per month, making it one of the 'stickiest' Web sites around. Consequently, the Web site's advertisers, which include casinos, pay banner advertising rates averaging $7 cpm.

Merger plans call for existing games to be altered at a low cost for the merged company's Web sites -- namely Gameland.com, Wavegames.com, and Dollarbill.com -- to attract even more people. 'We wrote all the software, and that's done,' says Beau Buck, a Bingo.com senior vice president.

It's easy to believe that Bingo.com will indeed turn a profit. Other small entertainment Web sites, like eCrush.com, run nice little businesses. It's when companies shoot for the stars that they get into trouble, and that will be Bingo.com's great challenge.

These days, there's a certain trend toward Web gaming, especially multiplayer computer games, and the increasing number of players will allow some game companies to turn a profit, according to P.J. McNealy, an analyst at the Gartner Group. 'It's the next great thing,' he says, 'at least this month.'

A small group of entrepreneurs started Bingo.com in January 1999 as a pay-for-play Web site. They succeeded in raising two private placements totaling $6 million. By the summer of that year, Mr. Murphy was on board and redirecting the company toward a free-play model because of legal and regulatory concerns. Today, none of the original founders are with the company.

Like Bingo players, Mr. Murphy and his crew are waiting to hear their numbers called. But trying to win at the dot-com game may prove to be a more difficult feat to manage than being able to call out 'BINGO.' Good luck.

Live long enough and you begin to see a few patterns in life. The economy rises and falls, certain friends will never find love, and some technologies are destined to fade away. Now, I'm beginning to doubt the future of business-to-business (B2B) marketplaces.

It all began with the lack of enthusiasm I felt at the Intermedia Group's Commerce Chain 2001 conference on B2B, held last week in Santa Clara, California. A few handfuls of people quietly milled about the lobby, while in each breakout session, typically only a couple dozen people listlessly sat through the presentations.

Flashback to the early 1990s: a similar scene unfolds at a sparsely attended conference on handheld computing. Vendors tout Apple Computer (Nasdaq : AAPL)'s Newton systems and Microsoft (Nasdaq : MSFT)'s pen-based computers, two visions that have since faded. I'm reminded also of an interactive television conference a few years later that held all the allure of a religious revival in downtown San Francisco -- in other words, not much.

Now that last year's Internet hysteria is dead, hard truths about B2B are surfacing. Those truths will affect the success and failure of every B2B marketplace or "exchange" currently under construction, such as Covisint, Transora, Rooster.com, LeatherXchange, MyAircraft.com, Dairy.com, and many others.

SUPPLIER DEMANDS

The vision of buying and selling manufacturing materials, food, auto parts, chemicals, and a myriad of other items through a vast Web marketplace with stock market-like efficiency has propelled B2B startups. But now potential participants -- especially suppliers -- must be shown hard data to support why they should discard their current sales channels and invest in a new one. That's a hard sell.

Remember, suppliers have worked long and hard to establish relationships with their customers, to build brands, and to trim unnecessary costs out of those processes. A disruption in any of these can have disastrous effects on their fragile bottom lines.

In her conference presentation, Marty Gruhn, a Summit Strategies vice president, aptly emphasized how companies switching to a B2B exchange must shoulder associated costs, which inevitably will come out of their profit margins. If that margin is 40 percent, for example, then they'll want to know how long it'll take to recoup costs and begin benefiting from the change. It's the classic return-on-investment conundrum, to which B2B vendors don't seem to have convincing answers.

Moreover, with so many new exchanges pitching their services, it's hard to figure out which will succeed, Ms. Gruhn said. One attendee said that before joining an exchange, he'd want to know names of participants, number of transactions conducted, and other hard numbers. "They don't have numbers," another attendee shouted. "Or they don't want to tell you," Ms. Gruhn said.

Then there's the concern over how Web exchanges will "commoditize" products, with brands becoming irrelevant and prices becoming omnipotent. After all, old-fashioned buyer/seller relationships are sealed and reinforced through human contact, which seems to disappear in an electronic marketplace.

MOVING TARGET

Still, vendors of B2B technology are pitching their vision hard. At the conference, Alventive vice president of marketing John Bruggeman claims to be able to tie together manufacturers and suppliers in a way that, for example, may shorten new product development cycles by as much as 12 percent. Ram Sriram, Nexprise's president, says his e-procurement technology can reduce a company's manufacturing costs by 30 to 50 percent.

Market researchers continue to predict a rosy future for B2B. In a report published this month, eMarketer estimates that B2B e-commerce worldwide will grow to $2.77 trillion in 2004, from $449 billion this year.

Many companies are rooting for B2B, but for now, those are mostly B2B product peddlers. True, such products offer value, but that vision of the future isn't the whole picture. B2B's technology, vision, and market dynamics are still morphing. Into what? We don't yet know.

"When will B2B be mainstream?" someone asks Ms. Gruhn. "Best-case scenario -- five years," she replies. "But by that time, the rules will have changed." I agree.

Despite the seemingly endless dot-com carnage, e-commerce is here to stay. Now it's time to confront the hard realities of what we now know about consumer behavior on the Internet.

Across the world, an increasing number of shoppers are jumping online, allowing researchers to compile new data, which will help us understand what does and doesn't work. For a current reality check, I turned to Cap Gemini Ernst & Young's Global Online Retailing report, published last month.

Cap Gemini based its study on research and surveys conducted in various countries throughout the world, including more than 7,000 questionnaires completed by shoppers in the United States, Brazil, France, Germany, Israel, the Netherlands, South Africa, Switzerland, and other nations.

The study shows a number of shifts in the Net shopping scene. While online shoppers have usually been affluent, highly educated men, in the past year a more typical middle-class consumer has emerged, with the average yearly household income of Web shoppers in the U.S. dropping to $52,300, from $59,000 in 1999.

Men still dominate Web buying worldwide, thanks in part to countries like Spain, Germany, and France, where 80 percent of shoppers online are men. But in the U.S., women comprised 60 percent of online shoppers, and in Canada and Australia half of all Web shoppers are women.

That's hard proof that online shopping is going mainstream. Consequently, there's even greater pressure today on e-commerce businesses to make Internet shopping easy and convenient. E-tailers must no longer expect us to become self-programmers or hapless guinea pigs, like many of us were in the early days.

SHIPPING WOES

The study found that high shipping costs are the main reason online shoppers abandon electronic shopping carts. More than 50 percent of people polled say they'd like to see lower shipping costs and that free shipping would prompt them to visit a Web site more often.

E-tailers take note: 11 percent of companies surveyed view delivery services as a profit center, which means they mark up delivery prices. Moreover, many e-tailers increase shipping costs based on purchase value, essentially penalizing shoppers for buying more. Those practices are self-defeating.

A majority of customers interviewed expect to find lower prices online, but often that's not the case. More than one-third of companies polled say prices listed on their Web site are either higher or lower than prices listed in their brick-and-mortar stores. Customers expect merchants to be consistent, and I agree.

Customers also expressed a big interest in buying "leading brands," which the report interpreted as concern for quality and customer service. By buying name brands, customers hope to avoid hassles they anticipate with returning items purchased on the Web. The idea of selling brands is a time-honored one, and one that's especially important on the Web.

SPENDING UPTICK

Still, 77 percent of online shoppers polled worldwide say they've increased their spending on the Web over the past year. They're also expanding beyond books, CDs, and computer equipment, although books remain the biggest seller in the vast majority of countries, and 70 percent of all online purchases in Brazil were for music. But one-quarter of respondents reported purchasing clothing last year, and increased spending was also seen in health and beauty products, sporting goods, flowers, and toys.

E-commerce sites can take heart from other data found in the survey. First, about 97 percent of all shoppers polled worldwide say they intend to continue shopping online. Second, more than half of all shoppers say they visit brick-and-mortar stores less often because they shop online. That trend portends serious repercussions for traditional retailers.

Anthony Noto, a Goldman Sachs (NYSE : GS) vice president, postulates in the report that if a supermarket, for example, experiences a 5 percent sales shift to the online channel, it may be forced to shut down up to 20 percent of its physical stores. The reason: stores would lose profit dollars and typically their highly desirable, big-spending patrons to the online side, leaving them with a lower-income, lower-spending clientele.

Still, there's a lot we don't know. For example, the study tells us that companies still don't have good business models to follow in terms of how to structure their online operations with their off-line operations. I agree. We're still in a time of experimentation and trial and error. But as time passes and more people jump online, e-commerce companies will surely benefit from experience, assuming of course, that they're still alive.

Sex may sell, but most e-commerce businesses won't resort to overt sexuality to generate profits. However, there's a lesson to be learned from Frederick's of Hollywood.

When selling water-filled bras, satin bustiers, plunging-neckline gowns, and crotchless panties, go to the Internet. At least that's what Gary Landry told me on his recent visit to Red Herring. Mr. Landry is president and CEO of the company's wholly owned Web unit, Fredericks.com.

In January 2001, sales at the intimate apparel Web site rose 100 percent over the same period last year, he says, after jumping 80 percent in December over the year before. Mr. Landry wouldn't disclose specific sales figures, but considering Frederick's has been hawking underwear online for four years, those numbers indicate substantial gains.

Mr. Landry looks me in the eye and says without flinching, "We sell sexy lingerie, and we're proud of it." Such purchases often are personal and private in nature, the types of products well suited for Internet sales. Thus Frederick's Web shoppers are attracted to the "privacy aspect of buying lingerie without having to interface with another person," he says.

SUPPORT HOWS

Mr. Landry joined Frederick's a year ago after serving as e-business vice president at Merisel (Nasdaq : MSEL), a computer products distributor in El Segundo, California. A big part of his strategy this year will be collaborating with vendors hawking romance-related products such as chocolates, wine, and gourmet foods. The idea is to market a few well-chosen products on the Web site, the sales from which would result in a Frederick's commission. Late last month, the company began selling flowers through an arrangement with Proflowers.com.

However, all is not well in Teddytown. The Web unit's parent, Frederick's of Hollywood, filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in July, crushed by $55 million in bank debt and other problems. A month earlier, Wilshire Partners acquired the company. The Web unit escaped bankruptcy proceedings.

Frederick's stores have been struggling mightily with the age-old challenges facing all apparel merchants -- catering to changing tastes and demographics amid tough competition. Born 55 years ago, Frederick's was, for many years, America's leading proponent of underwear as fashion statement and lingerie provider to movie stars. Today, Frederick's annual sales, estimated in published reports at about $140 million, are dwarfed by Intimate Brands (NYSE : IBI)'s unit, Victoria's Secret, with more than $2 billion in sales.

Mr. Landry boasts that Frederick's e-commerce business has been "profitable every month, every year" it's been open. But profitability is a vague term in the context of a multi-channel retailer, such as Frederick's. The Web staff of five people relies on the company's catalog and telephone operation and a big corporate warehouse for its logistics and fulfillment, amounting to a blurring of costs for dozens of people and associated overhead. Digex (Nasdaq : DIGX) hosts the Web site, which runs on a Commercialware platform.

WELL ENDOWED

Still, the Internet offers support to a sagging business. According to Frederick's data, Web shoppers tend to be younger and wealthier and more often male than their in-store counterparts. (Frederick's also sells men's robes, briefs, and thongs, although many men visiting the site are there to buy gifts for women.)

Online shoppers are 60 percent female, 40 percent male, ages 18 to 29, with household incomes of $125,000, according to Mr. Landry. By contrast, catalog shoppers are 75 percent female, 25 percent male, ages 18 to 39, with household incomes of $50,000. Of those online shoppers, 65 percent are new to Frederick's. The Web accounts for about 10 percent of the company's overall sales.

With 26 million catalogs distributed annually, and with 200 stores nationwide reinforcing the Frederick's brand and helping to guide shoppers online, the Web site should become a big e-commerce transaction engine helping to fuel the rest of the company.

Just when finding a salesclerk seems an impossible task, soon you may be helping yourself at an in-store Internet kiosk. Are we witnessing the end of customer service?

As paradoxical as it seems, an increasing number of merchants over the coming year will be installing computer terminals in hopes that customers will shop online while in their stores.

The latest retailer promoting in-store Internet shopping is Kmart (NYSE : KM), which is working with its e-commerce channel, Bluelight.com, to equip all of its 2,100 stores with Internet kiosks. So far, Kmart has installed 3,500 kiosks in 1,100 stores nationwide. Bluelight.com was formed by Kmart, Martha Stewart Living Omnimedia (NYSE : MSO), and Softbank Venture Capital. Other merchants that have installed or are planning kiosks include Staples (Nasdaq : SPLS), Best Buy (NYSE : BBY), and Barnes & Noble (NYSE : BKS).

VIRTUAL STOCKROOM

Kmart's plans sprouted from its two-year-old Solutions program, in which its customer service desks were outfitted with proprietary computer systems. The computers, operated by store employees, allowed customers to order hard-to-stock items like above-ground swimming pools, truck-bed covers, and big-screen televisions. Bluelight.com communications director Dave Karraker described Solutions as "not entirely successful, but innovative in its own right."

Those proprietary systems are being replaced with Dell PCs linked to high-speed T1 lines, offering customers a way to order items from Bluelight.com that they couldn't find in the store. The computers are being installed in customer service areas and, depending on the store, may also be found in the sporting goods and electronics departments.

Mr. Karraker points out that Bluelight.com represents inventory three times larger than typical Kmart stores, carrying 240,000 items, compared to 75,000 items in stores. Kiosks enable customers to purchase items that are sold out or not stocked at that location, as well as bulky items like large appliances that may be shipped directly to homes. Shoppers pay shipping costs, which typically run for the equivalent of standard mail rates.

However, not every item available in Kmart stores is available through kiosks, which display a modified version of the Bluelight.com site found on the public Internet. Not for sale, for example, are perishable goods, pet products, and smaller disposable goods such as tissues and toilet paper. Selling those types of items isn't practical or profitable, Mr. Karraker says.

Future plans include using the terminals to launch special promotions, like coupon and rewards programs, and to influence purchasing decisions, like guiding shoppers to certain brands -- Martha Stewart, for example.

IMPERSONNEL TOUCH

In the past, computer kiosks in stores and malls promoting store coupons, products, or services were mostly little-utilized novelties. Retailers hope that they will attract more people now, considering how the Internet and e-commerce has seeped into the public consciousness. Kiosks are a "valuable and beneficial way to tie the offline and online world together in a way that's relevant to consumers," says Robert Labatt, research director at the Gartner Group. "They'll actually improve the customer experience when applied correctly."

Retailers face a notoriously cutthroat business, involving a constant battle to lower costs and squeeze profits from thin margins. Kmart in particular has had to slash its workforce, resulting in a drop in customer service personnel. Another manpower-related problem Kmart has experienced is keeping stores properly stocked. "One of Kmart's major challenges right now is being out of stock," says Barrett Ladd, an analyst with Gomez Advisors. Kiosks "provide a major solution for them."

The kiosks may also improve Kmart's ability to market to different demographic groups. For example, Bluelight.com recently found that its online shoppers tend to be younger -- married women in their mid- to late 30s with at least one child -- compared to traditional Kmart shoppers, who tend to be married women in their mid-40s.

Technology is seen as a way both to compensate for reduced manpower and to provide additional services. I'm not sure if this is a disturbing trend or the future's bright promise. But I've noticed that stores increasingly resemble huge warehouses with nary a friendly face in sight, leaving me to fend for myself -- all of which makes me feel more like a store employee than a customer.