How the Census Bureau Underestimates E-Commerce
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

Millions of Americans will make last-minute gift purchases this week by going online. The federal government says, “Bah, Humbug!” It believes online shopping is the exception rather than the rule. Online shopping, though, is in a way like Santa Claus – real but rarely seen.
Last month, the Census Bureau estimated that online sales accounted for $22 billion in retail activity in the third quarter. For 2005, online retail sales are likely to approach $90 billion. By itself, the figure is large, but online sales are a meager 2.3% of total retail activity, which in America totals nearly $4 trillion. According to the Census Bureau, e-commerce is growing by about 25% annually, but even at this rate, it will be many years before official online retail sales account for even 5% of the total.
Is online retail destined to remain a niche market? Government data on its own indicates the answer is likely yes, but there is much more to the online economy than our government sees.
Consider eBay. In July, A.C. Nielsen released a study showing that 724,000 Americans describe eBay as their primary or secondary source of income. More than 1.5 million other Americans supplement their incomes by selling on eBay. And eBay sales nationwide will exceed $20 billion this year. All these sales count as retail sales, yet our government counts only a small fraction of this amount, just the commissions and fees, or perhaps 10% of the total, as ecommerce.
Also, federal data collectors only count sales as e-commerce when they are made by a separate business unit that has filled out a form classifying it as such. Many online businesses also have brick-and mortar shops, which together are a single business unit. Online sales by a local jewelry store or hardware store might register as retail sales but not as online sales.
Many other sales that would not exist without the Internet are not recorded as online sales. Consumers may go to various Web sites for car dealerships, examine inventories online, negotiate a price online, but ultimately make the purchase in person. Although the transaction is facilitated over the Internet, the federal government records it like an offline purchase.
A consumer may choose various items from an online retailer such as L.L. Bean or Dell. If the consumer makes the purchase entirely online, it is recorded as e-commerce. But if the consumer calls for assistance at an 800 number, and if the telephone clerk actually records the transaction, it becomes an ordinary retail transaction without any e-commerce content.
Further, many Internet transactions, such as airline or entertainment tickets, are not recorded as retail sales at all. They are included as transportation or services, but not retail trade.
To get a clearer sense of online commerce, it is helpful to look at online advertising. For the first half of 2005, the Interactive Advertising Bureau estimates such advertising was $5.8 billion. Online advertising appears to account for more than 5% of total advertising and to be growing much more rapidly.
Aside from the rapid growth of online advertising, two characteristics should trouble traditional advertising outlets. First, the most rapid growth of online advertising is related to customer searches at sites such as Google and Yahoo. No other medium can target potential customers as precisely as a search Web site helping a customer find a specific product or service.
Second, businesses with relatively few direct online sales, such as automobile manufacturers and banks, are heavy online advertisers. Online advertising is only partly about name recognition. It is also aimed at attracting users to visit state-of-the-art Web sites with far more detailed information about a company’s products and services than can be conveyed in other forms of advertising. Today’s customers still insist on a test drive before purchasing a car, but unlike their parents, today’s customers will also have spent several hours online learning about the detailed characteristics of a group of cars of interest.
Although it cannot harness a team of flying reindeer, the Internet does more to facilitate holiday shopping than any other person or device. Perhaps next year our government will do a better job of measuring the size of Santa’s virtual helper.
A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.