Where Is It Now? Open Market's Fall
This e-biz early bird didn't get the worm. Here's what went wrong, and what's next

Lots of companies claim to be pioneers in e-business, but few can match the bona fides of Open Market Inc. (OMKT) Founded in May, 1994--one month before Netscape Communications Corp.--Open Market spotted back in the early days the critical need for software that lets companies offer their wares on the Net. It attracted an A-list of strategic partners, including AT&T Corp. (T) and Time Warner Inc. (TWX) And with the dawn of Internet commerce being widely anticipated, the company's initial public offering in May, 1996, was a spectacular hit, placing a market cap of $1.2 billion on a company with only $1.8 million in revenues the previous year.

Now, 3 1/2 years later, Open Market's lead has all but disappeared. Although the company is still the No. 1 seller of consumer e-commerce software, its market share fell to 22% in 1998, down from 31% the year before, even as competitors such as BroadVision Inc. (BVSN) and Intershop Communications Inc. gained ground, according to Dataquest Inc. Four of the company's top managers have defected in the past six months, including Robert Weinberger, vice-president for marketing. Worse yet, all of this is happening when the e-commerce software market is finally exploding. It's expected to top $580 million this year and hit $3.7 billion in 2002. ''The market for commerce software is taking off. Open Market isn't,'' according to analyst Greg P. Vogel at Banc of America Securities.

EASY ERRORS. What went wrong? The Burlington (Mass.) company's executives made a series of fundamental mistakes--which serve as valuable lessons for other e-biz entrepreneurs. For starters, they chose the wrong market initially, investing $50 million in complex software plumbing best suited to large Web sites. The real hot spot was supplying easy-to-build electronic storefronts. Then they branched out into the lesser market of electronic catalogs instead. And they stumbled when it came to acquisitions. An ill-conceived merger with Folio Corp. saddled Open Market with a money-losing business that stalled its annual revenue growth at around 12%. That's a disaster in a business where growth rates of 100% are common.

The formidable advantages that Open Market started out with just melted away--in spite of its promising technology and a ready-made market. Its struggles show just how difficult it is to make smart choices in the chaotic e-business environment, where conventional business logic goes out the window. Normally, seeking out the largest customers, acquiring companies to fill in gaps in a product line, and building up a broad portfolio of proprietary technology are considered wise moves. In Open Market's case, they were blunders.

Just now there are glimmers that Open Market may finally be turning itself around. Financial results for the fiscal third quarter, due out on Oct. 18, were expected to show a 20% gain in revenue, to $17 million, while the company's net loss was to narrow to about $1.2 million, compared with $6.6 million a year ago, according to analysts. CEO Gary B. Eichhorn, who was hired in 1995, promises to deliver a new suite of products before the end of the year that includes less expensive versions of its software, with simpler tools for setting up electronic storefronts. ''They're providing a very robust product,'' says James R. Preissler, an analyst at PaineWebber Inc. (PWJ), who believes the company will eventually recover.

For now, though, Open Market finds itself in a sort of purgatory. In most industries, the rank of various players can change over time. But e-business enforces a harsh discipline: The leading companies tend to get big quickly, and they snap up the lion's share of the market. That leaves precious little room for players who don't execute crisply. ''Very few Net companies occupy the middle, like Open Market,'' says Shikhar Ghosh, the company's founder and chairman. ''The vast majority are either in the high stratosphere of market valuations, or they've died.''

Open Market may still be alive--but it's none too healthy. Ghosh and Eichhorn's first mistake was aiming too high. They focused on developing complex systems to help companies such as AT&T and Time Warner build online shopping malls. The price, including services: $1 million and up. Meanwhile, competitors such as BroadVision were building simple products for individual businesses. They focused on creating a satisfying shopping experience. Open Market paid less attention to shoppers--and got left behind.

When Ghosh and Eichhorn finally decided to branch out, they picked the wrong target. Instead of going after the storefront business, they added an electronic product catalog to their lineup. And they acquired a company to do it--Folio in Provo, Utah. Open Market's strategy was to increase sales quickly by introducing its e-commerce software to Folio's customers. But they weren't interested. Worse, integrating Folio's operations proved hugely distracting. ''What we lost in focus, we didn't gain back in business,'' admits Eichhorn.

INFLEXIBLE. At the same time, Open Market was wasting precious cash by investing needlessly in technologies that weren't absolutely vital. When it started, it had to build its own Web application server software--which makes e-commerce Web sites run faster. Later, after Netscape and other companies started specializing in such software, Open Market continued to pour money into the project. Partly it was misdirected pride. ''We considered ours to be better than Netscape's,'' says Ghosh. When he finally realized he was wasting money on something that wasn't strategic, switching over to Netscape's Web server ''was very expensive.''

Another costly blunder was spreading resources too thin by expanding overseas. After only one year in business, Open Market was offering its software in 25 countries. That played to the strengths of its software, developed from the ground up to have the capacity to handle e-commerce transactions in multiple currencies and different tax regimes. But updating software for all those countries was expensive--and didn't pay off. ''There is usually one customer in each country that wants this stuff,'' says Ghosh. ''It's very seductive.''

Now, Open Market is behind--and, what's more, it's having real trouble winning over new customers. In some cases, it's because the company isn't flexible enough. Kirk Sanders, CEO of Professional Golf Commerce Inc., which sells golfing gear on the Web to 17,000 pro shops, found Interworld Corp. to be more willing to modify its software to his requirements. ''Open Market thought they were the only solution,'' he says. Other times, Open Market was said to be a technology laggard., CompUSA Inc.'s (CPU) online computer retail store, chose BroadVision over Open Market six months ago. Open Market ''is on the right track,'' says R. Stephen Polley,'s CEO. ''But BroadVision is six to eight months ahead. We wanted someone geared to staying ahead, who can work with us to push the envelope.''

Eichhorn is pushing hard to catch up with rivals. He believes the company will ultimately regain momentum, thanks to the powerful sales-transaction technology that Ghosh started investing in five years ago. He's betting that it will become vital to thousands of Web sites as they grow up and that the competition won't be able to match Open Market's capabilities. ''In two years people might look at us and think it was a brilliant strategy,'' he says.

Open Market has a second chance--rare for startups that make this many. mistakes. Now it has to do much to deliver on all of its early promise.

Contributing: Victoria Murphy

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Where Is It Now? Open Market's Fall

TABLE: Lessons from a Stalled e-Commerce Pioneer

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