BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESS WEEK E.BIZ -- PERSONALITIES

Going for Gold at BlueLight
CEO Mark Goldstein aims to make Kmart's online retailer leader of the pack

Photo by Richard Morgenstern
Kmart CEO Mark Goldstein.
The two chief executives had been butting heads for months. Mark H. Goldstein, head of BlueLight.com, pleaded with Kmart Corp. ( KM), the Web site's majority owner, to dump its traditional photo-processing business and let him offer digital-photography services on the site. But Kmart CEO Charles C. Conaway wouldn't budge. He wanted to continue offering photo processing, and he didn't want Goldstein promoting a competing service. In mid-October, the two called a truce: Conaway would continue to offer regular film developing but BlueLight could promote its own photography services, too. ''We had to compromise more than we would have liked. But we agreed that photo-processing is good for Kmart, and what's good for Kmart is good for BlueLight,'' says Goldstein.

Such is the friendly fire between Kmart executives and Goldstein, who for a year has been striving to make BlueLight.com a retailing giant on the Web. It's a match rife with strife: Goldstein and Kmart are opposites. Kmart, the nation's third-largest retailer behind Wal-Mart Stores Inc. ( WMT) and Sears, Roebuck & Co. ( S), is a 38-year-old company where change comes slowly. Goldstein comes from the high-tech startup world and launched and sold three companies before piloting BlueLight. This is a supreme test of whether Silicon Valley and Main Street can successfully work together in the e-business era.

Goldstein has been on the offensive from the start. For instance, he insisted on having control over the business and on preventing Kmart from operating an independent site. ''If you don't push and challenge and make demands, you don't create change,'' Goldstein says. ''You're attacking processes that have been in place for decades.''

Too hip? BlueLight's CEO has so far been diplomatic enough to avoid alienating his big brother. The retailer, which owns a 55% equity stake in BlueLight, just invested $55 million as part of a second round of financing. Still, Kmart is preoccupied with its own operational problems. Because of poor inventory management and marketing, it posted a 22% decline in net income last year. So it's a challenge for Goldstein to make BlueLight a top priority there. Kmart wouldn't make top executives available for interviews, but spokeswoman Shawn Kahle notes that around the retailer's Detroit headquarters, Goldstein is considered a bit pushy. ''Patience is not his first strength,'' she says.

Goldstein is about as far as can be from the typical Kmart shopper, who is a mom with a household income of less than $50,000. At age 39, the hip Goldstein lives with his girlfriend on a houseboat docked in Sausalito, Calif. He does things to extremes, such as swimming in the frigid waters of the San Francisco Bay and taking two-hour runs up Mt. Tamalpais at 7 a.m. on Saturdays. He says he has been ''too busy working'' to get married.

Just recently, Goldstein started showing signs of settling down. He bought and is remodeling a 3,000-square-foot house on nearby Belvedere Island. ''At some point it's time to grow up,'' he explains. ''I have aspirations to have children, and you can't have kids on a houseboat.'' He's getting interior-design tips from good-taste guru Martha Stewart, whose Martha Stewart Living Omnimedia Inc. ( MSO) is a BlueLight backer. Her color recommendations--lime green and eggshell.

But maturity hasn't quelled Goldstein's fundamental feistiness. His opinions are strong. He's got a hot temper. And he's stubborn. ''He listens but he's not generally swayed. He stands his ground,'' says Stewart. It's a volatile mix. ''When you put that combination together, he'll have his admirers and detractors,'' says Rex Golding, a partner at Softbank Technology Ventures, which owns a chunk of BlueLight, too. ''Some people mistake his courage of convictions for arrogance.''

Does Goldstein have the right stuff to lead BlueLight? That's not yet clear. To be sure, he helped create the unusual business--part free Internet-access provider and part mass merchandiser. But he has never run a retail operation before. And his record as an entrepreneur is spotty. Investors came away empty from NetAngels Inc., a Web-site personalization-software maker that he co-founded in 1995 and sold in 1998. ''Every day I worry about not succeeding,'' he says.

As Martha Stewart would say, that's a good thing. BlueLight is anything but a sure bet. It has some strong pluses. While the company doesn't divulge revenues, it does say that more than 4.9 million people have signed up for the online service--placing it among the top three Net-access providers. And, with about 1.5 million visitors to its e-commerce pages in September, BlueLight is on par with the Wal-Mart and Target Corp. ( TGT) e-commerce sites, according to research firm Nielsen/NetRatings. But visitors spent less time at BlueLight than at the other two, and it has been getting low marks for customer service.

BlueLight's October relaunch of its Web site was designed to fix that. The new site plays up Kmart's clothing brands like Route 66, and is more aggressive with marketing, suggesting, say, a shirt to buy along with those pants. And it now offers 250,000 items, up from about 100,000 previously. Until now, BlueLight was ''a car with a motorcycle engine in it,'' says Goldstein. ''We're dropping a six-cylinder engine into it now.''

Goldstein is betting that a large fraction of Kmart's 30 million store customers a week will buy merchandise at BlueLight. To attract customers, BlueLight hands out free Net access software on CD-ROMs in Kmart's 2,100 stores. The promotion has proven successful at signing up subscribers--about 40% of whom hadn't previously used the Web, says Goldstein.

Photo by Richard Morgenstern
Goldstein, who lives on a houseboat, is not a typical Kmart shopper.
Right track. Getting those subscribers to buy has been another matter. BlueLight Net access subscribers who also have become e-commerce customers number only in the tens of thousands, says Goldstein. Now that there's more merchandise on the site, his goal is to turn 25% of free-ISP subscribers into paying customers by the end of 2001. Goldstein says he's aiming to sell $100 million of merchandise between now and the end of 2001, when he expects the company to break even.

Analysts think he's on the right track. The sales projections are attainable because the site is piggybacking on Kmart marketing. Making a profit will be harder. Spinway Inc. provides the plumbing for the dial-up service in exchange for selling the ad space on the site--so Goldstein is giving up a revenue source. On the e-commerce front, Goldstein faces fierce competition from general merchandisers like Wal-Mart.com and specialists like consumer-electronics seller CircuitCity.com ( CC). ''BlueLight will be competing on price, and that's going to make it hard to be profitable,'' says Heather Dougherty, retail analyst at research firm Jupiter Media Metrix.

That's why it's crucial for Goldstein to get loads of help from Kmart. He's counting on Kmart to plug BlueLight in TV ads and newspaper flyers and on in-store kiosks. Complicating matters: The BlueLight deal was initiated by top Kmart executives who have since retired. Goldstein argues that he's better off with the new regime. Conaway, he says, ''understands e-commerce and new merchandising techniques.''

If anyone is conscious of the gap between Kmart's mostly blue-collar clientele and BlueLight, it's Goldstein. To help his employees relate to the Kmart customer, all 170 staffers must wear Kmart clothes every Tuesday and shop there twice a month.

Goldstein asks a lot of his employees, so he tests their mettle before he hires them. He has had a handful of candidates for high-level jobs dive from his houseboat into the chilly waters of San Francisco. Hue Rhodes, now BlueLight's director of channel development, was taken aback when he interviewed with Goldstein last year. But, borrowing a pair of Goldstein's swimming trunks, he took the plunge. ''He was looking to see how willing I was to be outside of my comfort zone,'' says Rhodes.

Goldstein has always done things a little differently. He grew up in Rye, N.Y., a tony suburb of Manhattan, and had the entrepreneurial bug from the start. His father, Bernard Goldstein, ran a computer time-sharing company called Computech and Goldstein tagged along to business meetings and receptions. A ''B'' student in high school, Goldstein preferred the part-time work world over studying. He worked as a security guard at a Twinkie factory.

It took him a while to find his metier. At the University of Pennsylvania, he majored in marketing and economics, but, again, business grabbed his fancy. He made money by handing out T-shirts and caps for beer distributors on Philadelphia campuses. After college he drifted out to Silicon Valley, where he snagged a job at Apple Computer Inc. Apple ( AAPL) was already a large company, and Goldstein wanted to run his own outfit, so he stayed for just two years before striking out on his own. Within a decade, he started and sold three startups---financial-services software company Reality Online, NetAngels, and Web promotions company Impulse!Buy Network.

Goldstein's father played a key role in his son's career. The elder Goldstein invested in each startup prior to BlueLight, although never as a principal investor and never putting in more than $50,000. He passed on BlueLight since his son had lots of deep-pocketed investors. Dad was liberal with advice, too. Sometimes his son took it, and other times he politely brushed him off, saying ''my other line's ringing,'' the elder Goldstein recalls.

Now, Goldstein plans on succeeding with Kmart in a similar way: heeding it in some instances, sticking to his guns in others. Since Kmart has just two seats on BlueLight's five-member board, Goldstein says he views it as a partner rather than a boss. He insists he ''just knows'' when to push to get his way and when to back off. With BlueLight still on the bleeding edge of e-tailing, his intuition will be put to the test.

By LOUISE LEE
Contributing: Linda Himelstein in San Mateo and Joann Muller in Detroit

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