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Babbage's Game Plan for Selling Games Online The retailer says its strategy depends heavily on getting its offline and online businesses in sync On July 12, the gaming software company Babbage's Etc. launched its first online store and gaming portal. A privately held company with $500 million in annual sales, Babbage's is a late entrant in the E-commerce game and will have to move fast to be an online contender. On the surface, that would seem to make Babbage's Net initiative a long shot. But in fact, no gaming retailer has yet emerged as the clear market leader online. Moreover, Babbage's will be one of the first companies to aggressively leverage the strengths of its offline retail business as it executes its E-commerce strategy. It will do this by using the same infrastructure to fill orders -- at the same degree of efficiency -- that it uses for offline-store deliveries. Moreover, it will allow its online customers to use its stores for exchanges, refunds, and customer service. It's a strategy that many traditional retailers give lip service to but generally fail to implement. That may be about to change, analysts say. "It's just a matter of time before we see more offline retailers try to synchronize their online and offline businesses," predicts Jill Frankle, an analyst with International Data Corp. "They're more aware than ever of the advantages this will give them over pure-play [online] companies in the area of customer service and care." PARENT-FRIENDLY. Babbage's new site, called thegamestop.com, will sell thousands of game titles as well as gaming systems and accessories. It will feature news of coming releases, reviews, and playing tips, along with a special channel for parents who want to inquire about a game's subject matter and age recommendation. Visitors will be able to personalize their pages, download hundreds of game demos, and view video clips. They will also be able to pre-order new titles -- without paying for the games until they're released. Perhaps most important, according to Bruce Nelson, Babbage's vice-president for Internet commerce, games will arrive on the doorsteps of online customers the same day they arrive on the shelves of retail stores. And online purchases can be picked up, returned, or exchanged at any of the company's 485 outlets nationwide. "We believe it's a lot more powerful to blend the two [online and offline businesses]," says Nelson. "Such a combination is vitally important to our E-commerce strategy." One advantage, Nelson says, is the money saved on marketing. "We'd rather use our established audience to drive traffic than spend millions to promote the 'dot-com' business separately, for instance. This way, we can spend less money on advertising and bounce people back and forth [between the two stores]," he says. The site launch is costing about $2 million, Nelson says, and he hopes to be running at a rate of $5 million in online sales by the end of the year and an annual rate of $18 million to $20 million in 24 months. In an industry expected to generate $7.5 billion in sales this year and $10 billion in 2000, Nelson sees such goals as "very realistic." CAUTIOUS START. Babbage's certainly isn't the first traditional retailer to promote its Web site using its offline stores. For instance, companies such as Kmart, the Gap, and Costco have put Internet kiosks in their stores so customers can look at their Web sites, research products, determine availability at other locations, and even buy online. It's rare to visit a traditional retailer that doesn't mention of its Web site in its stores. Initially, Babbage's set itself apart from many of its competitors by sticking its toe in the online pool while other companies dove in head first. It was only a year ago, for instance, that the company created Gamelord.com, an information-only site about games that included reviews, new-release alerts, and playing tips. "It was originally meant to drive traffic to the offline stores," Nelson says. Then last holiday season, Babbage's put about 30 titles up for sale online. Even then, however, it had started on the task of making its offline distribution and fulfillment systems Net-friendly with the idea of using the strengths of its existing business to create a thriving online presence. "We have games and other merchandise in stock before anyone else because our distribution centers are near our manufacturers," Nelson claims. "Now we've made it so we can use these same fulfillment and distribution systems to pick and pack and drop-ship individual orders as well as deliver store shipments." Nelson says customers typically get games from Babbage's and its subsidiary, Software Etc., an average of two days before other vendors can deliver -- an advantage he says he'll also have online. SYNCHRONICITY. Many traditional retailers worry that by synchronizing their online and offline businesses, they risk losing offline customers to the Net. Babbage's is less afraid of that than of the idea that if it embraces the Net too timidly it might be blown away by upstart E-commerce competitors. It won't be long, Nelson says, before Amazon and barnesandnoble.com, which already sells PC software, make a big push to sell games. Indeed, with its recent foray into music sales, barnesandnoble.com has said it will launch a major marketing campaign to synchronize its brand online and offline. Why aren't more retailers doing just that? "It would be a phenomenal advantage," says Seema Williams, an analyst with Forrester Research. "But the truth is, it's really, really hard to do. Many companies are trying to work out the glitches, but they're also trying to establish a robust E-commerce presence first." The first challenge, Williams says, is integrating basic infrastructure systems so that when an item purchased online is returned to an offline store where it's recognized by the computer scanner. There's also the issue of restructuring employee compensation, since many retail salespeople earn a percentage of what they sell. "When there are existing pricing structures, development strategies, and partner relationships, synchronizing channels is a much harder problem to solve," Williams says. "Offline retailers are used to being the anchor of the business, while Internet pure-plays can make up the rules as they go." OOPS. In an interview last month with Business Week Online, then-toysrus.com CEO Bob Moog described an aggressive E-commerce strategy for his company, including the purchase of a new distribution center, the integration of offline and online inventory and fulfillment systems, and giving customers the ability to return, exchange, and pick up online purchases at traditional stores. Then last week, Moog resigned. "[His] ideas didn't agree with what [CEO of parent company Toys 'R' Us] Rob Nakasone had in mind," one source close to the company says. That highlights the tensions that can arise in trying to coordinate online and offline commerce. "Cannibalization is a valid threat to offline-store performance," says Forrester's Williams, "and will always be a major challenge. If an item bought online is returned to an offline store, the cost comes out of that store's bottom line." Babbage's Nelson has no ready answer for this problem, but he says it's important to simultaneously expand both businesses. As the millennium holiday season approaches, it will become clearer just how viable an E-commerce strategy based on the leveraging of traditional business strengths will be. Until then, the debate over whether it's better to sync or swim in Net waters will continue.will continue. By Stefani Eads in New York
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