OCTOBER 5, 2000
SPECIAL REPORT--THE NET'S FUTURE
Commentary by Alex Salkever
How Do I Love the Web? | Let me count the money, time, and aggravation it has saved me. Yes, I believe e-commerce pure plays have a promising future
| I bought a used suit on eBay. My colleagues snickered. My girlfriend was aghast (especially when I told her I planned to wear it to our wedding). But it's damn hard to find Joseph Abboud size-44 suits in used-clothing stores, and he's the only designer who makes suits that fit my fire-plug body type. And on my scribe's salary, I'm loath to fork over $500 for one of those sartorial standouts at Nordstrom or Saks Fifth Avenue.
Before the rise of the Internet, I would never have found such a suit without blindingly dumb luck. In fact, I didn't find it. I told eBay to search for Joseph Abboud items in a specific price range as they came up for auction and to e-mail the search results to me every other day. Not only did eBay find me a suit but it also let me scrutinize images of the garment before I bought it.
And when I paid up, I didn't have to make phone calls or send checks. I used a painless and secure person-to-person credit-card-payment system called PayPal. For just over $80 and no sweat on my brow, I'm now ready to waltz down the aisle in style.
A QUIET TRUTH. The success of eBay is old news by now. But my experience using it is indicative of a quiet truth about the future of commerce on the Internet. Has the Web lived up to the wide-eyed promise of the early years -- circa 1995? Heck, no. My desktop doesn't talk to my toaster, and I can't download the Gladiator movie and a Russell Crowe inflatable doll in half a second. I don't check my stock quotes using a broadband chip implanted in my femur, which also washes my car.
But strip away the hype, and the Internet, after five years of growing pains, has made my life markedly easier. The Net truly has aggregated information in a useful format. While sitting in a hotel room at midnight in Scottsdale, Ariz., I can find a safe hotel in Amsterdam and book a room there for my girlfriend the day before she's scheduled to arrive (yes, I did this).
Or I can cross-reference Consumer Reports for that bargain Brazilian full-tang chef's knives set and then buy it a few clicks later at a gourmet food site (yes, I really did do this). At Amazon.com, I can buy my father books and make sure no one else has already purchased them for him before me. And rather than me chasing after Joseph Abboud bargains, now the bargains chase me. That's real value, and it saves me the most precious commodity of all: time.
RETAIL IS RETAIL. Of course, it remains unclear how many of the companies providing this value can also turn a profit. Dot-com after dot-com continues to implode. And the vast majority of the companies that sell goods or do business mainly on the Internet -- the so-called e-commerce pure plays -- probably won't survive. But compared to what? This hardly differs from the bricks-and-mortar world, where more than 50% of new businesses fail the first few years.
As analysts have finally started to admit, Web businesses in retail and consumer sectors are very similar to physical retail operations with low margins and rough competition. The idea that just because a company can reach a mass audience, it should immediately try to do so was stupid from the get-go. Just ask the ghost of Sam Walton, who spent decades building his Wal-Mart empire from a single store in Bentonville, Ark.
"I do believe the pure-play Internet model can and will work with an appropriate appreciation of the limits of the business," says Ken Cassar, a senior analyst at Jupiter Research consultants. "They instead need to focus on narrow niches. It's the notion that everyone subscribed to back in 1995 and 1996, but everyone forgot about that." Thus, in hindsight, the soaring stock valuations of silly companies were ill-advised, to say the least.
"FAILURE IS GOOD." But as Cassar rightfully points out, eBay and a handful of other companies do things on the Internet that would be impossible or difficult to accomplish in other media. For example, SmarterKids.com sells educational toys and buttresses its business with online tests that can help spot weaknesses in a child's educational development. The site then recommends appropriate toys to remedy the problem.
"That's something you can't really do effectively in the store, and you certainly can't do in a catalog environment," Cassar says. "That's something Toys 'R' Us will never be able to do. Because it is such a particular niche, [SmarterKids.com] could be very profitable." To be sure, it isn't profitable yet and might never be. But so what? As they say in Silicon Valley, "Failure is good" -- at least it means you're trying something new.
Some of the highest-profile failures of e-commerce companies have come in notoriously tough retail sectors. Take the beleaguered world of online women's sites. Oxygen, iVillage, and Women.com all adopted formats quite similar to those found in women's magazines. They aspired to hand out free content and make a buck through dubious sponsorships, advertising, and e-commerce. It was a pretty dicey tack.
COUNTER EXAMPLES. Even if these sites had adopted a bricks-and-mortar magazine approach -- selling subscriptions, building out circulation, and layering on a Web site -- they would have faced years of losses before profitability. The fact is some money-making magazines, such as Conde Nast's Bride's, languish for five years or more without turning a profit.
Naturally, there are a few counter examples to the travails of iVillage and company. CNET has chalked up solid profits and revenue growth fueled through advertising and a subscription-database service built atop a freely distributed content site. And if free content can create one viable business, others should follow suit.
But back to the rag trade, a sector that has proved particularly hard to crack. The poster child for failure in this field was boo.com, where Palm handhelds flowed to young staffers like water, and millions were spent faster than Marion Jones could sprint down a straightaway. For the anti-boo, there's Bluefly.com, which sells designer clothes at steep discounts over the Web. Bluefly allows customers to set up personal catalogs notifying them via e-mail of items on sale in their size and from specific designers. "The consumer only sees what is available in their size. That makes an awful lot of sense," Cassar says. It makes sense to me.
REAL VALUE. I bought a sporty brown Joseph Abboud jacket there (hey, moving from Honolulu to New York six months ago meant a serious wardrobe upgrade) for $99 bucks on the third e-mail I got from the company. For me, that was real value, only achieved through the powerful database technologies driving the Internet.
In July, that perceived value nabbed Bluefly $3 million in additional funding, despite the frigid venture-capital environment for online commerce. The money came from Soros Private Equity Partners as part of a March, 2000, deal to provide the e-tailer with up to $15 million in financing at any time during the year. That Soros has chosen to keep chugging along with Bluefly speaks volumes. Of course, it didn't hurt that in the second quarter, the company managed to reduce customer-acquisition costs by 70% and increase sales by 480%, as compared to the same quarter in 1999.
Bluefly is still bleeding cash, for sure, and is far from profitability. But the company spends considerably less acquiring customers than traditional catalogs do. And it services existing customers more effectively. "We are not paying for printing and postage because e-mail is free," says Bluefly CEO Ken Seiff. "And when you are retaining customers, you are not dependent on their buying only when you mail a catalog."
SOWING SEEDS. Seiff and his fellow flysters may not be around much longer than a year: He says the company is trying to raise an additional $15 million in the next round, while the July injection should last 12 months. But the concept behind his store has sowed hatched seeds in the minds of other entrepreneurs. More important, it has shown enough people that e-commerce really does work -- and not just for standardized products like books.
So, would I go back to the dark days when buying a jacket meant hoofing around town and tussling with the rabid fashionistas at Filene's Basement, when all along I know my size and style probably aren't there? Nope, I won't go back there. And if there are enough people like me -- and I believe there are -- plenty of pure-play e-commerce companies will end up doing just fine, thank you.
Salkever covers technology and Internet issues for Business Week Online in New York
Edited by Beth Belton
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Copyright 2000, Bloomberg L.P.
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