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Online Extra: Q&A with Overstock.com's Patrick Byrne


Patrick Byrne, CEO of Overstock.com, has a ringside seat watching e-tailers keel over. Afterall, Overstock, an online store that sells clearance items at 40% to 70% discounts, currently makes about 20% of its living from the inventories of dead companies -- but they're not averse to raising that figure. Overstock has bought and sold inventories of defunct dot-coms including jewelry e-tailer Miador and online toy store ToyTime.com. Byrne spoke with BusinessWeek's Heather Green about what models he thinks work online and why. Here are edited excerpts of their conversation:

Q: How are you guys doing? What happens to your business when the dot-coms are all dead?

A: We're feeling very comfortable with the way things are going. The shakeout we have seen is pretty much expected. Only about 20% of what we buy is from people going out of business -- the other 80% has been from existing companies. We are fine when everyone shrivels up and dies.

Q: So how does your model differ from a traditional e-tailer?

A: We buy better than e-tailers. We buy below wholesale and sell at wholesale. Everyone else was buying at wholesale and selling a little bit above and losing money. On the practical level, we have far less focus on brand-building and the land-grab theory. We have 6 million to 7 million unique visitors each month. Brand-building is what people in marketing talk about when they want to squander money. We are much less concerned with brand and more with acquiring customer satisfaction.

Q: What kinds of business models work on the consumer Net?

A: Business models that are specific to the Web. Something is a good Web business when it isn't a good brick-and-mortar business, when it's something you can't do offline.

Q: Do you feel that, without the promotions and the buzz driven by venture-capital-backed consumer Net companies, the quality of online shopping and the interest in the consumer Internet will drop?

A: I don't think that interest is going to wane. I think it will level off. About 3% or 4% of retail is done through catalogs. Online retail may grow overtime to 5%. It's never going to replace brick-and-mortar, and that assumption isn't built into our plan.

Q: So what does that mean for the consumer Net?

A: It leaves us and eBay and maybe Amazon. Amazon, though, will be changing its business strategy. Then there are the niche players. If someone already has a catalog business, then the Web is, in a way, a cheap catalog. For the normal brick-and-mortar companies, it probably isn't worth the extra expense. Then you are just left with the other businesses that for some reason aren't good to do in the brick-and-mortar world. One is luggage and liquidation.

Q: Why luggage and liquidation?

A: Luggage is a horrible thing to sell in a store. Luggage costs a lot to have on the floor and in the back of the store. Retailing luggage has never been a good business, but it can be on the Net.

And liquidation, it's a weird business. Say you have 127 DVD players. Best Buy doesn't want those. How do you spread that out in stores? It's not worth the real estate in the printed page. There isn't any good way to sell them out of one store. It has been a dirty little secret about how [many] liquidation items there are and how hard it is to get rid of [them].

I've really never been in a business where I see no natural limits to its growth. It's a $50 billion market that isn't able to be serviced well. We did $40 million in sales last year, and expect to do $125 million to $150 million this year, then $500 million the next year.

Q: Are you guys profitable?

A: We were profitable for one month, then we slipped back below profitability. We have a -5% net margin. We're comfortable with losing $100,000 a month as we build out. We expect by the summer to be making money. A year ago, for every dollar we sold, we were losing $3.

Q: What have we learned about models that work?

A: The Net is great at slashing information costs, not distribution costs. Any business predicated on [distribution] will go by the wayside. Lots of companies in the real world are really a toll booth on information. If you own a toll booth, the Net can put in a six lane highway next to you. So the Net is good for companies that cater to job hunters, house hunters, people buying tickets.

An industry where they charge a huge toll and provide no added value is the recording industry. They take a 90% toll and provide no extra value. All it will take is for micropayments and digital payments to work out. When they are solved, and I think they're already partially worked out, the recording industry is going to implode. Anything that is digital -- other than books, because people like that tactile experience -- everything that can be copied digitally will no longer be distributed in physical form. Videos, tapes, and CDs will look archaic 10 years from now.


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