Good chance they will go profitable this quarter - despite the economy. Here's a great recent article.
aspnews.com
Digital River Expects Profits to Flow
By Paul Rubens
September 13, 2001
Digital River (NASDQAQ: DRIV) is built around the belief that ASPs have to do more than application
provision, management and support to be successful. The Minnesota-based ecommerce ASP supplies
its clients with electronic catalogues and other ecommerce basics, as you would expect from an ASP in
this field, but the company's offerings go well beyond this to encompass activities outside the remit or
competence of most ASPs.
"We do fall into the ASP space and with 8,000 clients we
think we are the biggest ASP in the world, but we spend a
lot of our time on e-marketing programs to increase store
sales for our clients," Joel Ronning, Digital River's CEO, told
ASPnews. In fact, about 30 percent of the company's
revenues come from its e-marketing activities. Digital River
carries out segmentation modeling and regression analysis
to test various approaches before running ful-fledged
campaigns on behalf of its clients to boost their ecommerce
sales. The company's innovative approach to the ASP
market earned it a spot in this edition of the ASPnews Top
20 list.
The company aims to assist its customers' conventional
marketing departments in two ways: "We become our
customers' ecommerce department, using our expertise to
work on their offline and online marketing programs to
ensure that the Internet offer is as good as the offline offer and that every opportunity to up-sell is
exploited," Ronning said. "We do work very closely with our clients, drawing up marketing calendars on
a yearly basis so we know exactly what campaigns are going to be run." Perhaps more importantly,
Digital River finds noncompeting but complementary products in its clients' catalogues, and uses these
to create cross-selling offers — buy a tax application from one client and get an anti-virus product from
another at half price, for example.
Putting Its Money Where Its Pricing Is
Customers know that Digital River has plenty of incentive to increase their revenues because of the
pricing structure the company has adopted for its ecommerce services. About 75 percent of Digital
River's clients are software verticals such as Symantec and Novell, and these clients are charged a
percentage of their ecommerce revenues.
Most of its manufacturing and retail clients are charged by a combination of transaction volume,
bandwidth and monthly hosting fees. "This variable charging system is good news for our clients
because we are embedded in their success, and our interests are aligned, although we obviously have
to be careful that our customers have viable brands to make it worthwhile for us," Ronning said. Monthly
fees for Digital River's service range in practice from about $1,000 for its smallest client to about
$70,000.
Digital River's ecommerce offering to its clients goes further still with many other supplementary services
including order fulfilment and returns management, and customer relationship management, service and
support.
The company works with fulfilment companies such as Federal Express, integrating its systems using a
series of its own APIs into their back-end systems. Ronning said the company has so much experience
in this area that it can bring up a third-party fulfilment warehouse in two days, using XML. Many other
companies would struggle to do this in two months, he claims. To provide customer services, Digital
River operates its own call center employing about 100 staff. Operators answer calls in clients' names
and field enquiries about ecommerce transactions including order status and returns enquiries.
Data Center an Endangered Species
Ronning said he believes data center ownership is vital for a company such as Digital River. Data center
operators, he believes, do not offer economies of scale and may soon be an endangered species.
"Look at Exodus and others — they are vapourising. We believe their service is being commoditised
and they are being left managing expensive bottom line costs, Ronning said. "We don't want to split our
synergies and we believe that you have to control your own data center to offer a service level
agreement (SLA)." The company has 50 Sun and 30 NT servers, and more 10 terabytes of data online
in its data center. The entire portfolio of products for all its customers is held in one shared Oracle
database, with 8,000 views corresponding to its 8,000 client's individual catalogues.
Digital River is currently in the market for a second data center, which it plans to get hold of through the
acquisition of an ecommerce company that has its own data center already up and running. Since 30
percent of Digital River's business comes from the UK and Europe, he says this is where the ideal data
center would be located.
Telcos Are No Threat
Data networks, however, are another matter, and Ronning said he believes that networking-owning
telcos are no threat to Digital River's business. "The value added is simply not in the network, but in the
ecommerce application. Our ecommerce applications can grow clients' businesses. Take a telco like
[UK-based carrier] BT. We think BT's ecommerce offerings are very crude — and the network is
unimportant." Digital River avoids including page load times and similar metrics in its SLAs, but uses
content delivery management company Akamai to speed up its service. (see an opposing viewThe One
True ASP, a profile of BT Ignite.)
Digital River was founded in 1994 and the company forecasts it to move into profitability by the fourth
quarter of 2001 on sales of $57 million. Costs are less than they were a year ago although sales have
more than doubled in the last 12 months, and the company is predicting revenues of about $100 million
next year. |
