Digital River plans an IPO this year
$13M private placement builds revenue stream for relocating firm
Henry Breimhurst Staff Reporter
It's hard to refrain from making a water analogy when talking about Digital River Inc., especially
given the activity at the Edina-based company.
Indeed, Digital River won't even be Edina-based by this June: The company, which has had its
headquarters in the offices of majority shareholder Tech Squared Inc., is shipping out to an Eden
Prairie location.
The company, which distributes software and other digital products over the Internet, has meanwhile
seen its trickle of clients grow to a flood, and with the ink on its most recent $13-million-plus private
placement not yet dry, Digital River is already looking forward to a possible initial public offering
(IPO) later this year.
While no date has been set nor filings made regarding the IPO, Digital River president and CEO Joel
Ronning said it is clearly the next step. With the white-hot market for e-commerce stocks -- witness
the success of Amazon.com, N2K and last week's K-tel flurry -- Ronning said his firm is on the
radar screens of several major securities firms looking to take Digital River public.
"Our goal is to do it in '98, and sooner is probably better than later," Ronning said.
Digital River, Ronning said, has spent the past few years getting licenses to distribute the software
products of various companies; to date, more than 1,200 companies have licensed the rights to more
than 100,000 titles. Most of these are stored on Digital River's massive server, and then downloaded
to the customer over the Internet once the customer has made the e-commerce purchase of the
software. Digital River, Ronning said, has spent the past few years getting licenses to distribute the
software products of various companies; to date, more than 1,200 companies have licensed the
rights to more than 100,000 titles. Most of these are stored on Digital River's massive server, and
then downloaded to the customer over the Internet once the customer has made the e-commerce
purchase of the software.
"Software is an ideal [product] for sales over the Internet," said Bill Burnham, senior research analyst
for electronic commerce at Minneapolis-based Piper Jaffray Inc. "It's going to take a few years. A
lot of it depends on the available bandwidth."
The database is also designed to allow different points of entry; for example, a consumer might visit a
software publisher's site. When this person wants to make a purchase, a link from the developer to
Digital River's server shows the customer just that publisher's products. On the other hand, visitors
to a retailer site will be able to view all the titles that retailer sells. In this way, Digital River can slice
and dice the database to serve a variety of customers.
"There's a big advantage from the publisher side," said Chip House, senior marketing manager for
Digital River. "There's greatly reduced cost to bring a product to market, and a greatly reduced time
to market. It allows them to pass the savings on to the customer." House said Digital River
recommends that its publisher clientele offer software over the Internet at costs 10 percent to 20
percent below in-store costs. "We want to make it a preferred mode of shopping."
"[Ronning] has really got sort of a holistic service offering," Burnham said. "If you want to sell over
the Internet, [Digital River] can make it happen. You're going to see a whole new breed of
behind-the-scenes electronic commerce firms."
The $13 million private placement, meanwhile, is Digital River's third: The first was the initial $1
million round, and the second raised $4.5 million last summer. The latest round, Ronning said, will be
the last before an IPO, and will pay for the move to new headquarters and the opening of offices in
London and Japan before year's end.
"Right now, we are the world's largest source for distributing software on the Internet," said Ronning.
"Not only do we have the tactical side, but we also have the funding." With customers like Oracle
and IBM, he said, Digital River has customers that "care that we're well-funded."
House said Digital River intends to grow from 1,000-plus publisher sites and 150 retailer/reseller
sites today to more than 2,000 publishers and 1,000 retailer/resellers by the end of the year.
As a bandwidth-dependent company, Digital River also finds it must invest in technology. The huge
server will soon be hooked up to a DS3 line, which is equivalent to 45 T1 lines. Ronning said the
company is performing about 700 transactions per day, and has revenues just shy of $1 million a
month and growing; historically, the company has grown at 20 percent to 40 percent monthly. The
company does offer physical delivery for some programs, including large, graphics-heavy games,
since they would take far too long to download.
Minneapolis-based NetRadio also plans to sell software over the Internet, but it will physically mail
the software to buyers. "It's not just the bandwidth speeds, it's also the types of people," said
George Burr, director of marketing for NetRadio. "I know a lot of people who aren't real
comfortable unless they go to Computer City" for a shrink-wrapped box of tangible software.
Digital River's clientele, he said, would logically include the tech-savvy who are comfortable paying
for something they never physically handle. The tech-savvy "are obviously a growing market," Burr
said. "But the Internet is attracting all types of people. We're filling [the needs] of other types."
Digital River points to estimates and surveys indicating that most software manufacturers expect
electronic delivery to be a major part of their business by 2000, and a third of Fortune 1000 IT
managers expect to acquire half of their software over the Internet by 1999.
Digital River's move to Eden Prairie will establish the company as its own entity. The symbiotic
relationship with Tech Squared will continue, but Ronning said Digital River no longer needs the
incubation or stability that Tech Squared, which sells Macintosh equipment, software and
peripherals, provided to the startup. Ronning owns about half of Tech Squared, but said he will
allow Tech Squared to run itself; his attention will be on Digital River.
c 1998, Minneapolis/St. Paul CityBusiness
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