DD Part 1
Strategic Alliances
The core strategic marketing alliances established by the Company to date are described below.
Bid.Com concluded an agreement with America Online, Inc. (“AOL”), the largest online service provider in the
world, to provide the Company's auction platform for goods and services offered to AOL subscribers. The
Company provides product procurement, transactional processing and order fulfillment services to AOL. AOL has
purchased 1 million Common Shares of Bid.Com and has a representative on Bid.Com's board of directors (the
“Board”). See “Material Contracts”. Bid.Com is currently working with other AOL companies to maximize this
strategic relationship. Management believes that its alliance with AOL is the cornerstone that will help it achieve
increased site traffic to achieve its business objectives.
Bid.Com launched a website in May, 1997 with an AOL branded interface, the AOL Online AuctionÔ. Sales in the
second quarter of 1997, which reflect the first three months of the AOL Online AuctionÔ, were $488,500 and in the
third quarter, representing the second three months of the AOL Online AuctionÔ, were $667,000. These initial
results were successful enough for Bid.Com to conclude a two year interactive marketing agreement with AOL
whereby the Company agreed to purchase advertising and promotion for US$1,250,000 per quarter with either party
having a right of early termination after the first year. This agreement provides Bid.Com with anchor tenant
positioning in a number of AOL's E-commerce offerings, plus ownership of various keywords such as “Online
Auction”. In addition, Bid.Com secured significant visibility and presence on AOL.com which is one of the most
visited sites on the World Wide Web. This aggressive promotional campaign of the Bid.Com Online Auction,
supported by substantial online advertising, was launched in March, 1998.
Bid.Com has also concluded an agreement with the Toronto Star Newspapers Limited (“Toronto Star”) to provide
local auction and cybermall services in the Province of Ontario. The Company will be providing transactional
processing and the Toronto Star will provide product procurement and order fulfillment to visitors of The Toronto
Star Online Auction and Cybermall branded site. Toronto Star, the largest circulation newspaper in Canada, has
purchased a total of 1.5 million Common Shares of Bid.Com and has a representative on the Board. See “Material
Contracts”.
Bid.Com entered into an E-Commerce and Promotion Services Agreement dated as at July 29, 1998 with Rogers
Media Inc. (“Rogers”) pursuant to which Bid.Com granted Rogers the exclusive right to co-brand the Canadian
Bid.Com auction, subject to the rights granted to the Toronto Star as described above and except for certain
charitable or “cause” marketing in which Bid.Com is involved (See “Business of the Company - Description of
Operations”). Rogers has agreed that the Canadian Bid.Com auction will be the only online auction displayed on the
home page of Rogers new E-Commerce portal and to be responsible for generating agreed levels of site traffic and
advertising revenues, as well as committing minimum levels of annual advertising on both media properties of
Rogers and its affiliates and arms-length media properties. Bid.Com also agreed to have a nominee of Rogers elected
to the Board. Rogers has committed in excess of $1,000,000 per year in media advertising to promote the
partnership. In a separate transaction, Rogers concurrently made an equity investment in Bid.Com. See “Private
Placement and Plan of Distribution”.
As described below, these core strategic marketing alliances provide Bid.Com with a foothold to take advantage of
the anticipated growth in E-commerce:
1) AOL is the world's largest online service provider with a subscriber base of over 10 million people (prior to the
anticipated acquisition of CompuServe with its approximately 2.6 million subscribers) and offers Bid.Com extensive
potential exposure to online consumers in the United States plus international growth opportunities. Over the next
two years, the Company believes that Bid.Com will become one of the highest visibility E-commerce partners in the
AOL community.
2) Rogers' national media properties include some of Canada's most widely read publications, Canada's only
television shopping network, a number of radio stations and several leading internet properties including Yahoo!
Canada, Quicken.ca, Electric Library Canada, Chatelaine Connects and Macleans Online. Rogers' parent company
also owns the largest cable network in Canada. The exclusive national partnership with Rogers leverages a number
of media properties to establish the leading online shopping destination in Canada as well as a number of trade
magazine resources to support the development of business-to-business online auctions.
3) The Company's relationship with Toronto Star is its first alliance focussed on territorially-based Internet content,
tailored to the local characteristics of a particular defined geographic region supported by a marketing mix of
newspaper, television and online advertising. Bid.Com anticipates a number of similar initiatives in major U.S. urban
centres over the next two years.
The Company expects to leverage the strong brand names and subscriber bases of its alliances as well as to invest
the substantial equity required to create Bid.Com's own brand recognition and customer confidence. These alliances
also increase traffic to the Bid.Com E-tailing sites due to advertising carriage arrangements which usually include a
combination of hyperlink banner advertisements and the directing of key words such as “Auction” and “Online
Auction” to the Bid.Com platforms.
These alliances have also demonstrated the speed and effectiveness with which Bid.Com can deliver custom branded
E-commerce solutions from a standing start to turnkey implementation. Bid.Com's platform and implementation
expertise now have strong endorsements from well known brand names. Steadily increasing distribution of the
Bid.Com E-commerce offering to a larger audience of Internet users while establishing exclusivity in certain
distribution channels is viewed by management to be a key success factor for the Company. The credibility of
Bid.Com's current strategic partners is also expected to accelerate the formation of future business alliances.
DESCRIPTION OF OPERATIONS
Operations
Bid.Com is primarily a sales and marketing company taking advantage of the new and expanding opportunities
afforded by its proprietary technology within the evolution of E-tailing and E-commerce through the Internet.
Bid.Com's business generates transactional revenues using two auction formats to sell a broad array of consumer
goods in many product categories including computers and software, consumer electronics, toys and games,
sporting goods, entertainment, memorabilia, jewelry and rare books. The auction can be structured as either a rising
or declining bid format.
The declining price or “Dutch” auction is a well proven method of high volume merchandising. A starting price is
set and a limited time period is allocated for a given quantity of product to be auctioned (3 to 5 minutes for most
Bid.Com items). As time advances the price drops in small increments. The longer one waits, the lower the price.
However, if a shopper waits too long the inventory may be sold out. The declining bid auction allows participants to
bid in a real time format utilizing the on-screen data which provides the declining time, quantity remaining and falling
price of the items for sale. The bidders remain online and actively participate in the final result at auction's end. The
Bid.Com declining price auction began operation in April of 1996. This unique format lends itself to a multitude of
consumer categories and services particularly in the emerging vertical markets of travel, entertainment and
memorabilia.
Bid.Com also offers the more conventional rising price auction format, where the number of top bids purchase the
corresponding number of items auctioned over the course of a number of days. The rising price auction allows
participants to competitively bid on available merchandise by incrementally adjusting their bid positions. The Online
AuctionÔ site reflects current leading bidders, minimum new bids and initial bid pricing. Participants are informed
of their bid status, stating whether they have won, been outbid, approved or declined via electronic mail. The
interactive nature of the bid update system encourages continued customer participation throughout the bid lifecycle.
The rising price auctions began with a seven day duration but have been accelerated to a three day cycle and most
recently to a one day cycle in the United States. Participants may periodically revisit the standing of their bid and
should participants be outbid from the range of winning bids, they are advised by E-mail and asked if they wish to
submit a new bid.
The Online AuctionÔ can support a large number of concurrent and sequential participants, capturing the
excitement of a live event in an online environment. Customers can interact at their convenience, gaining access to a
huge variety of merchandise at constantly changing prices. Bid.Com is positioned through its already proven
capabilities of real time auction performance to provide this platform, not only to its expanding universe of users, but
also in customized formats to its increasing strategic partner base.
Customers may view the Online AuctionÔ without cost or registration. Customers, however, must provide
pre-registration information required for purchase validation to participate in the Online AuctionÔ . This
information includes verifiable location and billing information, usually including a commercial credit card.
Customers or other interested parties can request to receive periodic updates regarding available products and
purchase opportunities which is facilitated through a consumer newsletter. The Company uses a set of applications
for processing successful bids as they are converted into customer orders. These applications determine shipping and
handling charges and applicable taxes for purchases, charge customer credit cards, print order information, transmit
order information electronically to the Company's contract warehouses and vendors, and provide transaction
information for the Company's accounting system.
Bid.Com also has technology which permits consumers to stroll through a cybermall which is an online version of a
factory direct discount mall to purchase fixed price goods at any time. The site is user friendly, with the operating
philosophy of being “fun, easy and secure”.
Transactional revenues from the sale of products create gross margin for Bid.Com either in the form of a negotiated
commission based on the final selling price of goods, or the difference between the actual selling price and the
reserve price negotiated with vendors. Shipping, handling and applicable taxes are costs which are paid by the
consumer in addition to the price paid at auction. Additional revenues are anticipated through direct marketing to
Bid.Com's growing database of consumers, by licensing the Company's technology platform and selling advertising
space on the Bid.Com sites as traffic increases.
In the circumstances where the Company has entered into a strategic marketing alliance, transaction and advertising
revenues are shared by Bid.Com and its partners according to the revenue attributable to each specific partner. Under
these arrangements, Bid.Com generally runs the E-commerce business and the marketing partner drives customer
traffic through the custom branded sites.
The Company's objective is to earn an appropriate gross margin on transactional revenues. Traditionally, E-tailing
activity has been directed at very competitive and low gross margin categories of products such as computers and
consumer electronics. To stimulate activity in its auctions, the Company may choose to start a rising price auction or
finish a declining price auction at prices below its reserve price and have “loss leader” negative contribution risk on
selected products sold to consumers. The Company's strategy is to broaden the product offering into potentially
higher gross margin categories such as travel, entertainment, toys, games, jewelry, rare books and memorabilia.
The Company obtains product for sale in its auctions from suppliers under arrangements whereby the Company
offers its distribution channels to such vendors. The Company does not have any liability for unsold merchandise
because merchandise is purchased by Bid.Com only after the decision to purchase the product is made by the
customer. However, in certain circumstances, the Company will allow customers to return merchandise as part of a
customer satisfaction policy, in which case, a restocking fee is usually charged and such merchandise is then resold.
Merchandise Distribution
The Company currently uses Purolator and UPS to distribute purchased goods and is in the process of expanding
delivery using FedEx and other alternatives. The Company ships merchandise through third party contract
warehouses rather than having the related overhead costs and in the majority of cases relies on many of its vendors
to process and ship merchandise directly to customers. The Company has limited control over the shipping
procedures of its vendors and shipments by these vendors may be subject to delays. See “Risk Factors--Reliance on
Merchandise Vendors” and “Risk Factors--Reliance on Other Third Parties.”
Customer Support and Service
The Company believes that its ability to establish and maintain long-term relationships with its customers and
encourage repeat visits and purchases is dependent, in part, on the strength of its customer support and service
operations and staff. The Company currently employs a staff of 12 full-time customer support and service personnel
who are responsible for handling customer inquiries, answering customer questions about the bidding process,
tracking shipments, investigating problems with merchandise, and acting as liaisons between customers and the
Company's vendors. The Company is actively working to enhance its customer support and service operations
through a variety of measures including improved customer reporting systems and automation. See “Risk
Factors--Reliance on Merchandise Vendors” and “Risk Factors--Management of Growth.”
Technology Platform
Portions of Bid.Com's technology and specifically the ability to run “real time” auctions have been placed under
patent application in North America. The Company relies on a combination of patent, trademark, copyright and trade
secret laws, as well as confidentiality agreements and technical measures to establish and protect its proprietary
rights. Bid.Com's technology allows the Company to run a large number of simultaneous rising and falling price
auctions, each with many customers across multiple technical platforms. Bid.Com was among the first companies to
process secure online credit card transactions across North America.
The Company has devoted significant resources to developing its proprietary software technology. The Company
believes that its success depends, in part, on its internally developed proprietary E-commerce management software,
which implements a variety of customized auction and cybermall formats. See “Risk Factors--Technological
Change”. The technology platform is constructed using distributed software technologies which allow rapid
redevelopment and deployment of new software technology in order to take advantage of emerging business
opportunities.
The Company's strategy has been to license commercially available technology whenever possible rather than to
seek a custom-made or internally-developed solution. The Company believes that this strategy lowers its operating
costs and increases its responsiveness to changing demands resulting from growth and technological shifts. This
strategy also allows the Company to focus its development efforts on creating and enhancing the specialized
proprietary software that is unique to the Company's business. Bid.Com works with its strategic partners including
AOL to develop applications and content. The technology platform is based on Microsoft core applications,
including the Windows NT operating system and an SQL server relational database, all residing on scaleable
hardware. The Company uses Intel based HP Netservers and DEC Alpha enterprise servers, which employ
symmetrical multiprocessing as the basis of the Company's hardware systems.
Engineering
The Company's engineering staff currently consists of four software development engineers plus third party system
consulting organizations. The Company has historically developed and expects to continue to develop its proprietary
auction management software. The Company's engineering strategy includes the enhancement of features and
functionality of its existing software components, the development of new software components, and the integration
of superior third party technology into its environment. The Company currently is investing significant resources in
software development and expects to continue to do so in the future. The Company believes its future success
depends on its ability to continue developing and enhancing its proprietary software.
Bid.Com originally developed and continues to expand upon its operational utility from both a customer and a site
administration perspective. Bid.Com's technical team is building modular applications that are utilized as required in
the ever changing E-commerce domain. Operationally, Bid.Com's online performance and customer interaction is
monitored by a third party 24 hours per day, 7 days per week. Bid.Com has self sufficiency in its hardware and
software applications and in its core programming development. The Company has embraced leading edge high
performance switching technologies, including Asynchronous Transfer Mode (ATM), to provide end users with what
Bid.Com believes is the fastest access possible to its Web site. Bid.Com's access to telecommunications
infrastructure is scaleable on demand and has proven to provide reliable transactional support. See “Risk
Factors--Management of Growth” and “Risk Factors--Reliance on Other Third Parties”.
Employees
The Company employs 40 people, including four in engineering support, four in operations, seven in merchandise
acquisition and marketing, 12 in customer support and service, and 13 in finance, administrative and senior
management functions. The Company also hires independent contractors for software development, technical
documentation and artistic design. None of the Company's employees are represented by a labour union, and the
Company considers its employee relations to be good. Competition for qualified personnel in the Company's
industry is intense, particularly for software development and other technical staff. The Company believes that its
future success will depend in part on its continued ability to attract, hire and retain qualified personnel. See “Risk
Factors--Management of Growth”.
Facilities
The Company's principal administrative, engineering, merchandising and marketing facilities total approximately
4,500 square feet, and are located on three floors within two office buildings in Mississauga, Ontario, under leases
that expire in October, 1998 and March, 1999. The Company also leases premises in Tampa, Florida where four
employees are located. The Company has entered into an offer to lease approximately 10,165 square feet on one
floor of an office building in Mississauga, Ontario, commencing November 1, 1998 for a three year term. The
Company believes that it has adequate space for its current needs. As the Company expands, it expects that suitable
additional space will be available on commercially reasonable terms. The Company does not own any real estate nor
does it currently own or lease warehouse space. The Company relies instead on direct shipments from vendors or
contract warehouses for its fulfillment and logistics requirements.
GROWTH AND MARKETING STRATEGY
Bid.Com's growth and marketing strategy is comprised of selecting appropriate categories of merchandise for sale,
offering consumers an enjoyable and interactive buying experience, increasing site traffic through marketing alliances
and improving consumer's propensity to make online purchases by leveraging existing brand awareness and
consumer research of its strategic partners.
Benefits to the Manufacturer/Vendor
Bid.Com offers a cost effective conduit for moving front line and end-of-line merchandise through the Internet with
minimal disruption to existing distribution channels. At the present time, approximately 75% of the products offered
by Bid.Com are front-line merchandise and 25% represent ends-of-line.
Suppliers do not have the traditional risk of inventory sitting on a retailer's floor since Bid.Com is paid in full by the
consumer prior to merchandise leaving the manufacturer's warehouse. Bid.Com normally makes payment for goods
sold on a 30 day basis.
Manufacturers also generally realize better gross margins than through their existing retail channels. Bid.Com does
not require the additional cost of co-op advertising, training allowances, shelf listings and returns of unsold
merchandise which add to the costs of conventional retail distribution.
Bid.Com provides a cost effective way for its suppliers to add a new channel to their traditional marketing mix.
Rather than each product supplier making its own investment in online commerce by having to develop the technical
infrastructure and then generate traffic to their Web site, they can leverage the traffic already at Bid.Com, avail
themselves of the Bid.Com transactional backbone, and receive prompt turnaround to requests for a Web presence
and ongoing updates.
Suppliers are embracing Bid.Com's approach as a new distribution strategy and are product segmenting different
models of front-line goods as they have traditionally done between large retailers, department stores and small
independent stores. As evidence of this, products from strong brand name manufacturers such as AST, Canon,
Compaq, Creative Labs, Dell, Epson, General Electric, Hewlett Packard, IBM, JVC, Koss, Magnavox, Motorola,
Nikon, Nintendo, Panasonic, Pentax, Samsung, Seagate, Sega, Seiko, Sharp, Sony, Toshiba, US Robotics, Western
Digital and Zenith have been committed for feature or have been featured in the Bid.Com Online AuctionÔ.
Benefits to the Consumer
Bid.Com uses primarily two auction formats to sell a broad array of consumer goods in many product categories
including computers and software, consumer electronics, toys and games, sporting goods, entertainment,
memorabilia, jewelry and rare books. The Company also has technology which permits consumers to stroll through
a cybermall which is an online version of a factory direct discount mall to purchase fixed price goods at any time.
Bid.Com's sites are user friendly and periodically changed to have a fresh and dynamic appeal to repeat customers,
with the operating philosophy of being “fun, easy and secure”. As a testimony to the appealing nature of the initial
Web site, in January of 1997, Bid.Com was selected by PC Week Magazine as # 7 on its list of the top 10
E-commerce sites on the World Wide Web. Other “Top Ten” companies included Microsoft, Cisco and Amazon.
In January, 1998 Bid.Com launched the next version of its technology platform, offering consumers the interactive
experience of being in an auction room and clearly differentiating its user interface from the more online catalogue
look and feel of current competitors. In August, 1998 Bid.Com launched its real time declining price auction on the
new technology platform.
The consumer enjoys detailed product descriptions with catalogue quality pictures and graphical representations.
The actual purchase transaction can be completed quickly, usually within 45 seconds for repeat customers. The
system provides full delivered cost disclosure prior to the consumer completing the purchase by adjusting the cost
charged to purchasers for all added taxes and delivery charges to the customers' door, anywhere in North America.
Bid.Com has endeavored to use the best security and encryption systems available. All customers who pre-register
or make a purchase, are issued a password. Repeat purchases are transacted using only the password. The actual
credit card transactions with the banking community are conducted over a separate ISDN line, through a server
which maintains customer information behind a number of state-of-the-art firewalls “off line” from the Internet and
encryption technology such as SSL (Secure Socket Layer). Consumers not wishing to send information online may
also use the toll-free (1-888 NET SHOP) telephone line to make credit card purchases or to pre-register with
Bid.Com. |
