This is sweet: From BusinessWeek:
Paul Allen's E-Commerce Play: Bring the Buying Club to the Net
At his site, called Mercata, the more people who agree to buy, the cheaper the product
When Tom Van Horn's boss, Microsoft co-founder and high-tech investor Paul Allen, told Van Horn to create the biggest and best E-commerce company, he was stunned. Van Horn, who managed and sold two Allen software startups during the past three years, wanted to do something big. But this was huge. After many brainstorming sessions, a revelation struck Van Horn: Use the Internet to create the world's largest co-op. On May 17, he'll roll it out.
The epiphany came in November after months of careful research. Van Horn had concluded that the Internet was best at connecting people -- and what people wanted was a good deal. What if you could gather consumers together on the Net, concentrate their demand for certain products, and get volume discounts for those goods? He decided to call the site Mercata so it sounds like a foreign marketplace. It would be the opposite of an online auction, where only one person wins with the highest price. Mercata would get the best price for many. "It is something that could only happen on the Web, which appeals to me," says Jupiter Communications analyst Ken Cassar. "It is a distinctly different model."
Mercata debuts next Monday with more than 1,000 branded consumer goods ranging from Makita power tools to Waring blenders to Harman/Kardon stereo systems. The premise is simple: The price drops as more people agree to buy a product. For example, a set of golf clubs starts at $350, but if 100 people sign on, the price drops to $325. If 500 consumers want to buy, the price falls to $275. A consumer never pays more than his offer and is always given the final price, even if it's lower than his bid.
The group purchases are dubbed Power Buys and can last hours or days. The goal is to give consumers a fair price and sense of community while giving manufacturers volume deals and insight into who is buying their products. "I think it has potential, but it all hinges on the number of people buying the product," says Rob Enderle, vice-president of Giga Information Group.
To get people to the site -- and to buy -- Mercata is counting on the deep pockets and influence of Allen, whose fortune is estimated to be $22 billion. "We are committed to the model," says William D. Savoy, Allen's right-hand man and president of his investment firm Vulcan Ventures. Vulcan is the sole investor in Mercata, but Savoy declined to disclose the exact amount.
However, Mercata doesn't have a blank check. Van Horn is under strict orders to be profitable within several years. Mercata will make money by skimming a small percentage above the manufacturer's price, much like a traditional retailer. Along with generating profits, Mercata's goal is to develop into an E-commerce engine that can provide everything for everybody anywhere.
With Allen's cable, wireless, and Internet holdings, Mercata could eventually be accessible on any type of digital device. In fact, technology is being developed so the Mercata concept can transfer easily to interactive television. In the next couple of years, it will be tested on Allen's cable-TV networks, which currently serve 3.4 million subscribers. "This could play well on the Home Shopping Channel, which caters to impulse buying," says James McQuivey, senior analyst at Forrester Research.
There are still some hurdles to clear before Mercata is ready for prime time. Van Horn and his 50-plus employees, including recent recruits from CostCo, OnSale, and AT&T, must simultaneously build a brand and educate consumers on the new buying concept. For the first couple months after the launch, Mercata will employ Internet banner ads, portal links, and word of mouth to build interest, with the latter being key to the company's strategy. The hope is buyers will entice friends and families into joining them in trying to bring the price down. To provide those good deals, Mercata has to be willing to subsidize some bargains, says Enderle. “The first few months they're open, they have to have some phenomenal deals to build a wave of interest," he says.
The big marketing fireworks go off on July 4, when Mercata will launch a massive national campaign featuring radio and print ads, plus sponsorship of special events. Vulcan's financial resources can fuel such a campaign, which will cost a minimum of $10 million, according to analysts. The goal is propel Mercata into one of the top E-commerce sites with over 10,000 product offerings by yearend, says Van Horn.
No small feat, even if you do have Paul Allen's pockets. Competition is already bubbling up. A San Francisco startup called Accompany has a test site centered on group buying and plans to launch a better version this summer after completing a $4 million round of financing. And then there are the big guys like Amazon and Yahoo!, which already have a brand and a loyal customer base. They might get a hankering for the group-buying concept and plunge into the market, despite Mercata's pending patents for its technology and business model. That's exactly why Van Horn needs to make his own power move now.
By Seanna Browder in Seattle
EDITED BY DOUGLAS HARBRECHT
Copyright 1999 The McGraw-Hill Companies All rights reserved. Any use is subject to (1) terms and conditions of this service and (2) rules stated under ''Read This First'' in the ''About Business Week'' area.
5/13/99 12:54 AM |
