Article 14 of 200
Business & Technology
Whoa! Has Buy.com got a deal for you! The latest in E-commerce: selling below cost
Fred Vogelstein
02/15/99
U.S. News & World Report
Page 46
(Copyright 1999)
It's hard to get anyone to say something bad about an Internet company these days. That's particularly true of companies that sell things on the Web, like Amazon .com. But even electronic commerce's biggest boosters have their doubts about the game's latest contestant, Buy.com. Scott Blum, its founder and CEO, says he can make money without marking up his products. Indeed, he says he can prosper even if he sells below his cost.
Traditional retailers dismiss Blum's plan as preposterous. "What, are there other ways to make money" besides markups? asks Suzanne Shelton, spokeswoman for CompUSA, the big computer retailer. But Blum, 35, says the Internet has freed him from the bounds of retailing economics. He thinks he doesn't need profit margins and plans to make money selling advertising on his site, instead. When he's done, he says, "the industry will have to follow us or get left behind."
Bold words indeed for someone pushing such an outlandish, untried concept. But Buy.com is off to a surprisingly roaring start. It posted more than $111 million in sales in 1998, beating the 15-year- old record (held by Compaq Computer) for a company in its first year. Buy.com is now generating $2 million a day in revenues--and could top $700 million this year. A group led by Softbank, big investors in some 100 Internet companies like Yahoo! and E-Trade, has backed Blum with $60 million. Some of America's best known executives like John Sculley, Apple Computer's former CEO, and Don Kendall, PepsiCo's founder and onetime CEO, sit on his board of directors. And now some of Wall Street's biggest firms are elbowing each other for the rights to run the company's eventual initial public offering.
Blum says his plan will work because he's giving Web shoppers what they really want--the lowest price anywhere--and that once consumers realize this they will flock to the site. Buy.com sells computer hardware, software, books, videos, and electronic games and plans to sell music, too. Like most start-ups, Buy.com has no profits, and so far, only about 100 advertisers are participating. But Blum is confident that before he's through, everyone from Procter & Gamble to Anheuser-Busch will pay handsomely to run its ad on his site.
Price busters. Blum, who has worked in the computer business since he was 18, spent more than a year perfecting search agents that would automatically scan the Web for the lowest prices on the products he sells--and then cut Buy.com's prices to beat them. He won't say how they work, except to confirm that he uses hundreds of dial-up modems hooked to individual phone lines so that competitors can't trace his searches and block him from seeing their prices. He says the company runs the searches every night out of its Southern California headquarters.
Still, it will take a lot more than low prices and a pile of venture capital for Buy.com to succeed. Blum needs manufacturers to risk alienating existing distribution channels to sell and advertise on his site. He also must contend with the growing number of companies like Dell, Gateway, and Compaq that have developed competing Web sites. He may be able to get their computers from his distributor, but it's hard to imagine these companies ever paying Blum to run ads.
Perhaps most important, Buy.com still has to demonstrate just how price sensitive consumers really are. Certainly, he will have an advantage on big-ticket items like computers. But "when you're looking for a book on Amazon .com, you're just not that price sensitive," says Genni Combes, an analyst at Hambrecht & Quist in San Francisco. "Who's going to say, 'Oh my god, I saved 50 cents on the new {John} Irving novel'?"
Buy.com may indeed turn out to be a gigaflop, as nearly everyone expects. But its progress is worth watching, because if Blum is right, he'll have done for online retailing what Sam Walton's Wal- Marts did for traditional retailing--and only historians will remember Amazon .com.
Online prices for the 3Com Palm III Organizer
Buy.com $218.95
CDW $267.57
Shopping.com $268.95
CompUSA online $302.97
3Com online $369.00
As of February 5
|
