OT somewhat - Another Paul Allen venture (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.
"COMMITTED." 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.
HURDLES AHEAD. 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
Obewon
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