Companies Wired To The Bottom Line

Eff Bezos's e-commercevision materialized during a cross-country ride in a hand-me-down Chevy Blazer. Meg Whitman's light bulb flicked on when she heard a woman whose life had been changed by selling China horses. Jay Walker's epiphany came during a takeout lunch with a group of patent lawyers.

Now they lead companies at the forefront of an online shopping revolution. And of course they are incredibly rich. But focusing on their sudden, shocking wealth is an asset-backward way of looking at these entrepreneurs. Better to ask, which of these three will change your life more? Even though online buying represents a fraction of total consumer sales these days, it's a fraction that didn't exist a few years ago--and with sales estimated at $184 billion within three years, the curve is headed straight up. And that's just a springboard for a future that no one's figured out yet. Even tougher to predict is the way we'll be shopping online. Since e-commerce is so new, the question is still open as to the best ways to do it. Will the process generally ape purchasing in the physical world, or will we try more exotic schemes?

For hints on that, look to the three current icons of e-commerce. Each embraces a different model, and all three approaches have already begun to change the way we shop. Bezos, 35, of Amazon.com, is a khaki-clad Seattle dude heading a classic start-up built on selling by the traditional exchange, only without the bricks and mortar of storefronts. eBay CEO Meg Whitman is a refugee from old-style corporations, a mother of two who believes that lives will change and fortunes will be made when buyers and sellers participate in auctions. And Priceline founder Jay Walker, a Connecticut marketing whiz, cooks up business plans that would have been impossible before the Net; the first of these allows customers to name their own prices for airline seats, hotel rooms and, coming soon, supermarket items ranging from cola to detergent.

A few years ago no one had heard of these people. But in the next century (you know, the one that begins in 80 days or so) their ideas may well furnish your bookshelf, stuff your pantry, arrange your flights and rule your pocketbook--if they aren't already.

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Jeff Bezos's laugh crashes his conversation every minute or so. It's a Tourette-like AHHHH ha ha ha haah bray that acts as a pointer to amusing phenomena in this interesting world we live in--the Amazon.com CEO's high-fidelity version of a raised eyebrow.

It's no wonder he laughs so much. One would have to be living somewhere far downriver on the actual Amazon not to have heard of Bezos's company by now. It's not only the dominant online bookseller (valued at $22 billion, while Borders, with 260 physical superstores, is worth a bare billion), but has quickly become the biggest music retailer on the Net, as well as a seller of toys and consumer electronics. Amazon.com is the flagship for Internet commerce, living proof of the viability of its business model--selling goods directly to customers on the Net. So why hasn't it chalked up profits yet? Its officers explain that revenues are still being plowed into building a business that will become, says one exec, "the place where you can discover anything you want to buy online."

Bezos's idea was simple: as the Internet extended its reach, an efficient retailer could do away with the bricks and mortar (hereafter referred to as B&M) of physical stores and serve customers better because the Net allows sellers direct contact with buyers. All at a potential profit margin the B&M guys can't match. If a chain of 1,000 stores wants to double sales, Bezos says, it has to open another thousand stores, with all the land and manpower costs that that entails. But once an online operation gets past the fixed cost of its Web site and distribution channel, it can handle bigger sales with very few extra expenses. "You can offer both the lowest prices and the highest service level," he says, "which is impossible in the physical-world environment."

These concepts came together in 1994 after the Florida-born Bezos left a job as a financial strategist and flew to Ft. Worth, Texas, to pick up his father's 1988 Blazer. As his wife, MacKenzie, drove, Bezos hammered out his business plan on a laptop. The destination was Seattle, which offered an ideal employment pool of overeducated slackers.

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Bezos's business plan originally met with skepticism, and even its author had doubts. "The big problem was not whether the technology would work," he says, "but whether customers would want to shop this way." He spent a year of planning before he opened the site, figuring out what would push book buyers into the digital age. His prime goals: providing a wide selection, good prices and an effortless experience.

Fortunately, Internet users then were early-adopter types, ready to take the virtual bungee jump into the new world of e-commerce. And as the Internet population grew, and increasingly resembled the United States' overall demographic, word of mouse spread. In the last two years Amazon's customer list has grown from 2 million to 11 million.

In the process, Bezos and company have helped define the online shopping experience. In B&M bookstores you get to scan the stacks, order a latte and maybe impress someone with a bon mot about "Chicken Soup for the Soul." Bezos had to pioneer alternative pleasures. For those wishing to grab a certain item and split, Amazon is streamlined for speed. But there's also reason to hang out. On Amazon, information is entertainment--and a way to lure people into buying more. Simply by repackaging the data it generates--ranking books by sales, identifying other purchases by buyers of a certain tome and revealing the best sellers among "purchase circles" (in a given area code or company)--Amazon offers an automated, useful and effective means of generating recommendations. Not to mention reader reviews: Amazon posts 'em all, even negative ones. Why? Because Amazon's business is not selling things, says Bezos. "Our business is helping customers make purchasing decisions," he clarifies.

Amazon.com and its model has quickly become a standard--and competition is everywhere, from catalog-based sellers as well as B&M retailers. But conventional wisdom has it that in any given retail category, there's going to be only two or three big-time winners in cyberspace. Rather than go head to head with a giant, competitors must specialize, and even then it's a struggle. "On the Internet," says Chris MacAskill, CEO of Fatbrain. com, which focuses on technical books, "you're across the street [from your competition], whether you like it not."

Bezos thinks that the entire economy will benefit from ripple effects of e-commerce. In the not terribly distant future, we'll have vans circling the suburbs with hardcover best sellers, CDs and grocery items. Within hours of logging your order on a Web site, the van drops off the loot. Or maybe the order will be logged from a palmtop computer or a cell phone.

The direct-selling model is still evolving, but it's the bedrock of e-commerce. "It all has to do with the balance of power shifting away from companies and toward consumers," says Bezos.

The next significant shopping innovation arrived in a flurry of Furbies. But at first Meg Whitman, 42, didn't get eBay. A career ranging from Disney to Hasbro toys had honed her instincts to appreciate the incipient power of the Net. But in early 1998, when she visited the site devoted to hosting auctions--largely collectibles like Beanie Babies and baseball cards--she found it hard to use.

The company had been founded in 1995 by Pierre Omidyar, who wanted to augment his girlfriend's collection of Pez dispensers. The Net was a great way to allow sellers of obscure items to reach others, and it was easy to use the technology to run auctions. Only after the site took off did Omidyar establish it as a business, and what a model it was: all the inventory, the ordering, the shipping and the payments would be done by customers, the sellers and buyers registered on the eBay site. Revenues would come simply by taking a cut of sales.

By the time Omidyar began courting Whitman to become his CEO, the site was wildly popular and already profitable. eBay had transformed auctions into supercharged classified ads, and the last-minute bidding frenzy added the extra oomph of a game show. But what finally lured Whitman to Silicon Valley from Pawtucket, Rhode Island, was her discovery that its user base had become a community. Its ingenious (yet imperfect) means of establishing trust in sellers and bidders: feedback from users themselves. Extensive chat boards let eBaysians share tips and gossip. By the time Whitman attended a focus group of people whose livelihood now consisted of hawking items on eBay, she understood how auctions could empower people-- and how customer loyalty could help eBay maintain a dominant market share.

But as Whitman has learned, hosting an Internet community is like leading a tiger by the tail. When you let your users down--eBay has been plagued by power failures--you hear their pain instantly. If you decide to raise a fee, as eBay did recently, the attacks will come with the passion of a Balkan conflict. let's [get] that moron out of office, went a recent rant about Whitman on an eBay chat board. "she is completely inept at her job."

Whitman quickly revamped the site to make it easier for users to participate, and addressed ways to make customers feel safer in purchasing. Now she's working to solve the cumbersome payment process by allowing all buyers to use credit cards instead of personal checks or money orders. She is also trying to expand eBay beyond its core model of collectibles. Los Angeles is eBay's testing ground for local auctions--stuff like cars and furniture that can't be easily shipped. And eBay's purchase of the snooty Butterfield & Butterfield gets the company into high-end jewelry and art.

Of course, there's a limit to the number of things people will buy at auction, a system that's entertaining but not necessarily efficient or thrifty for buyers (after all, the "winner" is the one who pays the most). So Whitman won't rule out some alternate models for eBay, including some fixed-pricing items.

In short, says Whitman, "we are enabling a kind of commerce that didn't exist to any extent before, and that's person- to-person commerce." A lesson she brings home every Saturday morning, when she spends a couple of hours online, bidding for Pokemon cards with her 11-year-old son. "Last weekend," she reports, "we got a Blastoise foil card for $49."

So far eBay is holding its own against tough competition, including free-to-seller auctions at Amazon and Yahoo! (Microsoft will probably do its own auctions on its MSN site later this year). But while the company may thrive, countless other firms will soon be using the auction model to sell business products and services.

In contrast to eBay's Silicon Valley-standard cubicles, decorated with knickknacks purchased on the site, the shelves in the Stamford, Connecticut, offices of Jay Walker are lined with leatherette Franklin Mint special editions and bound copies of patent applications. On the wall is a billionaire's bounty of rare items from the space race and a one-of-a-kind collectible: Richard Nixon's letter to Kissinger resigning his presidency.

Walker, the man who's taking e-commerce a step beyond eBay's auction model, isn't your typical Internet start-up CEO. At 43, he's a Scarsdale, New York-born veteran of more than a dozen companies. Marketing, not technology, has been his focus. "I was the kid who had the lemonade stand," he says. The Internet, of course, is sort of a marketer's nirvana, a gathering place for millions of credit-card-holding consumers. Walker, however, was clever enough to realize that Netizens were not to be regarded as sitting ducks, but as a new population hungry for ways to empower themselves. And that the Net can enable heretofore unimaginable business models. Models that could--and would--change virtually every industry on the planet.

Walker believes that those who think up such ideas should own them, a conviction reinforced by recent legal rulings holding that business methods could be patented. This opportunity was confirmed to him by a dozen patent lawyers whom he hired to eat lunch with him in the law firm's boardroom ("It cost me about $2,000," he says). He quickly formed a company, Walker Digital, to dream up new tech-driven schemes, patent them and spin them off into businesses.

The first big idea was Priceline, which allows people to name their own price for flights, if they offer flexibility on carrier and times. The airlines can sell unused seats, and won't lose their regular customers, since Priceliners can't specify which airline they want. It's the kind of thing that could be done only on the Internet, which offers millions of people quick access to airline databases, and hooks them to software that pulls the trigger on the right prices.

Walker patented the scheme. Then, after his brain trust figured out a way that airlines might fight the idea (an "anytime ticket" sold cheaper in exchange for letting the airline choose the flight), he patented that scheme, too. Just in case. (Some of Walker's patents are being challenged by inventors who say they had thought of the ideas first.)

Potential customers were drawn by a splashy ad campaign featuring William Shatner (who hopped on the Starship Free Enterprise by taking his payment in stock). But it took a while to get the airlines on board; Priceline wound up letting Delta take a big share of its stock. As customers learned to make realistic bids, and Priceline added airlines to make more flights available, more customers (but still less than half) are making successful bids. Priceline isn't making profits yet, but it's selling about 40,000 tickets a week. And though its stock is considerably down from its peak earlier this year, Wall Street values the company at more than $8 billion.

Priceline has extended its model to hotel rooms, mortgages and cars. How far can it go? Maybe we'll know when the company rolls out a service called WebHouse Club later this fall. This applies the name-your-price scheme to groceries. Customers can specify how much they'll spend for items like name-brand colas, batteries, scouring pads and diapers--but cannot specify the exact brand. If their prices are accepted (answers come within a minute), their credit cards are charged for the item and they print out a voucher that their neighborhood store will accept. (The service will roll out in the New York City area, with more than 600 stores participating.) Does this seem labor intensive? Walker doesn't think so: "If you can name your own price for beef or beer, you're pretty motivated."

Whether or not the grocery venture works, Walker has proved that the Net is fertile ground for launching entirely new approaches to commerce. Other companies will follow. For instance, a firm called Mercata brings consumers together so their collective buying power can drive prices down. And Microsoft's Expedia travel site has announced a name-your-own-hotel-price scheme that seems similar to Priceline's (no word yet on whether Walker will charge patent infringement).

Will new models thrive? Absolutely. But they won't necessarily drive out the earlier ones. Jeff Bezos's direct approach seems firmly established and Whitman's auction economy is finding favor in areas beyond the Pokemon zone. And other Internet giants like AOL, Yahoo and Microsoft--less inter- ested in direct selling than pointing their members to retailing partners--wel- come any model that draws customers.

Meanwhile, Walker is figuring out the next big change. Maybe, he muses, it will come when computers can reliably recognize voices. And Walker knows just how it will work: "You're going to walk into the store and say, 'Hi, I'm here. I have some Priceline prices.' And they'll say, 'Great'." Ka-ching!

Companies Wired To The Bottom Line | News