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A Good Idea, Gone Bad, Gone Good Againby Ezra Perlman and Evan Liang, Sam Mateo, CA Investment waves come and go, but perhaps none have come so dramatically, and departed so disastrously, as the great B2C wave of the late 1990s. Remember B2C companies? They originally came in many guises. There were e-commerce and e-tailing companies. Some (think eBay and Amazon) have become the fabric of our purchase decisions; others (best exemplified by the four famously well-funded pet supplies vendors) have not. There were content companies, some (think salon.com) with high-quality original content; others (think thestreet.com) with mindless background noise. A third area was community sites, such as women.com and its gender-focused counterpoint, theman.com. Many billions of dollars were invested in Internet community sites, and only a small handful of them proved to be anything other than an embarrassment to most parties involved. The last few years have not been kind to private B2C companies. The flow of venture capital has all but stopped. Dreams of IPOs or attractive acquisition exits have become nightmares. In the first half of 2002, Venture Capitalists put $140MM into B2C companies, down 90% from just one year earlier. Hiring great people has become harder than ever, as prospective managers think twice before joining any B2C company, for fear of looking stupid should the company not make it. More recently, a curious thing has happened. In both the public and private markets, a select handful of B2C companies have started to make good on the original promise of the Internet to revolutionize consumer transactions. After years of being famously unprofitable, Amazon is now famously profitable. Ebay is even more profitable, and in fact has never lost money. Expedia, Travlocity, Etrade, Datek, and Paypal are other examples of consumer-oriented companies that have built up billion dollar market capitalizations or acquisition prices in recent times. Amazingly, in the year period ending September 30, 2002, a stock index of the largest B2C companies rose nearly 40% while the NASDAQ fell by 20%. The fundamental performance of top B2C companies and their stock market performance are evidence that the sector might merit another look. The Economics of B2C Companies The original premise of B2C companies made an awful lot of sense. Many products and services that are sold to consumers really are ideally suited to the Internet as a channel. The Internet is an ideal communications medium, so many information-centric services (such as air travel) are more easily described, remembered, and compared electronically than physically. The Internet is also a great aggregator of both people and data, giving consumers access to a greater range of goods, services, and ideas than they could ever find in one location. Finally, the information captured through a web-based transaction can reduce back-end costs or be used for direct marketing and other analytics. Like many great ideas, the B2C wave suffered from an abundance of love. By now the stories of ill-conceived and money-devouring companies are the stuff of legend and will likely be recounted with awe decades from now. It would be a shame, however, if people took these disasters as evidence that the original premise was flawed. In fact the original premise was spot on, and the handful of companies that have carefully followed its conclusions and executed on a consistent strategy have become extremely successful. Today, with the benefit of hindsight, it is a lot more obvious what works on the Internet and what does not. Creating an arbitrary community where one does not exist also is a recipe for failure. But, providing a forum for an actual community that would congregate were it not for geographic barriers is a valuable and innovative use of technology. Hence Classmates.com and Match.com are some of the fastest growing, most profitable companies around. Each genuinely benefits from the so-called “network effect,” whereby each new customer makes the service more valuable to all other customers. Interestingly, niche providers can flourish around these behemoths – anyone of a certain age and ethnic profile can name friends who have met on the wildly successful JDate.com. Choosing some “category” of retail goods to dominate on the Internet clearly does not work – any competitive advantage from size and marketing bulk erodes quickly. Additionally, most “traditional” retailers are just treating the Internet as another channel in their arsenal of independent stores, stores within stores, direct mail, call centers, etc. However, selling more complex goods and services is well suited to the Internet, as long as the service levels match customer expectations. For an active stock trader, the idea of buying a stock through any channel other than the Internet seems quaint. Soon, airplane tickets may face similar levels of online market share. How can it possibly make sense for a traveler to call an agent who then types flight times into a computer when the traveler can more easily enter those flight times herself, along with additional preferences and purchase rules? The travel agency business appears to be in the early stages of complete erosion, and it is not clear how many of the airlines will survive the coming revolution in distribution of air travel. Looking Towards The Future It is admittedly not difficult (nor particularly valuable) to look back over the last few years and pick out the successful B2C companies. But, understanding the factors that have led to their success should help to predict what sorts of companies and business models will emerge and thrive in the coming years. Currently, about 1% of all retail transactions (in $s and volume) are conducted online. As that number soars over the next decade, it seems likely that many new B2C companies will emerge, some of which may dwarf today’s players in scale and significance. We are interested in Internet-enabling traditional businesses, particularly those with high levels of digital content. For example, the residential real estate market is poised to be the next major market turned upside down by the Internet. One of the largest economic sectors of the nation, accounting for roughly 10% of GDP, the real estate market has seen less structural change in the last 50 years than nearly any other industry. The dominant national franchise brands, the independent contractor model, and the fixed commission rates have been frozen in time since before the Internet existed. The industry worked well for the small handful of agents who controlled the listings and therefore the information flow (and the outsize commissions), but failed the consumer, who was frustrated in her efforts to get the information she wanted about homes for sale in her area. Today, 60% of all home buyers use the Internet to help with their process. Each of those people wants access to all the information that the real estate agent has about every listing in the area. But a complex web of regulations, local commissions, and national rules make it very difficult for a traditional real estate agent to interact with a customer in the preferred mode of the customer. Enter Internet-enabled brokerages like eRealty and ZipRealty, with large bases of highly trained agents, who use technology to help the decision process and to guide the buyer and seller through a complex transaction. Traditional agents will have a hard time responding due to structural factors, potentially ceding a significant portion of this enormous market to the upstarts. Other industries will also see similar changes. The Byzantine and inefficient network of car dealerships survived the initial foray of Internet-based business models (mostly through political lobbying), but it seems inevitable that some new entrant will find the right combination of technology, process, and marketing that will create a new type of automobile transaction. Traditional media outlets have become the dominant providers of news on the Internet, but new technologies that allow for better content creation, presentation, and pricing may some day change that. Even today’s leading categories, travel, brokerage, and books, could be revolutionized as new technologies enable new distribution and pricing strategies, new approaches to customer relationships, and new product categories. One more large traditional business that is undergoing tremendous change due to technology is the advertising industry. For years, advertisers have been pushing for ever more finely grained targeting of their audiences, but there was only so much that could be done. Monolithic network television audiences were replaced by targeted cable segments, but otherwise television, radio, and billboard advertising remain relatively untargeted. Some industries have employed highly targeted direct mail, but that channel has been a victim of its own success, growing to the point of being a nuisance. Technology and the internet are allowing companies to build ever closer relationships with their clients through genuine 1-1 marketing, personalization of experiences and offers, and better information capture and storage. As retailers combine POS terminals with the information they have gleaned from web interactions, the marketing possibilities explode. In a trial underway in Denver, Starbucks customers are able to dial a 1-800 number from their cell phones to pre-order and pre-pay for their favorite beverages, which are ready to pick up upon arrival at the store. Starbucks, in addition to he convenience offered to its customers, now knows for the first time which customers are buying which products at what location and how often. As more companies gather and look to utilize that sort of information, the opportunities for the advertising and marketing industries are tremendous. As the Internet matures as a channel, the opportunities will not end. Over the last 40 years, the seemingly “mature” retail channel witnessed wave after wave of innovation, each leading to giant new companies. Mom-and-pop stores gave way to national chains, main streets gave way to malls, restaurant chains appeared to fill every theme imaginable, big box retailers crushed the smaller stores, and banks started showing up in supermarkets. The only constant was the increasing rate at which a company could go from nothing but an idea to a proven success. The Internet only accelerates that trend, making it likely that the leading B2C companies of the future are ones we have never heard of today. Battery is very interested in finding great teams with detailed process expertise who are leveraging the power of the Internet to build consumer businesses. In particular, we are interested in the following areas:
For more information, please contact Mark Sherman, Ezra Perlman, or Evan Liang. | ||