NETREPRENEURS

Jeff Bezos, 34, is a now multi-billionaire (he was recently valued at $12 billion). He’s not a broker or bond dealer; he’s not a shipping magnate, porn baron, property developer or heir to an enormous family fortune. No, Jeff Bezos runs a book shop. Admittedly it is a most unusual bookshop. For a start, it isn’t really a shop at all. It has no property on the high street, no aisles for you to walk down, no racks or cash tills. Still, it offers 2.5 million titles (compared to a maximum of 150,000 in a normal book shop), employs 3,000 people, and has a customer base of 10 million with repeat buyers accounted for more than 66% of Amazon’s $1.5 billion in sales expected this year. Amazon is valued at $22.7 billion based on shares outstanding and is the number one seller of books, music and videos…. it has just a launched a web site marketing/ selling Star Wars merchandise.

Bezos’ shop, Amazon.com, exists only on the internet. To visit it, you need never leave your living room, just crank up your modem and then you can click through the latest recommendations and offers, read the reviews written by other users or search for any title currently in print and order it using your credit card.

“And it doesn’t stop there….” observes the Motley Fool (an online Investor web site) “the business-to-business e-commerce industry is expected to top $1 trillion to $2 trillion in three years, according to Cisco Systems. “How large will business-to-consumer commerce (Amazon’s niche) and consumer-to-consumer (auctions and classifieds) commerce become? How long it will take for Amazon to reach 35 million customers? Project forward and ask yourself how much of this market Amazon will own in 10 years time….. In this context Wal-Mart begins to look like a small player!”

Bezos, one of Business Week’s entrepreneurs of the year in 1999, is at the head of a new movement in US business. While many in big business have been skeptical or just plain baffled by the net, a mass of small businesses and one-man bands have been seizing it’s initiative.

They come from a variety of backgrounds, there are engineers and programmers, small shop owners and financiers and they sell anything from salami to Saab turbos. What they have in common is they have all looked at this global network of computers and while most the world has been trying to make sense out of it, they have been able to make money out of it. They are the netrepreneurs.

What Bezos is to books, the Olim twins are to music. Back in 1994 around the same time that Bezos was jacking in his job as a hedge fund manager, Jason and Matthew Olim, both scarcely out of their teens, started a business in the basement of their parent’s house in Pennsylvania. They had had this neat idea to sell cds over the internet. They called it CD Now.

They had no stock, no real shop, and hardly any staff. But by linking up with a number of warehouses across the US who could fulfil the orders, the Olim brothers were able to offer over 165,000 cds and videos - a far greater range than any branch of Tower Records or the like could dream of - as well as biogs of the artists and audio samples to help buyers make their minds up.

They have not only survived, they are booming. If you go to http://www.cdnow. com, you will see what an awesome business this has now turned in to. ‘We expected to do $300,000 a year in our first year,’ says Jason, ‘”we beat that figure by 700 per cent.’”. Sales for the 3 months ending 30th June 1998 were $11.3million and at the moment, there is no sign of a slowdown. Selling online still an industry in its infancy. The world wide web itself, which houses these netrepreneurs, is still less than six years old. And, it was originally designed for academics to cross reference their research papers, not for people to purchase the latest Oasis CD.

That was a year ago… how quickly things change… since then Amazon have moved into the world of selling CDs online and forced CDNow to merge with its main competitor N2K Inc… the merger should be going through this year.

Although the news has done little to appease investors… CDNow is currently valued at US$250million compared to Amazon’s multi-billion valuation.

Although time is now running out for Cdnow; their war chest is down to its last $10m buying them another month or two, it looks highly unlikely that Cdnow will succeed in finding that elusive net growth business model within timeframe.

However it is still very much an entrepreneurs area. Although the levels of growth are awesome, the absolute sums are still relatively small for most major corporations. To put the numbers into perspective, Tesco alone, turned over £14.98bn in the year to March. For this reason big business is still sitting on the sidelines - but the attractions to entrepreneurs are clear.

For a start, thanks to some clever programming, that basement in Pennsylvania was able to look like the largest record shop in the world. ‘On the internet,’ says

Jason Olim, ‘even a small business can appear to customers every bit as reliable and valid as the biggest business. The Net has allowed us to open up shop and have a bigger store than any of the brand name competitors.’

Chris Byrne, 31, runs Wedding Web (http://www.weddingweb.com) , which offers information and services to husbands and brides to be. ‘The Net removes many of the obstacles in starting a new business or expanding one that’s already established,’ he says, ‘It’s an entrepreneurs’ dream come true.’

Amazon might have had all the glory this year, but there has been another star Netrepreneur IPO this year - for Onsale (http://www.onsale.com). The company was founded by Jerry Kaplan, 44, who set up the business in May 1995 after spending the majority of his working life in the computer industry (he also wrote the best seller ‘Start Up - A Silicon Valley Adventure’).

Onsale allows real time on-line auctions between members for end of line computer and consumer electronic products. Freed from the physical restraints of a traditional auction where you have to get everyone in the right place at the right time, or at least print and distribute several thousand catalogues, this has become something of a success. Kaplan now calls himself the ‘PT Barnum of

Cyberspace’. During the quarter-ended December 31, 1998, Onsale’s Auction customers bid on average 6.8 times per visit and purchased on average 2.5 times per visit.

These twice weekly sales have been bringing in an average of almost $ 1.5million each - the total sales for 3 months ending 30th June 1998 were $51 million.

Although their US$ 350million valuation pales in comparison to E-Bay, the market leader in customer-to-customer online sales whose valuation at point surpassed Amazon’s monster market value.

The stock market however does not have an endless appetite for netrepreneurs, as the cancelled IPO for Auto-By-Tel. The company was founded by Peter Ellis whose, business history involved a $15 million loss in the early 1990s when he had to close down his chain of auto dealerships. However he has managed to re-emerge on-line with a highly rated service. Like Onsale, Auto-By-Tel (http:// www.autobytel.com), succeeds by making a mundane and irritating purchasing process much easier.

He makes money by selling on sales leads to car dealers who subscribe to the service. Interested car buyers come to the site and submit their requests over the net. This is then sent to the dealers who offer no-haggle prices. It is a simple effective service. ‘We help dealers find serious buyers and bring rock bottom prices to consumers,’ says Ellis. ‘It’s a win-win situation.’ In 1996 he had sales of $5 million. But, the IPO was cancelled due to a certain wariness over internet stocks on the US market even though several analysts rated the company’s service.

Even the most traditional of businesses are catching on. Vinny Barbieri is one of the proprietors of the Franklin Square Italian Supermarket in New York and of it’s cyber shop, Salami.com (http://www.salami.com). ‘It is the future,’ he says, ‘if you don’t get on the train you will miss out. Anyone who is not on the net I feel in five to 10 years time will be missing out on a lot of opportunities and potential business.’ Salami.com was launched in January 1995 and they are now turning over $18,000 online every month. This is a small percentage of the $6 million turned over in their supermarket, but they still make a profit. ‘The biggest surprise for us,’ says Barbieri , ‘is the international response we’ve had. We started out thinking that we would ship to those transplanted New Yorkers and ended up shipping to such far away places like Japan, Guam, Alaska and Puerto Rico. to name a few.’

Unlike the Olims who came to business because of the net, Barbieri can compare cyberbusiness with their experiences of the real world. And he has no doubt about what makes things work on-line: ‘Customer service, customer service, customer service. You must make the customer feel comfortable with you and know that you stand behind everything you sell and follow on your orders and make sure the customer is completely satisfied with the product you sell them.’ It’s for this reason that people get e-mail confirmations of their orders, that special care is taking with packaging and the odd free gift of balsamic vinegar or biscuits or a personalised note appears with the orders. It’s a strange sort of virtual intimacy, much closer to the relationship between Anthony Hopkins and Anne Bancroft in the film 84 Charring Cross Road than shopping through a Freemans catalogue.

Salami.com is very typical of one type of internet business. It’s specialist products simply aren’t available in many parts of the US, let alone the rest of the world.

Their first order actually came from Japan. The shipping charges on a $90 order almost doubled the price, but it was still a saving of some $150 for the customer from what he would have had to have paid at home.

Hot Hot Hot is another of these. The tiny store in Pasadena, California sells 100 hot sauces around the world through their web site (http://www.hothothot.com).

Monica Lopez the store’s owner says the net now accounts for 25 - 30% of their business ‘and has given us an international reputation.’ The market for those hot sauces in Pasadena is always going to be limited, but thanks to the net, they have been able to reach a global audience.

For businesses with a tradition of innovation, the net is simply as logical next step for development. 1-800 Flowers, for example was a brick and mortar business based in one shop in New York the 1970s. But there was the potential of toll free numbers and national delivery in the 1980s and so, started their transformation to its current form - a $250 million (£156 million) business. Now, it has a web site, as well as a presence on a host of specialist on-line services, combined these make up 10 per cent of total revenue and one of their fastest growing divisions.

This is helped no doubt by the fact that on-line orders carry half the service charge of standard orders (made possible because it is generally cheaper to service internet orders).

But it is not all plain sailing in on-line commerce. For a start although there are estimated to be around 25 million people hanging out online, only about 10% of surfers have actually bought something. A survey by US trade magazine

Advertising Age in October asked why they had resisted the urge. Of those who had decided not to buy on-line, 40% said they weren’t sure that it was secure, 27% said it was because they couldn’t touch or feel the merchandise, 18% said it was because they didn’t know the merchant and 15% said it was simply too difficult or time consuming. This is understandable. Anyone who has used the internet knows that it can often not be the easiest thing to get to grips with. The idea of actually using it to do your shopping is often just one step too far.

Security in particular is seen as a problem. Tales of hackers sitting in front of their screens intercepting credit card information are enough to put most people off buying anything on-line. The truth of the matter is that encryption, or the scrambling of your details, makes it much safer than handing them out over the phone - which we all happily do everyday. There is always going to be an area of fraud on-line where people are not who they pretend to be, but this is very different.

The issues raised in the Advertising Age survey are all serious obstacles, and all the businesses that have so far succeeded on-line have done so because they have managed to overcome these difficulties. However, the effort involved withdoing this is enormous, and it seems that smaller companies who are dedicated to the net have been able to master it, while larger corporations who see it at best as a peripheral activity have tended to fail.

In the UK for example, 17 major retailers including the supermarket chain, J Sainsbury, catalogue retailer Argos and Toys R Us all joined Barclay Square Shopping Mall on-line. It received enormous amounts of publicity, but the fact that it was both difficult to find and to use, along with the relatively small size of the UK internet home audience meant that turnover for the whole mall for its first 18 months was less than £10,000.

What went wrong ? Basically Barclay Square is difficult to find. You have to find and obscurely named site where, unlike, say Salami.com, the address (http://www.itl.net) gives no hint of what’s going on and even then it takes many minutes to find the shop you want, let alone the product. All in all, much less rewarding than a trip down the high street. Add to this the fact that the UK audience is even more skeptical than the US audience, and that figure actually seems pretty good.

Still, the big boys are coming and making it tough for the start ups. The likes of CDNow and Amazon are clearly going to face competition from the major players in their field, and they are aware of it. ‘I can’t tell you how many times people told me it wouldn’t work,’ says Jason Olim, ‘that someone would come along who was smarter, faster, better financed, and put me out of business.’ So far, they haven’t but one day they will certainly arrive soon and have the likes of CDNow in their sights.

Amazon is not expected to make a profit until the early years of 21st century, partly because it has budgeted $100 million on marketing to get it’s name known before the household names came online. Barnes & Noble has now launched its own comparable bookshop and the two are locked in a legal battle over exactly who is “Earth’s biggest bookstore”, as Amazon has always claimed to be.

Jeff Bezos is in bullish mood. Asked whether he is worried about the imminent arrival of major retailers, he replies: ‘It’s my job to be worried, so in that sense I’m worried. But we have more experience doing web retailing than anyone else on the planet, so I’ll be disappointed if the gap between us and our prospective competitors doesn’t widen over the next few years.’

Who will win? In some ways, it doesn’t matter. What matters is the fact that Amazon has risen from nowhere to become a major irritant to one of the most successful retailers in the US - a testament to commercial upheaval caused by the Net. We already have a similar battle brewing in the UK with the internet bookshop (http://www.ibs.co.uk) which has already been floated on the stockmarket (the shares were sold over the net, naturally) and is as good as, if not better, than Waterstone’s site (http://www.waterstones.co.uk).

The problem for many traditional retailers as they try to understand the net, is that there is a complete dearth of knowledge and expertise about it within their organisations. The result is that they have to bring in technical expertise - which can mean paying a lot of money for someone who speaks in a language you can’t understand.

The best netrepreneurs however have the really valuable knowledge from the founders. Virtual Vineyards (http://www.virtualvin.com) is a typical example of this. It’s founders are Peter Granoff, a wine expert with over 20 year’s experience in the industry (only the 13th American to be admitted to the British Court of

Master Sommeliers, no less), and his brother in-law, Robert Olson a Silicon Valley engineer. They launched the site in January 1995, and it has been another success - based heavily on their incredible levels of service and their attempts to make the often intimidating task of buying wine and quality food as pleasant as possible. ‘We couldn’t have a achieved what we have done if we had done it separately,’ says

Granoff. ‘There’s no way in hell without Robert who’s a crack engineer that I’d have been able to make the site work, and he would never have been able to line up the suppliers I have.’

This combination works very neatly. Granoff’s stamp is all over the site like any good shop owner’s should be, and Olsen’s expertise behind the scenes makes sure that everything works incredibly smoothly. First time visitors are greeted with a letter from Peter explaining the site and stressing that his aim is: ‘to find outstanding food and wine selections from superb producers and offer them to you for purchase’. If customers have queries they can send in an e-mail, and each is answered personally.

Like Salami.com, the stress is on making customers feel they are dealing with real people rather than modems and machines. Golfweb (http://www.golfweb.com), founded by Ed Patterman, a former technology industry executive, in 1994 is another business that could only exist on the net. It is, quite simply, the definitive on-line golf resource, a living breathing encyclopedia, newspaper, shop and meeting place dedicated to golf.

Sections include Golf Action which provides a news and result service for tournaments around the world, On Course an interactive database of 20,000 courses in six countries, a Pro Shop selling all sorts of golf merchandise and a

Library of articles and books on anything and everything to do with golf. Its revenue comes from a mix of selling advertising space, selling subscriptions for premium services and from retail operations. For this to exist in the physical world would be financially impossible - on the net, it is simply a matter of imagination and enormous effort.

The net continues to grow. Exactly how big it will get or what it will look like noone knows. But, at Virtual Vineyards, Peter Granoff, issues a note of caution to all who might be seduced by the lure of easy millions to be made on-line. ‘The cost of entry is low,’ he says, ‘but the cost of success, is high. Customer service and customer acquisition is incredibly labour intensive.

‘Most of this is still highly experimental. If you ask people if they really know what they’re doing, and they’re honest, then they’ll say: “Maybe, about 20% of the time.” If someone said to me that they knew exactly what they were doing, I’d say they were talking shit.’

‘I believe,’ he says, ‘that the net is going to polarise. That the only people who will succeed are going to be either category killers such as Amazon Books, or people like us who are carefully holding on to a niche. And for entrepreneurs there’s going to be not a lot in the middle’.

Indeed, the glory days of Netrepreneurs might already be over as big business finally muscles in on cyberspace. But you can be certain that as your read this, someone, somewhere has just had an idea for an on-line business, that is going to make them a very large amount of money. Expect to be jealous of them very soon.