Online Sales, Where Rules Don’t Apply

0

What names pop to mind when you think of the top e-commerce companies in Los Angeles?

EToys, Cooking.com, DVDExpress.com, Narrowfeet.com.

Wait, narrowfeet.com? A company founded last year that has five employees and sells shoes with narrow widths?

Well, maybe so. It’s this kind of e-commerce business model a Web site that focuses on one narrow niche that could characterize the second generation of e-commerce. Then again, it could be the giant “category killers” that will be left standing when the dust settles.

Or a combination of the two.

No one knows for sure which way the wild e-commerce twister will turn next (even though everyone seems to have an opinion on the subject). But regardless of what happens, the normal operating rules of business probably won’t apply.

In fact, when the Business Journal compiled a list of 53 local e-commerce companies defined as companies that generate the bulk of their revenue from selling products or services online it became apparent that there are few, if any, rules.

Start with some basics, such as what constitutes financial success. Is it a company with a widely known brand name like eToys, even though last week it reported a fourth-quarter loss of $75.5 million? Or is it a site that depends on a more efficient niche category?

Then there’s the matter of measuring how many customers an e-commerce site attracts. Is it the number of unique users that go to the site, or is it the number of people who actually cough up a credit card number and buy something?

No one can even agree on a definition of what e-commerce is.

Selling in Cyberspace

Does some guy working out of his garage who makes his kids box up goods and ship them off qualify? Does the Web site of a brick-and-mortar store count as an e-commerce entity?

Definitions abound

Jon Goodman, who is in charge of EC2, the technology incubator at USC, prefers a broad, all-inclusive definition.

“Electronic commerce describes methods of selling goods that has the Internet as part of its infrastructure,” she said. “Calling it anything else is pretty much splitting hairs.”

Scott Mednick, chairman of Internet consulting firm Xceed.com, begs to differ.

“If you want real e-commerce, e-commerce is not Amazon.com,” he said. “Amazon is a brick-and-mortar business with a Web interface. It’s the placing of a catalog on the Internet. E-commerce companies are the ones that will create industry change through digital means. Look at travel agencies they’re screaming that they’re going out of business since the e-ticket arrived. Looked at record companies they now all need some kind of online presence to deliver music that can be downloaded.”

But overarching the e-commerce muddle is this expectation: that the avalanche of startups will come to a rest sooner rather than later. And not all of the companies on the Business Journal list (pages 22, 24) will be around in 12 or 24 months.

“We’re perhaps devolving into the second generation of e-commerce companies, where getting to (cyber) space first will not be the most important thing,” said Ross DeVol, director of regional studies at the Milken Institute in Santa Monica. “So far, the venture capital model has been to get in the space as fast as possible and get an IPO. While speed is still important, people are going to have to look at the business model in the long term. It will get down to whether there is profitability in the space that somebody is going to, and so far, that has not been one of the overriding concerns.”

Ken Deemer, a founding member of Tech Coast Angels, a local group of angel investors, said the exuberance that used to be reserved for all things Internet is starting to wear off. While a lot of e-commerce companies exceeded expectations in terms of sales performance during the holiday season, stock prices have continued to tumble.

“There’s going to be a reality check here in the next couple of months,” Deemer said. “People are fickle. I think there are too many ‘me too’ ideas out there. There are going to be some big, long-term category killers that will emerge, but a lot of other ones are going to get gobbled up and go away.”

Weeding-out process?

Deemer cited eToys as the preeminent local company that has the ability to become a “category killer” and stake a major claim on market share. For many of the others, he said, it’s too early to tell if they will be a company for the ages or even for the next two years.

“Cooking.com hasn’t withstood the test of time like eToys, which has been through several holiday seasons,” he said. “CarsDirect.com is going to be a really tough business in the long term, because when it comes down to it, they have to go to the dealer and buy a car just like you and I do. eHobbies, I don’t know if that’s enough to build a big, sustainable business; it’s not an IPO kind of company.”

But others disagree.

“In my mind, there is a hysteria among these big sites,” said Sean Wargo, an analyst for PC Data. “They’re doing too much, too soon growing to huge proportions by buying out other companies, expanding product lines, overextending themselves. Those that are more specific in their niche in the long run are going to be those that survive after all the sexiness of this wears off.”

Predictably, executives at several incubators all believe that their brood of e-commerce companies will succeed.

Mariana Danilovic, senior business manager of the Digital Media Business Incubator at accounting firm KPMG, says that the AOL-Time Warner merger points the way for local e-commerce companies to follow.

“Selling ‘X’ on the Web isn’t enough, and we don’t think that content-only sites can sustain (themselves) on advertising revenue,” she said. “Look to the merging of the two. You have to have compelling content, or else why would consumers make a shopping decision to go to you instead of one of the competing 12 sites that are selling the same thing? You have to provide entertainment value.”

KPMG’s hatchlings include Digital Entertainment Network, BeyondMusic.com and MusicNow.com.

No geographic inertia

Jake Winebaum, co-founder of Santa Monica-based incubator eCompanies, says that e-commerce ventures must foster a sense of community.

Winebaum cites eHobbies, an eCompanies prot & #233;g & #233;, as an example. According to Winebaum, people who spend between seven and 10 hours a week on their hobby want to know as much about it as possible. The Web site creates a forum for those folks to chat, share tips, and shop all at the same time.

The brick-and-mortar marketplace for hobby aficionados is fragmented, he said, making it a huge benefit for users to find in one place everything that catches their eye. Getting a user’s attention in this manner is critical, he said.

“E-commerce doesn’t have the geographical inertia,” Winebaum said. “You don’t have to go to the shop that’s closest to you, because any other shop now is just a click away.”

Jason Labowitz, president of Sun Valley-based EntertainmentEarth.com, found his niche and stuck to it. In 1996, he launched the e-commerce company with his brother yes, out of the garage of his house. Over the next few years, the company became known as one of the largest sources for new “Star Wars” collectibles on the Internet.

Asked if he ever had doubts about what he was doing during those early days in the garage, he responds: “Those days in the garage? How about those nights in the garage. We were staying up all night to process orders. I was always hoping that it would be working up to something. I guess that’s what I’m still hoping today. We’ve already been approached to sell our company, and we are looking for other buyers or partnerships or VC money.”

Then there are those who say that consumer-oriented e-commerce is just so 1999.

“Right now we’re not as interested as we were in e-commerce companies,” said angel investor Eli Broad. “We’re more interested in business-to-business applications. Right now, the market for companies selling records, books or whatever is crowded already.”

Goodman agreed, noting that instead of focusing on the “gray hairs” of e-commerce, like eToys, the technological talent in Los Angeles should be looking for the next “insanely great thing,” as Apple CEO Steve Jobs puts it.

“It’s all about applications for new kinds of communication devices,” she said, with a laugh. “It’s all about wireless.”

Or then again, maybe not.

No posts to display