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With all the talk of the bursting of the Internet bubble and the death of the New Economy, many people have lost sight of an important fact: that lots of online businesses have been successful in revolutionary ways. Although the grandest predictions about the Internet have proved to be overblown, many people created businesses online that couldn’t have existed in quite the same way in the physical world. Successful businesses. Profitable businesses. Businesses that are, in many cases, poised to grow rapidly. Even leaving aside the Internet’s biggest names—superstar eBay Inc., intermittently profitable Yahoo Inc., and nearly profitable Amazon.com Inc.—when we sorted through the rubble left by the crash of Internet stocks we still found plenty of real gems. Some literally peddle gems. Some sell pre-embargo Cuban cigars. Others provide jobs data for Abilene, Texas, or a shot at contacting an old flame from high school. All offer lessons about how, when all is said and done, online commerce has created new ways of doing business. TINY PRODUCT, BIG PROFIT MARGINS Last Thanksgiving, Steve Flahive bought a $24,000 diamond engagement ring from online retailer Blue Nile Inc. (www.bluenile.com) for his fiancée. Flahive, a senior vice president at Salomon Smith Barney Inc. in San Francisco, had visited corner jewelers, dealers, and Tiffany & Co., but he didn’t like the pressure from salesmen working on commission. “It’s an emotional purchase, and salespeople know that,” Flahive says. “They want you to buy it right away, or at least to put a deposit down.” Not with Blue Nile, which was launched in 1999 to capitalize on men’s fear of walking into a jewelry store and plunking down thousands of dollars for diamonds or fine jewelry. With Blue Nile, Flahive could spend as much time as he wanted at a section of the site that explains the intricacies of diamonds. He could call with questions for Blue Nile’s customer sales reps, who don’t work on commission. Thanks to people like him, Blue Nile posted a $1.1 million operating profit for last year’s fourth quarter. The company expects to be profitable for all of 2002 (based on generally accepted accounting principles, without stretching the definition of profitability as many dot-coms—and now many companies of all stripes—became known for doing). The economics work because having a tiny but pricey product helps keep overhead low. While the average sales price for Blue Nile products is more than $1,000, diamonds and jewels are easy to ship and don’t require much storage space. Blue Nile operates just one 10,000-square-foot warehouse. Amazon.com, by contrast, operates 10 warehouses worldwide, the largest an 877,000-square-foot facility in Coffeyville, Kan. Because Blue Nile doesn’t have brick-and-mortar stores and employs just 80 people, the company says its overhead costs are 20% to 25% of revenue, compared with 40% to 50% for big, publicly traded jewelers. That has allowed Blue Nile to grow quickly by offering prices that it says are 20% to 40% below those of ordinary jewelers. Then there are the not-so-ordinary jewelers: Flahive says the same ring he bought from Blue Nile cost twice as much at Tiffany’s. CUSTOMIZED, YET CHEAP Economic-research firm Economy.com Inc. (www.economy.com) is using the Internet’s reach to expand beyond its traditional base of clients in Fortune 500 companies. The 70-person firm is reeling in foreign central banks, smaller businesses such as money managers, consumers, and charities—even a church. How? The Internet has let Economy.com offer customized reports that cost a fraction of what reports used to cost. The private company, which sells economic reports detailing the health of the 50 states, 320 U.S. metropolitan areas, and 65 industries, used to mail bound reports to clients. A few years ago, a 50- to 60-page report on 100 metro areas would cost $15,000, regardless of whether a customer was interested in only a handful of the localities. In 1997, though, the firm—previously called Regional Financial Associates Inc.—began putting its data on the Internet. Today, customers can log on to the Economy.com site and pick and choose, selecting, say, the Sacramento or Denver report at $200 each. “They don’t have to pay for what they don’t want,” says Paul Getman, chief executive of Economy.com. The change has opened a new market for smaller customers. A couple of years ago, a Texas church seeking a new pastor bought the report for its metro area to give candidates an economic snapshot of the region. Individuals moving to a new city are able to buy reports to find out about the local job and home markets in their future locales. Economy.com also has attracted a growing international client base. In addition to increasing revenue, using the Internet lets the company better target its research, helping it operate more efficiently because it can see what clients pull off its site. The company is now pumping out more foreign stats, for example. “When you put things into a book, you’re never sure what people are reading and what they aren’t reading,” Getman says. Economy.com says it earned an operating profit last year and expects to be profitable this year “in every sense of the word.” LOOK MA, NO INVENTORY Like eBay, eBags Inc. (www.ebags.com) doesn’t have to worry about inventory. The privately held company sells handbags, computer cases, backpacks, luggage, and other gear but has manufacturers—including Samsonite Corp., JanSport, and Adrienne Vittadini—ship directly to eBags’ customers. “We let the brand [manufacturers] maintain the inventory. That’s what they do best. They know what’s going to sell,’’ says Peter Cobb, eBags’ vice president of marketing. The company does have to spend on marketing (the sort of nasty detail that early dot-com evangelists somehow ignored). It mostly uses promotional contests that people can enter, such as a free ski trip to the Grand Tetons, to build its list of prospective customers. As of April, it had more than two million names in its database, up from 292,000 in January 2001. Still, the fact that eBags is just a clearinghouse that matches buyers with manufacturers—a neat trick that is almost nonexistent in the offline world—let it have its first monthly profit in December. The company says it expects to achieve “sustained profitability” during the second half of this year. Unlike many online companies, eBags has won high marks for its customer service as well as for tools on its Web site that make it easier to comparison shop or to design your own bag by picking favorite colors, fabrics, and accessories such as laptop sleeves or cellphone holsters. EBags “wasn’t started by technology types. It was started by people [from Samsonite] who understood the luggage business,’’ says Don McCubbrey, director of the Center for the Study of Electronic Commerce at the University of Denver’s Daniels College of Business. Another successful clearinghouse is Monster.com—the difference is that, in this case, people are being matched with jobs. Taking advantage of the Internet’s ability to let users sift through piles and piles of data, Monster charges companies to post job openings and access its résumé databases; it then provides tools that help job seekers find the right prospect and that let companies sort through the mounds of résumés they receive. Monster doesn’t have to worry about arranging interviews between employers and job seekers. The site collected $536 million in commissions and fees last year, up 41% from the prior year. Monster’s operating profit totaled $150 million in 2001. In February of this year alone, Monster attracted 14.2 million visitors. Research firm IDC calculates that while help-wanted revenue at U.S. newspapers tumbled 35% last year, to $5.7 billion, online job sites recorded a 38% jump in domestic revenue, to $727 million. For its part, Monster’s share of the online job market has climbed to half, from a third, over the past two years, IDC says. Media giant Yahoo (www.yahoo.com) clearly thinks Monster is on to something. It recently bought HotJobs.com Ltd., a smaller online employment site (www.hotjobs.com), for $436 million in cash and stock. Like Monster.com, travel companies Expedia Inc. (www.expedia.com) and Travelocity.com Inc. (www.travelocity.com) have succeeded as brokers that capitalize on the Internet’s ability to let users comparison shop more easily. For the quarter ended Dec. 31, Expedia reported net income of $5.2 million, while Travelocity recorded a profit before items of $4.9 million. A SMALL LEAP It was even easier for financial-services companies to move online. After all, “financial institutions have been exchanging digitized data on payments and transactions for more than a generation,” says Robert Pozen, former vice chairman of Fidelity Investments and a fellow at Harvard University’s John F. Kennedy School of Government. “It was a small leap for these to migrate to the Web’s retail arena for banking, securities, and insurance as the number of affluent, wired consumers reached critical mass.’’ Although online brokerage has lost some of its cachet, firms have built a solid franchise. E*Trade Group Inc. (www.etrade.com) had its seventh straight quarter of operating profits in the first quarter, generating $19.4 million in earnings before a charge related to a change in accounting rules. Ameritrade Holding Corp. (www.ameritrade.com) had net income of $11 million in its fiscal first half, ended March 29. GREAT SELECTION RedEnvelope Inc. (www.redenvelope.com), which relies on the Internet and a catalog to sell its goods, has distinguished itself through high-end gifts such as pre-embargo Cuban cigars, caviar kits, and aromatherapy candles. The company will even ship a Colorado blue spruce seedling in a silver-plated baby cup as a baby present. “They have unique gifts,” says Lauren Freedman, president of e-tailing group inc. (www.e-tailing.com), a consulting firm. Online shoppers also say they like the way RedEnvelope makes it easier to buy gifts. On the Web site, products are categorized by occasion, such as “romantic events,” “just because,” or birthdays, as well as recipient (her, him, kids, baby), and lifestyle (the gardener, outdoorsman, or sports enthusiast). Privately held RedEnvelope—named for the Asian tradition of presenting gifts in a simple red envelope—was founded in 1997 and achieved profitability in its fiscal third quarter, ended Dec. 31 (albeit on an Ebitda basis, meaning that it was profitable before interest, taxes, depreciation, and amortization). RedEnvelope expects to be profitable, also on an Ebitda basis, in the year ending in March 2003. SAVINGS FreeMarkets Inc., which holds auctions so corporations can buy industrial parts, materials, and services from suppliers via the Internet (www.freemarkets.com), says that as of Dec. 31 it had saved clients $6.4 billion off what they historically paid. For example, when Cooper Industries Inc., a maker of electrical products, tools, and hardware, used FreeMarkets to buy air-freight service, it drew 11 bidders, generating far more competition than Cooper would have been able to coordinate in the past. According to FreeMarkets, the lowest bids totaled $3.5 million, $1.2 million below what Cooper paid previously. Since 1995, more than 19,000 suppliers from more than 70 countries have bid through FreeMarkets, the company says. FreeMarkets doesn’t necessarily have a lock on the technique. Companies can arrange their own auctions or, as auto makers have done with Covisint, band together and buy from suppliers as a group. Still, FreeMarkets, which collects a fee of 1% to 3% of its auctions’ value, expects to be profitable for all of 2002, measured in terms of GAAP net income. In the fourth quarter of 2001, FreeMarkets’ net loss had narrowed to $2.8 million from $44.6 million in the year-earlier quarter. CONNECTIONS Classmates Online Inc. (www.classmates.com) was born in 1995 after its founder, Randy Conrads, tried unsuccessfully to locate a high school friend using online listing services and the white pages. The site is a sort of lost and found for old school chums and sweethearts, as well as military buddies. “If eBay is like a co-op for garage sales, we’re a co-op for finding old friends,” says Michael Schutzler, the company’s chief executive. The comparison is apt. Classmates’ minimal expenses mostly consist of advertising and payroll. As with eBay, each new Classmates member improves the list and makes it more attractive to anyone thinking of joining. The site has more than 27 million members and is adding 50,000 daily. More than two million are paying $36 a year, which gives them free e-mail contact with anyone else in the site’s directory, as well as access to special message boards and chat rooms and the ability to share photos. (Nonpaying members just have their names listed, usually by school and year of graduation. They can be contacted but can’t contact others. No e-mail addresses are listed on the site, so Classmates is the only medium for initiating contact with someone.) Classmates does spend quite a bit on marketing itself, mostly through arrangements with other Web sites. But the company, which employs 135, turned profitable in November (on a GAAP net-income basis) and expects to remain so. Schutzler says part of his company’s success stems from the strong feelings that get ignited when someone checks out names of old classmates. Customers recount stories of how they found their long-lost sweethearts or hooked up with their birth mothers. “People buy emotionally,” says Philippa Gamse, an e-business consultant—and Classmates lets them, based on memories that would have been prohibitively difficult to tap into before the Internet.
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