Columns

Nutty ideas worth billions

Ross Laver May 3 1999
Columns

Nutty ideas worth billions

Ross Laver May 3 1999

Nutty ideas worth billions

Columns

Ross Laver

As this magazine went to press, hundreds of angry Canadians were bombarding the Prime Minister’s Office with e-mail messages demanding that the government keep its greedy, good-for-nothing, cotton-pickin’ hands off the Internet.

“Your government is planning an absolutely outrageous action!,” wrote one such citizen, John Gile of Victoria, who graciously forwarded a copy of his Ottawa-bound missive to Maclean’s. “I can assure you it will cost the liberals millions of votes.”

The object of this fury was a report, widely circulated on the Internet, that the feds are quietly pushing through legislation to slap a five-cent tax on every e-mail message delivered within Canada. The money, so the report claims, will be used to subsidize Canada Post, which has suffered a decline in revenue because of the fading popularity of “snail mail.”

The idea is just nutty enough to be true, but e-mail addicts can calm down.

It’s really a hoax, perpetrated by an anonymous prankster whose scorn for the tax man makes him a suitable candidate for the job of National Post editorial writer.

The surprising thing isn’t that so many people fell for the ruse. It’s that somebody went to the trouble of dreaming it up in the first place. After all, the Internet is filled with nutty ideas, and most of them aren’t hoaxes. They’re so real that high-powered investors have seen fit to wager big money on them.

The most obvious example of Internet nuttiness is the stock market mania for companies that, by dint of their founders’ skill and superior intellect, have perfected the art of losing money hand over fist. Amazon.com, the steepedin-red-ink purveyor of books, music and assorted gifts, boasts a market capitalization of $45 billion despite having never generated a nickel of earnings. (The Seattle-based company was profitable during a brief period in 1995, but its CEO, Jeff Bezos, says that was an unfortunate “mistake.”) Two of the other hot Internet stocks, Yahoo! and America Online, do report earnings, but in neither case do the profits come close to justifying their sky-high valuations—$55 billion and $225 billion, respectively.

For what it’s worth, the millions of investors who own stock in these companies don’t think they’re nutty at all. Driven by greed, they’ve talked themselves into believing the prevailing theory about Internet companies, which is that, in these early days of e-commerce, profits count for far less than revenues and growth.

After mulling this over for a while, a U.S. venture capital lender last year came up with the idea for the ultimate Web business: a

company that sold dollars for 85 cents. The firm’s balance sheet would be a mess, but its shares would be in the stratosphere thanks to the volume of traffic on its Web site.

Sounds crazy, but don’t tell that to Scott Blum. He’s the 35-year-old chairman of Buy.com, an online retailer in Aliso Viejo, Cafif. With an estimated market cap of $4 billion—the company hopes to go public later this year—Buy.com is perhaps the ultimate expression of e-commerce logic. In theory, companies such as Amazon.com should be able to make money some day by selling massive quantities of books and other goods at a small markup, à la Wal-Mart. To Blum’s way

of thinking, however, that’s a cop out. Forget about the margins, he says. Buy.com is firmly committed to breaking even or losing money on every sale, and not just now but for as long as the company remains in business. The goods, you see, are just a come-on, a means of attracting eyeballs. The real point of the exercise is to turn Buy.com into file Web’s leading e-commerce portal, after which Blum hopes to cash in by selling ad space to companies that want access to those eyeballs.

Buy.com’s slogan, “The lowest prices on Earth,” pretty well sums it up. Every day, the company’s software automatically searches rival Web sites to compare prices on thousands of popular items, including computers, movies, video games and office equipment. Whatever the lowest price happens to be, Buy.com undercuts it. The strategy is ruthless but effective: in 1998, the company had $185 million in revenues, topping Compaq’s first-year record to become the fastestgrowing start-up in U.S. history. Blum, who owns 65 per cent of the company, has set his sights on $15 billion in revenues by the year 2003. To get there, he’s purchased the rights to more than 4,000 Web addresses, including Buyinsurance.com, Buycars.com and Buystuff.com. For good measure— and just because he knows it will drive them crazy—he’s also reserved Tenpercentoffwalmart.com and Tenpercentoffamazon.com.

Such gestures aside, Blum is deadly serious, as befits an individual who stands to reap billions if his scheme unfolds as he plans. How does one compete with a man who not only doesn’t mind losing money on each sale, but has actually made that an integral part of his business model? Will somebody else come along and promise to lose even more money on each transaction, and thereby steal some of Blum’s precious eyeballs?

Then again, a clever marketer could just forget the whole idea of selling products and simply pay people to view ads while they browse the Web. A company that did that would « attract all sorts of eyeballs, and it wouldn’t have to worry about mundane details like taking orders and shipping goods to customers.

Nutty? Perhaps, but that isn’t about to stop Jim Jorgensen from giving it a try. His Silicon Valley company, Alladvantage.com, is now signing up Internet users for an expected launch some time in May. Surfers will be paid 50 cents (U.S) an hour for the time they spend online, plus bonuses for referrals. In exchange for the money, they’ll see a narrow bar of advertisements scrolling across the bottom of their screens whenever they are connected to the Internet. More than a quarter-million people signed up for the service in the first 10 days after it was announced.

And no, this isn’t a hoax.