by Dana Blankenhorn
Volume III, No. IX
For the Week of March 1, 1999

This Week's Clue: Ol' Ross Rides Again

This Week's Clue: Ol' Ross Rides Again 

SSP (Shameless Self-Promotion)

Marketing vs. Performance 

Future Classes 

Sony's Internet Strategy 

Clued-in, Clueless

Politics chewed and spat out Ross Perot the way a little kid deals with a raspberry-chocolate cream from Mom's box of Valentine's candy - yum, ewwwwwww, p-tooie! Perot is a "bidnessman" who dreams big, finds allies, and gets things done. In politics, however, the task of finding allies never ends and nothing ever seems to get done. (It's just that simple.) 

While most 68-year old businessmen are ready to ride into the sunset, however, Ol' Ross' political failures seem to have given him a new determination. So he's back, with Perot Systems Inc., an outfit called an anti-EDS vendetta when he started it before the political bug bit. Since he recovered from that virus, however, he's gotten heavily into this Internet thing. 

A lot happened while Ross was off doing "Larry King Live" (and getting done by "Saturday Night Live"). Here's one thread of the story. We start with a little Pittsburgh outfit called Industry.Net, which built an interactive business-to-business (b2b) marketplace in 1994. Former Lotus Development chairman Jim Manzi bought 'em and moved 'em to Cambridge as Nets Inc., but he couldn't get the commerce engine working fast enough, and the next page he turned to read Chapter 11. 

When the assets were sold a former IBM executive named Jim Cannavino bought the commerce engine team (and its work) for Perot Systems, renaming it Time0. Finally Ross, who never sold his founding stake, decided to come back. Next thing you know he's an Internet IPO.

What makes Ross Perot an Internet IPO is Orderzone . A few weeks ago he was at their launch conference (click in the upper-right corner of the Orderzone home page to see it). His turn was short, and it came around the 30-minute mark in the hour-long presentation. (It was a little putting Shecky Greene and Jack Carter on top of a marquee, over Frank Sinatra.) The announcement was that W.W. Grainger, Marshall Industries , and four other major business suppliers are combining their systems into one site that will support open orders, a variety of payment mechanisms, and a common look and feel. Grainger and Marshall figure that just 60% of an industrial product's value is in its production - 40% comes from the process of selling it. (They had a chart showing this. Ross likes charts.) By combining their efforts on the Web, the distributors figured, they can maintain their role as middlemen and earn their mark-ups. Oh, and guess who is doing their system integration - Time0.

"This is the kind of stuff that'll give you a migraine headache, if you're a systems engineer, but it also gets you excited," Perot said at the Orderzone press conference. It was nice to see him back in the saddle again. Especially since the market he's now organizing will dwarf the business-to-consumer Web segment, according to Forrester Research. (They had another chart with that nugget on it.) So while the Industry Standard's going all Dick Vitale on the consumer Web's "diaper dandies," Ross Perot will be running the bigger e-commerce world.

I like these happy endings, don't you?

SSP (Shameless Self-Promotion)

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Now back to the show...

Marketing vs. Performance

I picked up one of my first Clues to Internet Commerce back in 1984, a decade before the Web was spun.

Back then I had a "rooting interest" in a company called Quadram, a 1982 start-up that made PC enhancement boards. I was one of the first reporters to take an interest in them, while working at the "Atlanta Business Chronicle," and after I was laid-off Quadram let me help write the annual report of their 1983 merger partner, Intelligent Systems.

A year later, when it came time for me to buy my first IBM PC, they were spending heavily on a corporate image campaign based on two interlocking Qs, meaning "Quadram Quality." So I bought one of their multi-function boards (all PCs then came with insufficient memory and port support). But the PC had problems. Upon further review, I found four separate resistors had been installed as "jumpers" astride some of the memory chips. It was an unpleasant discovery, but I was told the problems were corrected and a major quality upgrade effort was underway. Trouble was the changes came too late. Quadram's market share declined, and the company eventually slipped away. (It was eventually bought by National Semiconductor.) The equation was established -- poor performance, combined with a big marketing budget, can be a total disaster.

When you don't deliver on the promises of your marketing, in other words, increasing the marketing budget is actually counter-productive. This is why AT&T, Sprint and the Bells have gotten no traction in the ISP market, despite all their TV ads. (I use both AT&T and a Bell for Internet access - performance just doesn't meet the promise.)

The classic example of matching marketing to performance is Coca-Cola. Facing a revolt by bottlers over the price of syrup, legendary chairman Robert Woodruff turned to questions of quality control. Once quality was under control, his marketing effort only promised a tasty, refreshing drink. He didn't promise more than Coke could deliver. The rest is history.

The irony here is that the companies that most often ignore this Clue in today's Internet boom are the big "meat space" players, not the start-ups. Desperate to stop the drip of market share toward others' servers, corporate giants have put millions of dollars to work saying, in effect, "yeah, I can do that," without first making certain that they indeed can do that. The job of keeping store shelves stocked is nothing like the job of delivering millions of small orders from centralized warehouses. A Web site must also respond to and interact with customers, 24/7. Start-ups learn this as they grow, and slowly build the systems needed to sustain their Web growth. Corporate giants, on the other hand, can generate a fire-hose of demand, which they are often unprepared to meet. The opportunities of that demand then leak out as acid. Wal-Mart learned this, Costco is learning it, and it will take surprisingly little time to tell whether Sears  has done its homework for its coming online appliance store.

Anyone can build a Web site and grow with the market. But not everyone can meet a huge Web market head-on. That's the dilemma faced in "meat space," and that's why, in the continuing battle between Amazon and Barnes & Noble (I don't have a dime invested in either one), I'm still willing to bet on the start-up.

Future Classes

The Internet Age will have a class system, unless warehouse technology advances very quickly.

It's increasingly clear that the biggest challenge facing outfits like Amazon, eToys, and CDNow is picking and shipping orders. It's an extension of the back-room industry you see on TV whenever an announcer is talking about Microsoft's earnings - a collection of workers shrink-wrapping and packing boxes. The difference in this case is the boxes aren't coming off an assembly line, they have to be found on a shelf, and the orders go out one box at a time.

The cost of sorting, picking, packing and mailing is what's caused such big problems for the online grocery business  and it's also causing problems in online book selling . No one, not even Wal-Mart, has yet found a way to fully automate this process. This means that when most of us are getting most of what we get online, millions of us will spend our work lives picking, mailing and delivering. Will these people be able to afford the online luxury lifestyle? Don't bet on it.

At the top of the pyramid, of course, are the thousands bringing in absurd (not obscene, absurd) amounts from Internet IPOs. Amassing a $1 billion fortune is now the work of months, not decades, but what will these people do with the fortunes they're soaking up so quickly? I'm not against any of it. I'm just asking. And I'm wondering if the millions in the warehouse-factories produced by those fortunes will be asking, and whether the chance that one of their kids will win the lottery (or be part of the next wave) will be enough to maintain social peace 20 years from now...I'm just asking.

Sony's Internet Strategy

Sony is not your average Japanese company. In the 1990s, while other Japanese outfits were going back home with tremendous loss of face, Sony kept its movie business, expanded its music business, and brought in Americans (like former CBS head Howard Stringer) to run it.

Now it's expanding its Sony.Com Web site, with an eye to selling its full line of merchandise online. (Most areas of the store still have "under construction" signs on them.) Certainly it has the potential to be a powerhouse. The question is how will it bring in the customers? (That's a question News.Com failed to answer in a recent story on the subject.)

A big part of the answer is e-mail. Sony Music Entertainment quietly bought the e-mail newsletter business of Infobeat  in Denver a month ago. Infobeat sold its name, but will remain Sony's service provider under the name Exactis. Infobeat has over 4 million subscribers to its e-mails, which essentially repackage information from others and come with banner or text ads.

If Sony has been so slow, why should it be so powerful? Most Web users in Europe and Asia don't learn where to go by "surfing." Web use there is metered - there is no time for random walks. Instead, users outside the U.S. rely on print and e-mail. The job of supporting international Web sales is also horrendously complex. Most U.S. sites have simply ignored the complexity and, thus, the international markets. The guess here is that when Sony opens for business it will be able to take a wide variety of currencies, follow local laws worldwide, and push demand with e-mail. It's a strategy no Web site has yet implemented (especially with such wide media support for the rollout) and it may hit this market like a tsunami. Watch for it.

Clued-in, Clueless

Clued-in is  HotBot, which implemented Direct Hit technology to make the claims on its ads meaningful.

Clueless is Compaq , which could not avoid embarrassment in a channel conflict it saw coming five years ago.

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