Buy.Com inc

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BUY.COM INC.

Buy.com 's tagline says it all: "The Internet Superstore—Low Prices on Top Brands." Launched in November 1998, Buy.com claimed to offer the lowest prices on the Web for a wide range of consumer goods, which it offered through specialty stores devoted to such categories as computers, software, office products, wireless products, electronics, books, videos, games, music, and sports. The company's prices were so low, in fact, that Buy.com 's business model was not designed to make money on its margins the way traditional retailers have done, but to generate a profit by selling advertising on its Web site. By selling merchandise at, near, or even below cost, Buy.com hoped to attract enough eyeballs to make consumer goods manufacturers want to advertise on its Web site. It was a revolutionary business model, and one that founder Scott Blum hoped would make Buy.com the fastest-growing company in U.S. history.

INITIAL REACTIONS WERE SKEPTICAL

Barely two months after the Buy.com Web site was launched, Fortune magazine described it as a "seemingly crazy new model" and compared it to a Web site selling dollars for 85 cents. If Buy.com proved to be successful, the magazine argued, it would demonstrate that it was possible to build a brand completely on price. It also would have revolutionary implications for Internet retailing.

Buy.com originally was BuyComp.com, a discount seller of computer products founded in October 1996 by Scott Blum. BuyComp.com was selling about $1 million worth of computer products a day when it changed its name to Buy.com in November 1998. The name change reflected the wider range of products the company would sell. With $60 million in venture capital financing from Japanese software distributor Softbank, Buy.com was able to acquire SpeedServe, the Internet division of Ingram Entertainment that sold videos, DVDs, books, and computer games. Almost immediately the company launched a consumer advertising campaign that included national TV spots and print advertising. Buy.com offered videos and DVDs through a new sub-site of Buy.com called BuyVideos.com, thereby establishing a pattern it would follow of creating specialty stores for new product lines. To prepare for the addition of new specialty stores, Buy.com purchased the rights to more than 2,000 domain names beginning with the word "buy."

If Buy.com 's business model was to work, the company had to offer the lowest prices on the Internet. To accomplish this Blum spent more than a year perfecting search agents that would automatically scan the Web for the lowest prices on products he was selling. The company also did not carry any inventory, instead having wholesalers ship products directly to Buy.com 's customers. The company got off to a fast start. For 1998 it posted sales of $125 million, beating a 15-year-old record held by Compaq Computer Corp. for a company in its first year. By February 1999 it was selling about $2 million worth of merchandise a day, and for 1999 it reported total revenue of nearly $600 million.

EXPANSION, CUSTOMER COMPLAINTS MARKED FIRST YEAR

During 1999 Buy.com added an online music store that featured every title on the Billboard 200 for $9.95, excluding two-CD and box sets. In mid-1999 Buy.com redesigned its Web site to allow customers to buy products from its different specialty stores with one shopping cart. Specialty stores in operation included buycomp.com for computer hardware and software, buyvideos.com, buygames.com, and buybooks.com.

While Buy.com was hoping to gain customer loyalty on the basis of price, it was falling short in the area of customer service, according to some complaints. Protest sites with names like BoycottBuy.com began to appear, criticizing the company's customer service. A survey by ResellerRatings.com that was published in Sm@rt Reseller reported that more than 60 percent of online shoppers felt the company's sales staff was not knowledgeable and easy to deal with. More than 80 percent said exchanges were not handled professionally, and only about half said they would recommend Buy.com to a friend.

One area of consumer concern was the company's billing practices. Buy.com would book orders and bill the customer's credit card even if the item ordered was not in stock at its distributor, Ingram Micro. If the order went unfilled, then Buy.com would credit the customer's account—in some cases days or even weeks after the order was placed. When Buy.com 's advertised price for a Hitachi monitor was mistakenly listed $400 below the company's intended price, it refused to deliver the monitors at the incorrect price. That resulted in a class action lawsuit on behalf of customers who ordered the monitor, and the initial ruling in the case went against Buy.com.

All of this was especially troubling to Buy.com 's new CEO, Gregory Hawkins, who joined the company from Ingram Micro. To smooth things over, Hawkins invited a group of unhappy customers to the firm's Orange County headquarters in Aliso Viejo, California, and promised to hire customer service representatives to improve the firm's customer transactions. Before the end of the year, founder Scott Blum resigned as chairman and director, although he remained the company's largest shareholder with a 48-percent interest. Hawkins became chairman, CEO, and president.

Buy.com continued to advertise heavily in 1999 to build its brand. It took a TV spot in the Super Bowl and was expected to spend $25 million on advertising in the fourth quarter. When Nike Inc. ended its seven-year sponsorship of the Professional Golf Association's developmental tour, Buy.com signed a five-year deal to sponsor the tour starting in 2000.

IPO RAISED $182 MILLION IN 2000

Buy.com 's initial public offering (IPO) took place in February 2000. The company sold 14 million shares at $13 each, raising approximately $182 million. Investors quickly bid the price up to $35 on the first day of trading before closing at $25.12 a share. Investor interest appeared to be unaffected by Buy.com 's failure to turn a profit. Although revenue for 1999 increased nearly fourfold to $296.8 million, the company's loss for the year was $130.2 million, compared to a loss of $17.8 million in 1998.

As part of its sponsorship agreement with the PGA Tour, Buy.com made a heavy investment. It issued 1,125,000 shares to the tour, and made a cash payment of $8.5 million from the IPO. This was in addition to $6.4 million paid to the PGA Tour in 1999 and a $17 million letter of credit issued as security for payment of the sponsorship fee.

Buy.com expanded in several ways in 2000 with varying degrees of success. Through an alliance with United Airlines it opened a full service airline ticket booking service called buytravel.com. The site offered discounted fares and rates from United, fares from about 500 other airlines, and other travel-related services including hotels and car rentals. Buytravel.com operated from February to November 2000 before it was shut down. Other specialty stores that opened during 2000 included a new business super-store offering more than 55,000 office products, and a new sports store powered by Global Sports that offered activewear and sporting goods. In April 2000 Buy.com launched its License Online Program, which offered software licenses on the entire line of Microsoft licensing products. The program was later expanded to include software from Symantec, Computer Associates, Executive Software, and Trend Micro.

The company expanded internationally by opening Web sites in the United Kingdom and Australia. Both sites were accessible from Buy.com's home page. However, Australian operations were discontinued in November 2000, and the company's operations in the United Kingdom were sold to Britain's department store group, John Lewis Partnership, in March 2001.

Buy.com added wireless phones, service, and accessories to its product mix with the mid-2000 acquisition of online retailer Telstreet.com for about $8 million in stock. In October 2000 Buy.com opened its Wireless Store, which enabled customers to compare mobile phones and plans. The site also offered cellular phones and accessories, cellular plans, Web-enabled phones, and FRS radios. Among the wireless companies represented at the store were Ericsson, Nokia, Motorola, Mitsubishi, AT&T, Nextel, and Verizon. In the second half of 2000 Buy.com began offering wireless access to its Web site through agreements with Sprint PCS and AT&T Wireless, and Web-enabled mobile phone users could access and shop the Buy.com Web site.

WEAK HOLIDAY SALES LED TO CUTBACKS AND REFOCUS

As early as mid-2000 some analysts—notably investment banker Goldman, Sachs & Co.; financial magazine Barron's; and the stock market Web site TheStreet.com—thought Buy.com was in danger of running low on capital by the end of the year or in early 2001. Although the company raised its prices slightly at the beginning of the year and reported a positive gross margin of 4.3 percent in the first quarter, it still reported a net loss of $66.4 million for the first half of 2000 on revenue of $400.8 million. Its third quarter net loss amounted to $21.4 million on revenue of $190.2 million. By November Merrill Lynch & Co. issued a warning on Buy.com that the company was funding its operations from a dwindling supply of cash. That was followed by a report in The Orange County Register that Buy.com had enough working capital to last another year, even if it lost $30 million a quarter. The company's stock was trading around $2 a share in late November.

Buy.com had taken steps during 2000 to improve its customer service for the holiday season. In December Forrester Research ranked Buy.com the top etailer in its PowerRankings, which were based on a survey of 20,000 online customers. The rating was based on customer service, low prices, free shipping promotions, and quick e-mail responses. In terms of buyers, PC Magazine ranked Buy.com third among Web retailers for September 2000 with 428,000 buyers, behind Amazon.com and ticketmaster.com. Buy.com had every reason to be optimistic about the 2000 holiday shopping season, but competition from brick-and-mortar retailers and their Web sites reduced Buy.com 's Web traffic by 10.8 percent in the first week of December and by 16.5 percent in the second week, compared to the same weeks of the previous year.

As a result, Buy.com 's fourth quarter revenue was $196.7 million, about $23 million less than estimates. Fully expecting to be in business for the 2001 holiday season, Buy.com announced it would focus on delivering positive operating cash flow by the fourth quarter of 2001. It planned to refocus its resources on its core product categories: computer hardware and software, consumer electronics, wireless products, plus a general clearance category. It closed its sports store in March. Buy.com also planned to focus its efforts on the U.S. market and announced it would discontinue its Canadian store operations effective February 2, 2001. The company's British operations were sold to the John Lewis Partnership in March. Layoffs of 150 employees, together with other cost-cutting measures, were expected to reduce the company's annual operating expenses by $70 million.

Meanwhile, the company entered 2001 with a new management team. Chairman and CEO Gregory Hawkins and chief financial officer (CFO) Mitch Hill resigned in February 2001. Donald Kendall, former chairman and CEO of PepsiCo and a Buy.com board member, was appointed chairman. James Roszak was named interim CEO, and Robert Price joined the firm from PairGain Technologies as CFO.