Dot-Com Shake-Out - Maturity And Other Survival Strategies

The e-commerce explosion was largely predicated on the notion that, somehow, e-commerce companies, particularly pure-plays, were a qualitatively new kind of business, and thus needn't follow any of the traditional business strategies or market logic. Alongside this ethos, according to critics, came a heavy dose of arrogance. Perhaps typifying this characteristic was the online retailer Buy.com, one of the brashest of the pure-plays and the second-largest e-commerce retailer after Amazon.com. Led by its flamboyant chief Scott Blum, Buy.com eschewed nearly every type of traditional business sense and styled itself as a daring alternative.

The company built its business by selling computers, books, electronics, and other goods well below cost, undercutting competitors' prices. However, this strategy clearly wasn't designed with an eye toward profits, and the company held out hope that it could generate money via advertising. Moreover, Buy.com chose to cut costs by maintaining no inventory, rather choosing to outsource its entire order-fulfillment operation to logistics companies. This model couldn't be farther from traditional business sense, but the New Economy hype carried enough weight on Wall Street to lift Buy.com 's stock sky high with the help of heavyweight bankers such as Japan's Softbank.

The strategy seemed to work for a while, as the company amassed $125 million in sales in its first year, making it one of the fastest-growing companies ever. The company spent great sums purchasing other Web domain names with "buy" themes, such as "buymusic.com " and "buycars.com ." However, before long the company began to lose consumer confidence; its poor order handling, delivery, and consumer outreach—sparked in no small measure by its refusal to maintain any inventory—spawned dozens of Web sites devoted to bashing Buy.com.

Blum shortly after brought in a CEO to run dayto-day operations, and the firm, its future in doubt in the thick of the shakeout, began to change its character from the brashness of its early days to a more mature-and traditional-model. In other words, the firm took pains to map out for investors just how it planned to achieve profitability—in this case, by subtly raising its prices from their drastically low levels—and relied less for its revenues on flashiness and irreverence.

In Buy.com 's story were several lessons for e-commerce firms. In particular, those pure-play dot-coms without access to durable distribution and fulfillment operations, lacking a solid and dependable customer base, and with little brand recognition were hard pressed to survive, unless they managed to make themselves attractive enough for acquisition.