September 30, 2002, 12:00 AM

Buy.com’s Blum Takes on Goliath

(Page 3 of 4)

Other observers caution that Buy.com’s pricing move may not hold up. “Long term, I’m not sure that Buy.com’s economic model is sustainable,” says Geoff Wissman, vice president of Columbus, Ohio-based Retail Forward Inc., a consulting firm. “Even more than pricing below Amazon, the free shipping regardless of order size doesn’t make sense. If you offer free shipment, you at least want to keep a minimum-order size to encourage customers to buy more.”

But Blum takes exception to the notion that he can’t sustain the current prices. “We were always about 10% on average below Amazon,” he says. “It’s just that some books were priced as much as 16% below Amazon while others were a little higher than Amazon. By pricing at a consistent 10% below, we could promote the fact and still not see a decline in profitability.”

Blum claims he can charge less than Amazon because he does not have to support warehousing and order fulfillment. Additionally, while Amazon.com has to pour much of its operating cash into paying off long-term debt (see accompanying story), Blum notes that Buy.com is debt free.

But while Wissman agrees that Amazon’s debt adds significantly to its cost of doing business, he doesn’t believe Buy.com overall can operate that much cheaper than the competition. Additionally, he points out that Amazon is not Buy.com’s only competition. Particularly, in the electronics business, it has to take on Best Buy Co. Inc. and Circuit City Stores Inc., which also have strong Internet sales channels with the added convenience of store pick-up of orders. More importantly, these companies’ costs of securing product are likely to be much lower than Buy.com’s because they can purchase in larger volumes. “This is a business where size matters,” he says. “There are competitors that have a lot more resources so it will be a difficult road for Buy.com to travel.”

Indeed, other experts say that even in books, Buy.com may have a hard time sustaining the title of being the low-cost provider. Calvin points out that while Buy.com makes a big deal of pricing below Amazon, her research shows that Buy.com is still higher on many books than WalMart.com, another big player in the online book world. The low-price hoopla, she says, was just a way to get consumers’ attention. “Buy.com needed people to look at its offering and it needed to do something drastic to accomplish that,” Calvin says. “This got it a lot of press and people who hadn’t shopped there before started to look at Buy.com.”

Long term, however, Calvin says Buy.com will face a bigger challenge. “Buy.com might be able to price lower than Amazon, but it will be very difficult for it to be able to beat the prices of the high-volume retailers like WalMart.com and even Barnes & Noble. They can buy the books so much cheaper than either Buy.com or Amazon because of the volume discounts they get by selling the books both online and in their stores.”

Not a big threat

Others scoff at the notion that Buy.com will be more than a small irritant to Amazon. In a recent research report on Amazon, Safa Rashtchy, an analyst with Minneapolis-based US Bancorp Piper Jaffray, described the Buy.com pricing move as “overblown” and said it shouldn’t hurt Amazon. Still, immediately after Buy.com’s pricing announcement, Amazon’s stock declined more than 5%, or 91 cents, to $16.60.

And while Blum publicly took on Amazon in his ads, he admits it is unlikely that Amazon will feel his moves too severely. “They’re eight times our size,” he says. “Even if we took an aggregate 2% of their sales from them, it would be a huge difference to us while they would hardly feel it. Unlike what you read in the newspapers, we’re not trying to put Amazon out of business, we’re just trying to increase our own market share and show that we’re in this business for the long run.”

While Blum concentrates on taking Buy.com in new directions, he also has to contend with setting the course of a separate group of seven other companies that are part of ThinkTank, a holding company he owns. Blum has poured $20 million of his own capital into ThinkTank in order to get new technology companies off the ground. Blum’s interest in each of these companies ranges from 33% to 80%.

One interesting aspect of ThinkTank is that one of the partners with Blum in a ThinkTank company is Japan-based Softbank. Softbank is a venture capital firm that was one of the largest shareholders in Buy.com before Blum bought it back. As such, Softbank lost a huge sum in Buy.com. The company that Blum and Softbank are co-investors in is AqueDuct, a provider of technology used to plan, design and manage an Internet-based sales organization.

A Softbank executive declines comment on Buy.com, but Blum says there is no lingering resentment between the two. “Everyone wishes their investment had worked out, but it didn’t,” he says. “They didn’t have to sell when they did. But they got disillusioned and didn’t believe in the model anymore. I, on the other hand, never lost faith.”

Faith in his companies comes naturally to Blum, who started his first company when he was 19-Microbanks, a technology firm that sold product enhancements for Macintosh and IBM computers. Blum sold that company for $2.5 million when he was 21. Then he started an optical and recordable CD technology company called Pinnacle Micro, which he ran for nine years before selling for $150 million.

Having left Pinnacle in 1995, Blum spent a couple of years working on an Internet sales model before founding Buy.com.

And now-Professor Blum

Throughout all his company formations, Blum hasn’t had a lot of time for formal education, having dropped out of college after two years. He points out that many leaders in technology never finished college-Bill Gates being the most obvious. “There is nothing you can learn in school that will teach you how to run a company,” he says.

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