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Dot-coms close e-commerce doors under cost pressures

Executives at Internet companies are learning the hard way that online content and retailing are difficult to house under the same roof.

Hollywood Entertainment thought it created the perfect marriage in 1998 when it acquired Reel.com--a synergistic blend of a strong chain of video rental stores, robust online content and the ability to sell videos via the Web.

Investors sent the shares up 10 percent on the day of the announcement, and the company immediately set out to market its new and improved business model.

But after just two years, Hollywood Entertainment realized that what it hoped would be a financial version of "It's a Wonderful Life" had instead become "The Money Pit" as the e-commerce arm racked up millions of dollars in losses with no end in sight.

As a result, Reel.com laid off its entire e-commerce staff earlier this month and turned over its e-tail operations to Buy.com. Meanwhile, the parent company absorbed the news and information portion of the site, as it plans to continue to publish new material and license it to Buy.com.

As has happened with many dot-coms, Hollywood Entertainment's executives learned the hard way that online content and retailing are difficult to house under the same roof.

"E-commerce was the most expensive portion of the business, which accounts for shipping, warehousing, fulfillment, handling and product costs. That ate away at any potential profits," said Sean Mahoney, spokesman for Hollywood Entertainment.

"But this isn't going out of business, this is economizing, which is outsourcing the e-commerce portion of it. We are maintaining the site as a content site, which was its original intent," said Mahoney, who is optimistic about Reel.com's ability to derive revenues from advertising and e-commerce referrals.

Reel.com is only one of the latest dot-coms to illustrate the difficulty in producing strong content and selling products in-house. Oxygen Media said Monday it would discontinue retail sales from its site, closing two of its shopping-related sites for women. Last month, women's network iVillage said it was in talks with BabyGear to sell its e-commerce site, iBaby.

"It takes a Special report: End of the Beginning lot more to run one of these major e-commerce sites," said Jack Staff, e-commerce analyst for Zona Research. "You can have great community, and you can have great content, but if you do not have great commerce you're not going to be around after a while. This is the case for Reel.com."

Out of their element
For Net media companies, running a retail site could be compared to a traditional newspaper publisher opening a grocery store--the publisher may be very successful at creating compelling content that attracts readers and advertisers but knows nothing about stocking a fish department or pricing milk.

"A lot of e-commerce companies don't understand the core imperatives around retailing like a Wal-Mart does," said Carol Ferrara, online retail analyst at Gartner. "These companies are moving into an area that's outside their core competencies."

Once highly fashionable, running a retail operation on the Web has become something of a dog, especially for those that started in another business entirely.

Similarly, analysts say e-commerce companies that began publishing news and information related to their products may find that beefing up content dilutes the ultimate goal--to sell the products.

"A lot of (dot-coms) have mistakenly come to believe the Internet allows them to be equally good at selling things and creating compelling content," said Ken Cassar, e-commerce analyst at Jupiter Communications.

Years ago, content sites such as America Online dominated the Web, drawing millions of people online with the promise of quick and easy information on almost anything. Then commerce sites such as Amazon.com and eBay popped up, setting off a stampede as wild-eyed investors tossed money at scores of e-commerce start-ups.

Combining the power of the two was a natural move, and many content sites quickly built online stores and signed affiliate programs with merchants.

That mix of commerce and content is still widely used online. But many dot-coms that tried to run both businesses without the expertise found that the tail that wags the dog can become the dog.

A fresh start
Aware of the pitfalls of online retailing, Shopping.com was reinvented last year when AltaVista bought it and turned it into a search service for shopping on the Web. By becoming a recommendation site, the company could sell advertisements and make sponsorship deals.

"It would be expensive to do something that radically breaks through (the e-commerce model) so that we could succeed, said Ken Neibaur, vice president of marketing for Shopping.com. "We understood the pressures on margins due to the competition on the Net."

Other examples abound. CBS SportsLine bought and sold its e-commerce arm within two years. For the popular sports news site, selling related merchandise initially seemed to fit with the overzealous nature of its fans. Although the "contextual commerce" worked well for SportsLine--in 1999 the company had $16.4 million in product revenues--running the e-commerce business diluted its profit margin and cut valuable advertisers out of the lineup because many saw SportsLine as a competitor.

"The mix works really well, but from a financial prospect there's a certain amount of risk associated with entering into an e-commerce business," said SportsLine spokesman Andy Sterner.

Today, SportsLine refers customers to places where they can buy related goods.

For content companies such as SportsLine, adding a commerce component forces the company to spend money on buying, warehousing and distributing the merchandise--at a low profit margin. The dual roles can limit the kind of advertising a site will attract, a problem Women.com ran into with its e-commerce site, She Gets Dressed. Women.com shut it down after finding it detracted from other revenue sources such as banner ads from other deep-pocketed merchants.

For media companies, retail sales can dilute profits margins, which are centered on advertising and sponsorships and can reach 80 percent. Retail sales often have profit margins of 25 percent or less, knocking down the total margin significantly. Retail sales also shut out deep-pocketed advertisers with conflicting products. The cost of funding distribution, infrastructure, merchandise and fulfillment can also be enormous, so what was once an attractive opportunity online can get ugly fast.

Admitting defeat, however, can improve the bottom line significantly for media companies. SportsLine sold its outfit to MVP.com for $120 million, and MVP.com sends traffic to SportsLine in exchange for $10 million annually.

Meanwhile, many e-commerce companies are finding that creating content also holds some perils.

"From the commerce player side, often aggressive development of content undermines the goal to sell products," said Jupiter Communications' Cassar. "The commerce company doesn't want the customer to become too engaged in the content--they want the sale.

"Sometimes people forget to buy a book because they're wrapped up in content. And you don't want all the unqualified traffic that content sites tend to attract," Cassar said.

Bridging the gap
Recently, a cottage industry has emerged to help companies bridge the gap between offering content and selling goods. ePod, Yellowbrix.com, Pop2It, Vitessa and others help publishers link their articles to related products.

Readers of an article about surfing, for example, can click on a link and look at books or videos related to the activity within a pop-up window or microsite. The advantage to the Web site owner is that the customer remains on the site, and the site receives a percentage of any sales from the customer.

Some e-commerce companies, including eToys, Vitaminshoppe.com and eHobbies, continue to add content through expert Q&As, chat rooms and Webcasts. Last month, Barnesandnoble.com said it would incorporate free online classes through a deal with NotHarvard.com.

Selling products and publishing information works for CheckOut.com, but it acknowledges that only a small percentage of people come to the site to get information and buy goods at the same time.

"Embedding commerce within content is not as successful as separating the two," said Ann Garret, a CheckOut.com spokeswoman. "But I don't think a lot of people can survive with just content; you need different revenue streams." In March, the company redesigned its site to separate the e-commerce offerings from the movie information.