By Thomas L. Friedman / The New York Times,
A year ago I wrote a column about Lyle Bowlin, a professor of small business in Cedar Falls, Iowa, who had started an online bookstore out of his spare bedroom. I used his story to illustrate the low barriers to entry for those wanting to compete on the Internet, even against Amazon.com.
After the column ran, Mr. Bowlin's book site -- Positively-You.com -- was inundated with business and e-mail from moms and pops interested in starting e-businesses -- so much traffic it blew out his computer server. Thus inspired, Mr. Bowlin took a leave from teaching, raised $90,000, rented office space, hired employees, and decided to really try to compete with Amazon. Positively-you's cachet was that it donated 10 percent of the profit of every book you bought to the charity of your choice.
Well, this fair-e-tale, which I helped midwife, came to an end a few weeks ago when Mr. Bowlin went out of business. His experience taught him (and me) several lessons about e-commerce:
Lesson 1: Trying to be a mid-size pure-Internet company is really, really hard. Small is O.K. Big is O.K. Medium is tough.
"We had gotten a big burst of free advertising from all the stories about us, and that drove a lot of our early business," explained Mr. Bowlin. "We could not afford to advertise ourselves. Our plan was to approach large nonprofit foundations and encourage them to buy books from us and get the donations. But they took too long to throw business our way. In the meantime, our free advertising from news stories dried up. Then, when our business grew from $500 a month to $48,500 a month, the bank we were using to manage our credit card sales held back payments to us for 60 days. We had gotten so big so fast they were worried that we wouldn't be able to deliver the books, and they would get stuck with a lot of angry card holders. So our costs went up, while the cash flow and free advertising slowed down, and it was hard to raise more venture capital to buy advertising."
People will throw money at Amazon -- on the bet that it will one day dominate the whole world -- but they won't throw it at a medium-size company on the bet that it will be 10th in the world.
Lesson 2: Mr. Bowlin's experience perfectly illustrates the "Vardi paradox." Yossi Vardi is the granddaddy of Israel's Internet industry. He achieved fame and fortune by backing his son and three friends in founding Mirabilis -- better known as ICQ, better known as instant messaging on the Internet. ICQ became a hugely valuable company, because its popular service spread entirely by word of mouth, without ICQ ever spending a dime on advertising.
The Vardi paradox states: "The value of any Web site is in inverse relation to what it costs to attract new users." The biggest cost for most e-commerce sites is ads, so the more people come for free the more valuable your site.
Lesson 3: The barriers to entry into any Internet business really are low -- "as long as you want to remain a small niche player, or as long as you can get free advertising," says Mr. Bowlin. But, as his own case teaches, while it's easy to compete with Amazon.com if you remain small, it's not so easy to be Amazon.com if you want to get big. That takes big dollars.
Lesson 4: The only way to learn the e-business is to be an e-business. Said Lori McConville, the advertising exec who was Mr. Bowlin's main partner: "We learned by doing. The textbooks can't teach e-commerce fast enough. I got an education money couldn't buy -- well, actually, I did pay for it."
Lesson 5: Don't sell Main Street short. The success ratio of the real store that adds the Internet to its real business may be much higher in the long run than those who try a pure Internet store. The reason, says Mr. Bowlin, "is that the established store has loyal customers, and all you are doing with the Web is making it easier for them to spend, even if they move away. But when you are a pure Internet store, you're always buying customers, rather than having a customer who has already bought into you" -- and there is always someone who will buy your customers for more, just one click away.
Lesson 6: Owning an e-commerce site doesn't mean you've married a millionaire. "Everyone assumed that I got rich, and in hindsight my net worth is down from a year ago," said Mr. Bowlin. "I wouldn't trade the experience for the world. But I'm going back to teaching now -- with a lot more knowledge of e-commerce to share with my students."
