Boxman, a pan-European retailer of CDs over the Internet, last month became the latest high-profile European e-tailer to face bankruptcy. Investors once glad to throw money at any e-commerce start-up seem to have decided that even for firms with solid business plans, the costs of acquiring customers and establishing a brand are too high.
But just days before Boxman suspended its website, one of its founders, Swedish entrepreneur Ola Ahlvarsson, was helping to launch another. The difference is that the new site, the Big Deal (www.bigdeal.se), doesn't have to worry about establishing a brand name or a customer base. It is a first foray by U.S. fast food giant McDonald's into a new line of business on the Internet: offering everything from travel and book discounts to good deals on toys and gasoline — all over a dedicated website.
So what's the Big Deal? The idea was born when Mats Lederhausen, McDonald's vice president for global strategy, met Ahlvarsson at this year's World Economic Forum in Davos. Ahlvarsson's current company, Result Venture Knowledge International, specializes in carving new Internet business out of long-established international companies. The two brainstormed and settled on a plan to place racks of free postcards in McDonald's restaurants advertising exclusive discounts on products, redeemable only through the Internet. McDonald's, which has partnered with Yahoo for a Swedish trial, is getting revenues from ads on the postcards and on the site as well as referral fees from the partner companies. If successful, the new e-commerce service may be adopted by McDonald's restaurants in other countries and a stand-alone Internet company will be formed.
Ahlvarsson and a growing number of industry gurus believe multinational companies will be the ultimate online winners because they already have established customer bases and strong brand images. "It shouldn't cost blue chips more than about $100,000 and a little bit of time to test a concept," says Ahlvarsson. "The idea is to think big, start small and then move fast."
Established companies have met with failure online because they aren't nimble enough, they worry about cannibalizing existing businesses and they are terrorized by the trial-and-error climate of the Internet. Enter Result and competing ventures such as eVolution Global Partners, formed in April by venture capital firm Kleiner Perkins Caufield & Byers, consultants Bain & Co. and partners of buyout firm Texas Pacific Group; iFormation Group, formed in June by Goldman Sachs, information technology private equity firm General Atlantic Partners and consultants Boston Consulting Group; and London-based antfactory and Andersen Consulting, who announced in July they would team up to pool their expertise and fund targeted ventures. All of these ventures aim to design online businesses for off-line companies, then take a stake in them.
For example, Lloyds TSB wants to leverage its brand and customer loyalty to create online businesses in the financial services sector with the help of antfactory. "The assets [that companies like Lloyds have] are not only extremely valuable, they are critical to the creation of successful businesses," says Harpal Randhawa, chairman and chief executive of antfactory. "I am convinced that the so-called new economy will be owned by blue chips."
That will require that blue chips spin off more than just any online businesses they create. When a new product or service is not part of a company's core business, it can make sense to spin it off into a new company and sell stakes to outsiders, who are often better equipped to exploit the assets and commercialize them more quickly.
Germany's Siemens is a case in point. It developed an internal "knowledge management" network called ShareNet to help its salespeople find and share information about customers and contracts. After one division successfully adopted the service, other Siemens units and outside customers asked if they could buy it. Knowledge management is not a core business of Siemens, so it transferred all the intellectual property rights in ShareNet to a spin-off called Agilience in exchange for a minority equity stake. Co-founders of the new venture, Christian Kurtzke and Olivier Raiman, engineers with knowledge management expertise, plan to use ShareNet as the base of an "e-business transformation engine." They think they can transform the way companies operate by combining ShareNet with business re-engineering.
Big corporations like Siemens have big plans for such offspring. But it is too soon to know if the latest stabs at finding new ways to generate revenue in the new economy will be a big deal.