The e.biz 25 Staying Power?

In the span of just two years, e-business has morphed from

capitalist cure-all to pure catastrophe. The dot-com collapse took down not only

the majority of e-tailers but also a wide swath of software and hardware

companies that catered to them.

The ripples from that disaster had assumed tidal wave

proportions by the time they hit the telecom business, where the Internet bubble

fueled wild overexpansion.

The

changes of fortune took their toll on last year’s BusinessWeek e.biz 25 list

of the most influential people in the industry. Jeffrey K. Skilling, then-CEO of

Enron Corp. won his place on the list by building an online energy trading

operation. Now he spends his days pondering his fate in the wake of his company’s

ignominious demise. Thomas Middelhoff, former CEO of Bertelsmann, has also

exited his company. Now the company is retreating from his Web initiatives,

including his risky bet on file-sharing pioneer Napster and his pursuit of an

online book retailing empire. Stuart Wolff of HomeStore.com is gone, too–forced

out after the online realtor made huge earnings restatements that left it with

billions in losses.

There are plenty of casualties. But there are also survivors

whose strength and vision earn them a spot on the BusinessWeek e.biz 25 list.

Barring further accounting surprises, this year’s stars should have more

staying power–if only because they represent companies that are profitable or

have a large cash cushion. More than that, these 25 Web wizards are proving

that, with the right strategy, a dash of uniqueness, and excellent execution, an

e-biz company can still grow quickly and hope for a sterling future.

Some folks on this year’s e.biz 25 are repeat members who

marked major milestones in the past year. Jeffrey P. Bezos of Amazon.com Inc.

all but buried any doubts about his company’s viability. And Margaret C.

Whitman solidified auctioneer eBay Inc.’s spot as the most profitable dot-com

around.

Others in the class of 2002 represent rising trends. Kim Taek

Jin, founder of Korean online-gaming company NCSoft Corp., and Kaz Hirai,

president and chief operating officer of Sony Computer Entertainment America,

are positioned to cash in on the rapidly growing business of multiplayer video

games on the Net. Pierre Danon of BT Retail PLC has the unlikely job of taking a

stodgy national phone company and turning it into the first major Internet

service provider to build a WiFi high-speed wireless network in Europe.

Hiral is banking on machines that will let players meet on the Net for a monthly fee

Sony Rising

Then there are the execs in established businesses now facing

major hurdles. Both AOL Time Warner Inc.’s (AOL ) Don Logan and T-Online

International’s Thomas Holtrop, the heads of the largest Internet service

providers in the U.S. and Europe, respectively, have to figure out how to

convert their dial-up subscribers to broadband connections, thereby juicing

growth with the lure of features and services that only function well over

high-speed links.

Also on our e.biz 25 list are a handful of new e-tailers,

such as Patrick M. Byrne of Overstock.com Inc., who’s doing just fine in the

virtual retail world as his company cashes in on surplus merchandise sold over

the Net. Byrne’s success points to an online paradox: Even though dozens, if

not hundreds, of e-tailers have gone belly-up, the growth rate of online sales

continues to outstrip that of the brick-and-mortar world. According to the most

recent U.S. Commerce Dept. e-tail statistics, online sales jumped 24%, to $10.2

billion, in this year’s second quarter from the same period a year ago. That

compares with a 2.5% increase in total retail sales.

Total brick-and-mortar sales obviously still dwarf those made

online. Yet the Web’s share of overall U.S. retail sales rose from 1% in the

second quarter of 2001 to 1.2% in the same period of 2002, a 20% increase.

Moreover, some e-tail sectors that had been left for dead are now staging a

comeback. Key among them is the home-and-garden market, where Home Depot, Lowe’s,

and Bed Bath & Beyond are racking up impressive online sales gains.

"The surprise has been the resurgence of some of these categories that

weren’t conducive to online sales originally," says Lisa Strand, research

director at Nielsen/Net Ratings. She believes that much of this is just people

getting used to shopping for so-called high-touch items on the Web.

Cheap-to-free shipping prices, as popularized by Amazon.com, haven’t hurt. Nor

has the lack of many local sales taxes.

The big challenge for Holtrop’s T-online is to figure out how to convert dial-up subscribers to more lucrative broadband

German Giant

The continued vitality of e-biz also reflects forays into new

frontiers over the past year. The increasing adoption of WiFi wireless

connectivity has spurred a welter of startups that aim to provide Net access

anytime, anywhere. Now, such players as BT retail, Intel, AT&T, and Verizon

Communications are exploring that market, having seen sales of wireless routers

rise at a double-digit clip over the last year. With peripatetic consumers and

road warriors alike clamoring for wireless hookups, these services could prove

the home run the big telcos have hungered for.

Online gaming looks set to take off, too, as more of the Web

communities that are needed to make it profitable have sprung up. Two of the

most powerful makers of game consoles, Sony Corp. and Microsoft Corp. (MSFT ),

have designed their machines to let their customers meet on the Net for

multiplayer contests, for a monthly fee. According to game-research firm DFC

Intelligence, 114 million people will be playing games online by 2006. And

research consultancy Gartner Inc. predicts that this category will create $2.6

billion in revenues by the same year. That’s up from less than $200 million in

2002, as both Sony and Microsoft are just launching their interactive gaming

strategies.

In a bigger surprise, paid content has reemerged as a viable

business model. RealNetworks Inc., led by repeat e.biz 25 member Robert D.

Glaser, now has 750,000 subscribers paying tens of millions of dollars annually

to view professional and college sports online–plus music exclusives such as

archived footage from concerts at various House of Blues locations around the

country. And Yahoo! Inc. is compensating for the Net ad slump by adding more

premium, pay-as-you-go services such as mail forwarding and extra-intensive

document searches.

The increasing willingness of Netizens to actually fork over

some cash could presage a new era of cyber-entertainment. During the first

quarter, Web surfers paid $300 million for online content subscriptions,

according to the Online Publishers Assn., a nonprofit trade group that includes

some major print media. That’s up 155% from the same quarter in 2001. Among

the top providers of these subscriptions were three of this year’s e.biz 25

companies: Match.com, the dating subsidiary of USA Interactive’s

Ticketmaster-CitySearch; RealNetworks; and Yahoo!

Most promising of all the emerging trends may be what the

industry calls "Web services." The concept is to use the Internet to

deliver tools such as software or even entire Web sites to consumers and

businesses. Apple Computer Inc., for example, has gotten into the act with

calendar-synchronization programs called iCal and iSynch that go beyond the

simple linking of an electronic planner to a desktop PC. Now you can sync

multiple devices–including Apple’s iPod MP3 players, personal digital

assistants, and laptops–via central servers maintained by Apple. IBM is also

pushing hard into Web services. For example, an IBM customer could rent, for a

day or two, a special set of Web-based human-resources tools. "We can take

what had been a relatively fixed cost for customers and turn it into a more

manageable, variable cost," declares e.biz 25 member Dev Mukherjee, who

oversees IBM’s e-Business on Demand initiative.

To date, consumer acceptance of Web services has been

relatively tepid, something that Microsoft’s William H. Gates III complained

about in a July speech. But Gates and other industry heavyweights remain

faithful to the concept. Of course, the events of the last 24 months have been

enough to try the faith of the hardiest Netizen. But the Net lives–as does its

promise.

By Alex Salkever in New York in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc