Virgin Takes E-Wing

Richard C. N. Branson has made a career of confounding his critics. His

Virgin Group Ltd. spans 170 businesses, from airlines and railroads to music

stores and condoms. So when the British tycoon moves online, one shouldn’t

expect just digital music and virtual airline reservations. Try some 5,500

London households paying gas and electric bills online through Virgin’s Web

site since July.

An additional 2,000 Brits tooling around in cars they bought on the Net,

thanks to a new Virgin service launched a month earlier. Then there are the

nearly 2 million people in the country booking train tickets through Virgin–and

1 million using the Web to tap Virgin’s help in managing $4 billion in assets,

including insurance, mortgage, and investment funds. And don’t forget the

$58,000 worth of wine they’re buying online from Branson each week.

The irony here is that Britain’s most colorful and controversial

entrepreneur is no big fan of technology. "I’m not that interested in the

Net, personally,’’ says the 50-year-old founder and chairman, who doesn’t

use a computer and instead keeps copious notes in leatherbound notebooks. What

Branson does like is the ability to use the Net to bring order to his unwieldy

conglomerate. "A lot of people never thought Virgin was very logical

because we didn’t specialize in any one area,’’ says Branson, comfortably

seated in the London townhouse that doubles as his office. "But then the

Internet comes along, and I’m able to pretend that it was all a carefully

crafted plan,’’ he jokes.

Carefully crafted or not, virgin.com is a digital giant in the making. Still

in its first year, the Web site is attracting 1.9 million visitors a month and

ranks as the 12th most popular Web destination in Britain, according to market

researcher MMXI Europe. Now, Branson is trying to build virgin.com into one of

the world’s top portals. He has spent more than $225 million to develop Net

businesses and services, ranging from a global mobile-phone company to

radiofreevirgin.com, a sister site offering software to turn a PC into a digital

radio. Branson believes the Virgin name, known for its hip, consumer-friendly

image and exceptional service will translate well across a rash of Web

businesses.

Branson is starting out on his home turf and then rolling out

his virtual ventures across the globe with foreign partners footing most of the

bill. The Australian Mutual Provident Society (AMP), the country’s biggest

fund manager and insurer, for example, invested $175 million last year in

upgrading and maintaining Virgin’s online financial services arm, Virgin

Direct. All profits are split equally between AMP and Virgin, even though the

Australian company provided most of the funding.

That’s just one of at least half a dozen deals. The

partners are drawn to the fact that Branson splashes the Virgin logo and its Web

address across everything from shopping bags in the Virgin Megastores to the

sides of trains and the tails of planes, saving a fortune in advertising.

And then there’s the way Branson is using the Web to

streamline operations inside his empire. His Virgin Atlantic Airways Ltd. and

record stores now order inventory online as needed, instead of having to keep

huge stashes of CDs and parts close by. Within Virgin’s byzantine corporate

structure, the Net is used to orchestrate activities among the company’s

30,000 employees worldwide. Each business, for instance, has its own marketing

staff that relies on the Net to coordinate advertising spending and strategy

with Virgin’s corporate offices before booking the business with one central

ad agency. The privately held company estimates that the Internet will boost

efficiencies and shave 15% off its overall costs this year, although it declines

to provide specific figures.

Branson is betting the efficiencies will grow as virgin.com

becomes a cyber conglomerate. By putting all of Virgin’s businesses on one

easily accessible site, he can cross-promote the company’s seemingly limitless

offerings. For instance, users might log on to the Web site to buy an airline

ticket on Virgin Atlantic and then check out a mortgage or order a case of wine.

Now, Brits can find another online service from Virgin. On

Dec. 8, Branson launched an auction business available through virgin.com. To

kick off the service, nine Virgin companies will auction flights, cars, wine,

and mobile phones. For the first two weeks, consumers were able to name their

price–since all bidding began at $1.50. Beginning Jan. 31, the range of goods

and services will change weekly. Virgin plans to promote the auction channel

heavily across the various sites that make up virgin.com.

By Kerry Capell in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

Divine overhaul

Some of the cash-rich, market-cap-poor companies are taking the opposite

approach. Realizing their original business plans were failures, they’ve done

180-degree turns and overhauled their strategies. Divine interVentures, for

example, went public as an incubator and started up more than 50 companies. In

February, with its stock market value lower than the $190 million in cash on its

balance sheet, Divine announced plans to remake itself into a software company–CEO

Andrew Filipowski’s area of expertise. It even changed its name to Divine. The

moves have helped a little: The stock of the Chicago outfit has climbed from its

low of $1 a share to $1.69, although that’s still well off the $9 a share at

which the company went public last July.

In December, the California company, Ventro, closed two of its online

business-to-business marketplaces–the Chemdex market that allowed companies to

buy and sell chemicals on the Net and the Promedix market for medical supplies.

Ventro then said it would change its focus to helping other companies build

marketplace sites. So far, they haven’t convinced investors that its new plan

is any more viable than its last one. Its market capitalization is still only

$50 million, even though it has a treasure trove of $235 million on its balance

sheet.

Then there are those companies that are sticking to their guns. They simply

think the stock market is unfairly punishing them and, if they perform well,

their stocks will recover. Consider Neupert at Drugstore.com. "We’ve made

a lot of changes in the last six months–laid off a substantial part of the

workforce, dramatically reduced marketing plans, and reconstructed the business

model to break even," he says. That’s why he’s confident his business

will survive, even though its stock has dropped from $67.60 in 1999 to $1.31.

Autobytel is staying the course, too. The company, with $82 million in cash

and a $41 million market valuation, expects investors will become bullish once

it hits operating profitability in the third quarter. "We are well enough

established that we aren’t taking down marketing costs, nor are we

anticipating any large-scale layoffs," says CEO Mark Lorimer. "After

all, we’re going to post profits in a few (months)."

Despite the risks, cash can be a powerful lure for potential acquirers. If a

purchase can be completed quickly, the leftover cash can help fund the

operations of the surviving company. The women’s site iVillage acquired

Women.com Networks for stock in February, partly to get its hands on its

one-time rival’s $30 million in cash. The two sites combined some operations

to reduce expenses and now should have plenty of money to make it to the third

quarter when the business is expected to begin generating cash. "The deal

that we cut with Women.com makes sure that we have enough dollars for a rainy

day," says iVillage CEO Douglas McCormick.

There may yet be a handful of deals like McCormick’s in the wings. But it’s

a treacherous market these days and potential acquirers will have to weigh the

risks carefully–before moving licketysplit. The free cash is disappearing

fast.

Pallavi Gogoi–BusinessWeek