When Good Options Go Bad

By BEN ELGIN

On a mild New York City afternoon in late October, dozens

of employees crowded into theglobe.com Inc.'s (TGLO)

22nd-floor recreation room. The somber mood was a far cry from November, 1998,

when the popular Internet community site rocketed to fame with the

fastest-rising initial public offering ever. The ping-pong table was folded up

in a corner and the pool table was covered. The executives wore grim faces--and

not just because the stock had plummeted 98% from those halcyon days, to 80

cents a share. They faced the monumental task of reinventing the company they

had thought was a New Economy star.

Using matter-of-fact PowerPoint slides, newly hired Chief

Executive Chuck Peck laid out the details of the company's recently launched

strategy: moving beyond consumers and providing Net community services to other

Web sites. The massive restructuring, he said, would slash costs and line up

more resources behind the new business-to-business push. But the company's

third-quarter results--a loss of $16.6 million on revenues of $6.7

million--showed the toughest job was still ahead, including laying off 41% of

the staff. ''We've had to overhaul the business,'' Peck says. Now, it's up to

him and the 130 remaining employees to pick up the pieces and reassemble them

into a sustainable business.

It's a scene now playing at dozens of struggling

''business-to-consumer'' dot-coms. In a bid to survive, they're exclaiming,

''B2C? Not me!'' Instead of trying to attract advertisers for fickle Webhead

consumers, theglobe.com is offering concrete, useful services to real, paying

businesses. In recent months, the flow of consumer companies toward B2B has

turned from a trickle to a fire hose. The migrants range from Web delivery

service Urbanfetch, which recently shuttered its consumer-oriented

video-and-munchies service to become a business courier service, to

publicly-held search engine Ask Jeeves Inc., which is drastically reorganizing

its business to focus on providing search services to other sites. Even

e-commerce software makers such as Vignette Corp. (VIGN)

and InterWorld Corp. (INTW)

are veering away from selling to consumer sites in favor of courting mainstream

businesses.

Clearly, one big reason for the switch is that some of

those business models never worked and probably never will. Indeed, much of the

movement appears born of desperation, as wounded dot-coms try to leap on the

next hot trend. Problem is, even that doesn't always work: Skeptical investors

have pummeled some B2B wannabes, such as software seller Beyond.com (BYND),

computer reseller Outpost.com, and online auction house Bid.com International (BIDS)--pushing

each of those stocks below $3 a share. ''Selling Internet ad space is an

entirely different ballgame than selling services to businesses,'' says Bryan

Kester, a project leader with venture-capital firm Redleaf Group Inc.

Grand visions. Still, the redemptive power of the Internet

is that it's a ready-made place to quickly reach and serve new kinds of

customers. With the rapid pace of change on the Net, business-model mutations

are not just possible, but virtually required to stay ahead. ''Most Internet

companies are changing their business models three or four times each year,''

says Patricia B. Seybold, CEO of market watcher Patricia Seybold Group. In the

end, the success or failure of this massive business-model migration may well

determine how powerful the Internet is as a tool for corporate change.

The toughest challenge for companies trying to make the

shift is determining where to jump. It's often difficult to discern between

vibrant business opportunities and flavor-of-the-month Internet fads. When AskMe

Corp. CEO Udai Shekawat launched his knowledge-sharing software company in

August, 1999, he was intent on creating great software. But when the AskMe

knowledge-sharing Web site began seeing a significant jump in traffic and

resulting advertising revenues, several company insiders--including Shekawat--began

harboring grand visions of becoming an online megaportal. ''For a brief time, we

were going to take on Yahoo!,'' he says.

But after execs hunkered down over spreadsheets of revenue

and market projections, they quickly came to their senses. Shekawat pulled in

the reins last January and refocused his techies on writing software.

Corporations began requesting AskMe's knowledge-sharing program for their

corporate intranets. Today, just six months after garnering all of its revenues

from online ads, AskMe gets 90% of its sales from corporate customers. The

privately held company projects it will turn a profit in six months.

Once companies make their decision, they can't waste any

time. The penalties for waiting too long are severe. Theglobe.com, for one,

couldn't decide how fast to move into B2B services, so even as its online ad

revenue stalled, the B2B side didn't pick up the slack. Now, with a severely

trimmed workforce and less than $24 million in cash, theglobe.com's future looks

iffy. Beyond.com also short-circuited its push to sell to businesses, thanks to

a management squabble that kept it from running full-bore with the new plan. One

camp wanted to move exclusively into B2B, but CEO Mark L. Breier, a consumer

brand maven, wanted to stick with consumers. After mounting losses and executive

departures last year, the company finally ditched the consumer push, but now the

stock languishes at 63 cents a share.

By contrast, moving quickly to latch on to B2B

opportunities while they're ripe for the picking pays big dividends. Ask Jeeves

(ASKJ)

first began licensing its software to corporations in 1998, two years after it

began. Now, about half of its 750 employees are dedicated to supporting its B2B

efforts, which pulled in $13.2 million, or 45% of revenues last quarter. The

company expects to be profitable overall by mid-2001, with the B2B side turning

a profit by the end of 2001.

Given the need for speed, it's crucial for companies to

get their staff behind the changes fast. When Paula Jagemann decided last

February to spin off a company to provide business services such as Web-site

hosting from her consumer-focused OnlineOfficeSupplies.com site, she gathered

over 120 employees for several all-hands meetings to spell out her plans. That

helped prevent a mass exodus of talent, limiting its attrition rate to about 1%

annually. Jagemann expects the new business, part of her holding company,

E-Commerce Industries Inc., to pull in $15 million, or half its overall

revenues, this year. Says Jagemann: ''You almost have to behave like a

politician, delivering the same message over and over to your employees.''

Sometimes they have to behave more like the Grim Reaper.

Companies that assume their current staff can adequately address an entirely new

market are flirting with failure. OpenTable Corp., for example, cut its teeth as

an online restaurant-reservation service for consumers. But after tepid results,

executives realized there was a much bigger opportunity in providing Net-based

reservations systems and customer analysis tools to restaurants and hotels. So

last summer, the company overhauled its management team, including a new CEO and

several top lieutenants. But a handful of employees didn't like the moves or the

ensuing cultural transformation that made the company less cool. So new CEO

Jeffrey B. Edwards fired the malcontents. ''We couldn't let that negative

attitude linger,'' he says. Brutal, sure, but that helped persuade investors to

kick in an additional $42 million last month, a hefty sum in the current dot-com

drought.

Tricky maneuvers. Since changing business models isn't

cheap, it's just as key to get financial backers on board early. For instance,

HomePortfolio.com, which boasts a consumer home furnishings site as well as a

B2B services business for furniture manufacturers, needed a cash infusion

earlier this year. Execs made no bones about the fact that their true moneymaker

would be the B2B business, and that their consumer business would fade.

Investors bit, helping HomePortfolio.com raise $48 million in May. ''This isn't

the summer of VC love anymore,'' says HomePortfolio.com CEO Dale Williams.

''You've really got to keep these people in the loop.''

Jettisoning the old business, however, remains one of the

trickiest maneuvers. When you're starving for cash, it's tempting to try to feed

from two different troughs. But it's often tough to juggle two divergent

business models aimed at both consumers and businesses. Even while starting to

court business buyers last year, Beyond.com spent more than $20 million on

consumer-oriented television ads featuring a naked man who was happy he could

order from his clothing-optional home. But button-down business buyers may

hesitate to make purchases from a company whose icon is a guy with no pants.

Says Michael Dunn, CEO of Prophet Brand Strategy, a brand-consulting firm:

''Associations with the consumer brand can often be a liability going forward.''

Crossing the chasm. Indeed, there's no telling which of

these transformations will be sustainable and which will prove to be yet another

harebrained dot-com scheme. Some companies that have tried to switch have

utterly failed: After doing an about-face from a failed strategy to take on

Amazon.com Inc. (AMZN),

for instance, Value America Inc. (VUSA)

tried to offer order-entry and fulfillment services to other businesses after

filing for Chapter 11 bankruptcy protection in August. Too late. On Oct. 20, its

assets were acquired by technology products distributor Merisel Inc. (MSEL)

The companies best prepared to cross the chasm from

consumer to B2B e-commerce, say management experts, are those prepared for

inevitable change from the beginning. For one, that means building e-commerce

systems that can adapt to changing requirements. Timbuk2 Designs of San

Francisco, for instance, had a computer system that allowed consumers to design

their own backpacks. But analyst Seybold points out that it was flexible enough

for retailers to offer the custom-bag service to consumers as well--providing a

whole new revenue stream.

Mainly, the key is hiring flexible people. Some Net

companies ask job candidates questions that focus on how they would react to

turmoil and uncertainty. As the rapidly changing Internet economy continues to

force fast changes in strategy, companies need to know how to roll with the

punches and run with the new opportunities. ''This is where a lot of

change-management situations fall on their butt,'' says Ask Jeeves President

Adam Klein. ''You've got to have people who put the company mission first.''

Even if that mission changes almost as often as employees change their T-shirts.

By BEN ELGIN

Copyright 2001 , by The McGraw-Hill Companies Inc.

All rights reserved.