Buy.Com, Inc.

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Buy.Com, Inc.

27 Brookline
Aliso Viejo, California 92656
U.S.A.
Telephone: (949) 389-2000
Toll Free: (888) 880-1030
Fax: (949) 389-2800
Web site: http://www.buy.com

Wholly Owned Subsidiary of SB Acquisitions, Inc.
Incorporated: 1996 as BuyComp.com
Employees: 150
Sales: $787.7 million (2000)
NAIC: 454110 Electronic Shopping and Mail-Order Houses

With a mission to provide the “Lowest Prices on Earth,” and a trademarked description as “The Internet Superstore,” buy.com Inc. provides a wide range of goods through its http://buy.com web site. As of the beginning of 2002, buy.com offered the following categories of products to businesses and consumers: computers, software, books, magazines, videos, DVDs, games, music, electronics, and wireless. With no brick-and-mortar store behind it, buy.com was one of a handful of pure-play Internet retailers to achieve substantial sales. For the year 2000, revenues reached $787.7 million, a 32 percent increase over 1999 sales. Buy.com was never able to turn a profit, though, and Wall Street drove down the company’s stock price to less than $1 a share, causing it to be de-listed from the NASDAQ in August 2001. Founder Scott Blum, who had left the company before it went public in 2000, re-acquired all of the stock of buy.com in November 2001 for $.17 a share, or $23.6 million. He took the company private, making it a wholly owned subsidiary of his holding company, SB Acquisitions, Inc.

BuyComp.com: 1997–98

Scott Blum, an entrepreneur and junior college dropout, founded BuyComp.com in October 1996 to sell computer products at a discount. Blum was something of a serial entrepreneur, having founded his first company when he was 19 years old. After he sold that company, he founded Pinnacle Micro, a computer memory company that went public in 1991. Blum left Pinnacle in 1996 after the company got in trouble with the Securities and Exchange Commission (SEC) for booking revenues for items before they were shipped.

BuyComp.com was selling about $1 million worth of computer products a day when it changed its name to buy.com in November 1998 and launched its new Web site, www.buy.com. Buy.com offered a wider range of products, including videos, DVDs, books, and computer games, as well as computer products. These products were offered as a result of buy.com’s acquisition of SpeedServe, the Internet division of Ingram Entertainment, which buy.com completed with the help of $60 million in venture capital financing from Japanese software distributor Softbank. Both Ingram Entertainment and Softbank gained a minority interest in buy.com and seats on its board of directors.

With the acquisition of SpeedServe, buy.com set up specialty stores for each product line. It rebranded SpeedServe’s BookServe, GameServe, and VideoServe sites as Buybooks.com, Buygames.com, and Buyvideos.com. In many cases, buy.com was selling products such as DVDs and videos for less than retailers could buy them from distributors or the movie studios. In the future buy.com would follow a pattern of creating specialty stores for new product lines. Before the end of 1998, the company purchased the rights to more than 2,000 domain names beginning with the word “buy.”

Buy.com’s business model required it to sell products at the lowest possible price. In fact, the company did not plan to make money on its margins, the way traditional retailers did. Rather, it hoped to attract enough traffic at its Web site to make consumer goods manufacturers want to advertise there. In order to sell products at the lowest possible price, Blum spent more than a year perfecting search agents that would determine the lowest prices being offered on the Web. Buy.com also did not carry any inventory, relying on wholesalers to ship products directly to its customers.

Buy.com got off to a fast start in 1998. Its sales of $125 million beat Compaq Computer Corp.’s 15-year-old-record of $111 million for a company in its first year.

Buy.com Expands Amid Customer Complaints in 1999

By February 1999, buy.com was selling about $2 million worth of goods a day. For the year, sales rose to nearly $600 million. The company added an online music store that promised every title on “The Billboard 200” for $9.95, excluding 2-CD and box sets. In mid-1999, the buy.com Web site was redesigned to let customers buy products from its different specialty stores all in one shopping cart.

While buy.com was building customer loyalty on the basis of price, it was falling short in the area of customer service. Disgruntled customers began to set up protest Web sites with names like Buycrap.com and Boycottbuy.com. Sm@rt Reseller magazine published a survey by ResellerRatings.com that said more than 60 percent of online shoppers felt that buy.com’s sales staff was not knowledgeable about its products nor was it easy to deal with. More than 80 percent said exchanges were handled in an unprofessional manner, and only about half would recommend buy.com to a friend.

In March 1999, Gregory Hawkins, an executive at Ingram Micro, became buy.com’s president and CEO. As part of an effort to improve customer service and transactions, he invited a group of unhappy customers to the firm’s headquarters in Orange County, where he promised to hire customer service representatives to improve customer relations. One area of particular concern was buy.com’s billing practices regarding out of stock merchandise. Buy.com would bill a customer’s credit card for the purchase, even if the item was out of stock. If the order remained unfulfilled, buy.com would credit the customer’s account, in some cases days or even weeks after the order was placed. Another rift with customers occurred when buy.com made a mistake in listing the price of a computer monitor, pricing it $400 less than was intended. Buy.com refused to honor the erroneous price, which resulted in a lawsuit on behalf of customers who ordered the monitor, and the initial ruling in the case went against buy.com.

Through heavy advertising buy.com built its brand in 1999. Early in the year it advertised on professional football’s Super Bowl television broadcast. In its fourth quarter, the company spent an estimated $25 million on advertising to boost holiday sales. When Nike Inc. ended its seven-year sponsorship of the Professional Golf Association’s developmental tour, buy.com agreed to sponsor the tour for five years beginning in 2000.

Operating as a Public Company: 2000–01

Buy.com’s initial public offering (IPO) took place on February 8, 2000. The company sold 14 million shares at $13 per share and raised $182 million. Investors appeared unaffected by buy.com’s failure to turn a profit and bid the stock up to $35 a share on the first day of trading before it closed at $25.12 a share. For 1999, buy.com reported revenue of $597.8 million, more than four times that of 1998, and a loss of $130.2 million, compared to a loss of $17.8 million for 1998.

Prior to buy.com going public, founder Scott Blum resigned from the company, in part because of his previous company’s problems with the SEC. Hawkins became buy.com’s president, CEO, and chairman. The company’s IPO enabled buy.com to issue 1.12 million shares to the PGA Tour as part of its sponsorship agreement, along with a cash payment of $8.5 million. The agreement also required a 1999 payment of $6.4 million and a $17 million letter of credit from buy.com. When buy.com’s financial problems became more acute in 2001, the PGA Tour attempted to drop buy.com as the primary sponsor of its developmental tour, but buy.com remained the tour’s sponsor in 2002. At the beginning of 2001, buy.com sued the PGA Tour for breach of contract when the PGA Tour named USA Networks’ Electronic Commerce Solutions to design and operate the tour’s online store.

Buy.com’s attempts in 2000 to expand into new products and services were not always successful. Its specialty travel store, called Buytravel.com, operated from February 2000 through November 2000 before shutting down. The company also opened a new business superstore that offered more than 55,000 office products. A new sports store powered by Global Sports offered active wear and sporting goods. buy.com’s License Online Program launched in April 2000 and offered software licenses on Microsoft’s complete line of licensing products. The program was later expanded to include software from other companies, including Symantec, Computer Associates, Executive Software, and Trend Micro.

Buy.com expanded into international markets in 2000 by opening Web sites in the United Kingdom and Australia, both of which were accessible from buy.com’s home page. These proved to be short-lived, however, and the Australian operations were discontinued in November 2000. Following a disappointing 2000 holiday season, buy.com’s operations in the United Kingdom were sold in March 2001 to Britain’s department store group, John Lewis Partnership, who would continue to operate it as a co-branded site. As of the beginning of 2002, visitors to buy.com’s home page were given the option of selecting either the United States or the United Kingdom for their online shopping.

Company Perspectives:

Buy.com, The Internet Superstore and low price leader, offers its approximately 4 million customers nearly one million products in a range of categories including computer hardware and software, electronics, wireless products and services, books, and more. Individuals and businesses can shop quickly and easily at buy.com 24 hours a day, seven days a week. Buy.com was named the “Best E-Commerce Site” by PC World magazine (June 2001), “Best Overall Place To Buy” by Computer Shopper Magazine (January 2001), the No. 1 electronics e-tailer in the PowerRankings by Forrester Research, Inc. (November 2000), and a “Best of the Web” in the computer and electronics category by Forbes magazine (Spring 2000 and Fall 2000).

Wireless phones, service, and accessories were added to buy.com’s product mix in mid-2000 with the acquisition of online retailer Telstreet.com for about $8 million in stock. Buy.com opened its wireless store in October 2000. Customers could shop for cellular phones and accessories, cellular plans, Web-enabled phones, and similar products from companies such as Ericsson, Nokia, Motorola, Mitsubishi, AT&T, Nextel, and Verizon. In the second half of 2000, buy.com began offering wireless access to its Web site through agreements with Spring PCS and AT&T Wireless, and customers with Web-enabled mobile phones could access and shop at the buy.com Web site.

Problems in 2001

Buy.com’s cash position came to the attention of analysts as early as mid-2000, when investment banker Goldman, Sachs & Co., financial magazine Barron’s, and stock market Web site TheStreet.com reported that buy.com was in danger of running low on capital by the end of 2000 or early 2001. In November 2000, Merrill Lynch & Co. issued a warning that buy.com was funding its operations from a dwindling supply of cash. By late November, the company’s stock was trading around $2 a share.

Throughout 2000, buy.com was unable to reduce its losses. At the beginning of the year it raised its prices slightly and reported a positive gross margin of 4.3 percent in the first quarter. For the first half of the year, sales reached $400.8 million, with a loss of $66.4 million. The company’s third quarter net loss was $21.4 million on sales of $190.2 million. A disappointing holiday season resulted in sales of $196.7 million for the fourth quarter, about $23 million under estimates, and a net loss of $36 million. For the year, buy.com reported a net loss of $133 million on sales of $787.7 million.

At the beginning of 2001, buy.com projected it would deliver positive operating cash flow by the fourth quarter of the year. The company planned to refocus on its core products, including computer hardware and software, consumer electronics, and wireless products, plus a general clearance category. Cutbacks and cost-cutting measures included shutting its sports store in March, discontinuing its Canadian store operation in February, and laying off 125 employees—more than half its 230-person workforce—in the first quarter. Buy.com’s cost-cutting measures were expected to save about $70 million annually.

Buy.com’s top management also changed in the first quarter of 2001. Hawkins and chief financial officer Mitch Hill resigned for unspecified reasons, apparently forced out by the company’s board of directors. Donald Kendall, a long-term member of buy.com’s board, became chairman, and board member James B. Roszak was named interim CEO. Robert Price was hired as chief financial officer. E-Commerce Times speculated that the management change could signal a new beginning for buy.com as well as a possible search for a white knight. The white knight turned out to be company founder Scott Blum.

Buy.com’s first quarter revenue of $124.6 million was 40 percent less than the previous year’s first quarter, and the company reported a $45 million quarterly loss. It redesigned its Web site in May 2001 and added an enhanced search engine, new product menus, and a cleaner user interface. The site more heavily promoted the company’s most popular merchandise and increased the visibility of related products and accessories.

Second quarter revenue dipped even more, down more than 50 percent from the previous year to $94.9 million, compared to $193.2 million in 2000. The company’s net loss was $5.7 million, compared to $33.6 million in 2000. More than 80 percent of buy.com’s sales during the quarter were computer hardware and software. With its stock trading below $1 a share, the company was de-listed from the NASDAQ in August. An additional 50 jobs were cut, reducing the company’s workforce to 65 employees. Around this time it was announced that Scott Blum would repurchase buy.com for $23 million, or $.17 a share, and provide interim financing of $9 million. A two-member office of president was created, with CFO Robert Price and Kevin Baxter, senior vice-president of corporate development, jointly serving as president.

Blum wasted no time in cranking up buy.com’s advertising and promotion, even before his acquisition of the company was finalized on November 27, 2001. He brought back the “Lowest Prices on Earth” guarantee, which had been dropped in 2000 as the company’s losses mounted. Thinkbig Marketing Group, also based in Aliso Viejo and partly owned by Blum, was selected to create a new advertising campaign. By the fourth quarter of 2001, buy.com’s cost-cutting measures seemed to be having an effect, increasing gross margins to 12 percent from 7 percent the previous year. According to Forbes Global, Blum predicted that buy.com would turn a profit in the first quarter of 2002.

Principal Competitors

Amazon.com, Inc.; eBay; Priceline.com.

Key Dates:

1996:: BuyComp.com is founded by Scott Blum as a discount seller of computer products.
1998:: BuyComp.com changes its name to buy.com and launches the buy.com Web site.
1999:: Scott Blum resigns while remaining the company’s biggest shareholder.
2000:: Buy.com becomes a public company.
2001:: Scott Blum reacquires buy.com and makes it a private, wholly owned subsidiary of his holding company, SB Acquisitions, Inc.