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What Works
By:eCompany Staff
Issue: August 2000
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11 companies that have figured out how to make money on the Web.

What works? It seems like such a simple question. After all, businesses first started noticing the Web about half a decade ago. And as we've all heard ad nauseam, "Internet time" makes normal time seem like stop-action photography. So that half-decade must be the equivalent of at least 70 Internet years (as near as we can tell, 1 Internet year = 2 dog years = 14 human years, but that's just a guess). In all that time, companies of various stripes and sizes have been groping to find formulas that make the Web a moneymaker, not a black hole. Most of them are still groping. But there are a growing number that have found formulas that work. Some of their stories follow. And from their successes, large and small, we've distilled some basic truths about how to make the Web a profitable part of any company's business strategy.

Ah, profits. The Internet appears to offer everything in abundance except profits. Surprising as this may sound to some Internet CEOs who have become accustomed to bathing in red ink, a successful business is generally defined as one that produces profits. (Really. You can look it up.) Fortunately, they are now being reminded of this fact by investors spooked by last spring's stock market rout. This is healthy. "In the past," notes Credit Suisse First Boston analyst James Marks, "the capital spigot was opened so wide that irrational business models were getting as much money as the rational ones, and they were forcing out the rational ones because they were willing to have negative profit margins."

Now investors are saying profits count. It's no longer possible for public Net companies to postpone profits indefinitely as part of a dubious strategy to win customers. Tim Draper of Draper Fisher Jurvetson explains the relativistic logic of the venture capital community: "When there was a lot of money available, the right thing to do was to gain market share. If capital is going to be tight, the right thing to do will be to scale down marketing and achieve profitability sooner." That's good news for established companies with deep pockets. "Who would have thought six months ago that access to cash would be so important?" chuckles John Barbour, CEO of Toysrus.com. Management strategist Gary Hamel has a slightly darker view: "Right now the bricks-and-mortar guys are laughing up their sleeves," he says, "but what if the real lesson is that the Internet is the implacable, forever enemy of profits itself?"

Yes, the Web is unforgiving. It strips away time, space, and all the other attributes of the physical world that cloak the basics of price, quality, service, and brand. But that does not mean profits are out of reach online, not at all. It just means that companies have to be more intelligent about the Web. Already some are figuring out ways to mine the Net for profits, and we're not talking just about the porn sites and the infrastructure firms like Cisco Systems and Sun Microsystems. Set them aside and you'll still find some companies that actually seem to get this Internet thing. There are the big names of Web profitability -- America Online, eBay, Schwab, and Yahoo -- but there are also plenty of little companies that have figured out how to turn a profit, as well as more established companies that have discovered ways to use the capabilities of the Web to expand their business or offer customers better service.

What do these companies have that the rest of the dotcom world doesn't? Well, they have clever leaders and sound business plans. But they also have insight: In the past five years, they've been watching and learning, even as the costs of running an operation online have come down fast. If you look at the companies that are turning profits on the Net (or are close), a handful of lessons emerge.

1. Get Big Fast and First
If Yahoo can teach us one thing, it's that size matters. The first-mover advantage it gained early on gave it a sheer scale of operations that ensures that others will be hard-pressed to catch up. Yahoo is one of the few websites making money from advertising, simply because it attracts so many visitors. And it is able to derive even more forms of revenue by pointing its traffic stream to different parts of its site. Another function of reach is that as more people use a service, the more useful it becomes. eBay is the classic example of this so-called network effect: As more and more people participate in eBay's auctions, they bid up the prices, which in turn attracts people with better products, which attracts more buyers.

This same dynamic is true for all Web marketplaces, whether they are consumer-oriented or business-to-business exchanges such as Altra Energy's online marketplace for energy or DoveBid's capital asset auctions. The network effect is also behind the latest rage in Japan, NTT DoCoMo's I-mode Web phones. Just like a fax machine, the value of owning an I-mode phone increases with each new friend who gets one.

But while size matters, there is one important caveat to bear in mind:

2. Don't Overpay for Customers
Any venture capitalist will tell you that the key to success on the Web is to pay as little as possible to attract new customers. The problem with most consumer Web businesses is that they might spend $100 in advertising to get a customer who will never order more than, say, $40 worth of goods. Drugstore.com fits this bill almost perfectly. In the first quarter of this year, it spent $29.9 million on marketing, or $101 for every new customer. But in the same quarter, each of its customers spent on average less than $23. Or consider the sorry tale of software seller Beyond.com. After blowing through $81 million on sales and marketing in 1999, it finally came to its senses and canceled $24 million in future advertising contracts (and had to pay $11 million to do so). The rule of thumb is obvious: It's probably not a good idea to spend more on your customers than they are likely to spend on you.

One of the reasons everyone is so gaga over network effects is that they can induce your customers to do your work of getting even more customers, saving you the expense of costly ad campaigns. The cognoscenti call this strategy "viral marketing" because of its hoped-for effect of infecting everyone with the uncontrollable urge to visit the site where the virus started. A startling recent example of how this can work is a little-known company called Dialpad that offers free long-distance telephone calls over the Web. Since last November, it has signed up more than 7.5 million registered users with practically zero marketing. Think about it: Every phone call someone places through Dialpad's website is a personalized marketing call from a friend or acquaintance who inevitably will brag about the fact that he is calling for free over the Web. Dialpad has yet to figure out how to make money, but the company got its marketing right.

3. Let the Data Be Your Friend
The Web is like a giant experiment. Everything is quantifiable. Everything is measurable. The Web, at its base, is about the electronic transfer of data, and therefore companies doing business online have access to more information about what their customers want than ever before. Companies can track customer demand from the very point that it begins to surface. More important, a company can now change its marketing message, its product, even its entire business model and see instantaneously how customers react. Those who use their data wisely are the ones that progress fastest.

Perhaps the wisest approach is to take that data and personalize the customer's experience in ways that were never before possible. "What makes the Web work is the ability to remove a layer of expensive personal interaction," contends Jamie Ellertson, chief strategist of BroadVision, which sells e-commerce software that tailors websites to individual users. The best commercial websites use their knowledge of what a customer has done in the past to sell more stuff to that customer in the future. Harry and David's website, for example, keeps a list of what fruit baskets you bought for your friends and family last year, links you up to its inventory database so you can see what is in stock, and lets you order those same baskets again in a split second. No salesperson can be as knowledgeable or efficient.

4. Don't Forget the Real World
There are some companies, like eBay and Yahoo, that could exist only on the Internet. But most companies doing business online have to cope with real-world competitors. So it's not enough to have a snazzy website: You have to be able to offer customers a better experience online than they'd get in the off-line world. As Tod Francis, a partner at venture capital firm Trinity Ventures, puts it, "If you are simply offering someone a product they could get four blocks down from their house but will have to wait four days and pay for shipping, I don't know that you have improved anything."

Old-guard companies are hitting upon creative ways to make the Internet work with their physical operations and thereby expand their businesses dramatically. Those that find ways to separate the information from the physical aspects of their products will do the best. For instance, Circuit City allows people to go onto its website, compare prices and features, and place an order (all of which are easier to do online) and then pick up their TV or stereo at a retail store that afternoon. And the liquidation firm DoveBid combines its real-world auctions of excess factory and office equipment with live webcasts of the events, which more than doubles the number of participants. This brings us to our final -- and perhaps most surprising -- lesson.

5. Dinosaurs Rule
Old-line companies are supposed to be the dinosaurs of the Web -- outpaced by the fleet-footed startups. But when you come to think of it, many of the off-line companies that are only now getting religion about e-business may be in the ideal position to dominate the Web. They already possess many of the things that the dotcoms crave: brands, loyal customers, reasonable marketing costs, and profits. Enron is the perfect example. It trades electricity, natural gas, and bandwidth, but didn't go onto the Web until last November. Today, more than half of its transactions are done over the Web -- $1.5 billion worth of commodities a day. "We are knocking out 80 percent of our back-end costs for each transaction by doing business online," says Enron chairman and CEO Ken Lay. Or consider Toysrus.com, whose online sales out of the gate last year were $51 million -- a third the size of eToys's despite a late start and an advertising budget one-sixth the size of eToys's. Today, eToys's stock is floundering and Disney has pulled the plug on its own startup, Toysmart.com, but Toysrus.com is expanding its staff and has become the most visited toy site on the Web (although eToys still has more sales). Neither is yet profitable online.

What all of this points out is that Internet companies don't do business in a vacuum. Remember rule number one, how important it is to get big first? In a sense, Toys "R" Us got big first; it just didn't do it online. But now that it is moving online, it can throw its weight around in that arena as well. "When I came into this job six months ago," notes Toysrus.com CEO Barbour, "everybody was talking about Amazon's first-mover advantage and eToys's pure focus. But over the holidays we saw that brands really count on the Internet." Barbour gets to piggyback on top of his parent company's advertising and its $7 billion of toy purchasing power. And parents who want to return a toy ordered online may do so at a nearby store instead of dealing with the hassle of sending back a bulky package. It is telling that the competitor Barbour fears most is not Amazon or eToys, but Wal-Mart.

Well, there you have it: eCompany Now's five-step primer for how to create fabulous wealth on the Web. What are you waiting for? Go out and make your billions!

OK, we admit it, following these rules will not be quite enough; it also takes great products, an intelligent allocation of resources, and a certain amount of luck. These are still pioneering days, even after 70 Internet years. The 11 companies we profile on the following pages didn't follow a trend or hop on the latest bandwagon -- they studied the marketplace, saw an opportunity, and made it work. By this we mean that, for the most part, the Web has already begun to boost their bottom line. The companies range from hot-sauce vendor HotHotHot to Dell Computer, from porn site Danni's Hard Drive to chipmaker Intel. Each profile tries to capture exactly what worked for each company, and to extract more lessons that we can all draw upon. --Erick Schonfeld
NTT DoCoMo
Japan's largest cellular-phone carrier has a monster hit on its hands with its I-mode phones. Its secret? It didn't try to be a gatekeeper.

If there ever were any doubts about the prospects for the wireless Web, the I-mode phone has silenced them. Since NTT DoCoMo, Japan's largest cellular-phone carrier, introduced I-mode just 18 months ago, 25 percent of its 30 million subscribers have signed up for the service. The phone allows subscribers to access more than 15,000 websites that have been specially adapted to be viewed on a phone screen, so users can read and send e-mail, check stock quotes, look up train schedules, get maps, buy movie tickets, and download new ring tones. Teenagers love it.

But what is especially notable about I-mode is the cash it's generating for NTT DoCoMo. On average, I-mode phones bring in 30 percent higher revenues per subscriber than phones with plain-vanilla voice services. Not only are I-mode subscribers paying extra for Web services, but DoCoMo has found that they're actually making more phone calls. NTT DoCoMo also makes money by charging a 9 percent transaction fee every time someone uses I-mode for e-commerce -- say, to buy a movie ticket or perform a banking transaction. Some of the e-commerce services are rather unusual, like a cartoon that is beamed directly to your phone. Thanks in part to I-mode, DoCoMo's profits surged 23 percent last year to $2.4 billion on revenues of $35 billion. This year, Merrill Lynch estimates that the service should add an extra $2 billion to the company's cell-phone revenues.

One key reason for I-mode's success is a clever bit of strategy on DoCoMo's part: Rather than try to be a gatekeeper for companies hoping to reach its customers, DoCoMo made it easy for outside Web developers to make their sites I-mode-friendly. The company realized that the more websites that can be seen with its phones, the more customers it's likely to sign up.

Clearly, the strategy is paying off: NTT DoCoMo's customer abandonment rate -- the bane of cell-phone carriers -- has dropped considerably among I-mode users. It's scarcely surprising, then, that in the wake of I-mode's success, other mobile phone carriers worldwide, from Sprint PCS to Vodafone, have jumped on the wireless Web bandwagon.
-- Erick Schonfeld
Dell's Premier Pages
Dell has made friends with its corporate customers in a counterintuitive way: by reducing their options.

Dell Computer is known for building PCs to order, customizing computers to suit a buyer's every whim. But there are times when choice isn't a good thing. Think, for instance, of a large corporation: If every single employee has a computer that's configured slightly differently, it becomes mind-numbingly difficult for the tech department to tie them all together. And if employees are given an endless array of choices for their desktop computers, you can be reasonably sure that some employees just might order up a few more options than their jobs actually require. ("But I really need the stereo speakers and DVD-ROM drive in order to type my memos! Honest!")

This is precisely why Dell has had such success with its Premier Pages, which are special ordering sites customized for big customers like Toyota, Monster.com, and the Toronto District School Board. Dell may offer millions of computing configurations, but a Dell Premier Page might allow a company's employees to choose from only 1,000, or 100, or 1. (It also allows a buyer to configure a custom PC, pending approval from the company's purchasing department.) By placing limits on ordering options, Dell keeps its corporate customers' accounting departments happy, and their IT departments sane.

It also keeps Dell's coffers full: The company sells about $40 million of computers and accessories online every single day -- and corporations, government agencies, and educational institutions make up about two-thirds of that business. Virtually all of the orders flow through Premier Pages, which means that the pages handle billions of dollars of business each year. When Premier Pages began in 1996, Dell employees built them by hand, but the process has long since been automated. Now there are more than 46,000 customers with Premier Pages to call their own. One customer, online job board Monster.com, used its Premier Page to place a $500,000 order for Dell servers in January.

Dell continues to spend money to develop Premier Page software -- the program recently was translated into 14 languages -- and it's paying off in all kinds of unexpected ways. Dell saves $8 for every phone order its sales reps don't have to take -- annual savings run in the tens of millions of dollars -- and its factories gain efficiency because they can start building a computer 19 minutes after an online order comes in. Chairman Michael Dell points out that Dell's move online has let the company raise its return on invested capital -- a measure of a business's efficiency -- 10-fold, from 30 percent in 1993 to 292 percent this year.

But the real gain for Dell comes in tighter customer relationships. Since it extended Premier Pages to small businesses, for example, Dell has found that many use Premier Pages as a de facto procurement system. Meanwhile, larger companies want to tie their purchasing systems directly into Dell's. And customers look at the success of Premier Pages online, and turn to Dell for consulting on their own e-businesses. "People have been saying, 'Set up our company the way you're set up,'" says Patrick Vogt, a Dell Online director.
--Owen Thomas
HotHotHot
Marketing? Who needs marketing when you've got insane hot sauce?

Its name is HotHotHot.com, and its products include Mean Devil Woman, Ass-in-the-Tub, and Jamaica Hellfire. That might sound like a thumbnail description of a porn site, but HotHotHot is actually a purveyor of hot sauce -- and one of the few e-tailers that's turning a profit. Its secret recipe: Rather than plow through millions of dollars hoping for a big score, HotHotHot has frugally exploited a small niche for modest profits.

The site started in 1994, when Perry and Monica Lopez, the owners of a little hot-sauce store in Pasadena, Calif., decided to branch out online. Three years later, they sold the business to Golden Holdings, a small producer and distributor of gourmet foods. Ben Arora, HotHotHot's VP for Internet operations, says the site has never advertised on TV, or done much advertising elsewhere, for that matter. Instead, the site relies on word of (burnt) mouth, like when a visitor orders, say, Blair's Sudden Death Jersey Shore hot sauce and tells a friend. Customer acquisition costs are therefore limited to the expense of running a bare-bones site with a few drawings and icons directing visitors to a product catalog, which lists inventory by heat level, country of origin, ingredients, and name.

Arora says the Lopezes were grossing about $7,500 a month online, and his company now averages revenues of about $25,000 a month. That's a pittance compared with what most sites take in, but then again, most sites can't boast HotHotHot's gross profit margins, which are consistently in the 40 to 45 percent range. With a tight rein on marketing and other costs, "we do make a profit," Arora says. "We don't want to fall into the same trap as the dotcoms who are spending more than they can ever earn." He estimates his company spends about $400 a month on maintaining the website, including paying a hosting service, Brave New World. In addition, HotHotHot has an online staff of about a half-dozen employees, and it plows $20,000 to $25,000 into new features or services at six-month intervals.

HotHotHot's biggest challenge will be staying profitable while competitors swarm into its niche. When the Lopezes started, hot-sauce sites numbered about 20; now, it's more like 300. HotHotHot competes by offering custom-blended sauces, and by stepping nimbly into business-to-business commerce: Its sales to other distributors, stores, and restaurants now account for 60 percent of total revenue. But the most important way the site differentiates itself is simply this: It offers the hottest products in its niche. Its list of the most scalding sauces is headed by its best-seller, DOA-Cyanide Hot Sauce, which is so concentrated that there are 144 servings in every 5-ounce bottle. Arora says, "We understand what our customers want." -- Greg Hill

Consumer Reports
The venerable magazine has pulled off a rare trick: selling content on the Web.

Venture online and you can find just about any magazine for free. Time, Newsweek, eCompany Now -- folks seem to have determined that none of them are worth a dime. But there is one major exception to this rule: Consumer Reports. At present, its site has 420,000 subscribers; two-thirds of these have annual subscriptions, which cost $24 (or $19 for those who subscribe to the print version). The remaining one-third subscribe on a monthly basis, which costs $3.95.

So why are people willing to pony up the cash for consumer advice when other sites offer such information for free? The reason is simple: Consumer Reports has a vast collection of product reviews that are without peer, most notably in the area of used and new cars. (If you're about to shell out thousands for a car, what's $24 for a subscription?) In November, it launched an e-ratings service that evaluates shopping sites, and it also hosts forums where subscribers can ask experts for advice. The site's customers must be pleased: The number of subscribers has increased 50 percent in the last year.

As befits a nonprofit organization, Consumers Union, which publishes Consumer Reports, is coy about how much money the site takes in. By our calculations, it must be making at least $6 million a year in subscription fees. If Consumers Union were a normal business, that would be more than enough revenue to show a profit. Joel Gurin, executive vice president of the organization, declines to comment on the site's earnings; he will say only that "the website helps us to keep operations stable and solid." Or, in his magazine's parlance, the site is VG (very good). -- Caroline Waxler
EasyJet
The European airline started offering tickets online just over two years ago; today, it sells 70 percent of its seats that way.

When Stelios Haji-Ioannou launched EasyJet in 1995, he didn't even consider online bookings for the startup European airline. But the British entrepreneur's new venture was custom-fit for the Net. Modeled after Southwest Airlines in the United States, EasyJet took reservations only on its own phone system and never paid a pound in commissions to travel agents. In October 1997, however, a staff member persuaded Haji-Ioannou to launch a website. At first, EasyJet used the site as a PR device, mainly to give blow-by-blow accounts of its campaign against its huge rival, British Airways. In order to measure the site's impact, the company created a new toll-free reservation number that was given out only online. Calls to that number soared immediately, and Haji-Ioannou became an Internet convert.

In April 1998, EasyJet began offering online reservations, and the site quickly became an integral part of the airline's business. Just 19 months later, in November 1999, the company sold over half its seats online for the first time; by June it was regularly selling 70 percent of its 120,000 weekly tickets on the Web -- a volume well ahead of plan. (EasyJet has overtaken its onetime role model: Southwest books only 27 percent of its tickets online, and it still pays travel agents.)

Why are customers rushing to EasyJet's website? For one thing, the airline offered $8 discounts to customers who book via the Web. It's also making it harder to place phone reservations, says James Rothnie, EasyJet's director of corporate affairs. In May, Rothnie notes, EasyJet started requiring customers to use the website for bookings that were more than two months in advance.

There's a good reason to herd customers online: It saves EasyJet a ton of money. The basic software for online reservations costs only $2 million, and the company has a small in-house tech staff of four people dedicated to the Web. (Its software supplier, Open Res, deployed a team of consultants to get it launched, but EasyJet paid them upfront for their work to avoid an annual license fee.) This small investment has had an enormous payoff: Rothnie estimates that if the airline took orders only via the telephone, it would have to build a new call center and hire an additional 400 telephone sales reps; the staffers alone would cost the company some $16 million per year. EasyJet pays its in-house agents a $1 commission for every flight they sell on the phone, a cost it avoids with online sales; and online flights are ticketed electronically, with an e-mail confirmation.

So, does EasyJet dream of one day selling every single ticket via the Web? "I reckon we can do it next year, and just turn [the phone bank] into a customer-service center -- but that's speculative," says Rothnie. "Certainly, if we were starting an airline today, it would be Internet-only for orders." -- Owen Thomas

Danni's Hard Drive
Why is Danni Ashe's soft-core porn site so popular? Duh.

Sex sites are among the most profitable on the Web, and it's easy to figure out why: When it comes to a choice between coping with the raised eyebrows of your fellow shoppers at the convenience store, or scoring the same fare with a few mouse clicks on your PC, there's no contest. People spent $1 billion last year to look at dirty pictures on the Internet, according to Sextracker, a Web survey company that specializes in adult sites. There are half a million such sites out there, but only a few have managed to establish big names for themselves -- and one of the biggest names belongs to one of the mildest sites, Danni's Hard Drive.

Exotic dancer Danni Ashe started the site in 1995 with the simple aim of promoting her live performances. She spent $8,000 on computer equipment, scanned some pictures of herself into two computers, and connected them to the Internet. These days, Ashe is too busy to dance; instead, she presides over DHD Inc., a full-fledged Internet firm with 42 employees. Her site now features dozens of other models, offers video and audio streaming of adult content, and attracts about 3 million visitors a month. Of those visitors, 27,000 pay $19.95 per month for access to the site's Hotbox Club, a password-protected area with additional content. "I make money through subscriptions," says Ashe. "It's the only business model that works." The site reaps $6.5 million in subscription fees a year. Ashe says her net profit margin is around 35 percent, leaving her with more than $2 million -- although she has plowed some of that money into a newly constructed $1 million photography and video production studio.

But why would anyone plunk down $240 a year for Ashe's site, while tens of thousands of other adult sites offer their wares free of charge? "People pay for the fact that I organize the content for them," she says, and perhaps more important, she plays the Web porn equivalent of the welcoming madam, which adds to the site's appeal and branding in a special way. Andrew Edmond, Sextracker's chief executive, says the mildness of the site's content makes it stand out amid a sea of ultra-raunchy hard-core sites. "Overall, it's a very captivating layout that you really want to spend time in," says Edmond.

Another key to Danni's site: fresh goods. While most adult sites buy (or steal) pictures and video from other sites, Ashe produces all of her content in-house. Plus, she makes sure there's plenty to look at. "If you want to sell digital content," Ashe says, "you've got to be offering more than any person could look at in a week." -- Josh McHugh

Enron
This seven-month-old site has seen $80 billion in transactions.

"We currently have the largest e-commerce platform in the world," says Enron chairman and CEO Ken Lay. Not bad for a company that didn't get on the Web until Nov. 29, 1999.

Since then, it has done more than $80 billion worth of transactions over the Web. But Enron does have a bit of an advantage: It trades commodities such as natural gas, electricity, and bandwidth -- items for which corporate customers always have a big need. Just like a Wall Street firm that makes a market in particular stocks, Enron buys commodities from producers, builds up a book of assets, then turns around and sells them to businesses that need them. By launching EnronOnline, it found a more efficient way to create markets in those commodities. Now, over half of all the company's transactions are done on the Web, which adds up to about $1.5 billion per day. Of course, this startling number is the value of the commodities that Enron trades, not the revenues to Enron itself. And there is some double-counting going on because, as a market maker, Enron is both a buyer and a seller. But it's still a staggering amount of e-commerce.

EnronOnline is a vast improvement over the company's old system, through which it takes trades over the phone. Off-line customers have to make innumerable calls to find out the going rate for commodities, but online ones can just log on to the site. Since pricing information is so much more readily available, people have found more opportunities to trade, and Enron's volume has gone through the roof. In the first quarter, for instance, the amount of gas that Enron traded spiked 39 percent from the quarter before, while the amount of electricity it traded increased 17 percent. Lay attributes much of these gains to EnronOnline. "We are finding new counterparties we have never dealt with before," he explains. All of this activity contributed to a terrific first quarter, in which Enron's total revenues soared 72 percent to $13 billion and profits grew 34 percent to $338 million. Whatever EnronOnline's actual contribution to those results, you can bet that it more than paid for the $10 million investment required to get it up and running. The Web has also made it easier for Enron to tailor its commodities to individual buyers' needs: If you're a manufacturer who needs to buy gas in November and sell electricity in February, Enron can create a financial product to let you do just that. Currently, it offers more than 800 such "structured products."

The products are an ideal example of what Enron is able to do better than ever before because of the Web: It takes the information that used to be tied up in the transaction of buying and selling commodities -- who wants what when -- and repackages it as a new financial product in its own right. Enron has always had formidable physical assets for the efficient delivery of energy and, more recently, bandwidth (32,000 miles of gas pipes and approaching 14,000 miles of fiber-optic cable). Now, by establishing a system that lets information travel more freely, it's making its gas and electricity travel more freely too. -- Erick Schonfeld

Intuit
The financial-software company went online -- and found plenty of new customers waiting there.

When the financial-software company Intuit announced in late 1996 that it planned to sell its private banking network and concentrate its energies online, the move did not sit well with investors. The conventional wisdom back then was that Intuit's online business would simply be a costly way for the company to cannibalize its boxed software sales. And there was the small matter of selling off that network: "We had told investors the network was our future, and then we sold it," says company co-founder Scott Cook. "So, not surprisingly, they wondered about our future." Intuit's stock price, which was already languishing at $10 a share, dipped into the single digits and stayed there for much of the following year.

As it turns out, the conventional wisdom on Intuit was wrong. Far from competing with one another, its online and off-line businesses complement each other nicely. This year, an astonishing 80 percent of the people who used the online edition of TurboTax, for example, were brand-new customers, not users of the shrink-wrapped software version who had shifted to the Web. But Cook says that's just gravy. The true objective of going online, he says, is simply to allow the company to serve customers in the way that is most convenient for them. "If it were 50 percent new, we'd do the same thing. If it were 20 percent new, we'd do the same thing," he says. "We give them whatever flavor they like." As Credit Suisse First Boston analyst Lise Buyer puts it, "They're not trying to make customers think in new ways. They're trying to use the Web as a tool to make existing businesses better."

The company is already seeing a reward for those efforts: According to Cook, for the current fiscal year (which ends in July), three of Intuit's eight online divisions will be profitable. What's more, the company expects its Internet businesses to account for a quarter of its total revenues, up from 15 percent last year and 8 percent in 1998. For now, Cook declines to offer a date when the rest of Intuit's Web businesses will show a profit. But that day may be in sight: During Intuit's first three "Internet years," the company spent about $250 million on Internet research and development and took in only about $190 million in revenues from the Web. But add in fiscal 2000, and that picture goes from red to black; the company should spend about $140 million in Internet R&D while bringing in $250 million from the Net. According to Prudential Securities analyst Bryan Keane, Intuit should be Internet-break-even by next summer. And that's only part of the story. "Ten years from now," predicts Keane, "this will be a pure Internet company." -- Ian Mount

Harry and David
It's the reminders that count when it comes to gift-giving online.

Point your browser to http://www.harryanddavid.com/ and search for "pears," and you will find the following bit of prose: "From the sunny side of the equator," the site gushes, "pampered on the tree, rushed to you sweet and juicy. This rarest and most elusive pear variety ... is custom grown to our demanding specifications" and so on. You may scoff at its turgid pear-worship, but it must be working: Harry and David, unlike most e-tailers, is actually making a profit on the Web.

Part of this has to do with the fact that most of those pears are purchased as gifts, and gift shopping is one of the things the Web is best for. After all, if you're shopping for yourself, it's a pain to have to wait for your purchase to arrive, but if you're sending someone a long-distance gift, hey, you were going to have to ship it anyway -- why not let the site do all the work? Harry and David, a gourmet-foods catalog based in Medford, Ore., has long been popular among gift givers, so it made perfect sense for it to go online. In 1996, Harry and David launched its website, and since then, the Internet has accounted for more and more of its business. Last year, about 8 percent of its customers placed their orders online, garnering revenues of about $27 million; the company anticipates that 15 percent of its sales this year could come via the Internet. Harry and David declines to supply specific figures, but given the small size of the staff it has assigned to its online business (it started the year with 3 staffers dedicated solely to the online effort, and now has 40) and the fact that unlike most e-tailers, it sells its wares online at full retail price, it's hardly surprising that the company says the site is profitable.

Harry and David's secret is that once you've used the site, it musters all the information it has stored about you to make sure you do it again. Let's say you sent Uncle Joe a Royal Fruit Basket for his birthday. The crafty folks at Harry and David will send an e-mail when Joe's birthday rolls around again, complete with a reminder of what you bought him last year and gift suggestions. An online address book keeps his info handy, and if you want to make sure your gift choice is in stock, there's real-time inventory. And what if you haven't received a thank-you note and you're getting nervous? Try the package-tracking link.

These enticements seem to be working: More than half of the site's business is from repeat customers, and its conversion rate -- the percentage of people who come to the site and actually buy something -- is 9 percent, well above the 2 to 3 percent that many e-commerce sites average. "This is an area where we have 65-plus years of experience. We are not the new kids on the block when it comes to servicing customers," says spokesman Bill Ihle. -- Caroline Waxler

DoveBid
An old-line liquidation firm has discovered that online auctions aren't just for tchotchkes.

The gavel comes down hard, and third-generation auctioneer Ross Dove, CEO of DoveBid, yells out, "Sold to the bidder on the Web for $28,000." Ross just moved a DNA sequencer. He is at a recently shuttered pharmaceuticals laboratory in Palo Alto, selling off its equipment to the highest bidder. Sometimes it's one of the 250 corporate buyers crowded into the facility, but sometimes it's a buyer in Frankfurt or Beijing logged on to the auction from the Web. By the end of the day, DoveBid has sold some $5 million worth of equipment and collected about $1 million in fees -- half of that from online sales.

DoveBid is a venerable firm that has been auctioning off corporate assets since the Depression (during the 1980s it auctioned off the assets of Osborne Computer and Drexel Burnham Lambert), but over the past year, it has brought its off-line customers online in a big way. Nearly every one of its auctions is touted on its website and webcast live. As Dove explains, this simple shift has boosted business considerably. "The cost of [bidding via a] webcast is much lower for participants," he says. "And we are selling 50 percent of our assets to remote bidders, so we know we are getting better pricing." Clients seem to like the change: This year, DoveBid will hold about 250 live auctions, up from 80 last year. In addition to the live auctions, companies can post items for sale on a part of DoveBid's website that is active all the time, like a corporate eBay. The company generally collects a 10 percent transaction fee on every sale it makes, online or off.

DoveBid lost $4 million last year on sales of $12 million because it's investing heavily, not just in the Web but also in marketing and recent acquisitions of specialized off-line auction houses. Ross Dove and his brother Kirk, who is chief auctioneer, plan to spend a total of $10 million this year on technology but are committed to returning their company to the black by the end of next year. Says Bill Burnham, a board member and partner in Softbank Capital Partners, which is an investor in DoveBid: "The company is run by old-line people who don't want to lose a lot of money." And in the Web they have the key to unlocking a far bigger business than what DoveBid was just a year ago. This year the company is on track to hit sales of $70 million, up from just $12 million last year. More than half of its total revenues, the company says, will be due to the Web. -- Erick Schonfeld

Intel
The chipmaker's site saves customers precious development time.

One billion dollars a month. Every month Intel brings in more than $1 billion of revenues, on average, over the Web. That's not too shabby for a project that was started just two years ago as a way to get small and medium-size manufacturers and distributors overseas, especially in Asia, to move from a fax-and-phone relationship to an electronic one. Since then, the number of Asian customers that do business with Intel over the Internet has grown from 16 to more than 170 (and Asian sales have grown 36 percent to $8 billion). "The Web has enabled us to take on more customers without growing head count," says Sandra Morris, Intel's director of e-business.

But what started in Asia has now spread all over the world. Today, 10,000 individuals at 400 companies have personalized websites to help them order microchips, check the status of those orders, and collaborate with Intel engineers. Even customers and suppliers who have long had EDI (electronic data interchange) links to Intel are switching over to the Web because it allows them to manage their inventory in a very detailed way and on a real-time basis. Intel documents these efficiency wins with the painstaking precision you'd expect from a microprocessor maker. Sales-support folk, for example, now push less paper, which means that they are spending 48 percent of their time doing more important stuff like analyzing sales trends, a big jump from 20 percent just three years ago.

Even more dramatic are the benefits for Intel's customers. About 20 percent of all online transactions are now happening after normal business hours. And engineers at PC makers are now able to use the Web to get confidential information about upcoming chips. In the past, for security reasons, Intel had to send confidential chip-design documents through an arduous process that involved hand-delivering them to whichever engineering teams needed to see them. Simply getting the documents could take weeks. Now all the documents are available on the Web, though only those with clearance and the right passwords can access them. According to Intel, three out of four engineers who use the site say they believe it shaves a full week off their product development cycles -- no mean feat in the cutthroat high-tech field, where a one-week delay can mean the difference between market leadership and the dustbin. -- Erick Schonfeld

Lands' End
One of the biggest headaches about shopping online is that it's nearly impossible to get a sense, from the pixelated photographs onscreen, of how an item of clothing will actually look once you get it home. But the clothing catalog Lands' End has put some thought into promising solutions: Let's say you're eyeing a periwinkle Tankini but want to see how it will look on you. Just punch in your measurements, and the site's "Your Personal Model" feature can create a 3-D virtual model wearing that Tankini -- and you can rotate the view 360 degrees.

Still can't decide? Need your pal's advice? Punch in the site's "Shop With a Friend" feature, and your shopping adviser can log on and click through pages with you, even if she's halfway around the world. And if you still need help, click on "Lands' End Live," which provides interactive customer service via phone or online chat. Shoppers can communicate with customer service representatives and simultaneously view the merchandise online. This trio of shopper-friendly initiatives has helped boost Landsend.com's sales from $61 million in fiscal year 1999 to $138 million in fiscal year 2000. -- Stacy Perman

Superstitials
A highly effective Internet ad campaign -- isn't that an oxymoron? Perhaps not. The latest wave in Internet advertising is called the superstitial, and it seems to be working. The way a superstitial works is this: A cache-and-play delivery system quietly loads a 20-second ad onto your computer while you're browsing; then, when you click onto a new page of content, the program plays the spot while you're waiting for the new page to load. Superstitials have been used so far to promote cars, summer blockbusters, and shoes, with encouraging results: Nike's superstitial to promote its Air Cross Trainer II, launched in January, helped boost traffic to its site by 50 percent for two consecutive months. Nike also reports that as a result of its superstitial, it received 12 times more click-throughs than it had received with banner ads or buttons. -- Stacy Perman

Amazon.com's One-Click
Amazon.com's patented one-click technology, which allows shoppers to place an order by clicking a single button, is simplicity itself. We asked Amazon what the feature has done for its business -- whether it has increased sales, how many books are sold via one-click, and so on -- but the company politely declined to give us any information. Here's what we know about one-click: Apart from the fact that everyone we know uses it, Amazon's big rival, Barnesandnoble.com, liked it a lot too and built a similar feature into its site. Amazon felt sufficiently threatened that it asked Barnesandnoble.com to cease and desist. So we're assuming that one-click has been a success for Amazon -- but that it would rather keep just how successful it is several clicks away from the rest of us. -- Stacy Perman

Affiliate Marketing
Banner ads are bad: They're ugly, they slow down load times, and by and large, they don't really encourage Web surfers to visit advertisers. That's why, about four years ago, companies began seeking new ways to drive traffic to their sites. One of their solutions is affiliate marketing. The concept behind it is simple: Two companies agree to link to one another, and if someone clicks from site A to buy something at site B, site A gets a small commission on the sale. This approach is more targeted and less wasteful than simply plastering the Web with ads, and as a result, it has proved extremely popular: Barnesandnoble.com, for instance, has seen its list of affiliates grow from 49,000 two years ago to well over 400,000 today. -- Stacy Perman

Paypal
Shopping on the Web is very easy if you buy something from a big site that's set up to take credit cards. But it's not easy at all if you want to buy something from an individual, since most people don't accept Visa (let alone American Express). That's where PayPal comes in. It's a Web-based service that lets you send and receive payments electronically. The way it works is, you open a PayPal account and register your credit card; if you want to pay someone for that vase you bought on an auction site, or reimburse a friend for dinner, your card gets charged and you transfer funds from your PayPal account into hers. Ah, yes: she's automatically signed up for an account in the process. PayPal's competitors haven't taken off because they're limited to single sites -- Amazon and eBay have in-house payment services -- and don't bring payees into the circle. "There's a network effect that occurs," says Elon Musk, CEO of X.com, the online bank that owns PayPal. "There's value to joining the network. If one of your friends joins the network, great, but if five of your friends join the network, we're the payment system you'll use." That may help to explain why the service, which launched in November, had more than 2.2 million users in June -- with 10,000 more signing on every day. -- Owen Thomas

Hall of Fame
eBay: The electronic tag sale takes a small commission on every single transaction, which helped it earn $10.8 million last year on sales of $224.7 million.

Yahoo: It started as a search engine; now it's the king of the portals. The company has been profitable since 1996; last year, it took in earnings of $61 million on revenues of $588 million.

Charles Schwab: It performs more trades per day than any other online brokerage, and the assets it handles for online customers ballooned from $48 billion at the end of 1996 to $418 billion today.

AOL: It boasts 23 million subscribers and earned $1 billion on revenues of $5.7 billion last year -- well enough for it to, ahem, offer to buy eCompany Now's parent, Time Warner.

Hall of Shame
Boo.com: This ultrahip clothing e-tailer started with $125 million and cratered in May, six months after it launched, leaving 370 very stylish employees out of work.

Digital Entertainment Network: Its founders boasted that their content site would destroy television. But after blowing through $65 million on awful programming, the company quietly shut down in May. (TV still exists.)

Drkoop.com: The former surgeon general's namesake spent a lot on deals to supply its health-information content to Go Network and AOL; the only problem was, it didn't have much in the way of revenues. It has laid off a third of its staff since April.

Pixelon: The streaming-media company was started by a fugitive con man whose clever business schemes included spending a reported $12 million on a launch party.

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