December 1997

There are many ways to enter the world of Internet commerce. But why would you or I want to? It seems fraught with pitfalls. The largest retail success story is amazon.com, they've sold millions over the net, but (and it's a big but) they have yet to make a profit. But the web is like the California gold fields, fame and fortune may be just a click away. That's why we have Chumbo (http://www.chumbo.com). Chumbo wants to be to the software trade what amazon.com is to the book trade. Except, of course, they think they can get to paradise (i.e. make a profit) more quickly.

They may be right. The one thing, and the most effective thing, amazon.com has done for everyone on the web is create a model. Marketing classes in the next century are going to study amazon.com in great detail. Unlike ourselves they are going to have the advantage of knowing whether the model was ultimately successful or a multi-million dollar stepping stone to learning how to sell goods in a storefront as big as the planet and a margin as thin as paint.

The success of catalogue sales has made retailing on the Internet look like an easy next step. Concerns about security have retarded profitability. Convincing consumers that feeding their credit card information into a computer has proved a greater leap of faith than handing it off to a waitron for most people. But if we throw all of these ifs ands or buts, away, what we're left with is people delivering good product at a fair price to people of good faith.

IBiz: David, What's your background?

David Prais, (President and CEO of Chumbo): My Background? I have a history within the PC OEM community. I was among Dell's earliest European marketing managers. I worked in the UK. Then when Gateway 2000 started to enter Ireland I was the first marketing manager. I ran the business there from $0 to $2 billion per annum in 18 months. The fastest ever start-up in Europe. And then Ted (*) said, "Did I fancy coming out to the US, to South Dakoter?" And after many, many times of saying no he finally found a way to convince me to say yes.

Form there I headed-up a number of things, in reality all of Gateway's marketing.

IBiz: So why did you leave?

Prais: I needed to get back into what I would call civilization. Minneapolis has a lot of that, with more theaters per capita than any city outside Europe. . . . um, good grocery stores. It was a very friendly environment, but in the end I needed to be around people. Anyways, I saw this opportunity, I've been looking at the web for a long time. I headed up Gateway's web site and there again, in 9 months, we developed a half a billion dollar business.

They had a very big brand name of course. They had the most web aware customer base within the PC industry so it wasn't surprising. But I saw a massive opportunity because nobody is really marketing software to that base. People are trying to but they are doing it as an adjunct to their physical business.

So I thought , how can you do this by creating a distribution business with the absolutely lowest G&A(Sales and general Administration costs.) That could really start to challenge some of the current thinking in terms of buying of software and buying on the web.

What you see here is an office in which you've heard the phone ringing, those are suppliers, not customers. We interface with customers through our web site. We can look and see how many are on line currently.

(At this point Prais turns to a lap top on his desk and keys) OK. We were at 32/33 awhile ago. Today already we've had 928 people on the site. Now it's lunch time it's probably calmed down. There's nine, it was up to nineteen just as you knocked.

IBiz: How many people do you think you see each month?

Prais: It's difficult to say each month since we've only been up for two weeks. On the first day of business we saw 4,000 people. That's dropped back to about 2,000 people a day, these aren't hits these are individual people. That's scrapin' by.

IBiz: That's good, that's good>

Prais: You got to remember, today is what? Today is our 2 week anniversary.

IBiz: And the previous few months you've spent in. . . ?

Prais: In development.

IBiz: One of the most impressive things for me is your partnerships. Partnering is this odd web thing. I can't remember a business where partnering with other successful business is so much a part of doing business.

Prais: The web enables you to pull together some interesting partnerships. It's a growing , very dynamic era. I compare it to TV in the early days. If you could have spotted the winners in the 40s and 50s, you'd be a very rich man today. There are a lot of players out there, but only a few of their models are truly sustainable. I was looking today at a company called shopping.com. They've gone public on only $56, 000 of sales and they're trying to get a valuation of $14 million.

IBiz: I've seen companies where the initial offering lined the pockets of the owners and then the company collapsed.

Prais: That's not where we're going. We're not ready to go public. We need a bit of a track record. The thing that's very different between us and a number of other people is as we're sitting here the office is very quiet. When I was at Gateway where we had about ten thousand people and we would bring people in to see the hubbub, the sales people running around, the phones ringing continually. We had 4,000 people through our door the first day and if it wasn't for the fact we record this information we'd be unaware of it. Basically sales are coming into this office by the minute and they are being processed by a machine. Human's don't touch them/ We currently have 5 employees and we feel we can sell $400 million worth at that level. Our belief is that when we hit seven, with an extra couple, it will take us up to a billion dollars in revenues per annum.. Now we have very, very slim margins and pricing is very aggressive.

IBiz: I'm curious about the EDI aspects of your business. That seems to be unique.

Prais: We are doing EDI over the Internet, yes. Usually it's only large organizations that get into EDI not small organizations. We're taking advantage of new technology that has only arrived in the last few months for doing EDI over the Internet. Previously EDI has been done over VANs (Value Added Networks) which means there is a significant cost for usage on a per annum basis and a cost per transaction. Plus a significant hardware cost with frame relay circuits. We're getting rid of all that so that we can use our customer infrastructure, i.e. the T1s and T3s coming in here to communicate with companies via the Internet. The results are secure transaction levels with our distributors.

IBiz: You guys don't actually handle physical product?

Prais: Correct. The distributors drop ship to our customers. So currently that's Merisel.. But shortly we'll have a contract in place with Navarre. Also we're working with Tech Data, that's coming together very rapidly too.

iBiz: So you're making your money from the interface. You are indeed making your money from the web.

Prais: Absolutely. Purely from trading. If we don't sell anything we don't make a penny.

iBiz: How are you going to promote the site?

Prais: We've already gotten some press. The analyst, we've spoken to a number of analysts, have said we're the one to watch for software distribution. A number of others have said this is the up and coming amazon.com. Minneapolis is quickly becoming the hubbub of high technology businesses. Which is really quite interesting. There really are a lot of businesses here involved with the web.

Mostly we're going to do massive PR. We're doing a lot of work with the search engines. This morning we were on the phone with X-Cite. One of the key thing s we do is try to work very hard with the OEMs, the major corporations out there with a big presence so we can begin co-branding site with some of the larger OEMs. When for example you buy a Compaq machine, you can go the Compaq/Chumbo software store. There's an icon on your system, or a channel as we move into Windows 98 and IE 4, you can continue your relationship with your hardware manufacturer so it build their brand equity there, builds our brand equity, and gives an ongoing revenue stream to the OEM.

Same is true of the search engines. We’re putting together joint marketing proposals for branded sites. Part of our business is built around strategic relationships. For us to build a brand as a start-up organization would cost us far more than we have. So we're doing through relationships where we're offering our expertise in technology to other major corporations that need it and co-paying with them. It's working very well. There's a lot of interest 'though some of those decision cycles are quite slow.

iBiz:: I know you've been talking to NetRadio, what are you talking about?

Prais: They're very interested in our trading engine. The trading engine we've developed in house. We looked at others, Netscape and O'Reilly, but the ones we looked at couldn't cope with the volume we're dealing with. Much of our development is bespoke development, things we've created. That's why many people are shocked. Shocked at what we've been able to achieve in the time we've done it. We're only four and a half months in development.

The same is true of the partnerships, with Ziff Davis and Merisel, Cybercash, with Time-Warner, they're very surprised at the speed we've put those together.

Ibiz: I was certainly.

Prais: It's the web. You have to move this fast. That's one of the advantages of being a small, tight organization. We had a staff meeting this morning. By now the actions have gone out by email and everyone knows what they've got to pull together by next week. It has to happen at that speed.

One of the problems most people have is they've got a grown business behind them. There's a lot of headache and hangover that comes with that. For example my head of customer services.

Her main job is to find customer issues and automate responses. So the first time it's a pain in the butt responding. The second time it happens on an automated basis. We have less of the hangover because this is a new business and in truth a new model.

Ibiz: Did you find your previous relationships at Gateway advantageous when you went to set up these partnerships?

Prais: Absolutely. I don't believe there are many people who could have set up the relationships we did in the time frame we did. I still keep good relationships with Michael Dillon, Ted White. Michael Dillon is one of the most frequent visitors to our site. He's interested in seeing how we're developing.

iBiz: Obviously Chumbo is a consumer site. Are you going to segment for business to business sales? Is this something you're interested in?

Prais: Licenseit.com is the corporate site we are going to develop over time. We're not yet there but it's something we're looking at that very seriously. Licenseit.com will be for educational organizations as well as corporates. We see that as a problem for major corporations, licensing their software in an efficient and timely manner.

iBiz: How do you determine what you feature on the site?

Prais: We look for things that have good reviews from our customers and Ziff Davis. It's done totally neutrally. There's no payment, we won't accept payment. We were approached by one of the SW manufacturers who said we want to do some co-marketing with you. They offered us money for advertising.

We said we'd much rather you gave us a lower price for the product. Then we will feature the product because we can offer it at a lower price. What we're trying to do is put the thinnest layer between the publisher and the consumer.

We're offering people an opportunity that other retailers can't provide. Like Egghead, because their business is predicated upon their physical model. As with any company they spend a percentage of their revenue on marketing, with us it's perfect. We co-pay, if an order comes to us through a certain area, from Compaq say, the customer is registered as a Compaq customer, they remain a Compaq customer the rest of their life, Compaq will get a co-pay on that. At very little. If the customer doesn't buy anything, you don't get anything in return.

We get a lot of people calling up and saying, "Would you like to advertise?" We say, "We'd love to advertise, here's how we'd like to do it." The response is, "We don't have a model like that." Our response is to ask, "Who do I talk to in your company so that you can have a model like that?"

You have to get relatively up in the business and then you can say, "This is where the web is going to go." Because it can. If you advertise in some magazine, that magazine couldn't get paid from the people that respond to the ad. With us they can. We have attribution right down to bottom line dollar and cent and we can co-pay back to the people who brought us the lead. People know I'm not interested in setting up business relationships that do not make sense for all parties.

What we've developed here is, what I believe, the most efficient business transaction model in the world. When it reaches the appropriate sizing and that's what brings value to all parties. You say, "I've got an efficient marketing engine." We say, "Lovely, we've got a transaction engine that can monitor the efficiency of your marketing."

iBiz: How are you doing your transactions?

Prais: We took Cybercash 'cause we're working with Norwest. We have a great bank manager, I think because he understands what we're doing. They had Cybercash so we said we'll work with you and see how it works.

The stuff we got from Cybercash was totally useless. It was CGI interpretive code on our server, every transaction needed an interpreter. So we rewrote a lot of the interface with Cybercash so now it's not interpretive, it's totally compiled code on our end. A customer comes in puts in their credit card and while they're waiting it goes and checks their credit card. They know by the time they finish the transaction with us whether or not they're getting that product or not.

iBiz: What happens after that?

Prais: We have EDI and online information with the warehouses. We know whether the product will ship today or go on back order. The order goes to Merisel within 15 minutes, they confirm the order within a couple hours and by evening they confirm shipment. So a customer will get an email instantly saying, "Yes we received your order." They'll get another saying, "Yes our warehouse now has it." The they'll get an email saying, "Yes it's shipped here's your tracking number." If they return to the site after they've placed an order, they will be told all of the information.

iBiz: That sounds like good customer service.

Prais: When it comes to technology, where you can you do in terms of automation. There is no need for the customer to call us or even write us an email. If a customer goes on back order a customer is sent an email every few days letting them know they haven't been forgotten and they are notified immediately the product ships. We did it daily but then we figured, no that's bugging people. The more informed the customer is the happier they will be.

iBiz: Anything else in customer service?

Prais: One of the key things is our pre-order system. Because with hot games, like Riven for example, or when Windows 98 comes out. With us the minute the pricing is known you can preorder and the day it ships it will arrive on your doorstep.

Also when you come to our site we ask you to register. We're building profiles on everyone of our customers. We'd like to personalize the experience as much as possible.

iBiz: Do you have plans for a push channel?

Prais: We have a push channel already. You let us know when during the night your computer will be idle, it beeps us and we download news, new product reviews new product stuff. Because much of the stuff is large, in terms of software we ask how much of your hard drive you want to put aside.

iBiz: Are you looking at that for upgrades for your customers, what about downloads?

Prais: We are definitely not doing ESD right now. Apparently there are more people trying to sell ESD than there are buyers.

iBiz: On the site, how often do you update? I noticed a different front page this morning than I'm seeing now.

Prais: The changes to the site are always going on. We will over time develop. . . we will always keep the ability to change the site in real time. Another of the key things we're doing is this is the Early Education Bundle.

We work very closely with the PointGroup. They put bundles together for the OEM community. They do all of Compaq's education series, all of Compaq France, Gateway Europe, Dell Europe, IBM Aptiva has their stuff. We also have a games bundle packaged with a CH Gamestick which you get for the value of the stick. So we're putting together very good values. Both the bundles are good values. How do we save a part of it's the box. You don't get a big merchandising box, just the product.

What we're doing is trying to put together really, really good values. Most of the money here goes directly back to the publisher rather than any body else in the middle. And we do it at no cost to them we duplicate the software and do the packaging. They have zero cost and good revenue, we have minimal cost and great pricing, and customers get great pricing. Everybody wins. So those are the sorts of deals we're putting together. Just by publishing these and putting out press releases these will get great coverage.

Another thing is when you look at the other sites out there none of them are as informative as ours. Our philosophy is that an informed customer is a happy customer. That's why Ziff will work with us. They understand where we're coming from, I want to have happy customers they want to have happy customers. I want the best editorial content on our site and we believe we will be the best software site out there, and everyone who's seen us says we are, so hence it's good linkage. We're getting good credibility, we're getting good credibility. We're also linking, Warner Brothers is coming on board with their DVD products. We're linking with the biggest and best in the industry.

iBiz: So how many people are working on the site.

Prais: When we're finished I'll give you a tour. You'll see development work going on next door, product marketing on in the door after that, editorial work after that. Graphics work and coding going on in England. Systems design and development work going on in England. There are people working away from outside the office using tunneling protocols. Developers can get into our site through virtual private networking and continue the development work. I know that an OEM site went up today. Just to show them what we can do for them. That's being enhanced I know, as we speak.

We've taken our back-end and put it on the front end of they system until the new back-end equipment is installed. One of the things about real-time updating the site is when we're putting together something like this Early Education bundle. We need to get approval on how the product appears on the site from about six or seven people. Do you want us to use this graphic, this copy here, there's Trademarking all over the place. When we're looking to update a site live. What we do is get all those people on-line and then make the final changes as we discuss them and then get them to sign off electronically before they leave. That's very helpful.

Ibiz: What about tech support? With 6000 products some people are bound to contact you when what they buy from you goes wrong.

Prais: We don't do tech support. We're linking to Ziff's Help Channel and also we put down the publishers' information all their BBSs Tech Supports phone numbers and email addresses. We're not the people who should do tech support. With 6,000 products how long would it take to bring any of our people up to speed. So we send them to the publisher where they can get proper support from the people who should know the most about the product. And none of the physical retail stores are doing it.

Ibiz: Did you buy your shopping cart system or did you develop it?

Prais: We developed it, absolutely. On our site as you can see the basket is always visible. That's one of the things we saw wrong with all the systems on the market: you have to go to check out to see what's in the basket. On our site we want it visible always on the site. It adjusts as you add to the basket, or add or subtract quantities, you can see your dollar total. If you click here you go to the product.

Everybody thinks this is Java. It's HTML. It's a part of this frame. There's only two frames. The other thing people say is we don't like using frames. That's because some of the old browsers didn't know how to use frames properly, the new ones do. We use SSL (Single Socket Layering) to secure our customer transactions. Anything that supports SSL supports frames properly. Java we found slowed the site down drastically. Until we see massive significant value in using Java we won't. This doesn't need Java, everybody thinks it is, it just isn't.

On your second time through, once you've bought, it asks you for your password. Which is the second part of the personalization. And then you'll see everything is exactly right. Just click through in case you want to change anything and you'll see it has all your pertinent information except you credit card number. Most people don't have this. I don't know why.

The first part of our form is to validate your credit card. We do that before we do anything else. If you have a split order, something that's going to ship now and something that's going to ship at a later date. We well you how much we're authorizing on your credit card. And we'll tell you how much we clear when we ship the later product. 'Cause we only clear money when we've shipped.

iBiz: You've got a history of jumping into new business opportunities, making them succeed and then moving on. Are you happy doing it again?

Prais: By that do you mean would I rather be doing this than anything else in the world right now?

iBiz: Yeah!

Prais: Then yeah. I'm ecstatic.  iBiz