Low-Tech Winners in an On-Line World
Like the birth of the auto business before it, the explo-sive flourishing of the on-line communications industry marks the beginning of a new economic era. And even ordinary businesses are taking a piece of it
Call it a revolution. For better or worse, 1994 marked the year the on-line world, after quietly building momentum for years, finally hit the popular consciousness. The Internet found its way into everyday conversation, and suddenly, every fashionable business card included an electronic-mail address. By year's end there was no clichÉ more tired than "information superhighway." Everyone, it seemed, was worrying about building highway "on-ramps" or, God forbid, ending up as "roadkill."
Beyond the overworked metaphors, however, there lurks a larger truth: the move to conducting business on-line is an economic revolution. And like its predecessor the automotive revolution, which brought about the concrete superhighways, this upheaval will bring far-reaching change to all aspects of business. Not today, not tomorrow; despite the more breathless predictions of overnight technological transformation, yours will not be the last business in America to have a presence on the Internet. In the long run, however, you can expect to see some dramatic effects.
Sweeping changes in technology bring obvious opportunities but also unexpected ones. Think of the automotive revolution, and Henry Ford, the quintessential auto entrepreneur who founded a $128-billion company and pioneered assembly-line manufacturing, comes to mind. Similarly well-known is J. Paul Getty, whose petroleum empire flourished on the oil that fueled the cars. But who recalls R. Thomas McDermott, who in 1923 started $3-billion McDermott International to build oil-drilling rigs? Or the original Howard Hughes Sr., whose dominance of the early market for oil-well-drill bits built the family fortune? Or Joseph Eaton and Viggo Torbensen, who launched $6.1-billion Eaton Corp. in 1911 to make rear axles for that radical new innovation of the highway, the truck? What about George J. Mecherle, a farmer? He founded State Farm Mutual Automobile Insurance Co. in 1922, and the Bloomington, Ill., company became the nation's largest automobile insurer and the employer of 68,700 people.
Those make up but a tiny sample of the entrepreneurs who made it big. Along the way, countless thousands of small-business owners -- proprietors of a million and one gas stations, towing companies, and muffler shops -- have also made their fortunes, large and small, from the automotive superhighways. Cars changed the way Americans live and work, opening opportunities for everybody from mall builders to moving companies.
Maybe the "information superhighway" is a fitting metaphor, after all. The revolution that connects computer networks to one another and, ultimately, to telephones and televisions is another technological and economic transformation that will usher in a new era. Ultimately, it won't benefit only the stockholders of telephone companies and on-line services. Like any economic revolution, this one will reverberate throughout the economy.
But the revolution is still in its infancy. One recent survey, conducted in January, found that only 7% of U.S. households subscribe to an on-line service. Many of the earliest beneficiaries of the move on-line were the businesses you'd expect. Services like America Online and CompuServe, along with Internet service providers like Netcom and UUNet, are in the forefront. They are followed by a host of software companies with products that range from Internet interfaces to communications software. Anything related to computer networks and servers is big business, as is anything to do with the World Wide Web (WWW) section of the Internet.
No doubt many of the pioneers won't last -- just as most of the early auto manufacturers are long dead, merged, or forgotten. There are challenging hurdles to overcome, such as the security hazards of the Internet. And even the successful growth in on-line communication will likely lead to cutthroat competition, to business perils as well as successes. Just ask Dennis Hayes. In 1978 he founded Hayes Microcomputer Products, a company whose name is synonymous with modem standards: other manufacturers invariably proclaim that their products are "Hayes compatible." The modem market is booming, with 1994 shipments up 26% over the previous year. Such growth invites fierce new contenders -- and cash-flow problems. Last November Hayes Microcomputer, struggling in the market it defined, filed for Chapter 11 bankruptcy protection.
In any case, a real economic revolution reaches further than those who make modems, cable, or Internet interfaces. Sure, fortunes will be built around the new technologies. But there will also be perfectly everyday businesspeople who prosper because they seek -- and seize -- emerging opportunities in a fast-growing market. Already, some of their companies are starting to profit from the on-line revolution. Take a look.* * *
Free Range Media, Seattle
Frozen fish. That was Michael Samsel's line of business before he discovered the Internet. Samsel sold his five-year-old fish-processing company in 1990. After a few years of consulting for the new owner, a Japanese corporation, Samsel was ready for fresh challenges. Today he and partner Andrew Fry head rapidly growing Free Range Media, a company that other businesses hire to design their corporate presence, or "home page," on the increasingly popular World Wide Web section of the Internet. WWW home pages can include sound and graphics as well as electronic links to other information on the Internet.
Samsel's change of direction sounds like a stretch -- from fish processing to home pages, seafood to E-mail. But the truth is that Samsel has pursued the same strategy in both ventures: identify an emerging, fast-growing market and flourish by supplying the businesses in it. With his seafood company, that market was warehouse club stores. Samsel says that the company's initial customer was the first Costco store, and the company grew by serving the expanding new warehouse-club market. Similarly, Free Range Media aims to capitalize on businesses' increasing interest in the WWW. Under the direction of Fry, a Microsoft veteran, Free Range Media has assembled a team of artistic and technical talent that specializes in electronic design and the Internet. Since its founding, in late 1993, the company has worked on some 20 WWW projects, including home pages for such clients as MCI and Macmillan Publishing. Already, the market is changing, Samsel says: the sales cycle has shortened as companies become more familiar with the WWW, and Free Range is confronting more competitors. Samsel says first-year revenues for the company, which now employs 21, were slightly less than $1 million. He expects sales of a few million this year.* * *
Gonyea & Associates, New Port Richey, Fla.
As a career counselor, James Gonyea helps people bring about dramatic change in their work lives. That's a subject he knows firsthand. Six years ago, Gonyea's employment-counseling company was much like any other: he met face-to-face with clients. Now he conducts 100% of his business on-line.
Gonyea launched his company 15 years ago in the Manchester, N.H., area. At first, the business remained small, because Gonyea found himself facing stiff competition from other businesses in the area. In 1989 he started to learn about on-line services. Gonyea persuaded then-fledgling America Online to allow him to offer career services on-line. "Within weeks, I completely closed my local doors, because the electronic traffic was far greater," he recalls.
Today Gonyea's company is transformed. With a staff of five and headquarters in sunny New Port Richey, Fla., Gonyea maintains electronic "locations" on America Online, Apple eWorld, the Internet, Prodigy, and a number of electronic bulletin boards. In addition to providing on-line job counseling and rÉsumÉ assistance, Gonyea works with a growing national network of 65 independent employment consultants to compile on-line employment listings and rÉsumÉ banks. His main distribution channel is still America Online, which pays Gonyea & Associates according to the amount of time subscribers spend in the counseling firm's Career Center. Gonyea won't disclose the actual numbers, but he says his business is 15 to 20 times larger -- in both sales and profits -- than it was in its original, sole-proprietor incarnation. "Every business should consider an electronic storefront," he says.* * *
Elman Wilf & Fried, Media, Pa.
If pioneers open up a promising new economic frontier, the lawyers won't be far behind. Frederic Wilf of Elman Wilf & Fried practices technology law for the telecommunications and computer industries. "We advise clients on intellectual-property issues, like who owns what on the Internet and how to protect what you sell on the Internet."
The $1-million law firm, based in Media, Pa., was founded by Gerry Elman in 1982 as a boutique to advise biotechnology and computer companies. Now one-third of its revenues come from clients such as Internet consultants and software writers who distribute their wares on-line.
The partners had been using CompuServe and private legal on-line services like Lexis since 1982. Gradually, their professional use has become a source of business leads. Wilf now serves as a section leader in CompuServe's computer consulting forum. He spends an estimated five hours a week answering subscribers' general questions about the law there and in the on-line service's legal forum. Now some 50% of his personal client base is drawn from contacts made electronically, and many of those he never meets in person. He regularly handles client projects entirely on-line -- sending messages and contracts back and forth through CompuServe E-mail.
"We hope to use the Internet more to talk to our clients," Wilf says. His firm uses Pretty Good Privacy, a type of encryption software for Internet E-mail, but he worries that "security is still an issue. Even though most don't bother to, people can read your E-mail."* * *
O'Reilly & Associates, Sebastopol, Calif.
These days O'Reilly & Associates is a certifiably hot company. The Sebastopol, Calif., publishing company's Whole Internet User's Guide and Catalog is a best-seller in its field, and its Global Network Navigator is one of the WWW's highest-profile sites. In the last year alone, the company grew by 45 employees, to 140, and sales increased by 30%, to $17 million.
Life wasn't always so exciting at the company. In fact, it doesn't get much duller than O'Reilly & Associates' original business: computer documentation. These folks wrote computer manuals for their clients. The company, which Tim O'Reilly founded in 1978, specialized in documentation for products related to the UNIX operating system. It wasn't exactly a glamorous market.
In the mid-1980s, O'Reilly & Associates decided to retain the rights to some of its documentation. Then, at a 1988 trade show, the company for the first time offered its work as stand-alone books. "We were mobbed," Tim O'Reilly recalls. "It quickly became clear that there was a huge market for them."
O'Reilly & Associates released more computer-related books. The company's technical-book publishing division soon eclipsed the consulting business and by 1991 had put it to rest. O'Reilly attributes the publishing success to its employees' background in computers. "We are the market," he says.
The company continues to test new ventures. One of its best-known products, Global Network Navigator (GNN), informs users about interesting spots to visit on the Internet and also offers magazine-like content. GNN wasn't the product of formal strategic planning or market research: in fact, it began life as a WWW demo. The demo, O'Reilly had thought, could serve as the centerpiece of a kiosk in bookstores, where potential customers could learn about the Internet and O'Reilly's Internet books. However, once the company's managers saw the demo, they realized it was a product in its own right, and a new market was born. Books remain O'Reilly's core business, but the company keeps expanding into new electronic-publishing endeavors. Books about the Internet are the fastest-growing segment of the company's publishing business, representing about 20% of sales.* * *
Bindery & Specialties Inc., Plain City, Ohio
You might think the increased use of computers to exchange information electronically would be bad for the printing industry. In the long run, maybe it will be -- but Dick Izzard doesn't worry. Not long after he started his printing company, Bindery & Specialties Inc., in Plain City, Ohio, Izzard completed his first job for a nearby client that was also "very, very small" but growing: CompuServe. Sixteen-year-old Bindery & Specialties is one of 50-plus printers to work for the on-line giant, which last year sent manuals to approximately 120,000 new members each month. CompuServe, based in Columbus, Ohio, represents about 15% of Izzard's business, and sales at his 70-employee company have been growing at a steady rate of about 25% annually.
Sparco Communications Corp., Starkville, Miss.
There are an estimated 12,000 computer stores in this country. But few serve a predominantly international clientele -- especially from Starkville, Miss.
Just as cars changed the profile and number of customers an ordinary retailer could hope to reach, on-line selling dramatically alters the potential market of today's retailer. Now even a tiny start-up has a global reach, as Mubashir Cheema knows. Late in 1992 Cheema was a college student looking for a particularly hard-to-find, high-performance modem. When he finally located a distributor of the desired unit, Cheema decided to take a risk: he purchased an extra 18 modems. Soon, as he was peddling those modems over the Internet, Cheema realized that he was in business.
Sparco Communications today sells a lot more than modems, and at least two-thirds of its customers are outside the United States. Cheema is proud of the company's 49,000-item Internet catalog, which represents a wide variety of computer products. The company has automated E-mail and a World Wide Web server, so Sparco's customers need never interact with a person to get product and price information or place orders. Cheema, in turn, orders electronically from several of the distributors whose products he represents.
Sparco maintains almost no inventory -- just a few of the best-selling products. Four full-time and five part-time employees spend much of their time placing orders with distributors and managing the constantly advancing technology of the Internet. Since many of Sparco's suppliers won't ship overseas, Cheema's staff spends a fair amount of time receiving orders and relabeling the packages for international shipment. Cheema expects that this year Sparco will double its 1994 sales of $750,000.* * *
Doug Ahlers, G.M. O'Connell, and Robert Allen
Modem Media, Westport, Conn.
Unlike many other on-line entrepreneurs, Doug Ahlers and G. M. O'Connell didn't stumble into business. They had a plan. They had a vision. They knew the market they wished to target. There was just one problem: they started before that market existed.
Ahlers and O'Connell knew from the start that they wanted their advertising-and-marketing agency to specialize in the new technologies they called interactive media. Their plan was to help clients adapt to the new ways of selling. But in 1987, when the pair launched Modem Media from a Westport, Conn., condominium, interactive media like on-line services were embryonic. Instead of representing clients in the new media, Ahlers and O'Connell found themselves building and marketing on-line shopping malls for the likes of General Electric's GEnie on-line service.
It took a few years of market growth before Modem Media could become the agency for interactive advertising that the founders had envisioned. Today the firm represents and counsels clients like JC Penney, Coors, and MasterCard International in the use of new marketing technologies, such as CD-ROMs, on-line services, and fax-on-demand programs. About 20% of Modem Media's advertising-and-marketing business involves commercial on-line services, and 20% is Internet related. Voice-response, multimedia, and fax-on-demand projects make up much of the rest. The fastest-growing part of the business? "Answering questions about the Internet," O'Connell jokes. But the whole business is expanding: in the past year Modem Media's staff has tripled, to 50 employees.