And even though the spin-off companies have contracted out production, they will have to accept the blame for any glitches. "If there are delayed shipments or shipments arrive damaged, it reflects back poorly on you," says Hal Varian, the Berkeley dean. "You have to worry about fulfillment issues. You don't want the problems to do damage to the brand name you're trying to build."
Even if his suppliers perform well, Schutz and his managers face a difficult -- and unfamiliar -- task in forecasting demand. Flowers, chocolates, and fruit are seasonal businesses centered on holidays and other special occasions. Among the millions of people using the Blue Mountain site and seeing the ads for these products, how many will make purchases? Even if total orders are close to the target, customers may surprise Blue Mountain by ordering more red roses and fewer yellow roses than expected, or more of one chocolate assortment than another. "It's a very tough problem," says Cunningham. "It's tricky because ordering comes in peaks."
So as not to disappoint any customers, Cunningham says, Dan's Chocolates will err on the side of carrying a large inventory of candy. "We'll oversupply what we think our highest sales numbers will be," he says. "We have our production systems lined up so that if we see a particular SKU moving well, we can go in that direction." But overestimating demand would be costly. "If we project the numbers too high for the holidays, we can sell the chocolates through January and February," he says. "But we have to come close to projections on Mother's Day because it's slower during the summer. If we overstock, we would have to clean out at low prices or get stuck with it."
There's less and less room for error. Excite@Home's purchase of the Web site came at a time when it was facing more and more competition. New competitors, in fact, may very well be responsible for the more than 20% drop in traffic at the site since a February peak of nearly 13 million. Both Amazon.com and Microsoft's msn.com have added free electronic cards to their sites this year. Aggressive new rivals like Egreetings Network, in San Francisco, already have attracted a few million visitors a month. Egreetings, which filed to go public in October, was initially funded in part with about $25 million from Microsoft cofounder Paul Allen's venture-capital fund, Vulcan Ventures.
Gordon Tucker, president and director of Egreetings, doesn't hesitate to label Blue Mountain's cards "sentimental" and "somewhat cheesy stuff," arguing that selling flowers wouldn't have taken Blue Mountain very far. "Most consumers want to deal with a known retailer," says Tucker, who uses an advertising and partnership approach. "It's potentially a small business for Blue Mountain. It's not on our scale -- we'll get much faster growth."
"It was clear," says Jared Schutz, "that we couldn't continue to fund this out of our own pockets." Even so, Excite@Home's acquisition of Blue Mountain's Web site doesn't put to rest the tough strategic questions that drove Schutz's initial strategy. On their own, the owners of bluemountain.com "had some tough decisions ahead of them," says Carrie L. Ardito, an associate analyst at Forrester Research."Now Excite@ Home can deal with those decisions and can probably deal with them better."
Chief among those challenges is figuring out how far the owners ought to go in terms of commercializing the site. "It looks like Excite's objective is to monetize the relationships that Bluemountain.com has created," says consultant Peter Cohan. "That's quite at odds with the culture that it has promulgated since its inception."
How much at odds may depend on just how Excite@Home puts its stamp on its newfound acquisition. Stevens, of Excite@Home, insists that the company will take "very careful steps. The feel of the site and the community aspects to it are very important to us." What Excite@ Home wants to sell visitors on, he notes, is the chance to become subscribers to the company's consumer broadband service. "It's a very attractive market for us to offer broadband services to," Stevens says. Ardito, for one, isn't so sure. "The homemade value of Blue Mountain is earthy, and this is a service for traditionally technologically savvy people," she says. "There's no proof that these people would pay for broadband service. And add-on services like gifts are not proven to work, either."
Then again, bluemountain.com operates in an industry where not much has been proved. A Web site that attracts 10 million monthly users has provided all the proof it needs -- to justify a price tag of more than three-quarters of a billion dollars, anyway. It almost makes sense. "It doesn't matter that our revenues were negligible," says Schutz. "We've been losing a lot less money than anyone else out there. When you look at the terrible Internet companies Wall Street has taken public, we look great by comparison."
Stephen D. Solomon is an associate professor of journalism and director of the program in business and economic reporting at New York University. Additional research was provided by Anne Marie Borrego.
