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     Leslie Walker
      Columnist Leslie Walker hosted Gary Cullis, co-founder and chairman of Direct Hit on Thursday, January 28. Read the transcript.

    Onsale. Wholesale? Holy Cow!

    By Leslie Walker
    Washington Post Staff Writer
    Thursday, January 28, 1999; Page E1

    Jerry Kaplan has a history of being out of step, so the hooting on Wall Street had a familiar ring when he announced last week that the company he heads, Onsale Inc., will sell computer goods over the Internet at cost.

    At cost? How could you make money selling things at the same price you paid for them? Kaplan's answer did nothing to quell anxiety among stock analysts. He said low prices will drive high sales volumes, attracting millions of Web shoppers and allowing his Web site to sell more advertising. Profits would be small, but adequate.

    Onsale's stock dropped sharply. While Wall Street worried what tiny profit margins might mean if forced on all online retailers, I wondered about consumers. Could this be the start of the long-predicted price war that will boost their purchasing power?

    I logged on to compare Kaplan's prices with other Web stores and see if people would really save money. A full day of online shopping convinced me that Kaplan and another king of rock-bottom computer prices Buy.com are serious about selling at wholesale.

    For a basket of five popular computer items, after adding in various additional fees, prices at Buy.com and Onsale were about 10 percent lower than at Egghead.com, and 12 percent to 17 percent lower than at CompUSA.com. They were nearly 20 percent below those of mail order firm Global Computer Supplies.

    And the Internet's two at-cost stores beat CompUSA's real-world Rockville store by even wider margins about 24 percent. CompUSA is one of the few retailers collecting sales taxes online, so prices for its on- and off-line stores included Maryland's 5 percent tax.

    Does Kaplan really sell merchandise at cost? Not exactly. Onsale charges a "transaction fee" on each sale ranging from $5 to $10, plus a payment processing fee of about 2.5 percent to cover what all retailers pay the credit card companies.

    With those fees tacked on, Kaplan predicts his net operating profits eventually will be 3 to 4 percent, a margin that may not justify the current highflying stock prices of many Net retailers but that would be competitive with razor-thin profits of traditional retailing.

    Kaplan calls his approach "fairly radical" but says it's about reaching scale, the kind bookseller Amazon.com has with more than 6 million registered customers. "We are turning retailing into a service business as opposed to a product business," says Kaplan, who calls himself a "real-time retailer."

    By that he means how his prices are set. The site communicates directly with inventory records of its chief distributor when a customer enters an order, a query goes over the Net to the computers of Tech Data Corp. in Florida. A price quote and inventory status report are displayed in seconds on the customer's screen, reflecting what the wholesale price is at that moment. "It means we can vary and change our store pricing and promotion instantaneously," says Kaplan.

    As far-fetched as the at-cost idea sounds, I buy the kernel of Kaplan's idea. Whether he can elbow out other Internet gold-diggers to get to the advertising nuggets remains to be seen. Onsale.com's Web site has a long way to go before it is consumer-friendly, because its imprecise search engine and cluttered site layout make it hard to find things.

    Kaplan's strategy is the same .com credo driving most early Web success stories: Tap the new two-way communication channel to deliver a low-cost service. In Kaplan's case, the service is taking orders from busy people the same people who are attracted off-line to one-stop shopping discounters like Best Buy and Cost Co.

    Kaplan faces skeptics. Among them is rival software retailer Beyond.com. "We wish it were so easy," said Mark Breier, the firm's chief executive. "The business model of selling at cost doesn't work because you don't have enough gross margin to be able to afford to build a scalable, reliable Web site, one with good customer and technical support."

    Kaplan has stared down skeptics before, though not always getting the last laugh. Technology buffs know him as the visionary with a knack for being ahead of his time. In 1984, he and a buddy dreamed up the world's first personal information manager, a software doohickey that Lotus Development Corp. marketed as "Lotus Agenda."

    His next brainstorm was a hand-held computer called Go that was operated with a pen. Go went nowhere. The company shut its doors in 1993 and Kaplan wrote a bestseller about it.

    In 1995 he caught Internet auction fever and launched OnSale.com, auctioning surplus computers at a no-frills Web site. The site attracted 1 million registered customers and led to a public stock offering last summer.

    Today's rush to stake out territory on the Internet reminds economists of the 19th-century scramble to build the transcontinental railroad. The line cut the time to transport goods across the nation from six months to six days, much as the Internet is reducing selling costs worldwide.

    Bankers eventually grew impatient with entrepreneurs who had borrowed money to lay tracks and stake out pieces of emerging rail franchises, and called in many loans. More entrepreneurs went broke than rode the rails to riches.

    Jack Staff, chief economist for online market research firm Zona Inc., predicts it will happen again with the trial balloons of the Internet. Many are sure to pop.

    That makes cyberspace a tricky world for investors. But for consumers, it's only going to get better.

    Leslie Walker's email is walkerl@washpost.com.


    © Copyright 1999 The Washington Post Company

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