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    .COM LIVE

    Hosted by Leslie Walker
    Washington Post Columnist
    Thursday, May 20, 1999 at 1 p.m.
    Leslie Walker
    ".com" columnist Leslie Walker

    Welcome to ".com - Live," a real-time, moderated discussion with the people who are shaping the business strategies in the era of electronic commerce. My guest this week will be Tom Van Horn, chief executive of Mercata Inc., the new online buying co-operative that mimics an auction.

    Tom Van Horn
    Mercata CEO Tom Van Horn

    With financial backing from Microsoft co-founder Paul Allen, Mercata.com launched on the Web Monday with the aim of negotiating group discounts for consumers that grow larger as more people join in the "bidding" for each item.

    Van Horn was online Thursday from 1 to 2 p.m. to answer your questions about how an online buying cooperative works, how manufacturers are responding to the notion of dynamic discounts, what consumer reaction has been, and what "falling prices" might mean to the bottom lines of cyber-retailers.

    You can check out the site at www.mercata.com, then enter questions in advance using the link below.



    Leslie Walker: Hello all and a warm welcome to Tom Van Horn, president & chief executive of Seattle start-up Mercata Inc. Tom is joining us from a road trip in Boston today. Let's go to the questions.


    Leslie Walker: Hi Tom. Let's start with a mission thumbnail. Please tell us how your on-the-fly pricing system works. Is it an electronic shopping club, an auction--or both?

    Tom Van Horn: Hi, Leslie. Thanks for inviting me here today. I'd like to give you a quick background on Mercata. Mercata is here to lead the We-Commerce Revolution. We want to bring consumers together on the Internet so that they can pool their purchasing power to get amazing deals on the products they want to buy.


    Leslie Walker: Can you back up and explain the why behind your vision--what made you think of this in the first place, why now, and why should consumers care?

    Tom Van Horn: Mercata got started last summer when I had a meeting with Paul Allen, co-founder of Microsoft. He asked me if I would like to build a large, successful e-commerce company. I said absolutely. But he wanted me to build it on a fundamentally new premise or business model. My job was to go find a new, unique, compelling way to do commerce on the web--and We-Commerce is our answer. In essence, the more people who join together to buy something, the lower the price goes for everyone. It's about a creating a win-win scenario, almost the opposite of an online auction.


    Rockville, MD: In what ways do you see your auction site uniquely better then comparable online auctions such as Amazon.com and e-bay?
    Best Regards,
    Zack

    Tom Van Horn: Thanks for this question. Mercata is not an auction at all. In an auction, people compete. The prices always rise. One person wins, and he or she pays the highest price. This model is really best for scarce items, and it gets the best price for the supplier, not the consumer. We-Commerce, and the way we implement it, in PowerBuys are very different. People work together to drive prices down, not up. Everyone gets the product when the PowerBuy closes, and they all pay the lowest price. Our customers wind up much happier as a result.


    Leslie Walker: Can you explain for us slow folks how this purchasing system works? If I'm a buyer who visits Mercata.com, what do I do?

    Tom Van Horn: Here's how it works. We post a PowerBuy for a specific product. Say it's a Cuisinart Ice Cream Maker. The price starts out at, say, $60. A good price. When you join, the price automatically drops some amount. You tell your friends, or others just come to the site and join the PowerBuy. The price keeps dropping. You all get the lowest price the PowerBuy gets to, either when it ends hours or a few days later, or when we run out of product. Everyone gets an amazing deal, and the more who participate, the better it is.


    Seattle What kind of fees will you be charging? Any processing or handling fees other than shipping? Will you charge actual shipping costs or build in profit there?

    Tom Van Horn: We charge sales tax in certain states where we have operations, like WA and PA. We charge no shipping fees right now, as a special introductory offer. There are no membership fees. You simply create an account with your e-mail address and a password.


    Bethesda, MD: What's your plan for rotating merchandise into the "power buy" auction area? By that, I mean will the merchandise you offer at fixed prices be featured in the dynamic pricing area too? And if so, will it be on a set schedule? As a consumer, I don't understand how your system works even after visiting your Web site.

    Tom Van Horn: Right now we have a starting set of PowerBuys driven by our agreements with suppliers and initial customer requests. We will grow the number of PowerBuys as we grow, and they will largely be driven by requests from you, our customers. We launched a Cuisinart Ice Cream Maker PowerBuy yesterday after a woman from the Midwest e-mailed us to ask us to start a PowerBuy for that product. She said she and 4 friends wanted to buy it online at Mercata in a PowerBuy.


    Vienna, VA: Do you hold inventory on all the items you sell or are you drop-shipping? Can you tell us about your distribution system currently and plans for the future?

    Tom Van Horn: Good question. We are establishing great partnerships with our suppliers. Some can hold inventory for us and drop ship directly to our customers. Some ask us to buy inventory in advance of a PowerBuy. Some request that we work with distributors. We work in varying ways to be able to offer the best, premium brands on our site, because these are the products we learned from extensive customer research and focus groups that you wanted.


    Rockville, MD:
    How long did you work on this concept and Web site before launching online?

    Also, what was the hardest, most challenging part of starting up Mercata Inc?

    Tom Van Horn: We have been working on building up Mercata since last fall. We wanted to launch a high-quality site when we went live on Monday May 17th. Our greatest challenge is finding talented people to work with us, but we've been very happy with the people who have been sending us resumes in the past days, weeks, and months. We have doubled our work force in just the past few months.


    Washington, DC: What is the maximum price discount a consumer can expect from Mercata's dynamic powerbuys?

    Tom Van Horn: The discount depends upon the product. Some manufacturers ask us to follow certain guidelines in how we structure the PowerBuys. Other manufacturers give us the ability to offer very large discounts. Unlike some e-tailers that sell below cost, we almost always sell products at a substantial discount to traditional retailers, and we generate large discounts through the volume generated by the PowerBuy participants. Most of this savings is passed on directly to consumers.


    Seattle, WA: It is clear to me how your program allows consumers to influence the price they pay.

    Will consumers also have an opportunity to influence the site content and which items will be offered on Power Buy?

    Tom Van Horn: Absolutely. Great question. We offer a variety of what we call "premium brands for home and play" right now. We want you, our customers, to tell us what you want us to carry in the future. If we get a lot of requests for, say, wristwatches, we will endeavor to set up PowerBuys for watches. It helps if you can tell us exactly what you're looking for, like the brand, the model number, and so on. We've already received requests from Pampers to Porsches, from camcorders to kitty litter. We'll evaluate the feasibility of all these requests and use your input to help us launch new products on the site.


    Leslie Walker: How many manufacturers and products have you signed up so far? And of those, how many are actually live on the Web Site?

    Tom Van Horn: We launched on Monday with over 150 brands/manufacturers on the site. We'll be adding more products and brands every week. We're in discussions with new partners all the time. You can expect us to have thousands of products on the site by year-end.


    Gaithersburg, MD: How many other companies are pursuing the same idea of virtual coops with dynamic pricing? Are you the only one? Do you expect there to be many in the near future?

    Tom Van Horn: There have been a couple of questions like this one. The idea of group buying and co-ops goes back hundreds of years. It's intuitive and makes sense. However, we are the first company to offer this concept for consumer products. We have applied for patents on the business model and our We-Commerce technology. We are working on several more. Mercata is all about Group Buying Power, but we also focus on premium brands, great partnerships with our suppliers, and world-class customer service. No one is bringing this combination to the Net like Mercata.


    Bangkok Thailand: Can you tell us your other
    sources of revenue? Thanks.

    Tom Van Horn: Right now our revenue comes from product sales. We may have some other revenue sources in the future like advertising, but I expect that most of our revenue will come from product sales for the foreseeable future.


    Dallas, Texas: Your prices are higher than Buy.com. How do you expect to compete with etailers that are already buying in bulk and selling at the lowest possible prices their business model enables. Buy.com is selling at or below cost.

    Tom Van Horn: There are some sites that sell at or below cost in categories like music, computer hardware, books, etc. We don't compete with these e-tailers as we are in different consumer product categories. Selling below cost is not sustainable in the long run, and it doesn't lead to long-term relationships with suppliers or customers that can work. We have a model based on the economic principle of volume discounts that makes sense, already exists in retailing, and now can happen for communities of shoppers in real time on the Internet. That's why We-Commerce works and makes sense.


    Greenwich, CT: What is the next step for Mercata? Product Lines? Services?

    Tom Van Horn: Our focus in 1999 is to introduce this revolution in shopping to customers and rapidly expand our product breadth and depth. You will see us add new brands, new product categories, and new features to the site to make shopping at Mercata even easier.


    Toronto, On: How much revenue do you expect to come through your site in the first week, month, year?

    Tom Van Horn: Thanks for your question, but as a private company, we don't talk about our actual sales or projections. We do expect to grow quickly, and our actual sales in just the past 3 days have far exceeded our projections. Customers are embracing our approach to getting great deals on the products they want.


    Chicago, Il: I have seen 1 or 2 other companies out there doing something similar. What makes your implementation of group buying superior?

    Tom Van Horn: I've been getting several questions like this one. I know of one other company that is doing something similar to Mercata called Accompany. They sell computer products, not the kinds of products we sell. They have a group buying approach as well, and that's great for customers interested in computer products. However, I expect it will be very tough to generate enough volume in those products to offer prices that are better than those of sites or traditional retailers who sell computer products at cost or even below cost. I see Mercata's competition as large mass merchandisers or department stores, but these companies do not have our group buying approach and Internet technology.


    Leslie Walker: We are a little more than half way though this lively discussion. There are more questions waiting than Tom could possibly answer, but don't let that stop you from asking more or sending in your comments!


    Dallas TX: How many patents has Mercata applied for, if any? Accompany.com applied for one on the concept of negotiated group discounts that play out online in an auction-style format. Isn't that what Mercata is doing too?

    Leslie Walker: For those who aren't familiar with Accompany.com, it is another start-up that negotiates volume discounts for consumers at a Web site where prices fall as more people click to buy. The site launched as a preview version last month. Tom, are there significant differences between Accompany and Mercata? They both seem based on the idea of dynamic group discounts.

    Tom Van Horn: I answered part of this question earlier. I don't know the people at Accompany, myself, but I think they are on the right track in pursuing a group buying approach. Mercata has applied for patents in the area of group buying. We have additional advantages in terms of our technology, supplier partnerships, and focus on service. We also have solid backing from Vulcan Ventures and a very strong management team. We also offer both PowerBuys and what we call Group Values, products available for immediate purchase, because our customers are sometimes looking for the very best deal they can get, and at other times they most want convenience. We are looking to be not just the top group buying Web site. We want to create the most satisfying online shopping experience possible for our customers.


    Boston: This seems to be a complicated way to shop online. ISn't it much easier psychologically to what price you're paying for new merchandise? The idea of of falling prices depending on how many people are bidding may be a hard sell to consumers. How to you get over the hurdle of getting people to understand and participate in such a novel shopping system?

    Tom Van Horn: Just about everyone who's come to the site has told us they think it's really quite simple. However, as I mentioned, we also offer Group Value products available for immediate purchase.


    san diego, ca: I was wondering if your company is public. If not are you planning to become public anytime soon?

    Leslie Walker: Tom, Mercata Inc. is primarily owned by the Paul Allen company, Vulcan Ventures, Inc., right? What can you tell us about Mercata's funding so far and how it will fit into the larger strategy and e-commerce vision of Vulcan Ventures?

    Tom Van Horn: We have one investor at this time, Vulcan Ventures. We will likely seek additional sources of funding over time, and these may include other private and public sources. We work closely with Vulcan and share their "Wired World" philosophy. You might take a look at http://www.paulallen.com for more information on the "Wired World" vision.


    Schaumburg, IL: Tom, I've tried my first PowerBuy this past Monday. However, as good as the deal was, there is a 1 to 2 "shipping period". This is very unspecified and I still haven't received notice of my shipment. In what ways are you planning on improving delivery?

    Regards, Patrick

    Tom Van Horn: Right now PowerBuys last 1-3 days. As we have greater traffic and more products, I expect some PowerBuys will last only a few hours. We offer free ground shipping right now, and we will offer expedited (overnight air) shipping later this year. If you have a specific question, please contact CustomerService@mercata.com or call 1-877-MERCATA.


    Bethesda MD: What is the range of price discounts you've been able to negotiate with manufacturers? From a high to a low, and are they roughly comparable to the volume discounts that bulk retailers like Price Club or CostCo offer?

    Tom Van Horn: They vary with the product, but manufacturers are very excited about our business model and our long-term partnership focus with them. We have been able to negotiate very good discounts from the start, and we will be able to increase these as our customer base and volume grow. You and your peers are what make this happen through Mercata, for yourselves.


    Geneva, Switzerland:
    I understand the benefit you are offering consumers, but how will you make money in the long run given that your prices will fall very close to your marginal cost? Are you relying solely on volume for profits in the long run or do you intend to sell any other services?

    Tom Van Horn: Good question. Our basic cost structure is a lot lower than traditional retailers with land, buildings, etc. Therefore, we can pass on greater savings to customers. As we grow, that leverage increases, and we can pass even more savings on to our customers.


    Leslie Walker: Mercata.com has been live for four days now. What has been the volume and tenor of customer response? Anything about the way the Web site debuted surprised you?

    Tom Van Horn: Customer response has been fantastic. We have gotten hundreds of e-mails from customers telling us how much they like the concept and the site. One customer from Kentucky bought a product in a PowerBuy on Monday. He loved the process so much, he wanted to enter two more PowerBuys. But, his ISP broke down and he couldn't get on the Internet. So, he called us and placed two more PowerBuy offers with one of our customer service associates. Also, customers are sending us hundreds of suggestions for products they would like to see us carry and offer in PowerBuys.


    Alexandra, VA: Is Mercata envisioned as being a single Web site or part of a larger network? Is this eventually going to be a big commerce portal?

    Tom Van Horn: Our long-term vision is simple. Mercata's vision for its customers is for them to be able to shop for anything, anytime, anywhere, anyhow. We will offer a vast array of products, be open 24 hours a day (we are now), expand globally, and offer shopping over a variety of electronic media and devices (PC/Internet, wireless, CATV, etc.). And, we'll always have real people on the phone, too, just in case that's the way you want to shop.


    Washington DC:
    Are you shipping worldwide, and what are your plans for global expansion? Do you envision selling a lot of foreign goods too?

    Tom Van Horn: Right now we only ship in the U.S. and Canada. Look for us to begin to expand internationally in 2000.


    Old Tappan, NJ: My belief is that "disintermedation" is being misread as the shift in the "seesaw" from the buyer's leverage to the consumers having leverage. The only difference is the intermediaries are now working to bring consumers to buyers instead of products to consumers. Also, I believe Mercata.com is the final evolution of the perfect net model for dramatically revolutionizing the economy through price efficiencies. Do you agree that we are now entering, if we haven't already, the "consumer age" thanks largely to the Mercata.com model? P.S. I independently thought of this exact model 1 month ago... only I was 6 months to late and about $22 billion short.
    Thanks for your comments.

    Tom Van Horn: Your thoughts here in many ways mirror those of Mercata. We see our customers leading a consumer revolution in which they obtain great deals on exactly what they want in a way that could only occur through the power of the Internet. Mercata is simply the site that helps consumers make this happen. We also benefit manufacturers at the same time, because we help bring them closer to vast numbers of customers in real time.


    Tom Van Horn: Thank you all for your great questions. I'm really excited by the enthusiasm you all have for We-Commerce. At Mercata, we want all your feedback and suggestions so please come to Mercata.com, send us e-mail, and offer your ideas on our Product Request page. Leslie, my thanks to you and the Washington Post. This has been a great experience for me and Mercata to hear from customers in real time. I look forward to seeing you all at Mercata.com.


    Leslie Walker: Thanks to everyone who participated today, especially to Tom who took time out from a business trip to our questions. I'm sure we will be reading more about Mercata.com in the future.

    Come back in two weeks when we will be talking about how America Online Inc. is breathing new life into the one-time rival it now owns: CompuServe. Our guest on June 3 will be Audrey Weil, general manager of CompuServe.

    Hope to see you then!

    © Copyright 1999 The Washington Post Company

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