Date: November 7, 1999

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The Industry Standard's "Net Returns 2000" conference was
held Sept 29-Oct 2, 1999, at the St. Regis Hotel, Aspen, CO
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Dear Readers, Clients, Partners, Friends, and Dot-Com Buzz Afficionados:

It all flies by us so fast, the insights offered up at these Internet conferences. Many great soundbites for sure, but also countless pearls of wisdom, maybe not so obvious at first, are easily missed. We get distracted, grabbing a cup of coffee, chatting with a new friend, daydreaming our next Internet venture...or, okay, checking our email.

But, in an attempt to help clarify things -- for those of you who were present at this one or not, and for myself -- I again revisited my abundant notes in the weeks following, as I make a practice to, to see if some sense or organization can be made of the whole massive, overwhelming experience.

What were the nuggets of 'Net know-how, the killer insider insights, the tips, the buzz, the rumors, the skinny, the great laughs. Not to speak of some actual facts and figures -- those hard-to-find Internet startup metrics that people are always asking us to quote. In other words, all the many things we don't often get a chance to hear directly from those who are actually out there doing it, on the cyberfront. And which of these supposed pearls of wisdom might deserve some questioning, or followup, or re-examination? Or flat-out discarding?

That's the point here, friends. No one has all the magic answers. But we can't help but learn much when this many great people get together. So we sort through it all....

Hopefully, I've captured some of those good insights and high points in this and my previous three reports on the "Net Returns" event -- some that you may find valuable as you go forth and multiply, as good little Metcalfe's Law followers. I've grouped them here by key subject or issue (often in the form of questions), as the conference organizers had the speakers and panelists address them. Or in the manner that the moderators or audience members framed the questions.

-What Are the Key Issues for Consumer Brands' Internet Businesses?

Retail has always been about brand and serving customers, but e-commerce adds a new channel. This panel looked at the new challenges of creating a single experience for customers and managing brand consistently.

For Estee Lauder, which in the real world has an enviable 50% market share, the battle first of all is *getting* the customer information, then using it to improve the shopping experience. The objective being "to recognize the customer in any channel," said Angela Kapp, VP. Another great brand insight from Angela was that, for higher-priced, luxury items, "you must immerse the person in the brand."

[Speaking of customer information and improving the shopping experience, the conference featured electronic voting throughout. And one question asked later of the audience was "How important is personalization?" Fully 60% ranked it as "highest importance." I'll be learning more about that at the upcoming "Personalization Summit" in SF, which you can read more about at http://www.personalization.com .]

Ken Weil, VP new media of Victoria's Secret, stated his job very simply: "single-brand, multi-channel." With 800 stores, 400 million catalogs a year, and now the 'Net, "Our intent is to be a 360-degree brand," he said. [Well, Ken's mouse pads grabbed the most eyeballs in the press room, that's for sure--followed only by the the neon-orange "Cluetrain Manifesto" book cover/preview booklet.]

For Starbucks, it's "taking the physical experience of in-store, the 'esoterica,' and threading that to all channels, " said Debbi Gillotti, Senior VP. "And that's not easy to figure out -- how to extend the brand like that." [Till scratch-and-sniff Web is invented, we're left to assume.]

The objective for Larry Asfelin of Alta Vista/Shopping.com is to "connect *what* the customer wants to buy with *where* and make it a customer-friendly experience." For local retailers, he said, the challenge to date has always been maintaining perpetual inventory. "The web challenge is to fulfill the promise."

-What Percent of Visitors Are Buying?

For Victoria's Secret, it's less than 1%, but "we have unusually large numbers of browsers!" (Plus only a portion of their retail offerings are available online now, he said.) At Starbucks' site, about 1.5% buy, "and we're happy with that." More impressive for Victoria's Secret is that 35% of their mail purchasers and 10% of those buying in-store have first visited the web site. And Dan Nordtrom echoed the same point in a later panel -- i.e., that the Web drives people into the stores.

-What's New in Corporate Venturing in a Dot-Com World?

Certain big firms, like Disney, are placing at least part of their (big) bets outside -- one example being recent startup incubator eCompanies. Disney, along with such names as Goldman Sachs and CS First Boston, threw in a total of $130 million to fund the newcomer's first venture fund. And get this: co-founder Jake Winebaum says eCompanies is already receiving some 300 business plans per *day*! [Gee, that's more than triple the number Internet-investment powerhouse CMGI recently said it's getting. Huh? This raises larger questions: When is an idea a plan? When is a plan just an email? And when is an email really a plan?]

Heidi Mason of the Bell-Mason Group, who began working with Gordon Bell some eight years ago in corporate ventures, moderated this panel and drew out some big-picture insights from panel members, including John Hagel, author of "Net Gain" and "Net Worth". John is interactive multimedia practice leader at McKinsey & Co.'s Silicon Valley office.

Hagel said corporations must ask themselves what their "aspiration level" is for e-commerce, and how they will deal with uncertainty. His firm advises a limited number of bets, and "to fund them well." On the subject of metrics, he said, "You need to develop *leading* indicators. Financial indicators are lagging ones."

How tightly should you integrate your new EC venture into your traditional business? "Most companies overestimate integration and underestimate speed," Hagel noted.

What's more, he said, "It requires a mind-set shift: corporations have to look outside for help," he said, "instead of doing it all inside"... as well as looking at equity spinouts.

Todd Chaffee, who heads Visa's very successful venture group, said his company launched its VC program in 1995 and has made 20 equity investments to date, 60% of them in the U.S. The average investment is $1.5 million, and Visa focuses especially in the micropayments and wallet space. "Corporate venturing is an extremely efficient way to do R&D," Chaffee said, "with Silicon Valley entrepreneurs who are hungry and motivated." In speech recognition R&D, for example, he said Visa invested in Nuance Communications (a spinoff of SRI). "These guys had a prototype in two weeks! Soon, they'll be going public, and Visa will make a lot of money." Just recently, the company launched "eVisa," which Chaffee described as "a Special-Forces, Navy-Seal type of group, now 35 people under Visa USA, with an advisory board of Internet experts." [Could it be in reaction to AmEx's latest moves?]

Josh Grotsein of Citigroup spoke of his firm's "eCiti" venture, but said it's too soon to give results. "However, this acknowledges it can't be done inside, since we're spinning it out." He talked of the need for traditional firms to work with their new companies in a kind of "organizational XML"... comparing it to what some VCs call keiretsu. He said the best examples of this so far are Softbank and CMGI.

But back to Jake Winebaum, who's now incubating young Internet firms at eCompanies. Quite a change from Disney, he said, where he was spending some 50% of his time on compensation and employee issues, complicated by the fact they were experiencing 40% attrition. His mission now? "To launch companies of consequence in 90-120 days, ready for conventional venture financing." Speed is of the essence, Winebaum noted, because "we assume when we get an idea that six to eight others have it, too."

-What Are the Some of the Financial Issues for Internet Companies, and for Corporations Venturing Into the Dot-Com World?

For Nordstrom.com, the question of whom to initially partner with on the outside was of major importance, said Dan Norstrom. They of course chose Silicon Valley powerhouse Benchmark Capital. Asked if some people's money is greener than others, Dan said it wasn't about cash, nor even about what kind of valuation they could get. It was about "getting their attention, raising an amount of money that would get their bandwidth," he said.

A perspective from an older dot-com with large corporate partners was provided by Mike Levy, CEO of Sportsline USA. Asked if he was starting to see some of the pressures of an established company, Levy said, "Yes, for one thing, expenditures that don't have an effect on EBITDA will be looked at as bad by analysts." And he now has to spend time on a regular basis communicating with institutional investors.

Moderator Jonathan Weber turned to Dan Case, CEO of Hambrecht & Quist: "Will 'Net companies not spend enough if they feel pressure from Wall Street?" Dan didn't even hesitate: "Be bold, spend, don't worry about The Street -- go for the long term!"

Dan Nordtrom followed up by saying you need a strategy that's not only bold, "but that can be articulated well."

And Mike Levy noted that, in the fast moving world of the dot-com, long consideration of strategy moves is just not part of the picture. "We make a decision in two seconds and go," he said.

Dan Case, of course, was also asked about H&Q's recently announced merger partner. Why Chase? "Because they are the best managed wholesale investment bank in the world," he said. What about Chase's 'Net strategy now, which has been changing a lot: "H&Q will add some energy and urgency to this." And was it difficult to drop the long established name H&Q? "We'll still use it in the parts of our business that deal with entrepreneurs and high-net-worth individuals, but otherwise it's 'Chase West'," he said, proudly donning the hat.

Back to Dan Nordstrom, who was asked if there was a push within his company to do the dot-com inside? "In our case, I was the natural choice to run with it because of my technology bent, having started an interactive TV project six years ago, which didn't really go anywhere..." (that sort of morphing into the Web initiative, he implied). On the subject of ownership, Dan said that Nordtsrom "will maintain a significant share" of the dot-com, "going down to maybe 50%."

What about integrating the brand across the channels? Dan said "I spend about 70% of my time on this. The Web can actually drive traffic to the stores." But, he noted, human nature being what it is, the stores and the Web will likely be an "us vs. them" kind of mentality within the organization as they go forward.

A final bit of "levity" was provided by Mike Levy and Dan Nordstrom at the end of this panel. Asked by Weber if AOL does what they promise, Levy said: "You have to stay on their asses. CBS, too." To which Dan added: "That's funny. I'm on the board of MountainZone.com, and we were just talking about how we have to stay on Sportline's ass!" [A vicious circle, indeed, these partnerships.]

-And What of the People Issues -- the Human Capital?

John Battelle, CEO of The Industry Standard, kicked off this panel with a great question for the senior HR person at Yahoo: "Yahoo used to be *the* place to work -- how do you keep it that way?" Kelly Boyer, whose title is "HR Yahoo," joined the organization through the acquisition of GeoCities, where she was VP of human resources. She replied: "Well, they work at keeping it a happy company." But there's been an evolution, she said. For example, the average age is now 30.6, "which is getting older." And she admitted it has become somewhat of a two-class system, the millionaires and not, which provides some unique challenges. And also that "youth" can be a problem -- "a lack of experience and sensitivity."

On the subject of how well-heeled much of the Interent talent pool has become, David Nosal, a regional managing director for recruiter Korn Ferry [virtually licking his chops contemplating the above] said, "My two best types of prospects are those who've become rich, and those who've been acquired and want to move on."

Which raised the issue of turnover. Jon Low of Ernst & Young noted that it is, of course, a fact of life in this environment (his firm now experiencing about 20%), "But when people leave, it can still be a positive thing. They can be the best business-development people you'll have out there," he said -- implying departures, since they are unavoidable, be handled in a friendly, upbeat way. Jon also had another great observation: "The 'command and control' style doesn't work in an economy that operates virally."

What does Sony Online do to attract and keep people. EVP Richard Glosser said they "try to act like a 'Net company, with compensation to match." And create a great culture. "There's a lot of skunk-working going on in our company," he said, including an exciting focus on Internet devices. Look for things like "Jepoardy to the Palm Pilot," he promised.

Is there a trend now for senior-level people to jump from traditional businesses to dot-coms, Batelle asked? To which the Korn Ferry panelist sat up straight (as in, like, are you kidding?): "The Andersen Consulting CEO who just jumped to WebVan -- was this a tough decision? Hell, no!" he said. "A $4-billion pre-IPO valuation, and stellar backers. What's the risk? We're seeing a lot more of these [sudden] 'entrepreneurs' these days." [Licking chops of their own.]

"So, okay, what's a perk these days? Hell, it used to be *dental* for cryin' out loud," Batelle exclaimed. Jon Low, the E&Y fellow, said a survey they did found the most important thing is this: "a stimulating environment." To which David Nosal of Korn Ferry added: "Yes, the ability to change things -- like, the world! -- at least at the CEO level."

[So there it is, friends, the definitive answer: money ain't the point.]

-Man on a Qwest

On the first afternoon, we had the pleasure of hearing a keynote by Joe Nacchio, CEO of Qwest Communications. What a salesman this guy is -- had us all on the edge of our seats, eating right out of his hand. He made the short flight over from Denver just for this, then was enjoying himself so much up on stage that the moderator finally had to tell him to leave: "Joe, you gotta get back to the airport -- you'll be late for your next stop."

Anyway, Joe has a way with words, and with understatement: "We've placed our bet that there will never be a bandwidth glut," he said. "Broadband is the next great disruptive technology." Markets get more efficient as power and bandwidth get cheaper, Nacchio explained.

The guy who engineered the merger with US West is nothing if not a visionary. "The convergence of bandwidth, software, and silicon will transform our world," he proclaimed.

He said his company is burning $5.5 to $6 billion a year, and that they just announced a $1.5 billion deal with H-P related to mass storage.

"There are two things I worry about," said Nacchio. "One, how do you not get caught up with your success? (That is, speed vs. stability.) And, two, how do you get intellectual capital?"

But the sound-bite that seemed to jump out from it all? Joe left us with one big reminder: "We *will* be a predator."

-Ideas Are Easy; Execution's the Bitch

The technology integration panel looked at the issues of aligning the web with the rest of the organization, getting it to work with existing backend systems and, not the least, dealing with the different cultures involved.

Robert Shaw, CEO, US Web (who formerly headed Oracle's worldwide consulting business), noted his firm has gone from 600 to more than 4000 people in little more than a year. "There is an insatiable need out there," he said. "It's going to the CEO level -- they're rolling the dice, cannibalizing the business."

But it's not just the CEO here. "All parts of the organization must come together to defend themselves and expand themselves."

Pete Wolcott, president of Pandesic, says his firm is "enabling self-service for the online customer, and providing the opportunity to take business metrics to a whole new level -- like inventory turns." He said it's still early in this business. "We have impatient shoppers, but they're persistent."

One interesting thing Wolcott said was not to try to evolve your legacy systems. "Create new ones," he said, "Then come back later to integrate with them." He said Pandesic is "developing tools for dot-coms that will become the tools of business."

Tim Huder, CTO of Janus Mutual Funds, spoke of how his firm launched its "Virtual Janus" site one year ago. It allows customers to do such things as access their mutual fund statements and download prospectuses. "We're already doing as much business online as we are traditionally," Huder said. And his firm is integrating online into all parts of the business. "The technology part was relatively easy. More difficult was integrating the organizations, the 24x7 coverage, and dealing with the SEC."

So the question was then put to Shaw of US Web: "What's harder, the people part or the technology part?"

"Management needs to decide quickly," he said, "Do I have the culture to do this internally? They must move fast to get something up." They just don't have the time they used to take, Shaw said, like to implement ERP. "We always try to take the engagements that have access to the CEO. Otherwise, it just becomes another 'stovepipe' thing."

-So You Wanna Talk Fast Ramp-Up?

Listen to Jeff Arnold, CEO of WebMD/Healtheon, who now has *800 people* working on his firm's new web site, set to launch November 1.

"We've raised $500 million from strategic partnerships -- no VCs." [Of which $220 million was from Dupont alone, who was also in attendance at the event.] "We've put together 55 partnerships in a year and have portal exclusives by category with Lycos, Excite, WebTV, CNN, MSNBC, and others."

Arnold noted that WebMD began as a content aggregator, working with such venerable institutions as Johns Hopkins. "But we've evolved to being a source," he said. How? Well, for starters, by acquiring Medcast Networks in June, which brought them 75 medical writers, 75 physicians, and news bureaus in three cities.

For sports medicine content, they have a partnership with Sports Authority, and they do online branding with a sport medicine channel. For offline (real world) branding, WebMD/Healtheon has a partnership with Health South, which allows them to have signage and promotion in 2000 of their facilities, plus online branding and connectivity via 200 WebMD kiosks in certain of these locations. At these Health South facilities, WebMD is now distributing 100,000 gift certificates *per day*, Arnold said.

For offline content, they have a deal with Reader's Digest. For online content, they work with the sports medicine institute to provide information to Health South's 50,000 referring physicians.

The not-so-unobvious conclusion: "We're focusing on world-class partnerships," Arnold said.

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That's enough for now, friends -- this one's getting too long. So, I'll recap the remaining nuggets in yet another send, soon.

Meantime, think urgency, think big...and keep that Rocky Mountain High.

yours in continual Web knowledge mining,
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Graeme Thickins, Founder & Principal Consultant
GT&A Strategic Marketing Inc.
*Twin Cities *LA *San Francisco *Seattle
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