Date: September 16, 2000

************************************************
The Industry Standard's 2nd Annual "Net Returns" Conference
was held September 7-9, 2000, at the St. Regis Hotel, Aspen, CO
************************************************

(to subscribe to our list of heavy-duty New Economy execs, now 2000+ strong,
and receive future conference reports, click here and give us your contact info)

Dear Clients, Partners, Friends, Rock Climbers, Mountain Bikers,
Fly Fishermen, and Fellow Seekers of the Elusive "P":

That's profitability for you slackers out there. Yes, we heard the word three gazillion times in Aspen and, doggone it, ya know what? I think it's starting to sink in! Making money? Yeah, we got that in here! Let's see, that's on page...of the plan, isn't it, Charlie?

Those bricks-and-mortars (dot-bams), that's all they seem to talk about. Profitability this, and profitable-from-day-one that. Well, aren't we special? Okay already! If *that's* how you want to play...

---------

Anyway, now that I have that off my chest, here's what I said in the first story I filed on this very excellent event (to Conferenza.com) earlier this week....

Bricks-and-Mortars Gloat Over 'Net Success, But Advantage
Still With Culture and Growth Model of Dot-Com, Most Say

by Graeme Thickins
grt@gtamarketing.com

Just shy of 500 senior executives from Internet-related ventures gathered last week amidst the panoramic mountain views of Aspen in the fall, to breathe in something other than their own fumes for a few days. And to talk strategy--bigtime.

Some of the key themes they heard were these: (1) the dot-bams (as in bricks-and-mortars) may be making some good headway, but "dot-com" is by far and away NOT a nasty term; (2) if you're raising money, you'd better have something very creative up your sleeve; and (3) if culture isn't foremost in your mind, whether you're a traditional or a pure-play -- well, it may not matter whether you can raise more money.

Some further explanation of these themes:

1) The traditionals, or so-called dot-bams, may now be having their day, claiming much success on the 'Net -- but don't count out the dot-coms quite yet. It's not a matter of us vs. them -- some creative new combinations may be coming.

2) Raising venture money is becoming very difficult for all but the very top Internet startups, and also for the legions of existing dot-coms that aren't yet showing *both* growth and profitability. Consolidation is one hope for some, but the carnage may only be beginning. "Cash-flow-negative companies just have no leverage anymore," said one investment banker panelist.

3) A difference of opinion is still evident among traditional companies, such as retailers, as to whether their 'Net operations should be separate or integrated within their organizations. But the prevailing thought seems to tip in favor of separate. The most mentioned reason: culture. (Also of interest: the audience vote was 75% in favor of this approach.)

A Review of the Opening (and Perhaps Most Significant) Session:

John Battelle, CEO of The Industry Standard, began his introduction of the event by noting, "Last year, the tone was very different. Everyone was going to the moon. But, as it turned out, not everyone brought their oxygen tank."

He followed with this question: "Let's see a show of hands. How many of you are buying Super Bowl ads this year?" (Huge laughs.) And, to no one's surprise, not a single hand went up. [Liars.]

"Well, for me," said Battelle, "I'll just say it's great to be in the *news* business now!"

John Hagel, Chief Strategy Officer, 12 Entrepreneuring--and former senior McKinsey consultant, plus author of the best-selling books "Net Gain" and "Net Worth"--kicked off the conference with a keynote on the subject of "Tomorrow's Winning Internet Strategy." Some key points Hagel made were these:

"It's dangerous to compartmentalize 'Net strategy and bricks-and-mortar strategy. The win will be creative combinations."

"There are parallels to the fashion industry -- both have enormous uncertainty, with a temptation to lock in to one strategy or fashion, often with disastrous results."

He continued: "So, let's preview the fall line." The perception now, the prevailing thought, is basically this, Hagel said:

- EC is marginal, not transformational--it's only about faster & cheaper
- The market has spoken: growth is out, profit is in...and
- M&A clinches it -- "The bricks-and-mortars have won, and all that's left for dot-coms is bankruptcy or sell-out."

"But the reality is this," he said:

- "EC *will* be transformational--the early players just under-estimated the time required"...
- The market has "doubled the hurdle for management" -- they now need *both* growth and profits--and a high level of growth to justify value...and
- Current M&A activity does not go far enough -- what's needed is a new and different form of it. "M&A will be the primary form of value creation now, and dot-coms will play a significant role."

Hagel's key messages, then, he repeated:
- EC will be transformational
- Growth will be even more important
- New forms of restructured growth will be necessary

He feels the B&M sector is still largely about complacency, while the dot-coms have the advantage of urgency.

"EC is just getting started," he said. "It will restructure economic activity because it causes a systematic reduction in the time required to access markets, to search for and buy products."

Other key supporting points of Hagel's:

" 'Reverse markets' will shift economic power"....
- Customers are more powerful, creating a *market squeeze*
- There's an increasing value in intellectual capital, and shortages of it, creating a *talent squeeze*
- And there is the ever-present *margin squeeze* as well

"Traditional business will unbundle as interactivity costs decline." There are basically three functional areas within the traditional business, he pointed out:
- Customer relationship
- Product innovation and commercialization
- Infrastructure management

"These are now tightly bundled in most organizations, but they will unbundle. And there will be some large new players created."

Hagel continued: "There is a significant opportunity now for 'asset arbitrage' -- assets from bricks-and-mortar businesses being combined with dot-coms. The vast bulk of assets are in the existing B&Ms."

He noted that recent M&A hasn't provided a focused growth platform. "It's mostly been defensive -- about cost reduction." What's called for now, Hagel said, is a process that begins with redefinition -- "What business are we in?" -- which then leads to the right growth strategy.

Some News Bits and Predictions of Interest:

- Cory Johnson, columnist for The Standard and editor-at-large for TheStreet.com, was introduced before the first keynote and announced some news of his own: he had just officially agreed to join The Standard fulltime, in the role of editor-at-large (continuing to be based in SF). Though only listed in the program as moderator for the Wall Street Panel, Cory from this point on served as the emcee of the entire event -- which turned out to be a highlight, a pleasant departure. Cory provided a large amount of levity, and seems quite at home on stage -- perhaps from the increasing amount of TV work he's been doing, he told me later. From the sound of what editor-in-chief Jonathan Weber hinted to me at the Elk Mountain Lodge that night, we'll be seeing more of Cory on TV. I'm betting his face may even be gracing yours and my favorite New Economy TV addiction, CNBC Business News. (Thank god my hotel room had it this time! My selection of travel accommodations now includes that question first.)

- Watch for a unique play from 12 Entrepreneuring, the as-yet-to- be-officially-announced, incubator-like organization based in San Francisco and founded by CNet's Halsey Minor and other 'Net veterans (including Hagel). I've heard enough now, in two Standard conferences in a row, to read between the lines: it appears 12 Entrepreneuring (clumsy name and all) may be planning to pursue a new type of M&A strategy involving, at least in part, rollups of assets from traditional companies to form powerful new dot-com organizations, whose value will be in their ability to grow fast and hence create high market value.

- Charles Schwab & Co. will soon be introducing a branded cell phone with a "Call Schwab" button, according to Dan Leemon, Chief Strategy Officer. It's another technique, he said, "to create a rich relationship with the customer."

- Cisco now reports its latest calculation of the impact of the Internet on its own organization is a staggering $825 million -- in cost savings and increased revenues to date. And, said Pete Solvik, Cisco's Senior VP and CIO, that figure is conservative.

Other Observations:

- This year's event could easily have been called The Revenge of the Bricks-and-Mortars. Gloating was in large supply, as several speakers from traditional businesses spoke of their Internet successes, while taking not-so-subtle shots at the other side. It got so bad, one speaker had to pull back a fellow panelist she thought was going too far. "Let's not get into kind of a reverse hubris here," said Jeanne Lewis of Staples.com.

- One of the most vocal of the traditional execs was Gerald Storch, President of New Businesses at mega-retailer Target Corp. (formerly Dayton-Hudson), who proudly said, "The Internet is like a new circulatory system for us." He noted that the company had investment bankers tell them they could spin off Target.com and "get a valuation of one to five billion dollars, on day one." But Storch (a former McKinsey consultant) said, "we're glad we didn't. We can finance our own initiatives -- at 7% cost of debt." [Commentary: I'm happy for Target, but this seems to put them in the amazing transformation category to me, compared with just a few short years ago. Storch and then Dayton-Hudson were widely regarded in the Twin Cities as Internet naysayers, and quoted often in that vein in our local media. Storch, however, vehemently denied his firm was a disbeliever and late-comer to the party, when I asked him about this immediately following the panel. Well, that's sure not how I remember it. But, then, I suppose it's entirely possible I was smoking too much Dot-Com Wowie, huh?]

- The panel Storch participated in, by the way, was entitled "Fortune 500 Meets Silicon Valley." And it doesn't, we learned, in this case, anyway. The subtitle that moderator Jonathan Rabinovitz of The Standard gave the session, however--"The View From Minnesota"--was apt, in that it also featured Monica Morse, Managing Director of eVentures for Cargill. That firm, the largest private company in the U.S. (by a long shot), is also based in the Twin Cities. Interestingly, though, Monica isn't -- preferring instead Internet Ground Zero (SF). But she's certainly one to watch, and surprisingly young for what one might assume to be a stodgy, old organization. Monica originally pitched Cargill on the idea of a farm portal (a la their current joint venture, Rooster.com) way back in 1995, right out of business school. It took a few years, but--after she did a stint with a startup in Oregon--sure enough, Cargill came knocking and Monica signed on. [So it seems Target wasn't the only late-bloomer.]

- There was more than one prominent speaker still defending what the dot-coms bring to the party -- even how they will ultimately prevail in the next phase of the New Economy. For example, as noted above, John Hagel in his opening keynote speech on "Tomorrow's Winning Internet Strategy," spoke of "a new M&A" coming, in which he feels the dot-coms will have the advantage.

- Surprisingly, attendance at Net Returns was only slightly down from last September's inaugural event, which occurred just prior to the "anything-dot-com-will-win" euphoria of fourth quarter 1999 (or, as we now simply say, "pre-bubble"). Attendance from traditional companies was even a higher percentage this year, in part because The Standard smartly slanted its event marketing campaigns in that direction.

- The worst complaint I could think of at this event was that a few of the big-name speakers had to send substitutes at the last minute. But, then again, this happens to some degree at virtually every major conference I've attended--so what else is new? There were at least three disappointments, but the stand-ins did a commendable job. I heard no grousing.

- The energy and enthusiasm at this event was amazingly upbeat, after last year's hard to surpass good-times party atmosphere. And the networking and open interaction by the participants-- attendees and speakers alike--was as good as one could expect. [The Standard is getting very, very good at this conference thing.]

- Toughest sponsor act: iXL, trying to put on a stiff upper lip after its president had just stepped down two days before. Then, on the first day of the conference, we read more ominous news in The Journal: the company announced a layoff of 350 people. [At which point, other Web consulting firms in attendance begin licking their chops at the recruitment possibilities...]

- Got stock picks? Well, as a panelist from Merrill Lynch said, "There are no value plays in the sector." But the Wall Street Panel participants each gave us a favorite current buy...which were: AOL/Time Warner (Sanford C. Bernstein) , City Search/ Ticketmaster (Thomas Weisel Partners), and Mercury Interactive (Merrill Lynch).

- Do traditional companies still need a separate structure for their Internet operations? A hardy yes, according to at least two very credible and successful ventures -- Staples.com and Nordstrom.com. [More later.]

- One almost universal concensus is that culture remains a major issue in the success of any 'Net venture. An example: Cisco's SVP/CIO, Pete Solvick, said his company has found "an extremely high correlation of 'iCulture' with success." This as part of a major study they undertook with two partner companies, the results of which he presented. [Again, more later.]

A Selection of Quotes (in no particular order):

"Who do we worry about? Well, certainly not Boo.com! All the startups never mattered, and still don't."
-Bill Bass, Sr VP, e-Commerce, Land's End

"We traditional companies were largely late to the game. But, in our case, we're a $9-billion company with many strengths--so a startup with, say, $15 million in sales just has a hard time competing with us."
-Jeanne Lewis, President, Staples.com

"Competing on the 'Net is actually harder than in the real world."
-Dan Nordstrom, CEO, Nordstrom.com

"M&A will be the primary form of value creation now. And dot-coms will play a significant role."
-John Hagel, Chief Strategy Officer, 12 Entrepreneuring

"The real opportunity with the AOL-Time Warner merger is the dot-com culture taking over the bricks-and-mortar enterprise. If it's anything else, I'm worried it will achieve its objectives."
-John Hagel, Chief Strategy Officer, 12 Entrepreneuring

"The Chief Evangelist title is bullshit. The whole company has to be a church!"
-Peer Munck, CEO, TheSauce.com (B2B startup targeting independent restaurants)

"Despite what you read about VC investment dollars going up, investment in *early-stage* Internet companies went *down* in Q2 and Q3. The prevailing attitude seems to be, 'Show me a chance for 50% gross margins.'"
-George Zachary, General Partner, Mohr Davidow Ventures

"We'll see dealflow go down, and some really hard-ass looks at deals."
-Zach Hulsey, Managing Director, Chase H&Q

"Will more private M&A happen? Yes, but only if both companies actually have value. You can't glue two rocks together and expect them to float."
-George Zachary, General Partner, Mohr Davidow Ventures

"Where will all the huge, available VC funds go? Well, the quality deals will get tons of money. All else will go to pre-1997 valuations."
-George Zachary, General Partner, Mohr Davidow Ventures

"Creating online markets is hard without a market maker acting as a principal on one side. The consortiums will have a hard time executing. And we don't think the independent exchange model will be successful."
-Stephen Horn, VP, Enron Networks

"Yahoo's recent troubles with ad revenue decline should be viewed in the context of ad budgets being so extreme starting 3Q of last year, that we're now seeing a big aftershock."
-Gordon Hodge, Analyst, Thomas Weisel Partners

"Are Yahoo's troubles a major event? No. Advertising is continuing to grow well."
-Tom Wolzien, Sr. Media Analyst, Sanford C. Bernstein

---------------------

Enough? For now maybe. But, never fear -- I'll have more coming on the Net Returns event, in at least one more email report over the next few days. So watch for that. Including some of my usual features about interesting people I met, new companies I heard about, hallway buzz, cool company names I heard, the party report....blah, blah, blah.

If you'd like to be among the first to get my reports by email, just email me and say "yes."

your faithful, unstoppable, airport-roaming, mountain-climbing,
partyin-hardy, anything-but-subliminal, probably-should-be-at-the-
Olympics-since-I'm-an-Aussie conference reporter,
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Graeme Thickins, Founder & Principal Consultant
GT&A Strategic Marketing Inc.
*Twin Cities *LA *San Francisco *Anywhere
Voice: 612/944-1672
Fax: 612/944-1673
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
And Editor-in-Chief:
"Branding & Marketing to Win
in the Knowledge Economy(tm)"
http://www.gtamarketing.com
...A Unique Resource for CEOs...'Net Startup Founders...
VCs and Analysts...Marketing & Business Development
Executives...and Other Shapers of the New Economy...

(a web site and email list of Internet & new media
executives now 2000+ strong and growing!)

Check out our home page for past conference coverage, and also
see some of ours posted periodically at http://www.Conferenza.com

Catch me at several upcoming conferences and events, including
The Standard's iB2B in Chicago, plus Fall Internet World and
Upside Preview in "New Yawk"...

And, hey, if you have opinions about other events I should
be covering, please let me know, would ya? Thanks.

Over and out!