Ian McCaig’s History of Lastminute.com

Lastminute.com. Ian McCaig, lastminute.com‘s Chief Executive Officer, told the history of this online travel and lifestyle retailer to the Edinburgh Entrepreneurship Club.

From a stereotypical “dot com” baby in 1998, to the rapidly maturing teenager of 2010. Ian charted the way in which the business’s strategy, structure and ownership had evolved as it matured from something with the turnover of a small local pub, to a multi-billion enterprise. Covering the problems of merging acquired companies, the need to scale costs, and the change from a public (stock market) ownership to private equity.

This article is based on Ian’s talk. It concludes with some personal analysis of the future, with particular reference to my favorite topic, public transportation information… Read More

Bill Urschel on Internet Advertising Innovation

Bill Urschel is the CEO of the internet advertising exchange, AdECN. William spoke to a Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link gathering on 14 November 2007, about the development of AdECN, its role as an exchange market for internet advertising space, and the future of internet advertising. This article is based on Bill’s talk, which he gave in a personal capacity.

Development of AdECN

William Urschel first realising the market potential for computer/internet ventures when writing computer books. He has started a number of software/internet businesses since, and looks for three things in a new venture:

  1. Market: Something to address of a manageable size, with an overall growth trend (“the rising tide lifts all boats”).
  2. People: 1-5 people with either technology or business backgrounds, and the correct attitude and work ethic.
  3. Product: Address a need… and it is nice if it works.

Historically, advertisers would pay an advertising network, who would then display adverts using the advertising inventory on publishers’ websites. It was common for the network the advertiser dealt with to run adverts across multiple networks. Often business flowed from network to network to network, before an advert actually appeared on a publisher’s site. This resulted in reduced revenue for the publisher, as each network “middleman” took their share: Perhaps for every $1 of advertiser’s money spent, just $0.18 would reach publishers. Waste still existed in the market: Half of the display advertising market was either going unsold or “under-sold” (sold for a significantly lower value than it could attain, simply to fill the space).

How AdECN Works

AdECN was launched in 2002, but didn’t “get moving” until 2004. Its role is to act as a stock exchange for network-to-network advertising deals. The ECN part of the name, meaning Electronic Communication Network, is derived from financial stock markets.

Networks continue to deal directly with their own advertisers and their own publishers. The process will first try and match an advertiser’s demand to a publisher’s inventory within the same network. When advertising demand and publisher inventory within the first network are mismatched, AdECN steps in to broker a deal between different networks. The result is that advertisers get their adverts published, and publishers fill their inventory with paying adverts. The whole auction process takes place in 6-7ms, at the time the publisher’s page is viewed.

AdECN has been careful to make itself an ally of the networks, not a competitor to them:

  • It does not deal directly with advertisers or publishers – it has a distinct role in providing the infrastructure for the exchange.
  • Networks split the commission on the deals between them, just like stock brokers.
  • AdECN levies a flat fee, so is neutral to whoever wins or losses the auction.

The neutrality of AdECN is seen as their main competitive advantage over Yahoo and Google: AdECN isn’t an advertising network in its own right. [Although as described later, AdECN may simply be becoming the new breed of advertising network, in a marketplace where advertisers will increasingly deal directly with publishers. I did not get the chance to query this apparent contradiction.]

Contextual and Behavioral Data

Adverts can be targeted contextually or behaviorally:

  • Context considers simple variables such as time of day or location (typically the country viewer is resident in).
  • Behavior (or, behaviour, or “profile”) considers variables such as the age of the viewer and their search patterns.

Currently 95% of all targeting is contextual because it has historically been difficult to match behavioral information in a fast and ethical manner. In the next “3-5 years”, behavioral advertising will move to dominate 80% of online [display?] advertising.

AdECN capture a lot of data, which is increasingly the added value it can offer networks. By design it does not store data: Data is used only in the (near-instant) auction process. Individual networks/advertisers can bolt on their own “black boxes” to AdECN – bespoke software they design to utilise auction data so that their advertising spend is optimised. The most common use of black boxes is to split Cost per Click (CPC – advertiser pays when someone click the advert) and Cost per Action (CPA – advertiser pays when an action is completed, such as an enquiry form completed, or product sold).

Privacy remains a key issue. Self-regulation is seen as the way forward. This is based on not keeping personal data, and instead focusing on core questions like “what is the consumer going to buy?” The history of Gator (spyware installed which monitored browsing habits) shows that consumer pressure will eventually win over advertising network which don’t stick to reputable privacy practices.

In Hindsight

For the first two years of the venture, AdECN did not perform well. For an internet startup, two years is a long time. In the early years, AdECN’s team were “too abstract and too technical”. The software was eventually rewritten. Fortunately the venture’s backers were able to see the long-term potential. The lack of barriers to entry into the exchange did allow many networks to trial it, which allowed business to slowly build.

By 2004 they were “in the right place, at the right time”. They were bought by Microsoft. Bill Urschel couldn’t reveal specifics, but stated that there was “no b” in the price paid. His final round of investors received a x9.7 return over four months, so nobody was complaining. They sold “too early”, but in practice they had to sell: Similar (although William claims not actually exchanges) competitors Rightmedia and Doubleclick sold to Yahoo and Google respectively. It became inevitable that Microsoft had to buy an exchange.

The Future

The underlying market is expanding, and forecast to continue to grow. Critically:

  • Online advertising accounts for only 7% of total advertising spend, yet occupies more than 7% of consumers’ time: Advertisers are behind the trend, and will logically seek to catch up.
  • Display advertising (on publishers’ sites) is growing faster than search advertising (on sites such as Google search results).
  • With exchanges such as AdECN, display advertising now has the same data/targeting advantages search had 6-7 years ago. Real-time auctions and targetting have taken much longer.

The industry itself will like change, particularly what is meant by the term “ad network”: Advertising agencies can now deal with publishers directly, and use the exchange to handle excess supply or demand – there is no need for the old middlemen, the advertising networks.

The average CPM (Cost per Mile, where a mile is a thousand advert impressions) rates are likely to remain the same where already high (for example, rates around $25 will see little change). However, targeting will allow undersold inventory to be utilised much more effectively, so space sold closer to $0.25 will increase in value. As noted earlier, behavioral/profile targeting is likely to develop such that it dominates within 3-5 years.

Could exchanges move into the television and print advertising arena? Current systems could be improved, but the exchange really needs real-time auctions to flourish.

John Clare on Electronics Retail Margins, Scale and E-Commerce

The recently retired chief executive of DSG International, John Clare, spoke to a small group in Edinburgh on 5 October 2007. DSG is a leading retailer of electrical goods, primarily in the United Kingdom through stores such as Dixons, Currys and PC World. This article summarises the low-margin nature of the business, the drivers for globalisation and growth in scale, and makes some fascinating observations on the role of physical premises for developing a successful e-commerce (internet retail) model.

Price and Margins

Electronics retailing is characterised by infrequent purchases, with competition primarily on price: Consumers tend to decide to buy a specific product, and have little loyalty to specific retailers. Factors such as availability (“can I take it home from the store now?”) and after-sales support (“what happens when it breaks?”) are still important, but often secondary considerations to price.

Competition on price means low margins: 3-4% margin is typical on goods sold in stores (15-20% gross margin). On some goods margins are lower. A computer might retail at a price that offers a gross margin as low as 6% – not enough to cover the full cost of the sale. Creative sales techniques are required: For example, offer a free printer with the computer, but don’t include the connecting cable, the ink or the paper. Those additional items attract surprisingly generous margins – enough to offset the loses from the original transaction.

The United States market is even more price-centric: Consumers might drive huge distances to save a few cents on a purchase – without apparently considering that the cost and time of the driving may exceed the saving on purchase price. (DSG attempted to enter the US market in the 1980s, but failed. In part due to enthusiasm of Wall Street investors to encourage a competitor to grow a monopoly by continually losing money selling goods below profitable margins: In the long term, the strategy fails, because once a monopoly has been created, raising prices to profitable levels simply causes new competitors to enter the market again.)

Scale

Until 10-15 years ago, the advantages of scale in electrical retail were modest: Being part of a branded network of stores does not alter the property costs of owning local stores.

Two factors have made scale increasingly important in electronics retailing, and driven the current trend towards the globalisation of electronics retailing:

  • Limited scope for growth in domestic markets: Additional growth beyond a threshold (for example, DSG’s 20% UK market share) in a domestic market becomes increasingly harder and harder to attain – it is simply easier to focus on “foreign” markets.
  • “Systems” (supply chain, ordering) have become critical to reducing costs and so creating a competitive advantage. Remember, this is a sector where tiny cost differences can determine business success or failure. These systems are increasingly expensive. Walmart was cited as an example: Their systems are valued at over $1 billion. Eventually Walmart had to expand beyond the US to justify such high levels of investment in its systems.

Large established retailers in mature markets (such as France and Germany) were difficult to compete against. Instead DSG (and other large established retailers) have been focusing on “immature” markets – those still dominated by many small retailers, such as southern and eastern Europe, and China. India is also an attractive market, but lacks developed infrastructure and willingness of government to allow foreign investment in the sector.

E-Commerce and Internet Retail

Internet retailing has grown from around 1% of DSG’s sales in 2002/3, to about 10% in 2007. Competition tends to be smaller or unbranded businesses, competing on price. Consumer trust (in an established brand) and commitment to support give established large retailers an advantage online.

DSG has two distinct internet-based retail operations:

  • PIXmania, a “pure play” (internet-only) retailer selling to most of Europe. The decision to acquire this business may be characterised as “hedging one’s bets”: The only acknowledged internet-only success in the EU has been Amazon. It still is not clear whether the Amazon model will transfer to other sectors.
  • Existing physical retail brands, given online presences.

The second type of operation was initially similar to the first, until the introduction of a facility that allowed customers placing online orders to collect the goods from their local store:

The ability to order online and collect goods from your local store tripled online conversion rates, from 1-2% to 4%.

Customers ordering online typically collect goods outside of working hours (before 09:00 and during the evening). These are evidently people that wish to shop online rather than in a store, but want their goods delivered so fast they are prepared to travel to the store to collect them.

Conversion rates may still appear low compared to those at stores (around 30%). But the proportion of customers who are simply researching products, without the intention of buying immediately, is not known.

Improved conversion rates aren’t the only advantage for the retailer. The gross [I assume] margin on internet sales is only about 6%, with a tendency for orders to be for single items (for example, one low-margin computer, with no chance to sell money-making printer ink or paper). However, when the customer arrives at the store to collect their order, they are successfully being sold half (by value) as much again in other items. That raises the overall margin on “internet with collect-from-store” sales to 13-14%.

The e-commerce model is still being developed. Cost reductions are likely as software becomes more standardised, although retailers are simultaneously moving to higher quality, more complex systems, so cost trends are mixed. Currently internet retail operations are about 6% cheaper than physical retail operations.

That means that the “internet with collect-from-store” model has very similar overall margins to the store-only model – and both offer significantly higher margins than the internet-only model.

It is easy to overlook the constraints of slow physical delivery networks when discussing selling goods over the internet. DSG’s “internet with collect-from-store” model gives some rather compelling evidence for just how important rapid delivery is.