Who Wants to Be a Billionaire?
On the Internet, there's no accounting for taste. That makes it easy to explain the existence of Web pages with names like www.buttsacrossamerica.com and www.donkeysex.com. But what about that goody-two-shoes bluemountain.com? The crudest thing this site offers is its graphic design, a throwback to the days of 14.4 modems and Netscape 1.0. Instead of smut, visitors to bluemountain.com encounter a vast array of electronic greeting cards -- a disproportionate number of which feature dancing teddy bears -- that visitors can personalize and send to anyone with an e-mail address. For free.
Uncool? You betcha. Popular? And how. In September, of an estimated 2.8 million public Web sites, bluemountain.com was the eighteenth most-visited. That equates to nine million Web users visiting the site that month -- or about one in every nine people online.
Apparently, it doesn't matter that most of bluemountain.com's electronic greetings look like a twelve-year-old girl's Trapper Keeper. People love sending e-cards -- as long as they're free. Other, better-known greeting-card companies that tried charging customers to send e-cards fell flat on their faces. They had nice cards, but anemic sales and paltry hits.
Even bluemountain.com was uncertain what to do with its online success. The site is the Web spinoff of Boulder-based Blue Mountain Arts, publisher of greeting cards so syrupy you'd think Aunt Jemima was the CEO rather than two granola types. Self-proclaimed hippies Stephen Schutz and Susan Polis Schutz started the company in 1971; when their Net-savvy nineteen-year-old son Jared approached them several years ago about starting a Web page for Blue Mountain, it seemed like a lark. Instead of using the site to advertise and sell their cards, though, they developed a line of free online greeting cards. Why alienate visitors by running a lot of advertising or, even worse, charging for the cards? Old-hippie philosophy; new-age technology.
Far from alienating visitors, bluemountain.com brought them in droves. Soon more servers were required to keep up with the traffic. More artists were needed to design Thanksgiving cards in which turtles dressed as pilgrims danced with mice dressed as Indians. The site's popularity began to burden the core Blue Mountain business.
So last month bluemountain.com -- armed with its vast army of visitors but very little in cash and sketchy prospects of ever generating any from its loyal flock, sold itself for a staggering $780 million.
On the Internet, there's no accounting for accounting, either.
What makes Jared Schutz, executive director of bluemountain.com, interesting is not the fact that he's a 24-year-old self-made millionaire. Thanks to Bill Gates and Steve Jobs, any computer geek who hasn't made his first mil by age thirty is a certifiable slacker. And Schutz is no slacker. He's been worth a fortune for several years now -- at least on paper, thanks to the Chicago-based Internet service provider that he helped form while still in college and that he and his partners sold last year.
No, what makes Schutz interesting is the way he seems to be the real-life embodiment of Alex P. Keaton, a sitcom character played to perfection by Michael J. Fox in the Eighties series Family Ties. "Yeah, people say that a lot," Schutz admits. "I don't share his conservative ideology or anything. I remember he was a Reagan worshiper."
Schutz also lacks Alex's penchant for wearing business suits and neckties when completely inappropriate. He says he prefers a more laid-back look -- jeans, T-shirt, Velcro-strapped tennis shoes. He does, however, sport an e-mail-enhanced pager on his hip that's so large it's a wonder he doesn't tilt to one side. And in a picture accompanying a recent profile of bluemountain.com in USA Today, Schutz and his parents are shown perched on a rock -- dad in jeans, mom in a flowing skirt and overachieving son dressed for a power meeting. "I guess it says something symbolically," he concedes. "I'm far more comfortable in a boardroom than an art room."
Schutz shares something much more critical with the fictional Alex Keaton: two genuine Sixties idealists as parents. His father, Stephen Schutz, is a Princeton physics Ph.D.-turned-artist; his mother is Boulder poet Susan Polis Schutz. The pair got their start in business in 1970 selling posters out of a pickup truck they called their "office on wheels." The next year, they decided to settle down in Boulder, where they launched Blue Mountain Arts.
Most of the art was their own: Stephen's genteel watercolor artwork, paired with Susan's florid, emotive poetry. The combination struck a responsive chord with the public, and soon the duo was publishing books of poetry, greeting cards and calendars. Today, Blue Mountain Arts cards account for one-half of a percent of the estimated seven-billion-dollar greeting-card industry. (Both Stephen and Susan Schutz declined to be interviewed for this story.)
When Jared was still in high school, the family moved for a time to San Diego, where Susan's mother lived. Jared attended high school there but got his real education working hand-in-hand with June Polis, his grandmother, who was Blue Mountain's sales manager. Together they would head off to greeting-card trade shows across the country. While Jared helped set up display booths, he'd watch as his grandmother used her soft sell on the crowd.
"It was fun. It was an adventure," he says. It was also a learning experience. "There's nothing that can compare to growing up in a family where there's a small business environment. That was invaluable in giving me a skill set I needed to become successful entrepreneur."
For example, Schutz recalls the time in 1986 when his parents launched a David-and-Goliath battle against greeting-card giant Hallmark. "Their cards looked identical to our cards," he explains, "so we sought injunctive relief in the court system, and we won. And it was just an example of big business trying to put small business out of business."
(Schutz learned that lesson well: When Microsoft e-mail software blocked bluemountain.com messages from going through, Blue Mountain sued the software giant -- and won again.)
Even if he wasn't a Reagan worshiper like TV's Keaton, at age seventeen Schutz was among the first in line to dance on the grave of the collapsed Soviet Union. Taking money he'd earned the previous summer buying scrap metal at government auctions and selling it to businesses for a profit, he flew to Russia on another moneymaking adventure. The country had just begun its tricky shift to a free-market economy, which meant that industries once held by the government were quickly being privatized. Western news-media accounts had inspired budding American entrepreneurs like Schutz, who saw Russia as their big chance for a fortune.
"I realized it was a once-in-a-lifetime opportunity," he says. "I just decided I wanted to go and got a visa and went there without much of a plan." Leaving his parents, who were hesitant about his trip, behind with his younger brother and sister, Schutz landed on the commodities floor of the Russian stock exchange trading privatization vouchers. While his fellow high school graduates spent their summer goofing off, Schutz was more than happy to be moshing in the trading pits of Moscow.
That fall, he returned to the U.S. and started college at Princeton as a political science major. But flush from his trading success, he was eager to get on with business, too. Schutz got his chance during a 1993 trip to Chicago, when he was serving as the Princeton delegate for a national meeting of college Democrats. A college friend introduced Schutz to two recent graduates of the University of Illinois, Josh Schneider and Mike Hakimi. The finance majors were looking for a partner to start some sort of business.
"It was just a crazy time," Schutz recalls. "We strategized in Josh's basement. One of our major criteria for starting a business was one in which we didn't need much capital. And we didn't really know how to raise capital."
Though none were computer majors, all three were computer enthusiasts. Schutz had begun tinkering with computers at age five, when his father brought home an Apple II. At the time, there wasn't a lot of practical application for the home computer, but Schutz and his father couldn't get enough. And then as a teenager, he'd discovered the world of bulletin boards and the Prodigy service.
The three realized it wouldn't take a large investment to start an Internet company to cater to computer enthusiasts like themselves. "We had enjoyed Internet access at our respective universities," Schutz says. "At that time, a lot of university students were on e-mail. And we said, 'Gosh, we think this is going to grow beyond universities, and regular people are going to start using this stuff.'"
Right as they were, Schutz admits he had no "bold vision of the future." He saw the Internet as a niche market at best: "We basically thought kids graduating college would want to keep an e-mail account. And do it from us. Businesses might want to get on, too. We never thought it was going to become the pop-culture hit that the Internet is."
From its start with one computer, five modems and a dedicated connection to the Internet, their American Information Systems began to grow -- quickly. AIS focused on corporate connectivity for business and started connecting other Internet service providers to the Net.
But even as AIS was getting off the ground, Schutz was back in school in New Jersey, setting up other Internet ventures, including Stardot, a Net-consulting firm for political candidates that he later sold.
AIS soon began to move into the area of Web-page development. But many businesses were not yet on board the Internet, and those that were offered little more than shovelware. So Schutz asked his parents' company to become a client. In 1995, he launched a page for Blue Mountain Arts designed to sell its line of 5-D stereogram posters. In six months, the site managed to sell five of the posters. Blue Mountain's first foray into e-commerce was a flop.
So they decided on a different approach. "After having this boring e-commerce site, we decided to put free cards up," Schutz says. "It wasn't a groundbreaking decision at the time. It was like, 'Hey, let's just do it.'"
Schutz's parents already had a profitable company and weren't eager to exploit the Web to make a few extra bucks. "It never really occurred to us to charge for the cards," says Schutz. "It was just a hobby. We started with a few cards."
But Blue Mountain's free cards were an instant hit. "Right from the start, there were people using it," he remembers. "And it grew at an exponential rate. It was early in the Internet, and there were people coming online every day."
And, theoretically, at least, every person who visited the site to send a card attracted another person to view the card. One hit became two. And after the recipient "picked up" his or her card, he or she had the opportunity to send yet another card to someone else. In the Web world, the phenomenon is known as viral marketing. Blue Mountain unintentionally became one of the best examples of its power.
From its origins on one Web server built on a dorm-room floor, today bluemountain.com has 200 servers (currently housed in Phoenix and Palo Alto) delivering greetings in Spanish, French, Chinese, Italian and Portuguese. The site employs forty San Francisco-based artists to design cards, one person to create the music -- basically a high-pitched beeping sound file -- for the cards and another to match the music with the cards.
There's probably one oozing sentiment in your computer right now.
According to Media Metrix, the Web's version of the Nielsen ratings and one of the most influential tools in determining a Net company's prestige -- and worth -- here's how online greeting card companies stacked up in September:
Americangreetings.com had about 771,000 visitors. Hallmark.com had about 574,000 visitors. E-greetings.com, a San Francisco-based online greeting-card company, had 1.8 million visitors. bluemountain.com had 9.1 million.
Traditional greeting-card giants have learned a basic lesson in the new media economy way too late. On the Web, it's not about selling massive amounts of individual cards the way they traditionally do in gift shops and grocery stores. If you're a player on the Web, it's all about how many people see your site. And bluemountain.com has the world by the eyeballs.
Hallmark, with $3.8 billion in print-card sales last year, went online in 1996. "We wanted to bring the power of the brand to people online," explains company spokeswoman Kathi Mishek. By the next year, the company was offering cards on the Web site that you could buy and send to friends online. But very few people bought them. "The market said they wanted free, fast and fun," Mishek says. So in October, the company made all of its e-cards free.
"There are times when you can't send an e-card," explains Mila Albertson, publications and promotions director for the Greeting Card Association, the trade group that represents the industry. "What are you going to do? Send an electronic card when someone dies?"
The Web can't replace physical cards entirely, because sending a greeting is a "touchy-feely" type of thing, she adds. It's unlikely that people are going to store their electronic greetings in a shoebox for ten years as a keepsake.
According to Albertson, the greeting-card industry views the electronic medium not as a threat to existing business, but as a potential means of developing new market segment. "Card companies react to changes in lifestyles and demographics," she says. "Twenty-five years ago, did you have cards for the gay market? Not likely. Fifty years ago, did you have African-American cards? The Internet is a chance for expansion into a niche for people who like things electronically and like it fast."
And free, of course.
But if greeting-card companies are forced to give away their core product, where will they derive any cash flow?
"Gift solutions," says Mishek. "You can go anywhere from tylenol.com to the post office Web site to send an e-card. You get them free almost anywhere." What companies like Hallmark want to use their free greeting cards for is to lure consumers into a gift-buying environment. If you send your mother an electronic Mother's Day card, for example, you won't have to risk being disowned for sending such a cheap and impersonal memento of your love. That's because as you send your card, you'll be presented with the option to order real flowers online and have those sent to your mother's front door. The e-card was free, but it bought Hallmark the opportunity to make money on a bouquet.
American Greetings's online subsidiary and E-greetings.com presumably have similar strategies, though neither company could comment for this article because both have announced plans to seek public investment and so are in their federally mandated "quiet period."
E-greetings was co-founded by Tony Levitan, a former marketing bigwig at Leo Burnett. Although he's no longer with the company, Levitan once said its goal was to "provide a combination of demographic and psychographic data about the consumers using our service" to advertisers. Not exactly the touchy-feely approach.
If bluemountain.com cards are overly folksy, E-greetings.com's selection seems excessively hip. In addition to traditional holiday cards, it features everyone from Austin Powers to Christina Aguilera, complete with Shockwave sound samples of her "Genie in a Bottle." It may be cool to hear, but it's a drag on an older computer's resources. Plus, it's more of an online advertisement than a greeting card -- you and your intended recipient are only one click away from purchasing her album.
American Greetings currently has partnerships with Web portal Lycos and America Online, in addition to its own Web site that offers the opportunity to create and print your own free cards. It also sells various cards.
Jared Schutz soon recognized that like these companies, bluemountain.com had endless opportunities. But he and his parents also recognized that their resources to pursue them were limited.
The Schutzes seriously considered an IPO to raise capital, perhaps as much as several billion dollars, but it was a "long, risky haul," Jared says. "If Internet valuation metrics radically changed between now and our public offering, we would have been screwed."
Besides, going public also would have meant "bringing in a bunch of suits," which would have been somewhat at odds with Blue Mountain's Boulder-friendly, traditionally laid-back work environment.
So instead, the Schutzes began listening to potential suitors. Bluemountain.com's traffic made it a very attractive proposition.
Particularly to Excite@Home.
Excite@Home is a company with two interrelated missions: It is a Web portal like Yahoo!, which includes a search engine and a plethora of features and services for visitors, and also an online access point for super-high-speed cable modem Internet access (which AT&T Cable Services says won't be available throughout Denver until sometime next year).
The price that Excite paid for bluemountain.com -- $350 million in cash and $430 million in Excite@Home stock -- was remarkable, but less than other offers, according to rumors circulating before the sale. The Wall Street Journal had the rumored asking price as high as $1 billion. It also cited such potential suitors as Massachusetts-based CMGI, an Internet conglomerate, and eToys Inc. (CMGI denies it had any interest in bluemountain.com; an eToys spokesman says only, "It's our company policy to not comment on rumors and market speculation.")
If bluemountain.com attracts enough visitors during the holiday season, the Schutzes could also qualify for stock bonuses, pushing their $780 million windfall closer to $1 billion.
What made bluemountain.com so valuable to Excite@Home? The company certainly didn't have assets or revenues that equaled nearly a billion dollars -- not in the old way of valuing a company, at least.
But according to Tom Taulli, senior analyst for the Internet Stock Market Report in Santa Ana, California, the traditional variables of estimating a company's worth go out the window with the Internet. In the old way of thinking, a company's worth is set as a multiple of various factors -- its earnings, its assets (such as real estate or technology), or even its revenues. "The problem with Internet companies is you don't have earnings," he explains. "So you look at revenues. You don't have revenues, so you would look at the industry norm." And in the Internet industry, everything seems to be built on buzz. "Leaders tend to stay leaders," says Taulli.
According to a study published by the Stanford University business school on how corporate executives estimate the value of Internet stocks, the way companies are valued today "may be totally anachronistic by the end of next month."
"In some situations, there are no revenues, so you look at something like registered users," says Taulli. "But an independent company doesn't have the ability to monetize those users -- to turn those eyeballs into cash."
Mark Stevens, executive vice president of business development at Excite@Home, demurs when pressed for the specific criteria his company used when determining what they were willing to pay for bluemountain.com. "You can assume we did the right thing for our investors," he says.
So now that Excite@Home has bought those eyeballs, what is it going to do with them?
"This isn't about putting up big ads that say 'Go to Excite,'" says Stevens. The company, he explains, has plans to very, very gently coax bluemountain.com visitors to open their pocketbooks, all the while remembering that these are people who like their greeting cards to contain as much free mush as possible.
On the Web-portal side of Excite's business, the company already offers such features as Web-based personal calendars and reminder services -- perfect matches for a greeting-card site. The company plans to launch these features on the bluemountain.com site in hopes of generating interest in the rest of the Excite portal site and its advertisers. It also has the chance to market the broadband service to millions of potential Internet cable customers and sign them up on the spot.
One thing's certain: Even though the electronic operations will be owned by Excite@Home, bluemountain.com's cards will remain free on the Web.
That was important to the Schutzes. "We believe that if someone was acquiring us for a whole lot of money and they started to charge for the cards, then they would basically lose all the money they invested in the site because they'd undermine its value," Jared says. "If they were that stupid, then I don't think they'd be good owners for the site."
Jared says he and his parents will remain active with bluemountain.com for one year after the deal closes in December. He's particularly interested in pushing ventures with danschocolates.com, a former bluemountain.com subsidiary that now exists independently, and proflowers.com, taking advantage of those "gift solution" strategies that the greeting-card industry is eyeing.
As for his enhanced status as a many-times-over millionaire, Schutz remains nonchalant. He already owns a house and a car, and while he's interested in moving into the realm of "public service" at some point, he says, "I have no desire to spend massive amounts of money on consumption."
Besides, under Webonomics, Schutz has reason to be conservative with his cash. "Most days, I have no idea whether I'm a billionaire or bankrupt on paper," he says. "It's really hard to tell in this Internet industry."
So why not send him a sympathy card? It's easy online -- and thanks to the Schutzes, it's free.
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