Greeting card dot-com proves tech on way back

June 23, 2003

BY MICHAEL KRAUSS

Maybe somebody should send out a card -- a notice really: "Technology business not as dead as previously thought."

Business Week recently ran two cover stories within a four-week period on the comeback of "e-biz." Steve Jobs and Apple's iTunes are making money on a 99-cent pay-per-drink music model that appears to please. The city of Paris is offering free WiFi hot spots. The biggest problem on the Net these days isn't profitability, it's spam -- an unfortunate but obvious fallout of success.

As the old Shirley Polykoff ad line runs, maybe "we're not getting older, we're getting better" at this technology game (though I wish the spammers would lose my Internet address). It might be too soon to call the turn, but Yahoo! did earn $ 43 million on revenues of $ 953 million last year. As Business Week reported, "Momentum is growing. Net income hit $ 47 million in this year's first quarter as revenues powered ahead 47%."

My personal nominee as a model of tech turnaround success is AmericanGreetings.com, the online greeting card venture of 97-year-old, Cleveland-based American Greetings Corp. Under the guidance of CEO Josef Mandelbaum, and with the support of parent company CEO Morry Weiss and President and COO Jim Spira, AmericanGreetings.com has engineered a path to profitability worthy of being taught as a Harvard Business School case.

"We were profitable last year for the entire year. We are profitable for the first quarter this year. We expect to be profitable for the entire year this year," Mandelbaum says. "Given the fact that 90% to 95% of the dot-com companies from 1999 no longer exist, we've done well because we're still here. We've done extremely well because we're profitable. We have a business model that is sustainable and is going forward."

The real story about AmericanGreetings.com isn't simply its profitability; it's its path to profitability. When the company first started in 1995, AmericanGreetings.com was an early innovator of pay-for-content models. It was one of the first sites to accept credit cards on the Internet. Like most traditional companies, its executives saw the Internet as a new distribution channel -- an experiment and an opportunity.

While the company would have preferred to continue as a pay-for-content service provider, it was forced to go to a free model toward the end of 1999 and early 2000 just to stay with competition, which included Blue Mountain, Yahoo!, Hallmark and eGreetings.

"We were the lone stallion still standing with a pay model. We owned the biggest revenue pie, but the pie was shrinking very quickly," Mandelbaum says.

As the bubble burst in early 2000, Mandelbaum and his teammates went back to the blackboard and developed a new plan. They started looking for a mechanism for moving the business back to something that could be sustained over the longer term. The bottom had just fallen out of the online advertising market; while they had confidence it would ultimately rebound, they knew they couldn't rely on advertising revenues for more than a portion of their income. They needed to return to a pay-for-content model and they had to do something about the plethora of competitors. They also needed to continue to provide unique content to their customers.

What emerged was a three-pronged strategy. AmericanGreetings.com embarked on a series of smartly priced acquisitions to consolidate the market. Its executives conducted extensive analytical research and resurrected its pay model. And lastly, they segmented their audience and established alternative brands with unique content aimed at unique market segments.

"We acquired eGreetings in March 2001," Mandelbaum recounts. "They had gone public for $ 10 or $ 11 per share, (getting) a lot of money, but they had no long-term business model. We acquired them for 35 cents per share. We got rid of 99% of the costs . . . took the audience . . . kept a few people and essentially integrated them into our existing company. That was step No. 1.

"Unfortunately, Blue Mountain, which had been bought by Excite for nearly a billion dollars, was still out there," Mandelbaum goes on. "We kept a dialogue open with Excite CEO George Bell, and in September 2001 we closed on the Blue Mountain deal . . . for roughly $ 30 million."

While Mandelbaum was picking up other online greeting card companies at fire-sale prices, he commissioned a months-long study with Rosetta Marketing Strategies, a Princeton, N.J.-based analytics and marketing strategies firm. He commissioned Rosetta to assess the revenue and profit impact of a consolidated online greeting card market and determine the viability of returning to a pay model.

"It came back saying there definitely is a pay model here," Mandelbaum says. "The most important thing people were looking for was quality content and a lot of it. We knew that we had the best selection and the deepest selection of anybody out there."

According to Mandelbaum, with the acquisition of eGreetings and Blue Mountain, AmericanGreetings.com had 40 million unique visitors in November 2001. "Online greeting cards at that point in time were the second-most popular form of communications on the Internet behind e-mail. In 2001, it was ahead of instant messaging in terms of number of users," he says.

Having consolidated the market and done his homework, Mandelbaum was ready to return to a pay model, and did so in December 2001. It now costs $ 13.95 annually to be a member of one of his sites.

The third piece of the puzzle was about segmentation, branding and solid product offerings.

Through his acquisitions Mandelbaum had three great brand names: American Greetings, which is known as a traditional brand in the greeting card industry; Blue Mountain, one of the five or 10 brand names that were created by the Internet; and the slightly edgy eGreetings brand.

"Consumers didn't know that we owned all three brands," Mandelbaum says. "We chose to keep (and charge separately for) three separate brand identities. While the demographics seem somewhat similar across all three brands, the psychographics are completely different."

Mandelbaum reports that he now has 2.1 million paying subscribers -- not as many visitors as in November 2001, but each one of these customers is a buyer. They're not just showing up with their eyeballs, they're opening their wallets.

Mandelbaum says that to his knowledge, he operates "the largest content subscription service on the Internet." In contrast, Mandelbaum points to The Wall Street Journal's WSJ.com Web site, which he says has about 800,000 paid subscribers.

Mandelbaum still has an advertising sales force, and paid advertising represents about one-third of his revenues, but two-thirds come from fees from subscribers.

Today Mandelbaum uses a host of methods to attract new paying customers. He says one of his most effective approaches still involves giving something away, such as a 30-day free trial use of the product. After plenty of testing, he says that's the optimal offer. That's also the most that Mandelbaum plans to give away in today's new online era.

"Our next challenge is: How do we scale to get to 5 million or 10 million paid subscribers from 2.1 million?" he says.

My guess is Mandelbaum will get there, and he'll probably tell his tale from the well of a Harvard Business School lecture hall. When he does, I hope someone sends me a card. I'd like to be there to cheer him on.

Michael Krauss can be reached at michael.krauss@diamondcluster.com or news@ama.org.