Once and Future Kozmo

Last week urban college students around the country lost a dear, dear friend. Our friend Kozmo was there for us late at night, seven days a week, and was never more than 20 minutes away. Unfortunately, Kozmo.com was more of a giver than we knew—the company lost money on virtually every sale and was forced to go out of business early last week. Now we’ve got no one to rely on for late night snacks and movies, delivered straight to our door.

Conventional wisdom now holds that such failures were not only expected but welcome. Kozmo was yet another dotcom, in the ignominious tradition of Pets.com, eToys.com, and ifilm.com, that thought it could make more of a business out of the web than was really possible. Investors are now loathe to touch any stock whose name ends in .com, and the prevailing opinion is that such failures have been a cathartic experience for the technology industry. In a few years, the industry will be healthy and robust again, precisely because no one is wasting time and money founding companies with names like BBQ.com.

The problem with the conventional wisdom is that it confuses poor ideas with poor execution. Many of the failed dotcoms did indeed have poor business models, especially those sites like the still-there (barely) financial media outlet TheStreet.com. Like many sites, TheStreet.com tried to rely on some combination of advertising and subscription revenue to build a profitable business. Though it was not apparent at the time the company was founded, it’s now clear that consumers will almost never pay for information, or any other type of content, on the Web.

Other businesses—and it’s my argument that the majority of failed and struggling dotcoms fit in this category—simply got seduced by the land grab rhetoric of 1998 and 1999. In the middle of Web hype fever, startups were going to take over the world in 18 months, and anyone who wasn’t burning cash by the barrel to get an early lead was dead meat. Consider Kozmo.com. Their idea—Web-based, immediate delivery of videos, food and certain household goods—certainly encountered strong demand, especially on college campuses like ours. But the company didn’t take steps to conserve cash and reach profitability. It instituted a minimum-order requirement only a few months before its death, and by then it was too late to save the company. It expanded too quickly into too many cities, opening massive warehouses in such large and distributed cities as Atlanta and Los Angeles, where deliveries had to be made by car and were almost all unprofitable. All the while, it was hiring staff and counting on an initial public offering to raise the money it needed to continue operating.

In the case of Kozmo, we know the business might have succeeded with different management because we have a control case. In Los Angeles, there is a small, private company called PDQuick (formerly Pink Dot), which has been around since 1987—a lot longer than the Web. The company delivers groceries and prepared meals to the Los Angeles area and is currently looking to expand nationally. Even before the Web—Pink Dot took orders through an 800 number before launching its web site—the company found a way to be profitable. Its solution? Grow slowly. Pink Dot has still not expanded outside Los Angeles, and it prefers to open small storefronts instead of massive warehouses, a strategy which allows it to grow without spending huge amounts of money on warehouses that might never be used. And Pink Dot has always charged a delivery fee on orders under a certain minimum, ensuring that it will at least break even on most of its sales.

Right now, we’re in the dark ages of the Internet era. Many of the dotcom pioneers, like Kozmo, are dead, with others like Napster currently crippled by the combined weights of the legal system and the music industry. Nevertheless, these companies, despite their flawed business models and execution, proved beyond argument consumer demand for Internet-enabled services, especially those that catered to people’s desire for immediate gratification. New entrants into these markets may not receive the tens of millions of dollars in venture capital funding that Napster and Kozmo got, but they might be better off without it. Someone will step up to replace Kozmo, and when they do, it will likely be a company similar to PDQuick, which operated profitably for a decade before receiving a small investment to facilitate expansion. The companies that inherit the fortunes of the Internet may not change the world, they may not have a millionaire-making IPO, and they may take a decade or more to build, but they will make one thing that the Kozmo’s of the world never could: money.

Alex F. Rubalcava ’02 is a government concentrator in Eliot House. His column appears on alternate Mondays.