In sink-or-swim New Economy, how one company stays afloat
Seattle Times business reporter
Since the market for technology stocks burst last March, hundreds of Internet companies have burned out of existence, costing thousands of jobs, destroying billions in stock-market wealth and challenging the gains promised by the New Economy. Now the question looms: Will dot-coms create lasting value? As the 6-year-old Cobalt Group set its budget for 2001, The Seattle Times went inside to see how an Internet company struggles to get ahead while those around it fail.
MONDAY, DEC. 4, 2000
Kevin Root pulls up to a conference table ringed by executives and launches his budget pitch. The faces looking back are serious. The strain of setting a spending plan for the coming year shows in the puffy skin around their eyes.
Most of Cobalt's rivals in the automotive Internet business went bust or laid off workers last year, and the executives know their future rides largely on budget choices. With the aim of reaching profitability this year and with just $16.6 million in the bank - about what Amazon.com spends every three days - Cobalt is careful about money.
How careful? Root's group, which trains auto dealers to use the Web as a sales tool, wants two new positions. That's not much for a growing company with 600 employees, particularly in a division with lucrative prospects.
But the executives reject Root's request. The jobs carry salaries of $45,000 and $90,000, plus bonuses and stock options. Even though Root's group is profitable and likely would make money on the investment, the execs decide the cash would be better used elsewhere.
"The goal is to be cash-flow positive by the end of 2001 and to do it with the money we have," says David Snyder, chief financial officer. "There are a lot of meritorious ideas that ... get traded off."
So it goes at Internet companies these days. Around the country, technology start-ups have been hammered by the business equivalent of a perfect storm: the combined force of faulty business plans, collapsing stock prices and a slowing economy. They have learned that on the Internet, as in the real world, the fundamental principles still apply. To survive, they must provide something of value that people want to buy, sell it for more than it costs to produce, and make their capital last until they break even.
These realities are changing the early aura that surrounded Internet companies. Employees now shudder at being called dot-com workers. Older workers are joining up, bringing experience that can help build a sustainable business. And grand concepts like being the online source for something, or everything, are giving way to a single-minded focus on money.
A report last week suggesting that Amazon.com might run out of cash this year, despite having more than $1 billion in the bank and laying off 1,300 workers to cut costs, shows just how important money has become.
But for Internet insiders, the long hours remain the same. It is late afternoon in the same Cobalt meeting room and, as popcorn and drinks arrive, the executives press on to other business: How to drive employees toward sales targets higher than what the company is telling Wall Street. Whether there's a "hole" in sales projections. Whether the products are as good as they need to be.
"The competition is coming up," says Mike Martinez, vice president of marketing. "We need to put money into new software to stay ahead."
John Holt, the chief executive, agrees. "We're raising prices," he says. "The products have to be better."
Holt is a rarity, a founding Internet CEO who still has his job. Many of the 20-year-olds who started dot-coms in recent years have ceded control to better managers or gone bust.
At 44, Holt has held his position for nearly six years and has no illusions about the board's readiness to replace him.
But he seems to have the right stuff. A former actor and fisherman, he has the presence of a leader, a manner that puts people at ease and some strong Old Economy values. Holt believes a person should be of use, and that's his goal at Cobalt. The business pays rents and mortgages for hundreds of people and holds a "sacred trust" - venture capital - that helped it get started. It may be exciting that Cobalt is an Internet company. But it's almost irrelevant. Holt wants to run a company that's built to last.
In his office - a corner of a renovated brick warehouse on First Avenue South near Safeco Field - an inflatable plastic shark hangs from a thick beam overhead. It's a reminder that Cobalt has to keep moving, Holt says. Some sharks die if they stop swimming.
TUESDAY, DEC. 5
NEW YORK - DoubleClick, the nation's leading online advertiser, said it is cutting staff, signaling the consequences of the slowdown in online ads may be worse than previously anticipated.
Cobalt has survived by going where the money is. Unlike rivals who sought to put car dealers out of business, Holt sought them as a source of revenue.
Back in 1995, he began persuading automakers and the nation's 22,000 auto dealers they should work together to control their brands on the Web. Today, Cobalt counts 8,500 dealers and 15 automakers among its clients, and has claimed a growing piece of nearly $13 billion they spend on marketing each year. Dealers pay a set-up fee to create their Web sites and a monthly amount thereafter to keep them running.
Cobalt's future depends not just on signing more customers, but on persuading dealers, who aren't known for being tech-savvy, to spend more each month for increasingly sophisticated Web sites.
At heart, Cobalt is a software company that, like Microsoft or Aldus, grows by selling new versions of its products. Cobalt is spending heavily to develop wholesale exchanges for parts and used cars. And it is overhauling its computer platform to give its software more scope for growth, make international expansion easier and attract programmers interested in working with cutting-edge computer languages.
Cobalt recently raised prices 5 percent, an increase capped by the National Automobile Dealers Association, which endorses its products. But many Cobalt sales people think the prices are too low, considering most dealers spend $20,000 a month on advertising. Cobalt's "essentials" package, which costs $350 up front and $359 a month, gives dealers a basic site, the ability to post inventories of new and used cars, e-mail forms and locator maps so people can find the dealership. The top package, at $1,500 up front and $1,499 a month, adds software to search for parts at other dealerships, sell a car online and e-mail reminders when customers need an oil change.
"The job now is to up-sell and cross-sell across the breadth of services they have," says Allyson Smith, an analyst at broker SG Cowen in San Francisco.
The slowing economy could threaten Cobalt if dealers cut ad spending. But dealers might also decide that in a tough environment they need to reach as many customers as possible. And 62 percent of new-car shoppers are expected to do research on the Internet before going to a showroom in 2001, up from 54 percent in 2000.
WEDNESDAY, DEC. 6
NEW YORK - Apple Computer said that it expects revenue will fall short of its target by $600 million and that it will post its first quarterly loss after 12 consecutive profitable quarters. The personal-computer maker blamed a "swift industrywide decline in PC sales," among other factors.
It's 2 p.m. and Kevin Root's team assembles in a conference room. Like a police chief sending his force on assignment, Root briefs them on the budget. The group gets no new staff unless it beats its revenue target of $1 million. Root wants them to aim higher, for $1.77 million. "If we shatter our numbers, we're all heroes," Root says. "We need to blow that number away."
Root drew up his budget using a technique he learned at Microsoft. Each team member estimates how much income they can generate; the combined total becomes the target. The system ensures everyone has a stake in the outcome. If one person fails, the team suffers.
"It's all driven by what's in it for me," Root tells his crew. "If you really kick ass, you get over 100 percent of your bonus pool. Likewise, we do not pay bonuses for below-average performance. In that case, you're just doing your job, and base pay covers that."
Finally, Root asks each team member to set personal goals. During quarterly reviews, 55 percent of their score hinges on whether budget targets are met.
"At the end of the day, all that matters is did we make it or not. That's what we care about," Root says. "That's what the Street cares about, that's what the board cares about. Excuses don't matter."
Growth has been one of the few constants at Cobalt, but now even that may be changing. Cobalt doubled in size last year, adding 300 people. But in 2001, only 70 new employees will be added. Ironically, this slowing may be a relief, bringing a degree of normalcy after nearly six years of breakneck expansion.
In other ways, change keeps coming. Cobalt has two people, Wendy Miles and Chris Bayless, who handle what it terms "process redesign." One of their biggest projects came last year when car dealers grew frustrated with customer service. Cobalt's service was built around five departments, and work was falling through the cracks because it relied on "sneakernet" - people walking orders from place to place.
In response to complaints, Holt and his team spent hours outlining a fix: Blow up the departments and build a new team. Last summer, they launched an amalgam of 120 people organized around car brands.
Cobalt twice reengineered its professional-services group, which builds custom Web sites. Initially, Web designers worked in a pool and were tapped for specific projects for big clients. The approach adjusted easily to changes in work flow, but knowledge about the clients was getting lost.
So a year ago, Cobalt organized the designers into teams for groups of automakers, such as Toyota-Lexus and Honda-Acura. But that system risked having expensive talent sit idle. So Cobalt changed the structure again, keeping part of each team but putting designers back into a pool to restore flexibility.
The work still isn't over. The budget process estimated each of the 69 people in creative services cost $27,000 a year more in salary than they generated in revenue.
That adds up to $1.9 million in lost income, 20 percent of the department's annual sales. As CFO Snyder put it in the budget meeting, "we're getting creamed in this piece of business."
The department is now looking for software that will track hours and projects.
THURSDAY, DEC. 7
NEW YORK - Motorola says it will cut 2,870 jobs, about 2.2 percent of the communication company's work force, and outsource the manufacturing of $1 billion of wireless-communications equipment.
Rajan Krishnamurty recently changed his hair color. To gray. Cobalt's 44-year-old chief technology officer, who spent 20 years at IBM, wanted everyone to know he'd stopped dyeing his hair. So with mock seriousness, he slipped three shots of the new do into a PowerPoint presentation at a company meeting. The audience roared.
Cobalt, like most Internet companies, still draws twentysomething programmers with brightly colored locks. But Cobalt has grown up and diversified. All of the executives are in their 40s, except for the sales chief, Terry Smail, who is 57, and Martinez, head of marketing, who at 35 is the only one without any gray.
It's a shift employees have noticed. When someone remarked recently that Cobalt was getting "the look of an old company, I said `Oh, my God,' because it has other connotations," such as bureaucracy and old thinking," says Julia Pizzi, vice president of human resources.
"But instead of all 20-year-olds running around, there's almost a sense of relief that there's someone sitting over there with experience. That's comforting."
The average age is 32. Only 42 percent of employees are technologically trained. A third are liberal-arts majors. And many bring experience from previous careers.
Mike Johnson spent 20 years as a construction worker. At 48, his sandy hair is flecked with gray, and his skin is tawny from outdoor work. Two years ago, tired of the unsteady pace of building houses, he pored over newspaper classifieds looking for a new career. Cobalt's ads jumped at him, he says, but "like everyone else, I was scared away by all the qualifications."
Tinkering with a home computer helped him land a job in a call center handling tech questions for frustrated Earthlink subscribers. He mustered the nerve to call Cobalt and was hired for a technical-support job.
His lack of formal training wasn't a problem. "Dot-coms are a lot more open-minded than old-style companies," he says.
Johnson also thinks his pay and career prospects are better than in the Old Economy. He's earning more than some people he knows with degrees, and he has stock options that could add to that total someday.
His son, Jason, joined Cobalt this week, something that sparks pride in the elder Johnson. "If I was 18 and had a chance to come into a company like this... " Johnson says.
One way Cobalt hopes to improve its products is by overhauling its computer architecture. The project, code named Phoenix, will cost $12 million over several years, a sum that makes it Cobalt's most ambitious undertaking to date.
Employees know about Phoenix, and an interim step, known as Falcon. But as the projects have advanced, the distinctions have grown fuzzy. Today, a meeting is called to define the projects so they can be explained to the company.
Seven people, including three vice presidents and an outside consultant, gather in a small meeting room to brainstorm analogies for Falcon. A Swatch watch (changeable, cost-effective, durable, cool). Lego building blocks (fun, easy, advanced, colorful). A factory.
No one likes the smokestack image, but it's true that Falcon will enable Cobalt to manufacture Web sites. So factory sticks.
It took an hour of banter - and lots of scribbling on a white board with multicolored markers - to come up with the simple image.
FRIDAY, DEC. 8
SEATTLE - In a second round of layoffs, Network Commerce says it is cutting 85 jobs and closing a direct-marketing operation in San Francisco. The online-services provider has eliminated 167 jobs, or a fourth of its work force, in two months. An additional 59 workers at local dot-coms Net Nanny, iCopyright and Imandi.com lost their jobs this week.
It's 7:30 a.m., and the executive team is assembled in a conference room. Holt looks tired. His wristwatch is off and rests on the conference table beside the third mobile phone he's had in six months. (The others wore out.) The group discusses the National Automotive Dealers Association conference, coming up in February in Las Vegas. The event is the biggest in the automotive industry, drawing 35,000 people.
Among the many items Cobalt is preparing for the convention is a compact disc with car-related tunes to hand out. Cobalt has ordered 20,000 copies, at a cost of $120,000. Yet even on this item, its only giveaway for the year, it will be careful about costs. Only dealers will receive the freebie, not vendors or suppliers. Cobalt also is using the same booth it had last year, which was designed so the panels could be updated.
The budget has been finished in four weeks - on time - and Holt makes a point of thanking Kathy Ryan, 26, who has been crunching the numbers. Now the focus shifts forward. Cobalt will try to generate as much revenue as possible early in the year so monthly subscription revenue will build up by year's end. It also plans to push some major expenses, including part of Falcon, into the second half.
TUESDAY, DEC. 19
SEATTLE - Microsoft's president sent an e-mail asking employees to cut spending "very significantly" in response to slowing growth and rising competition, a message that pushed its shares down 7 percent.
Cobalt's board assembles at 8 a.m. to approve the budget. Among them is Joe Landy, managing director of investment bank Warburg Pincus, which has put up most of the capital Cobalt will spend this year. No cell-phone calls interrupt the six-hour meeting. Holt and Snyder say recession, slowing car sales or problems at big automakers could blow Cobalt off course. But barring that, the company can break even on a cash-flow basis. The board's big question surprises Holt: Have you cut too much? "Should you take more money from us?" Landy asks. Holt and the others insist they don't need it.
TUESDAY, JAN. 9
SEATTLE - Three analysts cut their investment ratings on Amazon.com's stock after the Internet retailer's fourth-quarter sales and profit missed Wall Street expectations. Separately, Loudeye Technologies laid off 50 people, or 18 percent of its staff, warning sales were falling significantly.
It's just after 9 a.m., and Cobalt's auditorium is teeming as hundreds of employees arrive for the monthly company meeting. Holt, in jeans and a turtleneck, hops onstage to reveal the good news: Cobalt will break even this year. "When companies do that they are permanent," he says. "We're about 10 months away. It's close enough that we can almost taste it."
But the focus on money doesn't stop there. Cobalt always ends these monthly gatherings with hero awards, and today Brent Rannow, a 28-year-old technician, is among the winners. While moving 175 phone lines in December to accommodate Cobalt's growth, he saved $9,000 by canceling lines that weren't being used.
"Congratulations," says Holt, as he hands Rannow his prize. "That's 108 grand a year!"
Seattle Times business reporter Alwyn Scott can be reached at 206-464-3329, or at email@example.com.
Information in this article, originally published Feb. 11, was corrected Feb. 18. Some sharks die if they stop swimming, others don't. An earlier version of this article reported otherwise.