Aussie Net companies battle US competition
March 23, 1999
by Todd Woody
(IDG) -- Do you Yahoo, mate?
America dominates the Internet in Australia. Sydney city buses sport purple paint jobs and yellow Yahoo logos, and the company's ads appear on local television with an Aussie accent. Meanwhile, LookSmart, one of Australia's most successful Internet startups and a Yahoo competitor, has moved its headquarters to San Francisco.
The role reversal highlights the dilemma for Net startups around the world trying to compete with American companies. It's tough to match the Yanks' venture capital, resources and cultural commitment to entrepreneurship. Australia is a particularly striking example, because the country has embraced the Internet so enthusiastically.
Roughly a third of Australians have access to the Internet, but nearly 70 percent of their online purchases are made overseas, mainly on U.S. Web sites. Amazon.com alone controls a whopping 70 percent of the Australian online book market, according to a leading Australian Internet research firm.
Now the "fight-back," as they say in the Great Southland, is coming. Entrepreneurs are bucking Australia's clubby commercial culture to offer native alternatives. No one expects local companies to drive the Americans back across the Pacific anytime soon. But conducting business by remote control – in Australia and elsewhere in the world – may become harder for U.S. companies to do.
Australians pride themselves on being techno-savvy. When a group of British tourists were stranded in a remote Outback desert last year, they were rescued by an Aboriginal man who wandered by while hunting kangaroo and called for help on his cell phone.
With 18 million people occupying a landmass roughly the size of the continental U.S., Australia needs the Internet to connect its communities to each other and the world. One Outback entrepreneur, for instance, makes kangaroo-hide cattle whips in a tin shed in the desert and sells them online to Eskimo dog-sled teams and Europeans.
A small market by global standards, Australia's affluent, English-speaking population has proven attractive to U.S. Web companies. IDC Australia estimates that the country's e-commerce market will have grown from $127 million in 1997 to $16 billion by 2002. "Australia's a good market for Internet commerce," says Simon Murdoch, VP of Amazon.com's European operations. "It has remote fulfillment needs because people are widely distributed."
Yet the country's own retailers have been slow to move online, allowing U.S. companies like Amazon.com and CDnow to capture a large chunk of the Australian e-commerce market by default.
Furthermore, high telecommunications costs, steep capital-gains taxes and a small venture-capital community's reluctance to invest in unproven Internet companies have discouraged startups. In 1997, according to an Andersen Consulting report, Australian and New Zealand VCs invested $235 million into online and offline startups. By contrast, their wealthier American counterparts pumped nearly $13 billion into new companies that year. "Australian businesses have not yet committed to the online revolution," the report concluded.
That environment has driven many ambitious startups into exile. "Australia is run by large companies," says Evan Thornley, the 34-year-old CEO of San Francisco-based LookSmart, which left Australia for America in 1997. "There are two or three companies in each industry and it's a cozy oligopoly. No one is excited about backing small companies that may compete against them."
Sydney Internet analyst Ramin Marzbani agrees. "For someone to break into this monopolistic culture requires a lot of balls and a lot of money."
While Australian businesses dallied, Amazon.com became one of the best-known Internet retailers Down Under, with neither local advertising nor local offices. The electronic retailer's main vehicle for market domination – other than the company's inescapable media presence – is its associate program. Under the popular promotion, Web sites that display a link to Amazon.com receive a referral fee for any sale made through their sites.
Amazon.com associates in Australia range from the Buddhist Council of New South Wales to an Aboriginal art dealer to the Australian National University. Amazon.com's influence is so pervasive that even competing online bookstores promote their relationship to the company.
Such a state of affairs clearly frustrates Rafael Chavan de Montero, founder of Ozbooks.com, a local online bookseller. "The Internet is an American invention and they already have penetrated the world," he says. "From e-mails we get, people are saying 'Thank God, at last there's an Australian Amazon, we don't have to go to America.' They've been buying from Amazon because Amazon is good. The only way they will stop is when there's a local alternative. I want to bank on that national pride." Ozbooks.com, he claims, will become "the Amazon.com of Australia."
The dream seems improbable. Ozbooks.com has five employees. The company's headquarters currently is Chavan de Montero's home office in Hornsby, a Sydney suburb of red brick houses that, but for the squawking of cockatoos perched among eucalyptus trees, would fit nicely in Ohio.
An industrial engineer by training, Chavan de Montero began looking for business opportunities on the Web in 1995 after selling a food-distribution company he founded. Some Australian bookstores had taken halting steps online, but no one had stepped forward with a pure Internet play. The time was right, he reasoned, to challenge Amazon.com.
Australia's bankers and venture capitalists thought otherwise. "Venture capital in this country is practically nonexistent," complains Chavan de Montero, who is dressed in a red polo shirt, slacks and bare feet. "When you go to get financing, they ask you the value of your land, your stock. Everybody wanted to know, 'Where is your store?' That's not venture capital; that's a bank."
Chavan de Montero's problem was not his lack of business experience. Having spent 25 years in the marketplace, he is not the stereotypical twenty-something Net entrepreneur, though he politely declines to reveal his age. After an unsuccessful trip to the U.S. in search of funding, Chavan de Montero eventually found four Australian angel investors to take a chance on Ozbooks.com.
Chavan de Montero's strategy is to import Amazon.com's business model and Australianize it. Ozbooks.com, like Amazon.com, relies on Ingram Books and other U.S. distributors to provide the bulk of its titles. Chavan de Montero offers discounts that are up to 40 percent greater than those given by his landlocked Aussie competitors, and he plans to copy Amazon.com's associate program.
Ozbooks.com sells 800,000 titles. Dymocks, Australia's largest bookseller, offers just 80,000 books online. Amazon.com, with some 4.5 million books, lacks a comprehensive offering of books published Down Under. "My little edge is that I have Australian books that nobody else has," Chavan de Montero says. His advantage, he says, will come from convenience and availability, rather than price. "People buy from Amazon because there are books that are simply nonexistent here."
Amazon.com does not reveal revenues from individual countries, but 20 percent of last year's sales came from international operations. "We find we're doing well [in Australia]," says Amazon.com's Murdoch. "What we've got – low prices, wide selection – works even at a long distance. That's probably woken up local e-commerce companies to compete."
That competition is forcing Amazon.com – and other American companies – to reassess what it means to operate globally on the Internet.
The web may have dispensed with physical stores, but plenty of brick-and-mortar operations still prop up the Internet Economy. At Amazon.com's distribution center near the port of Seattle, hundreds of workers track and pack books and CDs that move along conveyor belts snaking through the 93,000-square-foot facility. The company operates another warehouse in Delaware and will soon open a 7-acre distribution center outside Reno, Nev. In a downtown Seattle office building, several hundred customer-service workers answer phone and e-mail inquiries from around the world. This summer, most of Amazon.com's 2,100 employees will move into an art-deco former veteran's hospital on a hill overlooking downtown Seattle. Amazon.com's deficit from all this expansion was $116 million as of last September.
That investment has enabled Amazon.com to rake in sales abroad with little or no physical presence. But as international competitors build their own infrastructure, the virtues of operating overseas are disappearing.
Amazon.com's vaunted one-click convenience is none-too-convenient at a distance of 7,500 miles. Unless an Australian wants to pop for the A$46 express-shipping option, she may have to wait three weeks before cracking the cover of that best-seller.
Competing on price for international sales without local distribution is tricky. Amazon.com's attractiveness depends partly on exchange rates and shipping costs. The Australian dollar historically has been weaker than the American greenback and is prone to the occasional wild fluctuation. When the Aussie dollar takes a dive, as it did during the Asian crisis, buying from Amazon.com and other U.S. Web retailers becomes more expensive. Even with the currently anemic Australian dollar, a Sydneysider will save about A$5 purchasing John Grisham's latest novel at Amazon.com. But faced with shipping costs, the Australian consumer may well log on to a local alternatives like Ozbooks.com.
The rise of European competition led Amazon.com to acquire online booksellers in England and Germany and transform them into Amazon.com outposts last year. Simon Murdoch indicates that the company is also rethinking its Australian strategy.
"The key thing is distribution," he says. "Why did Amazon want to have a presence in the U.K. and Germany? One reason was to have a local editorial voice so customers felt they were closer to what they want to buy. The second was to have cheap and convenient shipping. We're thinking about how to cope with delivery time. It can take days for books to get to Australia.
"It's too early to talk about what we might do," he says. "It's not a trivial project to get into a country." In a recent Securities and Exchange Commission filing, Amazon.com cautioned investors that international expansion would not come cheap. "The company expects to incur significant costs in establishing international facilities and operations, in promoting its brand internationally, in developing localized versions of its Web site and other systems and in sourcing, marketing and distributing products in foreign markets."
Ozbooks.com received widespread media attention in Australia as a potential Amazon.com-killer when it launched last December. But Sydney Internet analyst Ramin Marzbani, head of Www.consult, thinks it's too late for Chavan de Montero – or anyone else – to catch up to Amazon.com's four-year head start. "They're going to have to spend so much to build brand. Amazon gets so much press just from its share price going up and down," says Marzbani. And he doubts Australians will rally around the flag when shopping online. "They may be patriotic when it comes to sport, but not when it comes to their money."
Chaosmusic's 28-year-old general manager, Victoria Doidge, holds no illusions that her fellow Australians will flock to her online store purely out of national pride. Still, she says, "We have had a lot of customers saying, 'We had been buying from CDnow and now will be buying from you.'"
When ChaosMusic launched last May, the time seemed right to challenge the Americans' share of the online music market. But Doidge found herself spending as much time battling the Australian recording industry as international competitors.
"They said you have to pay for $10,000 worth of CDs up front and could only sell within Australia," recalls Doidge of the record labels' response to ChaosMusic's request for distribution deals. "This is how they keep a grip on the industry here."
The recording industry's stranglehold on music sales derived from record companies' exclusive right to import CDs into Australia. With retailers forced to buy from the record labels, Australians were paying about A$30 for the latest releases.
Until January, ChaosMusic was operating out of Doidge's home in an unrenovated turn-of-the-century row house in the gentrifying Surry Hills district of inner-city Sydney. Now, the company is in Sydney's hip Darlinghurst district, where young women wearing little black dresses chatter into little black cell phones at sidewalk cafes.
Founded by chief executive Rob Appel in 1994, ChaosMusic began as a music Web-site producer that also offered 200 CD titles from an independent Sydney record label. Doidge, who previously worked for Rupert Murdoch's News Corp. and the Microsoft Network, joined ChaosMusic in 1996 and runs the company's day-to-day operations.
Like Ozbooks.com's Chavan de Montero, Doidge and her partners found raising money difficult. "In the U.S., a startup is a startup," she says. "In Australia, a startup is more like a toddler company. In Australia, to be a startup you have to put in a year's hard work before you can get capital."
ChaosMusic hit pay dirt when Australia's largest ISP, Ozemail, upped its stake in the company from 5 percent to 26 percent in 1998. The investment also gave ChaosMusic a prime spot on the Ozemail site.
The real break came when the government ended the Australian recording industry's monopoly on importing CDs. That meant ChaosMusic was free to find other suppliers, and it made a distribution deal with Valley Media, the California company that supplies CDnow and Amazon.com. ChaosMusic's catalog jumped to 230,000 titles, and major Australian labels suddenly expressed interest in doing business with the upstart. "It's a classic Australian example where you have to go overseas and prove yourself," Doidge says.
The international market works both ways. About 30 percent of ChaosMusic's sales now go to overseas buyers – primarily American and European fans who might have seen Australian bands like Living End on tour but found the band's music difficult or expensive to buy abroad.
Still, ChaosMusic will have a tough time taking market share away from CDnow and Amazon.com. "Australia is one of our largest markets," says CDnow president Jason Olim, who estimates about a fifth of his company's sales originate overseas.
CDnow has so far done little marketing in Australia. "Historically, we have captured all of our international sales by default," says Olim. But that's about to change. The company has opened a European distribution center and is turning its attention to Australia and the Pacific Rim.
"One of the big themes for CDnow in 1999 is localization. We're working very hard to support local currencies, local language, local distribution," says Olim. "We hope to be able to support the Australian dollar before too long so the exchange risk is borne by CDnow and not the customer."
Valley Media itself is considering finding a partner to open up an Australian distribution center, according to senior VP Ken Alterwitz – a move that would cut distribution costs for both Australian and American Web retailers.
There's no place like home, but for Australian startups, sometimes you have to go to Kansas to get back to Oz. Consider LookSmart, the Web directory founded by the husband-and-wife team of Tracey Ellery and Evan Thornley in Melbourne in 1995. They went abroad for their startup capital, securing Reader's Digest as their majority investor.
But that wasn't good enough. "You can't do deals out of Australia," Thornley says. "If you put 011 before your phone number, no one will return your phone calls. I know Harvard MBAs who can't figure out the time difference." So LookSmart decamped to San Francisco two years ago. Once ensconced in the 415 area code, Australian investors came calling – along with Cox Media – to finance the couple's buyout of Reader's Digest's stake in the company. A series of portal deals, including a five-year contract with MSN, has bolstered LookSmart, and an IPO is in the offing.
Now LookSmart is planning a homecoming of sorts. In a twist on the age-old Australian rite of finding one's fortune overseas, Thornley and Ellery plan to remain in California while making Australia the base of LookSmart's non-U.S. operations. The company already maintains a Melbourne office and will soon open an outpost in Sydney.
"Australia will be significant to us both as a domestic market and as a hub for global activities," says Thornley from his office in San Francisco's Multimedia Gulch. "We know what it's like to operate in a foreign market. We're not under any illusions that you can run everything from here – you've got to be multilocal. Not all of the American companies get that."
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