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August 19, 1999
Web posted at: 1:58 p.m. EDT (1758 GMT)

by Kenneth Li

INTERACTIVE Is the Internet turning you into a couch potato? Yes No View Results

(IDG) -- Marc Landau would rather be known as a film buff than a couch potato. But the Manhattan executive admits that he watches a lot of movies – at least five a week, and never without plenty of munchies like chips and candy.

Thing is, he does all that – spending some $120 a week – without leaving his house. Instead, Landau orders his flicks online from Kozmo.com, an Internet video rental firm with a convenience-store twist that promises to deliver the goods in under an hour.

"It's embarrassing," confesses Landau, who says he's spent over $5,000 in a year of using the service. But even that's not enough. "I'm waiting for them to deliver food and pizza with my movies."

And they will. New York-based Kozmo.com dispatches an armada of bike messengers to deliver videos and a growing array of convenience-store-type items to homes in under an hour. Soon, the company will expand its shelves by offering books, CDs and magazines. For Kozmo, which already has 30,000 customers in Manhattan and Seattle, the expansion represents the latest attempt to one-up Amazon.com, Webvan and other Internet retailers. While those companies follow more conventional notions of mail-order businesses, Kozmo's gambit is as instant as it gets, this side of sci-fi.

"Instant gratification," says Kozmo founder Joseph Park, stating his company's mantra. "Customers want it now."

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Kozmo's business model is risky. Charging $4 a movie and offering 30 percent discounts on books, the company relies on razor-thin margins. Park himself admits there are likely to be no profits in the foreseeable future. But the company has nonetheless caught the eye of brick-and-mortar video-rental giants Blockbuster and Hollywood Entertainment (owner of Hollywood Video), both of which, sources close to the companies say, are discussing working with Kozmo.

Kozmo is also talking to Procter & Gamble and other consumer products firms, these sources say, about testing and marketing new products with Kozmo customers. Some of Kozmo's customers on Manhattan's Upper West Side already receive CDs hawking MindSpring's services under a similar arrangement.

Blockbuster, which recently spun off from parent company Viacom, is in a quiet period and declined to comment. Hollywood Entertainment did not return calls for comment.

The idea isn't as far-fetched as it seems. Blockbuster already has a relationship with Boston-based online grocer Streamline to rent videos.

For Kozmo, a deal with a major rental chain would help the company reach into new markets. The company recently opened a new branch in Seattle and plans to launch service in San Francisco and Washington, D.C., by the end of the year. Park hopes to hit 30 more metropolitan markets by the end of 2000, carving out a piece of the direct-to-consumer market for groceries delivered to homes.

While videos have been the reason Kozmo customers place an order, it's the impulse purchases of munchies that have helped revenues skyrocket from $100,000 last year to $3 million by the end of this year. Adding potential impulse categories like music and games to the mix, the company expects to hit $20 million by 2000. On the whole, Jupiter Communications estimates the online grocery space will swell from a projected $350 million in 1999 to $3.5 billion in 2002. (Broadening beyond video rentals should help cushion the blow to Kozmo's original business when broadband movie delivery becomes a mass-market reality somewhere down the road.)

Competitors such as Webvan and Streamline have adopted similar strategies. Streamline, whose core business is delivering groceries, now provides more lifestyle services, including dry-cleaning and movie rental services. Webvan has begun offering cigars and PowerBars to virtual grocery carts.

And there's clearly money to be made. In just a little over two months, Webvan has raised about $400 million, and the company plans to go public later this year. It also recently placed a startling $1 billion order with engineering firm Bechtel Group to build automated warehouses.

Kozmo's not yet in that league but it has a start. Park and his partners have raised $4.5 million in private financing from investors including Bob Miller, who heads grocery chain Fred Meyer, and Rob McKay, who cofounded Taco Bell. The company is also close to completing its first round of venture-capital financing, led by Chase Capital-funded Flatiron Partners, for a total haul of $26 million.

With comparatively low startup costs of about $1 million to launch into a new market, Kozmo.com is hoping to blanket the nation ahead of the competition. Webvan, meanwhile, can spend somewhere between $40 million and $60 million to enter a new market, according to a Jupiter analyst. Unlike Webvan, with its exhaustive Safeway-like inventory, Kozmo takes the 7-Eleven approach, with a smaller, more targeted shelf of goods. That allows Kozmo to set up shop with fewer suppliers and warehouse space a fraction the size of Webvan's.

If their race to new markets sounds like the Gold Rush, it's an idea that's already crossed Park's mind. "It's like the 1840s," Park said. "All you have to do is stick a flag into the ground and say "'It's mine.'"