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Robertson Stephens Tech Conference: Onsale Sells Hard

SAN FRANCISCO -- It's a notoriously tough crowd here at the

BancAmerica Robertson Stephens Technology Conference

at the San Francisco

Ritz Carlton Hotel

. But the public sessions with these companies have lost their teeth. After fancy presentations, companies descend to private breakout sessions, from which the press is excluded -- and it's there that the buy side bares its teeth. Reportedly, fund managers and the ilk have been grilling management, hoping to find hidden frailties in gloriously painted pictures. If they smell trouble, they won't hesitate to hurl hardballs. But if they like what they see, they'll clamor to get on board the next hot story.

That brings us to online auctioneer



. Even before the much-loved breakout session, a standing-room-only crowd of money managers broke into applause after a presentation by CEO Jerry Kaplan. It seemed like the investors had just finished watching a terrific dog show stuffed with some good new tricks.

BancAmerica Robertson Stephens analyst Keith Benjamin introduced Onsale and expressed wonder at the company's recent struggles. Since posting a loss of 9 cents a share on Feb. 12, Onsale has dropped 24%. Following that odd introduction, Kaplan took the stage and made that slump look positively bizarre. Kaplan's best crowdpleasing trick: making the rising costs that have turned Onsale's profit into three quarters of losses look like a crucial step toward the company's dominance in a lucrative market.

By the end of the 30-minute presentation, the monied crowd was positively giddy with the possibilities.

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"They're definitely onto something very, very big," one fund manager gushed at the end of the presentation before racing off to the breakout session. "Just look at how people are responding to


. This will be much bigger than that."

Kaplan cast Onsale as a mosaic of profitable markets. "Onsale combines the bargains of a warehouse club like


, the entertainment of TV shopping, the skill of Wall Street and the fun of Las Vegas," he said.

He should have added the risks of the Internet. When Onsale went public in April 1997, investors liked it because it was one of the few Internet plays they'd ever seen that boasted pre-IPO profits. The company had managed to track down surplus PCs and consumer electronics and move them into the hands of the highest bidders without dipping into red ink.

But now that's changing. Onsale sees that it's onto a good thing. Repeat customers make up three-quarters of Onsale's revenues, well above the 30%-50% repeat rate of online retailers. Someare what Kaplan openly called "addicts," displaying quotes from what may conservatively be called satisfied customers. They talked of losing sleep at night fretting that they'd lose out to a higher bid or "drool over deals" on the site.

"We always knew this was going to happen, but one guy called in last week with $26,000 in purchases. He called us up and said, 'You've gotta do something and stop me from buying all this,'" Kaplan said. "I'm not making this up. How many people react that way to a catalog?"

Onsale quickly saw that it needed to draw in new addicts, so it upped its sales and marketing budget nearly sevenfold in 1997 to $5.9 million. General and administrative costs grew eightfold to $5.9 million and engineering costs fourfold to $2.9 million as the company hired new staff to move into new areas of auctioning.

Moving past the tech products of its roots, Onsale aims to expand into auctioning airline tickets, real estate, vacation packages, commodities and airline tickets. And some of these new markets have proven profitable. Those who are into PC auctions will also bite for sporting goods, even specialty foods like smoked hams. "We call our customers omnivores," Kaplan boasts. "They'll eat anything."

Investors at the presentation seemed just as eager to eat up what Kaplan was offering them. I asked a fund manager if the swollen costs weren't a worry. "Not if they are using it to build up their business," he said. "They're lining up new products from new companies. That's only going to expand their position in this market."