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IPO Pipeline: Content + Commerce = How2


by Hal Plotkin
Silicon Valley Correspondent

Although implementation challenges remain, analysts say they’re impressed with the way IPO-bound How2.com Inc.’s business model marries content and commerce.

“I’m certainly optimistic about the space they’re in,” says David Cooperstein, research director at Forrester Research, based in Boston. “The beauty of the Internet is the way you can tie content and commerce together. How2 has a perfect link between the two.”

That’s high praise considering the source. Cooperstein, one of the more-seasoned digital-commerce analysts, has been publicly skeptical of several other online business models, particularly those employed by companies, such as Mountain View, Calif.-based Epinions.com, that are trying to use expert or consumer opinions to drive online sales.

“How2 is different,” Cooperstein says. “They clearly have a viable business model.”

Dallas-based How2.com was spun off earlier this year from software-maker Citadel Technology Inc. {CITN}, also based in Dallas. The 180-employee company is aiming to become a one-stop source for online information, products, and services. The idea is to turn consumers seeking information into customers buying solutions to their problems.

“There’s no question there is a huge demand for this kind of stuff,” says Blaine Mathieu, senior analyst at Dataquest, based in San Jose, Calif. “Surrounding commerce with content is a booming trend.”

Check out How2’s Web site

Overall, the U.S. market for companies selling items over the Internet is expected to grow to more than $42 billion next year from $20.5 billion this year, according to Dataquest.

At present, only a tiny fraction of those sales are taking place through Web sites, such as How2.com, a market sector some experts call “cooperative e-commerce.” The term describes a business model where one company, in this case How2.com, provides content and then links the customers it attracts to allied Web sites where sales orders are processed, usually in exchange for a commission of some sort.

“Essentially, How2 is building content as a media company,” Cooperstein says.

One of the keys to How2.com’s business model is the fact that, thanks to the Internet, allied online merchants are always just one mouse click away from the company’s Web site, which makes it easy for consumers to immediately locate whatever they might need.

The Internet’s power, however, could also pose problems for How2.com if, for example, consumers turn to the site to learn how to do something, say interior decorating, and then decide to look for the products they need on competing comparative shopping Web sites that can help them find the lowest price.

“I don’t think that’s going to be much of a problem,” says Kevin Werbach, managing editor of Release 1.0, a leading high-tech newsletter based in New York. Werbach says the example of Amazon.com Inc. {AMZN} demonstrates that many consumers are more interested in convenience than shopping around to save amounts that are often quite small.

“You can get a better price on almost everything Amazon sells at the comparison shopping services,” Werbach says. “But as long as the value of what they offer is close enough to what can be found elsewhere, most consumers don’t want to go to more trouble.”

Werbach says that a substantial amount of commercial transactions come from consumers who have questions of some sort. That, he says, gives companies such as How2.com, which focus on answering questions first and selling goods second, an advantage over more traditional online e-commerce firms that merely push product.

“I think [How2.com’s] business model has legs,” Werbach says.

Although analysts are impressed with How2.com’s approach, they also stress the challenges that confront the company on its road to profitability. A quick visit to the How2.com Web site, for example, reveals a noticeable dearth of products associated with many of the tutorials offered by the company. In some cases, the only related products available are books that can be purchased through Amazon.com.

Blaine Mathieu of Dataquest says he isn’t particularly worried about that right now, noting that the company launched its service just months ago. “The bottom line is that they have a valuable concept,” he says.

Even so, Mathieu expects it will be some time before How2.com is able to pump a significant amount of sales through the channel it is creating.

“It’s all a matter of execution,” Werbach agrees. “But I don’t have any doubt that this is going to be a big space for e-commerce.”

How2.com’s IPO could also be boosted by the ambitious advertising campaign recently launched by the company. In Silicon Valley, and other regions with large numbers of Internet users, for example, the company’s ads, which appear on buses and in other media, are becoming increasingly hard to miss.

“Online experts are popping out of the woodwork,” Mathieu says. “But How2 has a good chance of building a strong brand.” How2.com’s advertising effort is being coordinated by Austin, Texas-based GSD&M, a firm that handles brand-building for major accounts such as MasterCard International, Southwest Airlines Co., and Wal-Mart Stores Inc..

How2.com posted a loss of $2.15 million on revenue of about $870,000 from its inception on Jan. 7 through June 30.

The date for the company’s IPO hasn’t yet been set.

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