Stock Ideas
[ February 17, 2000 ]
Interview -- Jim Rose, Chief Executive Officer, QXL.com
In association with Intel's® WebOutfitterSM Service (IWOS), we have recorded eight 15-minute interviews, with various industry big-wigs, on the Fool site. Below is a text transcript of one of our interviews. To see the RealPlayer audio/visual stream of this interview, click here.
Aged 38, Jim has been CEO and a director of QXL.com since May 1999. Prior to QXL.com, he had been CEO of United Information Group, the marketing subsidiary of United News and Media, and CEO of Blackwell Information Services, a global provider of academic and professional information. At Blackwell, he was responsible for all Internet development, including the launch of the Blackwell Online Bookshop. He has also been Managing Director for Dun & Bradstreet/AC Nielsen in the UK, Ireland and South Africa, and a management consultant with Deloitte & Touche. Jim received an MBA at the Kellogg School of Management, Chicago.
The Fool: Jim Rose, CEO of QXL.com, thanks very much for coming along to the Fool and agreeing to be interviewed.
Jim Rose: My pleasure.
The Fool: Can I just start, just for people who aren't very familiar with QXL.com, the few people that is, can you just give a brief run down on the story of QXL, its business model: how did it originate and where do the revenues come from mainly?
JR: QXL is the leading pan-European online auction community. That is what our whole mission is and what our whole focus is. We've been around for a little over two years, started in late 1997 which in the Internet space in Europe was very, very early pioneering days.
The Fool: You ancient, grand old man!
JR: Very old, very old company! I'm not the founder of the company, I'm the CEO. It was started by a guy named Tim Jackson who's a journalist for the Financial Times and also an author. He wrote Intel Inside about Andy Grove and some books on Branson and so on. So, covering the Internet for the FT, looking to America, working with some entrepreneurs triggered the idea that, "Hey this is not really a fad, this thing called the Internet, it's really going to be a trend. Let's take a hybrid model, bring it to Europe and then exploit it very quickly all across Europe and deal with the localisation issues and language and so on." So that's how Tim started the company and it's been very successful and, ever since, we've expanded and grown quite aggressively.
Our business model is unique. People say we're the European eBay and a big piece of our business is that, the consumer-to-consumer side of the business, but we're much more than that. I'd say we're eBay plus. We have business-to-consumer and consumer-to-consumer and it's very much integrated and the reason for that is, quite simply, is that from a consumer's point of view they don't say: "Hey, I think I'll do some B to C shopping today", they just want to go out and look at what they can get, whether it's new, whether it's used, in a very safe, secure trading environment. And that's what they're looking for and that's what we deliver, so it's a very strong consumer proposition, the integration of the B to C and C to C.
I think your last question was, where does our revenue come from; what's our economics? There's a number of revenue schemes in the business model. I'll take you through them but primarily it's a transaction-driven business model. We're looking to sell products and make money on the transaction. We also get revenue from promotions for our merchant partners and some value-added services, whether it's in our shipping, our escrow services, there are some marginal revenues there, but primarily it's a transaction-based, commission-based model and that's where the bulk of our revenues come from.
The Fool: OK, and on the business-to-consumer and consumer-to-consumer side, where predominantly do you think QXL's future lies? I mean, eBay is fundamentally consumer-to-consumer. Where do you think it lies for QXL?
JR: This is very much an evolving, developing business. If you look back twelve to eighteen months ago to QXL, it was a hundred per cent B to C inventory-owned business model. If you look to where we are today we are sixty-five percent Consumer to Consumer, less a very small percentage of inventory-based holdings now. Going very close to zero very quickly, so we've transformed this model in a very quick period of time to that environment -- which capital markets like. We've changed our risk profile and our ability to grow. We are also able to do deep integration with our distribution partners. We enable them with technology. We enable our big partners to upload and manage content on our site. So if you look at about six months from now, probably seventy percent will be from consumer to consumer, thirty percent business to consumer and a very, very negligible, if not a zero, inventory-based model with virtual warehousing, virtual inventory. We're not an Amazon. We're not building a seven hundred and fifty thousand square foot warehouse. We're not going with bricks and mortar in our model. It doesn't need it and we don't need to develop that kind of infrastructure.
The Fool: What about lastminute.com's model where essentially they're a retailer without any inventory risk. I mean that must be quite attractive to you. Do you think you would ever see yourself doing anything like that?
JR: That's where we're going to. I think the important thing to highlight here is that people think well, why do you ever carry an inventory in the first place? It's responding to the market. When we started out two years ago the whole business model was an agency model. A non-inventory holding model. We realised two years ago that most of these suppliers couldn't accommodate. They couldn't allocate inventory, they couldn't manage the customer experience, and they couldn't deliver products to consumers. So for us, to get a hold of managing that consumer experience, we took the inventory. We could control distribution, quality, content, availability and so on. And over those two years we then worked with those partners and said "Hey, you guys get with this e-commerce bandwagon, yeah? Your technology's not right, your interfaces aren't right, your distribution's not right." So we've worked with those partners for the last, twelve to twenty-four months or so and they've really come together in the last six to nine months. So now we can move back to the model that we always originally had intended to do, really a non-inventory based model. There's no risk in that environment. And that's exactly where we're at.
When we went public back in October of last year, one of the issues and criticisms of QXL was that it was an inventory-based model. We've moved from ninety-eight percent of our business to consumer stuff to sixty percent in our last results, in September. That number is going down quite significantly. So in about six months that business model has changed tremendously.
The Fool: That's interesting. So who do you think is really your closest competitor in Europe?
JR: In Europe it's kind of tough. There's a lot of challenges, but there's really no direct competitor in that sense. There's a lot of people who can potentially be. There's the American threat clearly, whether it's the Amazons, or the eBays of this world, or the Yahoos to a degree. Every day that goes by the Americans -- and me I've got all the right to say this, being an American, I can criticise the Americans, without being too pedantic, I think -- but they've really missed the European thing. And every day that goes by there's just another step forward for QXL. The door was right open and we ran right through it and really captured that space. Because this space is about critical mass, first mover advantage and all those kind of things so they theoretically have the wherewithal, the Americans, but haven't actually executed very well, and their window of opportunity is closing. So they're still out there as a threat, there's no doubt about that because they're big brands and they've got big resources. The other threats, if you like, are the local guys. There's a number of local auction players scattered across Europe. Some fairly material, all with ambitions to get out of their countries. They've had a very difficult time getting out of their countries, because their technology platforms aren't appropriate, their distribution relationships aren't right and so on. So both of those players can be threats for us.
The Fool: But you go out and buy them then.
JR: Oh, we've bought a number of them already. We've made about three acquisitions, very significant and strategic investments. When we get the opportunities to buy, on the right terms of course, for economics, we certainly do and we've got a very strong currency, now that we're public we can drive it. Generally still it's not a consolidating industry. It's still a developing industry so even through we have made a number of acquisitions in this space its generally not a consolidating industry. I think in six to twelve months from now you will see more consolidation taking place.
The Fool: I mean, if we are going to talk consolidation we have to talk the ultimate consolidation; do you ever see a situation where eBay could come and buy you, or you're going to go and buy eBay?!
JR: Yeah, well. The latter one would be really interesting. But, yes, yes there certainly is a possibility I think. If you look from an American's point of view eBay's got a market capital of, I don't know, fifteen, twenty billion, something like that, our market capital is about two billion, so we're ten percent of their market cap. So, if you believe QXL is leading this market, owns this space, do you give up ten, fifteen, twenty percent of your market capitalisation to own and dominate Europe? Probably a smart move. But the flipside of that is the Americans' priorities. Their priorities are their home markets, number one. eBay's particularly is local development, eBay LA, Chicago and really get localisation there, so I don't know where Europe actually fits into their priority list. If you look at their behaviour it certainly hasn't been exhibited very well as far as putting in infrastructure.
The other problem people like eBay have is that they have a proper business model, right? They're producing profits, one of the few. Their valuation is very much driven off the profitability side, so for them to organically develop in the European market place, I think the last quarter results we produced about a week ago, I think their profit was about four million dollars so if you annualise that, say about sixteen million dollars profit you could spend that in an offline advertising campaign in a country in six months. They've got this huge profitability issue to contend with. Where do they cross that line with organic development investment?
The Fool: There's going to come a time, in the next couple of years, where organic growth in the US slows down and the big market's going to be Europe.
JR: Exactly. Well there's certainly an option...
The Fool: What would QXL's reaction be to an approach from eBay?
JR: We would certainly entertain it, clearly. I mean, we look at what's right for our shareholders, you know. The demands of our shareholders and our customer base. So if it makes sense we'd certainly entertain that. I do think critical mass and size is very, very important in this space. If you have that you can service your customers better because in the auction world you can really drive a liquid market. Buyers want to be where sellers are, sellers want to be where buyers are. So that liquidity of the market is so fundamental and if that can accelerate, that's great, if not we can continue to do our thing and grow at the rates we're growing.
Related Links
• QXL.com
• QXL message board
Parts of the Interview:
Part 1
Part 2
Part 3
