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The second coming of the dot com bubble?

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The second coming of the dot com bubble?.

LISTEN TO JET.COM CEO BEING INTERVIEWED »

Larry Williams:
Is internet mania 2.0 upon is?

Frank Jasper:
Well those of us who remember the last internet mania in the late 90s will recall some of the stories. My favourite example of the excesses at the time was Pets.com. Pets.com was a business that lost money on almost every item it sold yet at its peak was valued by the share market at over US$400m. Unfortunately a company can't levitate on losses for ever and Pets.com fell to earth with a thud eventually going broke.

Larry Williams:
In a name reminiscent of Pets.Com, Jet.Com opened for business in the United States last night ...

Frank Jasper:
Yes, Jet.com's strategy is simple. They want to offer customers better prices on the millions of items in its online store than the mighty Amazon.com. They do have an interesting business model. Rather than make money by buying goods and selling them at a higher price like most retailers, Jet.com acts as a market place connecting buyers and to sellers. They will make their money from charging people a membership fee to access these millions of bargains. "Club price savings on everything you buy is the promise."

Larry Williams:
There is a problem though isn't there ...

Frank Jasper:
Ah yes. Matching Amazon's scale advantage is not easy, and Jet.com is a long way from having scale. In fact Jet hasn't signed up enough partner merchants or opened enough warehouses to directly sell much of the merchandise shown on its website.

So what happens when you click buy?

Well for now at least when a Jet customer buys items that aren't in its inventory a Jet employee goes online and buys the items from another website and has them shipped directly to you.

Larry Williams:
The Wall Street Journal did some digging into the financial impact of doing that on Jet.com?

Frank Jasper:
Yes a savvy journalist at The Wall Street Journal set up an experiment. They bought 22 items from Jet.com. Twelve of these items were shipped to the Journal by other retailers such as Wal-Mart, J.C. Penney and Nordstrom.

The price to buy these items from Jet added up to a little over $275. Unfortunately it cost Jet a little more than that to buy the items from competitors' websites. In fact Jet's total cost, which also included shipping and taxes, was $518.46. This means Jet had an overall loss of $242.91 on the 12 items bought by the Journal. That doesn't sound like great business to me!

Larry Williams:
Yet despite that investors are climbing over themselves to buy into Jet.

Frank Jasper:
Yes despite the fact that the company will likely suffer loses for many years Jet has launched with one of the highest valuations ever for an e-commerce company. The firm, which is not listed yet, has raised over $200m in funding in its first year and is now contemplating another capital raising that may value the firm at close to $3b. Investors are frothing with excitement about the outlook for Jet. Unfortunately we have seen this before. For the sake of its investors we hope Jet.com doesn't join Pets.com in the dog box of over hyped businesses that prove a simple maxim — if it isn't actually making money be cautious!

 

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