Taipei Times: Many Internet startups have shut down after running out cash and failing to secure an initial public offering. How do you control costs?
Sitou: According to my understanding, advertising expenditures account for the lion's share of many Internet startups' costs. But our spending on advertising is only about one-fifth of others'. Although we have a relatively low profile here, Taiwan accounts for 56 percent of our market in terms of book sales. In addition, those who have purchased books through our Web site like to come back time and again.
PHOTO:CHEN CHENG-CHANG, TAIPEI TIMES
We maintain zero inventory by setting up our branch offices close to suppliers, so we don't need to establish warehouses or develop distribution centers.
On the employee aspect, it is one of our biggest investments. To my knowledge, employees usually account for 30 to 60 percent of costs in an Internet company depending on different businesses involved. At BooksCity (
TT: You seem to have little interest in promoting BooksCity via advertising -- why?
Sitou: Many online booksellers spent a lot of money in advertising before their businesses reached the level that they should have in terms of infrastructure and customer service. In that case, if 10,000 users visited their Web site, there would be only 100 revisits and eventually less than 10 would continue to buy books from that site because they might not be satisfied with the service they got.
But at BooksCity, we have never once spent any money in placing newspaper ads or running TV commercials. Instead, we chose to go back to the traditional business value for better customer service. Most importantly, I don't think mass media advertising would be very helpful in drawing enough attention from our targeted customers. But book fairs such as the Taipei International Book Exhibition [of last week] did. Internet users are less loyal and are very price sensitive. You might draw a lot of attention through price cuts on one day, but would probably lose them on another day if you announce price hikes. In short, I am not a believer in per-dollar spending in advertising.
TT: Would you call yourself a conservative businessperson?
Sitou: (laughs) Yes, some called me a business conservative because I do not pour huge amounts of cash into marketing and advertising. But, interestingly, many competitors now recognize my business views and agree with my [philosophy] of developing business in stages, cautiously.
In fact, there are so many other online booksellers that you can access with a click, but the market sentiment changes so fast that you have to continue convincing both customers and investors this is more than just another online bookseller. Ironically, the market sentiment is not how do customers feel about you but what does the financial sector think about you. With this realization, if you do whatever they [the financial sector] want you to do and not follow the game plan you had set earlier, you are not the man in control, they are.
TT: Many in the financial sector have begun to question the business model of Internet companies, saying these money-losing startups are solid proof that the new economy may fail. Do you agree?
Sitou: The onset of Internet fever [in Taiwan] over the past few years has caused many to misunderstand the business models within the industry. I don't think many Internet companies were really doing online businesses. They were actually running the initial public offering because their financing dried up. Frankly, my view is that the past craze surrounding the Internet had ultimately caused unhealthy behavior, when the key is to focus on maintaining a place in investors' hearts and wallets, regardless of the cost.
But there is no big difference between Internet and traditional businesses as both share some basic values including customer service, gross margins, company morale as well as advertising and infrastructure expenses. Clearly, it will help if Internet industries can further consolidate and sort out the companies that don't produce, and companies are able to dramatically reshape their expectations. Otherwise, venture capitalists will continue to close the golden doors for the startups. But we're backed by three venture capitalists and they're fully prepared to help over the long-term.
TT: Amazon.com has "first-mover" advantage and dominance in this market. Do you think Amazon's case is a strong business model for online booksellers?
Sitou: It is hard to say which models are the best as the industry is still new. Amazon.com Inc has its model but I don't think it is suitable for us to emulate it. Look at Amazon, it is a listed company on the NASDAQ, it has billions of dollars in cash, maintains a large warehouse and is able to afford extensive inventory and write-offs. But the Seattle-based company has yet to turn a profit and continues to pile on steep losses.
BooksCity is far behind Amazon's scale of business but I believe what we have developed today is the most workable model based on our current financial conditions. For Amazon to continue operations and grow, it much either generate sufficient cash flow or keep raising money. But we don't need to do that. In our case, we enjoy a gross margin of around 30 - 40 percent through the online business and investors support our business model which is not based in part on Internet advertising but on putting a higher priority on infrastructure and customer service. So, based on our business model, I don't see any problem for the company in the next few years even if the company expands five-fold from where it is now.
TT: As Amazon is still operating at a loss and Hong Kong-based Chinese Books Cyberstore Ltd (博學堂) collapsed last year. What are the prospects for online booksellers in the near future?
Sitou: I believe the prospect is generally good for the industry and a cozy market space does exist for online booksellers. But I don't think online booksellers will replace physical bookstores.
Before Chinese Books Cyberstore shut down its operation, we had discussed with them to jointly develop the online business of Chinese books, as we enjoy different markets and may complement each other. Taiwan and Hong Kong customers account for 75 percent of our global market while readers in the US made up of 70 percent of their market. Although this partnership opportunity has gone, we still look forward to cooperating with other online booksellers in this industry.
TT: Some of Taiwan's major bookstore chains including Eslite Corp (誠品) and Kingstone Bookstore (金石堂) have recently set foot in the online book business, hoping their new investment in cyberspace will complement what they cannot offer at the physical stores. Will this threaten your business?
Sitou: Currently, we are focused on markets in Taiwan, Hong Kong, Canada and the US, and hope to position ourselves as a virtual bookstore offering books that are unavailable at local bookstores. I do not feel physical bookstores are direct competitors to us. Instead of competition, I rather believe a lot of cooperation opportunities exist.
While Kingstone is very aggressive in selling books through its business alliances with several local convenience chain stores, I am not very concerned because the products we offer are different from those of Kingstone. Nonetheless, I agree that allowing customers to pick up books and pay at local convenience stores is a very good idea.
TT: Are electronic books a premature idea for the time being?
Sitou: I will not say electronic books hit the market too early, but because these types of publications challenge people's reading habits, it will take time to shape the market. If you ask, how large the electronic books market may potentially be, that is really a big question. What I can say is the market is there but it will not be large.
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