E-greetings break the mold, redefine the industry

Discount Store News, Dec 13, 1999 by Mike Troy

The process of selecting, sending and receiving greeting cards has always been a sensory experience that plays on the emotions of sender and receiver. But technology is changing the way consumers share their emotions, and the sensory experience of giving and getting cards may never be the same as a result of the Internet and e-mail.

Estimated by the Greeting Card Association to be a $7.1 billion category, greeting cards have long been a highly profitable category for bricks-and-mortar retailers, where manufacturers handle the frequent resetting and restocking of the department while making upfront payments to retailers in exchange for multiple-year contracts.

This business model has endured, but the increasing use of e-mail poses a long-term threat to category profits by offering consumers an alternative that is often free, and in some respects superior to paper cards.

The best example is Blue Mountain Arts and its Web site, Bluemountain.com. It became one of the Internet's most heavily visited sites during the past three years by offering free electronic greetings--all the while foregoing the cost of advertising. During September, the privately held company ranked 18th on Media Metrix's list of the top 50 Web sites, with 9.1 million visitors. That compares to Amazon.com's 11.2 million visitors. The Web site's founders, Susan Polis Schutz and Dr. Stephen Schutz, cashed out in October by agreeing to sell Bluemountain.com to Internet portal and broadband service provider Excite@Home for $780 million in cash and stock.

The deal made the Schutz's rich. And though it pushed Excite@Home further into debt, the company got a large base of loyal users. Excite@Home, which is controlled by AT&T, lost $253 million on revenues of $95.6 million during the six-month period ended June 30.

The value of electronic cards on line is different than it is in the physical world, which makes attempting to assign a market value irrelevant. Cards in cyberspace tend to be free, with their worth being measured more in terms of an ability to generate traffic against which advertising can be sold or as a value-added component for purchasers of gifts on sites such as Amazon.com.

Determining how many people have avoided going to a store to purchase a card due to the availability of free electronic cards is difficult to quantity. However, Gibson Greetings, which reported a loss of $37.8 million on sales of $214.2 million during the first nine months of the current fiscal year, cited electronic competition as one of the reasons for its financial problems. Last month, the company agreed to be acquired by American Greetings.

"You can go to just about any site right now and find electronic cards," said Kathy Mishek, a spokeswoman for Hallmark, which offers about 600 versions of what its calls Ecards on its Web site, Hallmark.com. The cards are unique to the Web site and not available at its 5,000 Gold Crown stores. In addition, they are created by a separate team of designers.

Other card companies have also become more aggressive in the offering of free cards to generate traffic. American Greetings, which plans to offer shares of Americangreetings.com in a public offering scheduled for sometime after the first of the year, has seen its traffic numbers shoot up in recent months. After losing money for several years, Americangreetings.com posted a profit of $1.7 million on sales of $12.3 million during the fiscal year ended Feb. 28. During the six-month period ended June 30, profits were $245,000 on sales of $9.2 million. Its PC Data Online ranking increased to 72 during October, from 379 in September.

American Greetings owes the surging popularity of its site to agreements with AOL, Yahoo and Lycos. Those deals aren't cheap, though. In exchange for an exclusive arrangement with AOL, Americangreetings.com agreed to pay $100 million through 2004. In addition, Americangreetings.com is particularly dependent on its AOL agreement, as 59% of it revenues during the first six months of the year were derived from products and services through AOL. Unlike sites that just give away cards, Americangreetings.com also offers subscriptions. It currently has about 400,000 subscribers who pay $4.95 for a one-month subscription or $19.95 for a six-month subscription to access an offering of 9,000 cards.

Another company planning to sell stock is Egreetings.com. It offers free cards and tries to make money on the sale of advertising. The same day its prospectus was filed with the SEC, the company announced it had received $23.6 million in new equity financing from its venture capital partners. The funding was needed to offset mounting losses. Egreetings.com reported a loss of $12.2 million on revenues of $724,000 during the six-month period ended June 30. That compares to a $2.9 million loss on revenues of $97,000 during the comparable period the previous year. Roughly 95% of all company revenues currently come from advertising sales, although the company's prospectus indicates it plans to engage in e-commerce.