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Diamonds.Com

May 30, 2000 11:14 AM   By Martin Rapaport
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By Martin Rapaport

Wow, the internet. Money, money, money. Fast money. Easy money. Big money. Quick, grab those options, buy that stock, get your paper profits. Hurry, hurry, there’s no time. Do it all. Business plan, angles, private placements, venture capitalists, investment bankers, NASDAQ, IPO. C’mon. Get in. Catch that window and you’ve got it made for life.

Wow, wonder what it would be like to own Diamonds.com. Be in a position to play the internet game. Imagine what you could do and how you could do it. Want to understand what is really going on with the internet — the real issues?

OK, friends. Here’s the inside story on Diamonds.com.

It all stated in the early ’80s before Windows, the worldwide web, and the popularization of the internet. DOS PC’s, 8 inch floppy disks and 1200 baud modems. Diamond prices on CompuServe. Listings of stones for sale on direct dial-up Unix machines. Buy matching electronic brokerage with shipping and fulfillment services. Jacques Voorhees of Polygon was there and I was there with RapNet. Everyone else thought we were crazy.

In the ’90s, Windows, the internet, web browsers. Very slow at first, but always inevitable. More people using more powerful computers with better software. More databases, communication capabilities and business opportunities. Then everybody started waking up to the power of the information revolution. Figuring out how to use computers to manage their business’s better. Business to business (B2B) electronic trading grew and Diamonds.net developed.

There is certainly a lot more to say about Diamonds.net and B2B, and we plan to write about this in a future article. This story however, is about Diamonds.com and the business to consumer (B2C) world. We are going to take a look at the challenges and opportunities presented in the internet B2C world and consider the moral and ethical considerations faced by a member of the diamond trade that must protect, develop and optimize an extremely valuable strategic asset — namely Diamonds.com. While this is a personal story about the experiences of Rapaport, it is also an analysis of the issues confronting firms in the diamond industry that are challenged by the rapidly evolving internet environment.

Competition

To some degree the question of how and when we should further develop and expand Diamonds.com as a premier consumer site has been put on the front burner by the fact that Odimo.com has just bought the name Diamond.com and is in our opinion illegally and unfairly encroaching on our proprietary use of Diamonds.com as a consumer site for and about diamonds. Our lawyers have served notice and are dealing with the legal issues.

It is worthwhile noting that a principle shareholder of Odimo/Diamond.com is the powerful Steinmetz Diamond Group, one of De Beers largest customers. Diamond.com’s relationship with Steinmetz, Rough Diamond Traders, and five other significant diamond manufacturers and distributors claims to provide consumer’s with “continual access to the largest inventory of certified diamonds in the world.” Softbank has provided Diamond.com with a $125 million international development funding commitment and invested $31 million in a private placement.

Obviously, one important lesson here is that the hyper-competitive B2C internet environment is radically altering the diamond distribution system. De Beers sightholders are selling direct to consumers. The cat is not merely out of the bag, it is a lion roaring on the internet. While the question as to whether suppliers should sell direct to consumers by- passing traditional retailers is important and should be considered, let’s face it in reality, it has become academic. Of course, we must note that just because suppliers sell direct, does not mean that they will succeed. The new realities of the marketplace work both ways. Just because a firm is a successful and powerful manufacturer, does not mean that they have what it takes to be a successful retailer. In fact, it may turn out that there are very limited size-scale vertical integration benefits to be derived by selling direct.

Another important lesson is that valuable internet assets such as our Diamonds.com domain name and trademark need to be protected legally and commercially. While it has been prudent for us to sit back and wait while many large internet retailers have lost tens of millions of dollars trying to buy the internet marketplace, we must face the reality that the internet is also a very proactive environment. At some point, firms like ours that hold important strategic internet assets must take action. While we must be a responsible member of the diamond community and be sensitive to the ethical and moral concerns of the industry we cannot ignore fundamental changes in the structure of the diamond marketplace.

Commercial Considerations

While everyone is running around trying to cash in on the crazy internet IPO market it is worthwhile considering just how viable the B2C markets are or will be. So far the internet game has been fueled by firms selling illusions of their future profitability into a highly speculative and volatile stock market. From an objective “here and now” profit perspective the B2C internet firms in the jewelry sector stink. Not only are they not making money, they are losing money as fast as they can raise it. At current valuations B2C companies look like a sucker’s bet and bring to mind the tulip markets of the past. It’s not if the bubble is going to burst, it’s when.

And now for some hard questions. Should Rapaport be expanding our existing B2C business in the current internet environment? Why are current B2C’s failing? Is it because they have the wrong models? Is it because they are coming out too early?

Key questions: Is it possible to develop a B2C model that works — one that is not only profitable, but capable of working in harmony and synergistically with the rapidly evolving retail jewelry sector? What kind of B2C business model should Rapaport be developing?

The B2C Models

The major retail sites offering diamonds on the internet do a fine job presenting quality diamonds at very attractive prices. Most offer diamonds with internationally recognized diamond grading reports and have privacy, warranty and return conditions that are as good as brick-and-mortar retailers. Most of these are legitimate business’s providing a fair and reasonable competitive service to consumers.

The problem with the diamond jewelry e-tailers is that they are highly unprofitable. They are spending way too much money on advertising and promotion. These firms have been caught up in an internet diamond rush under the false assumption that the role of the e-tailer is to dominate the retail jewelry market. The idea that a couple or very few firms, will own the retail jewelry market due to the supposedly lower cost of e-tailing, coupled with the notion that firms can simply buy market share in a very traditional and highly personalized service industry is a fatal flaw that is more likely to result in the demise of the high flyers than their market domination.

At some stage the big spenders will run out of cash and we will discover the true strength of the internet retail jewelry sector. In the meantime, the e-tailers are unlikely to take over significant market share from the brick-and-mortar crowd. It will be interesting to see how the current crop of major e-tailers adapt their business plan to a normalized environment and if they can survive without infusions of VC cash. Over the long-term, what is now perceived as a great strategic threat to the traditional retailer may turn out to be a blip in the history of retailing.

Retailing

The fact that the big B2C’s might turn out to be paper tigers does not rule out the fact that the internet is here to stay and will have a major impact on the role of retailing in the twenty-first century. The key to understanding the role of the Internet in the future of the diamond industry is to understand the role of retailing in the diamond industry. We must recognize that retailing (i.e. the art of moving the diamond across the last 18 inches of counter space into the hands of the consumer) has always been and will always be a legitimate business because it adds value to the diamond product.

Certainly the internet will change the way retailing works and new tools and techniques will make retailing much more efficient and competitive. But no matter how you look at it, someone, somewhere — on an internet video link or across the counter — is going to play an important role selling jewelry to consumers. In the future the internet will do as much adapting to the needs of retailers as retailers will adapt to the demands to the internet. A synergy will develop between the skills of the retailer and the technology of the internet. Neither will dominate the other.

It is important to note that the secret to business — all business, everywhere, all the time — is adding value. Simply put, if you are e-tailing, retailing or even BS-tailing, the only legitimate long term way to make an honest living is by adding value to the product you sell. The big question is how the internet will impact the way retailers add value to the diamond product in the markets of the future. To a large degree, this will be decided by consumers. They are after all the final arbiters of what added value is, how and where it should be added, and what various types of added value are worth in dollar terms.

From a practical perspective, how and where consumers buy diamonds, as well as the extent of the commoditization of the retail diamond markets, will depend on how the synergy between e-tailing and retailing develops. While competition and commoditized internet diamond selling programs will drive down profit margins demand by consumers for personalized service and brand name designer jewelry will push up margins. We will see new models that synergize the two forces. E-tailers will have to become retailers and retailers will have to become retailers in the markets of the future.

Diamonds.com

Given our view of the road ahead and the need to develop and promote synergy between e-tailing and retailing it is obvious that one of the best uses of Diamonds.com will be to provide e-tailing services in cooperation with retailers and other sectors of the diamond industry. Whenever, and wherever possible we will work with retailers and the trade to provide a vehicle for the integration of traditional retailing and e-commerce.

We do not intend to turn Diamonds.com into a standard B2C consumer site. Rather, continuing and expanding on what we have already done over the years, we will be offering diamonds, jewelry and related products for sale to consumers as a service to and for retailers and other segments of the jewelry trade. We will also provide retail product sales and fulfillment services in cooperation with select retailers and other members of the trade.

The Rapaport perspective and mission in the diamond industry has evolved over the years to include a broad range of added value services to the trade and beyond. A primary goal is to use our website, Diamonds.com, to provide a broad range of product and market information services to consumers who have long used the site as an information resource. This will include sophisticated diamond appraisal, evaluation and valuation services.

While it is still too early to predict exactly how the Diamonds.com site will grow and develop we know that it will be a dynamic process of evolution that will keep pace with changes in e-commerce and the jewelry industry. It is our hope that Diamonds.com will provide the diamond industry with an incredible opportunity to meet the challenges of the internet head-on and to expand the role of e-trade in the diamond industry.
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Tags: Consumers, De Beers, Jewelry, Sightholders
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