November 17, 1997 Software store follows path blazed by Amazon.com It was only a matter of time before Internet bookseller Amazon.com's innovative business model starting popping up in other retail outlets online. And why not? It's an attractive model. In principle, Amazon.com maintains no inventory and ships books directly from the publishers to the consumer as they're ordered. This allows Amazon.com to offer lower prices, since there's no overhead associated with warehousing books, moving them around, and returning them to the publishers if they don't sell. There's no "bricks-and-mortar" retail outlet, so the initial investment is low. All you need is relationships with the publishers and the ability to put together a useful, effective Web site. That's the principle. In practice, Amazon.com does maintain an inventory in a warehouse in Seattle, so it can ship the most popular books more quickly. And the cost of developing and continuing to enhance the Amazon.com site is quite high: All revenues to date have been plowed back into infrastructure development, and Amazon.com -- despite a high volume of sales -- has yet to show a profit. But the allure of the business model is strong, due in part to Amazon.com's successful IPO. As a result, we can expect to see this model copied in a wide variety of markets. Anywhere that products move from manufacturers to consumers through a multitiered distribution channel (from manufacturers to distributors and wholesalers to retailers to customers), there's potential for the Amazon.com business model. Eliminate one or more of those tiers, the argument goes, and you can cut costs and reduce prices -- with minimal overhead costs. Streamlining software sales Enter Chumbo, a startup that aims to do for software sales what Amazon.com has done for book sales. Chumbo's not (yet) delivering software over the Net. Instead, its Web site lets customers order software products -- the kind that come on CD-ROMs in boxes -- that are then shipped via FedEx from the distributors' warehouses directly to the customer. Chumbo never touches the boxes, except to handle returns. Chumbo's site, which I visited a few days after its launch last week, isn't just an online catalog. It includes detailed product information, customer comments, and product reviews from ZDNet (a competitor to InfoWorld affiliate idg.net). Clearly, Chumbo founder David Prais has done his homework. According to Prais, this schema means that Chumbo's overhead costs are only about 2 percent to 3 percent of revenue, compared to 10 percent to 15 percent for traditional retail software stores. "We're not here to make massive benefits for ourselves," Prais said. "We're here to pass on the savings to the customer." While that might sound like the kind of patter you'd get from a used car salesman, Prais is onto something. Chumbo's prices are low, and if the system works, the Chumbo site could be one of the most convenient ways to purchase software. The interesting thing is that Chumbo doesn't actually eliminate any steps in the distribution chain, and that's the company's greatest point of vulnerability. Software products still must make their way from the manufacturer to the distributor, via Chumbo's retail storefront on the Web, to the customer. As a result, competitors that actually eliminate one of the steps in the distribution chain may have an advantage. For instance, a distributor could easily set up a comparable site to sell products directly to consumers, thereby cutting out the retailer (Chumbo). Or a particularly savvy online retailer could cut out the distributors, and ship products directly from the manufacturer. But Chumbo isn't just sitting around waiting for that to happen. In the meantime, they're pursuing partnerships with other companies -- hardware vendors, for instance -- in which Chumbo will provide co-branded software stores on those vendors' sites. If Chumbo can establish good brand recognition in the next six months, it'll have momentum -- as Amazon.com has -- and will stand a good chance of success. You can see Chumbo for yourself at http://www.chumbo.com. Seen any good business models lately? Tell me about them at dylan@infoworld.com. Missed a column? Don't despair -- click here to catch up.