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May 13, 1999


He Helps To Make Business Sense Of the Internet

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Mukul Pandya

Readers browsing a year ago through the Harvard Business Review might have stumbled across an article about an issue that keeps lots of corporate CEOs awake at night these days.

Shikhar Ghosh Titled Making Business Sense of the Internet, the article argued that the Internet could be tough terrain for large companies, and it offered a road map for executives willing to venture there.

Thoughtfully analyzing both the opportunities and threats that the Internet poses to traditional businesses, the author, Shikhar Ghosh, wrote that while setting up a web presence is easy, creating a web-based business model is very difficult.

Ghosh should know -- for he is no ivory-tower academic. As chairman and co-founder of Open Market, a Burlington, Massachusetts-based provider of Internet commerce software, 40-year-old Ghosh wrestles every day with the Web's opportunities and threats.

As electronic commerce has boomed in the five years since Open Market's 1994 inception, the company has been propelled to the forefront of its niche: producing software that permits secure Internet transactions.

A November 1998 report by Dataquest, an organisation that monitors trends in high-tech industries, described Open Market as the industry leader in Internet commerce software; its 8,800 licences sold placed the company ahead of Microsoft and IBM combined. That number has now reached some 13,000 licences.

Still, like most Internet-based companies, Open Market faces huge challenges -- the biggest of which is turning a profit. Although the company has announced a string of deals with leading Internet players such as America Online, Lycos and Time Warner's, it is still struggling to break into the black.

For the year ended December 31, 1998, for example, Open Market lost nearly $ 35 million on revenues of $ 62.1 million. A year earlier, the company had lost $ 58 million on sales of $ 61 million.

In an attempt to get its massive costs under control, Open Market recently slashed its headcount by 14 per cent. But staggering as the company's losses might seem, they are not unusual in the strange world of the Internet. After all, Wall Street values, the online book seller that has never been profitable, at more than $ 20 billion.

If anyone can turn these losses into profits, Ghosh and his team at Open Market probably can.

An alumnus of Bombay's Sydenham College, he came to the US in 1978 to work on his MBA at Harvard Business School. He got his degree in 1980 and then joined Boston Consulting Group, where he became a partner.

'I was one of the youngest consultants at the Boston Consulting Group,' Ghosh said in a past interview. 'We did studies for companies growing coconuts in the Philippines, studies for cruise lines, and a reasonable amount of work in the telecom industry. That's what got me interested in telecom. I did a lot of work on operational efficiency applied to industries like telecom and publishing.'

In 1988, Ghosh went from being a consultant to telecom companies to entering the business himself. Inspired by a colleague's success in an entrepreneurial venture, he founded a company called Appex to make software for the emerging cellular phone industry. Appex, as it turned out, was successful -- even wildly so.

"In 1987-88 the cellular industry in this country was just starting up," Ghosh explained. "Every city had a separate cellular phone company, and Appex created the roaming infrastructure for the industry. So if you moved from Boston to New York and you wanted to use your phone in New York, we did the validation and call forwarding and then the transfer of funds. We created that whole infrastructure. So as the cellular industry grew, our revenues grew with it."

Appex's revenues went from less than $ 3 million in 1988 to more than $ 100 million in 1994, which brought it to the attention of the media.Business Week, for example, named the company the fastest-growing entrepreneurial company in the US in 1990. By 1993 Ghosh had sold Appex to Electronic Data Systems and moved out, looking for the next challenge.

In some ways, the rise of the Internet in the 1990s closely paralleled that of the cellular phone industry during the 1980s -- a factor that prompted Ghosh to venture into the field. Greylock, a venture capital firm that had known Ghosh since his days at Appex, put him in touch with David Gifford, a faculty member at the Massachusetts Institute of Technology, and the two co-founded Open Market in 1994. At that time, the Internet was viewed largely as an academic network, with few commercial transactions.

But as the World Wide Web, the graphic interface of the Internet, grew in popularity, electronic commerce exploded, carrying Open Market along with it. When Open Market decided to go public in the summer of 1996, top investment firms like Goldman Sachs and Cowen & Co helped underwrite its stock offering.

Electronic commerce has grown faster than anyone could have predicted a few years ago, and Open Market has grown with it. The company has expanded aggressively into Europe and Asia, which, in part, explains why the company is still losing money -- international expansion is expensive. But by establishing its presence around the world, Open Market hopes to capitalise on its lead.

The continuing boom in electronic commerce should help Open Market move towards profitability eventually. According to a Keenan Vision study, the number of e-merchants will increase from 17,500 in 1998 to more than 400,000 by the end of 2003.

Vernon Keenan, Internet analyst and founder of Keenan Vision, said, "E-merchants are understanding the tremendous opportunity of selling online. It's now easier than ever before and competitive pressures are accelerating. Open Market's products are the right kind of tools and Open Market is well positioned to remain a major player."

In a Harvard Business Review article last year, Ghosh wrote that the Internet will 'enable certain companies to dominate the electronic channel of an entire industry or segment, control access to customers, and set business rules.'

If Open Market is able to do just that, it might prove to be as much of a winner for Ghosh tomorrow as Appex was yesterday.

Mukul Pandya is an editor at the Wharton School of the University of Pennsylvania.

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