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TMF Interview With Egghead.com Chief Marketing Officer Jon Brodeur & Director of Corporate Communications John Hough

March 17, 1999

With Yi-Hsin Chang (TMF Puck)

Egghead.com (Nasdaq: EGGS) was the first major company to close its nationwide brick-and-mortar store chain and move its business onto the Internet. The company specializes in selling discount computers, software, accessories and peripheral devices, and it has recently expanded its product offering to include such items as consumer electronics, sporting goods and jewelry. It also has an auction site and a SurplusDirect outlet store.

TMF: I've always been curious: how did you pick the name Egghead when the business was started in 1984?

Hough: The name Egghead was the result of the original founder Victor Alhadeff working with an advertising agency trying to invent a name that would reflect the evolution of the computer and sort of the braininess that sometimes is associated with computer nerds. It was intended to be playful, and it was intended to be memorable and also a word that could be associated with computer software and hardware.

TMF: At the end of this month, it will have been a year since you closed your national retail chain to become an online-only store. What has been Egghead's biggest accomplishments in the past year?

"We have these three major venues where customers can come in and pretty much get the latest and greatest front-line products to close-out-type products at the other end of the spectrum."
Brodeur: I know that from my prospective it's been really the merging of two organizations together and gravitating our systems, our processes and our personnel towards a totally Internet-based commerce site. The closing of the stores took place -- it was completed at the end of last year this month -- and an awful lot has happened over the last 12 months to really get us totally focused on the Internet.

Hough: The premier achievement was the design and the development of our new website, which is really our go-forward business model embodied in technology. Secondly, we just completed a secondary offering which has now given the company the incremental working capital to make investments in marketing, potentially in acquisitions, potentially in new technology, and to stay very competitive in this next critical period of time.

TMF: With so many companies now selling computers and computer-related products online, including expanded efforts by Dell (Nasdaq: DELL) and Gateway (NYSE: GTW), how do you plan to set yourself apart and to attract new customers?

Brodeur: Well, I think we start first with a very strong brand name that is very recognizable. In all the research studies we've done, Egghead appears to be one of the most recognizable brand names around. So we start with that, and we have basically three ways that people can shop, so it gives significant latitude.

For those individuals who want to buy front-line, latest and greatest products, they can shop at our superstores -- our Egghead computer hardware and Egghead computer software superstores. Then you've got customers who want great name brands, but want it at discount prices -- you know, typically like what's called off-price, similar to a Ross, Dress for Less or a T.J. Maxx. They can go to our Egghead SurplusDirect site and get some previous version stuff. It might be surplus new, or it could be refurbished type stuff, but they can get some great values on off-priced hardware and software. And if they like to buy in an auction format, you know, where they set the price, they have that opportunity, too, as well.

"In addition to the computer hardware and software, we have expanded our product categories to include other merchandise, particularly in the off-priced category."
So we have these three major venues where customers can come in and pretty much get the latest and greatest front-line products to close-out-type products at the other end of the spectrum. And we offer it all under one grand Internet site.

Hough: In addition to the computer hardware and software, we have expanded our product categories to include other merchandise, particularly in the off-priced category. So we have created with our customers the opportunity to cross-sell them many other items beyond the initial interest they might have had in a computer-related product.

Secondly, as we hear from time to time about another company entering the space, such as Dell, we really see that as a validation of the vibrancy in the marketplace that exists on the Internet today. The reason more and more companies are coming to the Net is because more and more shoppers are buying through Internet commerce, and there's room for many competitors and particularly room for ones who execute well and who develop and provide a high-level of customer service.

TMF: How do you view the Dell and Gateway efforts, I mean do you see that as a major threat?

Hough: No, just the opposite. I think as we see them come online and begin to compete, we see that as a validation of the strength of the current market that's on the Internet, and also they're a very different model than Egghead. If you go to Dell and you buy a Dell computer, and that's what you want and you complete the transaction, that's great. But if you come to Egghead, you can buy any number of different brand names of computers, you can buy an off-priced model of a computer, or you can buy an assortment of software from our company.

While you're there, if you want to participate in an auction on either computer products or other consumer products -- such as small household appliances and jewelry, watches, a whole variety of things including some apparel items and some sporting goods items occasionally -- we find that we have a very competitive business model. And it's the difference in some respects, to put it on a very simple basis, of going to a milk store because they sell only milk -- i.e. go to Dell and they only sell Dell -- or go to the supermarket, and you can buy milk and bread and everything else that you might need for your household that week. We're more the superstore, the supermarket.

TMF: Well, moving away from the Dell and Gateway, obviously there are other discount retailers online as well, for instance, AtCost.com. How do you distinguish yourselves from sites that have the same or similar pricing?

Brodeur: Basically, our tagline is buy it three times smarter. So, if you're an early adopter, or you want the latest and greatest computer hardware and computer software, you can come to our Egghead Computer or Egghead Software sites, and you'll basically be able to buy, select, shop and buy tens of thousands of the most current front-line computer hardware and software products.

If you're a person who likes to buy off-priced products -- brand named stuff at discount prices -- and you're willing to settle for something that's maybe previous version, refurbished or maybe at end of life -- it's still brand new but it tends to be a version that's about to be replaced with a new version product, whether it's hardware of software -- you can get that at our SurplusDirect site at specifically set prices, so you know exactly what you're going to pay.

If you're kind of a gambler, a gaming-type person, and you like to set the price, then you can come into our auction and you can set a price daily. With auctions running 24 hours a day, seven days a week, you can set the price on anything from computer hardware to software to consumer electronics products to sporting goods products to jewelry to gourmet food -- you name it. We think we offer a broad product offering that gives people a reason to be able to come to one place to accommodate their particular needs.

TMF: Well, since you mentioned the broader offerings, do you see Egghead becoming a diversified retailer and not just a computer electronics retailer?

Hough: We already are. We genuinely already are, and the best way to see that is to go to the site and go to the various components and look at the depth and breadth of the product offerings that we have currently. And going forward that will continue to be a part of the business, and you'll see some expansion in product categories as well.

TMF: I guess what I mean is I'm assuming that currently computers and computer related products are the dominant category for you.

Brodeur: Yes, if you look at the history of the Internet, computer hardware and software shopping and purchasing was probably one of the first categories that was acceptable because people tended to be computer users. So that's the core, that's the base of our company, its roots, and we will continue to focus heavily on that.

"Basically, our tagline is buy it three times smarter."
But one of the advantages to being out there early is you drive traffic. We have one of the greatest reaches of computer hardware and software related shopping sites according to Media Metrix. I think we're actually number one and have been for the last two or three months, and so basically when you've got that kind of reach where you've got in the neighborhood of 2 1/2 to 3 million unique individuals coming in per month and visiting on average three to four times per month, you can leverage that traffic across a broader product offering.

But there's no question that we need to first and foremost make sure that our offering of computer hardware and software products is top-notch because that's the root of the business, that's why people have come to our site in the first place. But if we can show great value and a great offering there, we then have the ability to leverage that traffic across other product categories. And where that goes ultimately I think remains to be seen as to how expansive we get in terms of adding additional product offerings, but we do have the ability to test product categories or individual products in our auction with all the traffic that we're getting and get feedback as to whether the test works well or doesn't.

TMF: Are you also looking to make advertising on your site a bigger part of your revenue?

Brodeur: We're certainly looking at additional sources of revenue. We spend a lot of marketing dollars to bring people to our site, and whether it's a brick-and-mortar store or whether it's a catalog, most of those organizations are generating advertising revenue in one shape form or another through either publishers or manufacturers that are advertising in their stores or in their catalog or on their Internet site. And that's an area we haven't really focused on up until fairly recently. So yes, you'll see a greater expansion in that area going forward.

TMF: Are you doing TV advertising, radio advertising to reach people who may not know about Egghead yet?

Brodeur: Yes, as a matter of fact, we had a TV and radio campaign that launched around the second or third week of November, and it talked about this whole three times smarter shopping. The 30-second spot ran on a variety of different cable and network channels, and we also did radio commercials as well.

TMF: Could you see a direct response from that?

Brodeur: There's no question that we saw a significant increase in traffic around the holiday time, which happened to be timed with the launch of our site and an off-line campaign, so one of the questions that we're trying to pore through is how much of it was seasonal, how much of it was the off-line campaign. It was probably a combination of the two. We feel that the off-line certainly had a major role to play in driving traffic to our site.

TMF: I think it's fair to say that you're still in a building stage. When do you expect to post a profit?

"The company is ideally positioned to be one of the ongoing success stories on the Internet."
Hough: We have not historically, nor are we allowed to project our future earnings. What we have said is that we're certainly in the short term going to focus on the development of our customer base and on the technology, and we will be making significant investments in all of the above, including marketing, and not unlike other Web companies for the foreseeable future, we're certainly going to have some reported quarterly losses, but we have not predicted a particular date or objective in terms of turning the corner. We'll make the judgment based on what's best for the business development and the customer development programs that we're managing.

TMF: And finally, where do you envision the company a year from now?

Hough: Well, I'm very optimistic. We have aggregated at Egghead a veteran management team, some of the best technology on the Web. We have one of the strongest brand names on the Web today. We have a number of essential and productive marketing agreements with companies like GeoCities (Nasdaq: GCTY) and Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) MSN, among others, and going forward I believe we are going to be a very competitive company, and we'll see incremental growth and development in our business that a year from now will make the current level of our business appear to be relatively modest.

Brodeur: We're also advertising with ZDNet, Computer Shopper, CNET, so we're covering a variety of different areas on the Web and those are some of the major ones, and then there's tens of smaller to mid-size deals that we've struck with Internet-based companies.

TMF: Great. Is there anything else you'd like to add?

Brodeur: No, just that we appreciate the time.

Hough: Yeah, and I think from my perspective, the timing of this discussion is particularly noteworthy because it's a time when we're reaching this one-year threshold, and a lot of important and difficult and innovative work has occurred during this last 12-month period of time, and now as we approach our fiscal year 2000 a few months before the actual calendar year 2000, I think the company is ideally positioned to be one of the ongoing success stories on the Internet.

TMF: Thank you so much for talking to me.

Hough: We're really delighted to take a few minutes and spend some time with you.

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