Cool head balances e-hype

By KARYN SCHERER

At the age of 35, Matthew Darby knows he is seen by some as too young to head a publicly listed company.

But in the so-called new economy, when eager young things with dollar signs in their eyes dream of retiring at 40, Mr Darby could also be seen as past his best-by date.

So it is refreshing to see the Christchurch-based head of fledgling technology company EstarOnline show a healthy scepticism for both the mania and disdain that surrounds technology stocks around the world.

"One of the big things with the US over the last three years is the e-commerce thing has been hyped up because of the opportunity," he concedes.

"The opportunity hasn't gone away, it's just that there's been some silly floats, that's the reality - people are throwing their money at ridiculous ideas."

Some people might question what makes EstarOnline any different.

Founded by Mr Darby and a couple of close friends just 18 months ago, the company's main business activity is an internet-based CD store called CDstar which so far has captured less than 1 per cent of the $128 million music market in this country.

Set up with just $1.6 million of capital, the company is now seeking another $10 million from investors, which could see it list on the stock exchange just after Easter. It does not plan to make a profit until 2004.

While Mr Darby concedes that sales so far are tiny, he stresses that he and his friends have big plans.

They also have some expert help, with a board hand-picked by Deutsche Bank, including the former head of IBM in New Zealand, Basil Logan, and the general manager of Telecom's mobile phone business, Lorraine Witten.

At the end of last year, CDstar expanded into Australia. It plans to launch in Canada next month and is also eyeing Asia.

Mr Darby admits the company has some catching up to do.

Between September and December last year, it notched up just $100,000 worth of sales. Its two major competitors in Australia - ChaosMusic and Sanity - managed $2.5 million worth of online sales between them over the same period.

Most of the money EstarOnline hopes to raise from investors will be spent on marketing, mainly in Australia.

Undeterred by the Tourism Board fiasco, it has appointed Saatchi & Saatchi as its global advertising agency - a decision Mr Darby admits was swayed by the fact that New Zealanders Kevin Roberts and Peter Cullinane hold key positions within the agency.

Nevertheless, Mr Darby's biggest fear is that the company will get labelled as a CD retailer.

In fact its biggest potential, he believes, is likely to be its back-end system, including proprietary software designed to handle vast amounts of goods.

The company is also keen to spread its wings in other technology areas, but he is unable to talk about any further deals at this stage because of stock exchange regulations intended to protect investors against unsubstantiated hype.

Instead, Mr Darby stresses the company's low overheads, which he believes compare favourably to its international competitors.

In fact, EstarOnline's operational costs are currently just over $1 million a year - a sum Mr Darby insists is frugal given the scale of its ambitions.

"The good thing about our marketing costs is they're not fixed costs like rentals and staff, so over time our marketing costs will come back in relation to sales. That's the huge value of the internet."

In almost the same breath, he concedes that internet-based retailers will not always be able to compete on price. He agrees that in the United States, price is already starting to become less of an issue.

"Price is a motivator at the moment because that's the way that people perceive the internet - as cheap. It's not. It's not cheap to set up and operate and it's not cheap to run and it should not be cheap to buy. It should be convenient and competitive and that's what our aim is."

One point CDstar is likely to emphasise heavily in its advertising is its ability to deliver faster than many of its competitors. Because it has local supply contracts, it is generally able to deliver its products within four days. Because most of its rivals use US-based contract fulfilment companies, delivery can take up to three weeks.

While CDstar can offer only the same range of CDs as local stores, compared to the much bigger range available in the US, Mr Darby is convinced it's the right strategy.

Not only does it give CDstar an advantage over its competitors, it could also prove a bonus once GST is introduced across the Tasman in July.

At present, Sanity and Chaos customers generally avoid paying a 20 per cent wholesale tax when their CDs arrive in the country.

But they may not be able to avoid GST - meaning both companies will either have to put up their prices, or absorb the difference by reducing their margins.

Whether or not this proves to be the case, Mr Darby is unconcerned by the fact that all three companies will be fighting over what could eventually prove to be less than 10 per cent of the total music market.

"With growth of 20 per cent a year in that market, there is room for three players to compete quite happily."

While CDstar is seeking a compliance listing on the Australian stock exchange, it hopes to keep its roots on this side of the Tasman.

He points to hugely successful companies such as Jade and Cardinal as evidence that Christchurch is as a good a home as any in the fast-moving world of technology development.

"We are a very clever country and here's a real opportunity to pool our resources and take things to the world," he enthuses. "It's so exciting - I believe that this is New Zealand's new economy. There's so much going on in New Zealand. It could easily be the major sector for us but the biggest problem we have is that e-commerce is so new that no one can really form an opinion on it yet."

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