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Offline profits hell beckons net denizens

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Open ... and Shut Even as offline retailers and other traditional "brick-and-mortar" businesses struggle to build their businesses online, some of technology's biggest online denizens are looking for ways to go offline. Google is the latest, reportedly opening a store in Dublin, Ireland, to sell branded merchandise, but it's just the latest in a group that includes eBay and even Amazon.

Each of these companies appears to be trying to replicate the success that Apple has had, but they may be missing the point: Apple's success is all about overall demand for Apple products, coupled with a retail push to educate and impress more than push product.

It's also the case that Apple's success derives in part from the very tangible nature of its products. Microsoft has this with its XBox and Kinect products, but it's hard to see how a retail presence makes Windows any more interesting, or how a retail storefront for Amazon or eBay moves the needle on their respective businesses, which sell other people's products (Amazon's Kindle being the exception).

For most of these companies, going offline is all about increasing sales. So while Wal-Mart and others move online to capture buyers sat at they're their computers at home or in the work place, and lower prices by eliminating sales tax in the bargain, the tech world seems desperate to go offline.

Results have been mixed, at best. Groupon paints itself as a technology giant but its business is almost entirely dependent on a huge sales force peddling its daily deals to would-be customers. The cost of running such a growing sales force, coupled with customer churn, has kept the company operating in the red for years.

And then there's Yammer, which gets the royal treatment from Techcrunch on the back of its $50m venture financing round, reportedly at a $500m valuation. For what? Well, in 2009 the company hit $1m in revenue, which grew to in 2010 to around $6m in revenue. In 2011 Yammer tripled this to $18m to $20m.

Colour me unimpressed. When I was at Alfresco we exceeded that in our first three years of business and on a fraction of the money that Yammer has raised.

But perhaps the difference is in how Yammer is spending its money. Like these other companies mention, Yammer is spending big on sales and marketing heads. Half the company is sales and marketing heads today. By the end of 2012, expect that number to grow considerably.

It has to. For one thing, while Yammer's reported 19 per cent free-to-paid user conversion rate actually seems to be getting slightly better over time, growing to 20 per cent in 2011, as the service saturates the Fortune 500 - it's already at 85 per cent - the company has to ensure more of those free-riding users start to pay. That means hiring more salespeople to convert users into customers.

This isn't a bad thing, but it does show the peril of Silicon Valley's grow-at-all-costs mentality. Yammer has a fine business but its outsized valuation and $107m or so in venture capital money may push the company into unnatural acts, like driving a low-cost, freemium business model with a high-cost sales model. It happened to Groupon, and the company is struggling to dampen its dependence an expensive sales and marketing model.

Similarly, it's not clear that Google, eBay, Amazon or even Microsoft also building out a consumer retail presence can foolishly follow Apple's lead, given that they arguably can't emulate the reasons for Apple's success.

Apple has a high-margin business that is strengthened by the tangible allure of its products. None of these other companies can boast the same, though Microsoft comes closest. Employing a cost-heavy offline model to peddle low-priced online goods seems like a match made in profitability hell. ®

Matt Asay is senior vice president of business development at Nodeable, offering systems management for managing and analysing cloud-based data. He was formerly SVP of biz dev at HTML5 start-up Strobe and chief operating officer of Ubuntu commercial operation Canonical. With more than a decade spent in open source, Asay served as Alfresco's general manager for the Americas and vice president of business development, and he helped put Novell on its open source track. Asay is an emeritus board member of the Open Source Initiative (OSI). His column, Open...and Shut, appears three times a week on The Register.

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