Speaking Of Which…

Patrick Byrne is one clever fellow.

The voluble, erudite CEO of Overstock.com has a way of presenting himself at conferences that appears reasonable, informed, and responsive to questions—even when he is saying nonsense.

I saw Doctor Byrne two weeks ago at the Bear Stearns technology conference—the summer kick-off for tech investors at the Grand Hyatt in sweltering New York City. I don’t know why, but New York City weather is always especially miserable during Bear Stearns; nevertheless, the conference always brings together a worthwhile variety of interesting companies with plenty of opportunity to for Q&A.

After all, nobody wants to go outside the building in that kind of heat.

Thus it was that I found myself in the Schubert Room of the Grand Hyatt, listening to the CEO of a public company—namely Patrick Byrne—repeat a false rumor about eBay and Yahoo rather than answer a question.

The question he didn’t answer was about what it might mean to Overstock’s faltering auction effort that Yahoo had waived listing and transaction fees on its own auction site.

“I’m surprised” at Yahoo’s moves, Byrne told the small room of investors, before cleverly shifting everybody’s attention away from the actual question—that is, how Yahoo’s moves might affect Overstock—by saying the following: “The scuttlebutt in the industry is that there was a private understanding” between eBay and Yahoo, “where eBay would leave Yahoo alone in Japan and Yahoo would leave eBay alone in the U.S.” Having grabbed everybody’s attention with a fake rumor that had no bearing on the actual question, Byrne repeated the rumor that there was some kind of illicit under-the-table deal between Yahoo and eBay, and concluded the non-sequitur by saying, “The rumor is that goes back five years or so.” Then it was on to the next question, and yet another non-sequitur—this time intimating that Overstock is an acquisition target, even though the next question wasn’t about Overstock itself being acquired (it was, as I heard it, about whether further eBay-for-Shopping.com-type acquisitions are likely in the industry): “The number of phone calls I get where it sounds like that’s what’s on people’s minds [acquisition of Overstock] is starting to pick up…” Byrne said. “But I’m not interested in selling at anywhere near this price.” All in all, during both his Ballroom D presentation and his Schubert Room Q&A session, Byrne made a money-losing hodge-podge of backwater technology (“We got to where we are on a shoe-string”) supporting me-too jewelry/auction/travel offerings sound vaguely sexy, alluring, and ripe for a takeover—while deflecting one of the better questions by repeating a false rumor.

Meanwhile, he casually dropped a bomb that nobody in the Schubert Room seemed to grasp—probably because they were still fantasizing about the takeover inquiries Byrne intimated he was starting to get.

The bomb being Overstock’s cost of acquiring new customers—which is, to continue the metaphor, exploding.

Overstock’s cost of attracting new customers (called CPA), hit $21 in the first quarter of 2005: asked about this, Byrne—who has always focused Wall Street’s Finest on Overstock’s low CPA—talked about the rising costs of attracting customers and said:

“I don’t want to chase it [CPA] over the mid-$20’s.” This is the same man who 24 months ago bragged, “we basically have the lowest customer acquisition cost on the internet,” when the CPA was $8.69 per customer.

This is the same man who explained away an $18.30 per customer CPA in October 2004 by saying “remember, we’re coming into the fourth quarter…I suspect that you see it drop.” The same man who called that $18.30 CPA “the high end of respectable.” Now he says he doesn’t want to go over $25?

As usual, Byrne had a ready comeback to the notion that maybe $25 a customer is not economic:

“We’re getting a lot more lifetime value in a customer.” Right. Okay, Patrick. Whatever. I didn’t want to disturb the fantasy by reminding Byrne that large catalogue retailers view $2 a customer as a reasonable CPA.

Oh—one thing more.

Shortly after the Overstock Q&A broke up, I had the chance to ask somebody about Patrick’s “rumor.” That somebody was Rajiv Dutta.

Rajiv is the CFO of eBay, and he happened to be conducting a Q&A about an hour after Doctor Byrne. So I asked Rajiv about Doctor Byrne’s rumored illicit agreement between two of the most successful companies in the world.

After smiling with incredulity as I read him Byrne’s absurd remarks, Rajiv became sober and firm: “There is no agreement, tacit or otherwise,” he said.

His face hardened: “this is an extremely competitive market,” he went on, getting very sober and very firm. Leaving no doubt that eBay and Yahoo were engaged in a high-stakes internet version of Mortal Kombat, Rajiv added, “If we see them doing something well, we will look at it.”

I left the Grand Hyatt for the hazy, hot and humid streets of New York, debating which guy to believe: Patrick Michael Byrne of the tripling customer acquisition costs and the “decrapitating” technology and the $7 million diamond “steal of a lifetime” and Project Ocean and Project Rocket and Project Whatever…or the CFO of one of the most successful Internet companies ever.

It wasn’t much of a debate.

Jeff Matthews I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.