• Jeff Matthews

The Mystery of the 38 Diamonds, Part III

And now, The Mystery of the 38 Diamonds itself.

This case involves yet another Overstock.com “skunk-works project”—that fanciful term given by Overstock CEO Patrick Byrne to initiatives which other, less promotional companies, might simply call “R&D.”

(Google calls them nothing at all—one day, without so much as a press release, a new and usually highly slick function will appear on Google search. You could say Google takes the Warren Buffett approach to new ventures: less talk, more rock.)

Given Overstock’s spotty history with such “skunk-works projects”—including the fizzled “Project Rocket” and the less-than-earthshaking “Project Ocean” —a cynic might refer to them not as “skunk-works projects” so much as “Hail-Mary passes.”

In any event, the “skunk-works” project in this mystery is the company’s “Build Your Own Ring” function within the jewelry site of Overstock.com, announced with fanfare in January:

“We have opened our own Build Your Own Ring site. Something like Blue Nile. But it is where you can think of the diamond industry, up to $1,000 is really controlled by Zales and Wal-Mart and mall jewelers and Blue Nile operates average order size is about $5,500. We intend to dominate in the $1,000 to $5,000 range. Fantastic pricing.”

It sounded good, it sounded exciting—in fact, it sounded like all “skunk-works” projects from Overstock have sounded, at first. (Recall early reports of the “mCommerce” shop-by-mobile phone phenomenon: “We decided that there would be an opportunity to lead the field…”; or the online auction business: “It’s…far faster growth than eBay saw in their first 15 days….”)

The key, of course, is the follow-through, and here the reality—as with “Project Rocket” and “Project Ocean”—does not appear to be cooperating with the ample vision of Dr. Byrne.

For starters, the diamonds offered on the “Build Your Own Ring” site at Overstock do not squarely fit the $1,000 to $5,000 price range Overstock intends “to dominate” with “fantastic pricing.”

Of the approximately 2,800 diamonds available at launch, 582 or so were priced at $5,000 and higher while another 490 or so were priced below $1,000. So roughly a third of the diamonds were offered at price-points outside “the range.”

Some of them way outside the range.

There were 14 diamonds offered at $25,000 a piece and up; 50 at $20,000 a piece and up; and more than 120 at $15,000 and up.

In fact, over $3 million of the total value of diamonds offered on the “Build Your Own Ring” were offered at $10,000 a piece and higher, while the total value of all diamonds offered at $5,000 a piece and higher was more than $5 million.

Granted, this $5 million should be put perspective. After all, if one-third of the diamonds were priced outside the $1,000 to $5,000 price range, then two-thirds were priced within the range. And these numbered approximately 1,750 diamonds.

Stated value of 1,750 diamonds “in the range”? Roughly $2.7 million.

So, having put it in perspective, we discover that the “Build Your Own Ring” site offered over $8 million in stated value of diamonds: $5 million worth at $5,000 a piece and higher; and less than $3 million within the $1,000 to $5,000 range Overstock intends “to dominate” with “fantastic pricing.”

Now, about that $8 million worth of diamonds.

After announcing the new site, and the price range he intends “to dominate,” Byrne went on to speak about what appeared to be the source of the diamonds being offered on “Build Your Own Ring”:

“We did a $7 million deal on diamonds that was the steal of a lifetime. Just fantastic pricing in there.” (How Overstock came to getting “the steal of a lifetime” on loose diamonds is another mystery, and not the subject of the Mystery of the 38 Diamonds. I take Byrne at his word that he somehow purchased $7 million worth of diamonds at an unusually attractive price, despite the fact that the diamond supply chain is tightly controlled, and not at all an inefficient market.)

Assuming an Overstock-type markup of 15% on those $7 million worth of diamonds, they would appear to be the same diamonds being offered for sale at the time of the launch.

So, how is “Build Your Own Ring” actually doing? Well, once again, it would appear, based on a careful monitoring of daily sales on “Build Your Own Ring” starting in late March, that reality indeed bites.

One diamond was sold March 29—price range $1,000 to $2,5000—and another on April 2, same price range. Then again on April 4, same price range.

Pretty slow.

But on or about April 7, something interesting happened: 38 diamonds vanished from the available inventory. I say “vanished” because it is impossible for an outsider to determine whether the 38 diamonds were sold, or otherwise removed from available stock. Either way, there were 38 fewer diamonds spread across various price points.

Furthermore, if the missing 38 were indeed sold, it is likewise impossible to determine whether they were sold one at a time to 38 different people—unlikely given that the previous single-day sales record tracked since March 24 had been a whopping one—or sold in a batch to a single buyer.

It is, however, possible to identify the price ranges from which the “missing 38” vanished: one was a $25,000+ stone; four were in the $17,500 to $25,000 range; four in the $10,000 to $12,500 range; six in the $5,000 to $7,500 range; and 23 in the $1,000 to $5,000 range.

Total value of the 38 diamonds newly missing: approximately $220,000.

It would be quite a coup for Overstock if the sudden vanishing of those 38 diamonds represented a sudden upsurge in ring-building on its “Build Your Own Ring” site. Going from the occasional one-a-day to 38 is exactly the kind of “tsunami” CEO Byrne once predicted for “Project Ocean.”

But just as suddenly as the 38 diamonds flew out the door one way or another, Overstock customers suddenly resumed building their own rings at a more measured pace—one more on April 8, in the $1,000 to $2,500 range. And none since.

Which makes the Mystery of the 38 Diamonds even more of a mystery than if those 38 were the start of something big.

Like previous Overstock mis-adventures—from The Enigma of the Sputtering Rocket to The Vanishing Naked Shorts and its sister case, The Stranger on the Conference CallThe Mystery of the 38 Diamonds will, no doubt, be followed by other adventures in the casebook of Patrick Byrne and Overstock.com.

It is also likely that certain of these new adventures will begin with a “Project” allowed to ferment in shrouds of mystery, its fanciful code-word hinting of grand aspirations (“Project China,” perhaps, or “Project Google-Killer,” maybe), designed to tantalize Wall Street analysts and perhaps result in the “super-sizing” of the Overstock.com P/E ratio.

And they may even, one day, prove more successful than “Rocket” or “Ocean” or “Build Your Own Ring.”

In the meantime, we watch and wait for an explanation to The Mystery of the 38 Diamonds.

Perhaps you, reader, were the one who bought those 38 diamonds—all $220,000 worth. We’d love to hear about it.

Jeff Matthews I Am Not Making This Up

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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