PATRICK BYRNE - OVERSTOCK.COM
CEO Interview - published 06/07/2001

DOCUMENT # MAL209

PATRICK BYRNE is the CEO of Overstock.com, where he leverages more than
15 years of business, distribution and manufacturing experience to
define and direct the company's vision. He is also the General Partner
of High Plains Investments LLC, an investment company located in Park
City, Utah. Previously, Mr. Byrne was Chairman, President and CEO of
Centricut, LLC, worldwide supplier of high-quality plasma consumables,
where he strove to improve and create new products to help those in the
metal fabricating industry run their operations more safely, efficiently
and profitably. He held the same three positions at Fechheimer Brothers,
Inc., a Berkshire Hathaway operating company. Mr. Byrne is a multi-
faceted individual, having received his Bachelor's degree from Dartmouth
College, a Master's degree from Cambridge University as a Marshall
Scholar, and a Doctorate in Philosophy from Stanford University. A
dedicated philanthropist and three-time cancer survivor, he recently
biked across country to raise awareness for cancer research.
Additionally, Mr. Byrne is an accomplished linguist, a published author,
a former pro boxer and a black belt.

Sector: consumer services

TWST: We'd like to begin with a brief historical sketch of
Overstock.com, and then a profile of the company as it is now.

Mr. Byrne: Overstock is based on one idea: manufacturers typically
overproduce by 5% - 10%, but before they produce they don't know which
5% or 10% that is. When they have overproduced and have excess inventory
they are willing to dump it outside normal sales channels just to get it
out of their warehouses and recover as much of their original cost as
they can. In the past that's been done through a liquidation market
dominated by people called 'jobbers' who buy excess inventories from
manufacturers, then job it out to stores around the country, often
through several levels of distribution. Overstock.com is based upon a
company that came from that industry. I'm an investor by background, and
I invested in that company, which had operated originally on a fax
broadcast method and then had opened an Internet site. We invested in
the company, had a friendly hand-over of management responsibilities,
and re-launched it as a totally consumer-driven B2C Internet site,
raising the quality of products within the site and sort of changing
some of the theory within the company. So that's the overview of
Overstock.com and history.

TWST: Where are you going to be taking the company in the next couple of
years?

Mr. Byrne: We're doing two major things. We have just opened our B2B
site. The theory there is as follows. We start off with a huge advantage
because we're buying so much cheaper than other people, we pay so much
less than wholesale when we step into bankruptcies, liquidation
situations, etc. We're buying the stuff cheap so we have this huge
advantage versus normal retail, and yet we give back a lot of our
advantage versus normal retail because of the friction cost of doing
business over the Internet: taking an order, putting it in a UPS box,
shipping it. But at the same time we've also realized that there's great
opportunity with small businesses. There are about 130,000 small mom-
and-pop retailers in the country, many of whom are being driven out of
business by the big chains. Mom-and-pops never have access to sub-
wholesale product: jobbers don't deal with them, the people doing the
closeouts don't deal with them, so they pay full wholesale, they
typically get lousy service from manufacturers, and it's very hard for
them to compete against the big chains. We have realized that we've got
all this inventory in our warehouse, why not just open up another site
called OverstockB2B, where we sell even cheaper to stores. So we can,
say, take 250 blenders in a closeout or in a bankruptcy, sell them one
at a time out to the B2C customers, and sell them in case packs of six
and 12 at even cheaper prices out to the mom-and-pop retailers. We think
there's going to be a tremendous interest in this from the mom-and-pops
because they've never had access to that kind of steeply discounted
product before, available in small lots, delivered to their door.

TWST: Are you the first company to do this?

Mr. Byrne: There are 400 jobbers in the country. We're the first e-
jobber.

TWST: I'd often wondered why the little store couldn't sell at the
prices that it would like to be able to sell at.

Mr. Byrne: Because they're paying full wholesale and they just never get
access to the sub-wholesale market. In fact, they start with three
strikes against them. They get lousy service from manufacturers (a big
TV manufacturer does not like sending a rep 200 miles to the middle of
Iowa to service an $800/month account). They pay full wholesale. And the
jobbers who have sub-wholesale product don't deal with them. A jobber
gets 10 truckloads of TVs and he sells them two truckloads to this guy,
five truckloads to that guy, three to some other guy, and he's out of
them. He doesn't want to deal with some mom-and-pop who calls in and
says: 'I'll take four TVs.' But we can.

TWST: He never had the right intermediary before the Internet?

Mr. Byrne: Exactly.

TWST: Would you talk about trends?

Mr. Byrne: There are several major trends. The first is, I think B2C
commerce will collapse to just a few players, one being Amazon, one
being eBay, and I hope the third being Overstock.com. eBay is morphing
into something like Amazon, away from the tchotchke stuff and fishing
lures and into more of a place where reliable businesses sell new, first
quality stuff. So it will come to pass, I think, that if a customer
wants to go somewhere and buy a microwave oven and brag about how she
got it in some auction, she'll go to eBay. If she wants to chat on the
phone with some customer service rep about how it's going to look in her
kitchen with its new wallpaper, she'll go to Amazon. But if she just
wants to get it as cheap as hell and with great customer service, she'll
come to Overstock.com. A broader trend is this: there have been a lot of
bad business models created that were simply subsidies from capitalists
to consumers. There's no more subsidies coming into this market and so
all the bad business models will flush out. What will emerge are
businesses that really do provide unique value propositions. By that I
mean, I think the only thing the Internet is good at is doing things
which you can't do well in the offline world. You can't do a flea market
well in the offline world. Flea markets are not very efficient markets.
Similarly, you can't retail luggage very well in meatspace. Luggage is a
hard thing to retail because of the physical space that you have to take
up in storing it, all the SKUs and so forth. You cannot have 25,000
electronics SKUs in one store, either, because the rent will kill you to
house all the oddball stuff that one guy comes by every three months to
buy. So Amazon is also something you simply could not do in meatspace.
Well, similarly, liquidation is something that doesn't work well in the
offline world. And I think the day will come pretty quickly when people
are going to hit themselves on their foreheads and say: 'What were we
ever doing thinking Internet was about retail? The Internet is not about
retail, the Internet is about liquidation.' So there will be an online
flea market (which moves higher-end), and an online mega-store, and an
online liquidator. Lastly, you'll see convergence among sites regarding
policies, like privacy policy, like policies on what you can do in terms
of pricing and things like that, even a certain common shopping
experience will emerge. There's now a couple of dozen different ways to
design a B2C site and I like to think that a certain common experience
will emerge that sites conform to, so consumers get comfortable shopping
on the Internet.

TWST: Is there a chain of events which could lead you beyond your
expectations? Could the thing mushroom a great deal?

Mr. Byrne: Yes. First of all let me point out that we already think
things are mushrooming under our current strategy, which is totally
focused on providing the consumer with first class products that we sell
cheap as hell, and if you do that, everything else takes care of itself.
We do little marketing, almost no offline marketing, we count entirely
on just having a great value proposition and letting our customers do
our marketing for us. With that approach we grew 16-fold last year. In
18 months we have grown from $3,000 a month to $7 million a month.
Beyond that, however, I think that this B2B thing is going to mushroom
enormously because of those 130,000 mom-and-pop stores. It's part of the
urban lore now how Wal-Mart is driving them out of business, and they've
really not had a way to respond until now. And now through us they have
a way of getting product far more cheaply than Wal-Mart, and for the
first time, they can beat the chains at their own game. I think it's one
of the single best business ideas I've ever had or seen in my life.
That's one thing that can just mushroom this exponentially. I'm also
working on a different idea, an unrelated idea, which is to acquire the
work of a lot of third-world artisans and craftsmen, and all kinds of
organization supported by NGOs ' non-governmental organizations ' such
as a cooperative of Palestinian widows who hand-make dresses and so
forth. And getting that to market in the United States is very much like
the liquidation problem. You have these dribs and drabs of very small
lots, highly fragmented supply, and until the Internet there was no
efficient way to marry that up to consumer demand. In Overstock, we've
already built a perfect engine for that. We've built the consumer
demand, we've built the customer base, highly female demographic who
care about social responsibility. We built a warehouse that can handle
very small lots of all kinds of different products; that is the nature
of liquidation. So, this June we're going to add a new department to our
site which just focuses on socially responsible products which we buy
out of the third world from these kinds of cooperatives. A third of the
world lives on $1 a day: the idea is to support as many people as we can
by that fragmented supply up to American consumer demand.

TWST: There was a very big article the other day about this aspect of
the third world. That the key to understanding the third world in part
is the unrecognized economy within all third world countries. And you
are tapping into it in a way?

Mr. Byrne: Absolutely. We're tapping into it in a way that before the
Internet could not have been done. There was no intermediary that could
have efficiently or economically matched all that production up to the
American consumer. You need a peculiar kind of logistics expertise in
small volume odd-lot supply, buying expertise, and an upper-end well-
educated female demographic that cares about social issues. It just so
happens Overstock has precisely those things.

TWST: Can you give us some idea of how you expect the company to grow
over the next few years?

Mr. Byrne: Sure. Two years ago we did $2 million and last year we did
$36 million. We expect to do at least $120 million this year, and the
B2B business may allow us to blow that away, then the $400 million range
next year, and want to be closing in on $1 billion by the year after.
Most interestingly, I think we can achieve that with little or no added
capital.

TWST: You're attending the Piper Jaffrey Conference and so, I assume,
you have some anticipation of going public very soon.

Mr. Byrne: I'm schizophrenic on the subject because it's literally
grounds for dismissal within our company to talk about going public or
exit strategies or any of that nonsense. Our motto is: The best exit
strategy is making a lot of money. If you are very profitable, other
things take care of themselves. So we never let ourselves talk about it
within the company, and yet, as the CEO and Chairman, I've got to take a
step back and say: God, if we had $50 million in the bank this ball game
would be over. I could use it to be making more money than eBay. So
that's why I stay somewhat schizophrenic on the subject.

TWST: What about your risks, difficulties, challenges, concerns,
worries, etc.?

Mr. Byrne: Risks? Things have moved so fast on Internet time, and people
are finally saying: 'Well, that Internet thing was all nonsense.' It's
really not nonsense. Every six months there's been different dogma
associated with the Internet and what works and what doesn't, and now
the dogma is that nothing works. The Internet is not nonsense but it is
developing quickly and the only way to stay ahead of that is to be
constantly in analysis. We have four PhDs on staff who are highly data
driven, and we're always on our toes trying to understand the customer
base, strategic directions and so on and so forth. So the risk is that
somehow the market develops in a way we've not anticipated, and that we
do not see happening until it is too late. This was never about first-
mover advantage, it was about last-man-standing, and the way to be last-
man-standing is about keeping off your heels while others sink down on
theirs.

TWST: Perhaps you can give us some idea of the character of the company
and what needs to be done with it.

Mr. Byrne: The character of the company is very much determined by the
principles of value investing. That school says that you buy a share a
stock if, and only if, the market were going to shut down for 10 years
tomorrow, would you still buy it? So you buy a slice of a company that
you really want. A corollary of that is you run a company as if you're
going to own it for 10 years and there's no outside market, there is no
outside capital, there's nobody else to please. That way you're always
making the best economic decisions because, as Ben Graham said: In the
short term the market's a voting machine and in the long run it's a
scale. So you are always really trying to build the intrinsic value of
the business. That is entirely the focus within the company. We never
talk about valuations and we never talk about comparables. We don't care
what analysts are going to think, reporters are going to think,
anything; we build the business as if there's no exit strategy, we're
owning the whole thing and we just have to make the right economic
decisions. And that's a constant challenge to keep people from looking
around and thinking along other principles. And truly the only absolute
ground we have for dismissal is to talk about an IPO or 'These guys have
this valuation and so if we made ourselves look more like them then we
could be worth this'' and all that rubbish. In fact, in a recent meeting
with a potential investor I was asked something like that, 'What
comparables are there in the public markets that you will model yourself
to get the highest valuations for your company in the public market?' I
had to think for a bit and said, 'Don't know. In 18 months we never
asked ourselves the question.' I wanted to add, 'Because it's a dumb
question,' but I didn't. I can't say it strongly enough: all we think
about is, how do we buy better while getting more revenue and running
with tighter expenses so we make more money. If we do that, Allah will
provide.

TWST: How many people work for the company right now?

Mr. Byrne: There are 30 professionals in the office and then there are
another 30 customer service and about 30 in the warehouse.

TWST: It seems to me that you've moved pretty rapidly.

Mr. Byrne: Yes.

TWST: What specific achievements would lead you to characterize the next
two or three years as successful?

Mr. Byrne: First of all, if we succeed in positioning ourselves so we
emerge with Amazon and eBay out of the cacophony of the Internet, we're
one of the three firms that emerge, I would call that successful. Also,
when I look at the economics of the B2B business, I just drool. It is
such a killer concept, I will be disappointed if that has not gotten to
$100 million a year over the next couple of years.

TWST: Where would you like to see the company in the year 2004? If you
were looking around then, what would you like to see?

Mr. Byrne: I would want to see us well over $400 million and as
profitable as hell. Making a ton of money. I want to see that next year.

TWST: You've said already that the business of going public is a mute
point. Let's just ask the final question this way: What would be your
appeal to investors? What would be the three or four most important
things that you would say to investors?

Mr. Byrne: I don't mean to say it's a total mute point about the IPO
because I do think that if we can go public and take $50 million into
our bank account, it will accelerate us two years. But what I would say
to investors who were considering investing in us is that we are not
right for most investors, for people who think in terms of exit
strategies and public comparables and quarterly earnings. We simply
focus on just earning a ton of money on a small amount of invested
capital. 'Earning' money, GAAP profits, not just flipping stock to some
bigger fool. We're totally focused on execution, running a tight ship,
and being as profitable as hell. And at the end of the day, by building
that company, everything else will take care of itself.

TWST: So you probably wouldn't want to speculate on acquiring or being
acquired or anything like that?

Mr. Byrne: No, we just don't think in those terms.

TWST: Is there anything you'd like say by way of summary?

Mr. Byrne: By way of summary, I'd say our last 18 months was really
overhauling an engine that was already running, and that was one of the
more difficult things I've ever encountered in business. We'd sort of
got the engine into the design that we wanted by last August/September,
we've spent eight or nine months just tightening down the bolts on the
engine. They're all locked pretty tight at last, and the point has just
come where we are giving it the gas.

TWST: Thank you. (MC)

PATRICK BYRNE
 CEO
 Overstock.com
 2855 E. Cottonwood Parkway
 Suite 500
 Salt Lake City, UT 84121
 (801) 947-3100
 (801) 947-3217 - FAX
 www.overstock.com
 e-mail: info@overstock.com

Each Executive who is the featured subject of a TWST Interview is
offered the opportunity to include an Investors Brief or other highlight
material to be provided and sponsored by and for the company. This
Interview with Patrick Byrne, CEO of Overstock.com, is accompanied by an
Investors Brief containing corporate information.

Copyright 2001 The Wall Street Transcript Corporation
All Rights Reserved


The Wall Street Transcript (TWST) interviews are published verbatim, and TWST does not in any way endorse or guarantee the accuracy of any information or opinions expressed herein and all opinions are subject to change without notice. Nothing herein constitutes a solicitation to buy or sell any securities. TWST interviews with CEOs may include include "forward-looking statements", which are based on factors that involve risks and uncertainties. Actual results may differ materially from those expressed or implied. TWST shall have no liability whatsoever for any trading losses arising out of use of this information. Copyright 1999 Wall Street Transcript Corporation. All Rights Reserved.