Making a Killing With Kindness

TIMES STAFF WRITER

When Stephen and Susan Polis Schutz started Blue Mountain Arts three decades ago, their goal was to support their self-described hippie lifestyle by selling silk-screen posters and greeting cards that melded her love poetry with his pastels of silhouettes and sunsets. When they added a free online greeting card service a few years ago, it was merely on a whim.

The business of selling paper greeting cards had proved a modest counterculture success. But the growth of the online service astonished them.

Last Christmas it surpassed even Internet pioneer Amazon.com in traffic to become one of the hottest properties on the World Wide Web. Now the couple's Net-savvy and entrepreneurial son, Jared, is planning to turn what has remained a comparative mom-and-pop store into a block of high-grade Internet real estate.

Boulder, Colo.-based Blue Mountain Arts is spinning off its Internet operation (http://www.bluemountain.com) from the paper greeting card company so it can go public to help finance its development as an e-commerce powerhouse.

But the path ahead won't be as trouble-free as it has been thus far.

Almost unnoticed, the greeting card sector has grown into one of the busiest and most ruthlessly competitive in cyber-business. While traditional greeting card companies such as Hallmark (http://www.hallmark.com) and online providers such as Egreetings (http://www.egreetings.com) are beefing up their sites, powerful new contenders such as Amazon.com and Microsoft are joining the pack. Like Blue Mountain.com, all now offer electronic greeting cards that users can e-mail to friends and relatives for free.

What makes the online greeting card business so attractive is its almost viral ability to expand its customer base and the precision with which advertisers can target those customers.

The recipient of an online greeting card typically gets an e-mail notification that a card is waiting--but has to go to the greeting card company's Web site to view it. That means every card sent can potentially bring in a new customer.

Those sites, moreover, are a perfect way to sell targeted products. A romantic card might be packaged with a pitch for flowers or a box of chocolates, while a Father's Day card would suggest anything from socks to a set of golf clubs.

Those factors, combined with Blue Mountain's New Age corporate personality, helped make it one of the Internet's busiest sites. In the week ended July 11, the site had 2.6 million individual visitors. That put it in 11th place, ahead of Amazon.com and just behind the auction site EBay, according to Nielsen/NetRatings. In holiday months such as December, the site does even better.

But until now, it was scarcely a business. While the company focused on developing its computer system and network of digital artists to keep the customers coming, it brought in little revenue.

Now its owners face a quandary about how to "monetize" its robust traffic, in the Webspeak favored by Jared Schutz, while retaining the warm and fuzzy feeling that makes it attractive to so many visitors. Susan Polis Schutz's own description of Blue Mountain's mission is "helping people around the world communicate their deepest feelings."

"The toughest thing is balancing the capitalist interests without losing the spirit and feeling of Blue Mountain that made it successful," said Drew Ianni, an analyst with Jupiter Communications, a New York-based market researcher.

However, he added, the potential of the site is simply too large to remain untapped. "That family has one of the last truly independent [Internet] properties that could be valued in the billions of dollars."

Jared Schutz, who will step down as acting chief executive to become president under a new chief executive whose hiring will be announced soon, says he understands the danger of moving too aggressively to exploit the warm feelings associated with greeting cards to generate cold cash.

"We have to see what [customers] see as value-added as opposed to negative advertising," he says.

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To be sure, Blue Mountain has always strived to merge the family's communal instincts with its genuine entrepreneurial character.

Jared came home from Princeton on vacation in 1994 and taught his 11-year-old brother how to program in HTML, the programming language used for building Web pages. Their father, who earned a physics PhD from Princeton, in turn learned the skill from his 11-year-old son and seized on it as another means of artistic expression. He developed online greeting cards as a way to keep in touch with Jared, who was tough to reach at school.

A year later, the family decided to host a free greeting card service on American Information Systems, the Internet service Jared had co-founded at school.

"We thought it would be cool to have free electronic greeting cards," said Jared, who credits his father with the idea.

Initially the publicity from the online site helped boost sales of Blue Mountain's paper cards--even though the company chose not to sell the paper cards online, lest it damage its relationship with retailers.

When the online business took off, the family chose for a long time to stay quiet about its success. But while Susan Schutz long insisted the family wasn't interested in making money on the site, Jared viewed the policy as smart business strategy.

"Our status as a private company has enabled us to open a stealth business under the radar screen of the competitors," he said. "Our success wasn't as hyped as the successes of other companies that spawned copycats. Most of our copycats have popped up in the last six months."

For all its talk of peace and love, the Schutz family has never shied away from battles with far larger competitors.

When Hallmark Cards, which controls nearly half of the paper greeting card business, came out with a new line in 1986 that appeared to imitate the look and feel of Blue Mountain's, the family struck fast with a $50-million lawsuit. Hallmark eventually agreed to drop its new line and not to block retailers from carrying Blue Mountain's cards.

That David-and-Goliath battle foreshadowed another major confrontation, this time with Microsoft. Soon after Microsoft identified electronic greetings as a "killer app [application]" and launched its own service, Blue Mountain discovered that a new version of Microsoft's Internet Explorer browser blocked Blue Mountain's greeting cards from being seen by users. Mysteriously, the program didn't block Microsoft's greeting cards.

Blue Mountain hired Gary Reback, the attorney who helped Netscape prod the Department of Justice into filing an antitrust case against Microsoft, to represent it. He won an injunction requiring Microsoft to make changes that would ensure that Blue Mountain's messages were delivered. The case goes to trial later this year.

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Blue Mountain is beginning to take cautious steps toward evolving into a more conventional e-business. The company has started to accept advertising to pay for the growing expenses of the Web site. Jared Schutz also launched Proflowers, an online flower business, which advertises on Bluemountain.com.

Even now, however, most of the advertisements only appear discreetly after a customer has sent a greeting card, to minimize the distraction of the commercial pitch.

"That way you reach the user when they are ready to do something else," said Karen Davidson, vice president of sales and marketing. "They are more receptive to the message."

Yet the company is now poised to go all out. The new chief executive will be responsible for developing a business plan and preparing the company to go public. The company is already adding new staff and planning new features for the site. They include an online address book similar to those offered by Yahoo and other portal sites, and links to an e-commerce site.

Investment analysts are generally optimistic. "If they use Jared's brain cells, they are off to a great start," said Peggy O'Neill, an analyst at NetRatings, a Milpitas-based Internet research company. "Proflowers is very slick. It has great customer service, reliability, and it's easy to use."

But there is still some question how this family business--even if bolstered by the experienced managers likely to be attracted by a forthcoming stock-option plan--will fare against competitors offering edgier greeting cards and aggressive marketing in the cutthroat world of e-commerce.

The biggest potential threat to Blue Mountain may be the newer online services such as 123 Greetings (http://www.123greetings.com) and Egreetings, which are trying to move beyond Blue Mountain's niche in traditional "event" cards (birthdays and holidays) to provide a broader variety of cards to a younger audience.

"Blue Mountain has cheesy stuff," said Gordon Tucker, chief executive of Egreetings, a San Francisco-based firm with backing from Microsoft co-founder Paul Allen. "They appeal to a narrow audience: women who are older or young teenagers who like a sentiment-based product."

At Blue Mountain, "if your taste strays from cute, light humor you can't find what you want," said David Sieks, who designs online greeting cards for Egreetings. Among his offerings: an Easter card showing a cat with a drink in her hand over the caption "Oh goody. Another dysfunctional family gathering."

Tucker sees online greetings as "enhanced e-mail." Consequently, the Egreetings site has 3,500 online greetings that can be searched by event or emotion. Choose "flaming" cards, for example, and you can find a card showing a hand with the middle finger upraised--one of the least likely images that would ever appear on a Blue Mountain card.

Microsoft's greeting card site even includes a series of cards for breaking off a relationship--one shows a heart breaking into pieces and sinking over the horizon.

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Analysts say Blue Mountain has a lot to learn from other sites about how to exploit customers for commerce. Hallmark, for example, offers a calendar feature that will remind customers of family birthdays and offer gift ideas.

Blue Mountain, unlike the competing sites, still does not require visiting customers to register, a free process that provides huge amounts of consumer data that can be used for targeted marketing. (A plan to implement voluntary registration is under consideration.)

"We know if you are male or female. We know your age and ZIP Code. We have a rich history on you," said Egreetings' Tucker. Each time a customer sends a gift or greeting card, he says, the sales information is added to Egreetings' database.

Blue Mountain's Davidson says the company will stick to its positive, family-friendly messages because it's an environment advertisers like to be associated with.

Jared Schutz insists that with an overwhelming share of the electronic greeting card market and one-quarter of all women online counted as Blue Mountain customers, his real competitors are the big portals such as Yahoo and America Online, not the greeting card companies.

"Portals are our main competition for eyeballs," he said. But he is wary of loading down Blue Mountain's distinctive site with too many irrelevant features.

"One of my worst nightmares is to wake up one morning and find that we are nothing more than the sixth-largest portal," he said.

As the company girds for battle, does Jared worry about changing the communitarian spirit of the company his parents created as the site becomes more commercial? He answers in the new language of the Net entrepreneur.

"The value is in the traffic even before it is monetized. We wouldn't jeopardize it."

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