Buy.com Is on the Brink of Shutdown

Buy.com Inc., the struggling Internet retailer that once promised the “lowest prices on Earth,” said it may shut down its operations as early as next week.

Buy.com has been losing customers in droves, but its immediate threat is coming from an unidentified company that handles Buy.com’s credit card transactions.

Beginning Sept. 1, Buy.com may no longer be able to process sales online because its credit card processor is planning to stop servicing customer orders. In a government filing Monday, Buy.com said that effectively could wipe out the Aliso Viejo company because credit card transactions account for 90% of its business.

Once the nation’s fourth-largest Internet retailer, Buy.com did not say in its filing why it was being dumped by the processor, and company officials didn’t return calls Wednesday. But industry executives said credit card servicers have become increasingly intolerant of online retailers, which have had a high rate of charge-backs, or refunds to credit card holders who are dissatisfied after buying products sight unseen. Rampant credit card fraud has added to the risk of companies that act as intermediaries between online retailers and banks.

Buy.com could continue operating if it can negotiate an extension or agreement with its current payment processor or find a replacement. But experts said the latter could be difficult given Buy.com’s dire financial portrait.

In its filing, Buy.com said its current processor had wanted to cut off the relationship in July, but Buy.com won an extension when it agreed to increase the processing fee by 1% and let the company withhold 5% of daily receipts as added security.

Several leading firms that handle online credit card transactions declined to comment. VeriSign Inc., a major Internet service provider that also processes credit card transactions, said it performed Web site security for Buy.com but did not handle its sales.

Mia Huntington, a manager at Internet Secure, an international credit card processor in Ontario, said her company dropped about 100 of its 3,000 online merchants last year--almost all because of fraud, on the part of consumers and merchants.

“Companies such as ours have to be careful,” she said. “If we even sense there’s more at risk than we bargained for, the smart thing to do is get out.”

Although Buy.com has been struggling to survive for some time, its strained relationship with its credit card processor is trouble few expected.

“They are really being kicked while they’re down,” said Carrie Johnson, an e-commerce analyst with Forrester Research, a market research firm. “I wouldn’t have thought this would be the thing to kill them, but if it wasn’t this, there’d be something else right behind.”

Buy.com is in the midst of overhauling its business, trying to avoid the fate of many other online ventures. Last week, the company initiated another round of layoffs that would eliminate 50 full-time jobs, or 40% of its remaining work force. Earlier layoffs and cutbacks helped the company narrow its loss in the second quarter to $5.7 million, compared with a loss of $33.6 million a year earlier. But Buy.com’s sales in the second quarter fell by almost 50% from the previous year to $95 million. What’s more, as of June 30, the company had less than $14.5 million in cash on hand, down dramatically from the nearly $56.7 million it logged in December.

Buy.com, controlled by Softbank Corp. of Japan, is in the process of being bought back by its founder, Scott Blum, who owns 37% but has given voting control to a trust. Blum, who founded the company in the fall of 1997, has declined to comment.

Last year, after Buy.com went public, Blum was worth more than $1 billion. The entire company now has a market value of about $23 million. Buy.com’s shares closed Wednesday at 14 cents in over-the-counter trading, down a penny, and off 79% for the year. The company was delisted from Nasdaq this month.

Buy.com specializes in computer products and electronics, and unlike Amazon.com and some other Internet retailers that operate their own warehouses, Buy.com contracts with companies such as Ingram Micro Inc. to stock and ship orders.

Early on, Buy.com made a name by offering discounts to reel in customers on the theory that the advertising it sold on its Web site would yield the profit, which never materialized. But it later backed away from the deep across-the-board discounts and began relying on loss leaders to attract buyers while pushing higher-margin items. That strategy, along with the economic slowdown, has eroded sales.