When kozmo.com launched in Manhattan in 1997, its ragtag fleet of bicycle messengers bearing videotapes and munchies was the closest New Yorkers came to video-on-demand. (Since then, Kozmo has expanded to six cities and plans to be in 15 by the end of the year.)
Now Kozmo founder Joseph Park is putting together deals to help his company get videos to consumers even faster - over broadband.
In the past several weeks, Kozmo has quietly struck strategic investment deals with Warner Home Video, Sony (SNE)'s Columbia TriStar and Liberty (LDIG) Digital to position itself for broadband entertainment delivery, Kozmo insiders say. These sources also say the company is close to striking digital music distribution deals with Sony Music Entertainment (dossier) and Universal Music Group, with more agreements in the works.
In its first stage, Kozmo will most likely offer its traditional delivery services to interactive TV customers through a deal with Liberty. Customers will be able to order From Dusk Til Dawn 3 along with a pint of Ben & Jerry's right from their TVs. In the second stage, Kozmo will sell digital music singles via dialup and high-speed Internet connections. And in its third stage, the company will deliver movies over broadband connections.
IPO-bound Kozmo execs declined to comment, citing SEC regulations.
On the face of it, the announced deals do little more than bolster Kozmo's access to videotapes, DVDs and CDs. Instead of relying solely on distributors, Kozmo is going directly to the source. Warner purchased 1.3 million shares, worth $10 million, in the company, and will supply videotapes and DVDs directly to Kozmo. Liberty Digital snapped up a $10 million stake. Columbia TriStar did not reveal details of its deal.
"Their plans are still formative," says Craig Enenstein, senior VP of business development at Liberty Digital, the technology and Net investment arm of Liberty Media. Door-to-door deliveries "are types of things they do far better in the short term," meaning that digital downloads are still a way off.
Insiders say that these deals are the first in a series of strategic maneuvers that will take Kozmo away from delivering videotapes, DVDs and CDs.
Kozmo's moves come when nearly every traditional entertainment player is trying to figure out how to make money on the Internet. At the same time, numerous dot-com entertainment firms have launched with little success. So why would Kozmo leap off the broadband entertainment plank, and why does the company think it has a chance to succeed where others have not?
The answer is simple: It has to. Kozmo's business in delivering videos and CDs has a limited life span, as those media eventually migrate to broadband. Kozmo has to hedge its bets. And it needs to lower operating costs. The recent market gyrations are leading investors to scrutinize money-losing dot-coms. The company has lost more than $26 million to generate revenues of only $3.5 million.
Kozmo is also well positioned to do business with entertainment companies. Hollywood players are wary of Internet pure-plays that seek to replace them. Kozmo isn't a threat; rather, the company is another storefront. Further, Kozmo lets entertainment companies bypass distributors - a strong motivation in Hollywood. The desire to control channels of distribution is what has led entertainment companies to work on digital download plans, making it even easier to deliver goods to retailers.
Still, there's one puzzle piece missing. Kozmo does not have the infrastructure to deliver digital media, nor does it have the money to build it - at least not yet. The company, sources say, will most likely acquire an existing tech firm to achieve its goal.
