Digital River, Inc.

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Digital River, Inc.

9625 W. 76th Street, Suite 150
Eden Prairie, Minnesota 55344
Telephone: (952) 253-1234
Fax: (925) 253-8497
Web site:

Public Company
Incorporated: 1994
Employees: 450
Sales: $57.8 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: DRIV
NAIC: 454110 Electronic Shopping and Mail-Order Houses; 541511 Custom Computer Programming Services; 514210 Data Processing Services

Digital River, Inc. is helping to define its entire industry. It builds, hosts, and manages e-commerce Web sites and Internet marketing solutions that enable business-to-business and business-to-consumer clients to cut costs and grow revenue. Digital River supplies full-service e-commerce solutions that include site hosting and development, system integration, order management, e-marketing, fulfillment, and customer service. The company takes over buying, processing, payment and product delivery for clients systems. Incorporated in Minnesota in February 1994 and reincorporated in Delaware in December 1997, Digital River has acquired many other companiesseveral at bottom-barrel pricesto build one of the most successful e-commerce service provider pioneers in the industrys relatively short history. The company has 450 employees with global operations headquartered in Eden Prairie, Minnesota, and offices in Chicago, Los Angeles, San Jose, and London. Currently counting 13,000 clients in its portfolio, Digital River has grown exponentially, even when similar companies have crashed and burned, and has succeeded by focusing on operations and costs, while many of its competitors pile up debt and burn through cash reserves.

By serving as a marketing intermediary and connecting software publishers and retailers to their online clients, Digital River has been likened by some to an online vending machine, but unlike the traditional vending machine, the services sold by Digital River do not end with the sale. The company also provides its retail clients with encryption software, high-speed Internet connections, marketing, and database management. All of these services are difficult for e-retailers to manage on their own, as they eat up time, money, and labor. With the aid of a central server and multiple software protections, Digital River takes the reins in providing thousands of clients with multiple ongoing e-services.

The Beginnings of Digital River

CEO and founder Joel Ronning had more than 20 years of experience developing computer technology before he came up with the idea behind Digital River. He founded Mirror Technologies, a manufacturer of Macintosh peripherals and components, in 1983, only to be pushed out by investors two years later. Rather than coddle a bruised ego, Ronning caught the competitive spirit and created a similar company in MacUSAwhich eventually became Tech Squared, Inc.and aggressively went after Mirror Technologies. Within three years, Ronning had acquired Mirror Technologies at a fire-sale price, and Tech Squared went on to reach sales of more than $46 million.

An epiphany struck Ronning in 1993 that eventually led to the creation of Digital River. He wondered why software was being sent in expensive packaging when it could more easily and affordably be transported directly to a persons computer via the Internet. Doing away with the cost of traditional packaging provided software publishers with a financial incentive to try digital delivery, while the electronic solution also appealed to Ronnings environmentally conscious interests.

A New Way of Acquiring Software

In August 1994, with $1 million in start-up funds$800,000 from Fujitsu Ltd. of Japan, one of Tech Squareds primary suppliersRonning amassed a group of programmers to develop a system that would distribute software digitally. The company eventually took out 12 patents for the encryption model developed by these employees. At the time, the Internet was being used primarily as a tool for the government and academics; Ronnings plan was to distribute software via bulletin board servers, the most feasible technology. But by 1996, the Internet had exploded in popularity and reach, offering a far better opportunity to realize Digital Rivers objective of delivering software swiftly and efficiently throughout the world. Utilizing the Internet as its core technology, Digital River grew rapidly, with sales soaring from $2 million in 1997 to $21 million in 1998. Although the company posted a net loss of $13.8 million in 1998, it was on the right track, with a company-wide profit safely projected for 2001.

One key to Digital Rivers success was its capability to allow retailers to sell software to customers in such a way that the client never knew they had left the retailers Web page. For example, when customers of Major League Baseball, who teamed up with Digital River in May 2001, wanted to make a purchase through any of the 30 Major League Baseball franchise Web sites, they automatically moved electronically to Digital River for completion of the transaction. But all signsincluding logosmade the purchase appear to be taking place through Major League Baseball. A proprietary Digital River security code, called the Software Defense Mechanism, shielded the system from hackers and offered security to users making credit card purchases.

Digital Rivers technology was not limited to software. Any digital information could be purchased online, including music and movies. E-commerce had become one of the purest ways of conducting business and Digital River was quickly becoming an important player in the arena. In July 1999, Digital River added to its downloadable software the capability to deliver Internet music.

In 1996 the company created an innovative digital commerce model and established its Software and Digital Commerce Services Division. Specializing in software, retail, education and shareware, this division offered digital tools for volume licensing and flexible e-catalogs to help clients design, manage, and grow Web commerce.

Digital River Goes Public and Experiences Exponential Growth

A few months before going public in the summer of 1998, Digital River signed an agreement with USA Today to enable software to be sold via the USA Today Web site. Digital River already held similar arrangements with 90 other Web sites, but USA Today was an especially sweet deal, as its site was one of the most popular on the Internet at the time. Digital River was claiming 5 million online visitors each month via all of its affiliate Web sites and expected to grow to 25 million visitors by the following year, with the help of acquisitions like the USA Today account.

Digital River went public on August 10, 1998, selling 3 million shares at $8.50 and garnering roughly $23 million after fees. At the time of the initial public offering (IPO), Digital River held contracts with 1,222 software publishers and 346 online retailers, including Corel, Lotus Development, Micro Warehouse, Network Associates and Symantec, among many others. The company maintained a database of roughly 123,000 software products from a variety of software publishers, including 18,000 titles and over 105,000 digital images, such as photos, clip art and typeface fonts.

Fourth-quarter earnings in 1998 were up 600 percent over 1997. The stock price rose 354 percent in its first year, with a second offering in December netting another $47 million and bringing the companys year-end total cash and investments to nearly $74 million.

In April 1999, Digital River reinforced its already strong industry position by acquiring Public Software Library and Maagnum Internet Group, two privately held companies that distributed software programs via the Web for some 2,500 shareware publishers. The company paid $6.5 million in stock and $2.5 million cash for Public Software Library and $5.2 million in stock for Maagnum. Both companies had been two of the largest distributors of registration codes, required to make downloaded software products work after trial periods expired. The acquisitions gave Digital River even further-reaching access to more shareware publishers.

Video game king Sega signed on with Digital River in July 1999, utilizing the e-commerce outsource providers flagship platform offering, CommerceBridge. This partnership was Digital Rivers first foray into the lucrative gaming market, helping to significantly build the companys customer base.

CommerceBridge consisted of ten e-commerce modules from which a client could choose those that best fit their needs. The modules offered Web store hosting, transaction processing, security, data center management, fraud prevention, order tracking, online reporting, marketing and merchandising, customer and distribution fulfillment, and customer service. This plethora of services appealed to IT managers looking for the advantages of an e-commerce Web site, but not the negative aspects of internally maintaining such a challenging, expensive and time-consuming infrastructure. The average cost of developing and launching an e-commerce site was reaching $1 million with a timeline between five and 12 months; Digital River was able to charge $100,000 for comparable sites, with a deployment timeline of two to four weeks.

Company Perspectives:

Digital River is a leading global e-commerce outsource provider, supplying small- to mid-sized businesses and large enterprises with complete, outsourced e-commerce solutions that include site development and hosting, order and transaction management, system integration, fulfillment, e-marketing, and customer service.

Building on Success

Many of the most popular computer utilities were now available for download directly from the Internet. Primarily freeware or shareware, these programs cost next to nothing to procure. Directly related to their low or nonexistent price tags, personal computer users downloaded these programs in droves. One negative aspect of such nondiscriminate downloading was that people often forgot which programs they had added to their machine.

Enter a new Digital River service, eBot. Introduced in September 1999, eBot scanned hard drives and automatically offered to update software with the latest versions, a benefit to the average PC user who did not know how to locate upgrades and fixes for their software. This approach to downloaded software maintenance was hardly new, as Symantec had been offering a similar product for some time, but eBot hoped to lure customers with improvements such as a sophisticated download manager that would let users schedule, monitor and control various software transfers. If a download was stopped or interrupted for any reason, the manager knew exactly how to continue where it left off. eBot not only fixed problems, as similar programs had done, but it actively sought the problems out, as well. More than 95 percent of the products offered via eBot were free, making it a relatively low-revenue venture for Digital River, but the company believed the product would bring much-needed visibility. In March 2000, The Business Journal recognized Digital River as Electronic Distributor of the Year, for continuing to blaze a trail for electronic software distribution.

Ronning had the foresight to bet his business on the assumption that traditional channel models would evolve into electronic delivery. As online sales grew, he again had the wherewithal to think ahead of the curve and branch out into marketing, launching the E-Marketing Services Division. The purpose of this new, separate division was to use strategic planning to plan, execute, track and evaluate clients online businesses to capture yet another piece of the e-commerce pie. By using direct mailing, campaign management, e-mail list servers and merchandising programs, Digital River was poised to create integrated online marketing plans to help clients grow their online businesses.

In early 2000, Digital River launched two new services calculated to facilitate returns for e-commerce purchases and create a managed Web presence for new distribution channels. The E-Returns Management System and E-Reseller Network System resolved possible conflicts around channel management by helping manufacturers uphold sell-side dealer and distributor relationships while increasing direct distribution channels.

August 2000 saw Digital River expand its business-to-business services to encompass more sophisticated and integrated e-commerce systems. The company was evolving into a full-service commerce service provider, leasing software and entire services on the Internet. Digital River announced a $2.75 million customer service center upgrade that included the integration of Siebel Systems Siebel Call Center 2000 and Siebel eService. This move was made in hope that it would double response capability by the end of 2000, with the ultimate goal of achieving 100 percent customer satisfaction.

A Change of Strategy in 2001

Digital River had originally focused on the software industry because they were the early adopters of the Internet, but seeing a shift back to the traditional business-to-business model, the company moved to the e-business model to support manufacturers. The company took a step away from its software distribution roots and embraced high-end non-software clients such as corporate giants Coors, Nabisco, and 3M. Grasping the business adage to embrace change or die, Digital River watched the e-business stock crash and its successful, reasonably secure business formula be knocked around by a swiftly changing, unforgiving marketplace. Unlike many of their competitors, Digital River struck out for different ground, offering its e-services to the traditional corporate market.

Acquisitions had become a key component of Digital Rivers long-term growth strategy. To that end, the company moved to obtain struggling e-commerce outsourcers that were weighing exit strategies, with established client bases and viable platforms. Digital Rivers E-Rescue Program was launched to assist companies left behind by e-commerce service providers that were failing or no longer in business. The E-Rescue Program was created to help victims smoothly move operations from their current, failing providers to Digital River.

Third-quarter numbers for Digital River had shot up, representing a year-over-year increase of 84 percent. This solid performance marked two noteworthy company milestones. For the first time since becoming a public company, Digital River recorded positive earnings before interest, taxes, depreciation and amortization. Secondly, September was the first month that Digital River achieved profitability on a company-wide basis, before goodwill amortization and acquisition-related costs.

Digital River and its CEO Joel Ronning have been recognized for many prestigious industry awards. Ronning was named Ernst & Youngs Entrepreneur of the Year in 2000 and Digital River was lauded as one of the top 100 Internet companies by Internet World in the same year. The company made Interactive Weeks 2001 Interactive 500 in 2001, while Ronning was named of one VARBusiness magazines 2001 Top 20 Visionaries and CRN magazines 2001 Top 25 Executives.

Principal Divisions

E-Business Services; E-Marketing Services; E-Products; Software & Digital Commerce Services.

Principal Competitors

CyberSource; Network Commerce; Scient.

Key Dates:

Joel Ronning begins to develop a system to distribute software digitally.
The company launches E-Returns Management, E-Channel Management, and E-Reseller Network System.

Further Reading

Black, Jason, Baseballs E-Commerce Pitch, Internet World, September 15, 2001, p. 14.

Blank, Dennis, Fraud Problems Take High-Tech Priority, Bank Technology News, September 2001, p. 12.

Claburn, Thomas, Take Me to the River: Joel Ronning Rides the E-Commerce Rapids, Ziff David Smart Business for the New Economy, May 1, 2001, p. 46.

Clancy, Heather, First Step: Better Management of Businesses Software Assets: Digital River Looks at Electronic Licensing, Computer Reseller News, December 6, 1999, p. 89.

Dalton, Gregory, Oversees Fraud Finder, Information Week, September 27, 1999, pp. 382383.

Gilyard, Burl, The Entrepreneur, Corporate Report-Minnesota, October 1998, p. 40.

Hibbard, Justin, Top Retailers to Sell Software Via Internet, Information Week, January 4, 1999, p. 26.

Jaleshgari, Ramin, P., On the Fast Track: These Hot Integrators Broke Growth Recordsand the VAR Mold, VARBusiness, July 5, 1999, p. 39.

Kindley, Mark, Feel the Power: The Channel Still Rules, VARBusiness, June 14, 1999, p. 5.

Kutler, Jeffrey, Joel Ronning of Digital River: Turning the E-Corner, Institutional Investor, February 2002, pp. 2224.

Madden, John, Digital River to Manage Segas Online Game Store, PC Week, July 19, 1999, p. 58.

Moriarity, Michelle, Assisting the Online Gold Rush, Computer User, February 1999, p. 50.

Nelson, Matthew, E-Commerce Companies Get Help with Returns, Information Week, February 7, 2000, p. 101.

Senia, Al, Nabisco Enters the Internet Age: A Reinvented Digital River Takes Retailer into Digital Space, VARBusiness, January 22, 2001, p. 34.

, The New Science of Selling: As IT Loses Its Grasp on Corporate Decision-Making, Solution Providers Engage a New Breed of Tech-Savvy Business Manager, VARBusiness, March 5, 2001, p. 8.

, Service after the Sale: Inside E-Marketing, VARBusiness, January 22, 2001, p. 36.

Stone, Adam, Midwest Company Contradicts Rumor That E-Commerce Has Died, Silicon Valley/San Jose Business Journal, November 16, 2001, p. 19.

Stone, Elaine Ellis, Growth Spurt: Digital River Impresses the Industry and Investors, Corporate Report-Minnesota, June 1999, p. 32.

, Rapid Run, Corporate Report-Minnesota, May 1999, p. 20.

Torode, Christina, Computer Reseller News Top 25 Executives of 2001, CRN, November 12, 2001, p. 133.

Vizard, Michael, Digital River CTO Advocates CSP Model, Info-World, September 18, 2000, p. 36.

Vogel, Andrew, From the Research Desk: Bigger than the 500, VARBusiness, June 14, 1999, p. 46.

Stacee Sledge