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WHY MALL WEB VENTURES FIZZLED

By Anna Robaton

Historic relics: General Growth’s Mallibu kiosks, circa 1999.

Squeezed by the apparent threat of Internet retailing and envious of the sky-high valuations of dot-com startups, many of the biggest U.S. mall operators fought back in the late 1990s with ambitious Internet ventures of their own.

They pumped millions of dollars into providing tenants with broadband Internet access that would supply a high-tech edge and boost efficiency, while allowing landlords to generate revenue by charging for the service. Some mall operators went even further by crossing over into the arena of online retailing themselves.

Mall owners, particularly publicly traded companies, “wanted to get into the dot-com world and create separate companies that they could spin off with huge valuations,” said Brad Boa, editor of Where It’s @, an Internet newsletter about the integration of traditional and electronic retailing.

What a difference a couple of years makes. Rather than spinning off their Internet ventures, mall operators are shuttering them or scaling them back and rethinking their strategies. Experts say some of the most ambitious ventures of the past few years stalled largely because demand among retailers for Internet services failed to live up to expectations. To some extent, another reason was that consumers never warmed up to the idea of shopping local merchants online.

For now, mall operators are focused on using the Web to market their properties, gather consumer information and run their own businesses more efficiently. Some say, however, that they haven’t ruled out the Internet as a potential source of future revenue.

“I don’t think [mall owners] have thrown in the towel,” said Ross Nussbaum, a retail real estate analyst at Salomon Smith Barney in New York City. “They have all the equipment sitting around, but it’s a matter of the economy improving and retailers figuring out what they want to do with their broadband Internet strategies and committing money to it.”

Indeed, MerchantWired, the biggest attempt by mall operators to cross over into the tech sector, wired more than 300 malls for high-speed Internet access before the venture fizzled on lack of retailer interest amid a slowing economy. In July Bloomfield Hills, Mich.-based Taubman Centers, a partner with other leading mall development companies in the money-losing venture, said after a planned sale fell through that MerchantWired would be shut down.

MerchantWired was launched in 2000 to sell Internet-based services to mall tenants. The partners pumped about $60 million into the ill-fated effort, signing up IBM, AT&T and other big-name tech companies to help build a nationwide, high-speed communications network using broadband technology, which allows for simultaneous voice, video and data transmission.

The network was intended to allow retailers to fulfill a number of communications needs at the same time, such as accessing a company’s point-of-sale inventory management system or providing real-time training broadcasts from a merchant’s corporate office. Indianapolis-based Simon Property Group, the lead investor, declined to comment for this story. Other original partners included The Macerich Co., The Rouse Co. and Westfield America.

“It was an idea that ultimately proved to be ahead of its time,” said Salomon’s Nussbaum. “Ten years from now, I’d be shocked if every retailer didn’t have a broadband Internet strategy. But given the economy today, retailers are much more cautious with their capital expenditures.”

That caution, along with the collapse of the dot-com sector, helped foil another major push into the tech business. Last year Chicago-based General Growth Properties shelved its efforts to sell Internet services to its tenants and took a $65 million pretax charge to shutter the venture. The company had been developing applications for retailers, including distance-learning programs, videoconferencing capabilities and faster credit card authorizations, and was installing a high-speed Internet infrastructure at its malls to run those applications.

General Growth has also significantly scaled back its consumer-oriented Mallibu program, intended at the time of its rollout in 1999 to be a direct attack on the threat of online retailing. Among other things, General Growth sought to rent space in its malls to Web-based merchants interested in broadening their reach, allowing shoppers online access in common areas and the chance to have products they normally wouldn’t buy in a mall, such as cars, delivered to their homes.

General Growth, which also saw the kiosks as a potential source of advertising revenue, had planned to help some of its tenants make the leap to electronic retailing by making a limited selection of their merchandise available online and then spreading out the costs through economies of scale. Mall visitors could shop those merchants at the Mallibu kiosks.

But retailers and consumers didn’t respond as anticipated, even as the kiosks were rendered obsolete by the proliferation of the personal computer, which has given many more people access to the Web. The kiosks, tested at only a handful of malls, have since been removed. General Growth says the equipment is being used at other malls to do research on potential new technology initiatives, but declined to provide details on those efforts.

Right now “we are using the Internet to augment our core business as opposed to seeing an additional revenue stream out of the Internet,” said Kevin M. Moss, CSM, the company’s chief information officer.

These days General Growth and other mall owners who run Web sites are focused mostly on providing timely information about their properties to both consumers and potential tenants, as well as gift certificates and other incentives to help generate more foot traffic at their malls. Many of their sites even provide links to retailer Web sites.

“It was all too alluring to think you could build Internet sites and sell them for advertising and conduct transactions on them,” said Eric Salo, a senior vice president of strategic planning at Santa Monica, Calif.-based Macerich. “The way we see this thing shaking out is that Internet technologies become pervasive through all of our relationships, internally and with the shopper and the retailer. You make money because you are just more efficient and effective than you would be otherwise.”

Some mall operators have begun using the Internet to try to pull consumers to their properties, rather than passively hoping to pique their interest with mall Web sites. They have begun sending out regular e-mails and Internet newsletters announcing sales and events at their centers, often tailoring the messages so that consumers get only the kinds of information they have expressed interest in (see story, Mall owners harnessing Web to generate sales).

“A lot of other developers have looked at the Web as a money-making vehicle,” said Carol Gies, vice president of marketing services at Taubman. “We have always looked at it as a customer service.”

Taubman, she added, recently surveyed 1,000 people who receive its weekly e-mail bulletin, and almost 75 percent of them said that the notices had prompted them to make trips to the company’s malls.

“The Holy Grail is how … you connect with your customer,” said Boa of Where It’s @. “The malls are interested in reaching out to the people who spend the most money at their properties. ... Every point of contact is an opportunity to know more about a person.”

Although mall operators who made ambitious forays into the tech sector are still nursing hangovers from those efforts, Wilson Magee, an analyst at Boston-based investment firm Grantham, Mayo, Van Otterloo & Co., says they shouldn’t be faulted for trying.

“If they had not done anything and the Internet had become even as successful as mail order,” he said, “they would have been incredibly delinquent.”

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