Mark Vadon liked buying a diamond on the Internet so much, it changed his life. “I was out shopping for an engagement ring a year ago,” he recalls. “I went on the Internet trying to get information and ran across Internetdiamonds.com. I got a fantastic ring, and it was just a very good customer experience, and I was intrigued with the model.”

Vadon, who has a financial background, was so intrigued he became the Web site’s CEO. Venture capitalists were similarly interested; seeing a niche that hadn’t been scratched, they gave the company $40 million last year. With its coffers now full, the Web site is changing its name to www.bluenile.com and wants to be the first nationally known jewelry-selling Web site.

Now if this were your typical Internet success story, the company would go public, its founders would become millionaires, and everyone would ride a new sports car into the sunset. But here the story gets complicated. As Bluenile was preparing to dip its oars in the water, Ashford.com, a popular watch and accessory retailer, also decided to enter the jewelry business. And halfway around the world, in Thailand, Gemkey founder Fred Mouawad was launching his own online retail jewelry store, Mondera.com.

And if that weren’t enough, on the heels of all this cyber activity came the launches of Miadora.com, iJewelry.com, Firstjewelry.com, and a host of others —all separate companies with similar ambitions. It’s possible there are other big players we’ve missed, or someone new will have joined the game by the time you read this. While some of these sites serve different niches, there’s enough overlap between them that this once-empty playing field has suddenly become congested. “It’s overwhelming,” admits Mouawad. “Every week, we hear about a new well-funded site launching.”

Of course, selling jewelry over the Internet is nothing new; there are hundreds of sites doing it. But the new sites differ from the first generation of Web retailers, who were mostly moonlighters supplementing an “upstairs” jewelry operation or wholesale diamond company. The “first-generation” sites sometimes had poor graphics and grammatical errors. Some even drew the wrath of the Federal Trade Commission, which has complained about their “misleading” claims.

But the new crop of sites is a slicker, more ambitious, better-funded lot. In addition to professional Web designers and programmers, they’ve hired people with extensive jewelry or retail experience—recruits include the former editor-in-chief of Modern Jeweler, the treasurer of the Diamond Dealers Club, a former vice chairman of The Sharper Image, and buyers from Zale, Tiffany, Fortunoff, and Cartier (see table beginning on p. 206). The new sites plan extensive advertising campaigns to “brand” their names with consumers; they all want to be the jewelry industry’s version of Amazon.com (a company that, it should be noted, has never shown a profit and probably won’t for years).

All this means that retailers will face more competition from the Internet than almost anyone assumed just a few months ago. According to Forrester Research of Cambridge, Mass., last year consumers spent $102 million in online jewelry purchases — which amounts to only 1% of the total market. But big names and a big advertising push could change that dramatically. While consumers might never make a large purchase at a site they’ve never heard of, they may be a lot more willing at a site they just saw advertised on TV, in a magazine, or on a billboard. At press time, all the sites say initial response has been encouraging.

 

The jewelry megasites was spurred by the rapid growth of — and increased consumer comfort with — e-commerce. “Consumers have bought books and CDs online, and now they’re going to buy higher-priced items,” says Kenny Kurtzman, CEO of Ashford. Ironically, the jewelry sector has attracted Internet interest because it’s considered wide-open territory — especially since the big names in the industry haven’t yet embraced e-commerce. “The brick-and-mortar people left the door open,” says Scott Segal, chairman and CEO of iJewelry.com.

Jewelry is also attractive because it’s considered a big-margin business — which will surprise a lot of jewelers who recall better days. Kurtzman notes that since jewelry’s an expensive item, you can make more money on it, and its small size holds down shipping costs. Jewelry is also easier to sell online than other fashion products. “There aren’t the sizing issues for shoes and clothes,” says Joan Bergholt, the vice president of Firstjewelry.com.

Still, despite the impressive expertise and money behind these sites, some are likely to fail. “Consumers can only remember three names in any business,” contends Segal. “There’s not room for 300 players.” However, the Web site executives, who no doubt once dreamed of having the sector all to themselves, now think there’s room for a few competitors. “If the Internet share of the jewelry market goes to around 15%, that’s a $5 billion to $10 billion market in the next few years,” notes Kurtzman. “You could definitely have three to four major players.” Adds Barry Gilbert, president and CEO of Miadora: “I was just in the mall yesterday, and there were six jewelry stores, so who’s to say?”

But at least one analyst thinks these sites face a daunting future. “Selling jewelry is not as clean as selling books or computers or software,” says Mike May of New York’s Jupiter Communications, an Internet research film. He says that since buying jewelry over the Web is a “blind-item” purchase based on trust, “virtual” stores have to prove themselves in ways real ones don’t. “A site like Mondera has to spend not just to get consumers to buy its products, but to legitimize the Internet as a place to buy jewelry in the first place,” he says. Given this, May thinks all the competition may actually be a plus: “The more noise, the better they’re able to legitimize the channel.”

May feels the field could get more crowded if Tiffany and other big names enter the fray. “Just as in other categories, bricks-and-mortar stores aren’t the first ones to go online. They feel they’re just spending more to get the same amount of revenues.” But most stores eventually go electronic for defensive reasons—after an Amazon or eToys snares a chunk of their market share. “The best time to do it is when the stakes are low rather than when they’re high,” he cautions.

In the jewelry sector, it seems the stakes keep getting higher.