Before Bitcoin: The Rise and Fall of Flooz E-Currency

iStock
iStock

In the late 1990s, Silicon Valley entrepreneur Spencer Waxman was in Morocco on holiday when he heard an Arabic slang term for money—flooz—that stuck with him. In the dot-com boom taking place back in the United States, URLs with obscure etymology were popular. When Waxman and partner Robert Levitan decided to co-found a novel way of disrupting the online commerce industry, calling it Flooz.com was almost a foregone conclusion.

What Levitan and Waxman envisioned was a virtual gift certificate that would drive business to participating online retailers, give consumers some sense of security over their private information, and make shopping for stubbornly gift-resistant recipients easy. Rather than merely offering cyber currency, this was a service with purpose.

Unfortunately, it was also one that was doomed to fail.

A screen capture of Flooz.com
Flooz.com

Non-cash currency has been with us since the Chinese used cowry shells to sort out debt for goods and services more than 3000 years ago. In the 1960s, credit cards became an alluring alternative to saving and carrying paper bills. When online retailing exploded in the 1990s, it was only natural that startups would begin to explore virtual payment methods.

At the time, digital transactions were perceived by many consumers to be a near-guarantee of identity theft. Handing a card to a vendor in a closed-loop retail environment was one thing, but the thought of hackers seizing their information once it was entered into the borderless environment of the internet kept many away from online shopping.

As it turns out, that paranoia would turn out to be justified in our current climate of constant data breaches. It was also good for businesses hoping to turn their apprehension over credit card security into a monetized solution. Flooz.com debuted in 1999, just one year after another currency-based URL, Beanz.com, had garnered press. Beanz were a kind of earned points system, with approved transactions gifting customers with redeemable gift vouchers. Flooz took a different approach: Customers would sign up to Flooz.com and purchase gift certificates for specific retailers, which they could then use themselves or pass along to a gift recipient via email.

For businesses, it was a way of driving traffic to sites; for consumers, it was a way to keep credit card transactions limited to one vendor; for Flooz.com, being the intermediary meant taking a 15 to 20 percent cut of completed transactions on the selected retail sites, which ranged from Godiva Chocolates to Barnes & Noble and Tower Records.

To help Flooz.com cut through online marketing noise, Levitan enlisted actress Whoopi Goldberg to be their spokesperson. In exchange for company shares and Flooz.com money, Goldberg led an $8 million ad campaign for radio, television, and print that extolled the benefits of using Flooz.com.

Whether it was Goldberg’s pitch or the concept itself, Flooz.com met with a receptive audience. The company debuted in the fall of 1999, and had opened 125,000 accounts by January 2000. That year, roughly $25 million in Flooz.com money was purchased and used. (In a nod to the impenetrable vocabulary of the internet at the time, the media loved to point out that Beanz could be used to purchase Flooz.)

Bolstered by the attention and early success, Flooz.com was eventually able to raise $35 million in venture capital. Consumers could meet their gifting obligations by emailing a code to their gift recipient without having to waste time shopping. For a time, it appeared Flooz.com would become a leading method of payment for online transactions.

Actress and Flooz.com spokesperson Whoopi Goldberg is photographed during a public appearance
Paul Hawthorne/Getty Images

But it didn’t take long for the seams in the Flooz.com model to show. While gifting vouchers to family and friends was convenient for the gifter, the giftee was stuck with a very limited number of vendors that took Flooz.com as payment. If Amazon, for example, had a deal on a DVD or book that Barnes & Noble didn’t, Flooz users were out of luck. Shopping for a bargain wasn’t possible.

The second and most crippling detail was one Flooz.com was forced to make in order to strike deals with vendors. The company guaranteed its transactions, meaning that it would make good on orders even if Flooz dollars had been purchased via fraudulent means. By the summer of 2001, that commitment became a tipping point. Agents from the FBI informed Levitan that they suspected a ring of Russian hackers had purchased $300,000 worth of Flooz in order to launder funds from stolen credit cards.

This created a paralyzing cash flow problem: As their credit card processor withheld funds until Flooz.com could secure the transaction, people were still busy redeeming Flooz dollars they had already spent. Retailers then looked for Flooz.com to reimburse them. Suddenly, customers trying to pay with Flooz were greeted with error messages that the site was down.

Those issues, coupled with the fact that corporate clients had already started to move away from gifting employees with Flooz dollars, forced Flooz.com to file for Chapter 7 bankruptcy in August 2001. Court papers cited almost $14 million in liability. (Beanz.com was also a casualty of the dot-com bust, when participating retailers processing the points steadily went out of business.)

Levitan rebounded, founding the Pando file sharing network and selling it to Microsoft in 2011 for $11 million. Meanwhile, Flooz.com remains a barely-remembered footnote in e-currency, though it would be hard to chart the rise of digital funds like Bitcoin without it. Like with so many other good ideas, timing is everything.

Ad Astra: The Time Earth Almost Got a Space Billboard

iStock
iStock

In the 1980s and well into the 1990s, everything associated with Arnold Schwarzenegger was big. Big biceps (22 inches during his bodybuilding heyday). Big box office (1991's Terminator 2: Judgment Day made $520 million worldwide, the highest-grossing movie of that year). So it was no surprise to open a newspaper in 1993 and see that Columbia Pictures was spending $500,000 to plaster the actor's name and the title of his pending summer blockbuster, Last Action Hero, on the fuselage of a NASA rocket set for launch that June. Schwarzenegger himself was scheduled to push the button that would propel the spacecraft into orbit.

The NASA project deal was being brokered for commercial advertising purposes by Space Marketing Inc., an Atlanta-based firm specializing in sponsorships and ads located outside of the atmosphere. The company's CEO, Mike Lawson, told the Los Angeles Times that he could've sold "dozens" of ads for the rocket, but that he and NASA officials didn't want it to "look like a pace car at the Indy 500."

The idea of promoting a movie in space was brazen, but not nearly as much as another, more ambitious project that Lawson was planning. If everything went according to plan, his Space Marketing would shoot a payload into space in time for the 1996 Summer Olympic Games in Atlanta. Once it was in orbit, mylar tubes would inflate with gas and spring open to support a mile-wide, quarter-mile tall reflective sheet that would be visible from Earth. Lawson called it an "inflatable platform," but the press—and critics—quickly labeled it something else: a space billboard.

If Lawson had his way, it would be able to make everything from the Olympic rings to the McDonald's logo as visible to Earthbound consumers as a full moon.

 

In Robert Heinlein's 1950 novella The Man Who Sold the Moon, a lunar entrepreneur hustles to sell advertising space on the moon as part of his attempt to make colonization a profitable venture. Lawson—a onetime director of marketing for his father's publishing company in Atlanta and a fan of science fiction—read the story. In 1988, he founded Space Marketing as a way to defictionalize the concept.

As fantastic as it sounded, the idea wasn't without precedent. In 1981, telecommunications mogul Robert Lorsch made a presentation to Congress that outlined a strategy for allowing corporations to "sponsor" space travel by letting them buy plaques that would go onboard spacecraft. In the same way they endorsed the Olympics, Lorsch said, corporate America could help subsidize space travel.

A McDonald's logo is visible from space
iStock Collage

The plan was a response to then-president Ronald Reagan's plea to have the private sector assist in helping the government overcome their financial burdens. While Lorsch's proposal was prescient—it anticipated the rise of privatized space exploration—the idea of having commercial sponsors for NASA didn't make it through the Byzantine maze of Washington bureaucracy.

Lawson thought the idea could be taken further, and not necessarily with the cooperation of government. Partnering with scientists at the Lawrence Livermore National Library and the University of Colorado, Lawson developed a plan to allow instruments developed by these institutions to go into orbit and collect information about the ozone layer. To underwrite the project, he would solicit commercial advertisers for the mile-long mylar sheet that would exit the atmosphere rolled up and then expand to full size once it reached orbit. The aluminized lettering would reflect the sun's rays, making whatever graphic it displayed visible for 10 minutes at a time at any given point on Earth. After roughly 20 days, it would disintegrate, leaving the sensors behind to continue collecting data for researchers.

'We could actually fly [the] Golden Arches in space," Lawson said in May 1993, referring to the ubiquitous McDonald's logo. With an estimated launch cost of $15 to $30 million, companies buying ads would cover expenses as well as contribute to a profit for Space Marketing—perhaps paying as much as $1 million for every day it was visible.

A few months later, the city of Atlanta began investigating Space Marketing's concept as a possible advertising vessel for the 1996 Olympics. "Special" glasses given away at point-of-purchase displays with cooperating sponsors would allow people to see the Olympic rings in orbit.

That last point appeared to be a concession to a growing chorus of concern over the idea of using space as a commercial entity. While proponents of the idea argued it was similar to blimps sailing overhead and displaying corporate propaganda messages, a coalition of scientists argued otherwise. Carl Sagan called it an "abomination," insisting that astronomy could soon become a practice of exploring the stars wedged between mile-wide ads for fast food and automobiles.

Consumer advocate Ralph Nader led a group calling for an orbital billboard ban, labeling it a practice of "defacing the heavens." Other groups decried it as commercial pollution of space and vowed to boycott any companies involved. Supporters of Nader's Public Interest Research Group picketed Space Marketing's Atlanta headquarters.

Lawson tried to parry the attacks in media, saying that the phrase "space billboard" was the source of the controversy. He preferred the term "environmental billboard" and said that the whole objective was to have a global company foot the bill for scientific research.

 

Conceptually, the idea of a floating Arby's logo the perceived size of the moon was too dystopian for lawmakers to handle. In 1993, Congress submitted legislation that would prohibit the Transportation Department from issuing a launch license to any company prepared to shoot a corporate image into space. (The bill was eventually signed into law by Bill Clinton in 2000.)

None of this publicity was particularly helpful to Space Marketing, which saw its Olympic plans wilt in the face of both legislative opposition and the probability of massive pushback from space advocacy groups. They turned their attention to Russia, which had no ethical objections to space endorsements, and facilitated a 1999 project that saw Pizza Hut attach its logo to the Proton rocket that carried supplies to the International Space Station. (The chain previously considered projecting its logo with lasers on the surface of the moon but abandoned the idea when they realized it would cost hundreds of millions of dollars.)

A rocket is propelled into space
iStock

Space Marketing's investors moved on to the blimp industry and the firm was dissolved by 2007, when Lawson became CEO of airship manufacturer Techsphere Systems. As for the Last Action Hero stunt: It dissolved when Columbia learned Lorsch was threatening legal action, claiming he owned a copyright on the idea of commercial space advertising. The movie itself also failed to launch, becoming a notorious summer bomb when it was pitted against Jurassic Park.

While space has largely been off-limits to such "obtrusive" advertising by law, not everyone agrees that's for the best. Earlier this month, it was reported that NASA is looking into selling off the naming right to its shuttles as a way to recoup some of the organization's costs. When Lorsch testified before a Senate subcommittee in 2004 to review his 1981 proposal, he said that his sponsorship program might have earned NASA $5 billion in revenue if it had been implemented.

Antisocial Media: The Rise and Fall of Friendster

iStock
iStock

When software engineer Jonathan Abrams arrived in Silicon Valley in 1996, the internet was known for three things: vast amounts of information, pornography, and anonymity. If users weren't investigating the first two, they were exploiting the third to argue about movies or politics, their unfiltered opinions unencumbered by concerns over embarrassment. People were known only by their screen handles.

Abrams, who came to California to program for the web browser Netscape, had an idea. What if people could use their real names, faces, and locations online? Instead of having an avatar, they'd simply upload their existing personality in the form of photos, profiles, and interests. They could socialize with others in a transparent fashion, mingling within their existing circles to find new friends or even dates. Strangers would be introduced through a mutual contact. If executed properly, the network would have real-world implications on relationships, something the internet rarely facilitated at that time.

Abrams called his concept Friendster. Launched in March 2003, it quickly grew to host millions of users. Google began talks of a lucrative buyout. Abrams showed up on Jimmy Kimmel Live, anticipating the dot-com-engineer-as-rock-star template. His investors believed Friendster could generate billions.

Instead, Friendster's momentum stalled. Myspace became the dominant social platform, with Facebook quickly gaining ground. Abrams, who once appeared poised to collect a fortune from his creation, watched as copycat sites poached his user base and his influence waned. What should've been a case study of internet success became one of the highest profile casualties of the web's unrestricted growth. It became too big not to fail.

 

Many businesses rely on a creation myth, the idea that a single inciting incident provides the spark of inspiration that turns a company from a small concern into a revenue-generating powerhouse. For publicity purposes, these stories are just that—fictions devised to excite the press and charm consumers. Pierre Omidyar, who programmed AuctionWeb and later renamed it eBay, was said to have conceived of the project to help his wife, Pamela, find Pez dispensers for her collection. In fact, there were no Pez dispensers. It was a fable concocted by an eBay marketing employee who wanted to romanticize the site's origins.

In early press coverage of Friendster, there was little mention of Abrams looking to monetize the burgeoning opportunities available online. Instead, he was portrayed as a single man with a recently broken heart who wanted to make dating easier. Abrams later said there was no truth to this origin story, though he did derive inspiration from Match.com, a successful dating site launched in 1995. Abrams's idea was to develop something like Match.com, only with the ability to meet people through friends. Instead of messaging someone out of the blue, you could connect via a social referral.

Human-shaped icons represent the concept of social networking
iStock

Following stints at Netscape and an aggregation site called HotLinks, Abrams wrote and developed Friendster for a spring 2003 launch. He sent invites to 20 friends and family members in the hopes interest would multiply. It did, and quickly. By June, Friendster had 835,000 users. By fall, there were 3 million. Facebook's launch in February 2004 was months away, and so low-key that Abrams met with Mark Zuckerberg to see if he'd consider selling. If an internet user wanted to socialize in a transparent manner, Friendster was the go-to destination.

When users signed up for the site, they were only allowed to message people who were within six degrees of separation or less. To help endorse unfamiliar faces, Friendster also permitted users to leave "testimonials" on profiles that could extol a person's virtues and possibly persuade a connection to meet up in the real world.

Naturally, not all mutual connections were necessarily good friends: They might have been acquaintances at best, and the resulting casual atmosphere was more of a precursor to Tinder than Facebook. One user told New York Magazine that Friendster was less a singles mixer and more "six degrees of how I got Chlamydia."

Still, it worked. The site's immediate success did not go unnoticed by venture capitalists, who had been circling popular platforms—America Online, Yahoo!, and, later, YouTube—and injecting start-ups with millions in operating funds. At the time, the promise of savvy business minds flipping URLs for hundreds of millions or even billions was a tangible concept, and one that Abrams kept in mind as he fielded an offer from Google in 2003 to buy Friendster for $30 million. It would be a windfall.

Abrams declined.

 

Investors—including future PayPal co-founder Peter Thiel and Google investor K. Ram Shriram—advised Abrams that there was too much money to leave on the table in return for short-term gain. Abrams opted to accept $13 million toward building out the site. He sat on the board of directors and watched as backers began to strategize the best path forward.

Quickly, Abrams noticed a paradigm shift taking place. As a programmer, Abrams solved problems, and Friendster was facing a big one. Buoyed by press attention (including the Kimmel appearance where Abrams handed out condoms to audience members, presumably in anticipation of all the relationships Friendster could help facilitate), the site was slowing down, unable to absorb all of the incoming traffic. Servers struggled to generate customized networks for each user, all of which were dependent on who they were already connected to. A page sometimes took 40 seconds to load.

The investors considered lag time a mundane concern. Adding new features was even less attractive, as that might slow the pages down further. They wanted to focus on partnerships and on positioning Friendster as a behemoth that could attract a nine- or 10-figure purchase price. This is what venture capitalists did, scooping up 10 or 20 opportunities and hoping a handful might explode into something enormous.

But for business owners and entrepreneurs like Abrams, they didn’t have a portfolio to deal with. They were concerned only with their creation. Its failure was all-encompassing; there weren't 19 other venues to turn to if things didn't work out.

Two word balloons represent the concept of social networking
iStock

Abrams saw the need for a site reconfiguration. The board was indifferent. Eventually he was removed and assigned a role as chairman, an empty title that was taken away from him in 2005. As the board squabbled over macro issues, Abrams watched as micro issues—specifically, the site itself—deteriorated. Frustrated with wait times, users began migrating to Myspace, which offered more customizable features and let voyeurs browse profiles without "friending" others. Myspace attracted 22.1 million unique users monthly in 2005. Friendster was getting just 1.1 million.

 

By 2006, Friendster was mired in software kinks and something less tangible: a loss of cachet among users who were gravitating toward other social platforms. Though Abrams was out, investors continued to pour money into Friendster in the hopes that they could recoup costs. In 2009, they sold to MOL Global for $40 million, which would later convert the site into a social gaming destination. But it was too late. Though the site still had an immense number of users—115 million, with 75 million coming from Asia—they were passive, barely interacting with other users. By 2011, user data—photos, profiles, messages—was being purged.

In ignoring the quality of the end-user experience, the decision-makers at Friendster had effectively buried the promise of Abrams's concept. They sold off his patents to Facebook in 2010 for $40 million. Coupled with the MOL sale, it may have been a tidy sum, but one that paled in comparison to Friendster's potential. A 2006 article in The New York Times reported with some degree of morbid fascination that if Abrams had accepted the Google offer of $30 million in 2003 in the form of stock, it would've quickly been worth $1 billion.

In the years since, Abrams has tinkered with other sites—including an evite platform called Socialzr and a news monitoring app called Nuzzel, which is still in operation—and tends to Founders Den, a club and work space in San Francisco. He's normally reticent to discuss Friendster, believing there's little point in dwelling on a missed opportunity.

The site did, ultimately, became a case study for Harvard Business School—though perhaps not in the way investors had intended. Friendster was taught as a cautionary tale, an example that not every good idea will find its way to success.

SECTIONS

arrow
LIVE SMARTER