Dueling Fools
eToys Will be eToys
August 11, 1999
The Bull Rebuttal
By
Jeff made a list -- and I'm checking it twice.
1) The toy business
Naughty, naughty, Jeff. Low margins. Going public in May with just $37 million in trailing online sales. eToys or Amazon.com? This is where the bookselling giant was back in May of 1997, too -- actually, with slightly lower sales. Two years later the company was valued as high as $35 billion.
I'm not going to say that peddling Jar Jar Binks action figures is margin nirvana. Then again, neither are books or music or any of the first wave of products to find a welcome audience in the realm of e-commerce. However, Wal-Mart is a $185 billion company today thanks to its ability to effectively manage low product margins with whirlwind turnover.
Jeff may not like toy retailers. I do. In uncertain times it is an industry that will provide the last line of resistance before an economic collapse. When times are tight you will pass up on personal indulgences of fashion, culinary gourmet, and technogadgets before you shortchange your kids, right? Toys -- the world's oldest concession.
My worthy Fool wrote that the toy industry suffers from "a lack of constant rejuvenation via new products." Is he serious? Beyond the standard Barbie or popular board game classics, the toy biz is all about hot new products every year. And, unlike a hardcover or CD best-seller, store shelves often go barren at the greatest time of need. That is why an online venue like eToys is so much more fulfilling than racing around town to see if this year's Furby or Tickle Me Elmo is in stock.
Jeff is also not in sync with history here in terms of mainstream toy retailers. Five years ago the home video game console world was in a state of flux. You had 16-bit machines by Nintendo and Sega sitting pretty while more advanced newcomers like Atari, 3DO <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THDO)") else Response.Write("(Nasdaq: THDO)") end if %>, and Sony PlayStation were being rolled out. That was the shining moment for the Babbage's and Electronics Boutiques of the world since most stores weren't ready to cater to all systems. With Sega's Dreamcast coming out in a few weeks, and PlayStation 2 just months away, the popular video game market is once again turning towards the merchants of selection. eToys stocks 50% more toy products than the bricks-and-mortar stores. Video games, lighter to ship than hardcover books I might add, will be a big part of eToys near future.
2) The company's valuation
Jeff brings up Toys "R" Us as if it's an adequate gauge to stack up against eToys. Back in 1993 a much younger Toys "R" Us commanded a $10 billion market cap on a fraction of today's sales. The debacle there has been company-specific, not industry-specific.
In a few years, can eToys be the online version of Toys "R" Us circa 1993? That's a double or a triple off of today's share price. Or, better yet, can it be a ten-bagger from here if it follows Amazon's well-laid footsteps? Okay, the latter scenario may be a bit optimistic, but it's clear that history bears out the substantial upside that is there for eToys to claim. Is there risk? Sure. But, come to think of it, eToys stocks that game too. "Conquer the world in one evening," the Risk description reads. Give eToys a little more time and see what happens.
3) The competitive landscape and the pure-play business model
What Jeff is suggesting here, that only the one-click shopping destinations need apply, is ludicrous. If that's the case, then I suggest any storefront that doesn't have a Wal-Mart sign out front should shutter its doors and re-open as an indoor putt-putt sushi bar. In the real world folks will drive well out of their way to hit the pure play stores. That won't die online -- especially when the pure plays are clicks rather than miles of skidmarks away.
The pure plays actually work out even better when it comes to the Internet. When the holidays roll around and you need to get that grandchild of yours a present -- and he lives on the other coast -- won't eToys be the first site you consider? The pre-wrapped personalized gift wouldn't have the same allure if it came in Amazon.com garb. When I want a musical CD the racks at K-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %> aren't exactly the first thought that pops in my head.
It's just what Scott Heiferman, CEO of i-traffic, told Wired recently: "One of the irrefutable laws of brands is, once you expand the brand, you lose the niche."
I think Jeff is actually a fan of eToys. Either way he is helping out the company since both of us filled our opening arguments with links to the store. But to Jeff, being the first mover, as eToys clearly is, isn't enough. You have to be the first to scale. I just ran a toy search on Amazon.com and the sum of my efforts was sobering. Sony? Zipo. PlayStation? Nada. Nintendo? One game (N64's Quake). I'll concede the store is still being built, with customer bribes being offered in exchange for patience, but while it will always command a lead in books, children's books, I doubt it will actually overtake eToys in terms of actual toys sold. Read between the lines of Bezos' bravado and you'll probably agree.
But my real point here is that with the pure play comes the opportunity to build a brand -- something which eToys is building out quite nicely and Amazon seems bent on diluting with every new venture. In an offline world it's a blessing to find a Wal-Mart where you know you will find the lowest prices on just about everything. Amazon is not the cheapest in its product lines and most of its sales beyond books will probably always be secondary impulse purchases (that is, unless even that lingering quality eventually diminishes). Will Amazon ever have a content library as effective as the BabyCenter magnet if and when it enters the baby products market? Doubt it.
eToys owns Boardwalk and Park Place in its eToys and BabyCenter sites. Jeff argues that owning the whole board is better. It's true in theory, but is it worth outlay of capital and the lack of focus and direction? So Jeff is bashing away at a company that is only now beginning to spend its newfound equity capital. It's going to be amazing as the company uses the money in building out those spaces. It's Community Chest just after passing Go, Jeff. Go Back Three Spaces, Fool. Enjoy the view. Pay your dues. Move forward.
Next: The Bear Responds