Dueling Fools
eToys Will be eToys
August 11, 1999
The Bear Rebuttal
By
eToys' stock has fallen 25% since I wrote the first half of my argument last week, so that means that I win, right?
No? Shoot.
My toy-loving friend, Rick, sings eToys' praises like I imagine a fairy in Candy Land (remember that game?) would yodel, and I don't entirely disagree with him. The company is impressive in its own right. But so is Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> and I still don't want to own it. eToys is in a difficult business, whether selling online or off. Also, it has limited itself, essentially, to one market -- a stance that I believe will eventually hurt it because convenience is king online. And convenience will likely mean going to one place to fulfill as many retail needs as possible.
If eToys had a partnership with Amazon, I'd believe that it would thrive as the toy leader. Instead, it is now fighting the retail leader. I repeat this number because it is important: Amazon added 2.3 million customers last quarter. eToys added 102,000. eToys had 467,000 customers as of June 30. I don't know if that truly is critical mass, as Rick called it. It is tiny compared to Amazon's 10.7 million customers, and critical mass will be determined online in part by the competition. If your competition has 20 times as many customers as you, it should be able to charge lower prices than you and your "critical mass," as a result, doesn't amount to much. You lose customers to cheaper competition.
Competition aside, I question eToys' goal of serving only the child market. eToys will sell video games, books, toys, music, and movies to young children. Most young children don't have credit cards. Parents need to do the buying. Despite this fact, one of eToys' arguments is that it provides a safe haven for children to shop. On the flipside, you can argue that Amazon provides a more convenient place for parents to shop for their children, because so many more parents already have accounts at Amazon.
Secondly, by focusing only on children, eToys will need to continually market itself as generation after generation matures. Part of the company's strategy includes getting children to the site so that they'll tell mom and dad what they want. One potential problem, however, is that most children are interested in popular music (for example) by an early age. For that need, Amazon (for example) might become the solution early in a child's life. So, by a young age, many children might be shopping Amazon for products and eToys could be looked down upon as a babies store. By focusing on just children (and children's parents), eToys probably will never have as many lifelong customers as an Amazon will.
At the right price, eToys could be an interesting investment in a niche leader -- if Amazon doesn't claim that crown from eToys, which it probably will in the fourth quarter at the latest -- that should rapidly grow sales for the coming years (excitement in quarter four especially might be good for the stock). However, eToys is far above the "right price" in my opinion -- even now, at $3.1 billion in market value, which is 25% below where I started this missive.
Next: Vote Results
Also Check Out the Duel Flashback: Excite@Home