What Are Failed Dot-Coms Worth Now?
Jun 11, 2001 2:08 PM PT
The fact that eToys was failing might have been the worst-kept secret in business history. The e-tailer put up more than one smoke signal indicating that it needed cash or a buyer really soon. Nevertheless, eToys was unable to find a buyer or savior willing to pay a price that would satisfy eToys shareholders.
Yet within weeks of its bankruptcy filing, much of what was once eToys was sold. In fact, the eToys domain name is back in business, now directing surfers to KBToys.com, the online arm of the Pittsfield, Massachusetts toy retailer.
After buying most of eToys' US$40 million worth of remaining inventory for a song, KBToys laid out $3.35 million for the eToys domain name and other intellectual property.
While KBToys got a trusted brand name and a well-known URL in the deal, analysts say that KBToys and others that purchase what's left of failed dot-coms are really getting thousands or millions of new customers at bargain-basement prices.
"Basically what the purchaser is getting is cheap customer acquisition," analyst Julian Chu of Mainspring told the E-Commerce Times. "If the price is right, this might be a very inexpensive way to grow a business."
For example, Garden.com, which raised nearly $50 million in its initial public offering (IPO), completed the sale of its major assets to Walmart.com (NYSE: WMT) and the parent firm of gardening company W. Atlee Burpee & Co. for a total of $4.43 million in January.
Garden.com had been in business for nearly five years and had 1 million registered members -- but by the end of 2000, the company was losing approximately $9 million dollars per quarter.
Chu noted that many dot-coms failed in part because they spent millions of dollars in venture capital and IPO money on the task of building brand awareness and acquiring customers.
Return on Investment
Remember all those discounted sales designed to hook customers? Although some are finally paying off, it is sometimes too late for the original business to reap the rewards.
For instance, eToys built a customer base of about 2 million people during its nearly three years in business -- which means, said Chu, that KBToys paid just over one dollar per eToys customer.
KBToys spokesman John P. Reilly told the E-Commerce Times that the decision to buy the eToys domain was an easy one.
"eToys spent four years building a brand and setting the standard for Web toy sales," Reilly said. "We felt we had a bargain on our hands."
Boo for Nearly Nothing
The math also worked out for Fashionmall.com, which acquired failed online clothing shop Boo.com at a steep discount.
"Boo.com spent $225 million, almost all of it on branding," Chu said. "People knew it as a place to get clothes online. Fashionmall was able to pick it up for low six figures. That's a pretty good deal by any definition."
The same formula helped convince CBS SportsLine to buy the MVP.com domain and brand name.
However, other factors can play a role in deciding to pick up the remains of a closed Internet merchant. For brick-and-mortar retailers, a failed dot-com with a strong technology base and an established Web presence might represent a fast, inexpensive way to get online.
Plenty of assets of failed dot-coms are still out there, awaiting bankruptcy auctions or another form of final disposition. The domain of Furniture.com -- whose farewell message touting its ability to generate traffic remains posted on its site months after its demise -- sits locked up in a court safe.
Struggling online grocer Webvan is selling several million dollars worth of assets, including kitchen equipment, delivery vans and warehouses that it once hoped to use for an aggressive expansion plan into a number of U.S. markets -- markets it has since departed or never got started in.
And every day, more dot-com assets hit the sales blocks at local real-world auctions and online. For example, Bid4Assets.com helped sell off Boo.com and now has MusicMaker.com assets coming up for sale.
Many dot-coms are sold in piecemeal fashion to maximize the value of each part, since many buyers do not want the entire business. For instance, before selling its inventory and domain to KBToys in separate sales, eToys sold its BabyCenter unit to Johnson & Johnson (NYSE: JNJ).
In the end, many failed dot-coms function like footsoldiers in a virtual war -- laying down the groundwork and then fading into memory amid greater triumphs by others.
"That's the approach you have to take when valuing dot-coms after the fact," Chu said. "Most e-tailers aren't going to maintain two brands going forward, so what you're paying for is the customers and the traffic the domain will generate to your main site. And a lot of the time, there are deals to be had."