PeoplePC Unravels
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By Dan Biers and Bruce Gilley
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PERHAPS NOWHERE IS the contrast between the unalloyed optimism of Softbank and the disappointment among investors over money-losing Internet plays starker than in the case of San Francisco-based computer-services company PeoplePC.
Founded early last year, PeoplePC offers the customer a personal computer with Internet access and a three-year service contract for as little as $25 a month. Softbank has invested $67 million for a 38% stake in the firm, which went public in August this year.
PeoplePC sells itself as "democratizing technology" for ordinary folk. But it has also moved into higher-margin corporate deals. It has contracts to supply and support Internet-access computers for U.S. giants like Delta Airlines, The New York Times, and Ford Motor (a PeoplePC shareholder), as well as for Singapore's National Trades Union Congress.
Gary Rieschel, executive managing director of Softbank Venture Capital, can hardly contain himself when talking about PeoplePC's prospects. "I love that deal," he says. "We're creating a channel to millions of people." Indeed, he likes it so much that Softbank and its European partner Vivendi in late October committed $50 million for a 35% stake in PeoplePC's new unit for Europe.
That enthusiasm is echoed by the Web-head's bible, Red Herring Magazine, which in June named PeoplePC as one of the 100 companies "most likely to change the world" for "bringing connectivity to the masses."
Yet for all that hype, a lot of investors hate the company. Its shares have been trading recently at around $3 each, well below the August offer price of $10. Softbank bought into the company at about $2 a share, so it's still sitting on a substantial paper gain. But hopes that PeoplePC would provide Softbank with a windfall gain on anything near the scale of its bet on portal Yahoo! have now faded.
Most of the reason is that the company shows little prospect of turning a profit anytime soon. It lost $171 million on revenues of just $44 million in the first nine months of this year. Analysts say its attempt to make money at the rock-bottom end of the market doesn't make sense, given the number of cheap PCs for sale worldwide.
Founder and CEO Nick Grouf says the IPO has given PeoplePC enough money to become profitable eventually. But he declines to even hazard a guess about when that might be. That isn't very reassuring to suddenly hard-nosed Internet investors. Says Fred Hickey, publisher of The High-Tech Strategist newsletter, "It's a terrible market to be in."
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