K-tel's Deal With Playboy Site
Again Makes It a Sexy Net Stock
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
For Internet stock analysts, Tuesday was deja vu all over again: A seller of
greatest-hits compilations known for its late-night TV commercials announces
a plan to hawk music over the Internet and sees its stock shoot through the
roof.
This time around, the music seller, K-tel International, saw its stock price
double simply by saying it had partnered with Playboy Enterprises to open an
online music store on the publisher's Web site. K-tel promptly jumped as high
as 17 7/8, and closed the day up 6 3/8, or 93%, to 13 1/4 on more than 40
times average Nasdaq Stock Market volume.
The frenzy around K-tel's stock was a virtual
replay of last April, when the company first
disclosed plans to build an retailing outpost on
the Web, K-tel Express. The announcement
singlehandedly resurrected interest in what had
been a nearly moribund stock for years, taking
its share price from 3 5/16 to the low-30s in the span of a few weeks.
For veteran stock watchers, the fact that a relative latecomer to online
retailing could generate so much commotion on Wall Street was an alarming
symptom of the hype surrounding Internet stocks -- and the broader excesses
of the 90s bull market. When K-tel's stock finally fell back to earth during the
wider market correction this summer, analysts saw the sell-off as a welcome
return of cooler heads to the investing fray.
Now, however, some fear the potential implications of the resurgence in
K-tel's stock. "In a sense, this means the irrational exuberance is returning,"
said Michael Murphy, editor of the California Technology Stock Letter in
Half Moon Bay, Calif. "The fact that we are replaying what was at work in the
last up-market is never a good sign," he said.
To be sure, even modest enthusiasm for K-tel's stock can easily turn into
outright investor fever. The company has a float of about 1.9 million shares, a
fairly limited supply of tradable stock that can cause its price to go bonkers
whenever there's investor demand for it. "This does seem to be a pretty classic
example of a company with very little float where you've got temporary
insanity" in its share price, said Keith Benjamin, an analyst at BancBoston
Robertson Stephens.
Mr. Benjamin and others remain highly skeptical that K-tel can succeed in
refashioning itself as a serious player in online music sales. Recently, the two
leading Internet music merchants -- N2K and CDnow -- agreed to merge, a
move that was seen as a response to the competitive challenge posed by
Amazon.com. Amazon, a pioneer in Internet book retailing, unveiled a music
store last summer and quickly vaulted to the top of the category, with $14.4
million in music sales in the third quarter. In the same period, CDnow posted
sales of $13.9 million , while N2K reported sales of $10.5 million.
Meanwhile, in its fiscal fourth quarter ended June 30, K-tel reported overall
revenue of $21 million. The company doesn't break out sales of K-tel
Express, making it difficult for analysts to assess the performance of its Web
sales. But most continue to question whether K-tel will be able to position
itself as an all-purpose outlet for music. "They're up against a brand identity
problem," said Nicole Vanderbilt, director of commerce research at Jupiter
Communications, a New York market-research firm. "People associate them
with compilations. CDnow, N2K and Amazon have done a good job of
marketing themselves as online superstores," she said.
Mr. Benjamin was more direct: "Anybody new trying to compete in the music
business is kidding themselves."
Analysts were equally skeptical about whether the deal with Playboy would
help drive Internet sales. The companies said they would launch the
Playboy/K-Tel Music Store in time for the holiday season on Playboy.com,
Playboy's Web site. The site will feature more than 250,000 music titles,
including K-Tel's music compilations, and will allow customers to create
customized CD compilations.
"This type of news is incremental at best," said
Derek Brown, of Volpe Brown Whelan & Co.
"I wouldn't expect the launch of the store to
drive a tremendous amount of transactions"
for K-tel.
Of course, K-tel isn't the only the company
that's tried to make itself over as an Internet
player. Perhaps the most derided attempt yet
was made by Zapata, a fish-oil and food
packaging concern that launched a foray into Internet publishing earlier this
year. The company began buying up small Web sites with a goal of assembling
them into a "portal" site and, for a time, the strategy seemed to excite
investors -- Zapata's shares hit 24 15/16 in early July.
But by mid-October, Zapata, citing market volatility, had abandoned its
Internet plans. Its stock trades below $10 a share now.
Some analysts joked that the resurgence in investor excitement for K-tel,
though, could prompt Zapata to change its plans. "Next we'll get Zapata
deciding they want to be a portal after all," Mr. Murphy said. |
