Why Chumbo.com Is Likely to Be a Name You'll Remember
By Herb Greenberg, Senior Columnist (1/11/99 6:30 AM ET)
From the "remember where you read it first, folks" department: Several
years ago this column wrote about Rambus (RMBS:Nasdaq) while it was
still private, noting that it would be a company to watch. Along those
lines: You've never heard of Chumbo.com, but there's a good chance you
will.
Chumbo, at first glance, is just another Web site that sells
software to the public at low prices. Big yawn. So do Beyond.com
(BYND:Nasdaq), Egghead.com (EGGS:Nasdaq) and a growing list of other
dot-coms. An even bigger yawn in this "am I too late to get in" kinda
market, Chumbo is private. But late last week Chumbo struck a deal with
IBM (IBM:NYSE) that may be the first of a series of deals with other PC
makers. The deal shows not only how different Chumbo really is, but also
why some analysts believe it could leap past the others the way eBay
(EBAY:Nasdaq) zoomed past Onsale (ONSL:Nasdaq) and Amazon (AMZN:Nasdaq)
bamboozled Barnes & Noble (BKS:NYSE).
Before getting to the IBM deal, though, a little history: Minneapolis-based Chumbo was co-founded several years ago by David Prais, one of the original European marketing managers for Dell (DELL:Nasdaq) and, until starting Chumbo, marketing
chief for Gateway (GTW:NYSE). His co-founder was Tim Burton, who ran the
Point Group, which licensed and resold software to PC makers. Point
Group was then merged into Chumbo, but the story took a new twist last
October when Chumbo sold a 30% stake for $5 million to Zomax Optical
Media (ZOMX:Nasdaq), which is based in nearby Plymouth, Minn., and which
makes CDs and DVDs, and licenses and resells software to PC makers. The
idea was to merge PC industry contacts of Zomax and Point Group and
Zomax's manufacturing and warehousing capabilities with Chumbo's Web
site and proprietary e-commerce software.
The following month Chumbo was named the best Internet software site by PC Magazine, which helped raise its visibility with software buyers, but kept it below most other radar screens. And Zomax itself was damaged goods on Wall Street after turning
in a lousy quarter last October.
Enter the IBM deal. Instead of overloading its PCs with costly software that many PC users won't or don't use, IBM decided to stock all new Aptivas only with Windows, a browser and several other basic software titles. As part of the
registration process for the new computer, users will be directed to a Web site co-operated by Chumbo and IBM, where they'll be able to buy other titles. The first two will cost $10, and IBM and Chumbo will share in the profits. "We're doing for the software industry what Dell and Gateway did to the hardware industry," says Prais, Chumbo's president.
There's chatter that he's talking about similar deals with Gateway, Dell
and other PC makers that are looking for new ways to cut unit costs
(those useless software titles add to the cost of the PC!) while
creating a new stream of revenue via the aftermarket sale of software.
Prais will only say that Chumbo, which has OEM relationships with seven
of the top 10 PC makers, already operates a joint Web site with Apple
(AAPL:Nasdaq) in the U.K. and is "in discussions with other people."
The more deals the better for a company like Chumbo, which unlike most
Internet retailers has spent virtually nothing to get customers. "Amazon
has tied up [Internet] real estate, but it has spent a fortune," says
hedge fund manager Bob Holmes of Gilford Partners in Chicago, who
prefers to short stocks but ranks Zomax as his favorite long position.
"Chumbo, it would appear, is starting to grab real estate -- now they
have IBM, and they didn't have to pay anything for it." As a result,
Holmes believes Chumbo has just started to turn a profit on revenues
that analyst Clint Morrison of John G. Kinnard in Minneapolis believes
are annualizing at roughly $10 million.
Zomax, meanwhile, just completed an acquisition of Kao Infosystems, a
large maker of CDs and DVDs. The purchase will triple Zomax's size.
Holmes sees Zomax "on one hand as a real company with earnings and
sales, and on the other you have a free call on what some people say is
the best software site. You're basically getting it for nothing."
The kicker: Zomax earned $3.5 million last year and currently has a
market value of $133 million, while Egghead lost $58 million and has a
market value of $540 million and Beyond.com lost $17.6 million and has a
market value of $868 million.
The obvious question is whether Chumbo will capitalize on the latest
round of Internet insanity by going public sometime soon. "Clearly there
have been discussions internally," says Jim Anderson, CEO of both Zomax
and Chumbo. "We would be foolish not to be considering it based on the
dynamics for anything with dot-com behind it."
Doubly foolish considering Zomax's measly $5 million original
investment.
Herb Greenberg writes daily for TheStreet.com. In keeping with the
editorial policy of TSC, he does not own or short individual stocks. He
also does not invest in hedge funds or any other private investment
partnerships. Greenberg writes a monthly column for Fortune and provides
daily commentary for CNBC. |
