Hi Fry <g>
This was poster earlier this week but I thought I would re-post it now for you.. I sold BYND, still own DRIV to play with...
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***RAGAS SPEAKS FOR THE WEEK***
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Beyond.com and Digital River - Future Software Titans or Digital Roadkill?
Sometimes it's best to keep your mouth shut and let your actions do the
talking. At least that's my advice this week for Beyond.com Corp. (BYND)
President and Chief Executive Mark Breier, especially when his company is
quickly building marketing alliances and distribution partnerships which
could eventually leave his top competitor in the dust.
Last Tuesday, Digital River Inc. (DRIV), a competing software retailer,
filed suit against Beyond.com in a Minnesota court, alleging Beyond.com
officers made false and defamatory statements about Digital River. The
alleged defamation began on a recent road show to gather support for a $140
million secondary stock offering which Beyond.com completed this week.
Digital River claims the Beyond.com officers repeatedly hinted during the
roadshow that a small number of clients accounted for a large portion of
Digital River's revenue last year.
Is it true? Well, both companies are still building their client base at
this point. Digital River's recent 10-K filing admits that three software
publishers DID account for 25% of the company's 1998 sales. However, by
the same token, Beyond.com's 10-K reveals that departments of various U.S.
government agencies accounted for 28% of its sales last year.
So stopping throwing stones, guys! Both of you are in the same boat.
The reason these two companies are going at each other like cats and dogs
is simple. Beyond.com and Digital River are both the leaders in the
emerging electronic software delivery (ESD) marketplace. Both are trying
desperately to win the favor of Internet analysts and fund managers in the
hope that their company will be crowned the budding Amazon.com of
ESD-delivered software.
After observing this name-calling match for the past two weeks, I decided
it was time to actually break down the two companies and see which is
destined to become the chump and which the champ in ESD.
Behind The Numbers
After acquiring software retailer BuyDirect.com in February for $123
million, Beyond.com claims it has more than one million customers. By
comparison, Digital River's current 10-K filing reveals that company
completed transactions for more than 490,000 unique end users as of March
5. This morning Digital River announced they will acquire two e-commerce
shareware providers for $14.2 million in cash and stock. While the deal
will add 2,500 new shareware clients to Digital River's customer base, it
is unclear how many additional unique end-users it will add.
Not surprisingly, both companies are still bleeding red in losses but
seeing impressive top line growth. Beyond.com posted sales last year of
$36.7 million, a 118% gain from the prior year. The younger Digital River,
on the other hand, racked up 1998 sales of $20 million, a whopping 736%
one-year sales increase. With a roughly $1 billion market cap on April 14,
Beyond.com was trading just over 21 times trailing 12-month sales. With a
market cap of $786 million, Digital River was trading at a pricier 27.5
times trailing 12-month sales. Analysts don't expect either company to
break even until fiscal 2001 or 2002.
Beyond.com offers more than 48,000 software titles, with 5,600 ready for
immediate electronic download. Beyond.com also maintains an affiliate
program with more than 20,000 Web sites. By comparison, Digital River
offers a library of more than 100,000 "digital products", including 30,000
software applications.
Enough Already!
All the bickering over who is biggest and who has the most partners is
childish at this point, especially since overall software sales through the
Internet are only expected to blossom to $2.4 billion by 2002, according to
Jupiter Communications. Beyond.com and Digital River are like two
teenagers bragging about whose hot rod has the most horsepower. If the
drivers don't know what they're doing and haven't performed the proper
maintenance, it doesn't matter how much they've got under the hood.
So here are the most important differentiating factors between these two
aspiring software hot rods.
1) Online Retail Distribution And Marketing Partners.
Digital River appears the weaker of the two companies in this area. Online
software sites that use Digital River's ESD technology include Kmart,
Wal-Mart, CompUSA, Cyberian Outpost, Corel, Adaptec and Shopping.com.
While Wal-Mart Stores Inc. (WMT), K Mart Corp. (KM) and CompUSA Inc. (CPU)
are kings of the offline retail world, they are still mere pups online. As
Raging Bull founder Bill Martin recently reminded me, "WalMart.com" is
still an invalid Web address. "Wal-Mart.com", including the hyphen, must
be typed to visit the retailer's online bazaar.
Beyond.com has struck a variety of ESD deals with both online retailers and
software publishers, including Symantec Corp. (SYMC), creator of the
popular Norton AntiVirus products, and Compaq Computer Corp. (CPQ) to
create a co-branded software store at the Compaq.com site. Other ESD
partners include Microsoft Corp. (MSFT), Network Associates Inc. (NETA),
AutoDesk Inc. (ADSK) and Netscape's NetCenter. The company also has a
wide-ranging group of marketing partnerships which include Yahoo! Inc.
(YHOO), America Online Inc. (AOL), Excite Inc. (XCIT), Ziff-Davis Inc.'s
(ZD) ZD Net, Microsoft's MSN, CNET Inc. (CNET), XOOM.com Inc. (XMCM) and At
Home Corp. (ATHM). Beyond.com management believes the partnerships can
reach more than 75% of the available Web audience. Distribution is key
online and Beyond.com seems to have the area locked up.
2) Broadband Strategies
The rollout of cable modems, DSL and other high-speed Internet technologies
over the next few years will present a sizable growth opportunity for both
ESD players but right now ESD is still a hassle for most consumers.
Downloading a new copy of Norton's AntiVirus still takes about one hour via
a 28.8 modem. As you can see, it's not exactly a picnic for dial-up
Internet users.
Beyond.com appears to get the nod over Digital River in this category as
well, primarily because Beyond.com now enjoys a valuable marketing and
distribution partnership with high-speed cable Internet provider At Home.
In addition, Beyond.com has a large marketing deal with AOL, which is also
a minority investor. Beyond.com should directly benefit from AOL's recent
DSL partnerships with various Baby Bells as the services are rolled out
over the next year. Greater bandwidth should mean faster downloads and
increased sales for both firms, particularly Beyond.com.
The icing on the cake for Beyond.com is that Microsoft co-founder Paul
Allen is an original investor in Beyond.com and his venture firm still
holds a seat on the board. Allen continues to scoop up cable companies and
related broadband service companies, so a wide-ranging partnership between
Allen's cable companies and Beyond.com would appear to be a possibility.
Of course, there is still time for Digital River to position itself in the
emerging broadband marketplace by striking partnerships with various cable
companies, ISPs, pc makers and telecoms. As more consumers get access to
high-speed pipes, ESD is a logical killer ap for the cable companies and
telecoms to offer their customers. Digital River must awaken and
capitalize on the opportunity.
3) Building A Brand
Digital River has oddly decided to focus on being the picks and shovel
player in ESD, an entirely wrong game plan for the market. The company
appears content to remain the behind-the-scenes player which provides the
digital software delivery technology for various software retailers and
publishers. The problem with such a strategy is that Digital River stays
invisible to the end consumer who could care less which company provides
the technology to download a piece of software. All the consumer remembers
is the name of the software publishing or retail site where the software
was purchased. Digital River? Who's that?
While Beyond.com is still not a household name, the company has made an
effort via traditional advertising and online partnerships to build a brand
name among consumers. While Beyond.com offers back end ESD services for a
variety of publishers and sites, the company also offers all of its
software library directly for sale to consumers via its website. In
comparison, Digital River's site serves as nothing more than an
informational site for prospective customers. Thus, Beyond.com has been
more aggressive in building their brand name. Beyond.com's CEO is a former
marketing vice president for Amazon.com Inc. (AMZN) so this brand building
strategy doesn't surprise me in the least. Actually it makes the most
sense.
Think about this for a second. A certain degree of Intel Corp.'s (INTC)
success has come from aggressively marketing their Pentium chips for a
number of years and building up an incredibly strong brand among consumers
for what is actually an unsexy product. Most consumers never actually see
the Pentium chip but expect to find the "Intel Inside" logo on the box of
their pc. Beyond.com is attempting to head down that same path. After
all, won't it be much easier for a current Digital River client like Kmart
to switch over to a competitor like Beyond.com if Kmart's customers never
realize that anything has changed in the first place? Absolutely. Just
ask Intel competitors Cyrix and Advanced Micro Devices Inc. (AMD) about how
that goes.
Risk Factors Abound
There are a variety of competitive threats that both firms must overcome in
the next 12 months. Beyond.com and Digital River are directly and
indirectly competing in a brutal field which includes larger names like
Barnes & Noble Inc.'s (BKS) barnesandnoble.com, Cyberian Outpost Inc.
(COOL), Egghead.com (EGGS) and Insight.com which are all looking for a
slice of the software sales pie.
In addition, both companies will increasingly find their margins coming
under pressure from zero-margin e-tailers like Buy.com and Onsale Inc.
(ONSL) who offer cut-throat "below-cost" pricing on thousands of products.
Then there is the strong possibility that e-tailing goliath Amazon.com will
step into the online software arena later this year. If that happens,
pesky litigation and name-calling will be the least of the problems for
Beyond.com and Digital River. |
