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Online computer resellers face tough times

Thin margins and heavy competition are taking a toll on Cyberian Outpost Egghead, and Onsale. As stock prices droop, analysts predict consolidation in the industry.

Despite slightly beating analysts' earnings estimates, online computer reseller Cyberian Outpost saw its stock downgraded today. The move comes as the industry faces rapid consolidation and as it struggles with thin profit margins and increasing competition.

Analysts downgraded Cyberian Outpost to a "buy" from "strong buy" this morning, pushing the stock down nearly 13.5 percent. Shares closed at 9.8438, down 1.5312

The company posted a net loss yesterday of $8.9 million, or 38 cents a share, compared with analysts' expectations of a loss of 40 cents for the first quarter, according to First Call.

Shaun Andrikopoulos, an analyst with Deutsche Banc Alex. Brown, downgraded the company due to uncertainty surrounding the seasonal effects of sales and the pricing and availability of PCs, according to his research notes. He also noted the company faces "intensifying competition."

Online computer resellers are taking a hit on their stock prices for many of the same reasons, analysts say.

Cyberian, for example, has seen its stock price plummet by more than 70 percent since January. Meanwhile, software retailer Egghead has lost two-thirds of its value since November, while Onsale (which sells computers and a host of other products) has fallen by 84 percent.

Online resellers are finding their stocks trading at an average of one to three times next year's revenues, while the average e-commerce company is trading around three to four times projected revenues, according to one investment banker.

"I think we're on the verge of some consolidation," said Kate Delhagen, an analyst with Forrester. "Any category can support two, three, or possibly four sustainable, viable players."

Analysts also point to the thin profit margins that come with selling commodity products.

"When you're in the computer software or hardware business, it's difficult for retailers to differentiate themselves when selling commodity products. The thin margins also make it challenging," said Ken Cassar, an analyst with Jupiter Communications. "I think there may be some room for consolidation in computer hardware and software retail space."

Onsale, for one, is attempting to shore up its financial performance with its recent shift to its AtCost program--a pricing model in which consumers can buy products at wholesale prices. The program basically hopes to beef up revenues by increasing volume, despite selling products at smaller margins.

One analyst believes the consolidation will spread beyond just the reseller space. Lauren Cooks Levitan, an analyst with BancBoston Robertson Stephens, said consolidation is likely to strike other e-commerce markets as well.

"There's a lot of irrational pricing behavior going on," she said. She added that online players need to "stem the vicious cycle of predatory pricing."

The only way that will happen is either through diminished access to capital for online firms, which Levitan doesn't see happening anytime soon, or through consolidation.

"I think a dose of consolidation could be very healthy here," she said.