No playtime for online toy stores

The past two weeks have been dark days for toy e-tailers as a torrent of closures, layoffs and executive resignations have swept through the once crowded and promising segment.

As first reported this morning by CNET News.com, Toysmart.com, a privately held toy e-retailer that is majority controlled by Walt Disney, is ceasing operations, its chief executive disclosed today.

Two weeks ago, Red Rocket, an online retailer of educational toys owned by media giant Viacom, ceased operations, citing difficulties in sustaining its business. Last week, Toysmart and KBkids.com announced employee departures and layoffs.

"The crutch that's been holding up (online stores) is that investors trusted that these companies would succeed," said Forrester Research senior analyst Seema Williams. "One thing that has become apparent now is that they can't stand on their own."

Toysmart chief executive David Lord confirmed the company is closing its doors. "We're ceasing operations as we speak," he said.

According to Lord, Toysmart's board voted late Friday to cease operations because a last-minute investment in an attempt to reposition the company "broke down." A majority of Toysmart's board members are Disney appointees.

Disney spokeswoman Michelle Bergman said the online toy market is competitive with "very strong players."

"After careful review with Toysmart and evaluation of other options, we concluded that ceasing operations and maximizing the assets of the company was the best course of action for Toysmart.com," Bergman said.

Many companies in the hyper-competitive online toy segment are facing tough decisions.

Those companies that went public are burning through their money, and investors' good will is running dry, Williams said. Also, online players are learning that the toy business is one of the most difficult. For years, selling toys on the Internet has been marked by furious competition and paper-thin margins.

Even strong players in the online toy space, dominated by Amazon.com and eToys, have faced problems.

After the holidays, investors snubbed online toy stores along with many e-commerce stocks. eToys' shares have plummeted from a high of $86 last October to $6 this afternoon. At Smarterkids.com, one of Toysmart's main rivals, the stock has dropped from a high above $17, to its current share price of just over $2, a 70 percent decline for the year.

Online toy firms have also learned that brick-and-mortar players can, even if they stumble intially, be an awesome force to compete against. One of the main reasons investors have abandoned the e-commerce players is the shift online by brick-and-mortar companies Toys "R" Us and Wal-Mart, Williams said.

"Brand seems to count for something after all," said Gomez Advisor analyst Alan Alper. "It turns out that the guy with the best-known name stands a good shot at winning. Having established infrastructure and strong buying power can't be underestimated."

Disney took a controlling stake in Toysmart last August. The stake, valued at between $40 million and $50 million, gave Disney the opportunity to add an e-commerce revenue stream to its online efforts, embodied in its Go Network Web portal.

The closure of Toysmart is also the latest blow to Disney's Web efforts. Go.com, as its Web portal is called, has struggled since its inception in January 1999. The company has suffered from executive shuffles, lower-than-anticipated growth, and a rethinking of its strategic direction.

The media and entertainment giant has recently decided to step back in competing against general portal leaders such as Yahoo and America Online. Instead, the company is trying to revamp Go.com into a more entertainment and leisure-focused site.

News.com's Jim Hu and Jeff Pelline contributed to this report.