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2HRS2GO: Dreaming of megamergers

Weekend ramblings...

The Internet version of "It Rose From the Dead" made its latest appearance today in the Financial Times of London, which reports renewed talks between Yahoo! (Nasdaq: YHOO) and eBay (Nasdaq: EBAY). Will someone please drive a stake into the heart of this silliness so these companies can get back to doing what they already do better than anyone in their respective niches?

While we're on the subject of Internet mergers, it's worth noting that nearly everyone these days is predicting a shakeout in online retail stocks. And where there's a shakeout, there's consolidation.

So consider this admittedly outlandish-sounding creation: the anti-Amazon.com (Nasdaq: AMZN).

The Amazon.com model relies on scale and product breadth for success. eToys (Nasdaq: ETYS), barnesandnoble.com (Nasdaq: BNBN) and CDNow (Nasdaq: CDNW) stand as Amazon.com's biggest competitors.

Why not merge them? If nothing else, you get one of Amazon.com's cross-promotion and ability to circulate customers like an online department store.

But that's not enough. What's the point of creating another copycat? You need that magic word: differentiator.

Enter Peapod (Nasdaq: PPOD).

The online grocer looks to be heading into the twilight of its existence, but there's reason to let that delivery ability to go to waste. By adding Peapod's order fulfillment and delivery capability to the online retailers' inventory and sales, you suddenly have Amazon.com improved, because you can drop off those books, CDs and toys yourself. Groceries too, of course. "Forget Mail Charges -- We Bring It To You."

The biggest challenge facing Peapod has been raising enough money so it could build warehouses in its markets; the departure of Bill Malloy as CEO killed off the planned $120 million investment.

But Peapod does have the largest customer base of any online grocer, and the company is probably available for a bargain basement price.

And presumably, a merger cuts costs for everyone. In last quarter of 1999, these four companies collectively spent $158.1 million, or 60 percent of revenue, on sales, marketing, general and administrative costs. Surely they could find enough overlap between the four companies to get that down to 50 percent or so, which would have meant an extra $26.3 million in that December quarter. That's enough for a Peapod warehouse (maybe even two, but probably not, because Peapod's planned fulfillment centers would need to be enlarged to accomodate toys, books and music).

At the same time, these retailers could promote each other across their websites along with "Free Delivery (And Groceries)" to accelerate sales of all product lines.

What a great idea!

Too bad others have already thought of it. Or why do you think Amazon.com invested in Homegrocer (Nasdaq: HOMG)? And Webvan (Nasdaq: WBVN) now sells books.

Incidentally, here's a scary fact to ponder: the combined December quarter revenue of eToys, Barnesandnoble.com, CDNow yielded $263.4 million, or less than 39 percent of Amazon.com's $676 million for the same period. No wonder no one likes B2C anymore -- it's turning into a race for a distant second.

eMachines (Nasdaq: EEEE) shows you why so many technology companies nowadays go public before they've even left the concept stage. When you're new and unproven, it's easy to whip up a frenzy, as eMachines did when it first appeared in the fall of 1998.

A year and a half later, cheap PCs aren't a novelty anymore, eMachines looks like just another box maker (with much lower margins) and its public trading debut looks like just another broken IPO.

CompUSA (NYSE: CPU) overhauled management ahead of its planned sale to Grupo Sanborns, which makes sense. But new CEO Harold F. Compton is an insider, having been with the company since 1994. Given the company's sluggish performance in recent years, why not look outside for fresh blood?

Then again, what competent outsider would want to run CompUSA? At least some of CompUSA's problems stem from the growth of online shopping, a market that has been led by technology products; no one can stop that trend.

Speaking of physical stores versus direct sales, at least one tech manufacturer continues to pin its hopes on traditional retail channels. Despite the growth of the Internet and OEM-bundling, modem maker Zoom Telephonics (Nasdaq: ZOOM) believes it can still do well through distributors, value-added resellers and bricks-and-mortar outlets.

With its Hayes product line, Zoom still has one of the most recognized modem brands in the retail stores. In an interview with ZDII, Zoom CEO Frank Manning argues those venues remain prime sources for people who need more information and support; he believes old-style retail will become even more important as high-speed Internet access grows, because broadband can be more complicated than simply plugging a box into your phone line.

Investors apparently see good things for Zoom; although the stock has been trading sideways this month, it remains more tha 265 percent higher since emerging from Penny Stock Hell in October. I'm skeptical about anything that relies heavily on retail, but judge Manning's words for yourself: my telephone conversation with the Zoom CEO will be available on the ZDII website this weekend. 22GO>

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