Software reseller Beyond.com’s (Nasdaq: BYND) merger with privately held rival BuyDirect.com is, of course, a significant deal. But potential investors shouldn’t get too excited. Online software retailing is a hypercompetitive, low-margin business, and right now the combination of Beyond.com and BuyDirect.com still doesn’t have the brand awareness or market capitalization of a CompUsa (NYSE:CPU).
This isn’t to say that Beyond.com and BuyDirect.com won’t create an absolute powerhouse. It’s just that investors should realize that Beyond.com lost US$31 million last year.
Some analysts are making the case that you shouldn’t invest in online booksellers because the competition is too intense and the margins are now too low. That same argument can be made about online software retailers. So if you really must invest in one, one approach is to put your money in a company that everybody you know has heard of. Amazon.com (Nasdaq:AMZN) stock is at such lofty heights because everybody — investors and non-investors alike — knows what it does. The same can’t be said of Beyond.com.
What about Egghead.com? Reality check: Amazon.com still loses $4 to $7 on each book it sells, some online retailers are pondering selling items at cost and making money off of banner advertising, and we are still in the gestation period of online retailing. There’s nothing wrong with riding the wave, but you should also be aware that someday the waves may come crashing down.
Beyond.com reportedly had discussed a partnership with Amazon.com, and this move can be seen as a preemptive strike just in case Amazon.com ever starts selling software online. But is the deal-making done? Who knows. After witnessing this merger, the folks at Egghead.com (Nasdaq: EGGS) may want to start looking for a dance partner.