So it’s November 1997. The Internet is catching on and you want to start an online business. You just need a big idea. How about selling toys on the Internet? That could be big, right? Hence etoys.com, a short-lived Internet retailer founded November 3, 1997.
That’s a bit of an exaggeration. While etoys was founded in November, the idea dated back to February 1997. That’s when former Walt Disney VP Toby Lenk joined up with Bill Gross, founder of a net startup incubator called Idealab, to start building etoys. They secured financing by September and launched in November, just in time for the 1997 holiday season.
Why the Etoys.com name
Why etoys? A company called Webmagic already owned the toys.com domain name. A common tactic in the late 1990s was to just tack the letter “e” onto whatever keyword you were selling on the theory that people would get used to the idea of typing “etoys.com” or “ecars.com” or “ewashingmachines.com” or “evacationbibleschoolstudies.com” into browser search bars to find you.
Browsers feeding invalid results into search engines put an end to that idea within a few years. But arguably, it wasn’t a terrible idea in 1997 as long as your keyword wasn’t too convoluted.
The early Etoys rocket ride
And initially it worked. It took less than a year for etoys.com to buy out toys.com. Not just the domain name, the whole business. According to the Dec 1, 1998 issue of CIO magazine, a year after its founding, etoys was offering 6,000 products from 500 manufacturers on its website, compared to Toys R Us’ selection of 4,000 products from 200 manufacturers on its website. But it was a relatively small company, with 100 employees and about $10 million in venture capital funding, much of which it used to buy placement on Yahoo and early search engines like Excite and Infoseek. The value of that investment decreased quickly as Google came onto the scene in late 1998.
It saw Toys R Us, the operator of big-box brick and mortar toy stores, as its main rival and saw them as vulnerable. They were, but both of them were vulnerable to Wal-Mart and Target, whose share of the overall toy market was gaining at Toys R Us’ expense. And while Toys R Us was getting online, they were as well.
The Etoys IPO
Etoys held its initial public offering on May 19, 1999, at $20 per share, raising $166 million in new capital. In typical dotcom fashion, the price jumped quickly, reaching $76 per share by the end of its first day. It sold on NASDAQ under the symbol ETYS. At the time, it was the fifth largest IPO in history, giving it $8 billion in market capitalization, bigger than Toys R Us.
By the time of its IPO, it was carrying 9,500 products and 750 brands, and had sold to more than 365,000 customers.
The absurdity of surpassing Toys R Us in market capitalization was that Toys R Us had $11 billion in sales in 1999 compared to $35 million for Etoys.
Etoys’ share price peaked at $84 per share during Q2 of 1999.
The problem of profitability
It doesn’t really matter how vulnerable your main opponent is if you can’t turn a profit. And turning a profit was a problem for etoys. According to the Aug 2, 1999 issue of Computerworld, etoys lost $2.17 million in its first quarter of 1998, while only selling $381,000. In its first quarter in 1999, it sold $7.98 million, but lost $20.78 million.
By Q3 1999, Etoys geared up for bigger and better things, building two new warehouses and expanding into the UK. But the incursion into the UK only lasted a year. By November 2000, Etoys closed its UK division. Its Q4 revenue hit $107 million, but profits remained elusive. It wasn’t selling toys at a loss, but its 13 percent margin on sales wasn’t enough to cover its overhead. The company lost $128 million in 1999.
Poor execution
But an even bigger problem was Etoys’ execution. Two years in a row, in 1999 and 2000, Etoys struggled to manage its inventory, ship orders on time, and provide order tracking. Christmas gifts are something no parent wants to mess up, so you probably only get one chance. Families whose gifts were delayed in 1999 would be buying their gifts elsewhere in 2000, and Etoys couldn’t afford to make the same mistakes two years in a row.
It made the same mistake in 2000. I remember adults with kids asking me about Etoys in late 2000. Some of them thought it was a scam. I assured them it wasn’t a scam and was more like Amazon than like, say, Cyberrebate, but at the time I wasn’t aware of its difficulties shipping orders on time because I wasn’t a customer myself. With Toys R Us, Wal-Mart, and Target all selling online by then, and Amazon expanding into toys, parents had four other alternatives online, in addition to just shopping in person the old-fashioned way.
It really seems like Etoys had a similar problem to Webvan. While its CEO had experience selling to kids and parents from his time at Disney, he didn’t have retail experience.The poor execution and rapid expansion suggests Etoys needed more retail experience in its executive team than it had.
It also didn’t help that in 1999, Etoys sued a Swiss art group who owned etoy.com, stating their name would cause brand confusion. This legal action caught the attention of hacktivists, who subjected the site to denial of service attacks during December 1999. This diverted resources and gave the company the wrong kind of attention.
The rapid unraveling of Etoys
In March 2000, Etoys’ share price started falling along with the rest of the dotcom market, and it lost 70% of its value by the end of April. In November 2000, rather than expanding, it was shrinking, laying off 700 of its 1,000 employees.
The 2000 Christmas season proved to be its last. In January 2001, Etoys warned it was running out of money, and its share price dropped to 9 cents per share. Investor capital was scarce at the time the company needed it to survive. Unable to secure more funding, in February 2001, it filed bankruptcy and wound down operations.
After Etoys failed, its creditors sued Goldman Sachs. The legal battle lasted nearly 14 years, finally ending in September 2013. Its creditors argued that Goldman Sachs priced the IPO too low, hoping to maximize gains in stock price while depriving the company of operating capital it needed. Had the IPO been priced closer to $75 per share, they argued, Etoys would have had the money to build the warehouses it needed to meet customer demand.
Goldman Sachs settled the suit for $7.5 million.
What went wrong
It’s easy to say that Etoys simply tried to grow too fast, and that was part of its problem. But a bigger part was that its business was seasonal. About 70 percent of its sales came in Q4, but rent, salaries, and warehouse maintenance remained at a fixed cost throughout the year. It couldn’t scale those costs down for three quarters and scale them back up in time for Q4. And while its products didn’t spoil like Webvan‘s groceries, there’s no guarantee last year’s hot toy will sell well next year.
This on top of reputational damage from poor execution just proved too much to overcome.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.