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Why Fatbrain Is Exciting Some of Net Investing's Best Minds The growth potential of its big idea -- letting authors publish at the site and collecting a share of the sales -- has analysts comparing it to eBay There is hardly a sweet spot in the current market for a company such as Fatbrain.com (FATB), which is best known for operating online professional bookstores. The main themes titillating Internet investors right now are the growth of high-speed networks and holiday shopping, neither of which has much to do with Fatbrain. And investors are getting impatient with Web companies that won't earn a profit for a while, a sentiment that's at odds with Fatbrain's current cash-drain mode. Still, as an e-commerce company with a big idea and a relatively small market cap, Fatbrain is worth a look. Its core business as a niche bookseller is more exciting than it looks. And in mid-October, it ventured into a new frontier on the digital publishing landscape with the launch of an area of its site called eMatter. On eMatter, anyone can publish their work and offer it for sale. Authors earn royalties of 50% and pay only $1 a month in hosting fees on the secure system. (This compares with royalties of a decidedly lean 5% in traditional book publishing).
"It ushers in a whole new class of publishing," enthuses CEO Chris MacAskill, who sees the digital format as ideal for pieces that are "longer than a magazine article but shorter than a book." eMatter will also serve traditional publishers that want to sell short stories, movie scripts, industry white papers, or lengthy magazine articles that can't be distributed cost-effectively in other ways. "There's no economic model for them today," says MacAskill. (The McGraw-Hill Companies, publisher of Business Week, has signed on to distribute some material through this service.) So far, eMatter is attracting a lot more interest from authors and publishers than from buyers, concedes MacAskill. As of its Oct. 18 start, more than 3,000 writers had signed up to self-publish there. George Nichols, a stock analyst at Morningstar who has started Web sites as a way to disseminate his own research on Internet-related topics, says he is excited about eMatter as an easier option than launching a new site or trying to get publishers to accept his work. But he wonders if the public is ready to pay for content on the Web. "The consumer adoption cycle for this is in its infancy," he believes. So is the software, as MacAskill freely concedes. He says the process is not as user-friendly as it should be. MacAskill describes the current version of eMatter as the "1.0" version and doesn't expect mainstream visitors to really take to it for a couple or product generations. "It's a hard technology to bring to market," he says. PAUL ALLEN'S INFUSION. That hasn't put a damper on Wall Street's enthusiasm. Most analysts who cover it rate Fatbrain a strong buy. When the company announced eMatter on Aug. 31, its stock climbed 40%, to around $24, but then settled back into the high teens in the following weeks. Indeed, analysts believe the economics of the business could be more attractive than in traditional book publishing. For one thing, buyers of digital documents pick up the tab for the cost of printing and paper. Also, Fatbrain "isn't tied down to inventory costs and the logistical nightmare of distribution -- thus boosting margins," says Nichols. The stock recently moved back into the 20s on news of a big cash infusion from some well-heeled venture capitalists. Vulcan Ventures, the firm of Microsoft co-founder Paul Allen, is anteing up $20 million for Fatbrain's e-commerce initiatives. That Oct. 18 announcement was followed by the Nov. 1 news that Highland Capital Partners, which recently hired away prominent Internet stock analyst Keith Benjamin from BancBoston Robertson Stephens, will contribute $10 million more. Benjamin will also sit on Fatbrain's board. "Those are pretty serious backers," says Chandler.
Fatbrain also does on-demand printing of technical manuals written by companies such as Sun, IBM, and Cisco for their customers. This business, with margins twice those of regular book publishing, is now up to 11% of sales, says MacAskill, who adds that print-on-demand customers usually buy other books from Fatbrain at the same time. For Chandler, Fatbrain's core business -- selling "low-volume, high-margin books" -- is the main reason for his strong buy rating. "That is underappreciated by investors," he says. "They don't realize that this is a business-to-business play." Thomas Weisel Partners analyst Christopher Vroom sees more potential in eMatter than in the core business, however. "This is a very, very good idea," he says. Although more competition is bound to be on the way, Fatbrain's early start gives it some lead time to establish its brand. MacAskill expects other booksellers to start offering digital downloads, "but it is hard to do," he says. For now, Fatbrain.com is not an expensive stock -- at least by Internet standards. The company lost close to $10 million last year on sales of $20 million. And in its most recent quarter, reported on Aug. 25, it said that online sales more than doubled, but to a mere $5.8 million. Vroom notes, however, that Fatbrain is selling for only three times next year's projected revenues at a time when many e-commerce stocks are selling for 12 times revenues. In an e-commerce world dominated by money-losing companies with billions in market value, Fatbrain's capitalization is only $250 million. "Investors aren't aware of the story," says Vroom. eMatter is no slam dunk. But it has already won over some of the best minds in Internet investing, and that will likely continue to provide it with enough capital to fund its costly startup stage. Fatbrain's core business is solid, and it might be an attractive acquisition, perhaps for a large book publisher. The real gold mine for investors, however, would be if readers one day get as excited about buying eMatter content as writers already are about selling it. Stone is an associate editor at Business Week Online. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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 Amey Stone covers the markets and investing for Business Week Online WEB POINTERS To visit some of the sites mentioned in the story, click here: Fatbrain Piper Jaffray Robertson Stephens Morningstar eBay MP3.com | ||||||||||||
