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December 27, 2006

BabyUniverse : Hit Me Baby One More Time!

posted by MR WAVETHEORY at 12/27/2006 12:20:00 AM
You have to give the team at BabyUniverse, Inc. (Nasdaq POSH) alot of credit for surviving not only the dot com boom and bust, but also managing to take the company public after weathering the storm. They are true dot-com survivors with the battle scars to prove it. When I read today that BabyUniverse is launching BabyTV.com (press release) - the Internet's first television network dedicated to moms - yes, they're trying to play the online video sharing trend - I decided to take a peek at what they've been up to for the last couple of years.

BabyUniverse started in 1998, and was a classic dot com. They raised venture capital when it was easy to find. Their arch rival was BabyCenter, which was folded into Johnson & Johnson (NYSE JNJ) after they ran out of money.

The idea is simple: BabyUniverse sells all sorts of products to women related to pregnancies, taking care of toddlers, and raising a baby. They're what I would call a niche e-commerce play - an etailer focused on a very narrow vertical. They several websites which in total have an audience of about 1.7 million unique visitors per month.

The e-commerce properties include:
The content properties include:
What's interesting about this concept is that BabyUniverse is merging commerce and content, thereby turning a retail business with predictable and steadily eroding margins into a media business with less predictable but much higher margins. If etailing is like selling Coke, then advertising is like selling cocaine. First hit is free, but future hits will cost you money.

The analogy works in several ways. Content costs money to create and will cost money to build, but content is much higher margin once it has been created, because advertising is a very high margin business. If only BabyUniverse could solve that content creation problem, it would be a great investment. Has it?

The answer is yes. BabyUniverse is partnering with Oxygen TV for programming as well as AlphaMom.

BabyTV.com has already partnered with the acclaimed women's media company Oxygen, as well as video-on-demand pioneer Alpha Mom, to bring a wealth of informative and entertaining programming to our viewers. Oxygen's "Oh!Baby" video on-demand (VOD) programming contributes segments of their popular shows, with content celebrating the highs and lows of parenthood. Alpha Mom contributes a deep catalog of informative programming featuring recognized experts on important topics from pregnancy through early child development.

I have to hand it to the team at BabyUniverse for going with a partnering strategy.

Would I Go POSH for BabyUniverse?

What I like about BabyUniverse's strategy is precisely that they are focusing more on content and shifting into the high margin online advertising business - think Google type margins. BabyTV takes them precisely in that direction by reaching a highly targeted demographic - pregnant women. According to POSH,

BabyTV.com is delivered through an interactive format in which the consumer can tune in to broadcast-quality live and pre-recorded streaming television, interact through live events, respond to synchronized and targeted advertisements, engage in e-commerce transactions, browse links on the Web, and participate in BabyTV.com's community features, without ever leaving the integrated broadcast platform.

BabyUniverse clearly has the business model figured out. In fact, they have already started syndicating content to of all companies, Amazon.com.

Commenting on the agreement, John Textor, Chairman and CEO of BabyUniverse, stated, "We are extremely pleased to announce Amazon as the first significant strategic relationship designed to support our long- communicated plan to transform BabyUniverse from a pure e-commerce company into a balanced content, commerce and new media concern. With an audience of more than 60 million active customer accounts, Amazon presents an opportunity for national brand prominence for our PoshCravings.com and ePregnancy.com content properties.

Is BabyUniverse stock a buy at $7?

Beyond saying that there is risk in any investment, I'd say POSH is a BUY. The market cap is $40 million and the company has trailing twelve month revenues of $35 million vs $24 million in 2005, $14 million in 2004, and $8 million in 2003. They are adding about $10 million in incremental revenue per year which is fantastic, steady, and predictable.

All else aside, the price is right at $7 and I'd say the going gets better for BabyUniverse. This baby has legs. Hit me baby one more time!

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