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Adieu, eToys

It may not have had the Sock Puppet dog, but for awhile doomed online toy e-tailer eToys was one of the great branding successes of the early Internet commercial era.

It was a short-lived phase, however, and ultimately meaningless, at least as far investors are concerned. For just 16 months after eToys fever hit its peak - with shares trading as high as $86 in October 1999 - the company announced on Monday it will lay off its remaining 293 employees by April 6, shortly after it is due to run out of cash. Shares of ETYS closed Monday at 28 cents.

Now, if you happen to be one of the people who bought ETYS at 3 cents last Dec. 19, this is still a feel-good story. But for the rest of us, the demise of eToys serves as a painful reminder that even when a company appears to be doing everything right, there's no guarantee it can survive, never mind become profitable.

Early in 1999, as overall online holiday shopping totals exceeded wildest expectations, eToys was one of the stars, topping all other Internet toy merchants in sales volume. While many analysts say eToys' emergence was due in large part to the bumbling initial online efforts by the likes of Toys 'R' Us, the company and its investors entered the 1999 Christmas season with momentum and optimism.

Then, amid reports of fulfillment problems and continued reported losses, eToys shares began to melt down, months before the bubble burst on Internet stocks in March 2000. From its all-time high price of $86 on Oct. 11, ETYS finished 1999 at $26.25.

While any number of reasons could explain eToys' ultimate fate, there really were three driving forces - all beyond the company's control:

1) Pricing pressures. Like nearly every other Internet retailer, eToys was forced to work with narrow, and even negative, margins in order to drive traffic and retain customers. Other money-drains such as free shipping and special discounts contributed to make profitability a distant dream.

2) Low barriers to entry for heavyweight bricks 'n' mortar competitors. Never mind the other pure e-tailers such as SmarterKids.com and Toysmart, or even Amazon.com - eToys was finished when retail giants such as Toys 'R' Us and Wal-Mart entered the picture. It didn't matter if these companies botched their online efforts because the battle then became a war of attrition. Guess who's still standing?

3) Lack of customer loyalty. Complaints about fulfillment aside (and all e-tailers received them), eToys designed a user-friendly Web site that put much of its competition to shame. By early 1999 it had positioned itself as one of the most recognizable e-tail brands in the country. But branding isn't enough to attract and keep customers who are motivated by selection and price, especially when the brand in question has shallow roots.

Even when eToys announced in December that Q4 sales would be woefully short of estimates and that it had retained Goldman Sachs to "explore strategic alternatives," I privately held out faint hopes that something of value could be salvaged from this noble failure. Now I guess it really is time to let go.