Will Selling Slashdot and SourceForge save Geeknet?

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For myself and a lot of nerds out there, Geeknet's (NASDAQ: GKNT) popular ThinkGeek online store is a dream come true. What self-respecting Star Wars fan didn't see the Tauntaun sleeping bag originally announced as an April Fool's joke and wish it was real? (It is now.)

Other whimsical items on the site include cans of what's purported to be unicorn meat, binary clocks and Star Trek cookie cutters, among other things. It's the Spencer Gifts of the digerati. As cool as the items on ThinkGeek are, it hasn't translated into profit for its parent company.

In addition to ThinkGeek, Geeknet also runs the tech news site and online geek watering hole Slashdot, as well as SourceForge, where many open source projects make their home on the Web. Or at least it did. Dice Holdings (NYSE: DHX) has just announced that it's buying those sites, as well as Freecode, another Geeknet property, for $20 million, the amount of revenue Dice said the sites generated last year. Dice posted a profit of $34.10 million or $0.52 per share last year.

Geeknet will concentrate on ThinkGeek now that these sites are changing hands, but it's going to have a tough time.

Geeknet has posted a loss for every year since 2008, but did post a profit last quarter of $1.61 million. There are two main reasons for the losses. First, ThinkGeek's sales are highly seasonal, usually around the end of the year, during the holiday season. Also, all that cool merchandise costs money to produce. They don't let you license Star Wars and Star Trek for free, after all. Geeknet's sales last year totaled $119.47 million. Their cost of goods sold alone was $86.34 million. Take out the selling, general and administrative expenses, the R&D costs and the depreciation and amortization and you can see how Geeknet runs into trouble year after year.

Geeknet allowed itself to be outflanked by upstarts to its major online properties. First, Slashdot was overtaken by sites like Digg, Reddit and Hacker News in the tech news and gossip space, and GitHub took over SourceForge's open source project hosting crown by offering seamless integration with the Git version control tool, making collaboration easy for programmers.

With the departure of these sites and the greater focus on ThinkGeek's merchandise, Geeknet is essentially a toy company now, so how does it stack up against its rivals? It's not much for Hasbro (NASDAQ: HAS) and Jakks Pacific (NASDAQ: JAKK). Both these companies posted profits of $387.42 million and $8.4 million, respectively, last year.

These companies have done so despite having the same problems as ThinkGeek: seasonal merchandise and high costs, including licensing major entertainment properties for their toys. Both of these companies can stock retail stores extensively, in order to get kids to beg their parents for the toys they promised to buy their kids but the stores were out of during the holidays. (See Robert Cialdini's book Influence: The Psychology of Persuasion to see how the toy companies have this market strategy down pat.)

Hasbro's had sales of $4.2 billion last year with a COGS of $2.0 billion, roughly half its sales. Jakks Pacific had sales of $677.75 million with a COGS of $457.83 million, which is pretty high but the company is still keeping its head above water. Compare that to Geeknet's costs mentioned earlier in the post. This numbers show how capital-intensive the toy business is.

ThinkGeek, by contrast, deals exclusively online, which makes sense, given that's where the geeks they're trying to sell to are. If they could expand into physical retail, they could attract some more impulse buys from kids young and old. But that would also mean more costs, something the company just can't afford.

As great as its products are, with the high costs, you have to wonder if Geeknet sold the right properties, or if it just sold its birthright for a very expensive bowl of soup licensed from George Lucas.


Fool blogger David Delony has no positions in the stocks mentioned above. The Motley Fool owns shares of Hasbro. Motley Fool newsletter services recommend Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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