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Shopping.com is the fourth largest shopping site on the Internet and the best comparison shopping engine.  Yet the company stated in its IPO road show that only about 18% of Internet shoppers have used a comparison shopping service.  That has strong implications for a number of companies.  Here are five of them: 


1. Comparison shopping could have a profound impact on the Internet retailing landscape.  Comparison shopping engines don't threaten differentiated retailers with great customer service.  You might well be happy to pay 20% more to buy a digital camera from Amazon if you get peace of mind and great customer service, since you're actually paying for a digital camera plus an insurance policy.  But Internet retailers that compete solely on price or by generating traffic from loss-leaders are threatened by this technology.  They'll face continual margin pressure or loss of revenue, and rising traffic acquisition costs as more companies bid for ads and placement.  Here are two publicly traded companies that I think are at risk: Overstock.com (NASDAQ:OSTK) and ECost (ECST).  Overstock is particularly threatened because its entire value proposition, embodied in the name of the company, is low price; but comparison shopping engines quickly reveal that it's prices are frequently not the lowest.  (I'm now short Overstock.com.)

2. Shopping.com and the other comparison shopping engines will quickly expand their services into other comparison shopping areas.  Shopping.com has specifically mentioned financial services, such as credit cards.  That's bad news for Bankrate.com (NYSE:RATE), which currently leads the market for comparison services for mortgages and deposit rates.  It's good news for Internet-intensive financial services companies, which offer better pricing on financial products because they lack heavy branch networks.  Internet banks, for example, usually top the list of the best rates on deposit accounts and CDs.   The spread of comparison shopping services should therefore boost account growth for Netbank (NTBK) and E*Trade's bank (NYSE:ET) in the medium term.  (I'm long E*Trade.)

3. Shopping.com is a natural acquisition target because it would be hugely more profitable if it had more free, incoming traffic.  That makes it a natural acquisition target for Internet companies with traffic but no (or poor) comparison shopping technology of their own.  The most natural acquirers are Amazon and AOL.  Amazon should purchase Shopping.com because it is pushing to virtualize the sources of its revenue.  It's moving from physical book and CD sales to directing traffic to afflilated stores and third party retailers and generating revenue from paid search.  Think of it this way: Amazon just added A9 search to its main site, despite the risk that doing so will encourage customers to abandon Amazon's site at the point of purchase.  Why would it do that?  Because eBay, Google and Shopping.com have a much more scalable, less capital intensive and more profitable business model than Amazon.  AOL, meanwhile, needs to better monetize its traffic.  Having purchased Advertising.com, a natural follow-up would be to purchase Shopping.com.

4. In the meantime, Shopping.com should boost its own traffic by entering the contextual advertising market.  That would help Shopping.com build a large network of partner sites and guarantee its traffic sources.   I've already written that most analysts underestimate Google's contextual advertising business.  Since Overture has failed to compete with Google in the contextual advertising business, the market needs a second strong player.  Shopping.com should build this organically or buy a company like Quigo.

5. Shopping.com missed an easy opportunity to increase its direct-traffic user base: it should have included the online brokerages in its IPO syndicate.  Between them, Ameritrade, E*Trade, Schwab, Scottrade and TD Waterhouse have about 10 million customers, many of whom are online shoppers.  Shopping.com's directors inexplicably missed a great free advertising opportunity by failing to push Goldman Sachs to include those firms in the syndicate.  Note that Google got this right.

At the time of writing, I own stock in Shopping.com and E*Trade and am short Overstock.com.

NOTE: I'VE MOVED ALL COMMENTARY ON INTERNET STOCKS TO THE INTERNET STOCK BLOG.

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This is the second Seeking Alpha article about Shopping.com; the first is Why the buy-side doesn't understand Shopping.com.  That article includes an explanation of why Shopping.com is currently the best shopping search engine on the Internet, and a discussion of Shopping.com's business model.

Other articles about Internet businesses and stocks at Seeking Alpha include: A lesson in technology and Internet investing from Netflix (NASDAQ:NFLX), Google's future is not what you think, Will Google be forced to re-ignite the browser wars?, Will Tiffany be hit by the Internet?, and Don't confuse Internet stocks with tech stocks.

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Source: Five quick thoughts on Shopping.com (SHOP)