HandHeld hopes buys spell profits

A San Francisco maker of portable digital video players has high hopes that several acquisitions of user-created video Web sites will propel it into a profitable 2007, while analysts remain skeptical of the business model.

HandHeld Entertainment Inc. (ZVUE) executives announced last week the firm had purchased FunMansion.com, a Florida company that specializes in humorous and work-safe videos submitted by its users, akin to a smaller YouTube. HandHeld bought a similar site, Dorks.com, earlier this autumn. The buys take them to “potentially 2.5 million unique visitors per month,” HandHeld said in a release.

They also show that the firm is diversifying after it decided to pull back from making higher-end versions of its flagship products, a $99 portable video player that competes with the more expensive Apple Computer Inc. (AAPL) iPod video and the Microsoft Corp. (MSFT) Zune. HandHeld makes money from sales of its players, from for-pay downloads at its store www.zvue.com and through advertising on its content. It has not yet been profitable, but executives said that could change in 2007.

“One of the things that a small company has to do to survive is adapt … to changing market conditions,” HandHeld CEO Jeff Oscodar said of the decision to drop the higher-end models, arguing that it didn’t make sense to compete with the two heavyweights.

Instead, he said he hopes the firm will benefit from increased advertising about video players by the bigger firms: “It also educates the market that ‘Yes, this is something we might like.’”

HandHeld decided in November to cut back its own advertising, relying entirely on in-store advertising at the Wal-Mart Stores Inc. (WMT) locations where the video player is available. HandHeld also decided to scuttle some 40 percent of its workforce and operating expenses, and outsource future video-player development.

Some analysts expressed skepticism about the firm’s prospects,citing less demand for video than music and a lack of variety of content compared to what other video players offer — albeit for more money.

“Given what is a really aggressive price point, it hasn’t shown as a really high-selling item, because the video quality is low,” said Robert Enderle of the Enderle Group. “The low end of the market, typically you’re on razor-thin margins, you don’t have a lot of money for marketing. It’s hard to build and sustain a market like that.”

Tim Bajarin, principal analyst of Creative Strategies, said that while he believes the buys are important because they allow for more content, HandHeld will need to go further and have more recognizable offerings.

HandHeld does offer SonyBMG music videos on its Web store, Oscodar said.

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