FTC Probe Compounds eToys’ Woes

Online toy giant eToys, Inc. disclosed last week that it has become the subject of a Federal Trade Commission (FTC) probe into its business practices.

In a filing with the U.S. Securities and Exchange Commission (SEC), the Santa Monica, California-based company stated that the FTC is conducting its inquiry “to determine compliance with the FTC’s Mail or Telephone Order Merchandise Rule, which regulates the timeliness of the shipment of orders placed by customers.”

Reportedly, the FTC is also interested in how eToys markets video games and software to children, with an emphasis on those products that have mature or higher ratings by the Software Rating Board interactive rating system. A mature rating indicates that a product is suitable for consumers who are at least 17 years old.

The FTC declined to comment, saying only that it does not discuss the agency’s investigations or e-commerce companies.

The Mail Order Rule

In December, the E-Commerce Times reported that a number of e-tail sites appeared to be operating in violation of the Mail Order Rule. Companies that are subject to the 1975 statute include those that engage in traditional sales by mail as well as companies that receive sales orders where “a computer, fax machine or some other similar means is used to transmit an order over telephone lines,” according to an FTC press release.

The FTC release said that the Rule requires companies to notify the consumer if an order cannot be shipped on time. The customer must then be given an opportunity to cancel the sale, although the company can presume that the customer wants the order completed if the customer says nothing after being notified.

If the company cannot meet the revised shipping date, the release said that the Rule requires the consumer to be notified a second time, and unless the consumer expressly consents to the new delay, the company must cancel the order.

The Shape of Things To Come

Many industry analysts indicate that the eToys investigation could be the beginning of a wider probe into the industry.

“Commerce is achieving critical mass, and so consumer needs are [important] for the government,” said David Cooperstein, director of online retail research for Forrester Research.

eToys was dogged by numerous consumer complaints following poor service during the 1999 holiday season. However, company CEO Toby Lenk maintains that 96 percent of orders placed in November and December were shipped on time.

Tough Times for eToys

eToys has traveled a rocky road since its founding in 1997. However, at the end of last year, the company reported a customer base of 1.5 million.

Back in 1997, Lenk said that the ever-growing customer count “underscores the growth of online shopping and the success of eToys’ holiday marketing effort.” However, as sales figures soared and eToys left competitors Toysrus.com and KBKids.com in the dust, the company’s losses piled up.

Now, not unlike other struggling e-tailers, eToys is grappling with its own infrastructure and fulfillment issues. By the end of last month, the company had decided to bring its distribution centers in-house, a move that could trim some of its losses.

That move may keep impatient investors at bay, but the current scuffle with the FTC and the accompanying publicity is likely to add to the company’s already mounting problems. The company has already indicated that any adjustment of its business practices will result in higher operational costs.