The merger last week of wine.com and wineshopper.com is proof that the e-commerce bubble has burst. A lack of investment and suffocating US legislation has been its undoing. But as Larry Walker reports this might be the best thing to have happened to the companies and their consumers.

The merger of wine.com and wineshopper.com is the beginning of the shakeout of B2C e-tailers selling wine directly to consumers, industry observers say. The two companies were faced with two major factors that led to the merger:

Firstly funding for B2C companies has become difficult since last Spring's selloff of dot.com stocks. And, secondly the level of internet sales of wine seems, at this point, too low to support more than one or two companies.

Mark Swartzberg, who tracks the e-wine sector for Salomon Smith Barney, a New York investment house, said: "This is a consolidation that makes sense. In our view, the US B2C online market will not ultimately support more than one or two leaders focused on wine and, possibly, selected premium spirits sales."

He estimated that the merged company will generate about $40m in sales this year. He said that, for now, B2C wine sales remain a favorable but nominal factor in the US wine market, representing less than 1% of all US retail wine sales.

Swartzberg, said that if online wine merchants reach sales of $1.4 billion by 2005, as he has estimated, "we'd still be surprised to see this market support more than one or two leaders".

The merger reflects what is happening to the overall dot.com segment in the US. A recent report by webmergers.com, noted that of 238 internet startups nationwide, 41 have failed this year, 29 have been sold, often in 'fire sales' and 83 have withdrawn their public offering plans. The main factor is that a number of sites are currently running into brick walls when it comes to the 'B' round of financing or their initial public offerings (IPOs). Webmerger.com is a San Francisco-based firm that provides research and services to buyers and sellers of web properties.

Most industry observers believe the merger will benefit consumers. "Anything they do to make it easier to buy wine on the internet - helping consumers make buying decisions, offering easy-to-use searching capabilities and good prices - is going to make it a more desirable way to purchase wine," Jon Fredrikson, San Francisco wine industry analyst told winetoday.com, an online arm of the New York Times.

Fredrikson said several factors are having an impact on the wine e-commerce sector. "For e-commerce in general, the ground rules are moving toward more traditional business models where controlling costs and producing a profit are expected by investors," Fredrikson said.

Not only has a slower-than-expected transition to the web to buy consumer goods had an impact on the bottom line but wine dot.coms are faced with other challenges - such as a product that is perishable, breakable and highly regulated, Fredrikson said.

"We're not talking about an Amazon.com selling books. It will be decades before the barriers in the states to allow (direct shipping) national sales will come down," Fredrikson said, "In internet terms that is an eternity. It will eventually happen but not that quickly."

However, he does see room for growth in overall market share for the internet sector. "The biggest (negative) impact will be for those companies who are selling wines under $10 - the margins just won't support it," Fredrikson said. "Many of the companies are also selling at retail price levels and for the low-end of the market there just isn't the incentive to buy through the internet."

Juanita Duggan of Wine and Spirits Wholesalers of America (WSWA) said in a statement that the combined company would benefit consumers. "They'll be stronger together than apart," Duggan said. "Customer satisfaction is the ultimate goal here, and I think they will be able to do it better together than if they were separate."

The WSWA is an opponent of direct shipping and in the past has been at odds with wine.com and its predecessor Virtual Vineyards, but Duggan said both companies are committed "to a solution of legal direct sales to consumers. To that end this merger will accomplish that. They are going to adopt the wineshopper fulfillment system and that system is 100% in compliance with state laws and one we helped to develop," she said.

Bill Newlands, president and CEO of wine.com, will serve as CEO of the new company. "We intend to leverage our combined resources, management expertise, and established industry relationships to provide the best customer experience in the online wine space," he said.

"Each company's strengths dovetail beautifully with one another. The new company will combine the best of both into a single category leader that can focus its resources on growing the wine market," said Peter Sisson, founder and CEO of WineShopper.com, who will serve as vice chairman and chief strategy officer of the new company.