From SmartMoney....on CNET
We put together a recipe to screen for strong Internet content providers in the belief that these will rise to the top when investors separate the wheat from the chaff. Filtering through the list for companies with strong balance sheets, low debt and high growth rates, we thinned the field to four. Three of those -- SportsLine USA (SPLN), our esteemed rivals at TheStreet.com (TSCM) and ZDNet (ZDZ) -- were down more than 60% from their highs, quite an attractive value if you believe they will come back. But the fourth, San Francisco-based CNET (CNET), down a mere 42.1% from its high, looks to be the most intriguing.
CNET has taken a different tack from its fellow sites -- or at least it's further along in its development. The technology-news provider visited Shangri La (a.k.a. profitability) for the first two quarters of this year -- posting profits of five cents and seven cents, respectively -- but decided that it didn't want to stay there, at least not yet. On July 1, the first day of its third quarter, CNET announced a $100 million sales and marketing onslaught that is expected to plunge it back into the red for a full year. That day, the stock fell 10.2%, to 51 3/4. A free fall since then took it to 30 5/16 before it recovered to hover around 40.
CNET (CNET)
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CNET offers technology reports and reviews, software downloads, auctions and assorted other services. The marketing campaign, the cost of which is about equal to the company's expected 1999 revenue, is aimed to expand CNET's audience beyond the IT professionals who use it now and make it into the last word on technology -- "in the same way ESPN and MTV have become synonymous with sports and music," according to a company release. About 40% of the money will be spent on TV advertising, 20% on print and the rest on outdoor advertising, radio, online and so on.
Is this just another Internet company that only knows how to spend its way into the red? Not according to the analysts who follow the stock. "We think [the campaign] is going to increase the size of their audience, and if you look at their business over the last year, the raw material of CNET's business is the attention of their audience," says Lanny Baker, an analyst at Salomon Smith Barney. He says CNET could double or triple its revenue if, as he expects, the service's unique monthly visitors increase from eight million to between 12 million and 20 million in the next six to 12 months. He has rated the company a Strong Buy, with a price target of $75.
Indeed, for a company that derives essentially all of its revenue from advertising, the number of "eyeballs" is the metric to watch. According to audience surveyor Media Metrix, CNET is the 17th-most-popular Web property. Were it to have the additional users Baker expects right now, it would rank in the top 10 (Amazon.com (AMZN), for example, had about 12 million unique visitors last month), which could certainly increase its advertising rates -- and revenue.
Forrester Research analyst Lisa Allen takes a cautious, though still fairly optimistic, view of CNET's focus on advertising. "Except for high-end financial information and pornography, content doesn't make any money on the Internet," she says.
But as content providers take to blending content and commerce as the preferred approach to profitability, CNET has been "more aggressive as far as blending the line," through its product search engines and contracts with vendors, which "gives it a better chance at making money," Allen says.
But what's to say that CNET's campaign will post the audience gain that CNET brass hope for and Baker predicts? Nothing. That's where a little bit of a track record comes in handy. "It's a company that has proven itself a profitable company and has made a number of intelligent investments in the past, in both operating expenses as well as external investments," says Friedman, Billings, Ramsey & Co. analyst Robert Martin.
CNET does have more of a history than most e-companies, having started as a technology-television production company in 1995. And since then, it has made a barrage of investments that have pumped up its balance sheet, something which allows it to do things like run $100 million marketing campaigns. Holdings in companies such as Vignette (VIGN), BuyDirect.com (recently purchased by Beyond.com (BYND)) and Snap.com (which is to be folded in with Xoom.com (XMCM) and General Electric's (GE) NBC Internet properties to form NBCi) have given the company a balance sheet stuffed with $320.8 million in marketable securities.
And the company has already begun to look for new ways to get its users to spend money on its sites. Late last year, CNET instituted a lead-generation advertising program, in which users can compare prices on a product from a variety of vendors and go directly to an order form at the preferred vendor's site. According to FBR analyst Martin, because these leads are more specific and more likely to turn into sales, CNET can charge $250 to $500 per thousand leads, as opposed to the $20 per thousand rate for regular, nonspecific ads.
"The lead-generation program has gone over pretty well, and has led the company to increase its estimates two quarters in a row and beat its estimates two quarters in a row," he says. According to Salomon's Baker, the marketing campaign, if it's successful, should allow the company to increase its annual revenue per unique monthly visitor from $9 today to $20 by the end of 2001.
Another company on our short list of content providers, ZDNet, held the title of Biggest Tech Trade Publisher on the Web, but has just lost it to CNET. According to both Martin and Baker, ZDNet -- which is the Internet tracking stock of trade publishing titan Ziff-Davis (ZD) -- was dragged down by its parent's offline, paper trade publications, which led the company to be less aggressive with its Web strategy. According to Media Metrix numbers, CNET passed ZDNet in the number of unique visitors in July. "The Ziff-Davis story should…go down in the annals of the Internet as the first real victory for the Web over a major traditional business," Baker writes in a recent report.
But there's still the question of the viability of advertising-based sites. Can Online Man live by advertising alone, or does he need transaction revenue? According to Baker, it's better to avoid getting mired in running transactional sites and all the difficulties they offer -- dependence on the vendors' competence, for one -- if possible. And according to Martin, CNET has a leg up on other sites because its content, technology news, and what it sells, technology products, are more closely tied than the content and products on, say, a movie or entertainment site. "The primary focus of their media is to sell technology products. It's the natural evolution of media, versus entertainment where there's no specific objective," he says.
Of course, CNET is not a shoo-in as the ESPN of technology media. The marketing campaign could be a flop, or it could fail to attract the deep-pocketed users advertisers want. But if the campaign attracts enough of the right people, CNET could climb into the black. And unlike many rivals, CNET would be making a return visit.
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