BROADCAST.COM: AN IPO WAITING FOR BANDWIDTH
from RedHerring
redherring.com
"AudioNet" sounded so old media, as if the chaps behind
the company were turning the crank on the Victrola while
fiddling with the connection on their T-1 line.
But the newly renamed Broadcast.com has caught up
with the 21st century, having filed with the SEC for an
initial public offering worth as much as $35 million. In its
prospectus, the company owns up to a big problem: Its
business model assumes that the bandwidth problem will
be solved sooner rather than later. But in a market where
even K-Tel can rocket buoyed by Wall Street's lust for
the hip convergence of music and the Net, investors are
likely eat this IPO up.
Branching out
Founders Todd Wagner and Mark Cuban started
AudioNet in 1995 as a sort of radio station for the
Internet. The company has since branched out into music
retailing and broadcast video, and now offers
programming 24 hours a day from more than 310 radio
stations and 17 television stations and cable networks.
The company licenses programming from content
sources, in most cases under exclusive, multiyear
agreements.
According to its prospectus, Broadcast.com is the
leading Internet broadcaster of radio programming, and
has relationships with radio stations and networks which
provide it with content from 18 of the nation's top 20
radio markets.
Aside from broadcasting live events -- including the last
three Super Bowls -- Broadcast.com plans to expand
into conference calls, annual company meetings, and
other business-related events. Other business services
include the turnkey production of press conferences,
investor conferences, trade shows, product
introductions, training sessions, and distance learning
courses.
Although the market for Internet broadcasting is clearly
growing, the speed of today's modems and Internet
connections still do not allow smooth transmission of
broadcasts to most desktops, and this remains one of the
major hurdles to Broadcast.com -- and one it can't
control.
Losing money, like everyone else
Even though it seems well-positioned to take advantage
of market opportunities in the future, Broadcast.com
must still persuade investors it's worth taking a chance on
now. As an Internet IPO, that probably won't take much
work.
"I would expect this offering to be oversubscribed and
[the price range] raised," predicts Francis Gaskins, editor
of Gaskins IPO Desktop.
Although the company is losing money -- like most
Internet plays -- it's showing a nice ramp in its business.
The company currently derives revenues from the sale of
advertising on its Web sites, as well as sales generated
through its business services unit. According to Media
Metrix, the company's sites served a daily average of
over 400,000 unique users in March 1998, and its
principal web site was ranked in the top 20 among all
news, information, and entertainment sites. And for the
quarter ending March 31, Broadcast.com reported
revenues of $3.2 million, up almost threefold from the
$1.1 million a year ago.
However, losses for the quarter reached $2.7 million,
which were also up significantly from a $1.1 million loss a
year earlier. The widening loss is attributed to the
company's expansion of its broadcast services. Mr.
Gaskins notes that with a recent (and apparently
sustainable) 60 percent gross margin, and despite an
accumulated deficit of $12.5 million -- which he says is
becoming pocket change for developing Internet brand
names -- before the offering, the company still has a
positive net worth of $28 million. "Not bad for a
two-and-a-half-year-old, development-stage company,"
concludes Mr. Gaskins.
Sharing the wealth
Money follows a good idea, and Broadcast.com is no
exception. Mr. Wagner and Mr. Cuban still hold a
majority 52 percent stake, but other major investors
include Motorola (MOT), which owns 16 percent before
the IPO, and Intel (INTC) with a 6 percent stake.
Morgan Stanley is the lead underwriter.
And while its critics point to the competitive landscape
for online content providers -- which includes such IPO
notables as Sportsline USA (SPLN) and RealNetworks
(RNWK), Mr. Gaskins notes that because
Broadcast.com is in the process of building an enormous
archived library, it is creating a major barrier to
competition, like the entertainment libraries of Hollywood
studios.
The final analysis, according to Mr. Gaskins: "This is a
one big long-term winner."
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