Now! bears here comes the Fool! Yeah right!!
Do you know that William's core holdings are decided by their advice? Their right wing Internet diatribe makes Lenin look like a capitalist!
F#$k these grammer school lay-abouts!
>>The Dow vs. TheStreet
The Motley Fool - August 09, 1999 17:43
August 09,
1999/FOOLWIRE/ -- It was hardly surprising this weekend to see Barron's
curmudgeon columnist Alan Abelson declare with all seriousness that "we
can't see anybody making real money out of the Internet -- except by selling
stock." I mean, that's been his mantra since America Online (NYSE: AOL) was
still in diapers, back, oh, six years ago, long before the online behemoth
sported a market capitalization 20x that of Abelson's century-old employer
Dow Jones & Co. (NYSE: DJ).
It also wasn't surprising to see Abelson describe James Cramer of
TheStreet.com (Nasdaq: TSCM) as "the logorrheic proprietor of an online
financial rag." After all, Cramer has feuded with Dow Jones and Abelson
plenty in the past. And truth be told, Abelson is understandably jealous of
anyone who can afford to be even more logorrheic than he is. Fact is, Dow
Jones may buy ink by the barrel, allowing Abelson to indulge his dot.bomb
habit, but TheStreet doesn't have to.
And that's what I want to talk about today. While you hear a lot about the
potential competitive advantages enjoyed by Internet e-tailers relative to
brick 'n' mortar retailers, the comparison is potentially even more apt for
purely information-based businesses like, say, financial journalism. For
example, the attractive cash flow dynamics of Amazon.com (Nasdaq: AMZN)
follow from the fact that a customer pays for an order at the time of
purchase, but Amazon itself doesn't pay its suppliers until a month or so
after it ships the product to the customer. That lag time creates a cash
"float" that essentially means suppliers pay for Amazon's working capital
needs.
OK, Internet investors should know this backwards and forwards by now. Part
of the recent anxiety about Amazon, in fact, is that this once mostly
"virtual" company with very light inventories is now building massive new
distribution centers and taking on increasing amounts of inventory to turn
around customer orders more quickly. Yet, assuming Amazon's customer order
tracking system is as good as billed, the company should still manage to
operate with much lighter inventories and capital expenses than your average
retailer. Thus, it should also be more profitable, even with fairly modest
net margins. But there's no arguing with the fact that Amazon is laying some
serious brick 'n' mortar as a foundation to its virtual empire.
Compare Amazon with a financial rag, offline or on. First, both a Barron's
and Street.com rely a lot on subscription sales, usually annual
subscriptions. Barron's now runs $145 per year while TheStreet is $99.95.
Imagine how sweet this is for the publisher. You, the reader, are paying
these guys -- in full -- months before they're going to satisfy their end of
the bargain. That creates an inherently appealing cash flow dynamic, one
that's potentially much more attractive than Amazon's since, at best, that
online merchant gets to play around with your cash for 45 days before it
must pay the book man.
But traditional newspaper and magazine publishers screw up this
theoretically sublime business model. Their entire distribution system is
designed around massive cash suckage. Can you say printing presses? Can you
say fish wrap, eh, newsprint? Can you say distribution centers, postage,
delivery boy? Let's assume that Abelson is creating phenomenal value for Dow
Jones. Investors love his mellifluous prose, his hauteur, his money-making
insights. But the process of getting his deep thoughts into the hands of
consumers is one now ruled by relatively expensive middle persons all
dipping their hands into the coffers.
Say what you will about TheStreet, but it just doesn't have the same
problem. And it probably never will. Think of the company (and other
Web-centric upstarts) as a financial news e-tailer, but one that doesn't
need to spend hundreds of millions of dollars on distribution infrastructure
the way either Amazon or Dow Jones currently must. Make no mistake, news
organizations that can build their franchises on the Web's open system
without simultaneously being weighed down by a capital-intensive offline
empire of brick 'n' mortar printing presses or proprietary networks have a
long-term competitive advantage over their old world counterparts, no matter
how well-branded.
Let's take a closer look at Dow Jones. The company is now divided into three
operating units. Its print publishing division includes The Wall Street
Journal, Barron's, Smart Money -- owned jointly with Hearst (NYSE: HTV) --
and television revenues from a U.S. news licensing deal with General
Electric's (NYSE: GE) CNBC. This unit accounted for 63.5% of revenues for
the first six months of FY99. Next, there's the electronic publishing unit,
which includes the mainstay Dow Jones Newswires (52% of this division's
sales), Dow Jones Interactive Publishing (Dow Jones Interactive, WSJ
Interactive Edition, and Dow Jones radio), and fees from licensing the Dow
brand for stock indexes. This division generated 20.2% of revenues
year-to-date. Finally, there's the Ottaway Newspapers, which operates 19
community newspapers. It's accounted for 16.3% of FY99 revenues.
Dow Jones has done a good job of taking its core products onto the Web. For
instance, subscriptions to the online edition of the Journal have soared,
increasing from 50,000 at the end of 1996, to 172,000 at the end of 1997, to
266,000 at the end of 1998, to more than 304,000 today. That's despite a
November 1998 price hike from $49 a year to $59. Dow Jones has also been
pushing corporate sales of Dow Jones Interactive, which provides customers
with now mostly Web-based access to a news library of over 6,000
publications, including the WSJ, the 50 largest U.S. newspapers, top
business magazines, and 1,500 non-U.S. sources. In FY98, the number of users
swelled 56% to 600,000.
The growth in online distribution helps compensate for and even explain the
fact that circulation of the print Journal has stalled in recent years, even
puttering for a 1.6% loss last year to 1.77 million. Meanwhile, the
circulation of Barron's has been equally sclerotic, simply holding steady
around last year's 296,000. Both publications have seen a recent pickup in
readers, but the broader trend suggests these gains should be viewed with
caution. Meanwhile, the Journal's advertising rates have increased slightly
but ad linage has gyrated with market sentiment, rising 6.9% year-to-date
after declining 1.1% for all of FY98 due to a terrible second half.
Frankly, Dow Jones shareowners should be heartened by what looks like a
consumer transition from print news sources to Web news sources.
Unfortunately, as the above stats attest, roughly 80% of Dow Jones' revenues
comes from print publications. That's why Dow consumed a stunning 278,000
metric tons of newsprint last year. That's why year-to-date, newsprint and
delivery expenses have run $133.1 million (13.7% of sales) despite a drop in
the price of newsprint. Last year, Dow Jones spent $278.8 million on
newsprint, second class postage and carrier delivery. In terms of the
company's main product (news, data, and commentary), these are necessary but
relatively unproductive expenses.
Still, operating expenses only begin to tell the story. Consider that Dow
Jones is now in the middle of a three-year plan to expand the Journal's
print capacity from 80 pages to 96 per edition and to boost color capacity
from 8 pages to 24 pages. Total cost: an unbelievable $232 million! Now,
this investment is no doubt expected to boost ad revenues both on a linage
and rate basis -- assuming advertiser demand remains strong. Yet, a
Web-centric company could increase its daily page output and colors while
spending just about nothing on new equipment. Moreover, a company that can
avoid such expenses also reduces the risk that such capital expenditures
won't pay off.
This is not an immaterial concern. In Q4 1998, Dow Jones took a $17.3
million charge related mainly to the write-off of its Global News Management
System. The company started building this system in 1993 with hopes it would
"provide state-of-the-art electronic news writing and editing to support the
company's print publishing operations." Unfortunately, the system never
worked as planned. So while Dow Jones implements a new off-the-shelf
technology solution, it has transferred staffers back to the old system.
Money wasted.
Of course, this doesn't compare to what happened with Telerate, the
real-time data provider that Dow Jones acquired for around $1.6 billion
earlier this decade. Telerate offered a proprietary system that Dow Jones
thought it could use to compete against Bloomberg in serving the information
needs of professional traders. After years of getting slaughtered by
Bloomberg, though, Dow Jones, in 1997, decided to take a $979.5 million
restructuring charge, mostly to write down the value of Telerate. Dow
finally sold Telerate to Bridge Information Systems last year for $360
million in cash plus $150 million in convertible preferred stock. It booked
an additional $150.3 million loss on this sale, making Telerate a $1 billion
plus disaster. That makes losses at most Internet companies look trivial.
Given such massive destruction of shareowner value, it's no surprise that
Dow Jones stockholders have suffered through a decade in which the stock
(unadjusted for reinvested dividends) has produced a truly dismal 2.5%
compound annual gain. Thankfully for those shareowners, Dow Jones appears to
be managing its business a little better now, based on recently reported Q2
earnings.
Still, in comparing the giant Dow Jones to the upstart Street.com, I'm
struck by a couple of things. First, TheStreet exhibits ambitions of being a
global financial news provider, meaning it will probably tackle every medium
in time. For example, it recently launched a weekly television show in
association with News Corp.'s (NYSE: NWS) Fox News. Still, as a Web-centric
operation, it doesn't suffer from the baggage of print or TV operations.
It's a content company, pure and simple. And its losses to date have been
completely understandable, related to brand-building and a ramp in staffing.
Though its varied electronic distribution costs gets buried in lines like
sales and marketing, I don't think it's ever going to lose 14% of its
revenues to unproductive print distribution costs.
Second, because of its light Web-distribution model, TheStreet is not likely
to incur huge capital expenditures for equipment and operations, some of
which don't pan out as planned. Even granting the David and Goliath nature
of this comparison, one stat sums this up. At the end of March, Dow Jones'
plant and property assets net of amortization amounted to $629.1 million.
That's more than 400 times TheStreet's measly $1.5 million in net plant and
property at the end of June. If you understand that such hard assets are
actually liabilities of a sort, then you understand why it's amusing to see
Abelson's repeated diatribes against Internet companies.
by Louis Corrigan
For complete market coverage written by investors, for investors, click over
to www.fool.com.<< |
