Good, objective article on TMCS.
City searching
Cyberstock Investor Report 11/05/99 7:30 PM
By Matt Ragas
Ragas Speaks for the Week
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While the Web has largely been hailed as a global medium to date, it also holds the potential of becoming equally as important on the local level. Perhaps even more so. Beyond the buzz of vertical destination sites, e-commerce, community sites, and portals, the Web of the future for the average Netizen will be largely delivered as a local experience. Think about it: almost everything, be it commerce or community, filters back down to the local level for completion, face-to-face interaction, or order fulfillment. In addition, while Web users have happily formed thousands of their own cyberspace communities, when all is said and done, these same users log off the Net and rejoin their local offline communities. Therefore, as we enter a period of increased globalization, I believe people will care more, not less, about their local communities in the future. Quite simply, local offline communities help give people a unique geographic identity. Inside this long-term trend lies immense opportunity.
Some Net architect will end up building the digital bridge that connects these two disparate worlds. It's just a question of whom. Think of this offline and online bridge as the power of "clicks and mortar" integration times ten. The Web platform that holds the key ends up in a lucrative and crucial position indeed. Thus, providing real-time information on local sports teams, local news, restaurant reviews, directions to neighborhood businesses, and a smorgasbord of other local content is what will truly make the Web a vital everyday tool for consumers. Yet so far, this hasn't happened. Print newspapers and the evening news still reign supreme on the local city level across the country, not the Web. In my opinion, portals will therefore have to move simply beyond offering creative community building tools and personalized start pages to make this opportunity a reality.
None of this "localized Web" talk is new to the ears of Ticketmaster Online-CitySearch (TMCS) CEO Charles Conn. CitySearch has long toiled away at trying to execute on this vision and build a national city guide network. In fact, Conn has been saying for years that roughly 90% of people's time and money is spent within 10 to 15 miles of their own homes. Makes sense. Perhaps Wall Street is finally warming up to the idea of a localized Web, as well as the smashing IPO debut Friday of e-grocer Webvan (WBVN) and the IPO of fledgling events ticketing player Tickets.com (TIXX) earlier this week.
However, you sure wouldn't know this by looking at CitySearch's stock price. The company's stock is down roughly 40% from its peak of 41 3/4 in mid-March. As of Friday's closing price of 22 3/8, CitySearch now sports a market cap of roughly $1.67 billion. Thus, Conn has to be shaking his head in bewilderment at Webvan's $8 billion valuation after its IPO today. After all, Webvan's current nationwide reach (a grand total of two markets) pales in comparison to the vast localized reach of CitySearch. In addition, I believe CitySearch, not Webvan, is currently best positioned to become the local e-commerce platform of the future. I decided it was time to take an in-depth look under the hood at Conn's localized Web "work in progress."
TMCS: the pros
Becoming the dominant local platform play. First of all, CitySearch drastically increased its long-term attractiveness this summer when it snagged Microsoft (MSFT) as a partner. Conn, as well as CitySearch's shareholders, must be relieved to have Microsoft out of the picture as a direct competitor. No one enjoys having to battle America Online (AOL) and Microsoft simultaneously. In July, Microsoft announced that it would sell its Sidewalk city guides to CitySearch for $280 million. The deal immediately increased the company's reach from 33 to 77 cities. This combination gives CitySearch a larger national presence than even AOL, which currently operates local guides in 60 markets.
As part of the deal, Microsoft also acquired a 9% stake in Ticketmaster CitySearch, with warrants to increase this position to 13%. In addition, CitySearch gained valuable distribution on the local channel of Microsoft's MSN, as well as WebTV. The move makes sense for both companies, as CitySearch looks to increase its nationwide footprint and Microsoft focuses more on developing its localized buying guides instead. The downside to this deal is that I don't see it speeding up CitySearch's quest for profitability. Published reports estimated that Sidewalk has burned through over $200 million since its initial launch. When software giant Microsoft bails out of a market, you know it's a tough one to crack. However, I have yet to see Microsoft become successful at any media-related venture; it's simply not what they do. Destroying competitors in the software space is much more their forte.
Whittling down the competition. With Microsoft out of the picture, CitySearch's main competition now comes in the form of online giant America Online. AOL announced plans in October to increase its total number of city guides from 60 markets to over 200 by next spring. If AOL's promises hold true, this would thrust AOL well ahead of CitySearch for at least the time being in the city guide battle. However, it remains to be seen if AOL can actually adhere to this rigorous launch schedule. In addition, CitySearch will continue to have to battle local sites from traditional print media companies. The most aggressive traditional media competitors to date have been Cox Interactive Media and Knight Ridder's (KRI) Real Cities network. Wisely, CitySearch has partnered with established media players such as the Washington Post Company (WPO) and Times Mirror in many local markets instead of taking these entrenched publishers head-on.
Portals such as Infospace (INSP) and Yahoo! (YHOO) have also dabbled in the city guide game, but without any local editorial presence, the guides are little more than a souped-up collection of Web links. Finally, CitySearch appears poised to face enhanced competition from longtime rival Zip2, formerly an operating division of AltaVista, which was acquired by CMGI's (CMGI) MyWay.com portal earlier this week. Regardless, with Microsoft retreating from the city guide business and none of the top portals willing to burn millions to establish a true local footprint, CitySearch's persistence and national reach has now emerged as a true barrier to entry for would-be competitors. Thus, at this point, the city guide space is left as only a two-horse race between CitySearch and AOL. In this case, I give the advantage to CitySearch, not AOL, because CitySearch has the ability to leverage transactional traffic from Ticketmaster Online to its other local content components. Therefore, it's not surprising that AOL went out earlier this year and scooped up movie listing site and ticketing service Moviefone.
Diversified revenue streams. While most city guide sites largely rely on a small pool of advertising and sponsorship dollars, CitySearch has developed a variety of alternate revenue streams. Through its merger with Ticketmaster Online last summer, the company has emerged as a transactional driven player in the online city guide space. While over 60% of last quarter's revenue were generated by Ticketmaster Online's ticket sales, the company also rakes in fees from its local auction site, CityAuction, and for hosting local small business sites. Through the acquisitions of dating sites Match.com and the One & Only Network earlier this summer, the company is also able to harvest a variety of monthly subscription fees. Together, this wide range of revenue streams positions CitySearch well ahead of its local city guide competition in monetizing its user base. In fact, advertising and sponsorships generated only 7% of the company's sales last quarter.
TMCS: the cons
The Diller stigma. I have to imagine that a certain amount of CitySearch's slide has to do with the fact that Barry Diller's USA Network is the company's majority owner. On the face of it, having a traditional media partner like a USA Network, should be a large plus for CitySearch. After all, USA's ownership of USA Network, Home Shopping Network, and the Sci-Fi channel present CitySearch with a number of cross-promotional opportunities. However, so far I have seen little signs of Diller successfully being able to promote his various broadcast and Internet properties in any sort of coherent fashion. On the plus side, Diller's decision to merge his Ticketmaster Online operations with CitySearch last summer helped provide the much-needed rocket fuel in the form of online ticket sales, and also masked the lackluster revenue performance of CitySearch as a stand-alone firm.
Regardless, in the eyes of some, CitySearch is clearly viewed as a cyber-plaything of the longtime media mogul. Some shareholders are invariably still leery from Diller's failed plan in February to merge Ticketmaster Online-City Search into his own Home Shopping Network and Lycos (LCOS). Non-USA Network shareholders of CitySearch would have received only 8.5% of the combined new firm. While Charles Conn may call the shots on a day-to-day basis, Diller clearly controls the long-term direction of CitySearch. The plus side of this failed deal is that CitySearch was able to negotiate its own distribution deal with Lycos, but in the end, the possibility that Diller deals CitySearch into whatever next great Web scheme he hatches is certainly a real possibility. Thus, CitySearch shareholders in effect have little to no control over their own destiny, and instead are betting primarily on Diller's deal-making ability and savvy.
Slogging through the accumulated losses. In many ways, CitySearch seems to be suffering through a case of Amazon-itis. Losses continue to mount while revenue growth is slowing. The natives are getting restless. Even for a true Internet stock believer, it becomes tough to see through the sea of red at some point. Through the end of September, CitySearch racked up an accumulated deficit of over $88 million. That's certainly not peanuts, and is something the company will continue to struggle with in the near term.
One way to look at this land grab among Internet companies in cyberspace, among their growing mountains of losses, is to view the current environment as the Net equivalent of the Cold War arms race. Those Net companies who can amass the largest nuclear arsenal, be it venture capital funding, or in this case national footprint, will scare off the advances of potential competitors. Thus, while CitySearch has been bloodied with losses throughout its history, this persistence and staying power will pay off immensely in the end.
Slowing revenue growth. The more disconcerting factor for growth-conscious Net investors is that CitySearch showed sequential revenue growth of only 7.5% on sales of $27.4 million last quarter. Keep in mind that even e-tail giant Amazon.com (AMZN), working off of a much larger total revenue base of $356 million, was able to show a 13% sequential increase in sales. That being said, I believe Net investors wouldn't have nearly as much trouble swallowing the company's EBITDA loss of $13 million last quarter and mounting total losses if they could see more signs of revenue drivers at work on the horizon. Clearly, the vast array of newly minted Internet stocks have given Net investors a huge buffet of fast-growing Net companies to pick from. While I agree with CitySearch's decision to continue to plow additional capital into launching new city guides, it becomes difficult for the average cyberstock investor to sit and patiently wait for this company's transformation into a profitable local network.
In addition, even after its 40% skid in share price, CitySearch still looks richly valued compared to its peers on an eyeball valuation basis. Based on Media Metrix's (MMXI) Top 50 Web site projections, #27 CitySearch attracted 4.91 million unique visitors to its sites for the month of September. This equates to a price per eyeball of roughly $360 based on CitySearch's current market cap of 1.67 billion. By comparison, Media Metrix's #28 ranked site, Sportsline (SPLN), checks in with a unique visitor value of approximately $190 for September. Even top five portal site Lycos shows a unique eyeball value for September of under $200. The flip side to this valuation argument is that CitySearch, largely through its Ticketmaster Online operations, has done a better job at monetizing its eyeballs so far. For example, CitySearch racked up revenue per user of roughly $5.50 last quarter, compared to only $3.27 per user for comparable site Sportsline. It remains to be seen how large CitySearch's audience reach is increased when Sidewalk's traffic is combined into CitySearch's existing numbers.
Looking to the future
While revenue grew 141% annually last quarter, slowing sequential sales growth continues to be a sore spot with investors. In addition, some investors are obviously feeling skittish with the increased competition Ticketmaster Online will face from the newly public Tickets.com. The looming threat of AOL pulling away from the online city guide pack and dominating the local Net space also is a possibility, although I believe these chances are very slim. So far, I still believe that Conn has his troops plodding in the right direction by continuing to expand his national footprint. The bigger CitySearch gets, the harder it becomes for any traditional media company or portal to seriously pose a real threat on a national scale. Key distribution deals with MSN and Lycos will only help further aid in Conn's crusade for localized Web domination.
I also believe chances are good that Diller will leave his hands off of CitySearch for the time being after the botched Lycos deal. The next great growth area for CitySearch is to take its local content and wrap numerous local commerce opportunities around it. Thus, I expect CitySearch to roll out a variety of practical tools for consumers, such as scheduling and reservation engines for reserving restaurants, and signing up for local events and participatory sports, in the coming months. These reservation engines are yet another way for CitySearch's site to become further ingrained in the everyday lives of individuals. In addition, I believe the next most logical step for CitySearch is to enter the e-grocer and e-delivery business through a partnership, investment, or acquisition. I'm not kidding. I truly believe CitySearch has a leg up on the likes of Webvan, Homegrocer, Peapod (PPOD), and other e-grocer contenders. CitySearch has the existing localized traffic and user base that all of these other e-grocers lust for.
As I mentioned previously, I believe CitySearch is uniquely positioned to serve as an invaluable conduit and platform for conducting commerce on the local level. After all, CitySearch currently provides an ideal funnel of localized traffic on the front end to be paired with a local e-commerce delivery service on the back end. Keep the faith, Mr. Conn. As the e-grocer craze continues to heat up, Web investors, as well as e-grocers, will eventually realize the true value of the local platform you've built. In the meantime, there are still many paths in the localized Web space to be blazed. One can only hope that hyper-dealmaker Diller does not deal off your local platform for a fire sale price in the meantime.
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