Will NBCi Be a Survivor?
Research Director: David Sterman
In hindsight, it's easy to conclude that many dot.com startups run by twentysomethings were bound to fail. Too many of these outfits lacked managerial controls and chased revenue with nary an eye toward profits.
Those dot.com debacles stand out in sharp contrast when viewed against the operating history of a firm like General Electric(NYSE:GE - Quotes, News, Boards) . Jack Welch and his minions have achieved a legendary status by instituting a strong management team in every business they pursue. And wherever GE has gone, they've made money. Which makes the spectacular flameout of NBCi(NASDAQ:NBCI - Quotes, News, Boards) all the more curious.
Earlier this month, the online arm of the peacock network (of which GE owns 40%) announced that its business model was falling apart. An ill-fated scheme to merge the strengths of Web portal snap.com, with the online marketing strengths of xoom.com and the search technology of flyswat.com yielded weak revenues and mammoth losses.
We'll admit that we didn't expect this to happen. Two months ago, we were convinced that NBCi was a sound investment at $20. But this spring, management was guiding the Street that all was going well, and the bullishness management broadcast in April helps to explain why the earnings warning of June was such a shock.
But where does the recent weakness in the stock leave investors? Are things as bad as they look? Or could there be some positive signs among the rubble?
Keep in mind that back in March, Will Lansing, was named as CEO, the third time in a year that the company has had a new boss. That is very un-GE like during the Welch era. But Lansing is a Jack Welch kind of guy.
NBCi hired him from Fingerhut, but before that, he was GE's vice president of corporate development. Perhaps that connection explains his being hired. Perhaps his old boss brought him back into the GE fold as the man to right an otherwise floundering ship.
Earlier this month, when the earnings warning was released, Lansing also announced his plans to dump all of the old disparate brands and re-launch the site under the NBCi brand this fall. That's when the new TV season kicks off. The NBC network plans to run loads of commercials touting the site.
If anything, it seems that NBCi is eager to highlight the brand name value of its GE and NBC parents and not downplay them.
But that subtle steering of the ship has yet to register with investors. In the weeks since the earnings warning and the new strategy was unveiled, the stock has continued to drift down. The stock had a nice bounce on Wednesday, gaining $1.50, but the shares drifted back $1 Thursday to $11.75.
Perhaps the drift can be explained by widespread skepticism that's now directed toward dot coms of all stripes. But it's also possible that the Street is waiting for an answer to what may be NBCi's greatest weakness: Advertising revenues that continue to fall as cash-strapped customers go out of business. Without that advertising, revenue will still be weak, and losses will remain large.
But it's to Lansing's credit that he quickly identified a new strategy: As a public company, you don't have the liberty to tell investors that you need time to make up a new game plan.
But ultimately, everything comes back to GE. That venerable company isn't likely to bail out its Internet unit financially, but it may not need to.
With the stock trading not far above cash, and nearly 90% down from its 52-week high, GE might have been tempted to bite the bullet and take NBCi private. By doing so, GE could have started from scratch, re-built the portal around its vision of a high-speed multimedia world, and then brought it public again in a few years at a much higher valuation.
One small problem: Analysts figure NBCi will lose nearly $400 million between now and the end of next year. GE earned $10.7 billion last year, so the NBCi losses wouldn't take a huge chunk out of the bottom line. But they'd be enough to potentially limit the earnings multiple.
Hiring Lansing as CEO essentially put a Jack Welch disciple in the captain's chair, and that may have been all that was necessary. NBCi still has plenty of cash left and will be around long after many competitors have gone belly up.
NBCi could even use $50 million or $100 million to buy up distressed Web properties on the cheap. Those properties could then receive valuable commercial space on the broadcast network. According to Gruntal & Co.'s Catherine Skelly, the company still has $300 million worth of air time to use on the network.
Bottom Line:
GE probably never seriously considered abandoning NBCi. It's equally unlikely that it will act as a White Knight any time soon. But NBCi now has a boss who learned all about Six Sigma from the master himself, and then got some seasoning running his own firm. Too bad other dot coms can't make the same claim.
individualinvestor.com
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