IS GEOCITIES WORTH THE HYPE?
By Peter D. Henig
Red Herring Online
August 10, 1998
To know GeoCities is to love it, but to know GeoCities' business model is to be skeptical of it.
The Web-page hoster, which has staked its claim to the Internet IPO land-grab largely on its top-10 traffic numbers and its early entry into the "community" space, priced at $17 Monday evening, above the proposed $14-$16 pricing range. Many expect it will be one of the biggest initial public offerings of the summer.
Some Internet IPO skeptics have been wondering aloud, though, under what investment thesis or business model GeoCities is worth the hype.
Whether GeoCities could ever justify a potential market cap of -- big, hard swallow here -- $1 billion or more has spurred yet another debate about Internet valuations. IPO analyst Mark Basham of Standard & Poor's said that S&P will take a much harder look at Internet companies lacking any earnings history.
All this newfound sobriety likely won't dampen the initial hype surrounding GeoCities. But after a time, the Street will have to examine the company's long-term revenue prospects. Its 1997 sales were less than $5 million, yielding losses of $8.6 million. And its run rate for 1998 will be significantly less than the $20 million to $25 million founder David Bohnett predicted in one of many statements later retracted in GeoCities' prospectus.
"That's just what a lot of these IPOs are -- hype," says John Fitzgibbon, editor of the IPO Reporter. "When it comes to market, it's sizzle. But after it prices, then we'll see whether it's steak -- or old, dead cow."
Just what is it?
GeoCities early on became the leading community site. Its 40 themed neighborhoods "allow 2 million member 'homesteaders' to interact with others on their areas of interest," according to the prospectus.
The company says membership has grown from approximately 10,000 in October 1995 to more than 2.1 million now, although the company says it counts member-built Web pages that have gone dormant.
The company claims that homesteaders have created about 17 million pages -- again, a figure that includes dead sites. RelevantKnowledge says the site in June attracted more than 14.8 million unique visitors, and Nielsen I/Pro says it generated over 925 million pageviews in May.
But the company must still translate its impressive traffic numbers into a proven business model with substantial revenue growth. And GeoCities seems to represent Wall Street's limit in backing the hope of future Internet riches.
Investors remain highly enthusiastic for GeoCities despite tiny sales. A brand-new management team is charged with wringing revenues out of advertisers who have largely shunned the mostly unedited personal content -- even though GeoCities' personalized pages drive the site's traffic.
"[GeoCities] is a Web-site 'community' business with an unsettled and greenhorn management team, without an easily explained product or service, in a business with no real barriers to entry, and with no prospects of earning a profit in the foreseeable future -- or maybe ever," said Chris Byron, investment columnist for MSNBC. He called GeoCities an "essentially worthless operation," and noted that lead underwriter Goldman Sachs once demanded that its companies report five straight profitable years before it would handle an IPO. "In those days, an offering like GeoCities would have been literally laughed out of the room," he said.
Steve Harmon, editor of the Internet Stock Report, suggests that "if we apply Infoseek's (SEEK) market value per user of $61 to GeoCities -- which grows faster and has more users -- then that implies a possible GeoCities market cap north of $910 million."
Invest in what you know?
"The reason for GeoCities' appeal is the same reason for Broadcast.com's or Yahoo's appeal," says David Simons, managing director of Digital Video Investments. "It's the half-baked Peter Lynch syndrome that if you like it, chances are others people will like it too. But Peter Lynch said you've also got to do your homework."
And homework reveals cracks in the business model, particularly in the short term. GeoCities' member loyalty is unquestioned. But there seems to be a disconnect between the site's traffic and how it will leverage that traffic into revenue growth.
In March 1998, GeoCities was the seventh-most visited site on the Web. With 14.7 million unique visitors, GeoCities was just behind search engine Lycos and ahead of Infoseek. But even Infoseek, ranked No. 9 on the list, had three times more in revenue ($6.2 million for the March quarter) than GeoCities ($2.17 million).
GeoCities is only now rolling out a comprehensive revenue model, and competition for advertisers is becoming fiercer than it was even a year ago, a factor which led to online community Tripod's acquisition by Lycos (LCOS).
Blinded by the traffic
Matt Ragas, investment columnist for RagingBull.com, prefers to look on the sunny side of GeoCities' neighborhood. "At this early stage of the game, eyeballs are the key and I'm pretty confident their new CEO Thomas Evans, former publisher of U.S. News & World Report, will find a way to monetize all of this traffic," he says. "Be patient -- the multiple revenue streams will develop."
But for now, "selling advertising on user-generated content is a very difficult prospect," says Mark Mooradian, analyst with Jupiter Communications. "Chats are especially a real hard sell. Chat CPMs [cost per thousand pageviews, the online rate charged to advertisers] are very low."
The community paradox
Another problem GeoCities faces: Its own members' attitudes toward commerce.
David Bohnett founded GeoCities in 1994 as a forum for the free expression of ideas, not as a way to make money.
The "homesteaders" who joined Mr. Bohnett's neighborhood were, and largely still are, some of the most critical voices when it comes to the encroachment of business on the Web. Many users joined GeoCities seeking an escape from advertising and commerce.
In 1997, the company had only six advertisers. Now, according to a recent New York Times article, after a reorganization of its sales force, the company says it has more than 100, though its inventory of members' pages are only about 25 percent sold.
Mean what you say
In the same article, Mr. Bohnett said that GeoCities hopes to quadruple revenue from $4.6 million last year "to a range of $20 million to $25 million this year." Stephen L. Hansen, the company's chief financial officer, was also quoted as saying he expected GeoCities to break even next year.
But either the company conducted a sincere reassessment, or both Mr. Bohnett and Mr. Hansen stepped over the line with an upcoming IPO. GeoCities' prospectus backpedals from the Times quotes: "The company disclaims all such statements."
And that's not the only misstep for GeoCities. The company was recently censured by the Federal Trade Commission for selling information about members without their consent or knowledge. The company says it has since changed its user privacy policy and settled the dispute.
These blunders also come at a time when many members are fuming about the company's new "floating watermark," a transparent branding logo which now lives on all user Web pages. Some members have gone so far as to organize a mass exodus until the company removes the logo.
Mr. Bohnett has defended the logo as necessary for branding, and claims that many users actually like the watermark and do not find it an intrusion.
Send lawyers, traffic, and money
GeoCities also has concerns in its newly hired management team and its partnership agreements.
Mr. Evans has a strong track record, having previously served as president and publisher of U.S. News & World Report, the Atlantic Monthly, and Fast Company magazines, all owned by real estate mogul Mort Zuckerman.
But can Mr. Evans leverage his print experience into the online environment, where distribution and partnerships are as important as advertising?
GeoCities hooked up with Yahoo in December: Yahoo links to GeoCities, and offers Yahoo users a chance to become GeoCities members. Yahoo also took a 2.6 percent stake in GeoCities.
The company is associated with several heavy-hitting investors, some of whom have incredible track records in the online space. GeoCities' equity investors include Chase Capital Partners, CMG @Ventures (a division of CMG Information Services (CMGI) which helped start, and then take public, Lycos), Intel (INTC), and Softbank Holdings (which has significant equity stakes in Yahoo, E*Trade (EGRP), and Ziff-Davis (ZD), the technology publishing concern which holds a minority interest in Red Herring Communications).
Before the offering, CMG and Softbank own 37 percent and 36 percent of the company respectively.
"GeoCities does seem to have the big investors," says Francis Gaskins, editor of Gaskins IPO Review. "But right now it's still an open ball game for communities. Competition could easily come from hubs and portals."
"The long term 'community' winner will be the one that executes better, both internally and through outside strategic partnerships," adds Mr. Gaskins. "The key now is whether the new management teams can make it happen in terms of market dominance, team-building and positive cash flow in the foreseeable future."
And how will this uncertainty play out in the IPO market for GeoCities? "Had it come three weeks ago, it would've been a moonshot," forecasts Mr. Fitzgibbon. "Today, it will still be good, but more like a starburst."
Any other predictions? "They don't call it the sell side for nothing," says Mr. Simons. "That's what it's all about. It's about making hay while the sun shines."
But, perhaps, the most realistic prediction came from Mr. Ragas: "Let's see what the Street thinks."
GeoCities
1997 sales: $4.6 million
1997 losses: $8.9 million
Filing date: June 12, 1998
Expected IPO date: August 11
Proposed ticker: GCTY
Offer price: $17
Total shared offered: 4.75 million
Total shares outstanding (post-offering): 30.66 million
Exchange: Nasdaq
Offering amount: $80.75 million
Proposed market cap: $459.9 million
Fiscal year-end: December
Employees: 114
Underwriters: Goldman Sachs, Donaldson Lufkin Jenrette, Hambrecht & Quist
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