TMCS
STREET WISE by Sam Jaffe
IS CITY SEARCH A NET STOCK THAT
DESERVES TO SOAR?
At first glance, the recent IPO of TicketMaster Online/City Search (TMCS), known
more
commonly as City Search, looks like just another Internet stock jacked up by the
feeding
frenzy of short-term traders. It was released on the night of Dec. 2 for $12 a pop. The
first
trade the next morning was for $60. It soon settled at around $40, where it has rested
since.
But that still gives it a price-to-sales ratio of 195, about 40 times that of the Standard &
Poor's 500 index.
That's seemingly enough to prompt any long-term investor to avoid the stock -- as is the
case with many Internet stocks that rest on a foundation of hype. But a closer
examination
of City Search's business model makes it stand out from the crowd as a company that
could
possibly be worth its sky-high valuation.
To understand why City Search might turn a profit someday, you must first understand
the
structure of the company. The old City Search was a local entertainment and business
guide
site serving about a dozen cities, with plans to expand to many more. Last summer, it
merged with TicketMaster Online, which is the Web arm of ticket distributor
TicketMaster.
TicketMaster (which itself is owned by USA Networks) now owns about 62% of the
newly
public company.
SIGNED AND SEALED. City Search has such an appealing future because of its
relationship with its largest shareholder. Thanks to a signed and sealed contract, City
Search
has the online rights to sell all TicketMaster tickets. Not only that, "we have the
perpetual
and exclusive and irrevocable rights to online tickets [via TicketMaster]," says Charles
Conn, the CEO of City Search. "We recognize the revenue, we reimburse the costs to
TicketMaster, and then we get 50% of the profits." Half isn't bad when you consider
that
the margins in this business are pretty high, as much as 25% gross, thanks to
TicketMaster's
dominant market share -- which is believed to range from 60% to 80%.
And that market share isn't going away soon. The ticket business, though seemingly
simple,
is protected by some of the highest barriers to entry you'll find in any industry. In fact,
TicketMaster has been sued by several companies in the past over allegations of
monopolistic practices -- to no avail so far. So TicketMaster remains about the closest
thing
there is to a monopoly that isn't being investigated by the Justice Dept. It sells tickets
everywhere in the country for every conceivable large event, from rock concerts to
sports
events to Broadway shows. Barriers to entry are all but invisible for most Web
concerns.
So when a company such as City Search is insulated against competition, it's worth an
investor's attention.
Doubly delightful for City Search is that ticket-selling is perfectly suited to the Net.
There's
no bulky product with high mailing costs to be shipped to the customer. And there's
endless
room on a Web site in which to describe an event. City Search will soon be rolling out
advanced Virtual Reality Markup Language (VRML) technology that lets you view a
theater in three dimensions from the section in which you'll be sitting.
Already, 5% of all TicketMaster sales are done online, and that number is rising quickly.
"The growth in online sales for tickets has been remarkable," says Paul Cook, the
manager
of the Munder NetNet fund (MNNAX), which currently doesn't own shares in TMCS.
"It's
a great company with great management, but it's price is a little too high for me now,"
Cook
adds.
BLUES CLUB BOON. Another opportunity for City Search is the Web's ability to do
for
niche businesses what it does for big businesses, at a low cost. The one area of the
ticket-selling business that isn't already owned by TicketMaster is tickets to small bars
and
clubs. City Search's specialty is guiding people to such venues, and now it has a way to
sell
tickets to them. Say you own a blues club and until now you've sold all your tickets at
your
box office. City Search can build you a Web page, link that page to its larger Web site,
and
then sell tickets to your events online.
The company is currently getting 40% of its revenues from selling tickets, another 40%
from selling companies Web pages on its City Search sites, and 20% from advertising.
It
expects to maintain that revenue mix.
Of course, City Search does have its inherent risks. It could suffer, for instance, if parent
company TicketMaster loses its hold on the market, whether from new competition or
via
the courtroom: Some antitrust suits against Ticketmaster are still being litigated.
As for competitors, they're huge: America Online (AOL) has its own city-guide service
called Digital Cities, as does Microsoft with its Sidewalk site, both of which are also
trying
to sell tickets. But neither has the leg up that City Search does, thanks to its relationship
with TicketMaster. So both AOL and Microsoft will rely heavily on advertising to
generate
revenue.
And then, of course, there's the Internet stock bubble to worry about. When it pops,
most
Internet companies may go down at once, not just the ones that don't deserve to fly
high. Of
course, when the bubble does burst, it could be an opportune time to buy Internet
companies
that have bright futures. And one of them could be City Search.
Jaffe writes about the markets for Business Week Online
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