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 |
