PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Most investors gave Web media companies up for dead long ago. And many of those that have survived are still swimming in red ink. But here's the surprising news: A few actually look like they could make it and reach profitability some day soon. Traffic is increasing, the credibility of online news and information is building, and -- stop the presses! -- a small percentage of audience members are proving willing to pay for some content.
That's not to say 2002 won't be another rough year. The online advertising business was down 20% in 2001 from the year before, and forecasters don't see even a mild uptick until the second half of this year at the earliest. And most Web content providers that have achieved black ink are using both the most favorable accounting treatment allowable while mining alternate sources of revenues, including subscriptions, syndication, and premium services. "These companies need to have plenty of cash on their balance sheet to ride out the storm," says Morningstar analyst George Nichols.
"REVERSE ENRON." Yet some Internet players are quietly building a business. Take CBS.MarketWatch.com (MKTW
), which reported its first cash-flow-positive quarter on Jan. 29. It increased its stash by $1.3 million, to $37.6 million in the fourth quarter, even though revenues were only $11.6 million, down from $14.7 million in the same quarter of 2000. Reported results didn't look quite so good: MarketWatch's net loss was $20.8 million, or $1.25 a share, vs. $24.3 million, or $1.47 a share, in 2000. But CEO Larry Kramer says hitting the positive operating cash-flow milestone -- even if for just one quarter -- is what counts. "We're sort of in a reverse-Enron situation," he says. "We are making money, yet I have to tell people we are not."
On Jan. 30, The New York Times Digital reported positive EBITDA (earnings before interest, taxes, depreciation, and amortization) for fiscal 2001. Positive EBITDA is a higher hurdle to clear -- especially on a full-year basis -- than positive operating cash flow. It also reported that traffic rose about 50% at NYTimes.com in November and December vs. those months in 2000. Those were big news months. And it's also becoming increasingly clear that the survivors in most instances have a television or print counterpart with which to leverage their Web site's audience and help support its business model, says Charlene Li, a director at online research firm Forrester.
Even as most online sites have cut costs to the bone, there are signs that businesses and consumers are willing to pay for content on the Web. One reason could be that online news is gaining credibility. A recent survey by the Online News Assn. found that Internet users say online news is about as credible as news obtained from more traditional sources.
CORPORATE SALES. "The world is changing, and people don't necessarily equate the Web with free when it comes to content," says Dan Schimmel, chief executive of OneSource (ONES
). His company, which provides data and research to businesses, earned $2 million in net income, or 15 cents a share, in the fourth quarter of 2001. OneSource is finding success by selling its service to businesses on an annual "per seat" basis -- $250,000 for 1,000 users. Hoover's (HOOV
) has adopted a similar model, which has helped offset a decline in ad spending on its free site.
Selling content to individuals is much tougher, but beleaguered Salon Media Group (SALNC
) announced on Jan. 23 that it has gained more than 35,000 paid subscribers -- proof that its effort to replace lost ad revenue is working. Indeed, more online media companies will be putting a positive spin on tough business conditions in mid-February. Leading women's site iVillage (IVIL
) reports earnings on Feb. 12. It became cash-flow positive in the third quarter and said in November that it expects to be profitable on a cash-flow basis through 2002. Its stock price has climbed from 37 cents in March, 2001, to a current $2.50 -- a level that indicates investors think iVillage will be a survivor.
By contrast, TheStreet.com (TSCM
), which announces earnings on Feb. 14, still has a lot to prove. As it has stemmed its cash burn rate and rolled out new products for subscribers, its stock has bounced back from 92 cents last October to around $1.73 as of the closing bell on Feb. 11.
TOUGH ROAD. TheStreet.com is still working on finding the right mix of proprietary offerings, however. On Feb. 4, it launched a $2,000-a-year paid site for professionals called RealMoney Pro. Many analysts believe subscriptions will work only if they're at what Michael Davey of Investec Ernst calls the "no-brainer" level -- perhaps $25 or $30 a year. TheStreet.com charges $200 for its cheaper RealMoney site. With $40 million in cash at the end of the third quarter, CEO Thomas Clarke says his outfit won't run out of money before it reaches profitability.
Sites that can outlast the economic slump may eventually reap a reward. Many experts say online advertising should grow faster than traditional advertising in the future. Consolidation will help limit the available inventory of ad space, even as the industry comes up with new ad formats and convinces marketers that they work. Ad-tracking outfit CMR predicts only a 1.5% rebound in overall advertising spending in 2002 but an 8.8% jump in Internet advertising.
"I don't think we've seen a turn in advertising yet," says Clarke. "It's probably going to be later in the year than anyone thought. But a lot of the online entities are finding other ways to survive and make money."
"UP FROM HERE"? The good news for investors is that it won't take much for the survivors to turn a profit once the advertising business rebounds. "When it does happen, online media companies have cut costs so much that you're going to see a lot of those revenues fall to the bottom line," says Darren Chervitz, research director at investment firm Jacob Asset Management, which owns positions in iVillage, CBS.MarketWatch, and CNET Networks (CNET
). "I think a lot of these companies have gotten to the point where they should only move up from here."
That turnaround may still be some way off. But as more online media companies prove they can survive the current advertising slump, their prospects for an eventual rebound can't help but look brighter.
Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column Edited by Beth Belton
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
