The Scoop on CNET


By Alex Salkever Shelby Bonnie is a rare creature among dot-com CEOs. The top dog at online publishing company CNET Networks (CNET), he has managed to keep his job. The former vice-chairman and a long-time executive with CNET, Bonnie succeeded company founder Halsey Minor in March, 2000, just before the tech bubble popped. He wasted no time paring expansion plans, shuttering multimedia efforts, and enhancing the efficiency of CNET's internal technology -- by 308%, he says.

Four years later, surviving Internet companies have morphed from dirt to diamonds. CNET has benefited, but it hasn't matched the eye-popping growth numbers of Internet cohorts such as Yahoo! (YHOO) and Google, which plans to go public soon. CNET still yearns for profitability. So the question remains: Can the soft-spoken Bonnie take CNET to the next level and transform it from a popular collection of niche tech sites into a powerful and profitable media brand?

He has his work cut out for him. Investors seem to believe in his vision, but there are significant risks (see the accompanying Q&A with Bonnie). At around $11, as of June 28, the stock is trading at a price-to-earnings of 47 for fiscal 2005. That's high for a media company. And CNET has largely missed out on the search engine advertising bonanza that Yahoo and Google have enjoyed. On the plus side, the 11-year-old CNET has improved its operational performance over the past year. But it will take more than that to get it solidly in the black.

MUSIC BEAT. Bonnie has put together an impressive group of offerings. CNET's reviews channel is one of the most comprehensive tech and consumer-electronics evaluation destinations on the Internet. News.com is a full-fledged tech news operation, with dozens of journalists writing stories daily. And GameSpot is a review and product-demo destination for video- and computer-game enthusiasts.

CNET is also building a digital-music business, positioning its recently reopened MP3.com as a one-stop site where surfers can legally buy and download music from providers such as Apple's (AAPL) iTunes Music Store and Roxio's (ROXI) Napster. Other properties include several shopping-comparison sites and one for wireless-gaming enthusiasts. CNET also offers Web publishing, licenses product databases, and runs an online marketplace for tech resellers and distributors.

Yet, CNET is still struggling to become a well-known brand beyond the Internet. It makes the lion's share of its money as an online-ad play. Its Interactive Unit kicked in $55.5 million of CNET's $63.4 million total revenues in the first quarter of 2004. Bonnie has been at the forefront of new types of Net advertising, including dynamic ads that are rapidly blurring the line between TV spots and online pitches.

NEWS SOURCE. CNET ads have boosted direct referrals to Sony's (SNE) e-commerce Web sites by 225% since the beginning of last year, according to Patrick Vogt, senior vice-president of Sony E-Solutions, the online direct-sales arm of the consumer-electronics giant. Vogt spends 30% of his annual online ad budget with CNET, a sum worth millions. What's more, referrals from CNET sites are more likely to make purchases, vs. click-throughs from other venues. "You do get a very high-quality lead when you advertise there," Vogt says.

Traffic growth is also impressive. CNET claimed 76.5 million unique visitors in the first quarter of 2004, a 27% year-over-year increase. Some of that growth comes from its strength in two of the hottest areas in technology: games and consumer electronics. And News.com is the leading tech-news site on the Web in terms of traffic. In 2004, CNET won the coveted National Magazine Award for general excellence online. That, plus further hiring at News.com has quieted chatter that Bonnie would shutter or sell the news division.

Most analysts and industry watchers agree CNET is making progress. "If you look at the numbers for the last year, the bottom line and the growth rates have improved," says Mark Mahaney, an analyst with American Technology Research. (Mahaney has a hold on the stock and owns no shares in CNET. His company doesn't do any investment banking.) "Ask the print publishers in this space, and they would be delighted with the percentage growth CNET is seeing in advertising revenue," says Jeff Dearth of media investment bank DeSilva & Phillips.

THE ROAD AHEAD. Online-media consultant and former Industry Standard publisher John Battelle adds that although CNET has high costs due to its news division and dedicated sales force, Bonnie holds an extremely strong hand in the tech field online. Says Battelle: "They've built a really strong position."

And investors have no shortage of optimism about CNET's future. Shares have more than doubled in value during the past year, running from lows of about $4.50 up to a high of $13.50, before settling back down into the $10 range. Standard & Poor's analyst Scott Kessler expects CNET to turn profitable in the fourth quarter of 2004 and stay there. (Kessler owns no shares in the stock and has a hold rating on it.)

Revenue growth is accelerating, and earnings before interest, taxes, depreciation, and amortization (or EBITDA, a common earnings measure in industries with high-fixed costs) will be strong this year, in the $30 million to $32 million range, says Bonnie. CNET did post positive EBITDA in the first quarter of 2004, a nice trick as this quarter is usually very slow for tech ads after the holiday shopping season.

"As we're able to grow the top line, we can translate that into wins on the bottom line," he says. "If more people consume our news stories or read our reviews, it doesn't require much additional resources from us."

THE BIG PICTURE. Bonnie upped his annual revenue guidance to a range of $275 million to $285 million, raising the top and bottom of the range by $5 million from the previous quarter. He also reported a decreased operating loss of $5.7 million, vs. $14.6 million for the same period last year.

Still, a lofty share price and the slower growth curve associated with the high fixed-cost media business means any investors buying CNET at these prices should likely be thinking long term. Salkever is Technology editor for BusinessWeek Online


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