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Beyond size, what else matters?
by J.K. Riggin
Believe it or not, something still matters after the beating the Internets have taken over the past month. Obviously, size still counts, as Web giants AOL (AOL:NYSE), Yahoo (YHOO:NASDAQ), Amazon.com (AMZN:NASDAQ), and CMGI (CMGI:NASDAQ) hung on to maintain a chunk of their sector-leading values. And profitability and cash flow still seem to matter as CDNow (CDNW:NASDAQ), DrKoop.com (KOOP:NASDAQ) and a rash of other bootstrapping, money-losing dot-coms took near-lethal body blows.
The carnage appears to be over, however, and recovery has commenced. Although you can still see some knees shaking here and there, earnings continue to meet or exceed expectations. And there are many quality IPOs still in the pipeline. In fact, the first quarter of 2000 saw more than twice the number and value of IPOs than the first quarter of 1999. More than half of these deals were Internet companies, which averaged a 60% return.
So with everything bottoming out, where are the best spots for you to jump into the Internet game?
First, note that the weak are being pimp-slapped off the corner. Millions of unique monthly visitors just won't cut it anymore. Underlying this trend is the more inevitable one toward consolidation. Stock prices have been slashed, and technology and standards are rapidly narrowing the playing field down to fewer and bigger competitors.
Not that this is anything new. The combined market value of the 25 largest U.S. companies in 1999 was US$5.3 trillion, compared to US$740 billion in 1989 and US$275 billion in 1979. The same thing is happening to the Internets players. Even without Time Warner, AOL comes in at about US$130 billion, which translates to roughly 13% of total market value for all Internet sector companies. Together, AOL, Yahoo! and CMGI make up a little more than 25% of the total; the top 50 Internet companies comprise about 75% of the market.
While size surely matters, we're now in a place where many previously overvalued Internet issues are suddenly undervalued. And rapid consolidation of the right pieces could result in some new players at the high end. But you also have to realize that many elements in the sector have begun to mature. While new users continue flocking to the Internet, the usage habits of existing users are evolving. This is affecting the general interest portals, where the challenge is to remain useful in fulfilling consumers' vast and varied information needs.
Portals, general vs. vertical
Although we just got used to calling them portals — the current parlance in some circles is now "eNetwork" — I'm talking about Web sites with more than a million unique monthly visitors that are sustained by advertising, commerce and possibly subscription revenue. Whether users start or end up there is relatively insignificant. What matters about portals is their ability to attract users, keep them interested and turn their mouse clicks into money.
Vertical portals have fast been gaining ground on the general portals, either as competition or potential partners. Vertical portals with particularly deep and expert content often work with general interest portals, syndicating special interest content to achieve name recognition. In the long haul, vertical portals capture more time per user than general interest portals. And because of their focused nature, vertical portals are more rapidly turning content and traffic into commerce. Basically, the more topic-specific the information, the more likely that an actual transaction will follow.
Among the vertical portals, what matters is affluent audience demographics, depth and stickiness of content, and closely related, contextual commerce opportunities. The most successful vertical portals ensnare their visitors in an endless transaction cycle, involving product browsing, research, buying and selling. Following are three successful vertical portals currently trading near their 52-week lows. All three have excellent track records in developing and executing the vertical portal business model.
Local play
It seems so obvious, but the Web has somehow lost sight of the fact that American consumers spend 80% of their time and money within 20 miles of home. When you add it up nationally, local and regional merchants spend just as much money on advertising as the national companies.
Ticketmaster CitySearch (TMCS:NASDAQ) aims to own this local-content market. CitySearch creates and maintains local city guides on the Web, each providing up-to-date and detailed information of local interest. Everything is there, from news to entertainment to shopping, professional services, community activities and weather. Bring in Ticketmaster, with its capability to sell tickets to almost any venue in the country, and you just scratch the surface. The company plans to ultimately direct its Web visitors to online grocery purchases, restaurant reservations, taxi paging and more.
By attracting and retaining the local user, the company is rapidly developing a retail advertising venue that surpasses the local newspaper in terms of reach, targeting and usability. At the same time it offers low-rent advertisers a favorable alternative to the yellow pages.
CitySearch built it, and the users are coming. Media Matrix reported in April that Ticketmaster CitySearch had surpassed a 10% national reach for the first time, the first locally-oriented service to do so. In addition, users are spending on average nearly 15 minutes per month at Ticketmaster CitySearch. That's more than the company's competition, namely AOL Digitalcity, KR Real Cities and Cox Cities.
The company's stock recently bottomed out at US$13; it's currently hovering around US$20. With its market cap still north of US$1.6 billion, watch for Ticketmaster CitySearch to acquire other struggling dot-coms as a way of adding customers and building out commerce offerings, especially in the areas of music and online grocery shopping.
Words for nerds
CNET Networks (CNET:NASDAQ), a multimedia company providing both Internet and television programming about the new digital world, has grown rapidly over the past three years. Its television programs alone reach more than 9 million viewers each day. The company's network of Web sites — including C|NET.com, news.com, computers.com, browser.com, builder.com, download.com, gamecenter.com, shareware.com and shopper.com—attract nearly 15 million page views per day.
What's particularly impressive about CNET is that, aside from achieving profitability in a relatively short amount of time, they've managed to do so in a crowded arena where others have failed or are struggling. Wired magazine, and its Web counterpart Hotwired.com, were the early leaders and trend-setters in expressing all of the various implications of the new digital age. But a failed 1996 IPO bid and subsequent sale to CondÈ-Nast have put a damper on Wired's revolutionary rhetoric. Ziff-Davis, and its offshoot ZDNet, also preceded CNET with their vast array of trade publications addressing the corporate and individual infotech industries.
CNET seems to fully grasp the fact that in order to use the Web you must first be using a computer. Web users are an essentially captive computer-using audience; like it or not, sooner or later, they will all need to fiddle with their machines. CNET provides a variety of avenues to help users stay current on industry news and events, download free and for-pay software and evaluate new computer-related products. And perhaps better than any other computer-related Internet property, CNET has been quite successful in turning viewers and readers into buyers.
After falling to US$22 in the tech correction, CNET's stock price has rebounded to the mid-30s. As CNET continues to exceed expectations in leveraging its commerce revenues, it will stand out among the Internets as a profitable opportunity and its stock will likely return to (or exceed) its former higher-flying levels.
Homes, sweet homes
Nothing lubricates the big-ticket purchase like free, customized data, and no one on the Web provides as much real estate information as Homestore.com (HOMS:NASDAQ). Public since late summer of 1999, Homestore.com maintains a network of Web sites providing real estate information, products and services, including Homestore.com, REALTOR.com (existing home listings), HomeBuilder.com (new home listings), SpringStreet.com (rentals), and CommercialSource.com (commercial properties).
At the moment, the company's revenue primarily comes from subscriptions paid by professionals to list properties on the Homestore network. All of the property listings are available to Web users for free. Web users access these listings directly through one of the Homestore.com sites, or through other Web sites (such as general portals or real estate agencies) that have syndicated the listing content from Homestore.com. Growing streams of revenue also are coming in from advertising sales and commerce. The company's plan is to assemble the best available package of real estate information on the Web, then help facilitate all transactions that may result.
For instance, in the future the company plans to provide mortgage lending and other financial services, as well as referrals to home improvement products and service providers. Homestore.com is working in a market worth over US$150 billion.
The company's first quarter earnings exceeded consensus expectations. And a recently announced deal with AOL should double the company's user base month-to-month. The five-year pact makes Homestore.com the exclusive national provider of residential home listings, professional and home moving services, and apartment listings on AOL, CompuServe and Netscape Netcenter.
Homestore.com's stock has followed a trajectory similar to the other vertical portals—after a January high of US$138, the stock has dropped to the US$20 range. Between its solid leadership position and successful
execution to date, this company's stock is a lock to ride the market's recovery and return to popularity.
The big get bigger, the smart get vertical
Think of a combination magazine, national chain of retail stores, mail order catalog and special-interest cable channel... this is the capability of a vertical portal. Internet content is at its most efficient when there's a commerce proposition behind it (or, put another way, a Web site cannot live on subscriptions and advertising alone). And Internet advertising only gets interesting when you're at or near the top of the heap in either traffic or targeted audience. Want to make money on Internet-based content?Get vertical.
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