Salon.com Typifies Demise of `Content' IPOs: Christopher Byron
By Christopher Byron
Weston, Connecticut, June 20 (Bloomberg) -- When the history of the great dot-com investment bubble of 1996-2000 is finally written, surely a few select comments will be heard from some quarter or other regarding the role that Wall Street has played in this game. It's called How to Fleece the Public and Get Away With It.
This week we'll drop by for one of our characteristically unwelcome visits with one of the more vivid -- and easily grasped -- examples of that fleecing: The initial public offering of Salon.com Inc., the San Francisco-based Webzine. This desperately struggling company perfectly encapsulates the failed promise and doubtful future of an entire generation of IPOs in the dot-com ``content'' space.
These are companies that never should have been taken public in the first place but were dumped on the public anyway. The senseless business theory that lured in the gullible: That advertising alone could support ``content'' marketing on the Web -- this when, in many cases, the advertising and marketing costs of the content companies themselves were greater than the total advertising revenue collected from others.
Worst of all, it was the IPO proceeds from one company that became the ad revenue of the next company -- a kind of Wall Street financed merry-go-round in which dot-com startups became little more than a capital transfer mechanism from Wall Street to Madison Avenue. It was all dependent in the end on the continuing flow of funds from the new issue market -- a flow that was destined to end sooner or later, and now has done just that.
Role of Underwriters
The bad guys in this tale? Fee-obsessed underwriters who couldn't say no to seven- and eight-digit commissions, and thereupon set the merry-go-round whirling to create a market for deals that had crash and burn tattooed all over them. The stupidos they preyed upon? Anyone who failed to read -- and heed -- the exculpatory warnings that came emblazoned across every prospectus: Caution, this deal is going to blow up in your face.
In case you might not be familiar with it, Salon.com is one of the best, most imaginatively written ``magazines'' on the Web. It routinely publishes such writers as Camille Paglia, my colleague Joe Conason, Garrison Keillor, and many others. The trouble is -- this editorially excellent content site for culture and political commentary hasn't been able to make a dime of profit from Day One, and it's hard to see how it ever will. The operation's costs are too high, its revenue is too low, and demand for what it offers the public is simply too limited.
Anyone could have seen these limitations from the moment Salon.com began in business -- which is why I wrote over a year ago that the company's finances were unworkable and that investing in the business would be no different from simply throwing one's money away.
Glory Days
But common sense -- and simple arithmetic -- didn't stop Salon.com's underwriter, W.R. Hambrecht & Co. -- from taking the company public in a much-watched IPO, exactly one year ago tomorrow, on June 22, 1999, at $10.50 a share. For a brief and glorious moment a few days later, Salon.com touched an intraday high of $15.12, giving Salon.com a market value of $162 million, as all involved congratulated each other on their collective financial genius ... while leaving for another day the annoying problem of what to do when the $24.9 million in IPO proceeds ran out.
And now, almost 12 months later? Well, a lot has happened. All of it was inevitable and easily foreseen, and for Salon.com it all spells disaster. For starters, the entire dot-com sector has crashed and shows no signs of reviving. Meanwhile, the IPO window has slammed shut, and venture capital fund managers have taken their phones off the hook and gone to work in the garden (or maybe to hang themselves). And in the middle of all this, the folks at Salon.com look to be running out of money.
Falling Down
In the process, the company's stock has plunged to as low as $1.25 Friday -- a decline of 92 percent from its high, and down 88 percent from its offering price. As of Monday, with its stock trading around $1.30 a share, Salon.com had a value of about $15 million, meaning that the company now faces the threat of de- listing from the Nasdaq National Market for failure to meet minimum tangible assets, net revenue, and market cap standards. The way things are going, the company may soon not even qualify for a Nasdaq SmallCap listing and could wind up being bounced to the OTC Bulletin Board market.
So it's not surprising that, in a desperate bid to stay in business, Salon.com announced on June 7 that it was firing 9 percent of its staff, while trimming projected spending by 20 percent.
Considering that most of the 13 people being axed are editorial employees, and that the high quality of its editorial content is the only thing Salon.com has going for itself, well, we need not dwell at length on the apparent business acumen of the knuckleheads who are running the company -- other perhaps than to suggest that the shareholders would evidently have been better served if the suits in charge had decided to let themselves go instead.
Roundup of Firings
Salon.com is hardly the only dot-com now handing out pink slips. In the last month, more than 30 different Internet operations -- almost all of them in the business of trying to deliver news, entertainment or other such ``content'' to consumers -- have fired at least 3,500 employees altogether. In some cases, the people let go represented only a handful of the company's employees; in several cases, they've been everyone on the payroll because the companies have gone out of business.
The one thing almost all these companies have in common is the confused, ``we'll figure this out as we go along'' nature of their business plans and strategies for actually making money.
Yet Wall Street financed them anyway, and the reason is hardly mysterious: For every dollar raised in an IPO, the underwriter typically gets seven to eight cents.
When Goldman, Sachs & Co. raised $100 million in an IPO for the bizarre iVillage Inc. 15 months ago, $8.4 million went to Goldman and the other underwriters before iVillage ever saw a dime. As for anyone who bought shares at the first trade in the after-market (for $95.88 each) and hung on to them since, why, those luckless souls have seen 94 percent their money disappear. But you'd better believe the underwriters still have their $8.4 million.
Goldman's Record
How bad has this exploitation of the public been, really?
Well, consider the following factoid, mined from the Internet database of Hoover's Inc., which itself went public last July and began trading at $24 and now sells for around $7.50: If you bought one share, at the first trade in the aftermarket, for every Internet IPO that Goldman Sachs has managed since its underwriting of Yahoo! Inc. in April 1996 -- some 60 deals in all -- you'd have done spectacularly well in less than half a dozen of them (Yahoo, RealNetworks Inc., eBay Inc., DoubleClick Inc.) and you'd at least have come out ahead, so far, in maybe 15 more.
As for the rest -- about 40 stocks in all -- you'd have done so poorly that your entire portfolio would now be down about 8 percent. You'd have been better off leaving the money in a coffee can in the kitchen.
What Investors Got
Instead, if you bought the IPOs of Goldman -- the premier underwriter in the business today -- you'd be the proud owner of dozens upon dozens of total disasters. Your stock in eToys Inc. would be worth 7 percent of what you paid for it. So would your stock in PlanetRx.com Inc. and InsWeb Corp. You'd have taken a 75 percent haircut on your Webvan Group Inc. stock, on your 1-800- FLOWERS.com Inc., on your NetZero Inc., your Agency.com Inc., your E-Loan Inc., and on and on and on. And if that's how you'd have done with the best underwriter in the game, imagine how you'd have fared with any of the rest.
As for Salon.com, the company's latest financial filings tell it all. In the three months ended March 31, Salon.com's revenue was $2.6 million, which is triple the year-earlier period -- but the base is so low (barely $900,000 in the 1999 quarter) that the magnitude of the increase is almost meaningless. Far more important is the fact that, based on the pattern of the previous quarters, roughly 17 percent of the company's revenue probably wasn't cash at all but so-called barter deals (I'll run your ad for free if you'll run mine on the same basis -- and we'll both call it revenue).
Real Revenue
Take the barter revenue out of the picture, and Salon.com's actual cash revenue in the quarter was probably only about $2.16 million. During the quarter, production and editorial costs ($2.4 million) alone ate up all that and more. If the company had done absolutely nothing else during the quarter except turn on the lights and pay its monthly rent, payroll and utilities bills ($795,000), it would have been in an impossible hole, spending $1.48 for every dollar of revenue.
But on top of that came another $3.56 million of advertising and marketing costs, net of barter -- the budget-busting expense that Salon.com and indeed almost all Web companies have had to incur to promote themselves to the consuming public. Put that into the equation, and Salon spent about $3 for every dollar of revenue.
Is it any wonder that in the January-March quarter the company's balance sheet cash and investments dropped from just under $24 million to just under $18 million? After all, the company was spending almost $9 million to take in barely $2 million in revenue.
Money Running Out
With the company's own underwriter, San Francisco-based W.R. Hambrecht, now cutting its revenue estimate for the fiscal year ending next March by 30 percent, to $14.3 million -- and with at least 17 percent of the net result likely still to be non-cash barter, the company could easily end the year with actual cash revenue below $12 million. Against that, Hambrecht is projecting $33 million of cash costs, meaning a cash shortfall of $21 million. With only $18 million of cash on hand to cover it, the company looks set to be stone-broke within five quarters -- and that includes the savings from the June 7 cuts.
To drag out the inevitable, there will doubtless be more firings, and more cutbacks, until the quality of the Salon.com editorial product is so ravaged that no one will want to read it anymore.
So, why, we may ask, was this business started in the first place? So that a group of talented writers and commentators could perform like barking seals for a year or two, while an obscure San Francisco underwriting shop bagged $1.3 million in underwriting fees even as their own clients got hosed? This is the New Paradigm? If so, you can have it.
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Carl
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