CNET's Chalk Outline Was Written on the Wall

The crime scene isn't pretty. It never is. You have yellow tape draped over what used to be red tape. You have a body that gave up the ghost before its time. Witnesses give awkward smiles, if only because they know that CNET Networks (Nasdaq: CNET  ) -- this morning's cadaver -- is redefining the term "exit strategy" in being bought out by CSI broadcaster CBS (NYSE: CBS  ) at $11.50 a share.

A crime was certainly committed. Now it's time to determine if the perpetrator was CBS or if the fatal wounds were self-inflicted.

It's probably the latter. In fact, once the lab results come in, Gil Grissom and his crew of super-sleuths will discover that CNET may have been dead for years.

The fall and rise of CNET
I recommended CNET in the summer of 2005 to Motley Fool Rule Breakers subscribers. I followed up with a re-recommendation the following summer when the stock fell into the single digits, and the stock remains an active newsletter pick.

Cracking open the CNET portfolio of online properties can make even a cynic giddy. It's not just the namesake tech gadgetry site. CNET also owns video game haven GameSpot, tech reporting site News.com, comparison shopping site MySimon, software hub Downloads.com, and techie hangout TechRepublic.

Some of its most recent moves have been to cash in on its juicy collection of generic lifestyle domains. TV.com, MP3.com, and Chow.com are now thriving hotbeds for couch potatoes, music fans, and foodies, respectively.

The real shame with CNET -- the reason why Dr. Market hasn't been able to detect a pulse in ages -- is that the company's financial performance failed to live up to its prolific dot-com standing.

Last month's quarterly report was frustratingly typical. CNET posted an operating loss. The company mustered a mere 3% revenue gain, and only because a 25% improvement abroad was enough to offset a 3% domestic decline.

CNET proved frustrating on both ends of the income statement. The top line wasn't able to live up to expectations, as nimbler blogs ate into its tech news stronghold. The bottom line was denied by an editorial-heavy company, even as its own ad sales team was enhanced through third-party deals with both Google (Nasdaq: GOOG  ) and Yahoo! (Nasdaq: YHOO  ) .

It's not as if CNET ever stopped trying. It went out kicking. It unloaded Webshots last year to American Greetings (NYSE: AM  ) , when the tough-to-monetize photo-sharing site was waning in popularity. Some of its most recent launches, like corporate lifestyle website BNET and cooking community site Chow.com, have been promising rookies.

Unfortunately, all of CNET's promise never materialized into the quarterly performance that growth investors expect. Throw in the 2006 options backdating scandal and this year's activist shareholder uprising, and any palm reader could have told you that CNET's lifeline was going to be painfully short.

Eye on CBS
CBS is going to like what it gets for its $1.8 billion. It's not just about the CNET properties that everyone knows. Search.com has always been a search engine waiting to be awakened. CNET also owns Kids.com, an underutilized domain that would fit in perfectly with CBS' family-friendly programming, if not an eventual rival to Disney's (NYSE: DIS  ) Family.com.

Despite its sleepy broadcasting frame, CBS has been a dot-com nibbler lately. Recent purchases include Web radio giant Last.fm and the WallStrip stock video series. The company must be drooling at what it can do with CNET sites like TV.com, ZDNet, and Urban Baby.

Am I surprised that the ultimate victor isn't a traffic-hungry Google chaser like Yahoo! or Microsoft (Nasdaq: MSFT  ) ? I am, but CBS actually makes even more sense. It is in a better position than the Microhoo crew to make this work. CBS will be able to breathe new life into CNET's rigor mortis-stricken monetization skills. CBS has a deep bench of advertisers through its television, radio, Internet, and even billboard businesses.

This morning's press release claims that CBS will become one of the 10 most popular Internet companies after the purchase, reaching a global audience of 200 million unique visitors.

The deal makes sense for both companies. You can call off the CSI team. The only crime that was committed here was the failure to live up to expectations. Bring in Survivor host Jeff Probst, though. The tribal council has spoken, and it's time to put out CNET's torch as a publicly traded stand-alone company.   


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