Paper Chase

Traditional media players seem to be scrambling to buy up online assets. There was Dow Jones' purchase of MarketWatch; the New York Times' purchase of About.com; and the Washington Post's purchase of Slate.

Such mainstream companies do not make such deals -- especially at high valuations -- on a whim. Traditional media players have seen erosion in newspaper circulation as more and more people get their news from the Web. Online content is timely, informative, and is becoming much easier to organize with new innovations like RSS feeds (RSS is a format for syndicating news and news content to readers).

Another such deal came about yesterday with the announcement of the purchase of 75% of Topix.net for an undisclosed amount. The buyers are traditional media stalwarts Knight Ridder (NYSE: KRI), Gannett (NYSE: GCI), and Tribune (NYSE: TRB) -- each of which will own 25% of the company. The founders of Topix.net will keep the remaining 25%.

This likely only represents the very tip of the iceberg as investment goes. Revenues were about $1 million in 2004 for Topix.net. On a shoestring budget, Topix.net built a following of 1.4 million unique users, which places it at No. 41 for online news. Ironically, it monetized this traffic using competitor Google's Adsense.

The company launched its website only a year ago and reached profitability in December. There are a mere nine employees, who will now be receiving salaries for the first time since they founded the company in 2002.

Topix.net has proprietary technology called NewsRank, which using some "artificial intelligence algorithms" monitors breaking news from 10,000 sources. The software reads stories and categorizes them into more than 150,000 Topix.net pages.

One of the attractions is that Topix.net categorizes news for 30,000 U.S. cities (each story is geo-coded). Local search is the next frontier for search stalwarts like Google, Yahoo!, and Microsoft. "Current methods for local search have their problems," said Mike Markson, VP of Business Development at Topix.net. However, if someone goes, say, to the Palo Alto Topix.net page, he or she likely has a tie to the community and as a result, localized advertisement should be more effective.

This deal is a departure from the recent media acquisition activity, which has involved outright purchases. Online news is a global business, and it's probably impossible for one media company to leverage it effectively. With Knight Ridder, Gannett, and Tribune partnering, they will be pooling their extensive content and distribution channels. Among them, the partners have 140 newspaper websites with roughly 30 million unique visitors.

Beyond the new revenue sources for these media partners, there is another play: cashing-out on inflated online media valuations. Knight Ridder, Gannett, and Tribune are partners in other online sites such as CareerBuilder, Cars.com, Apartments.com, and ShopLocal. With the online space bubbling again, perhaps an IPO for these fast-growing properties is not far off.

Fool contributor Tom Taulli does not own shares mentioned in this article.