FOOL PLATE SPECIAL
An Investment Opinion
Dark Business Sky at NBCi

By Brian Graney (TMF Panic)
June 13, 2000

Internet portal, entertainment, and e-commerce company NBC Internet (Nasdaq: NBCI) set off a mini-Web avalanche today after announcing a strategic refocusing of its brands and forecasting lower-than-expected revenues and earnings for the remainder of the year. Well, actually, the company wasn't expected to have earnings this year anyway, so the main bummer was the slump in revenues. Faster than you can say "path to peacock profitability," the stock was dumped for a roughly 35% loss this morning. Meanwhile, shopping network ValueVision (Nasdaq: VVTV), which is 36%-owned by NBC and the GE Equity unit of NBC parent General Electric (NYSE: GE), also headed lower. Ditto for computer-centric media firm CNET Networks (Nasdaq: CNET), owner of a roughly 18% stake in NBCi.

On a conference call, NBCi's management forecasted sales of about $135 million for fiscal 2000, up from last year's pro forma revenues of $74 million but below the $165 million to $175 million range that had been modeled in by sell-side analysts. In the nearer-term, revenues for Q2 are expected to be flat with Q1's $30 million. Instead of operating a hodgepodge of unrelated brand names on the Web, the company has decided to toss everything under the single NBCi umbrella. Property names such as Snap.com and Xoom.com will be phased out later this year, a rather glaring instance of rapid brand name asset evaporation considering both properties were brought into the NBCi family to much fanfare just a little more than a year ago.

While the rebranding decision opens up the rather large issue of the ultimate values of Internet brands, another major question that the NBCi news raises is the future direction of the advertising-based Web business model in general. The revenue shortfall was in part blamed on a "soft dot.com advertising market," a darkening cloud that has been hanging over most ad revenue-dependent Web companies for the past few months. NBCi's plan is to shift its mix away from online advertisers and more toward offline advertisers, which is a more notable strategic move than it may appear to be at first.

The switch was probably the main driver behind the half-dozen or so downgrades today from analysts, as the offline advertisers are likely to drive a harder bargain than the "spend it if you got it" online clients NBCi has been dealing with for the past few years. The company's management was nothing if not blunt on this point. "The dot-coms that are running out of cash are running out of cash now," NBCi CEO William Lansing reportedly commented, according to a take on the conference call that was relayed by ZDNet. "The writing is on the wall, it's pretty clear who they are."

Those comments may be remembered for a long time by investors as the final thud of the curtain ending the stage play of the Internet ad-spending farce that has taken place over the past few years. No longer will cost per impressions (CPM) rates remain artificially high for ad-driven websites thanks to the spending of upstart Web companies intent on funding prolonged quests for some "brand recognition" Holy Grail. This trend has been playing itself out for a while, so it's not really news. A recent AdKnowledge study found that average CPM rates on the Web have been declining lately for just about everyone. NBCi's firm statements today simply rammed the point home.

With cash and NBC promotion credits valued at $700 million, and a projected cash burn rate of about $40 million per quarter, NBCi is not in danger of going bust anytime soon. However, investors should expect that sailing will be rough. It's amazing to think that this is the same company that was able to get investors to shell out nearly $300 million for shares priced at $81 3/8 each in a follow-on stock offering a mere four months ago. With the speed at which the company's business has changed since then, it's a challenge to project with any confidence what the next four months may hold in store.

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