The Winter of Dis-Content

By Dave Marino-Nachison (TMF Braden)
January 5, 2000

Though I wouldn't dare speak for anyone else here in Fooldom, I'd be lying if I said I haven't been watching the ups and downs of the Web's myriad of pure-play "content" sites over the past several months with interest. Why? Well, although we're not publicly traded, I work for one of these sites.

And it hasn't been a great month or so for the egos of writers around the Web, the until recently ink-stained and now carpal-tunnel-syndromed wretches of the world, many of who've accepted stock options in exchange for the dubious privilege of being thereafter referred to as "content."

The winter has been rough, many of the big-name stocks -- in-the-know features hub Salon.com (Nasdaq: SALN), Gen-Y clubhouse iTurf (Nasdaq: TURF), and brash financial news site TheStreet.com (Nasdaq: TSCM) among them -- suffering as the market's tastes post-IPO continued to favor business-to-business enablers and wireless telecommunications companies. For all I know, if we were public, the Fool could have been right there with them.

Today, though, let's take a peek at Salon, a site I visit daily for its smart-mouthed commentary on travel, politics, and pop culture (not all the content, I should probably add, is for the Pokémon set, if you know what I mean). The company will likely make the rounds of market-day round-ups, the stock today jumping as much as 90% following the announcement that its technology writing will have a home on Linux peddler Red Hat's (Nasdaq: RHAT) new Wide Open News site, which bills itself as "The Open Source News Source."

That's cool news, but news enough to power a near-doubling of a company's market value in a single day? Of course not.

But what's important to note about stocks like Salon these days is that they, for the most part, move primarily in short spurts driven by individual news releases that provide some -- though not much -- indication about the long-term direction of a company's business. That sort of information comes from financial statements that, as is easily discovered with a quick read of quarterly filings and earnings releases, generally paint a disheartening picture of losses and cash burn.

It's in those statements where investors hope to see signs that their companies' press releases are paying off, and while it's easy to say stocks are out of favor because others are in favor, it certainly seems that investors have yet to figure out how long-term value is going to be created in the Web content space.

What's almost certain is that a model based solely on advertising is going to be difficult. The publishing business has always been a battle, with production costs potentially high if a site wants high-quality content in high volume -- never mind the impressive fees top writers can command -- with a view toward keeping visitors checking back regularly.

Add advertising and marketing to the mix -- particularly the high costs of establishing a brand out of nothing -- and you've got a difficult challenge.

With that in mind, there really has to be a value-add and a viable alternative revenue source. Will it be e-commerce arrangements? Or perhaps a play to create a fiercely loyal community that can be counted upon to provide free publicity and reliable additional retailing opportunities? What about a full-on crossover assault, a la World Wrestling Federation Entertainment (Nasdaq: WWFE) and Martha Stewart Living Omnimedia (NYSE: MSO), which -- though they aren't Internet online companies -- have parlayed their brands in various ways into television, radio, Internet opportunities, and merchandising with equal ardor?

Or how about verticalization, the segmenting of content and commerce offerings into tightly focused niche segments along the lines of Internet.com (Nasdaq: INTM), an October StockTalk interviewee, on the idea that more specific niches will provide advertisers with more valuable audiences? Salon, for its part, would have you believe that's what it's done by segmenting its content into a "network of subject-specific Web sites"; some might say with its, for lack of a better word, progressive idiom it's already pretty darn niche-specific. To each their own, I suppose.

Or how about packing it in, teaming up, and/or selling out in hopes of cutting costs, pooling resources and getting better marketing support, perhaps from an established media company?

What's important for investors to keep in mind is that many of the first sites to generate buzz on the Web were daring, innovative pure-play content providers -- and many if not most of those, ahead of their time, didn't make it to the public markets and are long gone, never to be heard from again. Whatever path companies such as Salon might eventually choose, you can bet this Fool will be watching closely.

Related Links:
Salon
Salon Message Board
Wide Open News

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