Last Friday I wrote that Internet manque GreenMountain.com had delayed
its planned IPO from last week to this week because investors have begun
spotting and punishing phony ‘Net companies.
The headline on the column was “Dot.Frauds On The Run”. It should have
read “Dot.Frauds In Full Retreat,” for GreenMountain.com on Tuesday
postponed its IPO, saying that current market conditions were
unfavorable.
It’s not likely conditions will ever be favorable again for companies
such as GreenMountain.com, which makes money by selling electrical
power, but thought it could ride the Internet IPO wave by attaching a
“.com” to its name, buying some banner ads and throwing up a “green”
educational Web site.
Back on March 29, when GreenMountain.com filed to go public, that wasn’t
a bad idea. There was a feeding frenzy for Internet IPOs. But since
Internet stocks have taken a beating in the last couple of months,
investors have become much more discerning about what is and what isn’t
a real Internet play.
None of which means GreenMountain.com won’t try again if the IPO market
gets hot. Another company that bailed out of a planned IPO several
months ago is back with an offering scheduled to go out this week.
Online music seller musicmaker.com filed to go public on Feb. 19, only
to postpone the offering a couple of months later.
Unlike GreenMountain.com, musicmaker.com is a real Internet company. It
sells regular and customizable CDs, which customers can either download
or order for shipped delivery.
Trouble was, it hadn’t been selling much. Revenues in 1998 were only
$74,000, against a loss of $4.7 million. Worse, the company had no
distribution deals with the music industry’s major publishers left it
with a small stable of oldies and alt-rock artists. What musicmaker.com
needed more than anything was the ability to sell music by “A-list”
artists.
So the company cut a deal with EMI, giving the publishing giant a 50 percent
stake in musicmaker.com in exchange for an exclusive five-year license
to EMI’s music catalog, which includes artists on Blue Note, Capitol
Records, Chrysalis, EMI Records and Virgin Records.
Now it’s back with an IPO designed to raise $109 million through the
sale of 8.4 million shares (Nasdaq: MMKR) at $12-$14, a considerably
more ambitious offering amount than the initial $30 million set in
February.
While the EMI agreement is a coup for musicmaker.com in a very
fundamental way, there are enough unanswered questions to make this a
premature IPO. For starters, even with its limited catalog, the company
should be increasing revenue. Instead, revenue for this year’s first
quarter was $20,100, down from the $22,400 in Q1 ’98. Meanwhile, the
cost of sales in Q1 doubled, to $463,000. Not much bang for the buck
there.
Secondly, EMI may have the goods in terms of its catalog, but it has
been relatively slow to the Internet. Giving a 50 percent — and essentially
controlling – stake in your Web company to a giant from another industry
that might not quite “get” the Internet could lead to problems. Just ask people at AltaVista.
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