First reader up this week asks:
“Will you be reviewing CitySearch and Digital Cities in the same way you have with the ad networks? Of particular interest is CitySearch since its IPO is anticipated shortly. I am very interested in their local advertising revenue model.”
Reply: By now you saw the news on August 13 about CitySearch opting to merge with TicketMaster Online, part of Barry Diller’s USA Networks media efforts. The merger combines two of an assortment of other items we think necessary to pursue consumer commerce, in this case directory and one small commerce aspect, event ticketing.
It’s missing about six or seven pieces of the puzzle to be a larger destination site replete with commerce, content, connectivity, community, context, and camaraderie to name a few. The new TicketMaster-Citysearch will have to get aggressive about acquiring complementary Web sites to fold into its offering before taking the package to Wall Street.
CitySearch could have gone public at the $300 million valuation range or what we think was 24x this year’s estimated sales. Now that it’s latched to TicketMaster the stakes are raised to make the merger meaningful. AOL’s Digital Cities, meanwhile, could be an IPOable event if AOL chose to spin it out. We expect it to wait until Digital Cities has better brand recognition and revenue flow.
Here’s an interesting thought: What if Microsoft (NASDAQ:MSFT) spun out a stake in its Web divisions as a separate company–MSN.com? I wonder how Justice would view that and if it would give Microsoft more room to weave its Web?
WEBDEX, One Size Fits All?
“Do you think that any Internet Web site can value itself according to the amount of unique users that it gets each month, e.g. $100+ per u.u.? Or is there a particular threshold above which unique user valuations only make sense?”
Reply: Web sites may be valued on a number of things, primarily unique users and page views. Mecklermedia created the WEBDEX (see the latest examples in Internet Stock Report, August 13 & 14) to give investors a look at what the top 10 Web sites were valued at per user.
But just as the top 10 cities in the world have different values per square foot of real estate, so does each and every Web site. So extrapolating the top 10 and applying those user values to random sites won’t work. A site heavy in selling may fetch more than one big on marketing, for example.
On top-end threshold as e-tail and e-commerce become commonplace, values per user for the top 10 sites could continue to rise to perhaps as high as $500 per unique user. Again, however, this depends on the ability of the site to generate sales per user. Ad revenue cannot support the valuations. Commerce can.
“How can Lycos/WhoWhere claim 9.3 million registered users of e-mail and 1.3 million Web page customers? Who do they think they’re fooling? Paying $133 million for WhoWhere when 80% of its e-mail traffic came from Excite (who’s now likely going to drop them), and 80% of the Angelfire home pages haven’t seen more than a few clicks? Doesn’t make sense to me.”
Reply: We estimate 50% of WhoWhere’s traffic was due to Excite (NASDAQ:XCIT), which may explain why the firm probably opted to sell to Lycos (NASDAQ:LCOS) rather than go public. Wall Street doesn’t like it when one firm accounts for 50% or more of sales usually.
Excite didn’t buy because it’s placing a bet on Throw, a service it acquired which allows small bands of people to create communities. The amount of clicks on Angelfire home pages doesn’t matter as much as you may think. It’s the person or persons behind the Web page that matter as potential customers.
“What is your take on NetGravity and the new deal with IBM? I thought this stock would take off, but never did?”
Reply: NetGravity (NASDAQ:NETG) makes ad-serving software, a widget-by-widget business model. Rivals such as DoubleClick (NASDAQ:DCLK), 24/7 (NASDAQ:TFSM) and LinkExchange combine service (ad networks) with software but emphasize service. An ad-network model provides a better way of leveraging the Web than a software application model. Services win over apps. In the future the distinction will be gone as services engulf apps altogether. Software becomes the invisible means to the end goal.
If IBM (NYSE:IBM) acquired NetGravity its best move would be to make it an ad network.
“Although I have failed to understand the historical absolute valuation of equities for the last two years, your recent work on quantifying the next economy equities has been clear and ground breaking.”
Reply: And the beat goes on . . .
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