Salon’s a Slick Read, but a Sick Investment

Salon.com (SALN)

Jim: Don’t buy

Mike: Don’t buy

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Mike: Today we get to talk about one of my favorite magazines, Jim.

Jim: Playboy?

Mike: Did I hear you say Field & Stream? But no, I’m talking about Salon.com, the online magazine. I think it’s the premier general information magazine on the Web. It is sprightly, well-written, impolite, always compelling. Its topics include politics, entertainment and technology, and it was founded by a bunch of refugees from the San Francisco Examiner.

Jim: I agree, it is a very good read.

Mike: I think it puts all competitors to shame. Especially the thing that Microsoft publishes called “Slate” or “Stale” or whatever it is. Salon is at the top of the bookmark list on my Web browser. I read it every day and I waste, er, spend, a considerable amount of our mutual employer’s time there.

Jim: Tread carefully here, Michael.

Mike: Well, if our editor is reading, I’ll just point out that I get lots of useful information from Salon. Now that we’ve established that Salon is a smart mag, let me add that it’s also the dumbest excuse for a stock I have ever seen. And the market has backed me up on this, as Horton the elephant would say, 100%.

Jim: Oh, I don’t know. The other day it rose a fraction--to around $1.50 a share.

Mike: That won’t make anybody happy who bought this stock at $10.50 a share at its initial offering back in June 1999.

Jim: It’s really sad. Now look, I know our readers would prefer we talk about a stock worth buying instead of a penny stock that should be avoided. But Salon.com provides a good lesson on over-hyped “dot-com” stocks that went sour in a hurry.

Mike: Just the other week, Salon.com said it was laying off a sizable portion of its writing staff. In fact, its chief executive and editor, David Talbot, made the announcement and had to actually announce that one of the people he was letting go was his wife! She headed one of its departments and wrote on women’s issues.

Jim: Yikes! But I’m not surprised, because Salon.com had warned that once again it was not only going to lose money in its fiscal fourth quarter--

Mike: --but lose a lot more than people expected.

Jim: Right. What’s ironic is that several old-fashioned magazines that focus on the Internet--I’m talking about ones actually printed on paper--are chock-full of advertising these days. Salon.com’s revenue is growing too. It totaled $8 million in its fiscal year ended March 31, more than double the prior year.

But the company also lost $33 million last year, and Wall Street has completely shunned this stock. So would I.

Mike: One example of those ad-laden paper magazines you mentioned is the Industry Standard, which covers the Internet and is run by a friend of ours. Every week this thing is so heavy with ads that it could pass for the June edition of Modern Bride. I mean, you could hammer a nail with it.

Jim: If you so desired.

Mike: But seriously, some of these paper magazines also are thinking of going public. I hope they’re taking a long, hard look at what happened to Salon.com before they consider jumping into the public market.

Jim: Exactly, because even if your top line is growing, your bottom line better be growing too, or investors will walk away from you. Or more precisely, you better just have a bottom line that shows a positive number.

Mike: All these publications--whether on paper or electronic--need to take a serious look at the basic economics of general-interest magazines.

It has been an article of faith, as long as I’ve been reading, that some magazines that cover politics, trends, society, culture and now technology, are profitable, and some are not. Overall, there are very few that make lots of money.

Jim: Some special-interest magazines make a good dollar, because they have specialized advertising that’s focused on their niche.

Mike: You can always identify those magazines because they’re the ones whose readers buy them for the ads as much as the articles. Modern Bride, for example. But the Atlantics, the Harpers, the New Republics and the New York Review of Books of the world hang in there, year after year, as sort of public services without the kind of growth that would stand up to investors’ scrutiny.

And I think Salon.com fell squarely in that league.

Jim: So explain what they were thinking, to go public.

Mike: I believe that those guys in San Francisco looked around one day and said, “Well, we’re on the Internet. The Internet is hot as hell, so let’s have our own IPO.” Unfortunately, the finances of magazines like this shouldn’t be exposed to public scrutiny, any more than the making of sausage.

Jim: To be fair, when Salon.com went public, Wall Street wasn’t yet using the cold, steely eyes to evaluate dot-com companies as it does now. Back then, investors were simply buying Internet stocks willy-nilly. No more. Now you make money--or else.

Mike: Even though this stock got as high as $15 right after its IPO, it was one that most people still looked at with considerable skepticism. Don’t forget: The business model of paper magazines is well understood. The ads are there. People actually pay some attention to the ads.

But it isn’t the same with online magazines. Nobody is satisfied with the degree to which readers actually pay attention to online advertising. Nobody has figured out how to make that advertising compelling in any consistent way.

Jim: It’s mostly just annoying.

Mike: Exactly. The real shame is that Salon.com probably could have survived indefinitely as a quiet private investment for somebody with a lot of money. Instead, every figure this company puts out for public scrutiny looks terrible. And if things don’t pick up--and I don’t see that they’re going to pick up much--this thing could go out of business entirely, and that would be a real shame.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).