CNet Sets Pace in the Battle for Tech-Savvy Internet Shoppers
Even after spending $100 million recently on a marketing campaign, San Francisco-based Internet news and commerce company CNet Networks is hardly the household name that Yahoo, America Online and EBay are.
But CNet can claim something that eludes all but a handful of the Internet elites: It’s one of only a dozen or so pure Net companies that have reported profits.
CNet runs a network of technology news and shopping Web sites, including CNet.com, News.com and Computers.com, and sends out news via free e-mails to 11 million subscribers.
By focusing on tech news and information, CNet targets a narrower audience than its better-known Web brethren, such as Amazon.com or Priceline.com. CNet visitors can click through more than 100 sorts of color ink-jet printers listed for sale by outside vendors, scan editor and user reviews, then see where they are all available and at what price. It offers tech product auctions, software downloads and technical support questions and answers.
CNet has lured technology advertisers like Compaq and Dell, which are willing to pay more to reach a tech-savvy audience that is more likely to buy on the spot. And CNet’s audience is growing: Its users need reams of information as tech products and prices change more rapidly. According to Media Metrix, CNet was the 18th-most-visited Web site network in March, with 10 million unique visitors, up from 7 million in January 1999.
Advertising sales now produce 60% of CNet’s revenue. But CNet has begun to broaden its sales by providing raw data on more than 100,000 pieces of hardware, so computer distributors and their customers can compare everything from a Toshiba notebook computer with an Apple desktop PC by price, memory and other factors.
CNet’s audience will grow because “technology is seeping into every facet of our daily lives,” said WR Hambrecht & Co. analyst Derek Brown, one of 14 analysts who rate CNet stock as “outperform” or better.
CNet is still an Internet stock, though, and its shares have taken a bumpy ride. The company went public in 1996, at a split-adjusted price of $4. It soared to a high of $79.88 last December, then tumbled to below $25 in the April Internet stock sell-off. It closed at $32.38 on Friday.
For 1999, on revenues of $112 million, CNet had an operating loss of $61 million, but it earned $417 million after the sale of Internet investments.
Then in this year’s first quarter, CNet reported pro forma profit of $1.5 million on revenue that more than doubled to $45.4 million. Pro forma numbers keep out merger costs, stock-based compensation and certain other expenses whose exclusion is accepted by many Wall Street analysts.
“CNet just had great timing with respect to getting to profitability,” said Thomas Weisel Partners analyst Matt Finnick. “The market definitely has turned [to an emphasis on profits], and the company is very astute in seeing that.”
CNet’s closest competitor is ZD Net, also in San Francisco, which is majority owned by longtime trade magazine publisher Ziff-Davis.
Begun as a Web companion to existing Ziff-Davis publications like PC Week and Macworld, ZD Net has many of the same things CNet has: radio and television programming, comparison shopping for technology products, and technology news on the Web and via e-mail. ZD Net also rates one step higher than CNet on the latest Media Metrix Web ratings.
But Ziff-Davis has lost money since majority-owner Softbank took it public in 1998, and it recently agreed to sell off its magazine and trade show divisions. “Ziff-Davis was stuck in the mud, with too many allegiances,” said one veteran of both Ziff-Davis and CNet.
And ZD Net’s tracking stock slid to $11.81 on Friday from its March 1999 initial public offering at $19. Ziff-Davis plans to merge with its Internet unit again, and ZD Net will emerge as the surviving stock. Ziff-Davis officials declined to be interviewed for this report.
In this head-to-head battle, Wall Street favors CNet, which now has more than $3 billion in market value, or triple the worth of Ziff-Davis.
“If it keeps going in this direction, I don’t see any competition” for CNet, said Alice Hill, who came to CNet as employee No. 50 and served as vice president of development before leaving this year to join online home repair store Cornerhardware.com.
Inside CNet, employees say the company’s discipline is likely to intensify under the company’s new CEO, former Chief Operating Officer Shelby Bonnie.
Bonnie in March succeeded CNet’s founder and now chairman, Halsey Minor.
The quintessential entrepreneur, Minor’s initial vision for CNet came to him on a sick day he spent watching cable television at home: Why not have a channel for technology news? Originally planned as TV programming that networks would pay to air, CNet soon morphed into a Web site with nearly incidental television and radio operations.
“There are some similarities between Halsey and [Apple Computer founder] Steve Jobs. They’re both pretty hot-headed and demanding, but they develop environments that things come out of,” said a former CNet executive.
Hectoring employees or heaping praise on them, Minor sent epic e-mails at any hour that seemed to demand an immediate response.
Minor’s most powerful insight was that the company should provide a combination of content and commerce. The nexus has been fundamental to the company’s success, and Bonnie isn’t planning to fool with that formula. “We are going to sit at the crossroads,” he said.
As an example of the power in that position, in September 1998 CNet was at the vanguard of Web sites demanding fees for delivering browsers to the electronic checkout stands of hardware vendors. CNet’s vendors complied, and CNet now gets an average of 60 cents for each referral, reducing its dependence on the shakier business of selling Internet banner advertisements.
Now when a CNet visitor chooses to read computer reviews of “desktops,” then clicks on “Top 5 Cheap PCs,” then “Dell WebPC,” and finally “configure and price,” off the visitor goes to Dell’s online store--and Dell sends CNet a check.
Other online sites have since adopted the CNet model. “It fundamentally changed the competitive marketplace,” Bonnie said.
On the surface, Bonnie has a lot in common with his predecessor and friend, Minor, who founded CNet in 1992. Both are competitive 35-year-old University of Virginia graduates with Wall Street backgrounds. Both own about 12% of the company, making each worth about $400 million in CNet stock alone.
Fortunately for the other CNet investors, that’s about where the similarities end. “Halsey was always running out of his office screaming that the site was down,” a former executive said. “Shelby was kind of the cool voice of reason.”
Now that Minor has reduced his schedule at CNet, he plans to spend more energy working as a venture capitalist.
And CNet has more stable leadership just when it needs it. Now that the company is too big to be run in fits and starts, it requires steady relationships with established business partners such as PC makers and its new data customers like Ingram Micro, the world’s largest computer wholesaler.
Since January, CNet’s big push has been toward supplying such businesses with information about electronic hardware. That strategy builds on the greatest strength of CNet--providing a wealth of data to an industry where current information of all sorts is crucial to doing business.
CNet has electronically organized all sorts of data on computer devices. A customer can request information on the cheapest possible desktop computers per megahertz of processor speed, a certain minimum memory, monitors no smaller than 20 inches, and so on, and the CNet data will produce a list that ranks the results.
“Because the [CNet] data is highly standardized, it supports very detailed searches and product comparisons,” said Jerry Goetsch, senior director of Web sciences at customer Ingram Micro in Santa Ana. And with all the CNet data standardized, automated customer search programs can even make more decisions with less human supervision.
There are other competitors in this field. Austin, Texas,-based PCOrder.com offers a similar data service. But CNet is bigger and has a natural tie-in with its news services.
And in another bid to beef up its relationships with the business world, this month CNet began an “enterprise” version of its electronic news pages and e-mails. The package is aimed at businesses and includes summaries of research from Forrester, Gartner and other analyst firms that typically charge for their information.
One criticism of CNet is that much of what it does earn has come from the sale of investments in other Internet stocks. Minor and Bonnie argue that they shouldn’t be faulted for being shrewd judges of the markets.
And their record gave CNet more credibility last month when it announced another near-first for an Internet company--a $100-million buyback of its own shares.
“We know our own story,” Bonnie said. “We have a lot of confidence in ourselves.”
