Salon.com’s Struggle to Succeed Plays Out in Unsightly Detail
Salon.com is the type of enterprise that by its character attracts far more media attention than its size alone would warrant, like Pixar Animation Studios or Krispy Kreme Doughnuts Inc. We’re talking, after all, about a company with $4 million in annual revenue, delisted shares trading in the low hundredths of a point and no record of profit, ever.
The San Francisco company’s release a week ago of its quarterly financial report, which was dire, occasioned another round of intense public commentary. “You’d think we were Apple Computer,” its chief executive, Michael O’Donnell, complained -- naming another firm with an outsized mind-share -- when I reached him to add this column to the frenzy.
When pressed, however, he acknowledged that there are legitimate reasons for the fervent media interest in the fate of his enterprise. (A) It’s also a media company, the producer of arguably the best magazine appearing exclusively online; (B) it had the hubris to have gone public in 1999; and, therefore, (C) its struggle to find a successful -- i.e., profitable -- formula for publishing general-interest journalism and commentary on the Web has been played out in the open, in all its unsightly detail.
Few of Salon’s quarterly reports have been as ugly as the latest, in which the company stated that unless it can finalize some financial deals currently under negotiation it might not last out the month.
“At first glance it looks pretty bleak,” O’Donnell says, before adding that if only the company can line up that new financing (some of which involves a further cash infusion from John Warnock, co-founder of Adobe Systems Inc., who has been a valiant and loyal backer), “we think we can get profitable this year.”
Of course, one of the downsides of running a public company is that O’Donnell has been on record saying the same thing in years past.
Much of the commentary on the latest financials concedes, as it must, that Salon is an extraordinary project. Founded in 1995 by a group of refugees from the San Francisco Examiner, it has held down a strong position at the left-leaning sophisticates’ end of the reading market, assisted by a stable of highly distinctive writers appealing to those who love iconoclasm.
As such, Salon has become an ongoing experiment in whether this variety of online publication can ever make money. Over the years it has tried just about everything to attract revenue. It has tried relying solely on advertising, charging subscriptions for some content, charging subscriptions for all content and, in its latest gambit, requiring readers to click through an interactive ad in order to obtain a “pass” allowing them access to everything on the site for several hours. O’Donnell says most readers prefer to go the day-pass route rather than pay the $30 yearly fee to subscribe (soon to be raised to as much as $50).
None of these stratagems has placed Salon in the black, but the experience has made O’Donnell an expert in the peculiarities of online publishing. His views are worth considering.
O’Donnell believes that Web publishing is still shaking off a number of initial missteps. Among the biggest is that it overpromised what it could do for advertisers.
“The early pioneers made some grave mistakes,” he says. “These were types who told advertisers, ‘The Web will give you accountability.’ ”
The idea was that interactive data would tell advertisers who was viewing their online campaigns, who was clicking on them to find out more and who was goaded by their messages to make purchases on the spot.
This concept spawned an advertising model to pay Web sites by the “click” -- in other words, by a percentage of sales generated instantly from viewers. “That’s an unrealistic standard,” O’Donnell grouses, and it’s one reason that online advertising has been seen as such a failure. If 15% of the reading audience is online, O’Donnell notes, then ad sales should be commensurate. But, in fact, they’re only 1% to 2% of the total spent in all media.
Salon went public in June 1999 at a valuation of $120 million, when its annual revenue was on the order of $3 million. By some contemporary measures, O’Donnell points out, this premium was conservative.
“Companies were valued at a billion dollars for selling pet food online. And it wasn’t just us: The very brightest minds on Wall Street were valuing companies that way -- look at the AOL Time Warner merger.”
Like many start-up enterprises of the era, Salon did not go public because it needed the money so much as because the money was there to be had.
At the time, an entrepreneur of my acquaintance described the difference between venture capital and stock market funding thus: “Venture money is expensive money, but it’s smart money. Public money is cheap money, but it’s stupid money.” He wasn’t quite saying that shareholders are morons; more that the public markets have little patience for the nuances of building a company in a novel industry and no tolerance for the roller-coaster swings that early-stage investing entails.
Salon has turned out to be, as the earliest critics of its IPO maintained, particularly unsuited to the public markets.
O’Donnell professes to believe, or hope, that public shareholders will tolerate the same tide of red ink that traditional magazine publishers sometimes grant their favored offspring before demanding they turn a profit. “How long does the average magazine take to reach profitability?” he asks. “Sports Illustrated -- 12 years. USA Today -- 10 years.”
But these publications were developed inside corporations big enough to hide the years of losses in a dark corner of the accounting department. Salon does not have that luxury. Every expenditure drops directly to the bottom line, where it’s paraded past the investment community.
“Being a public company has been a huge burden,” concedes O’Donnell, whose voice sounds permanently weary.
The tens of millions that Salon earned from its IPO are gone now, leaving only the SEC’s unrelenting public disclosure requirements in its wake. The Web site survives largely on periodic follow-on investments provided by Warnock and other devotees such as Silicon Valley investment banker William Hambrecht.
It’s as if Salon has come around, in the end, to the very financing model followed by similarly idiosyncratic print magazines: Find a well-heeled backer who will keep the operation going as an expression of noblesse oblige, as Martin Peretz does the New Republic and David Bradley does the Atlantic.
O’Donnell insists that advertisers eventually will spend money online on a scale that would make Salon self-sufficient. I hope he’s right. But I also hope that Warnock and Hambrecht stay in for the long haul, just in case he’s wrong.
*
Michael Hiltzik can be reached at golden.state@latimes.com.
