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The Wolf at Salon's Door

By Thane Peterson Rumors coming out of, the pioneering Internet magazine, are that it could be saved by an 11th-hour cash infusion. "Salon expects good financial news [this] week that will have a positive effect on our finances," says company Chairman and Editor-in-Chief David Talbot -- without, for the record, volunteering any specifics. But a former exec says the company will announce a bailout package and additional cost-cutting measures. "My understanding," the ex-exec says, "is that they have raised some money. [The investors] are people with a certain affinity for Salon."

If the bailout comes through, it'll be just in the nick of time to save this unique voice on the Web. Salon (SALN) may be close to running out of money, by my calculation. A little more than four months ago, the company said it had only $3 million in cash left -- enough, it announced at the time, to last from three to five months. Unless the company's top managers succeed in their efforts to convince investors to cough up more cash, this grand experiment in online journalism may be over. That would be a shame.

WEALTHY ADMIRERS. Investors who likely are being courted include John Warnock, retired CEO and co-founder of Adobe Systems (Adobe is Salon's biggest shareholder, with a 15.1% stake), as well as Constellation Venture Capital in Los Angeles, which has a 5.2% stake. Investment banker William Hambrecht, whose firm handled Salon's IPO, also has been asked to ante up. Hambrecht controls 11.6% of Salon's shares and added significantly to his holdings late last year and early this year. Board member and Salon investor Norman Lear, the famed TV producer, is another possible investor. (The companies mentioned declined to comment.)

If Salon does raise more cash, I suspect it will come more or less from wealthy admirers. Most ambitious general-interest publications -- including The New Yorker (owned by publishing magnate Si Newhouse), Talk magazine (owned by Disney's Miramax unit), and Harper's (supported by the MacArthur Foundation) -- are subsidized by their corporate patrons, largely for their prestige value.

In Salon's case, the idea could be to buy some time to pare down financial losses so that the company will be more attractive as a candidate for a merger or acquisition. Scott Moore, publisher of rival, which is owned by Microsoft, thinks "there's a strong possibility that they'll be bought out," though he adds: "We're definitely not in the market to buy Salon."

Salon is a hard sell because it has struggled so mightily as a business. The company has raised about $60 million since its launch six years ago, including $35.6 million generated by a private placement and an IPO in 1999. The Internet ad slump hit it even harder than most publications, and its revenues plunged to just $970,000 in the fiscal fourth quarter, which ended on Mar. 31 -- an astonishing 57% drop from the previous quarter. The $5.5 million it lost during that quarter was the latest in a string of big losses. In the fiscal year that ended on Mar. 31, Salon lost $19.2 million on revenues of just $8 million.

LONG WAY DOWN. Salon also is in danger of being delisted by Nasdaq, which would give its shares the lack of status and pinched liquidity of a penny stock. Salon's shares, which came out at $10.50 in mid-1999 and topped $15 at one point, had fallen to 29 cents as of Aug. 6. The company appealed the delisting at a July 26 hearing and has a plan to do a reverse share issue to raise its share price above $1, the minimum price Nasdaq accepts for a listed stock. But the issue may be moot unless Salon gets more cash -- and does so very soon.

Salon would be a lot more attractive if it could at least return to the revenue levels of last year, but that could be a tough slog. Most observers don't expect a turnaround in Internet ad placements, which account for nearly all of Salon's revenues, before 2002. The company is trying to boost revenues by creating a premium, subscriber-only version of its site that is ad-free and contains additional content.

In three months, it has signed up 12,000 subscribers, Talbot says, at $30 for one year and $50 for two. But the $300,000 or so that those subscriptions will add to annual revenues is a drop in the bucket. Eventually, the company hopes to sign up 1% to 2% of its 3.6 million or so regular readers, which it estimates would generate $900,000 to $1.8 million in annual revenues.

SLASH, CUT, REDUCE. In the meantime, Salon has been aggressively slashing costs. Talbot says it now operates on a $10 million annual budget, a huge cut from its $26.8 million in expenses during its last fiscal year. The company wrote down a big chunk of ill-fated diversification moves such as its $5 million purchase in 1999 of The Well, a subscription-based Internet community, and its $3.5 million acquisition of MP3 Lit, a Net-based audio and spoken-word outfit.

The company also has reduced marketing expenses, cut staff by

one-third to 100 as of Mar. 31, sublet expensive real estate rented during the boom, and forced "substantially all" of its employees to take a 15% pay cut. (CEO Michael O'Donnell says his and Talbot's pay, which was $300,000 apiece last year in salary and bonus, has been pegged at a $191,000 base salary, with no bonus, in the current fiscal year.)

The risk of deep cost-cutting is that it could hurt Salon's editorial quality. The site's strength is what it once called its "cacophony of voices": marvelous travel and cultural coverage, news-breaking political stories, and columnists ranging from social provocateur Camille Paglia to radio host Garrison Keillor. But as finances have tightened, editors have had to add a lot more canned wire copy. They also have turned off some readers with tasteless stories that seem mainly aimed at attracting attention to the site by creating controversy. Some readers I talked to gripe about the soft-core porn feel of the sex columns and reviews.

TAKING A LICKING. For many, the low point came in January, 2000, when sex columnist Dan Savage covered the Iowa Presidential caucuses for Salon and described how he went around licking hotel doorknobs in an attempt to infect Gary Bauer and his colleagues on the Christian Right with the flu virus.

Talbot strenuously objects to the suggestion that Salon's quality is suffering more significantly than that of any other magazine. "There are fewer stories, but the quality is just as high," he says. "Every media company has had to take steps to address the fall in advertising this year. We're no different."

Still, as an independent, Salon clearly is at a financial disadvantage to many of its rivals. Being part of Microsoft means that Slate's marketing expenses are a tiny faction of the $7.6 million Salon spent last year, for instance. While Salon has to maintain its own sales force, "our staff sells Slate, MS NBC, Carpoint and everything else Microsoft does," Moore notes. He says Slate has only 33 employees, one-third Salon's total as of the end of March. But, partly because of a lot of free promotion on the MSN site, Slate's tally of unique visitors hit 4.8 million in June, well above Salon's recent monthly peak of around 4 million.

Slate's losses are also tiny compared to Salon's, says Moore. "We're essentially at breakeven," he claims. "We can't say we're profitable because we didn't cover our share of Microsoft's overhead. But we covered our costs" in the fiscal year that ended in June.

IMPOVERISHED ORPHAN. Salon, by the way, also lacks the name recognition and strong corporate parents of publications such as BusinessWeek Online, The Wall Street Journal Interactive, The New York Times On the Web, and Time and Newsweek's online magazines. Established print magazines can constantly remind readers to log onto their Web sites, so, like Slate, they require far less marketing expense than an independent like Salon.

Can Salon make it? I hope so. It's an ambitious attempt to create a place where people with all sorts of different interests and political persuasions can go and find something interesting to read. I tend to agree with Paul Grabowicz, a journalism professor at the University of California at Berkeley, when he says, "Journalistically, I don't think much went wrong with Salon." Unfortunately, you can't say the same about its finances. Peterson is a contributing editor at BusinessWeek Online. Follow his weekly Moveable Feast column, only on BW Online

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