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The Dilemma of CNET's Success

By Sarah Lacy Shelby Bonnie remembers well the precarious state of the online advertising industry in the summer of 2001. His company, CNET Networks (CNET) was struggling through the tech bust, and he had just agreed to become the chairman of the fledgling Interactive Advertising Bureau. The standard-setting trade group was almost bankrupt. It had a paltry 34 members, and soon after Bonnie took the helm, the IAA's chief executive quit. "I can't let this go under," Bonnie recalls thinking at the time. "What will that say about the state of online advertising?"

The IAB didn't go under, and like the online ad industry as a whole, it's now doing quite well. CNET, too, had a good year in 2004. Sales were $291.2 million, up 18% from 2003. Revenue from online ads was up 30%, to $256.2 million. And earnings were $11.7 million, vs. a loss of $26.3 million in 2003.

"COST-PROHIBITIVE." Despite all that, edgy investors are worried about CNET's first-quarter forecast, released Feb. 2. The company expects to bring in $72.5 million in revenue in the current quarter and post a loss of less than $2.6 million. Wall Street had expected $77.6 million in revenue, with about $1.5 million in profits.

Should companies similarly reliant on online advertising be worried? The short answer is no. To start, Bonnie says the biggest problem is weaker-than-expected advertising in CNET's fledgling print business, not online. And CNET faces an odd Catch-22: It's a tech site, so it can charge a premium for tech advertising. But as it tries to grow and attract more mainstream consumer ads, it's discovering its rates are too high.

In 2004, tech-site ad rates jumped 46%, vs. no more than 4% for finance or sports sites. So CNET took in a lot of money from core advertisers like Microsoft (MSFT), Sun Microsystems (SUNW), and Hewlett-Packard (HPQ), but to maintain its growth, it needs to land a broader variety of advertisers. With ad prices so high, "for a retailer or entertainment company they're cost-prohibitive," says Jeff Lanctot, vice-president for media at Avenue A/Razorfish, the largest buyer of online ads in the U.S.

WIDENING THE FOCUS. Certainly, mainstream marketers do plenty of advertising on Web sites with a particular focus, such as travel or even technology. In 2004, such spending was 39% of all online ads. But only 7% of that money finds its way to tech sites, according to Avenue A/Razorfish estimates. More widely popular sites such as Yahoo (YHOO) and Google (GOOG) don't face the same problem. With online ads up almost 40% in 2004 and poised for similar growth this year, they're not boxed in by a narrow clientele.

It's a problem Bonnie recognizes, but he isn't ready to detail CNET's solution. "We've been able to charge attractive rates, but now we're wondering how we bring in a broader set of marketers," he said in an interview with BusinessWeek Online. Since it can't charge Dell (DELL) one rate and Gillette (G) another, CNET's best bet may be continuing to branch out into more technology lifestyle sites like its GameSpot for video-game players.

In fairness, CNET isn't exactly screeching to halt. "When we start to think 25% growth is a disappointing number, it's a little scary," says Lanctot of Avenue A/Razorfish. But in an industry where investors demand hypergrowth, that's to be expected. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau

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