When All The News Is Free

Online financial media companies face a hard sell

Never before have so many eyeballs been glued to financial news. Investors have become addicted to the stuff, whether it be the likes of broadcaster CNBC, magazines like SmartMoney, or any number of Web sites with names such as Raging Bull. In fact, volatility is making market news more popular than ever--traffic on some financial Web sites has more than doubled in recent weeks.

Yet online financial media companies such as TheStreet.com Inc., MarketWatch.com Inc., and JagNotes, which feature online news and commentary about stocks, are sucking wind. They are fast using up the cash they raised in their initial public offerings, and their stocks are being shunned by Wall Street. "No one wants to own an Internet content company that's not going to be profitable for 18 months to two years," concedes Thom Calandra, MarketWatch's editor-in-chief.

The real trouble, say analysts, is the flood of financial information, much of it free, on the Internet and elsewhere. America Online Inc. and Yahoo! feature free financial news, as do online brokers like E*Trade. People are loath to pay for financial news and analysis, and it doesn't appeal to a broad array of advertisers. In fact, companies that rely solely on the production of content are digging themselves deeper and deeper into debt. "Long term, online media companies that survive will either be acquired by or strongly integrated with offline media companies," says Matthew Cowan, general partner at Bowman Capital Management LLC, a large investor in TheStreet.com.

Until this happens, these stocks could flounder. TheStreet.com is now trading around $7 a share, down from an intraday high of $71.25 the day it came public last May. "We weren't sure how TheStreet.com was ever going to make money," says Steven Tuen, manager of the Internet Fund. Tuen sold a large position in TheStreet.com stock late last year that had been acquired by a previous manager. MarketWatch.com is 65% off its 52-week high. And less-known financial Web site JagNotes.com Inc. is trading around $3 a share, down from a high of $13 less than a year ago. Even tangential competitors like Telescan Inc., Multex.com, and GlobalNet Financial.com Inc., which also feature news but mostly stock reports and interactive investing tools, are way off their year highs. "These companies will never reach the valuations they once had," says Calandra.

CASH INFUSION. MarketWatch.com may have the best chance of survival. Although still not profitable, reporting a $22.7 million net loss for the most recent quarter, it posted $12.4 million in revenues--300% over last year's first quarter. It has also recently been infused with $86 million in cash, advertising, and promotion from its two largest shareholders, CBS Corp. and Data Broadcasting Corp., which together own almost 70% of the company. "MarketWatch is the leader from a traffic perspective, plus they've done all the right things when it comes to leveraging their content on radio and TV," says analyst Michael Legg of Prudential Securities Inc. Analysts says it's likely that CBS or Data Broadcasting will eventually buy out MarketWatch. Perhaps that's why its stock has popped almost $10 a share since Apr. 25.

JagNotes hardly registers as a competitor in the online financial arena. It posted a net loss of $5.1 million on revenues of just $628,000 in the first six months of last year.

But what about TheStreet.com? James J. Cramer, co-founder and columnist, asserted on TheStreet.com's show on Fox Broadcasting Co. that his company's stock is an excellent buy (for which his own editor, Dave Kansas, took him to task--after all, Cramer is the largest shareholder in the company). His primary argument: The company's large cash position--more than $100 million, which translates into more than $4 a share. Others say TheStreet's only attractive feature is its takeover potential. "TheStreet has built a good brand name that could be maximized by a larger media company," says Prudential's Legg.

TheStreet.com's chief executive, Thomas J. Clarke, rejects the notion that the company is on the block. Still, some analysts speculate that The New York Times Co. may buy TheStreet.com. That's especially true now that plans to offer a tracking stock for the Times' Internet operations could be delayed--or even scrapped--due to market conditions, say analysts. Last year, The Times invested $15 million in TheStreet in cash and services. A New York Times spokeswoman declined comment. MarketWatch.com was in talks to buy TheStreet as recently as two months ago, though MarketWatch CEO Larry S. Kramer says no formal offer was ever made. Yet another candidate to acquire TheStreet is rumored to be ZDNet Group, the Internet spin-off of media powerhouse Ziff-Davis Inc. The company CEO declined comment.

But for any buyer, TheStreet.com comes with financial and managerial woes. It posted a $13.9 million loss in the first quarter of this year on $5.7 million of revenue. And its $100 million cash arsenal is fast disappearing. Joel H. Krasner, an analyst at First Albany Corp., estimates the company will spend about half of it over the next year to stay afloat. TheStreet.com's hasty "burn rate" can largely be attributed to its penchant for recruiting high-priced reporters and columnists. Analysts say the company pays salaries almost twice as high as those of its competitors.

"A MarketWatch reporter makes from $50,000 to $100,000. A reporter at TheStreet makes $75,000 to $150,000. That's a pretty sizable difference," says Carolyn L. Trabuco, an analyst at First Union Securities Inc. Another cost for TheStreet: a vanity headquarters with a real Wall Street address that costs $2 million annually.

There are other negatives. The-Street.com's management shuffle has been in the headlines since November when CEO Kevin W. English abruptly departed. The chief financial officer, Paul Kothari, resigned last month. Other key employees, including the chief information officer, the general counsel, and a top sales exec, have exited in past weeks. "Obviously, if the company was going gangbusters and the stock was going up, people would stay, but they see trouble down the road," says Prudential's Legg, who recently downgraded the company.

OPTIONS NOT AN OPTION. Journalists could eventually start rushing the exits, say analysts. In fact, Martin Baker, editor-in-chief of TheStreet.com's U.K. site, resigned days ago, just six months after taking the job. Moreover, because of its dismal stock market performance, TheStreet won't be able to attract talent with stock options.

TheStreet's troubles, say analysts, continue to stem from its evolving business model. Having resisted offering free content since its inception--a mistake it is still paying dearly for--it will finally begin to do so. Still, big-draw columnists like Cramer, Herb Greenberg, and Adam Lashinsky will be featured exclusively on a new site, RealMoney.com, which is scheduled to be launched by July and will cost subscribers $200 a year. In contrast, MarketWatch.com has always featured free content, and it has a much broader audience and almost three times more viewers than TheStreet, according to Media Metrix. "Subscription-based models inherently limit number of potential visitors to a site," says Trabuco.

Adding to both TheStreet's and MarketWatch.com's woes: Competition is heating up. Popular financial Web site The Motley Fool Inc. just hired a former Coca-Cola Co. executive, C. Patrick Garner, to be its CEO and is gearing up to go public. Also, established financial news broadcasters CNBC and CNNfn are getting serious about their own Web sites. "The offline news organizations are gearing up for an online fight," says Prudential's Legg.

But that's a fight some online financial companies may have already lost.

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