The Wall Street Journal-20080129-New Media Icon Grapples With Newer Media Rivals
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New Media Icon Grapples With Newer Media Rivals
Full Text (1305 words)CNET Networks Inc. has achieved many Internet companies' dreams: more monthly users in the U.S. than Web phenomenon Facebook Inc. and about $400 million in revenue annually.
But the San Francisco company finds itself the target of hedge-fund and venture-capital investors looking to take control of its board. Its shares have fallen 45% in the past two years to $8.34 on the Nasdaq Stock Market.
The investor battle raging over the iconic Internet media company offers an object lesson in how high-tech Web firms that miss a beat can be vulnerable to succeeding waves of Internet technology. With the Web in its second decade as a popular consumer medium, some well-known companies that arose in its first decade, like CNET and Yahoo Inc., now face heightened competition.
"There are other sites now where you can get serious technology news," says CNET user Alan Wilensky, a San Mateo, Calif., analyst who advises companies on their Internet strategies. He used to read CNET.com daily but is now more likely to go to rival tech sites such as TechCrunch and Engadget. "I've gone totally cold on CNET," says Mr. Wilensky, who has no link with CNET or the dissident investors.
Founded in 1992, CNET operates a string of Web sites focused primarily on technology and entertainment, such as News.com, Game- Spot, TV.com and ZDNet. Those sites are staffed by editors and reporters and attract blue-chip tech advertising. CNET, along with the likes of Yahoo and Time Warner Inc.'s AOL, was for a while one of the few places on the Web that an advertiser could reach a significant number of consumers.
But the rise of blogs and online-ad networks has altered the landscape for such premium Web-publishing efforts. As tech blogs proliferated, CNET's News.com and ZDNet tech sites lost 27% and 4%, respectively, of their U.S. readers over the past year, according to comScore Inc. Online-ad networks allow advertisers to reach large numbers of consumers spread across many different sites. Such networks -- including ones now owned by Yahoo, AOL and Microsoft Corp. -- offer a single place to buy ad spots on many other sites. The ad networks often cut deals to fill ad slots that Web publishers' own sales forces haven't sold. Some advertisers see them as a one-stop way to have their ads displayed to a large number of consumers at a lower cost than traditional Web-site ad purchases.
Both CNET's management and the dissident investors agree that CNET needs to adjust to the changed Web landscape -- and both believe the company can get back on track with the right turnaround strategy. Their prescriptions in general involve bringing more users to its sites and increasing the amount of ad revenue it generates for each visitor.
The dissident investors argue that CNET has a "failed strategy" and lost its focus on core assets such as the CNET.com, Chow, TV.com and Game-Spot properties, according to people familiar with their thinking. They say the group believes a combination of tactics is needed, including making CNET content more easily found through search engines, selling ads for other non-CNET Web sites in the same topic areas in return for commissions, rethinking CNET's technical infrastructure for serving up ads to boost its ad revenue, and opening up its sites further for consumers to post content and interact with each other.
"CNET Networks has staying power," the company says. "We've demonstrated this in our ability to innovate to meet many different market conditions, especially over the last year as we've made changes to continue to drive our business forward and succeed."
CNET's management, led by Chief Executive Officer Neil Ashe, has said it is tackling problems. In October, it sold for $45 million Webshots, an underperforming photo-sharing site it acquired in 2004 for $70 million. CNET in March launched BNET, a business site that by December had about six million users, with most of them coming from its $20.5 million November acquisition of FindArticles.com, which allows users to browse article archives from different publishers. It also replenished its executive ranks with media veterans such as Stephen Colvin, former CEO of Dennis Publishing USA, the publisher of Maxim, Blender and Stuff magazines.
"We have significantly improved our company," said Mr. Ashe at a Citigroup investor conference Jan. 9. Mr. Ashe, who became CEO in late 2006, dismissed the idea that CNET had to lower its premium ad rates because of competition from blogs and other rival ad sellers, though he acknowledged that advertisers have recently become more comfortable with buying ads through ad networks. One person familiar with the matter says CNET is weighing whether to launch an ad network of its own to sell ads on behalf of other Web publishers.
CNET's Crave gadget blog (crave.cnet.com) and Webware site are examples of how the company has embraced blogging itself, say people familiar with CNET management's thinking. Launched in late 2006, they are growing, but Crave had just 243,000 users in December and Webware had 85,000, according to comScore.
CNET, which has about 2,600 employees, has faced more difficulties than some other early Web properties. Unlike Yahoo, AOL or Google Inc., CNET doesn't have strong Web search or email offerings to bring users to its front door daily. Also, in October 2006 a CNET board committee concluded company management backdated stock options and several top executives, including co-founder and CEO Shelby Bonnie, resigned. (The Securities and Exchange Commission later closed its inquiry into the matter without taking any action.)
CNET's financial performance has suffered even amid an online-ad boom. Revenue increased a modest 7% to $99.5 million in the third quarter of 2007 from a year earlier, or 9% when some asset disposals are factored out, and its net loss widened to $16.6 million from $2.3 million. By comparison, U.S. Internet advertising rose 25.3% to more than $5.2 billion in the third quarter from a year earlier, according to the Interactive Advertising Bureau trade group and PricewaterhouseCoopers LLP.
While CNET's U.S. users increased 12% to 35.8 million in December from a year earlier -- topping Facebook's 34.7 million -- the total time spent on its sites by users fell about 16% when the sale of Webshots is factored out, according to comScore.
CNET's investor battle became public this month, with filings showing the dissidents built up a 14.9% position in CNET Networks shares and have access to an additional 8% of shares they don't directly control. The dissidents, which include former IAC/InterActiveCorp executive Paul Gardi, hedge fund JANA Partners LLC, venture-capital firm Spark Capital and Sandell Asset Management, have proposed enlarging CNET's board by five members to 13 directors and have put forward several nominees for directors.
CNET has fired back, adopting a so-called poison pill against "coercive takeover tactics" that allows it to issue additional shares at a discount if any person or group acquires 15% or more of the company's stock. Earlier this month, CNET declared that the dissidents didn't meet requirements for putting their proposals before shareholders, prompting an affiliate of JANA to sue the company in the Delaware Court of Chancery. A ruling in the case, expected within the next few months, will decide whether the dissidents will be allowed to nominate their own candidates to CNET's board.
The dissidents' list of board nominees includes figures from early Internet companies, such as AOL's former chief executive officer, Jon Miller; Mr. Gardi, a former executive at search engine Ask Jeeves Inc. and its acquirer IAC, and Jaynie Studenmund, former chief operating officer at Overture Services Inc., which was purchased by Yahoo.
Even if the dissident investors win in court, they face a challenge getting shareholders representing two-thirds of CNET's stock to back their proposal to enlarge the board. People familiar with the matter say the investor group is privately courting other investors.
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Rebecca Buckman contributed to this article.
