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Thursday, July 12, 2007

Is CNET worth a look?

I was reading the 24/7 Wall St. blog today and I was surprised to see that for the month of May, CNET is the number 10 most trafficked web site on the Internet.

I consider myself reasonably savvy on Internet matters. I was familiar with their flagship site cnet.com where they provide reviews of PCs, cell phones, MP3 players and other consumer electronics products, downloads of free or shareware software, etc. I had kind of noticed that they provide news on the electronics industry and I had seen references to a few blog posts that came from CNET writers. As a former software developer I had also used their ZDNet and TechRepublic sites. I had no idea, however, that the CNET company (not to be confused with the cnet.com web site) also owned a ton of other web properties.

So I thought I might do a quick profile of the company and try to determine if we have an overlooked investing opportunity.

To give you an idea of the breadth of their properties, they own Chow for foodies, GameSpot, TV.com, TechRepublic, ZDNet and WebWare for techies, MySimon for comparison shoppers and the list goes on. In keeping with the latest trends, they now have a blog network featuring the writings of their editorial staff.

CNET is often knocked by some in the blogosphere for having high expenses and not enough first-mover hipness. Nevertheless, they have managed to become a $2.5B company. The bloggers are right, though, about the company's profitability problems. Over the course of the last year, on revenue of nearly $400M, CNET still managed to lose a penny a share. Some quarters they are profitable, some quarters they are not. The lack of consistency and delivery on potential has knocked the share price from a high of $16 back in January 2006 to today's $8.49

Bank of America analysts think there is some upside in the stock. They feel CNET is well-positioned to take advantage of the trend whereby more and more advertising dollars are making their way to the web. And then there are the usual takeover rumors.

Are blogs the way out for CNET? They have tons of professionally generated content but they are being left behind by sites that have user-generated content: blogs, YouTube, etc. CNET has showed it can swim in these waters with its very successful tv.com site which has millions of users and loads of user-generated content. The beauty of that model is lots of traffic and very low cost. The question is, how best to extend the model? Perhaps the answer is for CNET to buy an existing blog network like Gawker Media or even a property like Seeking Alpha. For that matter why not some individual blogs that have good traffic numbers and lots of buzz like TechCrunch, Gizmodo or Life Hacker? These sites would be a good fit with CNET's existing properties.

The next part of the question is how best to exploit the strengths of CNET? If they bulk up by enhancing their portfolio of blogs, will it be enough to get to real profitability? It's tough to give an unequivocal yes to that question; current management has not given much reason to be optimistic in this regard. There are two directions the company can go: (1) replace top management and start treating the company like a turn-around situation or (2) sell themselves to a company where real synergies will allow CNET to reduce costs in a significant way. From my point of view, I think it would be a great way to juice AOL and make it relevant again if Time Warner (TWX) stepped in and bought CNET. Time Warner understands media and professional content in the manner in which CNET presents it and could combine their properties and processes to wring some of the excess costs out CNET.

At this point, however, CNET's stock price is languishing. They report earnings later this month and, based on the jump in the stock today, maybe they have some good news up their sleeve. I any case, I believe CNET is a company we should keep an eye on. If one or more of these scenarios plays out, we could finally see the stock price jump. For now though, it's best to take a wait and see attitude.

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