Cnet Makes the Right Bet

Cnet Makes the Right Bet

Cnet Makes the Right Bet

Moneybox
Commentary about business and finance.
July 5 1999 6:51 PM

Cnet Makes the Right Bet

When stock prices explode the way they did last week, it's easy just to ascribe the leap to irrational buying or catch-up investing on the part of money managers suddenly concerned that they're going to be left behind. (Actually, this is the week when that will happen.) But one sign that investors aren't just buying indiscriminately is the way companies that disappoint or confuse the market are mercilessly punished. Starbucks, for instance, said its earnings would fall short of expectations and saw its stock price drop 31 percent in a day. (More on this tomorrow.) And Cnet, which was one of the few prominent Internet companies turning a profit, saw its shares plummet after it announced that it was embarking on a $100 million advertising campaign that would result in losses in the next two quarters and the whole of fiscal year 1999.

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At first glance, what happened to Cnet is somewhat perplexing, given the fact that all the company is doing now is precisely what companies like E*Trade and Amazon have been doing for a couple of years, or for that matter precisely what America Online did, to great effect, when it spent half a billion dollars on advertising and carpet-bombed America with AOL disks. (This was back in the days when people actually used disks and not CD-ROMs.) What investors were reacting to, then, was not the strategy per se but rather Cnet's rather sharp U-turn away from its previously announced emphasis on profitability. Just a few weeks ago, in a Fortune story on the company, Cnet executives took great pains to distinguish themselves from other .com companies because they were in the black. So this is a rather profound change in direction.

On the other hand, that doesn't make the decision wrong. Consistency has its virtues, and Wall Street likes companies that stay on message. But staying tied to the way you've always done things just because you've always done them that way is not the right approach to running a business, particularly one in an industry as wide open as the Internet remains. Cnet spent just $300,000 in offline advertising and another $4.2 million in online advertising last year. That helped it turn a profit by keeping marketing expenses low. But it also probably contributed to the fact that in a recent survey of the company's target audience--essentially anyone who can spend a lot of money on technology, from everyday consumers to information technology professionals--just 4 percent of those surveyed could even identify Cnet. (By comparison, 41 percent could identify Yahoo, a number that itself seems surprisingly low, when you consider how much publicity that company has received. Do you know anyone who couldn't identify Yahoo?)

Given those numbers, the choice Cnet was confronting is pretty stark. On the one hand, it could continue just doing what it's doing, turning a small profit and growing at a steady but not outrageous pace. (In May, for instance, it had 190,000 more users than in April, an increase of about 2 percent.) Or it could spend heavily on advertising, take substantial losses for a year and a half, and potentially transform itself from a popular but ultimately second-tier site (it ranked 17th in the latest Media Metrix survey) into what it really wants to be, namely the ESPN or Nike of the tech community.

There is, of course, no guarantee at all that the Cnet ad campaign will work. The company's business, which ranges from news to facilitating e-commerce, isn't as easy to explain as Amazon's or E*Trade's. And who knows if there are enough profits to be made as a middleman on the Net to recoup the $100 million in spending? But even when you take all that into account, the decision seems like the right one. Although the Internet is obviously becoming a part of mainstream America, it's still early enough that the most important thing to have is not profits but rather loyal customers. AOL succeeded because it realized that spending millions today could get it four years down the road. Cnet is not going to become AOL. But if it hadn't done something, it was essentially condemned to meander along as a perfectly fine, if overvalued, company. With this campaign, it's wagering its future on the upside. If the campaign fails, Cnet may not be around five years from now. But if it succeeds, it'll be huge. And at this point in the history of the Internet, that's the right bet to make.