Why CBS's purchase of CNET might work.

Commentary about business and finance.
May 15 2008 6:59 PM

Network 2.0

CBS's purchase of CNET is pricey and tricky, but it might just work.

Well more than a decade into the Internet revolution, none of the traditional television networks can boast that it has built a leading, burgeoning Web business. (That's true for many cable channels, too, with CNN.com, ESPN.com, and Weather.com being important exceptions.) It's not for lack of trying; I can vividly recall the hoopla surrounding the launch of ABC's GO Network in 1999, with the predictions that this "portal" would compete head-to-head with Yahoo and AOL. (Go.com still exists, but does not integrate with ABC's programming in the way that was promised.) And it's not that the networks didn't create compelling content online; CBSSports.com is a perfectly good Web site that nonetheless gets much less traffic than, say, the official Web site for Major League Baseball.

A primary reason for this is that television networks don't actually own much content that can't easily be reproduced elsewhere. So in 2005, Rupert Murdoch showed the networks the next wave: If you can't build 'em, buy 'em. The $580 million purchase of MySpace signaled the effective end of News Corp.'s expensive attempts to create an Internet empire around Fox's assets, and while it's not yet clear how Murdoch will make the MySpace purchase pay for itself, most people believe that a way will be found.

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On Thursday, CBS followed suit by announcing that it has made an all-cash offer worth $1.8 billion to buy CNET, the San Francisco-based network of Web properties. It is the largest one-time investment that CBS has ever made online. As the CBS press release says, this purchase will instantly make the network "one of the 10 most popular Internet companies in the United States," a desirable goal it was hard-pressed to achieve on its own. Predictably, CNET's long-battered stock leapt more than 43 percent by the end of trading Thursday.

So, on that level, a good deal for both companies. But is it enough?

CNET is an odd creature. It's best-known for having established News.com in the '90s as one of the leading places for tech news, gadget reviews, and downloadable software. The basic rap against CNET is that it has failed to make the transition from Web 1.0—essentially publishing online magazines—to Web 2.0, which values interactivity, community, and user-generated content.

The charge is at least partly true and probably exaggerated by the fact that CNET has muddied its identity and mission by snapping up an astonishing number of Web businesses in recent years. Some of those—like Chow.com, Chowhound, and Urbanbaby—are very good editorial sites; others, like shopping comparison site MySimon and photo-sharing site WebShots, are embarrassing category-laggers CNET probably wishes it had never bought. (Indeed, CNET sold WebShots last October for $45 million, $27 million less than it paid for it in 2004.)

Moreover, CNET has for the last several years been plagued with management and performance headaches. In October 2006, the CEO and co-founder Shelby Bonnie resigned after a special committee determined that he bore some responsibility for backdating company stock options for years. Around the same time, credible reports surfaced that CNET's overall Web traffic had plummeted by as much as 50 percent— even more for individual sites. And CNET clearly has trouble finding ways to make its business pay. It blames recent quarters of operating losses on certain one-time expenses, but the fact remains that even the $91.4 million in top-line revenue it reported in the first quarter of 2008 is lower than the previous three quarters. For these reasons, an activist hedge fund called JANA Partners has been doggedly calling for change in CNET's management and board.

So something at CNET ain't right. Is CBS the company to fix it? If this were, say, 2002, I think the answer would be no. Like all its network brethren, CBS has made its own missteps online—any one remember the bizarre, giveaway search engine called iWon? And from a strategic point of view, one could certainly argue that CBS would do better to focus on, say, the Monday and Tuesday night prime-time schedule before taking on a task like fixing CNET.

But CBS has lately demonstrated both effective and creative thinking about the Internet. For starters, the fact that this was an all-cash deal seems likely to get the JANA harpies off CNET's back—their activism has been handsomely rewarded—and give CBS some room to figure out who at CNET is worth keeping and who has to go. Furthermore, its $280 million purchase last summer of Last.fm, a U.K.-based music community site, was a surprising and potentially very savvy move; Last.fm may be less known in the United States than some of its competitors like Pandora, but, as Om Malik suggested at the time, the possibility for Last.fm to supercharge CBS's vast radio empire is real and tantalizing. A much smaller acquisition—the offbeat financial video site Wallstrip—also showed an ability to think outside the normal confines of a TV network. Much of this is attributed to Quincy Smith, the head of CBS Interactive, who is almost certainly the network executive whom the Internet crowd respects the most.

So don't write the deal off. Granted, $1.8 billion is a lot of money; even using generous projections for CNET's performance this year, it's something like 20 times earnings. But if ever there were a media deal with plausible synergies, this is it. No, I'm not talking about a CBS sitcom built around Urbanbaby (although that's not a terrible idea). I'm talking about the professional sales team at CBS figuring out how to monetize the best CNET properties and then dumping the rest. Here's a prediction: Three years from now, this deal will look no dumber than Murdoch's MySpace purchase does today. Not necessarily because CBS will have earned its money back but because the cost of not figuring out the TV-Web 2.0 relationship will be even higher.