Twelve years ago, the stocks of TV's home shopping channels were as hot as Internet stocks are today. They rose parabolically on visions of unlimited potential and the demise of brick and mortar stores.
Then they crashed, eventually losing up to 80 percent of their value. Today, TV home shopping is a business with about as much buzz as roofing supplies.
THE H.S.N. DILEMMAUSA Networks (USAI), dominant purveyor of shop-at-home TV, and Internet portal Lycos (LCOS) are predicting that USA's promotional power and home shopping facilities will catapult Lycos to leadership in online retailing. In a CNBC interview, Lycos CEO Bob Davis said, "With HSN and USA Networks, we put the pieces together in a way that competitors can only dream about."
But some might call it a nightmare.
The performance of USA's Internet Shopping Network (ISN) and First Auction has been pretty dismal compared to that of other Internet shopping outfits.
ISN doesn't even appear in the Media Metrix rankings of the 500 most visited Web sites or the top fifteen shopping sites. In fact, in November ISN sold its PC selling business to Cyberian Outpost (COOL).
And it's not as if USA/HSN is a newcomer to online shopping. It acquired Internet Shopping Network way back in September 1994, and fourth-quarter sales for ISN were just $6.7 million -- puny in the e-commerce firmament. USA's vaunted cross-media promotion muscle clearly confers little advantage.
Although ISN's sales grew 52 percent from 1997's fourth quarter, operating losses ballooned 158 percent, three times the rate of revenue gains. This is in sharp contrast with the even stronger revenue ramps of some other leading e-commerce companies, including Amazon.com (AMZN), which generated $253.0 million in sales for the same period for an increase of 283 percent; CDNow (CDNW), which garnered $20.9 million in revenue, or an increase of 165 percent; and Onsale (ONSL) with $59.0 million or an increase of 79 percent. Unlike ISN, each of these three exhibited revenue growth that outpaced operating losses.
Fourth quarter 1998| Company | Revenue (mil) | Vs. 1997 | Operating loss (mil) | Vs. 1997 |
|---|
| USA-Internet | $6.7 | 52% | $6.2 | 158% |
| Amazon.com | $253.0 | 283% | $42.1 | 272% |
| CDNow | $20.9 | 165% | $13.6 | 113% |
| Onsale | $59.0 | 79% | $3.8 | 65% |
Wall Street doesn't mind if Internet companies increase losses as long as revenue grows faster or at least keeps pace. But growing losses three times faster than revenue, as ISN has done, is an obvious disaster.
RESCUE PARTYCan USA Networks do for Lycos what it failed to do for USA's own Internet operations? Or are USA Networks' "traditional" properties a boat anchor on the valuation of USA/Lycos?
In 1998, Home Shopping Network's revenue grew just 7 percent, and Ticketmaster's only 3 percent. Operating income at HSN was flat, and actually declined 3 percent at Ticketmaster. Adding in USA's Internet operations -- excluding the spun-off Ticketmaster Online-CitySearch (TMCS) -- total revenue grew just 6 percent and earnings before interest, taxes, depreciation, and amortization (EBITDA) remained flat.
Fiscal 1998 (12/31)| Division | Revenue | Vs. 1997 | Operating income (EBITDA) | Vs. 1997 |
|---|
| HSN | $1.10 bil | 7% | $173 mil | 0% |
| Ticketmaster | $363 mil | 3% | $53 mil | (3%) |
| Total | $1.46 bil | 6% | $226 mil | 0% |
Yet those businesses represent 90 percent of the $1.6 billion revenue of the new company, including Ticketmaster Online-CitySearch. And their $226 million total EBITDA is all of the new company's pro-forma $170 million EBITDA for 1998.
Lycos CEO Davis argues that USA Lycos Interactive Network should be valued according to the same revenue multiple as are pure-play Internet stocks. Prior to its sharp run-up on rumors of a deal, Lycos traded at a multiple of around 30, reflecting triple-digit revenue growth. But even if Lycos and Ticketmaster Online-CitySearch grow 100 percent a year for the next two years, and HSN and Ticketmaster don't grow at all, Lycos and Ticketmaster Online-CitySearch will account for barely 25 percent of total revenue by the end of 2000.
The irony (or chutzpa) of Davis's assertion is that what's been created in USA Lycos is exactly what many traditional businesses have been trying to escape: a leviathan in which one division's rocketship growth is smothered by the larger corporate blanket.
The inability of mainstream companies to realize an Internet premium in the valuation of their stocks has provoked some to plan spinoff or tracking stocks. Barnes & Noble (BKS) and Ziff-Davis (ZD) are notable examples. The idea is that creating a pure-play Internet stock will unlock value by separating the high-growth Internet biz from the stodgier core business.
Now Lycos wants investors to believe that doing exactly the opposite should impart somnolent old-line businesses with supercharged Internet valuation. At the very least, it's a unique strategy.
David Simons is managing director of Digital Video Investments, aNew York-based institutional research firm.