Is This The Next Tech Bubble? Net magazines have great buzz, are loaded with ads, and seem indispensable guides to the new economy. Does that make them great IPOs?
By Devin Leonard Reporter Associate Theodore Spencer

(FORTUNE Magazine) – Recently, journalists around the country received a rather desperate e-mail from a total stranger. "Hello, my name is Eric Hellweg and I'm a senior editor at Business 2.0 magazine," it began. "We're in the midst of a hiring frenzy, looking for everything from editorial assistants to executive editors, for the magazine and our Website. We're based in San Francisco, but have a bureau in NYC and are opening posts in LA, DC, Boston, and maybe Austin... If you're interested, please drop me a line. If you're not, please feel free to forward this e-mail along liberally."

Hellweg had a good reason for sending out the breathless appeal. He has pages to fill--lots and lots of them. The two-year-old Net business mag has gotten so chock full of ads that the average issue chokes a subscriber's mailbox. Its first bimonthly issue is the June 13 edition, weighing in at 408 pages--up from its 128-page inaugural issue of July 1998. At the current rate, that will give the e-movers and e-shakers who subscribe to 2.0 just under 10,000 pages a year of new-economy ads and articles like "Go Global: If You're Not Everywhere, You're Nowhere." No wonder Hellweg sounded a little frantic about staffing the Austin bureau.

What's true for Business 2.0 is true for virtually every magazine covering this space, including Fast Company, The Industry Standard, Red Herring, and Upside. The June issue of Silicon Valley tech veteran Upside was 360 pages long. That's more than the June issues of GQ (278 pages) and Vanity Fair (246 pages). In June, Fast Company, a self-improvement manual for new-economy middle managers, was 418 pages big. Red Herring had 628 pages in June, and by the way, it too is going biweekly. Meanwhile, The Industry Standard, "the news magazine for the Internet economy," has been topping them all, publishing as many as 360 pages every seven days.

Buoyed by all this success, Red Herring, The Standard, and Upside say they are now ready for their close-up, thank you very much. Given that they are all Internet magazines, that can mean just one thing--an IPO. And that raises an interesting question: Sure, advertisers seem to have an insatiable appetite for these magazines right now. But do public investors have the stomach for yet another "Internet content" play? Is there any reason to think that these hot magazines deserve to be valued as anything more than, well, magazines?

The magazines' key advertisers are dot-coms. Competitive Media Reporting, a research firm in New York, estimates that Internet companies spent $687 million on magazine advertising last year, up 347% from the previous year. And while dot-coms seem to love all business magazines, including this one, they love the e-business publications the most. "A lot of these dot-com companies are advertising in these magazines not to reach people who would buy their products, but to reach potential investors--venture capitalists," says Karl Choi, a publishing industry analyst at Merrill Lynch. That's one reason The Standard brought in $13.8 million in dot-com advertising in the first quarter of 2000, according to Competitive Media Reporting, vs. FORTUNE's $12 million.

For now, this seems a great growth business. Flush with all their ads, publishers of these magazines have grand ambitions. They--and even newer comers to the field like line56, a B2B magazine scheduled to launch this summer--are spending lavishly to beef up their staffs, trying to poach employees from traditional business publications like Forbes, Business Week, and FORTUNE. They are hoping to steal more and more advertising dollars from those publications. They have plans for spinoffs, conferences, and Websites.

Getting the IPO bit of all this right may prove far more difficult than launching the magazines in the first place. For starters, the typical magazine makes money two ways, through advertising and paid circulation. None of the IPO-bound e-mags--i.e., The Industry Standard, Red Herring, Upside, and line56--has strong circulation. The Standard gives 53% of its weekly 150,000 copies away for nothing. Red Herring's paid circulation is 162,666, about the same as Dirt Rider magazine. While Upside reports monthly circulation of 221,000, most of its subscribers get the magazine for free. Line56, too, plans to give its magazines away. Then there's the fact that today's IPO pipeline is extremely crowded. According to Securities Data Corp., 365 companies have registered to go public since Dec. 1, 1999. In a market that's notably more skeptical than even a month ago, only the best IPOs will attract serious money from investors. Furthermore, even though the magazines say their future is intimately tied to the Web, none has a Website that generates serious traffic. Finally, the field is getting more crowded every day. Ziff Davis renamed its PC Computing as Smart Business for the New Economy and relaunched in May with a 300-page issue. There's line56. Trade publisher IDG is starting Darwin, a periodical for Internet business executives; Cahners has eCommerce Business; and then there's Time Inc., FORTUNE's parent company, which launched its own new-economy business vehicle, eCompany Now, with a 302-page issue in June.

(Ah, yes, eCompany Now. Just to be perfectly clear, FORTUNE is awash in potential conflicts when it comes to writing about this business. eCompany reports to FORTUNE editors and is run by two ex-FORTUNE staffers. The other magazines have wooed FORTUNE writers and editors, helping to drive up salaries of tech journalists. Finally, over the past year executives from FORTUNE and its publisher, Time Inc., have been in talks with several of these magazines about possible alliances or outright purchases. Executives say those talks are dead now that Time Inc. has launched eCompany Now.)

All the publishers of the new magazines believe they'll carve out a niche--or an empire--in the crowded field. "There are lots of good magazines writing about technology," says eCompany editor and president Ned Desmond. "But none is addressed at a general business audience that's just trying to figure all this out. That's what we're doing." Mike Jefferies, CEO of line56, sounds bolder. "We're focusing on B2B commerce," explains Jefferies. "That's our differentiation. B2B is related to every single business in the world. It's our entire focus. It's this big f---ing space. It's gigantic." Jefferies, who reportedly sold his former magazine, Office Products International, for $15 million, is still looking for more venture capital, a CFO, and more writers. But he does win the prize for wackiest magazine title. What's in the name? Get out your undergraduate copy of Shakespeare's Hamlet. Go to act 3, scene 1, line 56. See that part where the Prince of Denmark says, "To be, or not to be"? You got it!

Like Jefferies, the founders and CEOs of established magazines expect to command a grand valuation at their IPOs, far higher than what some run-of-the-mill magazine might get. Explains Chris Alden, Red Herring's CEO and editorial director: "Internet media is going to be a very fast-growing category," he says. "It is worth a valuation higher than other media." David Bunnell, CEO and editor of Upside, agrees. He believes that Upside Media is worth more than $100 million, five times its 1999 revenues of $21 million. (Traditionally, publishing properties sell for eight to ten times earnings--not revenues.)

The standout in the crowd is The Industry Standard, which has become the hip trade magazine of the Net economy. The company has reportedly sought a valuation as high as $450 million, and while CEO John Battelle won't discuss specific numbers, he is happy to explain why The Standard deserves a high multiple. "I'm out to redefine business publishing," Battelle says without a hint of irony. "The story is that we are not a traditional media company. We are a company that understands how to be a media company in this new economy. I go back to the last time a story this big broke, and by that I mean a story that fundamentally changed the economy--of course, that's the period of 1850 to 1950. What happened in business publishing during that period? Time Inc. was created, Reuters was created, Dow Jones, McGraw Hill...all created out of a need for information about a transformative time, when cities rose up, and mass media rose up, and distribution systems were radically altered because of highways and trains and planes. I believe that fundamentally the same thing's happening now. New media companies will rise up, companies that understand how to execute their business models in a way consistent with this new era."

He goes on: "This brand needs to mean that we are your source for making intelligent business decisions. If that means great research, if it means great consulting, if it means great recruitment, if it means financial advice--whatever it is that helps you be a better business person, we are the standard for that."

In other words, The Standard isn't a magazine that should be valued like Vanity Fair. It has all the potential of a great consulting firm, but one that should be valued like Amazon.com. Uh oh.

Does the name Louis Rossetto sound familiar? It should to this crowd--especially to Battelle, who was managing editor when Rossetto started Wired in 1993. Rossetto was the first magazine-company founder to make this tenuous argument about Net-sized valuations. Something of an eccentric, this anarchist-turned-Net evangelist wore sneakers for all occasions and required employees to take turns cleaning the bathroom. Some people found Rossetto's neon-drenched magazine as incomprehensible as his management style. But in three years Wired's circulation rose to 325,000 and revenues to $25 million.

Rossetto probably should have left it at that. Wired Ventures, the magazine's parent company, decided to pursue an IPO at an Internet valuation: $495 million, or 20 times revenues. To justify that lofty number, Wired went on an expansion binge. It launched a British edition, poured money into its online operation, and ended up swimming in red ink. The company was forced to cancel its IPO plans twice. In the end, it sold its magazine to Conde Nast for $75 million. The online operation went for $83 million. Not bad, but a far cry from $495 million. "They tried to position themselves as an Internet company," says Martin Walker, a New York-based magazine consultant. "The world said, 'No, you're a magazine company.'"

The next wave of proselytizers to seek a higher valuation for journalism with a Net connection were Website operators like Jim Cramer, co-founder of TheStreet.com, a financial news site, and David Talbot, the driving force behind Salon.com, a saucy online magazine of politics and culture. Cramer delighted in tweaking his print-media adversaries. "The dead-tree boys must be shaking in their boots," he said in 1998 after raising $10 million in venture capital funding for TheStreet.com. "We now have the money we need to complete our vision of crushing the old-line media behemoths. Who ever thought ruining someone else's margins could make so much money for TheStreet.com and its readers? But then again, who ever thought of the Internet?"

Talbot was only slightly less arrogant. He predicted he would build a multimedia Net company with TV programming and a thriving e-commerce business. "You don't have to be a rocket scientist to figure it out," he told Wired in January 1999. "I don't understand why people are so confused by the Web."

So what if neither of their companies had turned a profit yet? Neither had anyone else on the Net. Salon.com and TheStreet.com went public last year, only to see their stocks fall below the offering prices. Today Cramer and Talbot are humbler about their companies' financial prospects. "Frankly, we probably went out a little early," Talbot says. Cramer is not so sure TheStreet deserves an Internet valuation. "Here's what I would tell you," he says. "If you can get critical mass and get the brand going, then you do switch into a higher gross margin situation, because every incremental addition of TheStreet.com doesn't cost you. There's no marginal cost, whereas the incremental addition [to a newspaper] has transportation, ink, paper costs. That's a very big difference, but no one's gotten yet to that scale. Once we get there, the margins will really explode in this business."

The irony that Cramer and Talbot must hate is that the publications that experienced Internet-like growth weren't their dot-coms but the print magazines covering the dot-com boom. Growth like The Standard's has fueled huge expansion. Earlier this year, Battelle raised $30 million in venture capital for things like a European edition, a global Internet summit he held in Barcelona in May, and changes in the magazine's Website.

The Standard's competitors are growing almost as madly. Business 2.0 hopes to nearly double its 72-person staff. It also plans to start five editions in Europe, Asia, and Latin America this year. (Its parent, Imagine Media, is part of the Future Network, a public media company traded on the London Stock Exchange. Which explains why Business 2.0 is not pursuing an IPO. "We have lots of very handsome capital inside the company," sniffs Michela O'Connor Abrams, president of Business 2.0's business division. Neither is U.S. News & World Report's Fast Company.)

Meanwhile, Red Herring has doubled its edit staff in the past year to 100, luring writers away from the Wall Street Journal, Wired, and Forbes with high salaries and stock options as it gears up to go biweekly in November. The magazine also opened bureaus in Boston, Washington, D.C., and London, and raised $31 million in venture capital funding to beef up its Website. "The world of business is changing globally," Alden says. "Why can't we be a Time Warner-type company in the future?"

Even Upside is talking expansion, although many in the Valley believe that the grandfather of tech business magazines has lost its edge. CEO David Bunnell is coy about his plans, saying, "I can't give you specific numbers. We've got a lot of competitors that want to know." (Bunnell's reticence may also be because he is reportedly shopping the magazine around. He denies this.)

Growing rapidly, these top execs dismiss newcomers like eCompany Now and Ziff Davis' Smart Business as carpetbaggers ill-equipped to compete for their readers. Business 2.0's Abrams says she was flabbergasted by eCompany Now's first cover story, entitled "Now the Web Gets Interesting," about the likes of Reggie Jackson and George Hamilton getting into e-business. "Now it's interesting?" she says. "Hello? I am a FORTUNE reader, and I've been reading about technology and its impact in FORTUNE for a long time. What is eCompany Now going to give me that I can't get from FORTUNE? Honestly, people's impressions are that it's an ad play."

Replies Desmond: "I'm totally unbothered by that kind of bluster. Our magazine is quite different from FORTUNE. We're much more attentive to the practical and tactical details of how things get done." As for eCompany's being an ad play, well, duh. As businesses, so are Business 2.0, of course, and FORTUNE and Vanity Fair and The Standard and so on. And that raises one issue we haven't even mentioned yet--whether the dot-com advertising boom will last much longer. There's a shakeout on Sand Hill Road now, and for the time being venture capitalists don't seem to be funding startups willy-nilly. That doesn't bode well for most of the e-biz mags. "Go through The Standard," says Greg Mason, the publisher of Ziff Davis' Smart Business, "and you find half of their ads are from companies that in my view don't have viable long-term business plans."

The e-mags can't count on circulation revenues to make up for a dot-com ad slowdown. So what about their Websites, which all promise will be a key to their future growth? Not one is generating a substantial amount of revenue now. "We haven't seen the traffic numbers leap off the page," says Carolyn Trabuco, a new-media analyst at First Union Securities. According to Media Metrix, none of these sites draws more single visitors a month than TheStreet.com or Salon.com, both of which are still a long way from turning a profit. In fact, the Media Metrix numbers for April offer one great irony: While Upside.com had 679,000 visitors, Red Herring (292,000 visitors) and The Standard (276,000) have Websites generating less traffic than those of their "old economy" competitors, Forbes (586,000), FORTUNE (502,000), and Business Week (346,000).

In other words, these "new economy" publishers are struggling with the Web, just like almost everyone else in the world. That's nothing for a magazine to be ashamed of. It's just that these publications say they're a lot more than just magazines and are asking investors to reward them as such. Maybe these publishers should start reading their own magazines. They'd find articles like this one in The Standard: "The End of the Beginning: After a Gravity-Defying Run, the Internet Business Is Falling Back Down to Earth." Or the one in Red Herring titled "Living Dead: As the B2C Window Closes, the Ranks of the Living Dead, Public and Private, Will Swell." We've moved from dot-com mania to an era in which investors want dot-coms to prove themselves. And while many of the publications have shown themselves to be successful magazines, they want us to believe they are oh-so-much more. We're still waiting for the proof.

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