Thursday, May 15, 2008

CNET, a welcome SOS for CBS

It took a decade and a half to get there, but CNET finally is making it big in the TV business. Now, the $1.8 billion question is whether CNET can help CBS make it bigger in the Internet business.

On track to have its shares acquired for a juicy 45% premium by CBS, CNET originally was formed as CNET-TV in 1993 by Halsey Minor and Shelby Bonnie to create a technology channel for cable television in the days when the Internet was still a gleam in Al Gore’s eye.

Despite getting some programs picked up on the Sci-Fi Channel and the USA Network, the idea of an entire channel devoted to technology was deemed at the time to be way too geeky by cable-television executives, like me, who felt far more comfortable with shopping channels, old movies, bass-fishing derbies and pay-per-view wrestling extravaganzas.

With spare channels largely unavailable in the era before cable systems upgraded to digital broadband systems, the CNET crew decided to try its hand at creating programming for the then-emerging Internet. And the rest is history.

At the same time CNET was figuring out the Internet, “Dr. Quinn. Medicine Woman” topped the charts for CBS and the biggest headache at NBC was worrying about how to replace the blockbuster ”Cheers,” which was going off the air after a 10-year run that left it the fifth most popular show in TV history. (“I Love Lucy,” of course, will forever reign as No. 1.)

By the time the Internet got big and disruptive enough to merit the attention of TV and other legacy media executives in the late 1990s, the solution was to throw money at the problem. CBS bought a third of Sportsline, a feeble rival to ESPN.Com, for $100 million and was part of the group that plunged a collective $89 million into Third Age, a site for e-Geezers that essentially fizzled despite such puffery as a piece in Fast Company saying it was “poised for total media domination.”

Perhaps the best Internet investment CBS ever made was funding MarketWatch, which was sold to Dow Jones for $528 million in 2005. When Dow Jones finally woke up to the possibility of delivering market news over Internet after a dozing for more than a decade, CBS (then Viacom) owned a bit less than 25% of the business website. At that rate, CBS probbaly just about got its money back.

Critics of the CBS purchase of CNET say traffic on the site is growing too slowly and the price is too high. You also can add that CNET is a dilutive transaction, becasue its operating margin of 13.4% on sales of $408 million falls well below the 22.2% margins that CBS generates on $14 billion in revenues. Further, the 45% premium seems pretty strong for the apparently non-competitive purchase for a company that the New York Times said “no one wants to buy.”

On a strict financial analysis, therefore, the deal doesn’t pencil out (and that’s why CBS stock was falling this morning). But there’s more to this deal than dollars and cents, strategically speaking.

If CBS and CNET can be made to play nicely together (always a major "if"), each has a chance to help the other build stronger and more forward-leaning interactive businesses.

CNET possess the true Internet DNA that CBS can never hope to achieve. That’s why it had to do buy it. But CBS has a lot to offer, too, in its rich content, considerable financial resources and the inveterate showmanship that CNET can only dream about.

Given that he serves at the pleasure of the mercurial Sumner Redstone, Leslie Moonves is staking his career on making this work. But his risk is modest. If he didn’t do something like this to try to drag CBS into the 21st Century, he wouldn’t have much of a career, anyway.


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