FOOL PLATE SPECIAL
An Investment Opinion
Keeping Up to Date with the Times
By
Brian Graney (TMF Panic)
January 31, 2000
Jumping on the tracking stock bandwagon, newspaper publisher New York Times Co. (NYSE: NYT) filed a registration statement with the Securities and Exchange Commission on Friday for an initial public offering for its Internet businesses, officially known as Times Company Digital (TCD for short). Investors didn't seem to care too much about the news today, though, as shares of the Times fell slightly this morning.
The short-term share price movement of the Times is largely insignificant, as the real story is what the tracking stock decision means for the firm's shareholders and what it adds to the more general topic of how to properly value Web-based content business models. Judging from the paperwork for TCD's IPO -- which can be accessed through this link -- the soon-to-be-unveiled tracking stock certainly has some early competitive advantages in the online content space. But can the unit make the Times' successful newspaper model work just as well on the Web?
The linchpin to TCD's operations is nytimes.com, the Times' main Internet presence. The advertising revenue-supported website sports over 10 million unique registered visitors, is adding over 400,000 new users every month, and accounted for 66% of the 138 million page views racked up by all of the TCD sites in December. The other main TCD sites include the NYToday.com daily online guide to New York City, the Boston.com regional information portal, and the GolfDigest.com and WineToday.com special interest websites.
While there are many similarities between TCD and its parent company, there are also some important differences between the two models that investors need to keep in mind. Advertising is more important for TCD, making up 90% of revenues through the first nine months of last year. In contrast, ads accounted for 71% of the Times' total revenues in 1998. More notably, TCD is not profitable. For the three year and nine month period ending last September, TCD had pulled in a cumulative $45.7 million in revenues, which was more than offset by $50.2 million in total operating losses.
Yet, TCD owns one asset that no other Web media company currently has -- the New York Times' wonderful brand name. TCD has a ten-year right to the Times' print brand name and content, and its own 88-member advertising sales force will be augmented by the Times' large sales department. However, the rights to those assets will come at a price in terms of an annual fee that will be paid directly to the Times. The minimum fee is set at $5 million, but it will increase along a sliding scale as TCD's revenues ramp up.
The license fee payment will be a big re-occurring cash outflow for TCD, but it doesn't look so bad once other aspects of the tracking stock arrangement are factored in. Importantly, since the Times will maintain a large majority interest in TCD, the parent company will also handle the job of providing the Internet unit with the cash it needs to grow. Having a dependable allowance from a cash-rich papa like the Times is a significant advantage for TCD, whose rivals include start-ups that are trying to go it alone in the Web media business without a parental lifeline footing the bill.
Investors expecting a higher-growth, Web-based replica of the Times to magically appear overnight are in for a rude awakening. At some point, the Web may end up becoming the super low-cost distribution medium many people expect it will be, allowing a company like TCD to drive ever-higher earnings with very little in the way of additional capital. But one-upping the Times, which managed to boost its pre-tax income 30% between 1994 and 1998 with only a 10% rise in total assets along the way, will definitely take some time.
TCD is worth keeping an eye on, but a long-term subscription to the coming tracking stock carries a high degree of risk at this point. And unlike in the newspaper business, there are no trial offers in investing.
