Why editorial costs ain't the only digital media problem

The name CNET Networks won’t be familiar to everyone reading this blog. But for anyone who has worked in or around the technology or gaming industry, it will.

CNET was founded in 1992. One of the original dot.coms, the company expanded during the late 1990s by buying up the US tech publisher ZDNet and Silicon here in the UK.

Despite experiments with video and user-generated content, CNET was (and remains) a classic Web 1.0 publisher. Unburdened for the most part by print, the company set out to deliver high quality journalism online. During the past decade, it has frequently succeeded in doing so.

These days, CNET publishes both trade and consumer sites. In the UK, the company publishes 13 sites, including ZDNet, Silicon and the consumer-flavoured Cnet.co.uk.

These sites attract 9.8m unique users every month. That puts CNET among the UK’s top 15 web destinations. Strip out those that don’t run journalism, and the company rises much closer to the top.

In the UK, at least, the key to CNET’s success seems to have been its lack of print publications.

Elsewhere, once-mighty trade weeklies (like RBI’s Computer Weekly and VNU’s Computing, which I once edited) have dwindled in stature.

Quite aside from reduced display revenues, these titles have lost tens of millions of pounds-worth of classified recruitment revenues per year to specialist job boards that don’t carry editorial content.

As the only pure-play digital news provider in a market dominated by print-online incumbents, CNET didn’t have to weather an ugly storm of redundancies and cost-cutting. As best I can tell, the company’s UK subsidiary has been comfortably profitable for three or four years.

Of course, none of this was just happenstance. I know (and rate highly) many of CNET’s journalists and commercial people. This was a company that treated its editorial people well and knew how to appeal to readers.

All in all, then, this is a very Web 1.0 story. CNET Networks capitalized upon the great migration of both readers and advertisers from print to online. And it did so by providing them with good — and occasionally very good — content.

But enough of that. Instead, let’s fast forward to Tuesday of this week, when a bunch of “activist” US investors published a 38-page document lambasting CNET’s management for “a fundamental failure to adapt to the changing Internet environment”.

The activists want to turf out CNET’s current board in the US.

They’d like to replace them with a clutch of former investment bankers, executives from failed search engines, the former president of a company called PayMyBill.com and a Hollywood lawyer who specializes in “innovative product integration, sponsorship and advertising integration into branded content across multiple platforms” (sic).

In other words: strictly a second-tier lot. You’d struggle, for example, to find one of them who understands the link between “content” (in the sense of journalism) and “monetization” (in the sense of ad sales). Most of the interlopers come from that magic quadrant of the interweb where profits can be generated without recourse to original content.

But here’s the thing. The activist investors do have a point, and it’s this: for as long as anyone can remember, CNET’s share price performance has been lamentably weak.

During the past three years, US internet companies* have seen their share prices rise by 39%. And CNET Networks? Its share price has declined by 25%.

This year, if it’s lucky, the company will deliver an operating margin of 20% — compared to slightly less than 30% among its peers.

Worst of all, CNET’s revenues will grow by a measly 10%. This is poor by comparison with the industry’s average of 25%-30% (yes, that’s what’s currently expected of US internet companies, even amid the current annus horribilis).

So where did CNET Networks go wrong?

I know what you’re thinking. It must have been all of that editorial overhead, right?

After all, doesn’t Rafat Ali of Paid Content believe his company can become the next Reed Elsevier? Ali’s recipe for challenging the big boys is nothing if not low cost: ‘We can hire two good journalists, pay them well, and build a vertical,” he tells the New York Times.

And doesn’t Michael Arrington of TechCrunch think he can set up a “big fat CNET-crushing $200m/year in revenue business” by acquiring the services of half-a-dozen A-list bloggers?

Arrington might think this, but no, CNET’s activist shareholders have nothing whatsoever to say about content.

Instead, they criticize CNET’s commercial managers as fundamentally incompetent.

In particular, CNET’s technology for managing ads comes under fire. So, too, do the company’s weak attempts to optimize its pages for search.

Ad platforms and SEO: that’s the gist of it.

In other words, we’re in the presence of a novel allegation: that the producers of CNET’s “high quality” content (as well as the company’s shareholders) have been let down by their commercial bosses.

Ordinarily, for oppressed hacks, this kind of thing would be a joy to read. Throwing rocks at the management is not just an optional pastime for journalists: it’s nigh on contractual.

But CNET’s journalists should go easy on the schadenfreude — for now.

The first reason for caution is that the activists have made a prima facie case, but no more than that. (That said, CNET’s official response to the activists’ document was astonishingly weak. We’ve been promised more anon. It better be good.)

The second is the activists don’t voice a single word of praise for CNET’s content, or suggest that they will continue to fund it as heretofore. Instead, visibly, they approach discussion of the company’s “high-quality” content as if it’s an optional extra.

In their eyes, CNET’s journalism resembles a rare tropical bloom grown in a structurally-dodgy greenhouse on the edge of a cliff on the western side of the Outer Hebrides. (In other words: a curiosity, an aberration: one good shove, and the cognitive dissonance would be sorted. In my experience, that’s how activist investors like this lot tend to think about editorial.)

At least the existing regime at CNET takes editorial seriously — even if they haven’t been able to make it pay (very much).

As this saga unfolds, CNET’s employees will be watching closely for reasons of their own. For the rest of us, there will be two big attractions.

Watching a Web 1.0 publisher defend itself against allegations that it “doesn’t get” Web 2.0 will be one of them.

The other is the likelihood that the struggle will expose plenty of information about the mechanics of digital media that otherwise wouldn’t see the light of day.

Just remember: being digital is about more than just costs. The efficiency with which publishers and sales people can generate revenues is much less discussed, but just as important.

* Specifically, this is a reference to the Interactive Week Internet Index. During the same timeframe, NASDAQ, the US stock exhange favoured by high-tech companies, has risen by 15%.

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