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System Crashing 

Buying Wired magazine may align you with the digerati, but buying its stock might sink you into poverty

Wednesday, Jul 10 1996
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The futurists at Wired magazine -- the self-described vanguard of the digital revolution aimed at the "most powerful people on the planet today" -- pride themselves on being ahead of the curve. Louis Rossetto, who founded Wired in 1993 with Jane Metcalfe, frequently waxes philosophical about the profundity of the era his cutting-edge magazine simultaneously chronicles and promotes. "It's a new economy, a new counterculture, and beyond politics," Rossetto told the New York Times Magazine last year. "In 10 or 20 years, the world will be completely transformed. Everything we know will be different. Not just a change from L.B.J. to Nixon, but whether there will be a President at all. I think Alvin Toffler's basically right: we're in a phase change of civilizations here."

Rossetto, Metcalfe, and crew not only managed to make these grand pronouncements with straight faces; they delivered, turning Wired into what is arguably the hottest magazine in the country. With a vertiginous design that often renders it all but unreadable, Wired quickly became de rigueur for the digerati, a fanzine for the technophilic. Simply put, Wired holds a virtual copyright on at least one big byte of the virtual revolution.

The franchise is growing even broader these days at the Third Street warehouse that Wired Ventures Inc. calls home. HotWired, a popular and well-designed on-line magazine that practices "way new journalism," hit the Internet in 1994. (Don't call HotWired a Website within earshot of any employees, however; they sniff that their product is a "cyberstation.") A publishing division has six hard-copy book titles planned for the fall. A televised version of "Netizen," the political forum carried by Wired and HotWired, will debut in August. And HotBot, a search engine that indexes 51 million Web documents, is up and running.

Of course, creating a media empire doesn't come cheap. That's where you come in. Wired Ventures announced on May 30 that it will soon sell stock to the public at $12 per share, which would make it worth $495 billion if all goes as planned. Wired joins Netscape, Yahoo!, and a passel of related companies that have gone public in the last year -- all dramatically increasing the population of paper millionaires. So, despite all its paradigm-shifting pretense, Wired is plainly pragmatic. Rossetto and Metcalfe can't discuss the initial public offering (IPO) because Wired Ventures is in SEC registration, but they clearly hope to benefit from the new class of investors ravenous for all things Internet.

"It's been the go-go '90s of Internet IPOs," says Connie Bagley, an attorney and lecturer at the Stanford Business School. "Everybody has this dream that if they invest $10,000 and wait six months it will suddenly be worth $100,000."

But in the case of Wired, isn't this a bit much to ask for an enterprise that is posting pretty big losses -- and freely admits it can't guarantee hitting the black anytime soon? The unspoken truth is that Wired Ventures is ultimately little more than Wired magazine, which accounts for 92 percent of the company's revenue. And, whereas the value of a typical magazine usually falls between eight and 10 times its operating cash flow, Wired has the chutzpah to ask for close to 20 times its revenue. That might be acceptable, of course, if the company's other interests sweetened the deal enough to justify it. They don't.

Wired's on-line component is considered one of the best in a crowded field, but no one has figured out how to make money on the Internet yet. Book publishing and television production face cutthroat competition and a slim chance for profit. Even Wired's status as a high-flying magazine with attitude is nothing to bank on; picked up a copy of National Lampoon or Spy lately?

Wired Ventures may have a lot going for it, but it's hard to find anyone who thinks it's worth half a billion bucks.

"To be honest, I'm a little jealous," David Bunnell, who founded several magazines including PC Magazine, PC World, and Macworld, says with a laugh. "I think a lot of people may be taking out their resentment on Wired for all the publicity and praise it's gotten in the past. I think it's a good, promising company. If it pulls this off, it will be good for publishing as a whole."

But asked if he's planning to shell out $12 a share for Wired stock, Bunnell replies: "Oh God, no way!"

Adds Richard A. Shaffer, publisher of VentureFinance, a newsletter that tracks venture capital and initial public offerings: "Most Internet companies these days don't even have revenues, much less profits. At least Wired has built a real business. It has real readers. It has real advertisers. It's a legitimate, growing concern. That's cause for congratulations. But let's be honest; basically, you've got a magazine trying to pass itself off as an Internet company. It's not worth $12 a share. That's just preposterous."

True, preposterously inflated issues are not unheard of these days. But Wired Ventures may have missed the recent IPO gravy train. Investors who paid top dollar for Internet stocks during the past few months have been crying over their keyboards every time they go on-line to check prices.

Analysts are even warning that piss-poor IPOs could spark a downturn in the high-tech sector. That, in turn, could trigger the long-awaited correction in the stock market. For once, Wired may be behind the curve.

"I definitely see the possibility of a strong investor backlash against Internet IPOs," says Mike Walsh, president of Internet Info, a market research and consulting firm. "It's getting to the point that being associated with the Internet may be a penalty to a company going public. Wired's price is extremely rich regardless of when they decided to go public, but launching their IPO now makes it a real tough sell."

Not to the major Wired shareholders it isn't. If the public purchases the 6.3 million shares -- or 17 percent of the company -- that is being offered, Rossetto and Metcalfe will be worth $71 million and $69 million respectively. Nicholas Negroponte of the MIT Media Lab will add $29 million to his net worth, and S.I. Newhouse of the Newhouse publishing empire will reap a $50 million reward for his $4.5 million investment.

About The Author

Gordon Young

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