System Crashing

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

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.

In the inaugural issue of Wired, Louis Rossetto proclaimed that "the Digital Revolution is whipping through our lives like a Bengali typhoon." The typhoon, however, has not been accompanied by a financial windfall.

Wired Ventures spends more money than it makes. Since its launch in January 1993 through the end of March 1996, the company has posted operating losses of nearly $16 million. It has dropped more than $1 million a month so far this year.

And things aren't going to get better anytime soon. "The Company expects to incur operating and net losses for the foreseeable future," according to Wired's SEC filing. "There can be no assurance that the Company can maintain or increase its revenues in the future to offset its increased operating expenses."

It's a troubling admission for Anne Russell, editor of Folio, a trade publication for the magazine industry. "The thing that would scare me off as both a magazine professional and an investor is that they aren't suggesting a turnaround at some point," Russell says. "The SEC filing has the tone that not only are they losing money like madmen, but they will continue to do so at a very rapid rate into the foreseeable future. That's not very reassuring."

All the spending, mind you, has helped Wired Ventures grow. Total revenues topped $25 million last year, up from just under $3 million at the end of 1993. Magazine circulation has increased from 110,000 to more than 300,000 in three years. HotWired and SUCK -- a Website offering snotty and smart commentary on the Net that was started by HotWired rebels who have since been (financially) persuaded to return to the fold -- rack up a combined 25,000 to 30,000 impressions every day. That's double the number of visitors to the sites in September 1995.

It's important to note, however, that net losses as a percentage of revenues fluctuated between 26 and 39 percent from 1993 to 1995. For the first three months of this year, that figure climbed to 44 percent. As Wired Ventures expands, so do its losses.

And it plans to expand a lot. Wired's SEC filing proclaims that "its mission is to build a new kind of global, diversified media company for the 21st century." Wired products will be "aimed at a well-educated, affluent, technologically savvy, and influential consumer group." Judging from the various enterprises that Wired Ventures will combine to create this futuristic media holding, however, it's time to call Mr. Phelps (or, for the Wired generation, perhaps Tom Cruise). This is one mission that could be nearly impossible to pull off.

Wired did launch a pre-emptive strike by bringing the HotBot search engine to market shortly before announcing the IPO. This bolstered its claim of being an Internet stock, instead of just a magazine.

"It was a very clever move," says Rich Karlgaard, editor of Forbes ASAP. "If there was any confusion, it puts Wired into a slightly different taxonomy, where Wall Street is giving the highest valuations."

Sure. But it also throws Wired Ventures into competition with more than a dozen other search engines, including Yahoo!, AltaVista, and Excite. When analysts talk about a high-tech segment where more than a few companies will inevitably tank, they usually mention the crowded Web browser field. Last month alone, for example, Lycos' stock price dipped from $18 to $10.

What's more, HotBot didn't exactly hit the ground running, as Wired Ventures' own SEC filing concedes. Bugs are causing "improperly displayed graphics, long query times, and incomplete searches." Nor does the filing promise the arrival of a systems exterminator to save profitability. "While the Company and its HotBot strategic partner are working to solve the technical issues with the HotBot service, there can be no assurance that [it] will perform at a level sufficient to achieve market acceptance."

So what if on-line profits remain ethereal. The Wired brain trust knows how to make a buck on good old-fashioned paper, right? Don't count on it. Wired Ventures' nascent book publishing operation, HardWired, has six titles scheduled for fall release, ranging from a reprint of Marshall McLuhan and Quentin Fiore's groundbreaking The Medium Is the Massage to Digerati: Encounters With the Cyber Elite by John Brockman. But calling the publishing business competitive is like saying Wired's "innovative" design makes it only slightly difficult to read.

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