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net.wars: For sale: conferencing system, slightly used

Psst! Want to buy a piece of the Old Net?

Only four months after celebrating its 20th birthday, the WELL (which stands for Whole Earth 'Lectronic Link) is for sale. Three, maybe four previous owners. I'd say it's only been driven by little old ladies on Sundays, but that wouldn't be much of a recommendation for an online community.

Last time the WELL changed hands, it was 1999, and the buyer was Salon. At the time, the WELL bestowed a certain Net Cred and breadth on the younger business, which went public only a few months later at an offering price of $10.50 a share. In fact, Salon's IPO may have been more famous than it was itself: it was one of the first companies to go public via a Dutch auction so that the market set the price rather than the traditional way, in which the underwriters set the price. Salon raised $25 million from its IPO, and briefly had a market cap of $107 million. Its market cap now hovers at $2.76 million and its share price is down at 18 cents.

Since 1999, the WELL has shrunk from 7,000 users (according to the prospectus Salon filed with the SEC when it went public) to 4,000 (in this week's quarterly filing). Salon never disclosed the price it paid for the WELL (although it was known then that the previous owner had been looking for approximately $2 million), but the prospectus notes that it recorded "intangibles and goodwill of approximately $1.9 million", to be amortised over 24 months. Currently, the WELL generates about $500,000 a year in revenues, and Salon estimates its goodwill value at $200,000. The prospectus also says that the WELL's subscription revenues had declined from 1997 to 1998 from $517, 602 to $484,660, and put selling and marketing expenses at 18 percent of 1998 revenues, telecommunications and computer expenses at 45 percent of 1998 revenues, and administrative expenses at 53 percent of 1988 revenues. Since those add up to 116 percent of revenues, but the most recent filing describes the WELL as profitable, and the WELL's revenues seem to be steady despite declining membership, you'd have to conclude that the WELL is on a better footing now than when Salon bought it.

None of that tells us what a buyer might pay for the WELL – or what Salon would take for it, though the company's CEO has said they don't need the cash to finance its operations, so they're looking for the right buyer, not just any buyer. Again, comparing the prospectus with Salon's recent statements makes it clear why this would be true. Back in 1999, when "community" was a fashionable buzzword, Salon's prospectus said, "Salon intends to further its focus on developing online communities." These days, the company president, Elizabeth "Betsy" Hambrecht, is saying Salon wants to focus on its primary business, which it's redesigning to become more interactive.

In fact, the worse news for Salon is the note in its most recent filing that its premium membership numbers and advertising revenues have dropped over the last year. (In fact, between March 31, 2005 and June 30, 2005 Salon's subscriber numbers went from 84,500 to 80,600 – and below that to 78,900 by the time of its filing. That means in those months Salon lost more than a WELL of subscribers.) Of course, there are analysts who seem to have spent their entire careers predicting Salon's imminent demise, but the company is also predicting periods of "limited cash" over the next month or two. This in a time when the online advertising market is generally expanding.—only a few days ago, JupiterResearch  forecast that online advertising will more than double over the next five years, to $18.9 billion.

By the time Salon brought in subscriptions, in April 2002, the received Net wisdom was that subscriptions didn't work: too many prominent folks like Slate and the New York Times had tried and failed with that model. (The Wall Street Journal was the exception that succeeded.) Yet, even then it did seem as if Salon's mix of advertising and subscriptions was the logical way forward: if you couldn't or wouldn't pay in cash for the content, you'd pay with your attention. With people increasingly rebelling against advertising, doesn't that make sense?

But several prevailing trends are likely to make it harder for Salon. First is the explosion of free content: Salon competes not only with major media everywhere but also with tens of thousands of bloggers (some of them hosted on Salon). Second is the fact that a lot of the growth in online advertising is in paid search and contextual advertising rather than banner ads or the kind Salon uses, which require you to click through several ad-only pages in order to enter the site (for 24 hours). Who has the patience?

So the WELL and Salon have the same problem: how do you make the content compelling enough that people will pay to use something that has tens of thousands of free competitors? For the WELL, the answer has always been the people. And a right obstreperous lot they are, too, as any prospective owner will find out the first time he makes any suggestion for change, no matter how sensible.