Analysis: Why we're still waiting for the Big One

It's been widely predicted, and now come reports that companies such as NBC, CBS, Disney and Time Warner have been talking with the Web's foremost search engine companies.

Yet some insiders from at least one of the coveted companies -- Excite, namely -- are now saying that a deal won't materialize quickly, never mind long-standing talks between Excite and Michael Eisner's Magic Kingdom.

And other observers think a balance-of-power-altering deal isn't likely to happen any time soon, either.

So why hasn't one of these much-anticipated deals come to fruition yet?

Simply put, talking about a deal is a lot easier than closing one. According to analysts and principals, it's difficult for the search engine companies, with their high-flying stock valuations, to structure something acceptable to their shareholders and to the big media companies as well.

The stopper: 'Media promotion'
And one thing in particular makes it so trying: The biggest asset that a media company brings to the Internet is media promotion. Companies such as NBC, Time Warner (TWX) and Disney (DIS), with its ABC network, command billions of dollars worth of promotional clout. They can focus a huge number of eyeballs on a particular brand.

That's why a 30-second spot on a popular show can cost $500,000, and, in an exceptional case like "Seinfeld," well over $1 million.

Obviously, that media time is worth Fort Knox to an Internet company. Consider the case of CBS and SportsLine. Last year, SportsLine was looking for a way to compete with Disney's ESPNet SportsZone, which was receiving cut-rate promotion from ESPN and ABC. So CBS cut a deal with SportsLine that promised the independent, Florida-based sports site a certain amount of promotion from CBS properties -- about $50 million worth of promotion.

That was essentially the deal. CBS paid virtually no cash for a sports Web site -- something, by the way, that ESPN spent millions of dollars to create.

Coveting another CBS SportsLine
This deal also paved the way for SportsLine (SPLN) CEO Mike Levy to launch a successful IPO, partly on the strength of the CBS imprimatur. But the portal sites now talking to the media companies are already public -- and therein lies the problem.

Most observers think that if a deal's done, at least part of its value will include bartered media promotion. Chris Charron, an analyst with Forrester Research Inc., is among them. He expects a large media company to make a "minority investment" or "take some kind of equity stake [in a portal site] for a consideration that includes in-kind advertising."

In other words, rather than paying though the nose for the outsized valuations the stock markets have now placed on any of the leading search companies, the media giants want something more akin to the CBS/SportsLine deal.

Investors already angered
But an Excite (XCIT) or Lycos (LCOS) would undoubtedly have a tough time selling such an arrangement to their shareholders.

After all, some investors are already pounding at Excite's door for turning down a deal with Texas-based Zapata Corp. (ZAP) that ostensibly offered $72 a share. (Excite rejected the offer last month, saying that the proposal had no synergies for the two companies and no value to its shareholders.)

Further complicating matters is the fact that companies such as Disney can generate traffic for their own sites without paying billions to acquire a search site.

"Starwave [which produces sites for Disney Online] is perfectly capable of producing 'umbrella sites' which Disney essentially has now anyway," argues David Simons, managing director of Digital Video Investments.

For its part, Disney has sent conflicting signals about acquisitions. In an April 29 speech, Chairman Michael Eisner ruled out an acquisition of America Online (AOL), saying its valuation was too high, but did not rule out a smaller acquisition.

Pricy at any size
The Mining Co.'s CEO and founder, Scott Kurnit, noting this background, says it would be easier to build a deal with a smaller, more focused community -- like his own, by the way.

Of course, The Mining Co. is not at the top rung of portal sites, and insiders there name a heady figure as a possible acquisition price, meaning that no one is saying a deal with Kurnit would be cheap, either.