The question comes to mind in connection with an offering of 2.5 million shares of Broadcast.com Inc., a company in the streaming audio and video end of the Internet game.
The offering is being underwritten by Morgan Stanley Dean Witter, Donaldson Lufkin & Jenrette, and Hambrecht & Quist - three of the most prolific Internet IPO mills in the business.
Now, I am sure that Broadcast.com Inc. is a fine company. In the last three years it has grown from nothing at all to a business that provides gainful employment to 191 people, bringing in revenues that reached nearly $7 million last year and may top $14 million this year. On the other hand, a good chunk of that alleged "revenue" actually turns out to be so-called "barter" proceeds - about which more in a minute.
Meanwhile, there's one thing Broadcast.com Inc. is missing whether its revenues are in the form of cash, checks or seashells - and it's the same thing that virtually every Internet IPO has been missing since the Internet gold rush began. To crib a line from a famous tune of yesteryear: What ain't it got? It ain't got no profits! And profits are what any company eventually needs to show in order to retain the confidence of Wall Street investors.
I for one have frankly lost count of how many Internet IPOs have come to market in the last two to three years, and I know of no organization that keeps a running tally.
Nonetheless, Hambrecht & Quist publishes an "index" of some 60 or so Internet stocks, and in all that number it is possible to find only one profitable company that has gone public since the boom began: Yahoo - and that is only if you don't include a $44 million second-quarter charge off for R&D that came along with an acquisition earlier this year.
Yet it is Yahoo - and Yahoo alone - that investors now point to when looking for light at the end of the Internet tunnel. And that's because there's nothing else to point to at all.
Amazon.com went public as a money-loser and still isn't profitable. Ditto for Cybercash, Earthlink, Preview Travel, N2K, Sportsline and all the rest. In all these cases and more, investment money from Wall Street - mainly, it would seem, from individuals via the highly speculative Nasdaq stocks bazaar - has been fueling the growth of the Internet.
No profits in sight
But there is yet to be even the first glimmerings of a payback, and in too many cases there may never be one at all. Consider a financial data provider going by the name Multex Systems Inc., which has filed to go public on a $50 million stock offering while confessing no hope of turning even an operating profit for "the foreseeable future."
That's the backdrop to Broadcast.com, Inc.'s own IPO. The company opened its doors in January of 1996 and has racked up more than $12 million of cumulative losses since then. And just like Multex, it too is now seeking public equity on a confession that it anticipates nothing but "significant losses ... for the foreseeable future."
What Broadcast.com Inc. (formerly AudioNet, Inc.) does, basically, is collect and then distribute, via the Web, multimedia programming using so-called "streaming" technology.
Now streaming technology is a nifty thing, I am sure, but I for one believe that the technology is a niche product and is likely to remain so for many years.
Granted, the company's Web site offers a large array of audio and video programming, including sports, talk and music radio, television, business events, full-length CDs, news, commentary and full-length audio-books.
But the company's claim of 400,000 "unique users" of its services each day may not amount to all that much. Reason? The number seems to be based on the sum total of all Web users who click into Broadcast.com programming on all sorts of different sites that license the service. One of those is CNBC/Dow Jones Business Video, a sister programming service of the MSNBC Web site you are viewing. In terms of actual eyeballs (as they say in the Web business), the company's principal site - www.broadcast.com - barely ranks among the top 20 of news/information/entertainment sites on the Web.
As an "aggregator" of streaming media programming, the company is basically a network-type operation that takes streaming media programming from suppliers using technology provided by RealNetworks and/or Microsoft, then distributes it to Web sites that are willing to pay for the service. (Microsoft is a partner in MSNBC.)
If the technology gains mass market acceptance, Broadcast.com should do well. If acceptance takes longer than expected and/or if competing technologies arrive and upstage it, well, go figure.
Meanwhile, outside investors are being asked to pick up the costs for all cumulative losses to date as well as to subsidize all losses going forward. At a likely offering price of $12 per share, outsiders will be shoveling $8.74 per share into cumulative losses to date, winding up with book value of only $3.26 per share.
Those losses ought to be around for many years to come, too, for on the revenue side the company appears to be taking in a whole lot less actual cash than the numbers suggest.
That is because barter-deals (I'll run your ad if you'll run mine) accounted for 15 percent of 1997 revenues, or just over $1 million. Take the barter ads out of the picture and in 1997 the company collected revenues of less than $5.8 million and will probably take in less than $12 million this year.
One clear sign of the problem is to be found on the company's Cash Flows statement.
Losses exceed costs
It shows that in 1997 Broadcast.com actually consumed more cash in simply running the business ($6.6 million) than it reported as an operating loss for the year ($6.47 million). Compare that to the pathetic Multex Systems Inc., which reported $8 million in 1997 losses but only $7.1 million in negative cash flow from operations.
As always in these deals, the company's insiders will come out great in the IPO. Post-offering they will still hold nearly 44 percent of the company's stock, and the book value of their shares will have been boosted from $1.95 per share to $3.26 per share.
Yes, you read that right: Even without the IPO, Broadcast.com has a healthy balance sheet, showing a net tangible book value of more than $28 million. The company actually doesn't need the expected proceeds of more than $30 million at all, and says as much in the IPO filing.
The purpose, instead, is to create a market for the company's stock while Internet mania still prevails. Then, when the money runs out - as it almost assuredly will - Broadcast.com can come back for another helping... a helping of fresh cash to stay in the game in a business that would collapse with a thud if Wall Street investors didn't keep propping it up: the Internet.