SAN FRANCISCO (The Red Herring) - "AudioNet" sounded so old media, as if the chaps behind the company were turning the crank on the Victrola while fiddling with the connection on their T-1 line.
But the newly renamed Broadcast.com has caught up with the 21st century, having filed with the SEC for an initial public offering worth as much as $35 million. In its prospectus, the company owns up to a big problem: Its business model assumes that the bandwidth problem will be solved sooner rather than later. But in a market where even K-Tel can rocket buoyed by Wall Street's lust for the hip convergence of music and the Net, investors are likely eat this IPO up.
Founders Todd Wagner and Mark Cuban started AudioNet in 1995 as a sort of radio station for the Internet. The company has since branched out into music retailing and broadcast video, and now offers programming 24 hours a day from more than 310 radio stations and 17 television stations and cable networks. The company licenses programming from content sources, in most cases under exclusive, multiyear agreements.
According to its prospectus, Broadcast.com is the leading Internet broadcaster of radio programming, and has relationships with radio stations and networks which provide it with content from 18 of the nation's top 20 radio markets.
Aside from broadcasting live events -- including the last three Super Bowls -- Broadcast.com plans to expand into conference calls, annual company meetings, and other business-related events. Other business services include the turnkey production of press conferences, investor conferences, trade shows, product introductions, training sessions, and distance learning courses.
Although the market for Internet broadcasting is clearly growing, the speed of today's modems and Internet connections still do not allow smooth transmission of broadcasts to most desktops, and this remains one of the major hurdles to Broadcast.com -- and one it can't control.
Losing money, like everyone else
Even though it seems well-positioned to take advantage of market opportunities in the future, Broadcast.com must still persuade investors it's worth taking a chance on now. As an Internet IPO, that probably won't take much work.
"I would expect this offering to be oversubscribed and (the price range) raised," predicts Francis Gaskins, editor of Gaskins IPO Desktop.
Although the company is losing money -- like most Internet plays -- it's showing a nice ramp in its business. The company currently derives revenues from the sale of advertising on its Web sites, as well as sales generated through its business services unit. According to Media Metrix, the company's sites served a daily average of over 400,000 unique users in March 1998, and its principal web site was ranked in the top 20 among all news, information, and entertainment sites. And for the quarter ending March 31, Broadcast.com reported revenues of $3.2 million, up almost threefold from the $1.1 million a year ago.
However, losses for the quarter reached $2.7 million, which were also up significantly from a $1.1 million loss a year earlier. The widening loss is attributed to the company's expansion of its broadcast services. Gaskins notes that with a recent (and apparently sustainable) 60 percent gross margin, and despite an accumulated deficit of $12.5 million -- which he says is becoming pocket change for developing Internet brand names -- before the offering, the company still has a positive net worth of $28 million. "Not bad for a two-and-a-half-year-old, development-stage company," concludes Gaskins.
Sharing the wealth
Money follows a good idea, and Broadcast.com is no exception. Wagner and Cuban still hold a majority 52 percent stake, but other major investors include Motorola (MOT), which owns 16 percent before the IPO, and Intel (INTC) with a 6 percent stake. Morgan Stanley is the lead underwriter.
And while its critics point to the competitive landscape for online content providers -- which includes such IPO notables as Sportsline USA (SPLN) and RealNetworks (RNWK], Gaskins notes that because Broadcast.com is in the process of building an enormous archived library, it is creating a major barrier to competition, like the entertainment libraries of Hollywood studios.
The final analysis, according to Gaskins: "This is a one big long-term winner."