Profitability Revelations: Ancestry.com, internet.com, American Business Media

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ContentBiz from MarketingSherpa.com
(((((((((( Feb 14, 2000 - Vol II, Issue 7
Please forward *without* cutting. Thank you!

SPECIAL EXCLUSIVE INTERVIEW ISSUE

1) Roger Smith, Ancestry.com Director of Marketing, Explains How
the Site Grew to 300,000 Online PAID Subscribers

2) Gordon Hughes, American Business Media CEO, Predicts the
Profitability Outlook for Trade Magazines Online

3) Phillip Won, internet.com Director of Business Development,
Discusses M&As and Valuations for Web-Only Publishers

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1) Roger Smith, Ancestry.com Director of Marketing, Explains How
the Site Grew to 300,000 Online PAID Subscribers
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-> Free ContentBiz subscriptions: http://www.marketingsherpa.com

We admit it. We knew Ancestry.com was a very popular site when
we called Roger Smith, Director of Marketing, for an interview;
but, we didn't know it was the third largest paid subscription
site in the world! Ancestry.com's success story is a relief from
the doom and gloom you'll hear elsewhere these days. Enjoy.

Q: Can you give us a quick backgrounder? How did Ancestry.com
start and how big are you now?

Smith: Ancestry.com had an 18-year heritage as a successful
genealogy publishing business before it went online. The Web
site launched in April 1996 and we started selling subscriptions
around 1997.

It grew slowly from there. We tweaked it. It evolved. We hit
the 200,000 active subscriber mark in August 2000. Right now
we're number three as far as online subscription sellers in the
world. It's WSJ.com, ConsumerReports.org and then us. We just
launched an additional subscription offering (access to the US
Federal Census images) in October 2000. We're now quickly
approaching the 300,000 subscriber mark this month.

A quarterly subscription to everything except the Census is
$19.95. You can add the census for another $19.95. If you're an
annual subscriber for $59.95 you can add the Census for another
$39.95. We're pretty evenly split right now between quarterly
and annual as far as new subscribers. If you look at the base,
65% are annuals. Subscriptions are automatically renewed unless
someone calls to cancel.

Q: How have you sold all these subscriptions?

Smith: We have various channels that we market into to build the
subscription base. One is an affiliate program where we do a
revenue share with other sites -- we pay them a commission
anytime someone comes from their site and buys a subscription.

We also have several co-brand relationships, including ones with
AOL, Excite, Compuserve and Netscape. We do get quite a bit of
traffic from those sites.

We do email and newsletter sponsorship marketing to many
different lists. At this point, if you're online and have a
newsletter subscription, chances are you've seen our ad! We also
do online ads, keyword buys and other banner placements on
strategic portal sites. Plus we leverage the traffic we get from
our sister sites: MyFamily.com, RootsWeb.com and ThirdAge.com.

Also, one of the biggest traffic drivers for the site are our own
free newsletters. Between RootsWeb.com and Ancestry.com we have
over two million email subscribers.

It's a combination of all these sources -- it takes all the
components to keep us active and vibrant.

Q: Out of all those traffic generating tactics, which is the most
potent?

Smith: Several of them. RootsWeb.com is obviously really
targeted, so we do a really good job of converting those people.
Somebody that searches on Yahoo and gets one of our keyword
banners searching for family history or genealogy is pretty
qualified as well.

About half of our content is free so someone can come out and
just become a registered member and search the database of user-
generated content. People often do family histories and post
them for others to see. Also the Social Security death index is
free and that's popular. You can also build a family tree and
get on the message boards and lists for free.

A lot of times when the Web brings people in they get to know us
through the free content. When they get a little more into the
site, they realize they want access to paid databases as well.
We convert some people right away. With others it might take
some time. We let them opt-in to receive the newsletters. We
just try to show them the value and get them to convert.

Q: What's a realistic conversion rate to expect?

Smith: It varies so much from source to source. We probably do
conversion rates that are quite a bit better than the industry
average. We actually look at everything more granularly than
that. It all boils down to cost per action almost more than
conversion rates. This game is all about CPA for us.

We haven't struggled as much as other content sites. People
interested in family history research are pretty educated and
well aware of what's important and valuable to them. They look
at the list of databases on the site and see we have some really
compelling value.

One of the things about making a compelling content site, you
have to continually add value to the site to keep people renewing
and subscribing. We've added at least one, but usually more like
three-to-five, new databases every business day since we started
selling online subscriptions. In August we were around 700
million names. Now if you include the Census we have over a
billion names on our site, which is far and away higher than any
competitive site.

Q: How does your revenue stream pie break down, subscriptions
versus other revenues?

Smith: Subscriptions is the largest portion of revenues. We also
have a publishing business with two print magazines, and usually
do six-10 books a year that we sell in hard copy. The magazines
have a total of about 85,000 subscribers paying between $19-$25 a
year. It's a good little business.

We also published 110 CD ROM titles last year. Mostly they are
just different data sets that you can find on the site; but some
people decide they want to buy those. We'll probably do another
100 this year. Those sell quite well.

There's also ad sales and email newsletter sponsorships -- those
are revenue vehicles we rely on as well. We're trying to do more
package deals with print and Web as sales, and that seems to be
going pretty well. Online ad sales took a beating last year, but
we've seen some good results of late. Newsletter sponsorship
sales have been good. We've been able to keep them pretty fully
booked. I think advertisers are looking for companies that have
diverse ways of getting to their clients. We're ideal with
print, online and newsletter sponsorships.

We feel pretty good about the total revenue picture for us.

Q: How do you decide on subscription pricing; and how do you
decide which content to charge for and which should be free?

Smith: I think pricing is flexible. If you can show somebody
value, I don't think price is really that big of a deal. We've
done a lot to keep our price integrity as well. We've done some
dollars-off promotions but not a whole lot.

User-generated content will always be free. We've made a
commitment to our users that any data we acquire from them -- for
example if they post something -- we promise never to try to sell
that back.

The other content that's free isn't exclusive. They're things
you can find at other locations. The stuff we put behind the
subscription wall are things that are more scarce, such as our
periodical resource index. It's a database you can search to see
where your ancestors were mentioned.

The Census record is another perfect example of valuable content
nobody else offers. We spent a lot of money scanning every
single piece of microfilm from the National Archives and
digitizing the US Federal Census records. There are 450 million
names in those Census years -- they take an enormous amount of
digital space as you can imagine.

Q: How much bigger do you think Ancestry.com can grow?

Smith: We're actually hopeful that we can become the number one
subscription site. This is the marketing guy talking!

There are more people interested in families and family history
than there are people interested in stock quotes and investor
information. Everybody's got a family. Not everybody has a
portfolio.

We'll try to get to 500,000 first and then we'll see where we go
from there.

http://www.ancestry.com
http://www.rootsweb.com
http://www.myfamily.com
http://www.thirdage.com

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2) Gordon Hughes, American Business Media CEO, Predicts the
Profitability for Trade Magazines Online
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-> Free ContentBiz subscriptions: http://www.marketingsherpa.com

Last May, B-to-B publishing association American Business Press
changed its name to American Business Media. We contacted CEO
Gordon Hughes to learn how his 215 members who between them
produce 1,200 magazines and various ancillary products for 181
industries, are moving into the online publishing age.

Q: Who are the most exciting movers and shakers online in the
trade publishing industry these days?

Hughes: Primedia, Cahners and VNU are doing some exciting things.
I don't know of anybody else. I do think there are a lot of
other people sitting back and waiting.

The model of in print, online and in person -- that's powerful
convergence. When you combine online with the brands of
magazines and trade shows, it's a strong three-legged business
model. That's the power and opportunity behind the Internet.
It's really awesome. It's where we're headed in the 2001-2010
era.

Also creating mass portals that get you to a lot of different
brands -- that helps magazines that don't have strong brands.
You might look at Advanstar to see the way they've cross-promoted
between Web sites and brands.

Q: Should magazines use their print ad sales staff to sell online
media or should they build a separate sales team?

Hughes: There's no right or wrong way to do it. Having said
that, salespeople are going to become consultants. They will
have to be facile with every aspect of media they rep, so they'll
have to learn online. It just makes so much sense if you can
send somebody out to do both. The good companies will be
training sales people to talk about online. It isn't easy, but
it's very, very doable.

The issues are probably more on the agency side where they are
not set up to buy that way. They tend to have the most problems.
We also have to educate them that it doesn't mean you'll get it
cheaper. It doesn't mean free web site space if you buy X number
of print pages.

I also think you'll see more broadband, more emphasis on
streaming media. Banners have slowed this business down.
Banners were a stop-gap measure. They're really not that
effective. They may be a reminder if you've got a big brand
name. We're seeing click throughs diminishing.

What's already happening is that sponsorships are much like TV
ads. Your ratings will be very similar to BPA and ABC. What
time people are watching, what days.... You'll be able to build
content that goes with that viewership like radio does in drive
time. Hit them where they are. You'll begin running TV type
commercials in electronic magazines. And that's when agencies
will be incentivized to build better and more creative ads.

There is a lot of room for creative growth online and the
agencies have resisted it. When we can make this stuff sing, it
will ramp up. The agencies aren't incentivized to build banners.
There isn't a lot of money in building a banner.

So, sponsorship opportunities are where we're heading now. Once
you get good creative services behind them. I think it's all
wrapped up in streaming media and broadband. I think that's
eight months to a year and a half away. Now, we're not talking
about home use here!

Q: How about selling opt-in newsletter sponsorships? Some Web
sites tell us these are easier to sell than banners now.

Hughes: Oh I agree completely. I think electronic newsletters
with ads are the most profitable thing right now. It's doing
really well for all the right reasons.

Q: Should trade magazines be worried about new Web-only
competitors that are competing for their audience online?

Hughes: Why go to somebody else when you know Oil & Gas Journal?
That's why brand is so critical. You've got anywhere from 20 to
100 years of dependence on those particular brands. Where else
would you go? However, these brands better darned well be online
or somebody will come in and knock them up.

Sites like VerticalNet have issues once an offline brand fires up
and moves into the space. That's not to say that a start-up like
the Industry Standard can't be exciting and give you the
intellectual content. But the smart company that has its brand
in the travel or agricultural business will succeed because it's
got a magazine like Pork. If you are in pig raising, Pork
magazine is your friend. It's your ally. It's gotten you
through more years than you can imagine. If it's online, you'll
turn to it. If it's not there, you'll turn to somebody else.

That's why we beat the drums for these guys to be online in the
same way they are in magazines. Don't be afraid of start-ups!
Take them on. Move them out of your silo. You have the power to
do that if you are a recognized brand. And supposing you are the
number four book in a category with five of them, think of what
the Internet can do to help you support your brand.

The Internet and magazines are absolutely made for each other.
It's the dream couple. But you gotta know what you're doing.
You can't have a funky Web site and a great magazine. It has to
be a synergistic image you're portraying.

Q: How much should magazines be investing in their sites?

Hughes: There's no magic number. Our site was free for us. I
had a kid from college design it -- he was our receptionist.
I've known people who spent maybe two million on it. I don't
know what the right answer is.

I saw a strategy where a company went out and spent a half
million five years ago for all the bells and whistles. It was
fabulous. And it was sucking wind. They were hemorrhaging.
About a year and a half ago their competitors began to lose
market share and they couldn't figure out why. Then they figured
it was the one with the Web site that was kicking everyone's
tail. Today that particular company is the dominant one in their
field. I attribute that to the fact that they had the site and
magazine working in conjunction with each other. It will equal
out eventually because now all these companies are building Web
sites.

When I started with ABM in 1995, maybe a couple of members had
Web sites. In '96 about 20% did but none were making money. In
'97 it grew to 35-40%; and by 1999 every magazine had a Web site.
Today ABM represents around 1,200 magazines and 1,360 Web sites.
So there are more Web sites than magazines. Some are pure plays.
A company like Cahners has roughly 130 magazines and 150 Web
sites. Some are portals to get you into the category and route
you to other things.

In terms of profitability, in 1997 maybe 25% of our members'
sites were in the black. Then it was 32% for 1998, 35% for 1999
and by 2000 about 42%. Now, there are lots of games people play
with their Web site accounting. But the point is that people are
starting to make real money. In the B-to-B silos it's growing
faster than others.

It doesn't mean we're smarter than anybody. It's just that if
you're in Alaska working on the pipeline, you're going to go to
that Web site every day to find out how to make the pipeline work
better. If you pick up Vanity Fair, you don't necessarily need
that information on a Web site. There's a big difference from
B2B to consumer.

Q: What types of revenue models are working for your members?

Hughes: I have the first six months of 2000 numbers. We're
roughly at about 3% of the total industry revenues coming from
the Internet. That money is still mainly coming from banner
sales, but that is diminishing. The fastest growing piece is
sponsorship sales. I would look for that to pass banner sales
figures this year.

Q: What's the difference between an online ad sale and an online
sponsorship sale?

Hughes: The sponsor sponsors a piece of content. The best
analogy is if you're watching TV, what used to be the PGA Open is
now the Buick Open. That same model is being used on the Web.
IDG is probably the best at it. They were the first. They'll do
a story on a part of the industry and it's sponsored by so and
so. The advertising itself is not integrated into the story.
There's a church and state firewall. And they can run other
banners in the story as well as at the top of the page. But the
fact that "this has been brought to you by," to me that is really
the future of the business.

Q: What about other revenue streams online?

Hughes: Historical data retrieval is probably fourth, paid
subscriptions are third. Billboard magazine, AdWeek and AdAge
all do great jobs of selling subscriptions online. To me it's
remarkable that more magazines are not charging for content.

Q: What are your predictions for online revenues for 2001?

Hughes: We're in economic whitewater now with the dot-coms in a
shakeout period. It's just like Detroit in the 20s and 30s. Two
things may happen here. One is that advertisers will cut
Internet money because they know the least about it. They know
magazine ad pages work so they'll put money into pages. The
other school of thought is "I'm not spending much on Internet
advertising, why should I bother to cut it?"

So, I think we'll see a little slow down the first half of this
year, but in the second half it's going to be more and more
exciting every month. Yes we'll go through a hiccup, but that's
no reason why anybody in B-to-B should be backing away or not
building a Web site. If they do, they'll lose their position.

http://www.americanbusinessmedia.com


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3) Phillip Won, internet.com Director of Business Development,
Discusses M&As and Valuations for Web-Only Publishers
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-> Free ContentBiz subscriptions: http://www.marketingsherpa.com

We first met Phillip Won when he contacted us last Summer to see
if we'd make a good acquisition for internet.com. There's not a
lot of distinction in this, because Won contacts sites like us
every day of the week. In fact if Internet-related B-to-B content
companies like us were shoes, Won would be Imelda Marco's
personal shopper. As such, he probably has more experience in
ezine acquisitions and valuations than almost anyone else in the
industry. So, we contacted him this week to tap into a bit of it
on your behalf.

Q: Before we plunge into M&A talk, what's up with the rumor of
editorial staff cut-backs that somebody sent F***dCompany.com
about you?

Won: internet.com has been profitable for the last four quarters.
We're growing everything. We're not going to cut any aspect
back. I guess that rumor is just as reputable as the site it's
on.

Q: How have valuations of email newsletters changed over the
past year?

Won: Valuations have come down dramatically all across the
Internet mediums whether it's email newsletters, Web sites or
whatever. The pendulum has shifted from irrational exuberance to
the other extreme.

A couple of years ago valuations were all about Web side metrics:
how many users, subscribers, newsletter deliveries per month. We
were giving one to five times of whatever particular multiple we
were looking at. It was fairly comparable to public
transactions. Today because everybody is scrutinizing
everything, we've definitely steered away from multiples.

It all changed about six months ago to really how much money are
you making? Maybe Wall Street hasn't gotten it yet. We've
always said that these online publishers are old media just a
different distribution. You can have a Web site that has
millions of subscribers, but that doesn't mean crap if you don't
have a sales force selling ads on it.

I think this is going to be status quo for the rest of the year,
especially in the next 6-9 months. Everybody's projecting
continued softness in the ad space at least this quarter and
probably next quarter. So you're not going to see valuations
pick up dramatically.

Q: How have these lower valuations affected the acquisition
scene?

Won: The expectations of acquirees are still very high. However,
most of them are in positions where they don't have to sell. In
a typical week I might speak to 5-10 prospective candidates.
Based on current market conditions, for the majority of them it
probably would not be a smart thing to sell at this point.

Then, we always find companies that are in less of a desirable
financial situation. It's an opportunity for us to come in and
basically save them. Their other prospect is going bankrupt and
laying off people. In today's environment, there are
extraordinary opportunities for those like us that have the cash
to pick and choose the companies out there that are not in such a
good position.

It's also a great opportunity for smaller companies that are also
doing well. They should be going out and looking at possible
roll-up strategies as well. It's a question of are you a
profitable company, do you have the cash? For private companies
you can do a private stock transaction. If you can maintain a
decent cash flow position, you can go out and buy these
companies. Quite honestly some of these companies don't have
other alternatives.

Last quarter was tough for a lot of companies. Next quarter will
be tougher. A lot of companies losing money will have another
losing quarter. It's going to be even better for a company like
us to go out and cherry pick.

Q: What does internet.com look for in a potential acquisition?

Won: We just don't go out anymore and buy companies to enlarge
our portfolio. We've gotten to a certain size already. Now
we're in the mode where we're not going to buy anything that's
losing money day one. Now that not a single site out there is
more than 30-35% sold out in ad inventory, acquisitions are no
longer a function of we need more inventory.

We're looking for companies that are profitable. Not only do
they have an ad sales force and are generating decent revenues,
but are they a company that ran lean and bootstrapped it, and
have the mentality of bottom-line profit? We also look at what's
the revenue risk going forward. Do they have a grasp of the
infrastructure it takes on the editorial, on IT, on sales and are
they balancing that to make a profitable company? Can we make
them profitable because of synergies between our current
properties?

We look at trailing 12 month revenues, trailing 12 month EBITDA.
We give sort of a multiple based on our past experience, and then
we look at the forward 12 months revenues and forward 12 months
EBITDA. Sometimes they are only a year old so trailing doesn't
reflect enough.

We also look at how it would fit into our network and is it a
site we need as far as inventory? It would have to be in an area
where there's some need in our company. We want to acquire the
one to three sites or properties in a certain segment. Companies
that have come out of the pack. We're a little less concerned
with infrastructure. We have operations and IT. We're looking
to take over good editors and really good sales people all the
time.

Ultimately it comes down to how good are the revenues and how
good will they be in the future. Are we going to make money?

Q: How do you typically structure deals?

Won: We like to buy the company based on a fixed consideration up
front. If we feel the risk is higher than we're willing to
stomach, then we come to an interim solution -- a two-stage
acquisition with some reduced earn-out component based on a
milestone such as revenue on a 12-24 month horizon.

If it's a stand-alone company with a handful of founders that own
90%, we do an earn out to the corporation and they can divvy it
out amongst shareholders. If it's a company that has multiple
outside investors, then it gets a little more dicey. We have to
structure the deal so outside investors feel they're getting enough
value, plus we give incentives for those employees coming
on board.

We have to tailor every single deal we do. We don't have a
cookie cutter solution.

Q: Aside from advertising revenues, how is internet.com
diversifying income these days?

Won: We just announced a partnership with dice.com a few weeks
ago. They are one of the top IT job recruiting sites. We'll
promote them within our various media properties for a share of
the revenue.

We have seminars, small conferences and breakfast forums. We'll
continue to grow those in line with the regional Web sites of
internet.com.

Prior to 6-12 months ago I'm almost positive we didn't syndicate
a thing. Now we're definitely working with other sites to
syndicate content. We don't work with distributors. We do it
all on our own. We have a fairly tight hold on how we syndicate
our content.

We're also selling value-added white papers and research on
allNetResearch. It's not a stand-alone business, that's one of
the benefits of having such an infrastructure around it. It's an
incremental cost for us. It's been holding its own. It's only a
matter of time before it really starts picking up.

Q: What about back article sales? Most newspaper sites have a
for-fee area where people can read archives. Have you considered
that?

Won: It goes against the grain of our philosophy. Since day one
we've always felt content should be free (except for
allNetResearch where we're selling products.)

We only have a handful of sites where we charge some type of
subscription. We just don't believe in the subscription model.
You want to build your traffic and have a user base so you can
maintain your CPM rate and be able to boast about the number of
eyeballs you're generating on your site. You're potentially
limiting that by having subscriptions.

Alan Meckler has always said if WSJ.com had our philosophy and
did a non-subscription model from day one, they would be the
biggest online media company in the world today without a doubt.

http://www.internet.com

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