CNET's Traffic Collapse and

Includes: CNET, TST
by: David Jackson

Mid-last year, I shorted CNET (NASDAQ:CNET) in quantity at about $11. CNET, focused on technology reviews and news, was facing a seismic shift in its competitive environment, and nobody seemed to notice.

Yahoo was about to launch its own technology content. AOL beefed up its technology content by purchasing Weblogs Inc., a blog network dominated by gadget review site Engadget. And more important than both of those: there was an explosion of technology blogs, many of which were more focused, more informed, and more interesting than CNET's tech coverage.

Meanwhile, CEO Shelby Bonnie put CNET up for sale. But there were strong reasons why it wouldn't sell, including the fact that it was just too expensive. Despite that, speculation that Yahoo would buy CNET resurfaced in January.

Did Mr Bonnie understand the threats that CNET faced? My guess is he did. As far back as August 2005, evidence emerged that CNET was losing traffic. CNET had tried to boost growth by acquiring online photo site Webshots. But Webshots lost share to Facebook and other photo sites. Mr Bonnie evaded analysts' questions in the June 2006 conference call.

And now it's all played out. In a stunning development at the same time as Mr Bonnie's departure due to options-related issues, it's finally become clear that CNET is bleeding traffic. In Eric Savitz' words:

...clearly, there are more troubles at CNET than simply options backdating: it seems to be losing its audience. Youssef Squali, the Internet analyst at Jefferies & Co., says ComScore data suggests that traffic has been crumbling at some of the company’s core sites, with an overall 50% year-over-year drop in page views for all CNET properties in the third quarter. (Squali says his own estimates were for a 5% decline.)

Squali says that according to ComScore, page views fell 54% versus last year at, 21% at Gamespot and 30% at ZDNet. Page views at Webshots, the company’s photo sharing site, dropped 69%, as it suffered in the face of competition from more popular social networking sites.

So did I make money shorting CNET last year at $11? Well, the stock is now at about $9 -- that's almost a 20% gain on a short position in a rising market. But no, I covered my short at about $15 at the very peak of CNET's stock price at the end of 2005, at the height of the acquisition speculation frenzy.

Why? Because I thought I'd realize my capital loss to offset gains, because I got rattled by the barrage of positive CNET press, and because I let short term trading considerations override a sound investment thesis. As a result, I ignored all the evidence and sound analysis that had led me to short the stock in the first place.

What a mistake.

I'm not going to repeat this mistake with (TSCM), which I'm still short. Readers of Seeking Alpha certainly recognize the proliferation of stock market blogs with outstanding content. Look also at the fact that TSCM's boost from Jim Cramer can't lead to sustainable growth, how the company failed to sell itself, and how the stock is expensive. (Here's my short thesis in full). Yup, there's lots of Cramer and video-induced buzz. But this time I won't be rattled.

Hopefully my TSCM short will work out better than my CNET short did...

Full disclosure: short TSCM at the time of writing.

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