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Tuesday, November 16, 2004

Dow Jones Buys Marketwatch

Fred Wilson spent two years as Chairman of TheStreet.com and was an investor in that company for about five years. Having watched the financial news and information business develop online and being in the middle of some of the biggest debates, he has some excellent insights into the deal. Excerpts:

The three debates that I recall causing the most heartache were:

Paid vs Free - Should this business be totally ad supported or should it be subscription based?

News vs Analysis - Should this business focus on just reporting the news or should it focus an investment analysis?

Content vs Data - Should this business be mostly a journalistic endeavor or should it be a data aggregation business (like My Yahoo)?
Well it sure appears that Marketwatch got it right and TheStreet.com and Dow Jones got it wrong.

- The first and most interesting observation is that instead of choosing to make the Wall Street Journal a free site, Dow Jones has chosen to add a free site to its portfolio. It would be interesting to see how they integrate this because if WSJ content starts appearing on Marketwatch, then what is going to keep subscribers paying for WSJ.com?

- The second observation is that Marketwatch stuck to the basics of simply reporting the news for the most part. TheStreet.com has much better commentary and analysis and MyYahoo has much better data integration, but Marketwatch got the business model right (online advertising) and thus was able to monetize its site and build a valuable business. In the most recent quarter Marketwatch did $20mm of revenue and $2mm of EBITDA. On an annualized basis, that is $80mm of revenue and $8mm of EBITDA, about double what TheStreet.com is doing these days.

- The third observation make is that Dow Jones paid a very big price for Marketwatch. As a multiple of enterprise value to annualized Q3 numbers, Dow Jones paid about 6 times revenues and about 60 times EBITDA.

The strategic rationale for this deal was just higher at Dow Jones than for anyone else and that's why they paid more for it. In order to justify these kinds of numbers, Marketwatch and WSJ.com will have to be tightly integrated, both on the ad sales side and the content creation/journalism side. Maybe the long term plan is to use the free, ad supported Marketwatch business to wean WSJ.com off of the need for subscription revenue and eventuallly totally integrate the two businesses into the leading free ad supported financial news property online. That's a good plan and would justify the price.
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