New Media Notebook: Digital Island Floats a Cash-Crunch Plan

The stock is trading near its lows, but its CEO says funding opportunities aren't lacking.
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Weighing down the shares of many publicly traded Internet companies is the fear that the enterprise will run out of cash before it reaches the end of the mythical path to profitability. But you've just got to deal with it, says Ruann Ernst, chairman of Internet infrastructure services firm

Digital Island

(ISLD)

.

I Am a Rock
Digital Island forges on.

Ernst is getting a view of the issue up close. Digital Island closed Wednesday at a near-52-week low of $8.25, well off its 1999 high of $156.94.

"It is very clear the market is jittery today" about companies' getting enough funds to become cash flow positive from operations, Ernst says. "There's a legitimate market concern, considering how many nonviable business models there are out there."

Digital Island is telling the Street it has about six quarters of cash itself. But Ernst says the company has plenty of options between now and then.

First, she points out, "Six quarters is an eternity," suggesting that the capital markets, which have gone bone-dry over the past six months, could very well start gushing again.

The company can also cut costs, she says, by delaying new projects and wringing more efficiencies out if its data network, Digital Island can spend less capital expenditures than it expected.

And, finally, it can get money from strategic partnerships, or investments from business partners. Over the past fiscal year, in fact, Digital Island raised $95 million from strategic partners, and should other capital markets stay closed, that continues to look like a promising area for funding, she says.

So what makes her company's business model a viable one? Its traction against a business plan, she says -- adding new customers, lowering the cost per customer and not letting revenue per customer fall. Year by year, quarter by quarter, the company has shown progress against its plan. Further assumptions about the company's growth aren't based on a dream, but on reality, she says.

Loose Lips

By far the most expensive place for online music this week was the Manhattan courtroom where a judge announced that

MP3.com

(MPPP)

would have to pay

Seagram's

(VO) - Get Report

Universal Music Group

, or UMG, $53.4 million stemming from UMG's copyright infringement suit.

But by far the most entertaining place to be was uptown at the

Next Generation Media

conference held by

Thomas Weisel Partners

, where rapper Chuck D lectured to a lunchtime audience of bankers and buy-siders about the earth-rattling changes that the MP3 music format and online distribution of music are wreaking on the music industry.

Most of the time, investment conference panel discussions are dull affairs, featuring one suit-wearing man telling another suit-wearing man that he begs to differ over the validity of a particular business model. But Chuck, who co-founded the group

Public Enemy and now heads the online music site

Rapstation.com, illustrated Tuesday the same thing that

George W. Bush

illustrated when he was caught in September describing a

New York Times

reporter as a "major-league" vulgarism: You get a lot of attention in life, if you make the mistake of expressing your honest opinion.

So Chuck had them rolling in the aisle Tuesday, when he begged to differ with the validity of an online business model proposed by the music label

EMI

. Except he didn't put it that way. Instead, he referred to the "knuckleheads" in EMI's boardroom, who thought people would pay $17.99 to download an album off the Internet. "What kind of (insert plural form of Bush's favorite vulgarism here) are they?" he asked.

Not that Chuck cornered the market on insights at the panel. Vaughn Halyard, senior vice president of new media and e-business strategy for

Disney's

(DIS) - Get Report

Buena Vista Music Group

, for example, reminded the audience that the value people find in the file-sharing service

Napster

isn't so much the file sharing as much as the "emotional intellectual property" that's being passed around. "You can push garbage out to the edge of the cloud, and no one is going to pull it down," he said.

New Era

Getting tired of the expression "path to profitability"? Now you can start talking about "accountability." After all, everyone else on the Internet is.

Sure, it's a weak market for Internet advertising. But talk to any number of Net advertising companies, and they'll say that they'll be able to prosper where others fail. And why? Because they're "accountable." Spend money with them, and you'll see results.

"Accountability is what advertisers are looking for," says John Ardis, vice president of marketing for advertising firm

ValueClick

(VCLK)

. "They want to spend online, but they want to get reliable results."

In part, accountability is a code word for pay-for-performance: Advertisers are spending money based not on how often an online ad runs, but on how often Internet users click on the ad or take another ad-related action. Pay-for-performance has been embraced by some online ad companies including ValueClick, but others such as

America Online

(AOL)

rail against it as a dangerous concession made by ad sales people to advertisers.

If you're an advertiser, of course, you've got to be pleased by the trend. "The whole category is moving toward greater accountability," says Mark Stewart, executive vice president of

Universal McCann

, the media arm of

McCann-Erickson Worldwide

. "And that's a good thing."