Let's say you hear of a Wall Street stock offering involving a money-losing Internet start-up company in a conventional, low-margin business -- like publishing or retailing. If you're a late-'90's, late-bull-market investor, you'll probably leap for the phone (or should we say mouse?), place an order for 1,000 shares with your broker (or the virtual equivalent thereof), then start figuring out how you'll spend the money when your shares leap from $20 to $100 in the first few minutes of trading.

But would you do this -- that is, spend your hard-earned money for stock in a money-losing company that might never make a dime of profit for as far into the future as the mind of Man can see -- if the deal were structured in a way so as almost to guarantee that the shares you buy won't budge once you buy them?

That's the question now being posed by the planned initial public offering for


magazine, an Internet publishing operation. Salon is being taken public in a highly unusual form of offering known as a "Dutch auction." As a result, it will be almost impossible for speculators and daytraders to make a quick killing on the shares.

We'll get into the details of why that is in a minute -- as well as what it says about the difficulty


must have had going public in the normal way for an Internet start-up. For now, however, it is enough to know that anyone who invests in the Salon IPO will be doing so, whether wittingly or not, on the basis of the company's track record and its future prospects as a business. We'll get into that more deeply in a minute, too, for as a business proposition it is clear already that


amounts to little more than a new way to waste money.

That's really rather sad because as an editorial undertaking,


is actually a good product. In case you might not recognize the name,


is the Web 'zine that leaped to prominence back in the Monica Lewinsky days (remember them?), when it outed

House Judiciary Committee

Chairman Henry Hyde for pursuing manly self-expression with the aid of a woman other than his wife.

Whether or not that sort of revelation appeals to you, the magazine as a whole is first-rate, especially if your politics lean leftward. For starters,


writers and columnists are excellent, and the topics they address -- mostly in politics, business and culture -- are always timely and provocative. In the wake of the Littleton, Colo., school massacre, the Internet's major news sites all carried little beyond wire-service copy. But Salon quickly posted a powerfully detailed account of the slaughter, filled with interviews of survivors-all written by a local


freelancer, Dave Cullen, who seems to have been in the thick of everything within minutes.


coverage on the war in Kosovo has also been outstanding. The magazine sent a reporter, Laura Rozen, to Macedonia as the troubles began, and her dispatches have been as good-or better-than anything you've read in

The New York Times

or anywhere else. And when it comes to opinion pieces, it is hard to find anything better on the Web. I personally think columnist Camille Paglia, a


regular, should be cloned into whole armies of people who look, write, think and talk just like her.

The trouble with


is not its editorial product but rather its horrid financials -- the result of a business plan that seems to have no way of becoming more than a marginally profitable venture at the very best. I hope I'm wrong because Salon lends a touch of class to the Web simply by being there. But over the long term, I frankly do not see how this business can work.

Salon was, after all, launched back in 1995 when the Web itself was in the cradle and all the best and brightest figured the Internet could be commercialized as an advertiser-supported medium. Now we know better.

In the spring of 1999,



, the search-engine outfit, is the only publicly traded Web site operator I can think of that is making a profit on advertising alone -- and a lot of its advertising is coming from related-party deals involving other Web sites in which Yahoo!'s own major investors hold big positions. What's more, the data suggest that the Internet's top 50 Web sites, with Yahoo! at the head of the pack, collectively control about 90% of all advertising in the medium. This leaves the Web's thousands of smaller sites -- Salon among them -- to fight over what's left. And, frankly, there just isn't enough to go around.

That's why


, which is mostly dependent on advertising for its revenue, reported gross revenues of barely $2.05 million during the nine months that ended Dec. 31, 1998. That's triple the revenue of the year-earlier period, which looks pretty good until you consider that during a comparably early stage of its life,


(IVIL:Nasdaq), the unimpressive, advertiser- and e-commerce-supported Web site for women, grew its own revenue more than twice as fast.

More important, when you drill down deeper into the actual components of


reported revenues, it turns out that the fastest-growing part of them are accounted for by noncash barter deals, in which companies swap promotional ads for themselves for free on each others' sites.

Accounting rules require these transactions to be booked as revenue and offsetting costs even though no actual cash changes hands, so the effect on the bottom line is nil. But if you look only at revenue -- which is all anyone looks at when it comes to Internet companies -- it appears that revenue is growing sharply when in fact it is not.

In the case of


, it's the barter component that has been doing the real growing, soaring eightfold during the March-to-December 1998 period over the year-earlier period. As a result, barter now accounts for 15% of all reported revenue for the company, vs. only about 5.6% during the year-earlier period. To get a true picture of


revenue, you've thus got to take the barter deals out of the number, which reduces net revenue for the March-to-December period to only about $1.7 million -- which is to say, to probably no more than $2.3 million, at the most, for the whole of 1998.

That makes


, as a business, no bigger than a very small weekly newspaper in a very small town -- but with an editorial and production cost structure that alone appears to be running at close to $3 of outlays for every $2 of revenue, and that's just to pay the writers and run the computers.

On top of those expenses come millions more in advertising and marketing costs, administrative outlays and various research and development expenditures. Add it all up and during 1998 the company looks to have taken in close to $3 million in gross revenue and paid out maybe $7 million in costs. The IPO registration statement offers no hope that this will improve without a major new infusion of capital to turn things around, and maybe not even then.

There was a time not all that long ago when a company with financials like that would have been doggedly bankrolled by a venture capital firm until it was able to stand on its own. Then the firm -- which would hold the bulk of the shares in return for the financing -- would take the company public on Wall Street to recoup its investment. And God knows


backers -- mostly consisting of a venture capital group put together by San Francisco-based

Hambrecht & Quist

-- have pounded plenty of money down the rat hole, with the magazine's accumulated deficit to date totaling more than $10.5 million.

But one look at the "risk factors" section of the IPO's registration statement makes clear enough why the backers now want out. Says the registration statement, in a warning that appears, in one form or another, in nearly all Internet IPOs these days: "We have not achieved profitability and expect to incur operating losses for the foreseeable future."

Burdened with such basket-case financials and grim prospects for the future,


has now agreed to become what amounts to an IPO guinea pig for one of the co-founders of Hambrecht & Quist, William Hambrecht, who left his firm a while back and is now trying to develop a new business built around selling IPOs directly to individual investors via the Internet, thereby cutting Wall Street out of the action altogether.

The normal way these Internet deals have been working is for some shameless beatcha-to-the-bottom white-shoe operator like

Morgan Stanley Dean Witter


Goldman Sachs

to take some turd-on-a-plate Web outfit like iVillage and shop it to a bunch of momentum hedge funds for $15 or $20 per share. Then, when the deal went public, the funds would turn around and instantly flip their shares to daytraders and retail investors in the after market, whose buy-at-any-price mentality would send the stock soaring within minutes to $80 or $90 per share.

The funds, of course, know that the companies aren't worth bubkes, and that the only reason to buy their shares is on a bet that they'll be able to resell them within minutes to retail knuckleheads for three and four times their original price.



financials were so wretched that not even the tarts of Wall Street would touch them isn't known. In any case, the company wound up agreeing to be taken public by Bill Hambrecht. His approach (the so-called Dutch auction) invites anyone who wants to buy shares -- from the smallest individual to the biggest hedge fund -- to log on to Bill's Web site, fill in a registration form, then enter a bid price and a specified number of shares. At the end of the auction, Bill's company will type up a long list with three columns.

In column A will go the price-per-share bids, ranked from highest to lowest. In column B will go the numbers of shares bid to be bought at that price. In column C will go the name of the bidder. Bill's boys will then start at the top of column B and, moving downward, tally up all shares until the total reaches 2.5 million -- that being the amount offered in the IPO. According to Dutch auction rules, the price to be found in column A opposite the lowest bid included among the 2.5 million shares tallied up, will become the selling price for all 2.5 million shares.

The way these things work, such an arrangement means that the price being bid (and not the number of shares offered to be bought) will determine who gets into the deal and who doesn't ... which means that individuals and institutions alike will be placed on an equal footing in getting an "inside price" for the IPO.

But that means that with everyone being invited to bid as insiders, no one will be left to drive the price skyward in the aftermarket ... which means there will be utterly no point in investing in the IPO as a speculative, daytrading play. Instead, the only reason to buy the shares at all will be as a long-term holding on


dreary business fundamentals.

So what will people do? Beats me. As a long-term play, it's hard to make a case for buying these shares at all -- and as a daytrading speculation, well, it's basically the same thing. But who knows? In the current nutty climate on Wall Street, this stock could go public at $10 per share and instantly soar to $50, anyway -- driven skyward by a mob of Greater Fools who didn't know (or maybe just didn't care) that the rules on this deal were different and that they could have bought into the company for a fraction as much only a day or two earlier. Go figure.

You can reach me at


Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at