Big Media Ads Are Gold to Xoom.com

Net companies need exposure, and one way to get it is by hitching up with a major media partner like NBC.
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When people discuss the "currency" used in Internet mergers and acquisitions, typically they mean the acquirer's soaring stock.

But the

deal announced this morning among

NBC

,

CNet

(CNET) - Get Report

and

Xoom.com

(XMCM)

again illustrates that television networks have their own strong currency: advertising time.

Internet stocks' rich valuations often prevent more conventionally valued non-Internet companies from bidding on them. But this deal illustrates the value of publicity to Internet companies, and by extension to the major media players that can provide that exposure, such as NBC, a unit of

General Electric

(GE) - Get Report

, and

CBS

(CBS) - Get Report

.

As part of the transaction,

NBC Internet

-- the new, publicly traded company to be formed in combining Xoom.com with some Internet properties held by NBC and the

Snap.com

portal, which is co-owned by NBC and CNet -- agreed to buy several hundred million dollars of advertising from NBC. Initially, NBCi will buy $380 million in advertising that would run on NBC over the next four years. In what Xoom.com's chairman and co-founder, Chris Kitze, termed a "horse trade," NBC is contributing nearly all of that money -- $370 million, to be exact -- by buying debt that's convertible to equity and would on conversion raise NBC's stake in NBCi from 49.9% to 53%.

Though it was hard to follow Kitze's math on a conference call with reporters Monday morning, he suggested that a quarter of the value of the new NBCi was tied up in the NBC brand alone.

Whatever the value, getting on NBC is obviously very important to Xoom.com. "We believe that to be a player, you need to have a major media partner," Kitze said. He pointed to how Snap.com has been helped over the past few months by its link to NBC. "It really does drive people from television to the Web," he said.

Just a brief look at the numbers explains how useful a tie to a major broadcaster can be. NBCi, which an executive on the conference call suggested should be viewed as primarily Snap.com and Xoom.com, could report $72 million in revenue in 1999, Kitze noted. Yet NBC's initial $95 million average annual contribution in advertising dwarfs Xoom.com's actual first-quarter revenue of $4.4 million and its sales-and-marketing costs of $2.4 million. So that's a lot of advertising that Xoom.com and Snap.com wouldn't be able to buy otherwise. Snap.com's numbers aren't publicly available, but Kitze said its operational results were comparable to Xoom.com's.

Meanwhile, NBC's currency of advertising time, added to other assets, such as its stake in CNet, enable the company to get eventual majority control of the future parent of Xoom.com, which has a billion-dollar market capitalization. NBC's move shows that, contrary to conventional wisdom, it's not just Internet companies like

Yahoo!

(YHOO)

that can afford to buy richly valued money-losing Net companies.

Similarly, CBS is also obtaining equity in Internet companies in return for advertising and promotion time -- a strategy it has pursued with companies such as

MarketWatch.com

(MKTW)

,

SportsLine USA

(SPLN)

and, last month, the

Office.com

subsidiary of

WinStar Communications

(WCII)

.

WinStar CEO Bill Rouhana said last month he was happy to sell a one-third stake in Office.com, a site targeted at small- and medium-sized businesses, for $42 million in TV, radio and outdoor advertising and promotion on CBS-controlled properties. "We wanted access to the media clout, the buying capacity, the promotional ability of a giant like CBS," he said.

CBS spokesman Dana McClintock said the company has been getting hundreds of Internet companies hoping to trade equity for promotion. With "millions" of sites on the Web, McClintock says, "How do you stand out among the millions? Clearly the way to do that is hitch yourself onto a media company."

Though NBC is contributing its own Internet assets to the new venture, recent moves by the network and its rival CBS run counter to what

The Washington Post

noted only last month: "Valuations already are so high that most traditional media companies, which Wall Street expects to make profits, can no longer afford to buy into the Internet game."

Sure they can -- especially if they have some advertising time to swap.