Salon: In the Arms of the Angels

Every weekday, at least a half dozen SEC filings land in my inbox, most of which I glance at quickly and discard. But one of those arriving today describes the financial situation at a site I love, Salon.com, and the news is not good.
According to the company's 10-Q, net revenues decreased 16% to $1.8 million for the three months ended December 31, 2008 from $2.2 million for the same period a year earlier. Salon's total operating expenses exceeded $2.9 million for the quarter, up from $2.7 million a year earlier. So, to provide some context, the company's net quarterly operating loss essentially doubled, from $562,000 to $1,133,000.

Another way to make sense of these numbers is that Salon went from earning about 82.5 percent of the revenue needed to support its operations in the fourth quarter in 2007 to only around 62 percent in 2008.

Looking at the editorial product, there is no reason for this decline. The excellence of the site's offerings has remained consistently high. Particularly robust are the comments and other evidence of audience loyalty. In fact, the site has experienced significant audience growth

Salon's business model has not exclusively relied on advertising revenue; it also has long offered a subscription option called Salon Premium. This service offers users who paid up an enhanced experience that contained no ads.

It was here that Salon made a mistake that truly doomed its future as a business. What kind of message is a media company sending to its most loyal advertisers when it guarantees its most loyal users that no advertisers will "pollute" their content experience?

An awful message, one based in the absurd tradition of print media that segregated content from ads along the lines of the false religion of a "state-church line." Had Salon's leaders been more sensitive to how dependent they were on the good will of advertisers, they would have offered Salon Premium with rich, enhanced ads, shared the demographics of these loyal readers with their business partners and earned a handsome premium on those ads (probably 8x) as a result.

Had that been the business model Salon implemented, today's 10-Q would be quite different than it is.

Alas, Salon is and always has been guided by journalists stuck in the past, with little sympathy for the businesses that would have loved to serve their elite membership, which is affluent, highly educated, politically engaged, and connected to those who help establish what is culturally cool.

Therefore, the company reports that it expects this trend (of reduced paid subscriptions) to continue. No mystery there, since "the number of paid subscriptions has declined from approximately 33,900 as of March 31, 2008 to approximately 26,100 as of December 31, 2008." That is not decline, that is a hemorrhage (roughly 25 percent.)

I'll spare you the language that has to be inserted into such a dismal SEC report at this point other than the dreaded doubt about this firm's ability to continue as a "going concern." I'm not sure how many of you read these types of documents, so I will now quote from Salon's "Risk Factors" at length:

Item 1A. Risk Factors. Factors That May Affect Salon's Future Results and Market Price of Stock

Salon's business faces significant risks. The risks described below may not be the only risks Salon faces. Additional risks that are not yet known or that are currently immaterial may also impair its business operations or have a negative impact on its stock price. If any of the events or circumstances described in the following risks actually occurs, its business, financial condition or results of operations could suffer, and the trading price of its common stock could decline.

• Salon's projected cash flows may not meet expectations
• Salon relies on cash projections to run its business and changes such projections as new information is made available or events occur. The most significant component of Salon's cash projections is cash to be generated from advertising sales and, to a lesser extent, cash to be generated from Salon Premium.
• Forecasting advertising revenues and resulting cash receipts for an extended period of time is problematic due to the short duration of most advertising sales contracts. If projected cash inflows and outflows do not meet expectations, Salon's ability to continue as a going concern may be adversely affected.
• If Salon forecasts or experiences periods of limited, or diminishing cash resources, Salon may need to sell additional securities or borrow additional funds. There is no guarantee that Salon will be able to issue additional securities in future periods or borrow additional funds on commercially reasonable terms to meet its cash needs. Salon's ability to continue as a going concern will be adversely affected if it is unable to raise
  additional cash from sources it has relied upon in the past or new sources.
• Salon has relied on related parties for significant investment capital
• Salon has been relying on cash infusions from related parties to fund operations. The related parties are primarily John Warnock, Chairman of the Board of Salon, and William Hambrecht. William Hambrecht is the father of Salon's Chief Executive Officer, Elizabeth Hambrecht. During the current fiscal year, these related parties have purchased $2.0 million in convertible notes.
• Curtailment of cash investments and borrowing guarantees by related parties could detrimentally impact Salon's cash availability and its ability to fund its operations.

(Note: I helped launch Salon, as a consultant, in 1995, and also worked there, as Managing Editor, Investigative Editor, Washington Bureau Chief, and as a senior executive from 1998-2000. I continue to view Salon as one of the most valuable sources of political and cultural news on the web.)