The brewing battle comes after Ziff Davis in August informed CNET Networks and ZDNet that it would cancel the online contracts "due to various breaches by ZDNet," according to a U.S. Securities & Exchange Commission filing. The claimed breaches were unspecified.
RIGHTS RUN INTO 2003
CNET in October completed its $1.6 billion purchase of ZDNet, which holds rights through August 2003 for online content tied to Ziff Davis magazines, such as Interactive Week and PC Magazine. The effective date for the move is listed variously in SEC documents as March 1 or March 31.
A ZDNet spokesman said "in our view, under the contract they are not entitled to terminate in March," and called Ziff Davis Media's claim "completely without merit."
A CNET spokeswoman quoted company lawyers saying Ziff Davis Media has "absolutely no legal recourse to do this."
The controversy follows a decision last year by Ziff-Davis Inc. and its then-lead shareholder, Softbank, to break up the company after Softbank decided to focus on other Internet investments.
Ziff Davis Media bought the magazines from Ziff-Davis in December for $780 million and currently publishes 14 titles, including FamilyPC and Yahoo! Internet Life. The terms of that deal left the exclusive licenses of its online brands with ZDNet, an online venture then controlled by Softbank. With the sale of ZDNet, Softbank now owns 18.1% of CNET.
According to its SEC report filed Oct. 16, Ziff Davis Media on Aug. 22 made known its decision to contest the contracts for the lucrative online content. News of Ziff Davis' move was first reported by Bloomberg News Service Oct. 17, the day CNET closed its acquisition of ZDNet.
ROOM TO REGAIN WEB RIGHTS
Ziff Davis Media Chairman-CEO Jim Dunning has hinted the CNET deal may have left him with room to regain his magazine brands' online rights, and at last month's American Magazine Conference he said he'd canceled the relevant contracts.
In conversations with analysts, CNET has dismissed the significance of Ziff Davis magazine-branded content to the company's overall health as "almost immaterial." A ZDNet spokesman said that less than 25% of ZDNet's total online content came from Ziff titles.
Bill Lerner, Prudential Securities senior Internet analyst, said Mr. Dunning's move is predicated on a "change of control" provision in Ziff Davis Media's contracts with ZDNet in which the contract is void if ZDNet is sold to one of several listed competitors. CNET is not listed as one of them.
Still, Ziff Davis' claim is "legitimate," said David Card, a senior analyst with Jupiter Research, a unit of Jupiter Media Metrix, as CNET "is a competitor" in the tech information space. But, Mr. Card quickly added, "I know nothing about contract law."
"My sense is that CNET spent a lot of time looking at ZDNet before they brought them on board," Mr. Lerner said. "If they missed some sort of loophole there, I'd be very surprised."
`A SCARE TACTIC'
Mr. Lerner said that in a conference call with investors, Mr. Dunning referred to the situation with ZDNet "and basically said they hoped to work something out. In my opinion, it appears they want to renegotiate. . . . They're using [the cancellation] as a scare tactic."
Under the cloak of anonymity, Ziff Davis executives have not been shy about expressing displeasure with how Ziff Davis magazines' sites look and feel within ZDNet.
Mr. Dunning declined to comment. An executive familiar with the situation said at one point in September the company mentioned internally that a press release on the matter would be released within 24 hours, but it never materialized.
A Ziff Davis spokeswoman said, "The only thing I can say is that we have a number of [online] initiatives in development that will see the light of day in 2001."
Ziff Davis Media has had an active autumn, launching Expedia Travels and redesigning Interactive Week. But it's been a tough year. Through September, according to Competitive Media Reporting, the company's overall ad pages were down 19.1% vs. '99, by far the largest drop posted by any top publishing company.