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August 29, 2006 at 12:41 PM

InfoSpace dives after sell rating

Investment bank WR Hambrecht said it has started following InfoSpace, initiating coverage with a “sell” rating that contributed to a fall in stock price today, according to StreetInsider.com.

Shares dropped about $1 to a low of $20.82 before recovering to close at $21.90, or down 9 cents. But WR Hambrecht Analyst Denise Garcia seems to think the stock could fall much lower, having set her price target at $17.50.

InfoSpace partners with wireless carriers to deliver content such as ringtones to customers. It also delivers content directly to consumers on Moviso.com.

“We believe growth prospects for the mobile content market have become more realistic than in previous years, helping provide more reliable expectations for investors,” Garcia said in a research note. “As the market has begun to take shape, we question the role of third-party service providers such as InfoSpace. We believe the role of the third-party service provider will become increasingly pressured as large content providers and mobile distributors seeking competitive and financial advantages create direct relationships with each other.”

In July, I wrote about how the Bellevue company was betting on the wireless industry. In the story, Oppenheimer analyst Sasa Zorovic said the extent of the carriers’ control of the wireless industry made it a tough business. If an InfoSpace does too well, carriers will demand a larger cut. If it doesn’t do well enough, it could get cut off, he said.

“Wireless carriers are just like cable operators,” said Zorovic, who also had a “sell” rating on the company. “They own the customers. If they see you are starting to make money, they will squeeze you. They don’t have to share their revenue.”

In another story, I focused on the middleman companies that fall between the carriers and the content owners. It analyzed whether carriers would continue to need help with content. Although there is some threat they won’t, there is also the assumption that with more and more content being created for mobile, there is no way that a carrier — whose core business is building wireless networks — would be able to manage of them.

We’ll have to wait and see.

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