Jack Schofield
Three of the world’s best-known companies – Microsoft, America OnLine (AOL) and Yahoo! – are locked in a billion-dollar battle to give you something for nothing: a “portal”, or gateway to the Internet, where Web wanderers can start when they go online.
Portals attract millions of users, and consequently lots of advertising. With the Net expanding at breakneck speed into e- commerce, video, music and voice transmission, the biggest prizes will go to the sites that capture the most surfers.
This desire for “eyeballs” is behind the frenzied bout of takeovers that has radically inflated Internet stocks. The most dramatic example came last week when Yahoo! paid $6- billion for Broadcast.com, a small company sending out streams of audio and video.
The company’s accounts show it had revenues of only $22-million. This sounds like the most overpriced transaction in history, but not through the looking glass of the Net which sees online multimedia and e-commerce taking off once cheap, speedy Internet access becomes widely available.
But how many companies will be able to stay the pace? Yahoo! president Jeff Mallett thinks there will be three, with Yahoo!, the Microsoft Network (MSN) and AOL “clearly starting to separate themselves” from a pack that includes Disney/Infoseek’s Go, Excite, Lycos, C|Net’s Snap!, Compaq’s AltaVista and several others.
Chris Charron, research director at Forrester Research in Cambridge, Massachusetts, says he predicted portal market consolidation more than a year ago. The market “is definitely going to shakedown, and it’s in the process of doing so”, he says. But picking three winners is not easy.
“Certainly Yahoo! and AOL are the leaders,” says Charron. “The third spot right now? Excite, the Go network and MSN are challenging for that.”
Barry Parr, director of the Internet and e- commerce strategies programme at the United States-based International Data Corporation (IDC), also predicted a shake-out last year. He says the “big three” will be “AOL, Yahoo! and TBD or To Be Determined”.
It is a poker game with huge stakes. This year, Yahoo! also paid $4-billion to take over GeoCities, which provides Web users with free home pages. Last year, it bought a string of companies including ViaWeb (shopping), Yoyodyne Entertainment (promotions), HyperParallel (data analysis software) and WebCal (online calendar software).
Each purchase, licensing deal or in-house software development gives Yahoo! an advantage in attracting more users. But, says Mallett, it is lucky if a lead lasts 60 days, because what one portal offers, others will match.
To stay in the race, Yahoo!’s rivals have to strike their own deals. Excite has taken over the Webcrawler search engine, Magellan; NetBot (shopping); MatchLogic (advertising) and Classifieds 2000. It has also been taken over itself by AtHome. Lycos picked up WhoWhere for its directory, the Angelfire and Tripod homepage sites, GlobeComm’s iName e- mail service and Wired Digital for its HotWired site, HotBot search engine, Wired News service and online magazine.
One of Yahoo!’s strengths is that it is one of the few Net companies that makes money. Last week, it reported $86-million in revenues for the first three months of this year, and operating profits jumped from $2,6- million to $20,6-million.
By contrast, AOL and Microsoft both have substantial incomes from other businesses: AOL from paid subscriptions to its online service, and Microsoft from sales of personal computer software. Both can afford to lose money on the Net.
AOL and Microsoft also have other sources of traffic: AOL has 16-million subscribers, and Microsoft gets a lot of traffic by setting MSN as the default homepage on its Internet Explorer browser.
With independent incomes and the ability to generate traffic, neither AOL nor MSN has had to spend as heavily as other portal contenders.
However, AOL has made two huge purchases – CompuServe and Netscape for its Netcenter portal and Navigator browser software.
Microsoft has concentrated on creating a string of websites including Microsoft.com, MSN, Expedia, CarPoint, Home Advisor, MoneyCentral, WomenCentral, Slate (an online magazine), the Sidewalk series of city guides and, in partnership with NBC, the news site, MSNBC. It has also bought three Net companies – Hotmail, Link Exchange and Electric Gravity.
But the portal players are aware the game is not even half over, and it may not be decided on the Net. However many Web users there are today, there are twice as many who are not online, but who will arrive in the next five years. According to IDC’s Parr, “they’re going to find out where to go probably from television”.
That is what give portals like Go a chance. Go has been created by combining Infoseek’s portal – in which the Walt Disney Company has a 43% share – with Disney’s string of TV- related websites. The Go portal thus had 20- million users when it launched in January, but Infoseek CEO Harry Motro says the aim is to grab the next 50-million people to come online.
Lycos is now going through a three-way merger that will link it with USA Networks and its television channels. The combined company will start with four of the top 20 websites plus 19 online city guides, the Internet Shopping Guide and First Auction site. It will also reach 70-million homes with televisions and handle more than a million telephone sales per day.
Yahoo! has not allied itself with a television network, and Parr thinks “they’ll have to pick one eventually”.
However, in January it announced a deal with Rupert Murdoch’s News Corporation, which owns the Fox broadcasting network. Yahoo! has been promoting itself with advertisements in Fox programmes, including the Superbowl, and sponsoring a programme called Family Guy, while Fox has been promoting itself through Yahoo!
With newspaper readers tending to get more news via the Net, and tending to watch less TV while spending more time online, this is probably a relationship Murdoch would like to cultivate. However, a takeover is unlikely because the prices of Internet stocks are famously over-inflated.
It is the inflated value of their shares that is enabling portal builders to take over smaller Internet companies, and while that continues, they would be silly not to grab the extra assets. The real shake-out may come only when that stops and the survivors run for cover by merging their operations.
Whether there will be three or more winners remains to be seen, but Mallett’s choice of Yahoo!, MSN and AOL must be a good bet for two out of three. It will be a great shame if Yahoo! is not one of them.
ENDS