Empires pay billions for more visitors

By Jim Hu and Mike Yamamoto
Staff Writers, CNET News.com
June 5, 2001, 4:00 a.m. PT

Excite@Home executives knew it might be a tough sell to investors.

In October 1999, the high-speed Internet service agreed to pay as much as $1 billion in cash and stock for Blue Mountain Arts, an online greeting-card company that made no money. To help justify the purchase, Excite@Home issued a press release touting Blue Mountain's "strong differentiated content."

But executives knew the primary reason was one of sheer numbers: Excite@Home was engaged in a bitter contest to claim the most visitors, and archrivals Yahoo, Lycos and AltaVista had made major traffic-boosting acquisitions that threatened to knock the company off the A-list of Web portals.

"It was a market share play," acknowledged one Excite@Home source who requested anonymity.

To many, the deal illustrates how far companies were willing to go to buy traffic at the time, even though the real value of those numbers remained unclear. Until the Internet economy began its steep descent a year ago, Web portals and other online companies were engaged in a kind of arms race through acquisition that produced multimillion-dollar deals seemingly every few days.

Growth by acquisition is a fact of life in any industry, but the unprecedented pace and price of Internet deals redefined the corporate merger in America. Yet as today's investors seethe over their dwindling portfolios, critics from Washington to Silicon Valley have denounced many deals as foolish decisions that backfired on companies and arguably contributed to the decline of the overall industry by squandering resources.

Driving this merger mania was the assumption--or hope--that raw traffic would eventually be converted to profits. Leading the charge were portals frenetically building empires throughout cyberspace in the belief that they who had the highest numbers would win all the spoils.

The fatal flaw in that strategy was an unrealistic reliance on advertising dollars, which companies hoped would increase indefinitely along with the number of people exposed to banner ads on Web pages. Even if the economy had not slowed, it is doubtful that ad revenue could have come close to supporting the inflated costs of megamergers--forcing companies to begin charging for their services.

"It was the fundamental faith that if the audience was gathered in sufficient numbers it would be monetized," said Marty Yudkovitz of NBC Digital Media, who worked on the development of the NBC Internet portal. "But in fact, it was jumping the gun considerably because there was no truly rational business model that was supporting the cost of acquiring that audience."

Let's go shopping
Of all the portals, Excite@Home is often attributed with starting the Internet buying spree that would make 1999 the year of the merger. The company was created by the estimated $6.7 billion combination of cable Internet service provider @Home and Web portal Excite.com in January of that year, marking one of the first major marriages of Net leaders.

Just nine days after that deal was announced, Yahoo responded in kind. Worried that Excite@Home and Lycos were creeping up on it in the all-important traffic rankings, the leading Web portal announced plans to buy online community GeoCities for about $3 billion.

Two months later, in March, Yahoo raised the stakes again with a deal to buy Web streaming media company Broadcast.com, a purchase that later closed at $5 billion.

Yahoo's concerns were not without substance. The month after it announced plans to purchase Broadcast.com, rival Lycos issued a press release announcing that it surpassed Yahoo in "reach"--industry jargon meaning that more people had visited Lycos than Yahoo (51.8 percent to 50.8 percent of the total online population in the United States, respectively).

By July, Internet investment company CMGI decided that it needed to get into the acquisitions business as well. The company, one of the best performers on the Nasdaq Stock Market that year, announced its intention to buy AltaVista in a deal estimated to be worth $2.3 billion at the time of the agreement.

A pioneer of search engines, AltaVista had become a sort of Don Quixote of Web companies. It failed to evolve into a full-fledged portal like Yahoo, Excite.com or Lycos, in no small part because of corporate confusion with former owner Digital Equipment.

CMGI launched a $120 million advertising campaign in hopes of turning AltaVista into a major Web portal to take on Yahoo, hiring multiple-Grammy winner Lauren Hill to perform at its relaunch party. True to its misfortunate self, however, AltaVista pinned the date of its initial public offering on the week after the market crash in April 2000. Since then, the company has shelved its plans to go public, undergone rounds of layoffs, repositioned itself as a search company, and lost its CEO.

Lycos, too, played heavily in the traffic game. The portal bought companies such as home-page community Tripod, financial service Quote.com, online gaming site Gamesville, tech information site Wired Digital, and Web yellow page service WhoWhere.

The acquisitions "were meant to drive audience," said Bob Davis, former chief executive of Terra Lycos. That, in turn, was closely related to another goal at the time known within the industry as "stickiness": the ability to keep surfers on the site once they visited by enticing them with content and services.

"Audience was meant to drive stickiness, stickiness was meant to drive the network at large, and the network at large was meant to drive earnings," said Davis, who has parlayed his entrepreneurial experiences into a career in publishing and will soon release a new book titled "Speed is Life."

Those acquisitions, most of which were paid for in stock, helped keep the company in the highest of Media Metrix rankings through the dot-com crash last year. Lycos was then acquired by Terra Networks, a Spanish ISP looking

	Reassessing the madness John Hagel, author, "Net Gain" and "Net Worth"

Enticing the offline giants
The misguided urge to merge was not limited to the pure Internet companies. Frightened of being outmaneuvered by scrappy Web start-ups, Walt Disney in 1998 purchased a 43 percent stake in search engine Infoseek for $465 million. That laid the groundwork for Disney's ill-fated Go.com portal, which the entertainment giant shuttered in January after reporting a $790 million loss and laying off most of the staff.

General Electric's NBC has encountered similar difficulties since taking a stake in the Snap.com portal created by CNET Networks, publisher of News.com, and combining it with online community Xoom.com and its flagship NBC.com to create NBC Internet. The company initially went public and fared well, but its heavy reliance on advertising took a toll. In April, the network bought back all outstanding shares of NBCi, laid off most of its staff, and recast its Internet strategy to tie it closer to TV programming.

In many of these cases, the last link in the business-building chain--earnings--remained missing. And once evolutionary development of such Net ventures as Go.com and NBCi was stopped short, the value of traffic and the acquisitions made to increase it fell under wide criticism.

Because of its stature and recent financial problems, Yahoo has been the subject of much scrutiny for its acquisitions and other business strategies. Under this microscope, the decision to pay 21.5 million shares for GeoCities appears questionable to some, especially if the main objective was to increase traffic.

Home-page building "was a business that wasn't proved viable from an advertising standpoint," said Patrick Keane, an analyst at Jupiter Media Metrix. "The community sector is completely bankrupt as a revenue opportunity. It was a reach play."

Yahoo declined to comment on its previous acquisitions. But even Tom Evans, the CEO of GeoCities at the time of the acquisition, criticized the strategy, saying the Web portal failed to follow through with effective use of his company's strengths.

"Can you turn those eyeballs into dollars and those users into customers?" Evans asked. "I don't think Yahoo maintained fully the GeoCities model and all the things we were doing in GeoCities. What they determined to do was to integrate it into the Yahoo network."

The Broadcast.com deal has been criticized as well. The multimedia company's core business of providing streaming technology for internal corporate Webcasts is a shell of its former self, according to people close to the company, and it remains unclear whether the division is drawing any significant advertising.

The portals defend their actions as necessary to compete in a world turned upside-down by unrelenting pressure to expand at virtually any cost. Many executives acknowledged the flaws in acquisition strategies but said they were trying to keep up with an insatiable demand by investors to raise stock prices.

"By acquiring you were able to add more tonnage into the network, keep your ranking high in Media Metrix, and that was a nice virtuous circle and it supported your stock price," said George Bell, former chief executive of Excite@Home. "It was a silly cycle in a sense that it had no basis in reality."

That is a troubling observation, especially if applied to Excite@Home's acquisition of Blue Mountain, for which it agreed to pay $780 million in cash and stock and another $270 million if the site met goals largely measured in traffic gain. The company reasoned that the deal was a way to enlist paid subscribers for its high-speed Net service from the millions of people who sent Web greeting cards through Blue Mountain's site.

The result has not been pretty. Excite@Home's stock traded around $40 a share at the time of the Blue Mountain deal but is around $4 a share this week. In January, the company wrote off $4.6 billion in intangible assets for the depreciation of value for both Blue Mountain and Excite.com.

The company is rumored to be seeking a buyer for the two entities, though no obvious takers have emerged. Only two years separate 2001 and 1999, but in Internet time, it might as well be a lifetime.

"It was shortsightedness," said Joshua Sinel, chief executive of Blue Barn Interactive, a New York community and chat company. "What they bought were eyeballs and traffic. But what they failed to realize was that buying people doesn't do much--it's what you do with them."