2HRS2GO: Healtheon WebMD still a question mark

Now this is how you do an Internet deal.

Combine two companies that have little in the way of sales, let alone profits. Give your target audience free subscriptions to your product. Get one of your chairman's worst enemies to pay for it over the next five years.

At least that's one way to look at the merger between Healtheon (Nasdaq: HTLH) and privately-held WebMD.

Healtheon WebMD: online health titan?

Jim Clark -- the Healtheon chairman and Netscape co-founder who has described Bill Gates as a thief -- had to pour a lot of water under the bridge to sign off on the agreement, which includes a $250 million equity investment (more than 10 percent, according to executives) from Microsoft.

More important as far as the new company's top line goes, Our Friend In Redmond will directly provide $150 million of Healtheon WebMD's revenue over the next five years by underwriting subscriptions to WebMD's information, and guarantees another $100 million through sales of Internet ads on co-branded portions of MSN, WebTV, MSNBC and WebMD's own site.

Counting all commitments, Healtheon WebMD says it'll have a bare minimum of $470 million in revenue over the next five years, with annual rate of 500 million "transactions" (whatever that includes), and 28 billion Internet impressions. That sounds pretty good for companies that together saw revenues a little shy of $50 million last year.

It also sounds pretty skimpy relative to the investors' expectations, at least today. By mid-afternoon, Healtheon was worth almost $7.3 billion, or almost three times the value that executives themselves put on the combined Healtheon WebMD (based on the fact that Microsoft's $250 million investment gets it a 10 percent stake).

Proponents touted the new company's ability to tap into a health care market that by some estimates generates $2 trillion in total sales around the world. Half a million doctors influence 80 percent of medical commerce, declared executives at this morning's news conference.

WebMD lures the doctors in with "free" subscriptions courtesy of Microsoft and DuPont, and Healtheon gets them to pony up for its many services, which include some e-commerce but largely seem to deal with the medical world's mind-numbing bureaucracy -- credentialing, insurance verifications, patient databases, and whatnot. It's a lucrative field, without question.

But even Clark has pointed out that the medical field is slow to adopt new information technology. The new company's ability to take subscribers and transform them into buyers of goods and services is completely unproven. And when the subsidies from Redmond and Delaware run out, how many doctors will actually decide to pay $360 a year for their WebMD subscriptions?

And although Healtheon WebMD has some impressive technology partners -- Excite, Intel, Covad and Ziff-Davis' own master, Softbank -- today's announcement was noticeably lacking in new partners from the medical industry, which is what Healtheon WebMD really needs if it wants to become a big-time player. Granted, Healtheon already has agreements with SmithKline Beecham and UnitedHealth Group, but the new company will need a lot more before it can dream of huge revenues.

Keep in mind also that leadership on the Internet is an ephemeral thing. Participants at today's news conference (most embarrassing moment for the journalism profession: some reporter from Atlanta asking if the new company would be publicly traded) emphasized Healtheon WebMD's first-mover advantage, but that doesn't necessarily apply in the case of an educated audicen such as physicians. They're smart enough to shop around, and if someone comes up with something better -- HBO McKesson, where are you? -- they'll jump on it.

Other issues:

Adam.com Inc.

(Nasdaq: ADAM) Baaa. Baaa. Baaa. In the wake of Healtheon WebMD, the investing sheep went out and bought up every medical stock with even a peripheral relationship to the Internet, and the most egregious sins of all have been committed with Adam.com, which is anything but a quality stock.

We're talking about a company trying to transform itself as a provider of online health information before its CD-ROM business goes completely into the toilet. Regardless of whether it succeeds, this is neither Healtheon nor WebMD. There's no guaranteed subscription revenue here, no e-commerce partnerships, no services for health care professionals. It's just a portal, and a niche one at that.

CAIS Internet Inc.

(Nasdaq: CAIS) One of those rare occasions -- although they're become less rare nowadays -- in which Internet investors didn't go gaga over an Internet IPO. CAIS, which has an nice idea in providing high-speed DSL service for businesses and hotels, should be happy that the market didn't go crazy over it, because now it can concentrate on building its business instead of worrying about living up to ridiculous expectations.

Ciena Corp.

(Nasdaq: CIEN) Even nine months after disappointing everyone, Ciena remains an uncertain investment for many people. But investors might start smiling again if the telecom equipment maker can show us a broader revenue base when it releases its earnings report this afternoon.

The overall technology market was clinging to a small gain going into the final two hours of regular trading. The Nasdaq Composite Index was up 5.34 to 2582.74, the S&P 500 had risen 3.78 to 1348.01, and the Dow Jones Industrial Average had picked up 27.13 to 10914.52. 22GO>