Analysts: Lycos bailed out while it could

Terra Networks' buyout of Lycos today raises the stakes in the race to create a global Internet services company.

The deal marks the first time a U.S. Internet portal has been acquired by a foreign firm. Yet the deal was inevitable, given Lycos' position in the marketplace, analysts said.

Although Lycos has maintained its status as a top-five Web portal in terms

Gartner analyst Whit Andrews says it seems likely that Terra Networks sees Lycos as a valuable foothold in the United States, which would make Terra bigger--but not necessarily better. see commentary

of audience reach, many analysts have doubted the company's ability to close the gap with market leaders America Online, Yahoo and Microsoft's MSN.

"The perception has been that Lycos has been sitting on its hands for a long time," said Patrick Keane, an analyst at Jupiter Communications. "In my opinion, they're no longer in this AOL-Yahoo competitive category.

"Something could be said for Lycos getting out while the getting is good," Keane added.

Analysts say the success of Yahoo, AOL and MSN has created a glass ceiling for other general-interest portals. Many of the "second tier" portals have already decided to change course to focus on more specific types of consumers. Disney's Go.com, for example, has recast itself as an entertainment site, and Excite@Home has played up its broadband content.

By contrast, Lycos has struggled to differentiate its services from those of the leading general Web portals.

Lycos has been searching for a partner for a while. Last year, the company tried to merge with Barry Diller's USA Networks, but the deal was scrapped because of a lack of shareholder support.

Some analysts said joining with a company with international reach is a smart way for Lycos to set itself apart from its rivals.

The combination of Terra and Lycos would create an Internet company with considerable international reach. Terra Networks operates an Internet service targeted at Spanish- and Portuguese-speaking consumers and is 66 percent-owned by Spain's biggest phone company, Telefonica.

"What's the next point of differentiation? Sink your teeth into the next-fastest-growing market: the Spanish-speaking market," said Emily Meehan, an analyst with market research firm the Yankee Group. "I don't think they were absolutely desperate for a partner. This is a perfect fit and complementary for both."

Still, such a deal could carry substantial risks, according to some analysts, who said the Spanish-speaking Internet market is still developing and may not offer immediate returns.

"I think it's certainly better than Lycos alone for sure because Lycos is stuck in a dangerous middle ground in the U.S. portal market," said Jordan Rohan, an analyst at Wit Capital. But he cautioned that the deal wasn't particularly well executed.

"The Latin American Internet market is one of the least mature," he said.

According to Rohan, the Latin American Internet market is estimated to account for less than 5 percent of total global advertising spending by 2004. He added that Terra Networks has only 2 million ISP subscribers, half of which do not pay for access.

Analysts have predicted a shakeout among Internet portals for some time.

According to a December 1999 study by Forrester Research analyst Charlene Li, Yahoo, AOL and MSN combined accounted for 15 percent of all Web traffic for the year, while the remaining portals combined accounted for 5 percent. Forrester projects that the gap will rise over time: In 2000, the larger portals are expected to account for 17 percent of traffic and the smaller for 4 percent; in 2004, the larger ones will account for 20 percent and the others for 1 percent.

Compared with the portal race two years ago, the contenders in the back have already begun looking for different routes to the finish line.

Take Excite.com, which last year was acquired by cable Internet service provider @Home. The company recently said it would refocus its resources on developing its broadband services, possibly at the expense of its narrowband Excite portal.

AltaVista, majority-owned by CMGI, also has stepped back from the portal race. The company recently has retraced some of its steps toward its search engine roots. Earlier this month, AltaVista unveiled Raging Search, a stripped-down search engine that aims to compete with Google.com.

Since the failed USA Networks acquisition, Lycos has spent the lion's share of its time acquiring smaller companies and following industry trends by bulking up its site with new services.

Lycos has added smaller Web firms, including financial site Quote.com, MP3 player Sonique, Web community builder Valent, and online gaming site Gamesville.

Meanwhile, it launched Lycos Music, unveiled a free ISP service, and created an Internet incubator, to name a few initiatives.

All of this activity, however, did not result in a significant boost in traffic. It appeared more a way of keeping up the pace rather than leading the pack.

"They pulled out of their broadband play; there's been a lot of vaporware announcements," said Yankee Group's Meehan. "The reality is that AOL and Yahoo are far and away the No. 1 players here, and it will take quite a bit for another silver medalist to slide up next to AOL."