Go2Net uses different approach to woo users
In a period of flattening Web traffic, go-for-broke marketing budgets, and declining ad banner rates, Seattle-based Go2Net has been sneaking up on some of the Web's heaviest hitters.
It's staged its success by adhering to a surprisingly simple business model: keeping costs low and investing in high-margin businesses.
For a company that has spent only $2 million in advertising over the past two years, Go2Net has seen strong growth. It has jumped into the ranks of the Web's most-visited sites, according to Media Metrix, although it slipped from 9th to 12th place from August to September.
Frugality and careful investing seem to have rewarded the company. Its shares shot up more than 10 points after an impressive earnings announcement yesterday. Excluding merger costs, the company posted pro forma earnings of 12 cents a share, exceeding analysts' estimates.
Has Go2Net figured something out that others haven't? As Internet companies continue spending for growth through acquisitions and big-budget marketing initiatives, Go2Net is one of the few companies taking a less ostentatious approach.
"They've been able to do this without spending big advertising dollars. That's been the main differentiator [from other Web portals]," said Michael Legg, an equity analyst at Prudential Securities.
Go2Net's earnings report comes on the heels of warnings about flattening, or decreasing, traffic at some top Web sites. The company will be hard-pressed to keep its marketing costs in check as it chases elusive users.
But the company also has had success in drawing revenue from sources other than advertising, including subscriptions--something few other sites have been able to pull off.
"Even though we have been believers in ad revenue opportunities, our view is that it's still a cyclical business," said Russell Horowitz, Go2Net's chief executive. "So we focused on where we could build subscription revenue and licensing revenue streams."
So far, Go2Net has acquired a handful of Web sites that have generated small but loyal followings. The company is focusing specifically on four markets: small-business services, personal investing, Web search, and online gaming.
Similar to Viacom or Turner Networks, Go2Net sees itself as an umbrella for a network of "vertical" Web sites. Rather than creating content, however, Go2Net has focused on buying platforms that allow customers to create their own content through chat boards, interactive gaming, and small-business hosting, among others.
The company says its strategy has allowed it to keep costs down while building strong traffic.
In April 1998, Go2Net paid $33 million for Silicon Investor, a stock message board that has 120,000 subscribers paying either a $200 lifetime fee to post messages or $60 for six months. In addition, Go2Net runs small-business services Web sites HyperMart and Virtual Avenue, online multiplayer gaming site PlaySite, and MetaCrawler, which groups results from multiple search engines.
Subscriptions, licensing, and other non-advertising income accounted for 38 percent of Go2Net's revenues during the past fiscal quarter. The company wants to boost that to 50 percent.
Lending further credibility to the company, Microsoft cofounder Paul Allen in June took a 34 percent stake in Go2Net for $436 million.
Despite Go2Net's apparent success so far, some analysts predict the company will have trouble maintaining its core strategy as it matures into a larger aggregator of sites, effectively competing with market leaders such as Yahoo, Excite@Home, Lycos, and Disney's Go Network.
"They're going to have to do something different in some more specific way to survive and be successful," said Chris Charron, an analyst at market research firm Forrester Research. "The reality is that given the diffusion of traffic on the Internet, being a broad-based portal is tough; the economics are tough."