Netscape site revenue down

When Netscape Communications (NSCP) decided last month to offer its browsers for free, the company was left with two revenue engines: its Web site and server software.

But what if one of them begins to sputter?

In the case of the company's Web site, revenue dropped last quarter at a time when two main rivals, Yahoo (YHOO) and Excite (XCIT), enjoyed healthy growth. After three straight quarterly gains, revenue dropped 22 percent to $21 million in the fourth quarter, which ended December 31. The decline comes amid new reports that Netscape is considering selling pieces of its business, including its Web site, to suitors such as America Online.

"They're back where they were at the beginning of 1997" in terms of Web site-related revenue, said David Simons, managing director of market research firm Digital Video Investments in New York City.

That comes despite the revamp of the site last fall into "Netcenter," a one-stop shop for e-commerce, community, and news for millions of viewers each day. The site's partners include big Internet companies such as AOL, Amazon.com, FTD, and Travelocity, as well as Yahoo and Excite.

But no matter how many partners Netscape signs up, it faces another, longer-term challenge: As Microsoft eats into Netscape's browser market share, its Web site traffic may decline. That's because of the site's default status as the Navigator start-up page. As a result, companies may be wary about making a Web site real-estate deal with Netscape, some analysts argue.

"Apart from Netscape software sales, service, and support, there's nothing unique there," said Simons. "There are other places you'd think of going first if you were an Explorer user."

Netscape executives say they are not alarmed. The decline in last quarter's Web site revenues merely signals a shift in the way Netscape collects money from its partners, said executive vice president Mike Homer. In short, he said, the company is getting less money up front and is relying more on revenue-sharing deals over longer periods of time.

Despite the drop in Web site revenue, Netscape's total ad revenues grew for the quarter, Homer added. The company does not provide a breakdown for advertising, transactions, and sponsored positions, he said. Homer also pointed to the company's long-term growth streak for Web-related ad revenue: from $9 million in the fourth quarter of 1996 to $27 million in the third quarter of 1997.

He is not worried about the prospect of declining site traffic, either. The number of Navigator users continues to grow, he said, despite Microsoft's inroads in the browser market. And the site is "just getting warmed up" with community forums, user directories, and more marketplace storefronts coming later this year, he added.

Web site partners still are waiting in the wings. "Even if their share of the market is eaten away by Microsoft, they'll still control a significant amount of traffic," said Ben Narasin, president of Fashionmall.com, who wants to rent real estate on Netcenter.

But the partners also face some financial risk. For example, in May 1997, Yahoo signed a deal with Netscape to run the Netcenter Internet guide and sell the site's advertising. Part of the deal included a $5 million "license fee payment." The companies also will share revenue from advertising, but Yahoo had to guarantee Netscape $4.7 million for the first year of the deal, according to Yahoo's quarterly earning statement.

Yahoo has handed over $1.16 million through the third quarter of 1997, according to financial statements. "The latest Netscape news [on declining Web site ad revenue] may portend that ad sales won't generate the $4.7 million guaranteed owed by May," Simons wrote in a report last month.

Yahoo could not be reached for comment on its potential risks, either in opportunity or out-of-pocket costs. Simons thinks opportunity costs pose the greater risk.

Given Netscape's--and online commerce's--fledgling status, it remains to be seen how much return on investment the site gives Netscape and its partners. One true test will come up as the first set of agreements begin to expire. Will third parties renew their leases for Netscape's Web real estate, or will they move on?

"What's important is not whether you do a deal in the first place--it's whether you renew the deal later, and for how much," said Narasin.