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Search deals enhance services

In their ongoing metamorphosis, search engines increasingly are becoming free online services. The buyout of Tripod is the latest example.

In their ongoing metamorphosis, search engines increasingly are becoming free online services--and today's buyout of Tripod by Lycos (LCOS) is the latest example.

The acquisition, one of the largest among Internet directories, is an effort to bring navigation and community together to build the "new generation of online services," the companies said. (See related story) It comes as Web-based services such as America Online and Microsoft Network are adding email and community features of their own, upping the ante in this high-stakes battle.

In order to fully integrate new services with existing search products, the "urge to merge" is necessary, and more deals can be expected, according to Paul Noglows, a digital media analyst with Hambrecht & Quist. Lycos is looking to blend information and functionality, something that can't be done just by striking a marketing alliance, he said.

Some companies, such as Excite, are taking a slightly different tack: buying online advertising services firms such as MatchLogic to help "deliver the right ad, to the right person, at the right time."

Tripod chief executive Bo Peabody told CNET's NEWS.COM today that several suitors had come calling for its service. "We had a lot of offers, and many of them were written."

But the acquisitions come at a cost--sometime a high one. It can be an extra financial burden because these companies are money-losing or barely profitable operations. As a result, often they are turning to stock-only deals, taking advantage of the inflated price of their shares. However, that's an unstable currency, especially if the stock price suddenly falls.

Despite some differences, most search services are heading in the same strategic direction. They want to become much more than Internet directories to, in essence, serve as "portals" to the Internet. Keith Benjamin, an analyst at Robertson Stephens, said he was not surprised by today's deal because of the rampant competition among search engines and online services for that matter, to differentiate themselves.

To establish themselves as gateways, there are certain services they need to offer. Just as free email became a "must-have" for search engines, online communities and personal Web hosting are now hot items. What's next? Analysts say it's the full integrating of existing services such as stock quotes and email into a "supersite" operated by the Internet directories.

The Lycos acquisition allows the company to douse Tripod with all of its resources. Lycos can leverage its existing traffic and sales force to boost revenue.

"Owning a company gives us a larger user base that we could never have access to on a partnership basis," said Bob Davis, chief executive of Lycos, in a conference call today. "This deal allows us to take advantage of all revenue generated at Tripod and the whole member base," which is estimated to be nearly 1 million.

"It is the same thing with Yahoo," said Noglows. "Yahoo didn't buy Four11 for its 750,000 subscribers, but for the opportunity to provide free email to its 26 million users."

So while some shareholders may worry about the cost of these acquisitions, Lycos's $58 million deal isn't too much to pay for the chance to expand its offerings, according to many analysts. It is estimated that Microsoft paid about $400 million for Hotmail and its 8 million subscribers, coming to roughly $50 per user. By contrast, Lycos's deal came in at about $58 per user.

"Lycos is using its stock, which is at an all-time high. It is not spending cash but really leveraging the value of the stock," Noglows added.

Last month, Yahoo got a bit cozier with GeoCities by making a $5 million equity investment in the company. That equity stake, however, has limitations for integrating the two companies' offerings.

GeoCities members will have access to Yahoo navigation throughout all 40 service "neighborhoods," and they will be able to register on GeoCities for Yahoo chat and email services. Yahoo's registered members also will have access to GeoCities' Web publishing services. By contrast, Lycos users will be able to search the company's Internet directory and automatically receive links to Tripod user's Web pages.

This new generation of online services combines the search capabilities with chat, Web hosting, free email, classifieds, yellow pages, along with the ability to personalize the search site to bring up users' customized home pages--a place that the search companies hope will build loyalty, increase page turns, and boost advertising revenue.

Internet news editor Jeff Pelline contributed to this report.