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Tech Industry

Search engines urged to expand business model

Analysts want to encourage search engine companies to bring in revenues from businesses other than online advertising.

    As search engine companies prepare to report quarterly earnings, industry analysts say they want to encourage the companies to bring in revenues from new businesses such as e-commerce and develop more strategic relationships to expand their brands.
    (See chart below)

    Search engine companies by and large rely on online advertising revenues. Reams of statistics pumped out by industry trade groups support the strategy: Online ad revenues surged to $129.5 million in the first quarter of 1997, an 18 percent rise from the previous quarter, the Internet Advertising Bureau reported in June. Ad revenue is expected to reach $5 billion by the year 2000.

    But because the industry is so young, there is no guarantee that it will reach those levels, analysts say. According to Greg Vogel, an analyst with Montgomery Securities, Yahoo and other Internet-based companies must to diversify their revenue to keep growing their businesses in case advertising on the Web slows down.

    Companies need to focus on building a brand, gaining new users, and expanding their profit base.

    "The quality of the different searches is indistinguishable, and brand is big," said Bill Bass, senior analyst with Forrester. "Search companies are not running television ads to reach the people that are already on the Internet."

    Search companies are beginning to do this. Yahoo (YHOO), Infoseek (SEEK), Excite (XCIT), and Lycos (LCOS) last March renewed their contracts with Netscape to be the premier search engines on Netscape's Net Search page. Exposure from Netscape's site could boost traffic for Yahoo, as well as the others, by 20 percent, said Tim Albright, an analyst with Cowen and Company.

    Other deals with Netscape surfaced during the quarter such as Netscape Guide by Yahoo, in which Yahoo would produce a section of Netscape's heavily trafficked Web site that helps users locate news and other information on the Web.

    Yahoo also shelled out a $5 million one-time fee and committed to generating at least $25 million for Netscape in advertising revenue over the next two years.

    Lycos and German media company Bertelsmann said in May they had formed a European joint venture in which they plan to offer directory services in 37 European countries in local language versions. Bertelsmann plans to invest $10 million in the Lycos venture, which will be called Lycos-Bertelsmann.

    Excite too rolled out a new format on its Web site that includes 14 channels organized around general topics designed to lure more users?-and therefore more advertisers--by targeting specific audiences.

    But they need to do even more. Brian Oaks, an analyst with Lehman Brothers says search companies need to expand into "a new types of revenue streams that go 24 hours a day, seven days a week, 365 days a year," so that they can continue to make money even when the office is closed.

    Analysts' estimates for search engines
    Fiscal quarter Analyst estimate
    Reporting date
    Q2 (1 cent) July 9
    Q2 (15 cents) July 15
    Q2 (55 cents) July 21
    Q4 (6 cents) Late August
    Source: First Call