Market-share hunger feeds Net firm takeover madness

Before the Internet, it was customary for new industries to mature before they consolidated.

Not any more. Now companies that have had barely enough time to turn a profit are on the acquisition trail.

Last week, Yahoo!, a company that offers a "portal" or gateway onto the World Wide Web, bought GeoCities, a free Web home page community, for $3.58 billion (€3.16 billion).

The deal follows a rash of Internet acquisitions as companies play a game of leapfrog to try to gain the greatest market reach. In recent months AT Home bought Excite, America Online bought Netscape and Lycos bought Wired Digital.

Yahoo!'s aim was to defend its number one position on the Internet, a rank it held until America Online's (AOL) acquisition of Netscape.

Not wanting to play Pepsi to AOL's Coca-Cola, the company had two choices - either attract more eyeballs, hits or page views (the Net equivalent of bums on seats), or buy them. In an industry that moves so rapidly, the choice was simple - buy them, it seems, at any cost.

This hunger for more page views is driving the takeovers, so it is taking the Internet just a couple of years to reach a level of consolidation that took the car and oil industries decades.

Why? Because the stakes are higher, according to Mr John Robb, founder and principal analyst with Gomez.Com, an Internet consumer report firm in Boston.

"The Internet is 10 times the size of any market we have ever seen before," he said. "That number one position Yahoo! is vying for will be worth tens of billions of dollars in a couple of years."

Certainly, retailing on the Internet or e-commerce reached a milestone last Christmas with shoppers spending more than $2 billion during the holidays, twice that of the previous year.

So the dizzying amounts of virtual cash changing hands as stock options for these takeovers do not reflect real income, but rather potential the Internet may bring.

The greater the amount of eyeballs a company like Yahoo! can generate, the greater that potential e-commerce revenue. It's prime real estate if you will, the difference between the St Stephen's Green Centre and the Dun Laoghaire shopping centre.

Like television, the more visitors or viewers a portal can offer the greater the advertising rates they can charge.

"When you have a very young market, share means everything," said Mr Andrew de Vries, director of marketing communications for Wired Digital, in San Francisco, a firm acquired by Lycos last year. "Just look at CNN. It got out before anybody and cornered the market."

He may be right. But defining Internet market share is a black art. The most widely quoted figures come from Media Metrix, a sort of Neilsen Ratings for the Internet. According to Media Metrix, AOL has a market reach of 54.5 per cent. Market reach is the percentage of unique Internet visitors to a site in a given month. Microsoft has 48.4 per cent, Yahoo! has 48.2 and Lycos 46.5 per cent.

This adds up to an initially puzzling total of 197.6 per cent among four companies, but of course many Internet users will go to more than one site. With the addition of GeoCities, Yahoo! now expects to have a network reach of 58 per cent.

Another factor driving the consolidation is that in order to get more visitors these Web portals need to provide a wider range of services. These services tie users into a particular site, thus building brand loyalty.

"The best services to offer are the so-called `sticky' services, such as email and Web pages," said Mr David Cash, analyst with Jupiter Communications in New York.

Sticky, because it is harder to change an email address or a home page than, say, a search engine. Two years ago Yahoo!, Lycos, Excite and Infoseek only provided search engines or directory services.

Now most throw in free email and directory services, or a telephone directory for the Web, as well as chat, free home pages, personalisation and even an address book and diaries.

These free services attract the user, so the company can sell them an ever-increasing range of products and services such as shopping channels, share trading and even financial advice.

"Because we're on Internet time, companies simply can't build these services quickly enough to compete," said Mr Ron Rappaport, industry analyst for Zona Research in San Jose, California. "They have to buy in what they don't have."

And every month the list of what they "don't have" changes as new products and services become available. So the normal reasons for a takeover such as reducing operational costs, pooling resources or, God forbid, making a larger profit become a secondary issue.

"I don't believe that you can apply the normal rules of business to Silicon Valley," said Mr Ted Schlein, partner with venture capital firm, Kleiner Perkins Caufield & Byers in San Mateo, California. "This is a new business and we don't know all the rules yet."

In short, there are only two rules at work here - become one of the top five most-visited sites on the Web, or sell out to one of them.

When will this feeding frenzy stop? Not for at least another year according to Jupiter's Mr Cash. "Now the media and telecommunications giants want a slice of the action."

Last year, US broadcasting giant NBC took a stake in Snap, the portal subsidiary of the San Francisco Internet publisher Computer Network (CNET), and Disney took a stake in Infoseek. Now there is speculation that Microsoft or Time Warner is looking at Lycos as a acquisition target.

As the acquisition madness continues, share prices of these Internet properties are going through the roof, with a single share of Yahoo! stock at $354, AT Home costing $125 and Lycos at $137.

Even the usually taciturn Mr Alan Greenspan, chairman of the US Federal Reserve, warned the US Senate last week that while some of these "pie-in-the-sky" stocks would provide income for investors, "the vast majority are almost sure to fail".

In the meantime, everybody is looking for the next pot of gold on the Internet. Mr Rappaport is looking to high bandwidth Internet access for the next wave of acquisitions. Mr Robb believes online shops such as bookseller Amazon.Com will fuel a buying spree. Mr Cash is betting on the special interest content portals as a fertile area for expansion.

"The next wave will be in affinity, or special interest portals such as Women.Com," said Mr Cash.

If true, it may mean that we will begin seeing email addresses such as joesoap@braywanderers.ie or littlepat@dustintheturkey.ie.