Thought the thread would be interested in the attached text, from this week's issue of Internet World magazine. Best regards,
-Mark
Mark S. Peterson
Director of Public Relations
Go2Net, Inc.
December 15, 1999
Building A Portal For Broadband
The future may not be that far off for Go2Net, now that investor Paul Allen is on board
By Claudia Kuehl
Prodigious amounts of concentration and drive have helped propel Russell Horowitz to this watershed point in his career. Focus is his favorite word, and he uses it so often it becomes a subliminal chant: "Focus...focus...focus." The 33-year-old CEO and co-founder of Go2Net, a network of branded technology- and community-driven sites, has never stopped pushing for his portal to be the best. The effort bred results, and in March, Paul G. Allen, a co-founder of Microsoft, announced his interest in Go2Net. Allen's investment organization, Vulcan Ventures, eventually bought $426 million in stock--a more than 30 percent stake in Go2Net. Then, in October, Go2Net joined Vulcan Ventures and Charter Communications, the fourth-largest cable network in the United States, as an equity partner in Broadband Partners, which aims to be "the definitive broadband portal," Horowitz says.
Now Go2Net is poised to deliver content and services via cable to Charter's more than 6 million households, probably starting within the next year. It's an immense advantage over the nascent broadband market, and Horowitz revels in the coup.
"Anybody that offers narrowband services has to look at what broadband means to them," Horowitz says. "It's going to require a tremendous investment on all levels to be able to be competitive. For us to have that distribution really mitigates the risks of what we're going to have to do anyhow." Another portal designed for broadband is Excite, which merged in early 1999 with @Home. However, there has been speculation the companies may split up.
Meanwhile, in narrowband, Go2Net now ranks among the top dozen most-visited Internet properties, according to Media Metrix. That's Go2Net, not the high-profile portal Go.com nor Idealabs' search engine GoTo.com. Go2Net's brand awareness may be muddy, but some of its properties are hot names on their own: Silicon Investor, HyperMart, and PlaySite among them. "Our view is, the network of branded sites is the winning model," Horowitz says. After Vulcan Ventures' investment, Go2Net went on a spree, buying content providers and services such as Virtual Avenue, Dogpile, Haggle Online, and Authorize.Net.
The Columbia University graduate works hard--"80 hours-plus a week"--and plays hard, on Go2Net's indoor soccer team.
"We won the [last] league, and now we're in the next league, and we're undefeated in this one, too," Horowitz says firmly, always focused on the goal. He doesn't like to lose.
As a manager, he expects a lot of his employees. He merely requires that they "live, breathe, eat" the needs of the company. "We all have the ability to know when we're challenging ourselves, when we're pushing ourselves and when we're not," he says.
Internet World spoke to Horowitz in depth while he was in New York recently to speak at a forum for institutional investors.
Internet World: Given the massive investment in Go2Net of Paul Allen's Vulcan Ventures, how has your own role in steering the company changed? Who calls the shots?
Russell Horowitz: My role has evolved. With Paul Allen's involvement we had a tremendous infusion of capital, both cash and human--access to their strategic resources, access to their network, their people. We drive a lot of the vision generally, and now we have the ability to collaborate with some people that have a whole bunch of resources.
IW: How have you spent the money so far, and will that strategy change in the coming year?
Horowitz: A lot of Internet companies are losing a lot of money, and so they need capital to fund the losses. We're cash-flow-positive and operating-income-positive, and so our cash is really being utilized for strategic expansion. Since we had that investment we've made six acquisitions, and where previous to the Paul Allen investment we had exclusively used our stock, [the cash has] given us a fair bit more flexibility, so a number of those acquisitions have involved inclusions of stock and cash. The other thing that it has done, which is pretty key for us, is it has allowed us to make some strategic investments in other companies. In the coming quarters I wouldn't be surprised to see us make a double-digit number of investments. Without the cash none of that would be possible.
IW: What is the single most important thing you've learned from Paul Allen since you started working with him?
Horowitz: The thing I've gained the greatest appreciation for is what the next cycle in this industry will look like. We're in the second generation of the medium, and when you go to the third generation you'll start to see a transition from a PC-centric platform to one where you have multiple Internet appliances. What I've learned is that whether it's a cell phone, a PDA, a set-top box on your television, or a PC, you have different priorities as a user. And there are also various opportunities or limiting factors associated with each.
When Go2Net came into the industry in 1996, I felt that traditional media companies wouldn't be able to just format their content onto the Web, that companies had an opportunity to develop unique content and unique services just for the Web, and that was the way you were going to need to differentiate yourself. And I feel like existing narrowband content providers or portals are in a similar position to where some of the offline media companies were in the last few years, which is looking to repurpose their content for broadband or for different appliances, when in fact you need to look at the unique elements of each and specifically develop that content or those services for the specific appliance or for broadband.
With [Allen's] focus on the living-room experience--accessing the Internet as a combined experience with your television--the set-top-box-centric opportunity becomes one that has significant implications in terms of overall Web usage. The way he characterized it, the average use of a PC is less than two hours a day, and the average use of a television is, I believe, over seven hours a day. The question is, do you want to try and teach people to use a PC, or do you just want to go to where they already are? To make the investment in cable that he has, to focus on the residential market, makes a lot of sense. We feel fortunate that we're well positioned to provide the content technologies that will drive much of the service and experience that those users have.
IW: You've said that you see Go2Net as a "niche portal," and yet your vision is to be "the Internet's premier destination." How do you turn a niche into a premier destination for everybody?
Horowitz: We need to get bigger and smaller all at the same time. As a company, we need to continue to grow and add resources and look at new categories, and other services and content offerings we can have within existing categories--and we need to continue to add greater focus to each of the things that we do. There are niches of niches that are incredibly valuable. Lots of new companies are focused on these, and if you can't maintain a competitive focus, you run the risk that somebody else is going to have a better offering.
Our goal is to be a first-tier company with a broad base of offerings and all these various verticals or niche categories. We looked at the competitive landscape and saw AOL buying Netscape and said, If we're going to be a first-tier company here, we need more capital and we need some strategic resources. And that's when Paul Allen inquired about the relationship which we ended up putting together. That was the competitive change in the industry, based on the big getting bigger.
Now I almost feel like while that's still true, we're on the other side of the spectrum. You have all these small competitors, extremely focused, that are coming into these various segments, and so now you have to also get a lot smaller. Internally we're trying to make sure that people--while they're focused on what Go2Net's doing overall--live, breathe, and eat the specific properties that they're working on to make sure that we're competitive with these upstarts.
IW: You're obviously proud of your cash flow situation, and it's somewhat unique at this point.
Horowitz: It's not unprecedented. There are a few companies that have shown that you can build both a market position and profitability in this industry. One of the things that we really focused on from the get-go, and it's a discipline we've maintained, is recognizing what we do well and what other people do better. We recognize that we're real good at building Web communities and Web technologies. And so we said let's focus on that. We want to do Internet-only businesses: technology-driven content and services. Maybe people will create a lot of value and have tremendously profitable businesses at some point in the future selling products online. That's not the way we wanted to participate in commerce. We wanted to focus on high-profit-margin businesses, and so we position ourselves by providing a commerce infrastructure. We own Authorize.Net, which is the No. 1 payment gateway on the Internet. We have approximately 50,000 merchants that use that. On Silicon Investor we provide the message board technology, but the users create the content. We recognize that editorially there are a lot of other people that are better at it than we are, but we do a real good job of providing a forum for these communities to interact and create their own content.
We said, let's look at Microsoft as an example of the ultimate business model: 40 percent net margins. Well, in software, the unique element is once the software's created--whether you ship 10 copies or 10 million--your incremental cost is the plastic for the disk. You don't even have that with digital distribution; your only difference in cost is the incremental bandwidth and hardware, and some additional people. But the revenue opportunity increases geometrically, which leads to huge leverage for your bottom line. And that's been our story, which is, by focusing on these particular categories and trying to make sure that our products really added utility, we've been able to add users, and as we've added users it has increased the revenue opportunity with little incremental costs, which has led to rapidly growing profitability. So we think in this industry you can have it both ways. You can rapidly expand your market position, and you can achieve profitability.
IW: Which of your properties accounts for the largest revenues?
Horowitz: It's not something that we discuss publicly. But we have very diverse revenue streams. While we've grown advertising revenues very rapidly and are big believers in the growth in ad revenue streams, our view has been that advertising as a medium is cyclical and it's going to follow the economic cycles on some level. We want to build as much predictability into our business as possible, so we've tried to build recurring revenue streams around subscriptions, licensing, and commerce--and for us, commerce, again, means transactions-based commerce--that have 80 percent to 90 percent gross profit margins, as opposed to selling products at 20 percent to 30 percent margins. Our goal has been to have over half our revenues come from recurring revenue streams by the end of this year. In our most recent quarter it grew to 38 percent of our revenue from non-advertising sources.
IW: Our understanding of HyperMart, one of your properties, is that it's a free Web hosting service for small business. How do you make money on free?
Horowitz: To get something free, in this case free hosting, you let us put an ad on your page. It is a tremendous customer acquisition model. HyperMart is the leader in the space, and we have over 2,000 new members per day. In aggregate, with HyperMart, Virtual Avenue, and FreeYellow we have over three quarters of a million small businesses. Our customer acquisition cost is next to nothing, and we know with each incremental customer we're adding a profitable revenue stream. Now that's not the end of it, because we know that some of those people upgrade to a paid solution, which makes it a more profitable customer. We expect a lot of these people will use our e-commerce infrastructure once we offer them the integrated solution, which will get launched later this quarter, which will make them that much more valuable.
IW: This is another spot where you have a lot of competition. You've got Amazon announcing the zShops; you've got Yahoo Store and freemerchant.com.
Horowitz: This is a place where we are the first mover. We acquired HyperMart in August of 1998, when other people were not focused on the small-business space, and now everybody realizes that this is the biggest and most explosive category in the industry right now. One of the names you didn't mention who's very focused on it is Microsoft. But if Yahoo proved anything in '95, '96, as a first mover you do have some unique opportunities that you can leverage. We just signed a deal with Net2Phone to integrate their IT telephony as part of an overall communications platform for our network. And one of the real differentiators in that relationship, in terms of coming to Go2Net, was access. We are the one company that has critical mass of small businesses in this space.
IW: Any other first-mover ideas that we're going to see in the next quarter?
Horowitz: One of the places that I think is a big opportunity going forward with broadband is multiplayer games. You have one of the ultimate sticky applications--an average visit of over 40 minutes per user--and you have the ability to integrate all sorts of community features and buddy lists and messaging and the things we know are most popular around game-playing. I think that e-mail was the reason for a lot of people to adopt the narrowband Internet. Multiplayer games will be one of the catalysts for increasing the steepness of the adoption curve of broadband.
Going back to traditional television, people needed specific reasons to go out and pay more for cable when they could get networks for free. And what happened? You had an MTV, you had an ESPN, you got some vertical offerings with great depth. Well, the same thing needs to happen with broadband. If people are going to go out and pay more, they need some services that are unique to it. Our feeling is multiplayer games will be one of those, and we expect to be squarely positioned in it. |
