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The Vacuum at InfoSpace
By:Erick Schonfeld
Date: January 26, 2001
That giant sucking sound you hear is InfoSpace's top management team running for the exits.
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When I last checked in with the hyperbolic workaholic Naveen Jain (see the profile of him that I wrote last December, Naveen Jain Is the Greatest High-Tech Entrepreneur of All Human History) and the wireless internet company he'd founded, InfoSpace, the company's CEO Arun Sarin commented that Jain "is one of the few people I know who works more than me." That is now especially true: Last Monday, InfoSpace announced that its well-regarded top management team -- Sarin, as well as the COO and CFO -- were all stepping down. The stock was slammed, falling 22 percent that day to $7, where it remains (which is 95 percent down from its all-time high of $130 last March). What precipitated this mass defection one week before InfoSpace was scheduled to disclose its fourth-quarter earnings?
We might find some clues when the company announces its results on Monday (the consensus estimate is that it will report earnings-per-share of one penny, down from the 3 cents a share it earned in the previous quarter). Word from the company is that former CEO Sarin -- who will remain as vice-chairman of the company's wireless division -- resigned his post because he could not take the weekly commute from San Francisco to Seattle and wants to spend more time with his family. "Frankly, I was tired of the travel," he tells me. He also notes that, after the company's merger with Go2Net last November, the number of employees grew to 1,200 from 300 when he had joined in April, and it was no longer practical for the CEO not to be living in Seattle. But this company line isn't all that satisfying.
Sure, constantly flying up to drizzly Seattle could wear down the hardiest soul. But Sarin was fully aware of this aspect of the job when he took it last April. And although the CFO was also commuting from San Francisco, this does not fully explain why the CFO and the COO decided to quit at exactly the same time. According to chairman and founder Naveen Jain, who has now resumed the CEO role as well, these two individuals were planning on leaving by the end of the year anyway, so it was better for the company to take the hit all at once. "InfoSpace is not a job," says Jain. "It is a religion, a crusade. And when you are on a crusade, you need leadership that is stable."
If they gave out awards for spinning under pressure, Jain would be a favorite to win it. When a company loses its most respected executives, that is usually seen as a sign of instability, not stability. Wall Street, for one, is no longer buying Jain's story. It had approved of the pedigree of this management team. Sarin was recruited from Vodafone, where he was the heir-apparent to the CEO. COO Russell Horowitz was formerly the CEO of Go2Net and the fact that he sold 140,000 shares of InfoSpace stock just before Christmas is not exactly a confidence builder. And CFO Rand Rosenberg was the head of telecom and media investment banking at Montgomery Securities. Jain is a passionate entrepreneur. But his willingness to cede operating responsibility to these seasoned executives was a major reason that Wall Street was so bullish on InfoSpace. It was seen as a sign that the company had the management in place to scale up and join high tech's major leagues.
News of the shakeup caused Merrill Lynch to downgrade the stock to a neutral rating (which in Wall Street parlance is tantamount to a recommendation to sell the stock). In a note to investors, Merrill Lynch analyst Virginia Genereux cites her concern that the stock will go nowhere until "the market determines whether these executives left because of specific challenges in the business."
Indeed, could it be possible that, in addition to the wear and tear of his travel schedule, Sarin simply did not feel that the opportunity presented by the wireless Internet was as vast as he originally thought it would be? Perhaps the wireless Internet (and, consequently, use of InfoSpace's software and services) is not catching on as fast as originally anticipated, and the rewards Sarin feels he can expect for his sacrifice no longer look so appealing.
Unsurprisingly, both Jain and Sarin deny this suggestion. "Wrong, wrong, wrong," says Jain. "Nothing could be further from the truth. Arun's decision and our wireless business are not related. Our wireless business is doing just fine." Sarin agrees, adding that "on the question of wireless, you can judge for yourself whether it is in the zone or not" when the company reports on Monday. But the company seems to still be working on the starter deals they've announced so far. For instance, at Sarin's alma mater Vodafone, InfoSpace is providing wireless Internet software and content for only two of the wireless carrier's 24 markets worldwide (the United States and Australia). And the company still derives an estimated 85 percent of its revenues from offering software services to regular wired websites.
The other odd thing about InfoSpace's management blowup is that it was accompanied by an announcement of a deal the company has struck with Microsoft TV to provide software and content for interactive TV services. This was followed by announcements of similar deals with Liberate Technologies and OpenTV. The peculiar timing of these disclosures seemingly sends the message that InfoSpace is now hopping on the broadband bandwagon, just as earlier it hopped from directory services to content to wireless. "That is not the message, there is no de-emphasis on the wireless side," objects Sarin, who is still overseeing InfoSpace's wireless efforts. Jain, for his part, says that broadband is where wireless was two years ago, and reaffirms that the company is absolutely committed to wireless. Nevertheless, Sarin is the individual at InfoSpace most closely associated with wireless, and the fact that he is no longer heading the company cannot be considered a positive sign for the prospects of that part of InfoSpace's business. While he is not abandoning the wireless Web completely, it is clearly not something he feels is worth devoting his entire life to. Such a standard may be unfair to him personally, but in today's world, shareholders expect no less of individuals who, if successful, are routinely rewarded beyond reason. Call me a cynic, but perhaps the fact that all of Sarin's options are likely underwater has also contributed to his waning enthusiasm.
As for Jain, one wonders if he just has trouble playing with other kids in the sandbox, especially when he considers the sandbox to be his. About a year ago, he lost another top executive, COO Bernie Strom, who at the time was widely considered to be in line for the CEO spot. With the more recent departures, Jain is in danger of establishing a disturbing pattern of not being able to hold onto talented executives. He denies this, of course. "The reason Arun stepped down," he says, "has nothing to do with he and I not getting along. We are good friends." Moreover, he says he was happy not meddling in the day-to-day affairs of the company during Sarin's tenure, and that if he can find another executive of Sarin's caliber, he'd gladly offer him the CEO spot. This time, though, any prospective candidate would have to agree to move to Seattle. Jain also remains unfazed by the market's repudiation. "Wall Street is not very smart," he says cavalierly. Of course, last March, when his company's market cap reached an untenable $28 billion, he was not nearly so dismissive of the market's intelligence. |
