Here's some initial comments from SSB's Lanny Baker (OCR'd somewhat imprecisely):
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Online Media: A New Portal Sets out to Scale the Mountain
Salomon Smith Barney - Lanny Baker
01/27/99 Media(All)
--SUMMARY:
+Compaq's widely anticipated decision to set its Alta Vista search engine onto a higher growth trajectory is a positive for DoubleClick, while it may also add to the competitiveness of the mass audience/portal market.
+Alta Vista intends to 1) go public via an IPO, 2) position itself as
the "aspirational" brand among internet destinations, 3) emphasize
e-commerce and e-services, and 4) leverage its relationship with CPQ.
+Since Sept. 1998, Alta Vista's audience reach has grown from 16% of the online audience to just under 20%, and it currently ranks 12th overall.
+Although other portal players have shown that the challenge of chasing market leaders Yahool and AOL is daunting, Alta Vista has headroom to move closer to the market leaders1 even if attaining #1 remains tough.
+However, Alta Vista's emphasis on a CPQ "OEM boost" should be evaluated.
SUMMARY & OVERVTEW:
Compaq's decision to set Alta Vista off as a stand-alone Internet
company, and to take the unit public in an initial public offering,
should set Alta Vista on a higher growth rate trajectory during 1999.
Without really pushing Alta Vista to its full potential, Compaq has
managed to capture one of the top 12 audience share positions on the
Internet with this fast search engine. With Alta Vista now independent, we would expect it to become more aggressive and persistant about expanding its scope, scale and potential. We note that until mid-year 1998, Alta Vista was run as a break-even unit of CPQ, eschewing the intense marketing and promotional push that the other search engines have undertaken as they have transformed into mass audience, full-service portals to the Internet.
The acceleration in Alta Vista's business plan will no doubt lead to
further audience share increases in 1999, beyond the +22% gain in
audience reach seen at Alta Vista since Sept. 1998. Clearly, Alta
Vista's newfound assertiveness will heighten the pace of inter-portal
competition. That said, we believe that Alta Vista may be a large thorn in the side of the second and third tier portals than it will be for the current leaders, as explained below.
In considering Alta Vista's anticipated increase in competitive vigor and new higher growth goals, DoubleClick is positioned as a clear
beneficiary. Under the terms of a binding, three-year relationship
signed a week ago, DoubleClick will provide Alta Vista's ad delivery,
targeting and measurement needs with the DART technology.
Additionally, Doubleclick will continue to sell the search and directory ad inventory on Alta Vista under the new agreement. At the same time that Compaq and Alta Vista will put greater resources behind the new portal, DoubleClick will also allocate increased resources toward maximizing the advertising potential of the site. Although DoubleClick's share price has recently moved higher in response to the new three-year binding relationship with Alta Vista, we believe Doubleclick's share price still does not reflect the full revenue and earnings upside contained in Alta Vista's enhanced business objectives. Doubleclick remains our top pick in the Online Media sector and out target price on DoubleClick is $120 per share,
according to the valuation parameters outlined in our research note of
last week. We rate DCLK a 1-H.
Although Alta Vista will now become more aggressive in developing and
executing its portal strategy, it is important to consider the company's strategy and where the strategy differs from the path pursued by the other portals. Alta Vista has stated that its primary objective is tied to e-commerce and e-services, making the portal more of a place to buy than a place to learn or become informed. In comparison, AOL, Yahoo! and their primary portal peers are more focused on gathering audiences and selling not goods and services, but rather selling the interest and attention of those audience members to advertisers and merchants.
Financially, all this means that Alta Vista may have greater revenues
(including product and service sale.) than the more media-oriented
portals, although at a lower margin. Alta Vista's long-term model shows them being 3.5 times the size of Yahoos in terms of revenue, but with a 12% operating margin versus Yahoos's current 35% operating margin. Net net, if Alta Vista's model proves attainable, it would produce 20% more profit dollars than Yahool. However, we should note that Alta Vista's current annualize revenue run rate is about $50-55 million, while Yahoo! is generating $75 million in revenue per quarter at latest read.
To catch up and pass Yahoo! on the revenue line, Alta Vista will need to expand the size of its online audience and to expand the number of ways in which the portal generates revenue. While we have little doubt that Alta Vista will be able to build significant businesses selling technology-related products and services in light of its Compaq parentage, we believe the audience growth goals will be more
challenging. Alta Vista seems to be tying a large portion of its
audience growth to OEM relationships with Compaq which will make Alta
Vista the integrated default search engine/portal called up by Compaq
PCs. Although the OEM relationship with Compaq has already had
demonstrable impact on Alta Vista's audience growth, we note that OEM
bundling can only go so far and may have limitations of its own.
For instance, consider the Compaq PC user who connects to the Internet
via an AtHome connection: The Compaq PC will attempt to push the user
toward the Alta Vista home page, while the AtHome connection would direct the user to the Excite home page. Where the user would wind up in this scenario is anyone's guess. Our own suspicion is that many users, even with the above-described hardware/software/connection configuration, might still choose to direct their browsers and their attention to the Yahoo! home page. No doubt, hard-wired default start page set ups are strong influences on user behavior, but we still believe that brand affinities and user choice are a stronger determinant of user behavior in the Online Media environment. In this light, we will watch Alta Vista closely to see what kind of brand personality the site and service stake out as they develop.. At present, however, Alta Vista's plan to become the "aspriational" Internet brand still seems a bit vague to us.
One final point: As Alta Vista pursues its growth strategy in the
future, we believe that consumer advertising and marketing campaigns will become a necessary component of the tactical mix. Here, it might make sense for Alta Vista to enter into a major media company alliance in order to gain cost-effective access to traditional media advertising and placement exposure for the brand, as well as to the content resources of a media company. Either way, suffice it to say that Alta Vista will become a competitor to watch in the Online Media/Internet marketplace and we anticipate that today's announcements are not the last the market will hear from this new contender.
We continue to recommend Yahoo! and AOL as the leading companies in the mass-audience Online Media market at the moment, as we believe that the advertising-driven profit gains that these companies can derive from their audience leadership in the new medium are not fully reflected in their share share prices. |
