From Wired Magazine:
Yahoo Finally Gets the Network News
The portal giant's planned acquisition of GeoCities is the first step in a network strategy. Look for more deals soon.
By Jim Evans
The beast is finally awake. After months of watching competitors pick up companies with extraordinary valuations, Yahoo joined the fray last week. It announced plans to buy GeoCities in a deal valued at a cool $5.02 billion, as of the market close last Thursday.
And the portal giant isn't done, according to many insiders. They say that Yahoo has been pursuing several deals for months and that it plans to make liberal use of its $500 million cash reserve and sky-high share price in 1999. The Yahoo-GeoCities merger is the first clear signal of a distinct shift away from a strategy that had previously relied on organic growth.
On the face of it, this deal isn't complicated. The leading Internet portal is buying the leading Web-based community site in order to reach a larger audience. Yahoo's rivals have already taken similar steps: In the last year, Disney took an equity stake in Infoseek to build Go.com; America Online agreed to buy Netscape; and just two weeks ago, AtHome announced its intent to buy Excite. Lycos also made a serious bid at Yahoo's crown by acquiring companies like WhoWhere, Wired Digital and Tripod.
Yahoo executives say there have been reasons for their apparent timidity.
"We've always had a lot of opportunities to do acquisitions, because of our brand name," says Tim Koogle, chairman and CEO of Yahoo. "We're pretty careful about managing our business. When we first started thinking of doing acquisitions, I put down a rule that we wouldn't do any until we got our business together."
Until last week, Yahoo has worked to expand its reach by relying on its first-mover advantage and the enormous power of its brand. Now, it's pursuing something closer to the "network" model that AOL, Disney-Infoseek and Lycos have embraced.
"There are two ways to do the network strategy," Koogle says. "You can be a holding company or you can build services making use of common platforms. That's what we are doing in this case." Some observers think Yahoo will look to extend this network through further deals. "They've indicated to me that there is more on the way," says Andrea Williams, a Web analyst with Volpe Brown Whelan & Co.
Bo Peabody, formerly CEO of Web community builder Tripod and now VP of network strategy at Lycos, claims Yahoo's purchase of GeoCities validates what Lycos has done for the past year. Lycos bought Tripod last February for $58 million.
"It's amazing that it has taken them this long to wake up to it," Peabody says. "One of our goals in the last year was to make Yahoo sweat, so we've accomplished a big goal this year."
Well, perhaps, but Yahoo's deal with GeoCities seems motivated by a little more than simple portal envy. The merger adds 10 percentage points to Yahoo's already impressive reach. According to Media Metrix, Yahoo properties ranked No. 3 in reach among all Web sites, at 48.2 percent, for the month of December 1998. GeoCities came in fifth, with 33.4 percent. Yahoo now stands at about 58 percent, ahead of AOL Web sites, which have a combined reach of 54.5 percent.
More important, the existing base of GeoCities page builders will be a captive audience for the e-commerce software Yahoo picked up when it bought ViaWeb in June 1998. Right now, Yahoo offers the software, for a monthly fee, to Yahoo customers who want to build mom-and-pop shops online.
But Yahoo hopes to sell to GeoCities members more than just commerce software. Yahoo shopping, communications and personalization services can all be pushed to the GeoCities membership, according to Koogle. While Yahoo gets the bulk of its revenue from advertising deals, it is hedging its bets by licensing technology and renting space to online merchants. GeoCities, for its part, for the most part relies on advertising and has yet to turn a profit. It reported a fourth-quarter loss of $8.4 million, or 27 cents a share, last week.
The relationship between Yahoo and GeoCities really started a year ago, when the two companies signed an agreement to do a cross-distribution deal in which Yahoo promoted GeoCities publishing tools on its sites and GeoCities registered its audience to use Yahoo's personalization services.
At the same time, Yahoo acquired a small equity stake in GeoCities. It held 3 percent to 4 percent of the company before the merger, according to Koogle. Yahoo actually considered buying GeoCities at that time, according to sources familiar with both companies. However, GeoCities wanted to remain independent, and acquisition talks gained momentum only last week.
That Yahoo and GeoCities share the same financial pedigree certainly helped grease the skids for the deal. The two firms are backed by Softbank, which owns about 29 percent of both Yahoo and GeoCities. Investment firm CMG owns 30.9 percent of GeoCities. To some observers, that makes this deal a lot like the Excite-AtHome deal. Both Excite and AtHome are Kleiner Perkins Caufield & Byers investments.
Gary Reichel, the executive managing partner of the Softbank Technology Ventures Fund, feels that there are similarities between the two deals, but says the chemistry between GeoCities and Yahoo management really made the deal happen. "We're often accused of pulling the strings, but in reality we're not running the companies," Reichel says. "If we ever start running these companies, we'll screw up."
The question now is: Who's next? Yahoo's network strategy will take more than a single affiliate brand. One source familiar with Yahoo's plans says that if E-Trade, another Softbank investment, was still trading at $22 a share, there would be discussions to fold the booming online trading company into the new Yahoo network. Whether it's E-Trade or some other company, many market observers don't expect Yahoo to slip up soon. If anyone can build the Web's biggest network, it's Koogle and Co. That's something even Yahoo's enemies concede.
"We have a lot of respect for Yahoo," says a source who sits on a rival's board of directors. "We know they will not make many mistakes with their purchases. They know this business." |
