Go2Net.com sets its sights high -Upside.com Oct 3, 2000
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upside.com
Go2Net.com sets its sights high
by John F. Ince
October 03, 2000
From the November 2000 issue of UPSIDE magazine
John Keister and Russell Horowitz were classmates at a Seattle-based school that is perhaps best known for spawning another pair of mildly successful software executives. Although Bill Gates and Paul Allen attended the Lakeside School well before Keister and Horowitz, apparently some of the school's entrepreneurial magic is still at work now with Seattle-based Go2Net (GNET). On July 26, the company announced an upcoming merger with InfoSpace (INSP) to create an infrastructure-services company.
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SPECIAL REPORT:
SMALL BUSINESSES TAKE CENTER STAGE
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Go2Net now delivers an end-to-end integrated platform of applications and technologies for converging media platforms including narrowband and broadband PCs, TVs, PDAs, pagers, cellular phones and other Web appliances. Pending regulatory approval, the new company will be called InfoSpace and will have a strong presence in the small business market. Leveraging Go2Net's merchant base of 1.1 million, InfoSpace will have a combined merchant base of almost 2 million.
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From the beginning, Go2Net intended to grow through acquisition and consolidation.
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Keister, who played professional basketball in Europe, and Horowitz, who worked on Wall Street, kept in touch after their Lakeside days. When Yahoo (YHOO), Netscape and others started going public back in the mid-1990s, Keister says, "The bells started ringing, and we decided we needed to be in this game."
Since its inception in 1996, Go2Net has focused on high-margin categories such as search, message boards, multiple-player games, and its current emphasis on free website-hosting infrastructure for small businesses. At the time of the InfoSpace merger, Go2Net had more than 500 employees, and in the second quarter of 2000, it had more than $23 million in gross revenues and $10 million in net profits. With a 29 percent operating margin for the quarter, Go2Net is unique in running a low-overhead business. Keister says, "Our margins are second only in the industry to Yahoo." Fifty-two percent of Go2Net's revenues comes from its infrastructure and e-commerce side, primarily in licensing (Hasbro (HAS) paid $7.5 million to license its game platform), and 48 percent comes from advertising.
Building upon the Lakeside School and basketball connections, Paul Allen's Vulcan Ventures took a 30 percent stake in Go2Net (Allen is owner of the Portland Trailblazers professional basketball team). Go2Net went public in April 1997 after burning only $1 million of its initial funding, most of which came from a merchant bank that Horowitz had started. Its valuation at the time of the IPO was only $35 million. From the beginning, Go2Net intended to grow through acquisition and consolidation. It's acquired 13 technology-driven companies in four years.
But the acquisition that placed it in the middle of the small business sector was HyperMart in August 1998. Go2Net's small business strategy was to acquire critical mass, to aggregate traffic, and then to partner with companies that wanted to access that traffic. It now has more than 30 partners. Many of these partners have paid Go2Net multimillion-dollar fees to be listed on the website.
To accomplish its small business strategy, it also acquired two other hosting sites: FreeYellow.com in October 1999 and Virtualave.net in April 1999. It had been looking at the free-hosting model for small businesses since 1998, even before b-to-b had become a catchphrase. The company liked HyperMart because of its viral growth pattern. Keister says, "We don't believe in spending millions of dollars on Super Bowl ads. We prefer to go after companies that are a vital part of people's everyday life on the Internet." Even without the Super Bowl ads, HyperMart is expanding impressively. It had 30,000 businesses on its network at the time of acquisition, and today it has more than a million, with 60,000 new members joining every month.
It's easy to set up a storefront on HyperMart. Step one is store building or retrofitting. The process is designed for people with no Web-design experience. Keister says, "You basically plug in the numbers, select a font and push 'Go.' " The site is hosted for free, and it sets up a merchant account to permit credit card transactions. Through AuthorizeNet, you set up a payment gateway for fraud protection. It helps drive traffic to the site by getting it listed in the Metacrawler search engine.
The cost of the whole process ranges from $19.95 to $114.90, depending on the number of products and the size of the site. HyperMart also takes between 10 and 20 basis points for every transaction that goes through the site. In the last quarter, Go2Net processed more than $310 million in transactions, so those revenues are becoming significant. That revenue stream, combined with advertising and licensing revenues, places Go2Net in an ideal position to be a major player in the small business space.
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Go2Net/HyperMart at a glance:
URL: go2net.com
Services include: infrastructure technologies for narrowband and broadband (Go2Net); Internet applications (Go2Net); website hosting (HyperMart) and small business marketplace (HyperMart).
CEO: Russell Horowitz
Launch date: 1996 (Go2Net), 1997(HyperMart)
Web traffic: 12 million unique users
Exchange/symbol: Nasdaq/GNET (after expected merger with Infospace in Q4 '00, the combined company will trade under INSP).
Market capitalization: $1.7 billion (as of Oct. 2)
URL: upside.com
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