Just incase anyone wants some real info on what INSP is doing, instead of making up silly rumors about Broadband being shut down..............
theinternetanalyst.com
Naveen Jain,
Founder, Chairman, Chief Executive Officer and Chief Strategist
Interviewed by George S. Mack
InfoSpace (INSP) is in the process of re-inventing the portal business as it provides Internet infrastructure and private-label support to its customers, which include names like AOL Time Warner (AOL), Microsoft (MSFT) and Terra Lycos (TRLY). At the same time, the Bellevue, Wash.-based company is providing a similar portal technology to wireless service providers that include Verizon Communications (VZ), AT&T Wireless (AWE), ALLTEL (AT), PowerTel (Australian: PWT) and VoiceStream Wireless [a unit of Deutsche Telekom (DT)]. With InfoSpace know-how, these carriers offer their consumers a personalized set of services, including m- (mobile) commerce. InfoSpace's extensive carrier network also enables it to offer person-to-person and business-to-person short messaging system (SMS) technology that is now generating $1 billion in revenue per month globally, but which has yet to take off in the United States. Even with its innovative platform, InfoSpace has not escaped the wreckage of the Internet, advertising, telecom and information technology upheaval of the past 15 months. For the one-year period ending July 6, InfoSpace stockholders have suffered a greater than 90% decline in share price versus a 50% decline for the Nasdaq.
[THE INTERNET ANALYST — GEORGE S. MACK] Naveen, when you and I first spoke two years ago, you were a portal-in-a-box like Yahoo! (YHOO), supplying infrastructure to other companies. You've changed.
[NAVEEN JAIN] Actually, George, fundamentally we have not changed at all. InfoSpace is essentially a technology company that provides the underlying infrastructure that people can build a portal on top of, for any type of service — whether it's commerce services or consumer services. We provide the same technology to the consumer side that we distribute to our partnerships — companies like AOL, Netscape [a unit of AOL Time Warner], MSN, Cingular Wireless [a joint venture of SBC Communications (SBC) and BellSouth (BLS)] or Broadwing (BRW). These companies use several of our technology services. All of them essentially offer the consumer a complete and unique mobile experience, which caters to a particular device, whether it be a PDA [personal digital assistant], a cell phone or any other wireless device.
[GSM] So, whether it's wireline, wireless or broadband, you're an infrastructure provider.
[NJ] Yes. And on the merchant side, our infrastructure is directed at the local merchant. We distribute these infrastructure services through merchant banks, such as American Express (AXP), or through our partnerships with yellow page providers.
[GSM] Your business model has four different units that we've already spoken about — wireless and broadband (on a subscription model), your merchant unit (e-commerce and m-commerce transactions) and your wireline unit (per use or per query). Which of these is going to offer the biggest potential for InfoSpace?
[NJ] At this point, we obviously see our greatest potential in both the wireless arena and the merchant arena. On the wireless side, we provide the services that can be catered to the local merchant or the consumer. Our commerce services allow a local merchant to offer a promotion so that a consumer could purchase an item with a single click. The merchant could either be offline or online. The consumer can do anything from ordering coffee to ordering a book from his cell phone. In one case, the book could be shipped to the house, and in another, the consumer would go pick up the coffee at Starbucks (SBUX).
[GSM] Tell me about your SMS technology. You're having some success with this in Europe. Explain what it is, how it's working, and will it be a viable model in the U.S.?
[NJ] As a matter of fact, that's one thing we get really excited about, but it's not just in Europe. A large amount of usage on our existing phones is coming from SMS. It essentially allows people to get information that's relevant, personalized and actionable. So a person doesn't have to keep checking to see what the Mariners&lsqo; game score is. Anytime the score changes, it sends you a message with the new score. Or you can set an alert to let you know if your flight is going to be more than 15 minutes late. SMS allows people to get actionable information so they can control their lives better. SMS is evolving, and you can not only receive information, but you can also send a message and proactively get information based on certain criteria that you've set up. But even now people are able to use the phone for more than just voice. I'll be able to write and send a message to George on his cell phone.
[GSM] Why has SMS been slow in coming to the U.S.?
[NV] There's no inter-carrier operability on SMS today, such as in Europe, where there is the GSM system [global system for mobile communications] with signal interoperability. But InfoSpace has a relationship with all these U.S. carriers I've mentioned, and now we'll be able to offer interoperability between carriers for SMS. That means any person could send a message from any phone to any phone, and it will be delivered.
[GSM] SMS is a huge cash generator in Europe. How much can this mean to you in revenue?
[NV] It's hard to judge, but let's look at the potential. People today are sending billions — I think the number is something like 15 billion — messages a month. So there is tremendous potential for how people can use this SMS service. Today, more than 90% of phones are SMS capable, and 40% of phones are Internet capable. So essentially you take that to the next level.
[GSM] In July 2000, you acquired Go2Net, and with it came a payment-processing platform. You already had a payment-processing platform, but this was supposed to be something special. You've had it for a year now. How is it working for you?
[NV] First of all, we did not have a payment-processing platform before the acquisition of Go2Net. What we actually acquired was something called Authorize.Net. What it does is authorize the payment and provide fraud detection. We integrated that with our other commerce services for the local merchant, and today that business is growing extremely well for us. To give you an idea, you know that the fourth quarter is the seasonal high for the amount of transactions for merchants. We grew from $450 million in transactions in the fourth quarter to more than $500 million in transactions in the first quarter. And in the second quarter, it grew even faster than that.
[GSM] The migration to 2.5G and 3G [looming generations of wireless Internet protocol packet technology] has been a lot slower than we might have thought a year ago. But you're looking forward to this, I believe.
[NV] I think 2.5G is going to be a very successful initiative. I think 3G is still several years away, but most of the benefits of 3G really come with 2.5G. Those benefits include instant-on and packet-based technology. One of the biggest misunderstandings people have is that they think the slowdown in telecom spending will hurt InfoSpace. That's very far from the truth. When telecoms stop spending, they stop buying equipment, and they stop buying software. But they like us, because we are an ASP [application service provider]. That means they don't have to spend any money when they work with us. There's really no cost to them, and we allow them to generate more revenue. Every time we get paid two bucks, they make 10 bucks [laughing].
[GSM] But you were obviously hurt by the downturn in advertising this year.
[NV] Absolutely.
[GSM] This has caused you to redirect your energies away from consumers and to almost totally become a business-to-business company. Is that right?
[NV] What happened is that with the acquisition of Go2Net, we acquired some very good technology and some very good people. But it came with a package — a lot of direct-to-consumer properties that I think were hurt significantly in the advertising slowdown. And as we are an infrastructure company, we have been directing more of our efforts at building an infrastructure business. There's no two ways about it, while we have been doing that, we have lost a lot of the potential revenue we could have gotten from a direct-to-consumer effort. That has still not bottomed, in my opinion.
[GSM] Naveen, you have some major contract renewals coming up next year. I'm curious about what kinds of indications of interest you might have received. How do you feel about your upcoming renewals?
[NV] Well George, the way you look at this is if your partners come back to you and ask for more things while you're working with them, as opposed to fewer things, then that seems to be a good sign. To give you an idea, every single month or two months, we're launching a new set of services with Verizon, Cingular or with AT&T. In fact, in the last several months, we've signed several new agreements with the same partners. So, at this point, all I can say is that we feel really good about the partnerships.
[GSM] Regarding the size of your markets, I've heard figures like $5.3 billion in 2005. And I'm looking at which companies are some of your customers — Verizon, Microsoft, Bloomberg, Charter Communications (CHTR) and other names. If they see your business model working, why would they really need your infrastructure, and why do they need you?
[NJ] Simply because our products and services are very complex. It's like saying anybody could start a portal like Yahoo!'s. Also, it requires a network, and for a company to do it alone would be very cost-prohibitive. To give you an idea, if you bought the software and hardware from Oracle (ORCL) and Sun Microsystems (SUNW), it would cost you $80 million to $100 million per year just to get started. The fact that we are able to take that cost and amortize it over 20 carriers, 3,000 Web sites and over 2 million merchants — that's what makes it a cost-effective network. That's not all. When a consumer is looking for a merchant, you have to have a merchant network. The fact that we have our own merchant network that brings them into contact with consumers, and the fact that we share that with the carriers, allows us to deliver these services much more cost-effectively than any carrier could do by itself. And as I said at first, this is very complex. You cannot just wake up one day and go and build this.
[GSM] But couldn't Microsoft do it? [Note that in 1979, Jain joined Microsoft as a program manager on OS/2. He then worked on MS-DOS, Windows NT, and Windows 95, on which he holds two patents. He became a group manager for the launch of the Microsoft Network].
[NJ] It's not a core competency of Microsoft, which does the PC thing. And Microsoft is very good at that. It has not been able to build the set of services for mobile devices, because that would require a complete paradigm shift. Microsoft just doesn't know how to play in this area.
[GSM] A year ago, you had given up your role as CEO to former Vodafone (VOD) executive Arun Sarin, but you remained chairman and became the chief strategist. Your theory at that time was to divide the duties up between the two of you. Arun is not with InfoSpace anymore. What happened?
[NJ] Essentially nothing happened. I was focusing on things that were six to 12 months away rather than on day-to-day operations — the next generation of growth. Arun was taking care of more of the day-to-day things. As it turned out, the company felt that I needed to come back and execute some of the ideas we were looking at to make them a reality. Arun explained that for a number of reasons — family reasons and commuting reasons — he would not be putting in the time that it would take to make this company successful.
[GSM] Last November, Ed Belsheim joined your company. In January, he became COO. He's had more than 25 years of experience in M&A (mergers and acquisitions), an area in which you've been very aggressive. Does this mean you're going to be as aggressive in acquisitions as you have been, or maybe more so?
[NV] What's happened is that acquisition costs, as you well know, have come down a lot [laughing]. So now the companies are coming to us and are willing to be sold for $100,000 instead of the $1 million that they wanted a year ago. These start-up companies that had VC [venture capital] funding that has now dried up are willing to sell all their intellectual property for pennies on the dollar. Every single week, we get somewhere between seven to 10 unsolicited business plans from companies that want us to acquire them. We're very, very actively looking for intellectual property that we can acquire for pennies on the dollar.
[GSM] Is that the reason you brought Ed Belsheim into the company?
[NV] The reason we brought him in is because he's very organized and operationally excellent. So while my strengths center much more on what's coming on the horizon, Ed Belsheim is much more of a day-to-day manager. He makes sure everything we've promised to customers is delivered.
[GSM] Even though you say InfoSpace is fundamentally the same as it was when you and I spoke for the first time more than two years ago, the Street has this image that you've changed your business model several times. Is this a failure to communicate?
[NJ] George, I think it's what people focus on. To give you an idea, we launched the wireless side of our business in 1996 with AT&T (T). But when we were on our road show in late 1998 and early 1999, people didn't want us to talk about wireless. Nobody wanted to hear it, even though we kept saying that's where the future was. Now that the future is here, people are saying InfoSpace is focusing on wireless. But the fact is that's what the people on the Street are now focusing on — wireless. Wireless is not something new to us in 2000 and 2001. |
