Is Netscape a Portal Company? From Briefing com.
Netscape, who truly deserves the credit for making the Internet a
reality, found itself weakened and wounded in the Internet Browser Wars.
Earlier this year, it basically threw in the towel, as it made the
source code for its browser available for free. It simply couldn't
compete against Microsoft as a software company.
So it reinvented itself in early 1998, proclaiming a new direction.
Netcenter would become Netscape's future and be an Internet Portal,
competing with Yahoo and AOL instead of Microsoft.
Yesterday, Netscape announced its earnings for Q2. The press release
broke out revenues into Enterprise and Netcenter segments, allowing us
to look at the portal portion of Netscape's strategy.
This was the critical earnings report for Netscape, as it makes its
transition from a software company, the original Internet software
company, to a "portal" company.
Is Netscape's strategy working?
To answer that, we collected revenue and earnings information from three
other portal companies, America Online (AOL), Excite (XCIT), and Yahoo!
(YHOO), and compared these to Netscape. Here's what we found.
Revenue
We looked only at revenue derived from ecommerce and advertising.
Fortunately, AOL has started to break these out separately. For Yahoo
and Excite, all of their revenue falls in this category. AOL is about
twice as large as the others, who are all about equal.
Revenue Growth
Again, this is ecommerce and advertising revenue only. Here, Excite and
Yahoo are the clear winners as their growth curves are way ahead of AOL
and Netscape. However, Netscape's number is not exactly comparable, as
only a quarter-to-quarter revenue comparison was provided by Netscape.
All other revenue growth numbers are year-over-year. Unfortunately,
Netscape needs to show that like the other companies, high revenue
growth rates can be achieved. As a late-comer to the portal arena,
Netscape hasn't shown that yet. Yahoo's quarter-over-quarter growth
number is 36%, for comparison.
Earnings
Earnings are shown in actual dollar amounts for the entire company, not
on per-share basis, and not by segment. The reason for this is simple:
earnings can be redirected anyway a company wants. A company with a
larger earnings stream, regardless of source, can fund more new
development and increase marketing budgets with greater ease. All
numbers shown are before any extraordinary charges. Excite's and Yahoo's
are pro-forma numbers because of acquisitions, however, for comparison
purposes, the numbers are usable. The conclusion is obvious. AOL is
spinning off lots of cash, while Netscape isn't. In fact, Netscape,
because they broke out the Netcenter P&L by segment, is actually losing
money ($1.7 million) in the portal arena.
Cash on Hand
Cash on hand simply gives you a quick idea of how much money is in each
portal's war chest. Netscape stacks up just below Yahoo here, if you
count the recent $250 million Yahoo received from a private placement
with Softbank Holdings. The $147 million shown below is prior to that
investment. If a marketing spending war breaks out, Excite is going to
be hurting, Netscape should be okay.
Conclusion
How does Netscape stack up as a portal company?
First of all, we need to define "portal." The concept, which first got
broad usage about six months ago, referred to companies that could
generate traffic and derive revenue from the traffic. As traffic
skyrocketed, so did visions of future revenue. Lately the term "sticky"
portal is gaining acceptance, as people realize that traffic alone does
not automatically mean revenue. The internet is not a mall, or
DisneyWorld. In both of those physical places, traffic definitely
correlates with revenue.
Portals will have to both generate traffic and revenue to fulfill the
vision. Behind AOL and Yahoo's valuations is the concept that AOL will
be able to extract a percentage of every ecommerce transaction
originated through its service. This is by no means certain. (For more
on this idea, see this week's StreetBeat.)
Nevertheless, if Netscape is to be viewed by Wall Street as a portal, in
the same league with AOL and Yahoo, they must be able to convince the
Street of two things: 1) they can draw the traffic; and, 2) the sky's
the limit. Deriving revenue as a portal hasn't been clearly established
by any portal yet.
Netscape's weakest element in this area is revenue growth. Netscape
hasn't yet released usage or membership figures for the latest quarter,
so we can only use the Netcenter revenue growth numbers as an indicator
of traffic growth.
On this score, we only have one quarter for analysis. At 24% growth,
Netcenter hasn't really demonstrated momentum yet. Although Yahoo is
roughly the same size, you can reasonably conclude that their growth
rate is higher because of the longer time period. Trends simply tend to
continue, until proven otherwise. Yahoo continues to add services and
features in their effort to be a "sticky" portal. Netscape will have to
keep up alongside Yahoo to be truly considered a portal.
But in summary, the verdict just plain isn't in yet. The next quarter
will be a critical one for Netcenter. It will need to post growth
numbers in the same league as AOL at a minimum. Although it is
financially strong, and has committed $10 million to advertising
Netcenter, if Netscape can't achieve parity on growth rates of other
portals, it will quickly be left behind by investors.
Unfortunately, this means waiting another three months to truly answer
the Netscape-portal question. In the Internet world, everything could
change in that time. |
