Article 14 of 200
Net Interest
Web Firms See Future in Merger Trend
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Amazon Is Pushing Along the Rush
Toward Industry Consolidation
By Kara Swisher
10/13/98
The Asian Wall Street Journal
Page 7
(Copyright (c) 1998, Dow Jones & Company, Inc.)
Jeff Bezos, chief executive officer of Amazon.com Inc., had every reason last week to feel
intimidated. Some major competitors had joined forces last Tuesday against the online book and
music merchant.
But Mr. Bezos remains upbeat. An accelerating stream of Web-related mergers and partnerships,
he argues, proves a few big, pioneering players such as Amazon will grow and get stronger,
while small rivals fade.
"What is happening is that people are finally realizing that these Internet businesses are scale
businesses," Mr. Bezos said in an interview. Further consolidation, he added, "will be
increasingly common for the industry."
He is pushing the trend along. Seattle-based Amazon has spent about $235 million this year to buy
five Web companies. Another aggressive deal-maker, the Internet search service Excite Inc., has
carried out four acquisitions and partnerships that collectively cost $226 million in cash and
stock.
"By the time the year 2000 rolls around," said George Bell, Excite's CEO, "there will be a lot
fewer independent players standing."
Indeed, a series of pressures is making Web players pair up like desperate singles at the end of a
dance. Many companies are convinced time is running out to build audience and grab market
share. Building a brand in crowded Internet markets will require ever-larger spending on
advertising and marketing -- just as the volatile U.S. stock market makes investors more skeptical
about Web companies that are far from turning a profit.
For example, German media giant Bertelsmann AG joined forces last Tuesday with Amazon's
biggest rival, paying $200 million for a 50% stake in the online division of U.S. bookseller
Barnes & Noble Inc. Both companies also said they will contribute $100 million each to their
joint venture, increasing its war chest to try to catch up with Amazon.
Similarly, Web music sellers CDnow Inc. and N2K Inc., which recently began facing competition
from Amazon, confirmed that they are in talks about a transaction that could merge their
operations.
Expecting stronger competition, investors last Wednesday reacted by selling Amazon stock,
sending it down $14.875, or 14%, to $93.4375 in Nasdaq Stock Market trading. Monday
morning, Amazon was trading around $98.1875, up $7, or 7.7%, from Friday.
The atmosphere last week wasn't helped by a warning from SportsLine USA Inc., a big operator
of Web sports-news sites, that third-quarter revenue will fall short of expectations and that the
company is paying more than $23 million to expand a marketing deal with America Online Inc.
Where the stock market once seemed to reward most Internet efforts, investors are now more
discriminating about which companies will grow into big, sustainable franchises.
"Public markets funded an awful lot of small companies in the last couple of years that will find it
increasingly challenging," said Lise Buyer, an analyst at Credit Suisse First Boston in California.
Bigger players, she said, tend to increase their competitive advantages over time, in a
phenomenon that economists call increasing returns.
Nowhere is the rush to get big more evident than among "portals," those Web services that are
vying to become central destination hubs. Besides Excite, rivals include Yahoo! Inc., AOL,
Microsoft Corp. and Lycos Inc. In this arena, many of the deals are aimed at placing links that
funnel Web surfers from one popular site to another, increasing traffic figures that drive higher
advertising rates.
"Portals need to build subscribers that stay there longer and longer in order to generate more
revenues, so very big distribution deals are increasingly important," Excite's Mr. Bell said.
"Everyone is trying to figure out the best ways to become more prominent as the options to do so
become smaller."
Lycos, for example, since the spring has spent hundreds of millions of dollars in stock to acquire
several Web companies. Last week, it paid another $83 million to buy closely held Wired Digital
Inc., the onetime sibling of Wired magazine. "More distribution is critical to our efforts to
establish ourselves as a national network" for the U.S., said Bob Davis, Lycos's chief executive.
Not everyone feels the same amount of pressure. Yahoo, the No. 1 Web portal, has been
approached by a wide range of companies, such as Walt Disney Co., to discuss possible deals. But
Yahoo has more often generated new services internally or purchased small technology
companies.
"Most of the time, the best decisions we have made concerning deals is to say no," said Ellen
Siminoff, Yahoo's vice president of business development and planning. One danger of multiple
partnerships, she argues, is that the Yahoo brand name could be diluted or confused by
connections with too many partners.
Amazon's Mr. Bezos said he is also trying to be selective. "It's important to remember that while
good acquisitions can save you six months in the market, a bad one can slow you down just as
much," he said.
Over the long term, Mr. Bezos added, consolidation pressures will tend to leave at most three or
four major brands in each Web market. But one company won't necessarily kill all the others.
"This is also not a winner-take-all game," he said. "The Internet is just too big for that."
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Nick Wingfield contributed to this article.
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Let's Make a Web Deal
-- Bertelsmann pays $200 million for half of Barnes & Noble's Web
book division, which delays public offering.
-- CDnow and N2K in talks to combine their online music-selling
businesses.
-- Lycos agrees to pay $83 million for Wired Digital, which operates
news and information sites.
-- USA Network's Ticketmaster unit merges with local Web service
CitySearch and files public offering.
-- Disney buys 43% of search site Infoseek, for stake in Starwave
Corp. and $70 million.
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