Thatís a good question, in our opinion, since after the Netcenter deal expires (in 2000), it is very likely
that AOL (through AOL.com, ICQ, and Netcenter) would indeed be competing with Excite (in point of
fact and technically speaking, they are already competing now, since AOL.com has been up and running
since early this summer). How Excite jockeys for position and manages its way through this
competitive/cooperative quagmire should prove crucial to how shareholder value develops; it helps to
know that Bell, et al. are entirely cognizant of these dynamics.
Netscape (NSCP)
Hey, What About The ëScapers?
>From where we sit, having watched Netscape evolve in fits and starts over the last handful of years, we
think the AOL deal is good for shareholders (weíll wait to see how Netscape customers feel, but already
weíre starting to see research shops like Forrester lionize the deal from a Netscape enterprise software
customer standpoint).
Though we think the enterprise software assets at Netscape are more valuable than we sense AOL was
valuing them in this transaction, ultimately, this deal proves that Netscapeís ìre-vectoringî of the
company into both a portal and an enterprise software business was the right move for increasing
shareholder value (though their realization that the traffic may be worth more than the software may have
been a bit tardy).
We decided to wait on the sidelines to determine if the synergies between these two businesses ever
played out on something more than a powerpoint slide (and thus our neutral rating), but this transaction
means weíll probably never get that opportunity. Netscapeís most recent quarter suggested that the
enterprise software business wasnít as robust as some of us would have hoped. Netscape reported in-line
EPS ($0.04 before amortization), but somewhat below our top-line for software and services ($114mm),
though the Portal business generated some nice growth ($48mm, 128% y/y and 24% sequential).
Obviously, weíll be keeping our neutral rating on the stock until the deal closes (officially early spring),
at which time weíll lament the loss of one of the most interesting, changeable, and kinetic companies that
weíve had the pleasure of observing. There can be little doubt that the Street will be lesser for their
absence.
Observations
The Convergence Future
We had the pleasure of attending the Western Cable Show this week in Anaheim, CA where an
influential group of cable industry types convened for a revealing discussion about the future of
convergence, that idea that the PC and the TV will become one device. As if AOL needed another sign to
signal their arrival as a major player, flags were waving all over Southern California that AOL is a
distinct threat to cable companies.
While in years past, venom has been directed at Washington (both DC and Redmond), this year it leaped
across the Potomac to Dulles. Decker Anstrom, President and CEO of the NCTA (National Cable
Television Association) kicked things off at the opening session with strong statements about AOL.
Anstrom explained to the crowd that cable operators must ensure that AOL not get access to cable plant
at below market costs so that these cable companies are not disintermediated from their cable subscribers
(which tomorrow become their high speed, high margin data/Internet subscribers).
The AOL bashing continued as Leo J. Hindrey, Jr., Barry Diller, Bob Wright and Gordon Crawford took
to the stage in a discussion about the future of cable in a world moving fast toward convergence. Many
panelists believe that one of the most important challenges facing the industry is regulatory interference.
Their fear is that the FCC will prevent them from monetizing their (substantial) investments in cable
plant.
Of course, cable has more issues at stake than Internet access (like the actual take-up rate of high
bandwidth technologies), but surprisingly that was one issue the panelists returned to again and again.
Gordon reiterated how huge the potential for high-speed data customers is, predicting that in five years,
with 50 or 60 million Internet households, 50% of those users should be cable high-speed customers.
Though we share much of Gordonís optimism, this prediction seems incredibly bullish on the heels of
Dataquestís cable modem industry report released earlier this week. According to Dataquest, the
worldwide cable modem market will grow 130% this year (1998) with 492,000 units shipped, up from
214,000 in 1997 but will grow at much lower levels over the next five years reaching 2.4 million modems
in 2002. The conclusion we reach is that, no matter how much cable operators squawk about giving away
access to their plant at below market rates, their ability to monetize their plant will proceed slowly in any
case.
One of the primary motivating factors driving cable operatorís optimism is speed. However, because we
are dealing with a consumer product, price must also factor into any assumptions about broadband
penetration. Cable World released study results this week reporting that 73% of online households
responded that it was ìnot at all likelyî or just ìslightly possibleî that they would pay $40 for Internet
access at a connection speed fifty times faster than their current dial-up connection. If cable is truly in the
ìcustomer businessî, as some panelists at the conference suggested, then maybe they should listen to
their customers more closely; one of the lessons that AOL and the rest of the Internet media companies
out there have taught the Street is that cost matters for the mass market.
If You Needed More ProofÖ
The Clinton Administration, with help from John Chambers (Cisco) and Meg Whitman (Ebay), released a
report at the White House this week that mandates a course of action that will, ostensibly, help
ìaccelerate growth of the Internet and electronic commerce as vital cogs of the global economyî. The
Commerce Dept, FCC, and SBA will work in tandem to help, among other things, increase the
participation of small businesses in e-commerce and establish consumer fraud measures online. The
Internet tax moratorium was also reinforced as a key element in helping to build the medium.
Though we view regulatory and government involvement in the Web with a deep (and innate) suspicion,
the event at least acted as the ultimate lagging indicator. Perhaps the most interesting data point to come
out of the press event, however, was President Clintonís assertion that, once he leaves office, heíll set up
shop as an Ebay entrepreneur selling, of all things, his presidential memorabilia. If you thought Furbyís
were good for Ebayís top-lineÖ
Online Retailing Survey Results
A ZDNet survey completed recently concluded that some 68 million U.S. adults used the Web during the
past three months, with more than 6 million of them planning to do some of their holiday shopping
online, close to a 10% e-commerce participation rate. During the past three months, more than 11 million
people gathered information about a product on the Web and then purchased online using a credit card,
with that figure up 44% during the three month period ended in March, 1998. The data confirms what we
have suspected for some time, that this Christmas retailing season should be a watershed event in the
maturation of the Internet economy. |
