The Internet Capitalist
SG Cowenís Companion To Internet Investing
December 04, 1998
Scott Reamer: 212.495.7769 reamers@sgcowen.com
The Week
AOL Throws Netscape A Buoy
News From Mt. Hood
Trend Watch
Internet as Consumer Medium
More Value Chain Reorganization
Company Watch
America Online (AOL-$86)
Amazon.com (AMZN-$187)
Yahoo! (YHOO-$187)
Excite (XCIT-$50)
Netscape (NSCP-$37)
Observations
Observations From The Western Cable Show
The Ultimate Lagging Indicator
ZDnet Online Retailing Survey Results
Valuation Watch
Playing By Their Own Rules
Froth Watch?
The Calendar
Data Bank
The SG Cowen Internet Universe
ìThe Internet Capitalist" is published every two weeks by the SG Cowen Internet Research team and is
distributed through email, First Call and fax. This companion piece attempts to place both anecdotal and
concrete data within a thematic context that will help institutional investors gauge where the greatest
shareholder value will be created over time in the Internet universe. And though we certainly subscribe to
the notion that ìless is moreî, we have included a broad array of issues within this piece, the underlying
logic being that successful Internet investing necessarily demands a wider, not narrower, view of these
stocks and the issues that drive them. Additionally, since the Internet is also a democratic medium at
heart we encourage feedback. Suggestions, challenges, criticisms; all are welcome. Our hope is that this
piece will offer, on balance, greater utility for the one commodity with any real value: time.
SG Cowen Securities Corporation makes a market in AMZN, NSCP, YHOO and XCIT securities.
SG Cowen Securities Corporation co-managed an offering of AOL and DCLK securities within the last
three years.
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herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be
a complete statement or summary of the available data. Any opinions expressed herein are statements of
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The Week
AOL Throws Netscape A Buoy
Much of our last two weeks has been consumed by the digestion of the curious AOL/Netscape/Sun deal.
That digestive process has taken its time, starting off with a mild dyspepsia (read: confusion), then
proceeded with fits and starts as the deal was explained, and ending up with a feeling that, in the end, the
meal was probably worth the price (read: cautious optimism). Despite (or perhaps because of) the
fawning missives from Business Week to the WSJ and NYT, we believe the deal should be examined a
bit more carefully. Not because we donít believe there are real positive elements of the transaction, but
rather because the deal could possibly still represent a shift in strategy for the burgeoning new media
vendor. First, however, letís go through some of the more obvious positives.
There are plenty of self-evident elements of the transaction that make sense for AOL, Netscape, Sun, and
consumers alike. For instance, weíre right behind AOL on the logic and benefits of acquiring the
Netscape Netcenter portal business, and for many of the same reasons; it will strengthen AOLís
burgeoning Internet-only presence (Netcenter joins ICQ and AOL.com as AOLís important Internet
traffic generators), it will help expand the breadth and depth of AOLís influence in the interactive
medium (to something north of 50mm users), it will help AOLís broader goals of owning and monetizing
multiple brands (across a shared infrastructure), and should provide ad/commerce revenue synergies and
cross-promotions throughout this very valuable network of interactive properties.
And financially speaking, the addition of the Netscape portal business to AOLís roster of interactive
properties makes a lot of sense too, since it will provide (perhaps substantial) incremental revenue
opportunities to AOL that would not have existed otherwise. After all, who can argue with the belief that
AOL is likely to be able to better monetize the Netcenter traffic than Netscape was? No disrespect to
Netscape on this one, since $48 million is a good chunk of revenue for any portal to have in one quarter,
but AOLís skill set is not only set directly against this opportunity, but they have honed it for quite a few
more years than anyone else around. Can AOL generate more than $200 million (the current Netcenter
annualized run rate) from this property next year? You bet.
As well, owning the Netscape browser could prove beneficial (though it is not without its risks). This is a
more subtle point than the benefits spelled out above, but we think theyíre is a real case to be made that
having ownership of the Netscape browser adds a very real element of defense to the AOL service. The
idea of persistence and of having the client-side software being tied to the content are concepts that are
steadily gaining currency. Netscape has been busy in their own right more closely tying the browser (and
its functionality) to the Netcenter site (e.g. their ìsmart browsingî feature in Communicator 4.5).
Microsoft, too, has already started down this path (via ìutilities frameî), making the IE browser more
integrated into the content and services that they offer at Expedia, CarPoint, HomeAdvisor, etc. |
