Inktomi: The Next Platform?
Briefing.com
Updated 11-Feb-99
Of all the companies presenting at the Goldman Sachs Technology Symposium in New York this week, Inktomi is the one company with the most potential to alter the business hierarchy of the Internet. As Roger McNamee stated at the Portfolio Manager's panel discussion Inktomi has a chance to wind up as the next "platform" company for the Internet.
A platform company is one whose technology becomes an integral part of the very structure of the industry, and is therefore, omnipresent across all implementations. In the PC industry, Microsoft and Intel both achieved platform status. As the PC industry grew, both companies were linked directly to the industry's growth.
How can Inktomi become a platform for the open architecture of the Internet?
Imagine, if you can, a single company that is able to somehow derive a piece of revenue from all traffic across the net. A company that gets paid everytime you click on a link. A company that gets a slice of very ecommerce transaction.
Inktomi is a company with those goals.
Inktomi Technology
Inktomi's originations lie in technology originally developed, under government grants, at the University of California, Berkeley. Dr. Eric Brewer and Paul Gauthier, a PhD student, were developing clustering software for workstations. As multiple machines were clustered together, the input/output (I/O) systems became overwhelmed. As part of the work solving this problem, the Inktomi technology was developed to allow the I/O systems to scale efficiently as more processing units were added to the cluster.
Inktomi's core technology is the scalability algorithms. Most people think of Inktomi as a search engine technology, but the search engine service was only the first application of their core abilities.
Inktomi Product Line
Search engine: Inktomi's search engine is a service product. They are, in essence, a "private label" provider of indexed internet searches. Inktomi builds a database of all the documents on the internet in the same way that AltaVista does, and offers the search engine database access to portals. Yahoo (YHOO) is the largest client, but GeoCities, and AOL also make use of Inktomi search engine capabilities.
CEO Dave Paterschmidt stated at the Goldman Sachs conference that Inktomi is now branching out into specialized and international sites. These sites are signing up for services on a per-use or per-transaction basis. SNAP and Disney are both using the Inktomi services for their specialized sites on a per-use model. N2H2 is a company that is developing a "porn-free" search service for children. Inktomi is partnering with them to blend their data filtering technology and Inktomi's search technology to provide a portal service that can be sold to educational institutions.
Inktomi is also partnering with companies outside the US to provide portal services to European sites. A recently signed deal with British Telecom will provide BT with the Inktomi portal services for development of a new European focused portal. They have also signed a deal with WorldBlaze to provide instant translation of any document into other European languages. If you retrieve an Italian document, you can request instant translation tino English or French.
The new clients for the Inktomi search engine services will be paying for the service on a per-use basis. The amount paid per access to the Inktomi databases was not revealed.
Traffic server: The traffic server brings scalability to datadelivered
from a web server. The traffic servers allow a server to provide multiple streams of data, voice, or video. The principal attraction of the technology is in higher bandwidth servers, such as video servers. Inktomi sells the traffic server products as software product, with an initial upfront license fee, and a recurring maintenance fee paid annually.
The traffic server technology makes use of network caching technology developed as part of the clustering software. AOL and Digex are principal customers of the traffic server products.
The business model for the traffic server more closely resembles the traditional software model, with an initial license fee and an annual maintenance fee. However, the caching capabilities are sold on a modular basis, which means that as the traffic increases, additional modules need to be purchased.
Ecommerce engine: This is the most remarkable part of Inktomi's business plan. Inktomi will be offering a scalable ecommerce technology, as a service, starting in June. Inktomi will provide a transaction processing and transaction database system, as a service,for a transaction based fee. Just as Inktomi is "behind thescenes" at Yahoo, Inktomi will be the engine behind many ecommerce sites.
Mr. Peterschmidt claimed that they have signed up over 300 merchants already, with transaction fees ranging from 5% to 20% of the entire sale. The average weighted fee is around 7%. Inktomi will be paid this percentage on every transaction that uses their system.
Fulfillment and inventory will all be the responsibility of the merchant. The user of an Inktomi-enabled ecommerce merchant won't even know that Inktomi is involved.
If you are shocked reading this, you should be. It is an astonishing model. One of the money managers at the Goldman Sachs conference felt compelled to double check his understanding of this arrangement. "Do you mean," he said, "if the merchants sell $100 million, you will receive $7 million?" The answer was "Yes."
Why would a merchant pay Inktomi such a huge percentage? Inktomi charges no upfront costs to set up the ecommerce solution. A merchant dying to get into the ecommerce business can do so without any upfront investment. Compared to the cost of setting up a complete system on their own, it may look appealing.
No merchants were named at the presentation. Although the full rollout of this ecommerce service will not occur until June, a more public announcement of the service is likely well before then.
Of the three product lines, the search engine service currently accounts for 61% of revenues, with the network traffic caching servers 39%. The ecommerce solution is not yet operational.
Inktomi Business Model
Inktomi's business model is revolutionary. They have created a model which generates recurring revenue based on transactions and surfing on the internet, both of which are expected to continue to boom ndefinitely. All three services, the search engine service, the traffic server business, and the ecommerce engine, have revenues linked to the usage of the technology. Microsoft's model was linked only to PC sales, which will extremely lucrative, is far more limited than the potential use of the internet.
In the software industry a license fee is the principal source of revenue, and recurring revenue comes from maintenance contracts. Inktomi probably could have used the software model and sold a software product to content providers and portals with good success. But with the transaction based model, the revenue stream is extended well into the future and is linked directly to the growth of the internet.
The only question is whether it will work or not.
Briefing.com Analysis
Three years ago, it appeared that Netscape would be the platform for the internet. But the browser wars basically ended in a bloody draw, with no one really reaping much from the sale of browsers. And while web server software is still pretty good business, it pales next to the potential of internet commerce. Netscape, in fact, after practically inventing the Internet, may show up in only the first two chapters of the still-to-be-written "History of the Internet."
Inktomi, on the other hand, may wind up with a book of its own.
If Inktomi's game plan works, the revenue potential is directly tied to the growth of the Internet. The "if" is a huge one, however. The search engine services and traffic server software are already proven, but the ecommerce model is still conceptual.
Charging retailers 7% is a huge percentage of sales. Many retailers operate on much lower margins than that. How will they pay for it? It may mean that retailers will charge a surcharge on the internet, which is contrary to most expectations. When asked if shoppers will use the internet to comparison shop, but will buy offline to avoid a surcharge, Mr. Peterschmidt said "We'll just have to live with that."
We can't fault anyone who is skeptical about Inktomi's ability to make this transaction based model work. It is as if word processing vendors decided to charge on a "per page written" basis. It is unprecendented for a vendor to a merchant to work on a percentage of revenue basis. The merchants apparently view Inktomi as a distribution channel instead of a vendor.
The fact that Inktomi has signed up over 300 merchants however, lends some credence to the model. Frankly, if Inktomi had presented this concept without any signed merchants, we'd be extremely skeptical. Obviously the 300 merchants must believe it will be a good deal for them. But who agreed to a 20% cut? We'd like to see where that kind of commission works. Unfortunately, we will have to wait a while to see who signed up.
However, Inktomi is about as pricey as a stock gets. With just $10 million in revenue last quarter, the company has a market capitalization of over $3.5 billion dollars. We would like the stock a lot better if it were cheaper, but even at this price, if the model works, it could be a tremendous investment. By tieing their revenue directly to the growth of the Internet, Inktomi may become a proxy for the Internet in general. If that happens, INKT will undoubtedly worth much more than it is today. |
