...INKT...
Updated 11-Feb-99
Inktomi: The Next Platform?
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 (INKT) 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 every 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 data delivered 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 the scenes" 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 indefinitely. 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 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.
_________________________
even Cramer wants a piece of it (although I think his last sentence or two only applies to a daytrade.)
A Cautionary Tale
By James J. Cramer
2/12/99 12:15 AM ET
Homework can kill you. My younger associate visited Inktomi (INKT:Nasdaq) at the Goldman Sachs conference and got blown away. He wanted badly to put some on the sheets this morning feeling that it was the best story he heard at the conference. He loved the management, thought the story was dynamic and believed that the numbers were too low, despite the loss of the Microsoft (MSFT:Nasdaq) contract. The management even dispelled any of the negatives surrounding that loss. It sounded like a real live Net play that would work on a rebound.
But there was a problem.
Novell (NOVL:Nasdaq) has been walking around claiming it has some sort of Inktomi-killer, some device that will put the fear of Hades into Inktomi shareholders. Sounds like some sort of doomsday search engine.
So my young associate said before we could buy Inktomi, we had to see what Novell had to say, and Novell wouldn't be speaking till later.
I had a hankering for this Inktomi because Roger MacNamee said he loved these guys.
(Some cynic emailed me and said, What else would Roger say? He's an original backer and shareholder. I immediately shot back that there is a level in this business where you don't tout and you don't bag. Where your reputation is too highly valued. Roger is in that league. He would never mention Inktomi to me or anyone if he thought it stunk, even if he were long. His currency is his insight; he will not debase it.)
But my associate said we have to wait. He had to see Novell. Sure enough, Inktomi opens at $59 and then proceeds to trade lower.
Points lower.
Have to wait to hear Novell.
Then it starts ramping with the rest of the Net.
Nah, gotta hear those folk from Novell.
Now it is up six, Novell meeting breaking up.
Then seven. Then eight.
Wouldn't you know it: When my associate calls, Novell, he says, has nothing, nothing to worry about.
Inktomi's up 10 when I get the call.
Even on the Net that's too late.
Only on the Net does dotting the Is and crossing the Ts cost you hundreds of thousands of dollars.
In a morning.
//
Recent press releases
Wednesday February 10, 6:23 pm Eastern Time
Inktomi sees growth in specialized sites, media
NEW YORK, Feb 10 (Reuters) - Web-search and traffic software company Inktomi Corp. (Nasdaq:INKT - news) said Wednesday it expects to add three to five new search contracts per quarter and sees big demand from specialized Internet sites and the media.
Inktomi, which recently lost a high-profile search contract with Microsoft (Nasdaq:MSFT - news), expects to do deals with Internet niche sites like GeoCities (Nasdaq:GCTY - news), which offers free do-it-yourself Web sites, or Go2.com, an Internet search company.
It also sees high demand growing in Europe and among media companies in general.
''Specialized sites and the media -- that's where the big expansion is in search technology,'' Chief Executive David Peterschmidt told Reuters in an interview after a presentation to investors at the Goldman Sachs Technology Symposium in New York.
''The big portals have moved on to other areas of focus, like shopping,'' Peterschmidt said.
Inktomi sees the growth of personal computer sales and the race to speed up Internet access driving demand for more of the company's Internet traffic or cache software. Cache software, which allows Internet users to download information from the Web and move from page to page, currently represents just over half of Inktomi's revenues.
Peterschmidt said he was comfortable with analysts estimates that caching business would represent 60 percent of Inktomi's revenues in 2000.
In late January, Microsoft said it would phase out Inktomi's search engine in favor of Alta Vista's, Compaq Computer Corp.'s (NYSE:CPQ - news) Internet navigation service. The switch-over is not expected to affect Inktomi's business and Peterschmidt said though Inktomi was sad to lose a partner it was not phased by Microsoft's move.
Inktomi, which signed a search contract with British Telecommuications Plc (quote from Yahoo! UK & Ireland: BT.L) on Wednesday, sees similar European deals as demand grows for country-specific search engines over the next 12 to 18 months.
Wednesday February 10, 6:02 am Eastern Time
Company Press Release
Inktomi and BT to Form Strategic Alliance
Parties to Provide Net Users With Greater Access to Localised European Web Content Through European Search Data Centre
SAN MATEO, Calif.--(BUSINESS WIRE)--Feb. 10, 1999--Inktomi Corp. (Nasdaq:INKT - news) and British Telecommunications (BT) today announced they have signed a non-binding letter of intent to form a strategic alliance through which BT will host Inktomi's first European search cluster, and will use and have the rights to sales and distribution of Inktomi search services as part of its Internet solution portfolio. Implementation of the strategic alliance is subject to completion and execution of definitive written agreements.
John Swingewood, director of BT's Internet & Multimedia Division, said, ''This alliance will underline BT's continued commitment in delivering world class Web hosting, co-location and search services to the UK and European markets. The addition of Inktomi's search technology to our portfolio is intended to strengthen our existing product and service offering which comprehensively address all sectors, from mass market consumer, small to medium size enterprises through to Corporates.''
David Peterschmidt, chief executive officer of Inktomi, said: ''Today's announcement is recognition of Inktomi's and BT's interest in providing high-quality search services in Europe. By providing European 'Net users with more relevant, localised search capabilities, Inktomi and BT intend to drive the growth of Internet usage across Europe.''
BT's investment in developing one of Europe's newest & leading edge server farms, offering co-location and Web hosting facilities, is reflected in Inktomi's decision to partner with BT for its first European search cluster. The co-location facility is expected to establish new industry benchmarks for Quality of Service and operational support.
It is the intention that Inktomi will deploy one or more Inktomi search engine clusters at BT's hosting facilities to provide European Internet content. Users would be able to access relevant content from Inktomi search partners holding up to 40 million Euro-centric documents, making it one of the largest search indexes of European content in the world. Further content would be available from Inktomi's 110 million-document clusters based in the U.S.
Inktomi plans to complete deployment of its European search cluster at BT's facility by summer of this year. Inktomi will also provide a range of search services to both BT content sources and publishers, and other European and global customers. Users will be able to carry out country-specific searches and real-time translations as part of the search experience.
About BT
BT Internet & Multimedia Services provides a broad range of online services addressing consumer and business requirements
-- BT Internet - providing a range of dial access Internet services
-- BT Net - a range of fixed leased line and ISDN services for
customers wishing to host their own internet servers
-- BT Intranets - a range of fully managed and self build solutions
for Intranet based services
-- BT Network for Lotus Notes - a fully managed Lotus Notes service
offering
-- BT Connect to Business - UK SME business focused Internet Access,
Content and Web hosting service
-- BT Webworld - Shared, Dedicated and Custom Web hosting solutions
including co-location
-- BT Click+ - pay-as-you-surf Internet service with no registration
fee, fixed term contracts or monthly subscriptions.
-- Talk21 - a free email address service
Joint Venture initiatives include:
-- LineOne, a web-based service offering Internet connection and
online UK focused content.
-- BiB, a provider of digital interactive television services
-- Excite UK
Wednesday February 10, 6:01 am Eastern Time
Company Press Release
Inktomi Announces Suite of New Search Engine Services
Dedicated Search Clusters and Custom Data Blending Extend Search Platform
SAN MATEO, Calif.--(BUSINESS WIRE)--Feb. 10, 1999--Inktomi Corp. (Nasdaq:INKT - news), developer of scalable Internet infrastructure software, today announced a suite of new customizable services for its industry-leading search engine offering.
Using new premium services running on the Inktomi Search Engine platform including ''Dedicated Search Clusters'' and ''Custom Data Blending,'' portals and destination sites can offer highly differentiated new capabilities incorporating their own custom data and communities. In addition, Inktomi has signed a service distribution agreement with WorldBlaze to deliver real-time language translation services on top of the Inktomi search platform, adding to last month's distribution agreement with Centraal for its RealNames system.
The Inktomi Search Engine, which has received broad acclaim for delivering comprehensive and highly accurate Internet search results, has also added new features to strengthen its core search technology. Search customers will gain access to new ''Universal Search'' capabilities, which provide portal customers with the flexibility to incorporate multiple public and private data sources into searches. Universal Search intelligently blends Web data, custom data, and a collection of new search data sources covering news, company, and product information into a single page of search results.
''Our customers are looking for more than high-powered Web searching,'' said Paul Gauthier, chief technology officer of Inktomi. ''Inktomi's flexible infrastructure services help these companies draw upon their unique differentiating assets to innovate and develop new revenue-generating services.''
Using these new infrastructure elements, portals and destination sites can incorporate millions of pages of their own unique content to enhance existing general-purpose Web searching and create a new generation of specialized, targeted, and vertical search engines. The new search services include the following features:
-0-
-- Dedicated Search Clusters. Inktomi now has the capability to
build dedicated search clusters, allowing custom searching of any
data. For example, portals can integrate millions of pages of
their own content or specified third-party content into the
search experience, and the data can be refreshed daily or hourly.
Customers that use this functionality include GeoCities, which
offers search access to over 20 million of its 'Homesteader' Web
pages, ICQ, a subsidiary of America Online, Inc., which is
providing search access to content created by its 28 million
registrants, and Aeneid Corporation, which has created
highly-focused vertical business catalogs as part of its
information aggregation platform.
-- Custom Data Blending. The new search service offers the
capability to integrate customer data sets into Inktomi's
whole-Web search offering, enabling a wide variety of custom
searches. Customers for this functionality include N2H2, which
has integrated its adult content filters to create the
Searchopolis family-safe search service, and iAtlas Corporation,
which recently announced an agreement with Inktomi to provide
search sites with web-page filtering technology that allows users
to focus their searches by industry type, company size, site
popularity, or geographic location.
-- New Search Data Sources. Inktomi search customers will also gain
integrated access to an expanded set of search databases using
Universal Search. These new data sources can be offered as
standalone search applications or transparently integrated within
standard Web search results to dramatically increase the
convenience and relevance of queries. New data sources include
news data from 50 of the world's top news authorities, stock data
incorporating ticker symbol lookup and stock quotes from the
world's ten largest financial markets, product data from the
upcoming Inktomi Shopping Engine, and Centraal RealNames.
Availability
Dedicated Search Clusters and Custom Data Blending are available immediately. Universal Search and new search data sources are scheduled for availability in late February. New services incorporating Centraal and WorldBlaze functionality are scheduled for availability during the first half of the year. |
