June 29, 1998

Internet Action Update
by Nico Detourn (TMF Nico)

After barely taking a breather from their March-April rampage, Internet stocks are again running wild through the Street, fueled this time by speculation of mega-media mergers. This always noisy bunch is outdoing itself, smashing through record highs, and in the process creating palpable fascination among market participants. For some, that fascination is accompanied by heady joy, as their portfolios sweetly chime to the tunes of favorite stocks. For others, it is the fascination of disbelief, as companies barely out of diapers reach outrageous market cap, all rules having been tossed out the window.

The latest round of Internet mania was officially triggered earlier this month when General Electric's (NYSE: GE) NBC unit made a 4.99% investment in CNET Inc. (Nasdaq: CNWK), a deal that also found the largest corporation in the galaxy taking a 20% stake in the online content provider's struggling Web portal, Snap! Online.

Things ratcheted up just nine days later when long-leaking rumors of a deal between Walt Disney Co. (NYSE: DIS) and third-tier portal Infoseek (Nasdaq: SEEK) took on over a half-billion dollars worth of substance, promising what has been a relatively stable balance of online power, as measured by Web traffic.

Just the day before came a never-confirmed report that America Online (NYSE: AOL) had rejected a high-premium buyout bid from AT&T (NYSE: T). All this news, whether real or not (more below), gave the "big boy" imprimatur to a sector whose bottom-line performance has yet to match its well-publicized, some would say over-publicized, promise.

For all of the flash these big name alliances generate, the Internet sector is characterized by a steady flow of smaller-scale deals and partnerships. These can pass through the PR mill unnoticed if we don't follow the companies directly involved. However, seen or not, the pace has picked up in recent months, and as deal follows deal, their cumulative impact is reshaping the online world.

As the clock ran out on once-critical contracts for rotating positions on Netscape's (Nasdaq: NSCP) website, a new spotlight was turned on the "search engine" companies. It revealed differences among them that might have gone unnoticed when placing them into the same box. Some observers said Infoseek had the best search technology, and so was a natural shoe-in as the "premier provider" of search services for Netscape's revamped Netcenter. When that honor instead went to Excite (Nasdaq: XCIT), which would also provide Netscape with content, it was a powerful acknowledgement that search was no longer the name of the game.

This same period also saw Yahoo (Nasdaq: YHOO), the King of Search, swap out AltaVista (now part of Compaq (NYSE: CPQ) as its search provider). In its place, and just in time to help kick-off a thus far successful June IPO, came Inktomi (Nasdaq: INTK), a portal-less software developer whose technology also powers search services for CNET's Snap!, HotBot, and Microsoft's (Nasdaq: MSFT) forthcoming "Start" portal site, among others. Two days later, Yahoo announced a parting of the ways with Netscape, thus forfeiting future Web traffic -- the blood in the business model -- from the Netscape site to its own.

These events alone point to key changes in this segment of the online industry. From an investment perspective, of greater importance is how these developments underline the need to periodically reexamine our assumptions about companies in an industry as dynamic and still unformed as this.

Things happen fast. Company profiles and business models can change subtly, but significantly, from one quarter to the next. Yahoo's profit-busting acquisition this month of Viaweb, a developer of online commerce tools and services, and Excite's January acquisition of MatchLogic, an Internet advertising services firm, show how diversification can reposition a company, opening strategic opportunities, and in this process reshape and advance an industry. And with Infoseek growing mouse ears, we may be approaching the day when the term "search engine" will no longer be used to describe these companies, which nevertheless remain "under construction."

In a perhaps less left-field way, Amazon.com's (Nasdaq: AMZN) recent launch of a CD store on virtually equal footing with the books -- which are generally considered to be the company's specialty -- expands the scope of its retail operations. Amazon is now directly taking on prominent online music retailers CDnow (Nasdaq: CDNW) and N2K's (Nasdaq: NTKI) Music Boulevard, as well as Barnes & Noble (NYSE: BKS) and Borders (NYSE: BGP). But do specialties count? Will a dedicated focus on music give CDnow an advantage? Does Amazon's formal diversification into music run the risk of over-taxing its resources, or alienating its core customer base? For that matter, are books really Amazon's specialty? Or is it something else altogether?

And speaking of diversification, there is America Online. As a content channel, an ISP, eyeball aggregator, cyber landlord, or the ultimate online brand, AOL -- love it or hate it -- defies simple description. AOL's scope and diversification is worth reflecting on in light of reports of an AT&T buyout bid, and even more so in light of news that AT&T will be merging with Tele-Communications Inc. (Nasdaq: TCOMA.)

Assuming that the reports were essentially accurate, did an AT&T buyout of AOL make sense? Does an AT&T merger with TCI make sense? Would both deals make sense? If so, would that mean AT&T views AOL and TCI as being in some way interchangeable? Or that the order in which it acquired and integrated these two diverse companies was of no consequence? I have to figure that if AT&T knows what it's doing with the TCI deal, which surely took more than a week to analyze and structure, then reports of its bid for AOL had to be inaccurate at best. Or am I missing something? What do you think?

Post your thoughts on this at Nico's Internet Nook