Terra Lycos: Profiting from Information Products
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INSEAD Terra Lycos: Profiting from Information Products 05/2003-5108 This case was written by Theodoros Evgeniou, Assistant Professor of Information Systems, at INSEAD, based on public material and on the earlier case Terra Lycos: Creating a Global and Profitable Integrated Media Company written by Patricia Reese, Research Associate, under the supervision of Soumitra Dutta, the Roland Berger Chaired Professor of E-Business and Information Technology, and Theodoros Evgeniou, Assistant Professor of Information Systems, all at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2003 INSEAD, Fontainebleau, France. N.B. PLEASE NOTE THAT DETAILS OF ORDERING INSEAD CASES ARE FOUND ON THE BACK COVER. COPIES MAY NOT BE MADE WITHOUT PERMISSION. INSEAD 1 5108 On a bright mid-September morning in 2002, Rafael Bonnelly, Terra Lycos’ vice-president of content management, was examining the traffic and revenues from his company’s websites. The message was clear: visitors to his portal spent most of their time in ‘user generated’ sites, such as chat rooms, personal web hosting, email, etc, which, unfortunately, generated very little, if any, revenue per visitor. Although the ‘Terra generated’ content, such as news and music sites that Bonnelly’s global team spent its time and budget creating yielded higher revenues per visitor, it attracted less people, for less time, and for not enough revenues. The goal was clear: have Terra’s customers visit Terra generated sites more often while at the same time make them pay more for all sites and services. And therein lay the problem: How does one get customers to pay for a service which was previously free, and remains so on your own or competitors’ websites? In the highly competitive and rapidly changing portal environment, contenders found themselves facing a clearly Darwinian challenge – adapt or risk extinction. In 2002, Terra Lycos trailed its three heavyweight contenders, AOL-Time Warner, Microsoft/MSN and Yahoo! Like all portals, Terra was suffering from a serious backlash in Internet advertising revenues, its key revenue source during the dot.com bubble. It was now time for major changes in its strategy and business model if the company were to become a top-tier player in the international portal market…or even survive. By reviewing the evolution of the portal environment with its successes (AOL and Yahoo!) and failures (Snap.com and Excite@Home), what lessons could Terra Lycos extrapolate in developing its new strategic focus? What kinds of revenue streams should it explore to achieve positive earnings as quickly as possible? What hurdles would it need to overcome towards this direction? How could it create new revenue sources in an industry where ‘free’ was traditionally the ‘secret’ reality? Creating Terra Lycos It was the Big Bang of the Internet industry: the announcement on 10 January 2000 that America Online, Inc. (AOL) was merging with Time Warner, Inc. to create a multi-brand media and communications behemoth. The new company would have more than US$30 billion in combined revenues with diverse online and offline brands such as AOL, Time, CNN, Warner Brothers, Netscape and Looney Tunes. While growth by acquisition was not new in the Internet world, the sheer size and breadth of the AOL-Time Warner deal threatened to completely reshape the Internet portal landscape in one masterstroke. What would such a deal mean for independent companies like Yahoo! and Lycos? A mere month after the merger, representatives of Terra Networks approached Lycos’ CEO Bob Davis about joining the two companies. The first meeting in February 2000 between Davis and representatives of Terra Networks did not go well. Davis recalled slamming the door after only 15 minutes when he realized that Terra was interested in buying out Lycos, not in establishing a joint venture as he had been led to believe.1 Yet Terra persisted, eventually 1 Davis, R. (2001) Speed is Life: Street Smart Lessons from the Front Lines of Business, New York: Doubleday. Copyright © 2003 INSEAD, Fontainebleau, France. INSEAD 2 5108 getting Bertelsmann Chairman and CEO Thomas Middelhoff, a friend of Davis, to bring him back to the table. Terra also brought in some very big guns – its Spanish telecommunications parent, Telefónica, which had net profits of €2.5 billion and billed more than €28 billion in 2000. By 16 May 2000, the parties had hammered out a US$12.5 billion stock deal, which closed on 27 October 2000 at US$6.5 billion due to their sagging stock prices. Telefónica promised a rights offering that would give the new company €2.2 billion in operating capital – some of the deepest pockets around for an Internet company – and gave Terra a 49% stake in a new wireless joint venture called Terra Mobile, together with Telefónica Móviles, the mobile subsidiary of Telefónica. (Terra’s stake in Terra Mobile dropped to 20% in January 2002.) Bertelsmann agreed to a five-year US$1 billion deal to make checks out for advertising and services to Terra Lycos. The German media company also gave Terra Lycos exclusive access to its content, including BMG artists like pop star Christina Aguilera and Random House authors Louis L’Amour and Danielle Steel. The deal was positively viewed as it combined Terra’s obvious strength in Latin American markets, the deep pockets of Telefónica, and access to one of the world’s largest wireless networks, with Lycos’ brand name, online properties, strong US presence and positive bottom line. Touting itself as the newest global media company in the world, Terra Lycos could boast of operations in 42 countries and 19 languages by late 2002. It controlled 142 websites reaching 120 million unique users, who racked up on average 368 million page views per day in late 2002. The total number of subscribers jumped from one million to just under seven million. Terra Lycos was now ready to take on the market leaders. “It makes it a real equal of the Yahoos of the world and a great near-equal for AOL,” noted one shareholder.2 Terra Lycos now had ambitions to become a real equal of the top three portals in actual numbers, too. The goal became winning the portal war and capturing the lion’s share of the portal market. A Brief History of Portals and the Portal Wars A portal is defined as “a site that aggregates an array of content and offers a range of services to be the home page for as many users as possible.”3 With already more than 2.85 million websites online in 1998,4 portals early on became extremely popular because they gave surfers a coherent view of the web and provided them with tools, like search engines, online shopping and free email. Revenues generally spring from one of the following sources: advertising (Yahoo!, Lycos), subscriptions (AOL), or e-commerce (Amazon.com). There are two categories of portal: horizontal (Lycos, MSN and Yahoo!) and vertical or ‘vortals’, which cover specific industries or demographic groups such as Raging Bull for 2 “Lycos, Terra Complete Merger,” Bloomberg News. 27 October 2000. Quote from Brian Grove, a principal at Vaughan Nelson Scarborough & McCullough. 3 Hu, J. “Racing to the Start Line,” CNET News.com, 14 May 1998. 4 “June 1999 Web Statistics,” Online Computer Library Center, posted on the SIMS website at the University of California at Berkeley. http://www.sims.berkeley.edu/research/projects/how-much- info/Internet/wwwdetails.html. Copyright © 2003 INSEAD, Fontainebleau, France. INSEAD 3 5108 finance or iVillage for women. The development of the first portal is generally attributed to Jerry Yang and David Filo, who created ‘David and Jerry’s Guide to the World Wide Web’ in January 1994. Within five months, more than 100,000 people had accessed the guide of these two Stanford doctoral students. Yahoo! and the portal business model were born.5 The beginning of the portal wars can be traced to 1998 when companies started taking note of the huge profits that portals like Yahoo! were raking in. Yahoo’s net revenues for 1998 (US$203.3 million) had tripled over the previous year.6 Soon other online and offline companies such as Disney, NBC and Microsoft followed suit – some more successfully than others. In mid-1997 Netscape decided that if it was receiving more than 100 million hits per day, then it had a good incentive to create its own portal.7 (Netscape is now part of AOL- Time Warner.) Disney got into the act by developing Go.com, which it closed down in January 2001, and Microsoft decided to realign its Internet strategy throwing more than US$1 billion in marketing behind msn.com in October 2000. So why were so many portals battling it out? Pure economics was the major driver. “There’s always been the belief that more of the prize goes to the dominant player and that there’s a huge reward for being number one,” said Andrea Rice, a research analyst at Deutsche Bank Alex Brown. “What those people who are not AOL or Yahoo! are struggling with is that the gap is so vast, and more vast than they had expected.”8 Reworking Terra Lycos’ Business Model: In Search of New Revenue Streams The first priority of Joaquim Agut, a former General Electric executive and now executive chairman of the newly-formed company, was pushing Terra Lycos into the black. While 2000 was a spectacular year for Terra Lycos with an 87% increase in revenues and 336% more subscribers,9 the tech bubble continued to deflate. Advertising revenues sunk, and given that the Terra Lycos’ revenue mix was heavily advertising-dependent (to the tune of 75% with the remaining 25% coming from its ISP business), the company was hard hit by the downturn.