INSEAD Terra Lycos: Creating a Global and Profitable Integrated Media Company INSPECTIONNot For Reproduction COPY 06/2002-5042 This case was 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 © 2002 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. INSPECTIONNot For Reproduction COPY INSEAD 1 5042 “Market leadership is a challenge within our reach, but requires us to achieve several objectives: consolidating our product offerings to make our portals the most comprehensive and compelling on the World Wide Web, taking advantage of our extraordinary cash position to grow profits and extend our website network, and finally offering small- and medium-sized businesses effective e-commerce solutions. Terra Lycos must make full use of our advantage in the convergence of media, communications and interactive content, thanks to strategic alliances with Telefónica, our majority stockholder, and Bertelsmann.” Joaquim Agut, Executive Chairman, Terra Lycos The bright mid-September morning had not started well for Rafael Bonnelly, Terra Lycos’ vice-presidentNot For of content Reproduction management. He had just found out that FIFA,1 the governing body INSPECTIONof World Cup soccer, had given COPY the nod to Yahoo! to design and manage the official 2002 World Cup website. In knocking them out of the competition, FIFA had overlooked two of Terra Lycos’ greatest strengths: the company’s product diversity and its global reach, especially in Latin and South American markets where football—or soccer—was more a religion than a sport. Disappointedly, he eased back in his chair and surveyed the colourful website print-outs plastering the walls. They represented another strategy to be deployed— one that would hopefully boost Terra Lycos to profitability and a top-tier position. A battle might have been lost, but the war was still on. This case recounts the efforts of Terra Lycos, an integrated global media company formed by the October 2000 merger of Spain’s Terra Networks and US-based Lycos, to achieve profitability and a leading market position (Exhibit 1). At the time the case was written (November 2001), Terra Lycos trailed its three heavyweight contenders, AOL-Time Warner, Microsoft/MSN and Yahoo! (Exhibit 2). In the highly competitive and rapidly changing portal environment, contenders found themselves facing a clearly Darwinian challenge—adapt or risk extinction. 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 strategic focus? Was the market large enough to allow Terra Lycos a leadership position? What kinds of revenue streams should it explore to achieve positive earnings as quickly as possible? How should the organisation change in order to support Terra Lycos’ drive to profitability and market leadership? And finally, how great a role would issues such as management, branding, and international market reach play in the drive to achieve a positive bottom line? The Wake-up Call It was the Big Bang of the Internet industry: the announcement on 10 January 2000 by America Online, Inc. (AOL) that it was merging with Time Warner, Inc. to create a multi- brand, media and communications behemoth. The new company would have more than $30 1 Federation Intérnationale de Football Association. Not For Reproduction Copyright © 2002 INSEAD, Fontainebleau, France. INSPECTION COPY INSEAD 2 5042 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? Post AOL-Time Warner Merger Musings In the purple-and-yellowNot For Reproduction Yahoo! boardroom, Chief Yahoo, Jerry Yang, CEO Timothy Koogle INSPECTIONand President David Mallet debatedCOPY this question. “After four hours, a pot of Koogle’s bitter coffee, and umpteen squiggles on the white board, the trio reached consensus: They would not follow AOL’s lead. All of Yahoo’s chips would remain on the Net.”2 Lycos’ response would eventually be its October 2000 merger with Terra Networks of Spain. In fact, Lycos was ahead of its time. At least a year before the AOL-Time Warner merger, Lycos had already attempted to walk to the altar with USA Networks, but Lycos’ shareholders had balked and the deal was cancelled. While some analysts had reacted positively to the USA-Lycos deal, others felt that the call-off was just another opportunity for Lycos to merge with the likes of Time Warner, Microsoft, NBC and News Corporation—all considered possible suitors at the time. Others thought that money-making Lycos should continue to forge ahead on its own: “Lycos goes back to being Lycos, which is one of the best-run, most aggressive players in the Internet space,” recounted one analyst.3 Creating Terra Lycos Yet it was clear that the AOL-Time Warner merger put pressure on smaller, second-tier web portals like Lycos to merge or risk sinking even further. 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.4 Yet Terra persisted, eventually getting Bertelsmann Chairman and CEO 2 Ben Elgin with Linda Himelstein, Ronald Grover and Heather Green, “Inside Yahoo!,” Business Week, 21 May 2001. 3 Jim Hu, Sandeep Junnarkar and Tim Clark, “Going solo may not work for Lycos,” CNET News.com, 12 May 1999. Quote from Paul Noglows, an equity analyst at Hambrecht & Quist. 4 Robert Davis, Speed is Life: Street Smart Lessons from the Front Lines of Business, New York: Doubleday, May 2001. Not For Reproduction Copyright © 2002 INSEAD, Fontainebleau, France. INSPECTION COPY INSEAD 3 5042 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 million and billed more than €28 billion in 2000. By 16 May 2000, the parties had hammered out a $12.5 billion stock deal, which closed on 27 October 2000 at $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. Bertelsmann, which owned 18.4% of Lycos Europe,5 agreed to a five-year $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 artistsNot likeFor pop Reproduction star Christina Aguilera and Random House authors Louis L’Amour and INSPECTIONDanielle Steel. COPY The deal was seen as being positive 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 a positive bottom line (Exhibits 2 and 3). Touting itself as the newest global media company in the world, Terra Lycos could boast of operations in 37 countries in 19 languages. It controlled 120 websites reaching 94 million unique users, who racked up 400 million page views per day. 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.6 Seeing Red? Combining US and Spanish Management Only two months after the merger was announced and before it was even complete, the company faced its first major test. Since Lycos was the first American portal to be bought out by a non-US company, analysts were paying particular attention to the melding of American and Spanish management and corporate cultures.7 Though Lycos had joint ventures in Europe and Asia, it was an American company run by Davis from its Waltham, Massachusetts, headquarters. Terra’s hold on the Hispanic market extended to the US, but it was a Spanish company, headquartered in Barcelona, with marching orders given by Juan Villalonga, then chairman and CEO of Telefónica and chairman of Terra Networks. Initially, Davis and Villalonga had agreed that Davis would run the new company. However, Villalonga was ousted from both Telefónica and Terra in July 2000 and replaced by Joaquim Agut, a former General Electric executive. “From the start, Agut made it clear he would be 5 Eric Bovim, “Lycos Europe Open to Terra or Bertelsmann Takeover,” Reuters, 22 May 2001. Bertelsmann and Lycos co-founded Lycos Europe in 1997. Terra Lycos has a 29.6% stake in Lycos Europe, and Christoph Mohn, CEO of Lycos Europe and the son of Bertelsmann foundation chairman, holds 11%.