Enticing the offline giants
The misguided urge to merge was not limited to the pure Internet companies. Frightened of being outmaneuvered by scrappy Web start-ups, Walt Disney in 1998 purchased a 43 percent stake in search engine Infoseek for $465 million. That laid the groundwork for Disney's ill-fated Go.com portal, which the entertainment giant shuttered in January after reporting a $790 million loss and laying off most of the staff.
General Electric's NBC has encountered similar difficulties since taking a stake in the Snap.com portal created by CNET Networks, publisher of News.com, and combining it with online community Xoom.com and its flagship NBC.com to create NBC Internet. The company initially went public and fared well, but its heavy reliance on advertising took a toll. In April, the network bought back all outstanding shares of NBCi, laid off most of its staff, and recast its Internet strategy to tie it closer to TV programming.
In many of these cases, the last link in the business-building chain--earnings--remained missing. And once evolutionary development of such Net ventures as Go.com and NBCi was stopped short, the value of traffic and the acquisitions made to increase it fell under wide criticism.
Because of its stature and recent financial problems, Yahoo has been the subject of much scrutiny for its acquisitions and other business strategies. Under this microscope, the decision to pay 21.5 million shares for GeoCities appears questionable to some, especially if the main objective was to increase traffic.
Home-page building "was a business that wasn't proved viable from an advertising standpoint," said Patrick Keane, an analyst at Jupiter Media Metrix. "The community sector is completely bankrupt as a revenue opportunity. It was a reach play."
Yahoo declined to comment on its previous acquisitions. But even Tom Evans, the CEO of GeoCities at the time of the acquisition, criticised the strategy, saying the Web portal failed to follow through with effective use of his company's strengths.
"Can you turn those eyeballs into dollars and those users into customers?" Evans asked. "I don't think Yahoo maintained fully the GeoCities model and all the things we were doing in GeoCities. What they determined to do was to integrate it into the Yahoo network."
The Broadcast.com deal has been criticised as well. The multimedia company's core business of providing streaming technology for internal corporate Webcasts is a shell of its former self, according to people close to the company, and it remains unclear whether the division is drawing any significant advertising.
The portals defend their actions as necessary to compete in a world turned upside-down by unrelenting pressure to expand at virtually any cost. Many executives acknowledged the flaws in acquisition strategies but said they were trying to keep up with an insatiable demand by investors to raise stock prices.
"By acquiring you were able to add more tonnage into the network, keep your ranking high in Media Metrix, and that was a nice virtuous circle and it supported your stock price," said George Bell, former chief executive of Excite@Home. "It was a silly cycle in a sense that it had no basis in reality."
That is a troubling observation, especially if applied to Excite@Home's acquisition of Blue Mountain, for which it agreed to pay $780 million in cash and stock and another $270 million if the site met goals largely measured in traffic gain. The company reasoned that the deal was a way to enlist paid subscribers for its high-speed Net service from the millions of people who sent Web greeting cards through Blue Mountain's site.
The result has not been pretty. Excite@Home's stock traded around $40 a share at the time of the Blue Mountain deal but is around $4 a share this week. In January, the company wrote off $4.6 billion in intangible assets for the depreciation of value for both Blue Mountain and Excite.com.
The company is rumored to be seeking a buyer for the two entities, though no obvious takers have emerged. Only two years separate 2001 and 1999, but in Internet time, it might as well be a lifetime.
"It was shortsightedness," said Joshua Sinel, chief executive of Blue Barn Interactive, a New York community and chat company. "What they bought were eyeballs and traffic. But what they failed to realise was that buying people doesn't do much--it's what you do with them."
