<SPECIAL FEATURE>
'98 Year In Review
December 17, 1998
Currents of Internet Consolidation
by Nico Detourn (TMF Nico)
The Internet of 1998 has been the subject of a long series of acquisitions, mergers, and the taking of megabuck equity positions. The biggest deals of the year were real attention-getters. They carried what often felt like decisive weight, at least at the time. Yet, after all the consolidation, repositioning, and bottle-spinning we've witnessed, the main cast of characters in our drama has, with a few notable exceptions, barely changed. And so the year is ending with the shape of what we call the "Internet industry" quite different, but no more fixed, than it was when it began. Paradoxical? Perhaps a bit. But paradox and the counter-intuitive can be par for the course when considering online space. Indeed, some might say these are among its most, umm... endearing qualities.
In contrast to established and mature industries, such as oil, airlines, or automobiles, where consolidation will be prompted by cost-cutting and the need to squeeze out marginal competitive advantage, consolidation within the Internet industry is much more a function of the industry defining itself in the first place. It comes as no surprise, then, that the consolidation we're seeing takes place on several levels.
At its most basic, there have been mergers and acquisitions involving essentially interchangeable companies. Online music retailers CDnow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> and N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %> provide a classic example of competitors combining to more effectively compete against larger common enemies. The apparently insatiable appetite of Internet Service Provider (ISP) MindSpring <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %>, which at last count gobbled 15 smaller ISPs this year, shows another basic consolidation move, this time of the big fish/little fish variety. Commercial Internet and Web services providers PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> and Verio <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRIO)") else Response.Write("(Nasdaq: VRIO)") end if %> have pursued a similar acquisition course, in which operating scale and market share are the twin goals.
Despite the significance of these acquisitions and mergers, such consolidation of turf is not unique to the Internet. What they tell us about the industry's possible future is limited. And it is of course the future that we're interested in here.
At a more significant level are consolidations that play on the theme of diversification, the most common variation being when an acquiring company reaches beyond its established niche. Online bookseller Amazon.com's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> April acquisition of privately held Internet Movie Database was such a move. And although Amazon's much-celebrated diversification into music involved no acquisitions, it nevertheless figures in the consolidation equation, if for no more than its direct impact on CDnow, N2K, and other smaller competitors.
On yet another, less immediately visible level, there was Amazon's August buyout of e-commerce software company Junglee. Rather than a simple extension of product-line -- books to music to video to software... all the same difference, practically -- moves of this sort represent an extension of functionality, a diversification in depth which adds to a company's bag of tricks. This is where the currents of consolidation can be most powerfully felt. And it is here where the Internet industry, circa 1998, can be best viewed in its unformed nebulaic glory.
Some of the year's most interesting and potentially important acquisitions involved strategic moves of this sort, though few if any of them qualify as megadeals. Included here are Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> acquiring Viaweb (June, e-commerce software), and Yoyodyne (October, interactive marketing); Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> buying MatchLogic (January, ad management/marketing), and Classifieds2000 (April, online classifieds); Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> acquiring Wired Digital (October, Web content properties including Wired News, HotWired, and Suck.com); Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> capturing Firefly Network (April, user profiling/personalization technology), clicking with LinkExchange (November, advertising network), and sealing Hotmail (New Year's Eve, 1997, email); and Inktomi <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INKT)") else Response.Write("(Nasdaq: INKT)") end if %> snaring C2B Technologies (September, e-commerce/shopping) in its trickster's web.
Maybe because they are more conceptually complex and less easily predicted than would be, say, a CDnow-N2K merger and its subsequent (and purely hypothetical) acquisition by Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> as its online music division, they can appear to come out of the blue. They'll often receive less attention for their longer-term strategic value to the company than for their impact, usually negative, on next quarter's bottom line. But these are no longer simple consolidations of competitive turf. The acquisition of these assets, often in the form of patents and personnel, can be understood as consolidations of intent in the way they can reveal a particular understanding of the industry, and contain the seeds of further company and industry growth. For all the immediate noise such deals can (though not always) create, they are invariably long-term plays.
Headlines were also made this year as "old media" companies made big plays for online properties. Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> and NBC made significant June investments in Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> and CNET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %>, respectively, leading to continued media and investor speculation that other similar deals would pop up any moment. Who Will Be Next? was the name of the tune. Nothing else like that quite materialized, but there was no lack of news on the M&A front.
AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> announced its $48 billion acquisition of cable system operator Tele-Communications, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %>, giving it, among other things, a controlling interest in cable Internet company @Home Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>. This June announcement added even more passion to the debate over the future of Internet access, with America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> and now AT&T representing opposing sides of the issue. And the October announcement by German media octopus Bertelsmann of its 50% stake in barnesandnoble.com sharpened the focus on e-commerce, and highlighted accelerating consolidation.
America Online was reported to have been on AT&T's shopping list during the June mating season. But while declining the touch of AT&T, AOL did manage to pick up a few interesting items in 1998. After the February completion of its 1997 CompuServe acquisition, AOL bought NetChannel (May, Internet TV technology), Mirabilis (June, instant communications and chat technology), and PersonaLogic (November, ecommerce/personalization technology), all of these providing examples of consolidation at the longer-term strategic level, although the Mirabilis buy did add an instant 12 million ICQ registrants to AOL's expanding universe.
And then, of course, there was America Online's acquisition of Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> .
The $4.3 billion price tag AOL hung on the founding company of the modern Internet might have been a slim fraction of the $48 billion AT&T-TCI merger. But with only days to go, 1998 has not yet turned up a rival to the AOL-Netscape deal's claim on the attention and imagination of Internet users, observers, and investors. But then, America Online and Netscape, along with the ever-present Microsoft, played a role, directly or indirectly, in most of the year's dominant Internet storylines, the threads of which are crossed and tangled in ways that go beyond the scope of a brief year-end review.
Mergers and acquisitions (and there were many more of these in 1998 than were just mentioned) are the most visible form of consolidation. They're what we think of first. But beyond the outright takeover of one company by another, consolidation also works through partnerships and the formation of "strategic alliances," which are naturally greater in number. These can not be seen as reliably predictive. They should certainly not be over-weighted in making investment decisions. But they do, sometimes, turn out to have been precursors of more formal arrangements, including mergers, and are no small part of the larger consolidation story.
The alliances between companies, the web of links they establish, reveal their common interests. Their patterns are worth looking at from a variety of angles, and under different lights. It is, after all, the combined weight of those interests, in cooperation and competition -- or, in what has been termed "coopetition" -- that ultimately powers and guides the consolidation and evolving shape of the Internet industry.
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