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By David Kathman, CFA, Ph.D. | 01-29-99 | 12:00 AM | Email Article
Yesterday's announcement that Yahoo YHOO is buying GeoCities GCTY for around $5 billion worth of stock was the latest move in what's shaping up to be a bruising fight over control of cyberspace. This was the third multi-billion dollar Internet merger to be announced in the past few months, following on the heels of AOL's AOL purchase of Netscape NSCP in November and At Home's ATHM purchase of Excite XCIT just last week. Most observers are expecting more deals in the near future, and they're undoubtedly right. There's always a Darwinian period of consolidation as any new industry gets its footing, and the Internet is no exception.
David Kathman, CFA, Ph.D., is a senior analyst covering active strategies on Morningstar’s manager research team.

Just to look at the financial numbers, you wouldn't necessarily think GeoCities was worth $5 billion. True, its revenues increased by 300% last year, but they still totaled only $18.4 million, less than 1% of its total market cap. And the company spent nearly $30 million (over half of that on sales and marketing), so its net loss exceeded its revenues. At least that was an improvement over 1997, when GeoCities spent three times as much as it brought in, giving it a net loss of $9 million on revenues of $4.6 million.

But of course, this is the Internet, and few people are paying attention to such things. Instead, they're focusing on "eyeballs"--the quirky term used by marketers and advertisers to refer to the number of people viewing a given web site (or television program, or whatever). Everybody wants to get as many people as possible viewing their sites, because each pair of eyeballs represents a potential source of revenue, either directly from the customer or from advertisers trying to reach that customer. And companies are willing to do whatever it takes to get viewers now in order to build customer loyalty and brand recognition, on the theory that whoever gets to those eyeballs first will have a big advantage in the long run.

The quest for more eyeballs on the web played a significant role in the other recent Internet mergers, but in both cases there were other factors involved. AOL and Netscape run two of the most popular sites on the web, and they're seen as complementary, with AOL primarily used at home and Netscape primarily used at work. But Netscape's server-software business is its main source of revenue, and its technological expertise was also a major attraction for AOL. And while AOL has been increasing its revenues from advertising and e-commerce, it still gets 80% of its money from subscriber fees. Excite's 16 million users on the web were certainly a major attraction for At Home. But At Home makes its money by providing broadband Internet access over cable TV lines, and the advantage of the merger is supposed to come from the integration of content (provided by Excite) with the infrastructure to deliver that content (provided by At Home).

In contrast, both Yahoo and GeoCities are entirely web-based businesses. Though Yahoo has started to branch into e-commerce, both companies get the bulk of their revenues from advertisers, and thus have to get people to visit their sites in order to survive. That means that the number of viewers is particularly important for these companies, more so than for more diversified Internet firms which have other sources of income.

Measuring these viewers is Media Metrix, which publishes monthly ratings for web sites and other "new media". These ratings are based on the number of distinct users who visit a given site at least once during the month; thus someone who visits Yahoo thousands of times in a month is counted the same as someone who only visits it once. Last week Media Metrix announced its web site ratings for December, and they revealed a horse race between AOL and Yahoo. AOL.com was the most popular individual site on the web, with 28.3 million viewers (or 49.8% of active web users); Yahoo.com was close behind, with 26.8 million viewers (or 47.3% of active web users).

In third place was Geocities.com, with 19 million users. Yahoo is obviously hoping that combining the Yahoo and GeoCities users will catapult it into first place in the rankings; in fact, Media Metrix estimates that the combined audience for the two sites is 33 million people, which would put them ahead of AOL. But AOL is buying Netscape, whose web site attracted 17.5 million users in December. It's not clear yet which combination--Yahoo-GeoCities, or AOL-Netscape--will end up on top once the dust settles. The wild card in all this is Microsoft MSFT; it has two of the top 10 web sites, MSN.com and Microsoft.com, whose combined audience in December was actually slightly greater than Yahoo's. Also coming on strong is Lycos LCOS, a web-based company (like Yahoo) which has been buying up web sites such as HotBot over the past year, catapulting it into the top five when the audience for all its sites is combined.

It will be very interesting to see how the battle for web turf plays out over the next few years. Will primarily web-based companies like Yahoo-GeoCities be able to survive, or will they be eclipsed by deep-pocketed competitors such as AOL and Microsoft, who have their fingers in other pies and are thus less reliant on attracting web viewers? By purchasing GeoCities, Yahoo has given notice that the battle for eyeballs on the web has only just begun.
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David Kathman, CFA, Ph.D. does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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