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End of the Road for Independents?

Internet: Changes on the access-provider scene may mean Netcom is ripe for a takeover.


Of all the independent Internet service providers, Netcom On-Line Communications may be the most venerable--and vulnerable.

Started eight years ago to let college students connect to university computers from off campus, Netcom has become one of the largest independent access providers in the world. More than 500,000 subscribers log on through 330 local access phone numbers in the United States, Canada and Britain. The San Jose company raised $267 million in three public stock offerings, including a $24-million IPO in December 1994 that made its venture capital investors some of the first Internet millionaires.

But the same fiery winds of change that threaten to extinguish smaller Internet service companies are singeing Netcom, leading analysts to believe that the company is ripe for a takeover. (Company executives, including Chairman and Chief Executive David Garrison, did not respond to requests for an interview.)

Among the main problems: Netcom's core consumer Internet access business is bleeding money. In the first half of the year, Netcom lost $19.2 million, including $1.2 million on an ill-fated investment in the McKinley Group, a Web search firm that Excite acquired last month.

Netcom predicts more losses for the foreseeable future because of increasing competition. The red ink comes despite an 85% jump in revenue during the first half of 1996, to $52 million. Sustained losses and the overall downturn in Internet stocks have seen Netcom shares tumble, dropping from a 52-week high of $91 in November to less than $20 in recent days. On Friday, Netcom closed at $17.75 a share, down 25 cents, in Nasdaq trading.

Life as Netcom knew it ended in March, when AT&T launched its WorldNet consumer Internet access service. Analysts heralded the event as the beginning of telephone companies' push to offer a bundle of digital services that eventually could include everything from Internet access to cable TV.

"They started the game," said Kate Delhagen, an analyst with Forrester Research in Cambridge, Mass. Netcom acted quickly to match AT&T's $19.95 monthly subscription fee, and added incentives such as free Web pages and an e-mail service to cut down on customer churn--monthly turnover that afflicts most Internet service providers and in Netcom's case may be as high as 60%.

Netcom also rolled out an international expansion plan and began focusing on the corporate Internet market, whose fatter profit margins could subsidize the consumer business.

Netcom's continued losses and bargain stock price make it an attractive acquisition target. In a newspaper interview last month, Netcom Chief Financial Officer Thomas Weatherford said the company isn't ruling out a sale but would hold out for more than $50 a share.

They're dreaming, responds David Simmons, managing director of Digital Video Investments, a New York firm that provides research for institutional investors.

"What Netcom apparently wants and what even the most optimistic [analysts] think it's worth are far apart," Simmons said.

Who would be interested in buying? Other Internet access providers are likely candidates, as are long-distance resellers planning to compete against AT&T, Pacific Bell and other major phone companies, Simmons said.

Other prospects include transaction-processing companies such as Electronic Data Services, ADP or Lexus/Nexis, which now use private networks but are interested in expanding to the Internet and could use Netcom's infrastructure to do it, he said.

Michelle V. Rafter writes Internet columns for Reuters and the Chicago Tribune's Web edition. E-mail her at

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