AOL, Netscape and Sun are throwing a holiday bash, but not everyone is invited. Investors in Internet stocks may want to take a good look at the guest list.
America Online's $4.3-billion takeover of Netscape Communications, and the pair's broad alliance with Sun Microsystems, launches a starry-eyed agenda for pervasive Internet use and electronic commerce. Should it deliver on its promises, the alliance arguably could influence the fortunes of myriad companies in an Internet-centric industry, just as Microsoft and Intel have defined the rules of the game for years.
The troika plays in virtually every node in the Internet chain. AOL is the dominant access provider, Netscape's Navigator is the leading browser, and Sun's servers are the hardware of choice for hosting Internet content. As owner of both AOL and Netscape's hugely trafficked Web sites, or "portals," the new AOL has the opportunity to serve and sell to both home and workplace users.
With Sun's Java software, they have a development platform for cable set-top boxes and hand-held Web-access devices that could, among other things, go a long way toward fulfilling the slogan "AOL Anywhere."
The deal has put a new spin on how investors size up the combatants in the turf wars that drive the Internet's evolution. For some, like Microsoft, it represents a direct challenge; for others, a boon. However, if the long-term impact is likely to be large, it's also largely unknowable. The deal demonstrates that no industry changes as fast and unpredictably as the Internet.
Among analysts interviewed, most say the group facing the clearest risk is the portals, particularly the search engines that have morphed themselves into Internet gateways providing information, advertising and services. Yet when news of the pact hit, almost all Internet stocks got a lift, including Yahoo, Excite, Lycos and Infoseek.
"There's nothing rational to that response," said Derek Brown, an Internet analyst with Volpe Brown Whelan & Co. in San Francisco. "The level of competition just increased dramatically."
In the short term, the deal could drive more traffic to Redwood City, Calif.-based Excite, which is a prominent partner of Netscape's own portal, Netcenter. But looking farther out, Excite's place at the table may be endangered. "The opportunity for Excite to parlay its relationship with Netscape seems less likely now," Brown said. "If I am AOL, I want to leverage Netcenter as much as I can."
Henry Blodget of CIBC Oppenheimer in New York puts it this way: "The industry is becoming a waltz of elephants--AOL, Yahoo and Microsoft--and Excite is looking smaller and more lonely than it did a little while ago."
On the other hand, the deal is likely to spur continued turbocharged growth for the entire business, allowing room for several portals to do well. With AOL pledging to keep its properties distinct in their appeal to different audiences, another portal might prosper by adopting a niche strategy of its own--focusing on being all things to fewer people.
Furthermore, the deal could force offline media giants to commit to acquiring the remaining independents, Excite or Lycos. That sentiment may be reflected in Excite's stock price, a hefty $50.87 at Friday's close. But if the terms of the AOL-Netscape, Disney-Infoseek and NBC-Snap pacts are any guide, rich premiums are not guaranteed.
If the troika makes good on its scheme for widespread Internet access via consumer devices other than PCs, Spyglass Inc. of Naperville, Ill., is positioned for sparkling growth. And analysts say it's an idea whose time will come: International Data Corp. of Framingham, Mass., forecasts that 50 million such devices will be sold in 2002.
A few years ago, it looked as though Spyglass could have been a contender. In 1994, for $13 million, it licensed its Web browser code to Microsoft, which made the technology the basis of what became Internet Explorer. Having reinvented itself, Spyglass is now the only publicly traded specialist in non-PC Internet software and services. The two leading platforms for this not-quite-emerging market are Microsoft's Windows CE and Sun's Java, and Spyglass considers itself an arms supplier to both sides.
The AOL news, as well as a recently inked deal with cable set-top box designer General Instrument, whet investors' appetite for Spyglass shares. The stock went vertical the week of Nov. 23. Even with a recent pullback to $21.75, it has quadrupled year to date in this overheated market for Internet stocks. Analysts advise caution in the near term but still describe it as a long-term buy based on the opportunities ahead.
"In the last several months, we are starting to see signs that this is a real market," said Frank Sparacino of Barrington Research in Chicago, who expects the company to nudge into profitability this quarter. "There's a great deal of volatility in the stock, but the market they are in is good and their clients are big, established names."