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NBC to Merge Internet Units With Xoom.com

Media: Network seeks to gain bigger share of online audience. Combined entity would be called NBC Internet, or NBCi.

May 11, 1999|MICHAEL A. HILTZIK | TIMES STAFF WRITER

Striving for a greater share of the ever-nebulous online audience, NBC on Monday announced that it plans to merge several of its Internet properties with Xoom.com Inc., a rapidly growing but so far profitless online direct marketing company, to create a new company known as NBC Internet.

In addition to Xoom.com, the new entity would encompass Snap.com, a Web search and portal site NBC owns jointly with CNet Inc.; a 10% stake of the financial news-oriented CNBC.com Web site, which NBC expects to eventually become an online juggernaut; NBC.com; and several other, smaller properties.

In addition, the merged company--which would also be known as NBCi and be largely controlled by NBC--would acquire up to $880 million in NBC advertising time over its first 10 years. Such network advertising air time is coveted by online companies because numerous surveys have shown that television promotions are highly effective in attracting viewers to the Internet.

The ultimate goal, NBC executives said Monday, is to convert the network TV audience into a community of online shoppers--and to gain a commission on each commercial transaction.

"This is all about how to take TV viewers and make them Internet users, and then developing them into buyers," said Tom Rogers, president of NBC Cable and head of the network's Internet operations, in a conference call with journalists Monday. NBC also hopes to sell ads on all the sites as a package deal.

NBC has run neck and neck with Walt Disney Co.'s ABC in terms of the enthusiasm with which it has embraced the Internet as a complement to its broadcast and cable businesses. NBC, like Disney with its ubiquitous promotion of its Go Network Web site, has strived to create an online brand name through Snap.com, which claims about 2 million registered users.

The addition of Xoom.com would contribute 8 million more registered users. Xoom.com operates by offering visitors free home pages and other services in exchange for their e-mail addresses, which it then uses to pitch services and merchandise to them online. Xoom.com Chairman Chris Kitze, who would become the new entity's chief executive, said the services would rank seventh among Web sites in combined "reach," a measure of unique visitors to the sites in a month.

Xoom.com is typical of fledgling Internet companies in that it has consistently operated in the red, largely because of the marketing expenses associated with attracting a large cohort of registered users. For the year ended Dec. 31, the company lost $10.8 million on revenue of $8.3 million, of which about two-thirds came from e-commerce and a third from advertising.

The proposed merger lacks the implausibly stratospheric valuation figures that generally get tossed around when one Internet company is taken over by another Internet company in an all-stock deal--such as Yahoo Inc.'s acquisition of Broadcast.com for $5.7 billion in Yahoo stock. But this deal does resemble several other deals in which Internet companies have merged with traditional media firms at much lower valuations--such as NBC's purchase of 19% of CNet and 4.9% of its Snap service for $64 million last June.

In this case, NBC, which is owned by General Electric Corp., would be contributing several operating units whose future profitability is still speculative, along with advertising time, the real value of which may be hard to pinpoint.

The deal also represents an effort to avoid the confusion that has hampered shareholder acceptance of one other recent Internet deal--the proposed merger of the search company Lycos Inc. with assets of USA Networks Inc. That merger agreement, which is at risk of collapsing, would involve combining a pure Internet company with such traditional "brick and mortar" assets as USA's Home Shopping Network, which are valued by sharply different yardsticks.

Indeed, Internet investors appeared to give the deal a nearly unalloyed blessing Monday. Xoom.com rose $6.75 to close at $81.88 on Nasdaq, and CNet shot up $22.44 to close at $136.19, also on Nasdaq. GE fell $1.19 to close at $108.75 on the New York Stock Exchange.

Xoom.com's Kitze argued that the potential growth of the combined services, enhanced by NBC's marketing power, justified investors' enthusiasm.

"The Peacock is one of the most recognized brands in the country," he said, referring to NBC's distinctive symbol and nickname.

But some industry analysts were skeptical that the disparate services that would make up NBCi would make an attractive package for advertisers.

"I'm not sure what, beyond aggregating eyeballs and reach, NBC is contemplating here," said Lisa Allen, a senior analyst at Boston-based Forrester Research. "The aggregation of sites is something of a mishmash. With CNBC alone, you know the target audience. But how do you sell this to advertisers?"

After the merger closes, which is expected in the third quarter, NBC will own 49.9% of NBCi, with an option to increase its stake to 53%; CNet's Snap will own 13%; and shareholders of Xoom.com, 34%. NBC President and CEO Robert Wright will be NBCi chairman.

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