AltaVista searches for profits

Digital Equipment's AltaVista now sells ads for its popular search site, but in a fiercely competitive market, it's unclear if that will be enough to make the business unit profitable.

Digital would like to see the AltaVista division become a good candidate for an initial public offering. The division has set no date yet for an IPO, but is clearly tweaking its business model before subjecting itself to Wall Street's scrutiny. The company registered for an IPO in August saying it planned to raise as much as $50 million.

While a company spokesman declined to offer up-to-date financial details about AltaVista, Digital's August prospectus revealed that the division lost $29.9 million on revenues of $3.6 million for the fiscal year that ended June 29.

Today's decision to sell ad banner space for the first time on the AltaVista site may well lay the groundwork for the delayed IPO, according to at least one stock market analyst.

"I expect AltaVista to do at least as well and maybe better than the other search engines because they have a better engine and more users," said John Puricelli, a software industry analyst with the brokerage firm A.G. Edwards. AltaVista is one of the busiest sites on the Web with about 24 million hits a day.

But, he pointed out, the competition for ad dollars among the search engines is still cutthroat. Yahoo, Excite, and Infoseek have all lost millions this year, despite spectacular ad revenue growth.

And AltaVista's entry into ad sales may confuse customers, since the company already licenses its search engine to at least one competitor, Yahoo.

Digital signed the deal with Yahoo in June to derive revenue. Financial terms of the deal were not disclosed, but Yahoo officials said both companies will share revenue from targeted advertising based on AltaVista searches.

Nevertheless, AltaVista has brand-name recognition that is likely to appeal to advertisers and perhaps Wall Street as well. And selling ads is only part of AltaVista's business plan.

The unit is also pursuing a series of other revenue sources including sales of a family of six software tools for building and managing Internet and intranet sites; licensing agreements for "mirror sites" in Australia and Sweden; and additional fees from Yahoo and SEARCH.COM (a member of the CNET family.)

Digital is working with DoubleClick, the recently formed Internet division of Madison Avenue's Poppe Tyson ad agency, to sell targeted ads that are delivered according to the keywords entered by each user.

Partly because of this innovative sales approach, AltaVista may well be able to benefit from the growing market for Net ad sales. According to Jupiter Communications, more than $300 million of ads will be sold this year, 40 percent of it by search engine companies.