April 30, 1998 8:15 AM PDT

Netscape extends search contracts

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As the clock runs out today on agreements between Netscape Communications and its four main search partners and Netscape works on plans for its own search engine, the companies have agreed to extend their current contracts for between 30 and 60 days, according to Netscape.

Netscape currently maintains with Lycos, Excite, Infoseek, and Yahoo deals under which those search and directory companies pay Netscape to be featured as premier providers on its highly trafficked search page.

Under the current arrangement, Netscape rotates these four companies as the default provider. According to documents filed with the Securities and Exchange Commission, for the deals covering April 30, 1997, to April 30, 1998, Excite paid a minimum of $8.3 million for 40 percent of the impressions, Infoseek paid $12.5 million for 35 percent, Lycos paid $4.7 million for 20 percent, and Yahoo paid $4.7 million for 5 percent.

All the involved parties have been in the process of renegotiating those deals, but search providers have balked at signing any deals before Netscape selects a partner for its own branded search engine, which the company announced last week. Other concerns of search companies include the amount of rotations that will be available to the other premier providers and the fee Netscape will charge after it launches its own engine.

Just which search provider winds up striking a deal with Netscape has become a subject of intense speculation. Analysts point to Infoseek as a likely candidate because of the relatively high proportion of its traffic (26 percent) that currently comes from Netscape's search page.

Lycos has not ruled out making a deal to be Netscape's search partner, according to chief executive Robert Davis, who contradicted published reports. Davis told CNET's NEWS.COM that his company would be interested in partnering with Netscape on the Netscape-branded search engine "depending on what the business arrangement will be."

Excite is reportedly still under consideration. Analysts doubt Yahoo will wind up the partner. Inktomi's relationship with Microsoft makes it an unlikely candidate as well.

Partnering with Netscape on its search engine may wind up being a double-edged sword.

"It's a very awkward position for the partner to be in," said Volpe Brown Whelan equity analyst Andrea Williams. "They would be in a two-year deal with Netscape, which [according to reports] would get both cash and an equity stake in the company, only to usher in a competitor. It's questionable what you get if you win. If you win, do you really win?"

In addition to its deals with the four "premier" search providers on its search page, Netscape also maintains deals with five search and directory companies that are featured as "marquee" partners. These providers get a link on the Netscape search page, but they are not rotated into the default search position. The five are WebCrawler, AOL NetFind, HotBot, LookSmart, and Snap, a division of CNET, which publishes NEWS.COM. Contracts with these five providers also were set to expire today but have been extended for 30 to 60 days.

What kind of deal Netscape winds up cutting with the Netscape-branded search engine partner is a matter of speculation at this point. But what appears clear is that the search providers will get fewer default rotations once Netscape enters the picture with its own service.

Mike Homer, who heads Netscape's Netcenter revamp, said the company plans to continue offering the other search engines to its users.

"We will continue to have third-party search services. Netscape will be one of the many offered," said Homer. He denied Netscape is looking at making its service the only search engine on Netcenter.

The search engines largely say that they are not overly concerned with a reduced cut of the action. They note the proportion of the traffic they receive from Netscape's Web site has greatly declined in the past year.

"If we lost a small percent of the rotation we are currently receiving, it would not have any effect [on our revenues]," said Lycos's Davis. "No search engine is sold out of its available inventory [for ads]."

And given the traffic growth that search engines have encountered, any lost traffic from Netscape may be offset by the growth the industry is currently experiencing, search executives note.

Meanwhile, another question search engines face is whether Netscape will greatly increase the fees it charges to be in the rotation, said Robert Hood, chief financial officer for Excite.

"After we hear what [Netscape] has to offer, we'll decide what we want to do," Hood said.

Jeff Mallett, senior vice president of operations for Yahoo, also noted that the company is waiting to see what Netscape's underlying search program will look like before making a decision to extend its contract.

Outside the premier provider button with Netscape, Yahoo also has a two-year deal to operate and sell advertising space on "Netscape Guide By Yahoo." There is one year left on that deal. Under that arrangement, Yahoo guaranteed Netscape $4.7 million against shared ad revenues for the first year and up to $15 million in the second. And as part of the deal, Yahoo paid Netscape a nonrefundable, up-front "trademark license fee" of $5 million.

Analysts note that the combination of declining click-through traffic and a lessening proportion of default rotation sooner or later may separate Netscape from its current partners.

"Yahoo may grin and bear it, as some of the other sites will, for as a long as they can," said Forrester Research analyst Chris Charron. "But six months from now, if Yahoo's traffic [coming from Netscape] drops from its current 8 percent to less than 5 percent, Yahoo is likely to jump ship."

Mary McCaffrey, equity analyst with BT Alex.Brown, agreed. "My sense is that Yahoo will be a competitor to Netcenter over time and will wean themselves away," she said. "They all could get phased out, but there could be continued relationships that would be for smaller amounts of money, and a special relationship with one or more companies" to build the Netscape-branded engine.

Paradoxically, while the search engines presently pay Netscape for the privilege of appearing on the Netscape search page, Netscape remains dependent on them to make that page worth visiting.

"Even though they want, in time, to cut the umbilical cord with all these companies, Netscape can't do it until they've done a bit more work," Charron said. "They can only do that once they've developed their own content and features--like their own email and news--so that users have reason to stay."

Indeed, analysts say one of Netscape's demands in the current negotiations involves increasing recirculation to Netscape pages. These provisions would redirect users back to Netcenter or Netscape search once they had run a search on another search engine.

"Portals are receptive to that in direct proportion to their dependence on Netscape," Charron said. "Yahoo is likely to say, 'Forget about it.' But Infoseek is likely to accept it."

Whatever its value in driving traffic to the search sites, Netscape's search page remains extremely valuable Web real estate. But the value of that property is entirely contingent on the search button at the top of its Navigator browser, and therefore on the company's ability to stave off the competitive onslaught of Microsoft's Internet Explorer browser.

"Either Netscape maintains 60 percent browser market share or Microsoft winds up with 80 percent," said Bruce Smith, a New York City-based independent Internet analyst. "That's just the way software tends to go. Microsoft is gunning for them really hard, and it's really up in the air. If Netscape maintains 60 percent, they could make a business out of Netcenter. Everything hinges on keeping 60 percent."

 

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