THE DAY AHEAD: Goto.com's IPO could shine, but revenue picture unclear

After a quiet week in IPO land, look for a big rush today. And Goto.com Inc. (Proposed ticker: GOTO) could be the big winner even though it has a long way to go before proving its business model can fly.

Among the other IPOs on deck today: Viant Inc. (Proposed ticker: VIAN) priced at $16 with competitor AppNet Systems Inc. (Proposed ticker: APNT) pricing this morning. Mail.com (Proposed ticker: MAIL), a free email provider like USA.Net, priced at $7, well below its price range. Streamline.com Inc. (Proposed ticker: SLNE) priced at $10.

Goto.com: Can its business model work?

It won't be easy to get attention, but early indications are that Goto.com should be strong. Goto.com's price range was increased Thursday to $13 to $14 a share from $11 to $13. The 6 million share offering priced at $15.

Goto.com, not affiliated with the Disney-Infoseek Go Network, operates like a typical search engine, but advertisers with the highest bid get the top results. For example, a search on "investing" brings back SS Investor as the top result. That advertiser pays Goto.com 50 cents for a click. The cost to the advertiser is clearly marked.

Pretty trendy, but the jury is still out on whether Goto.com can grow a profit.

Goto.com in regulatory filings calls itself an "online auction where advertisers bid for introductions to consumers seeking information, services and products."

Sounds fine, but Goto.com's biggest problem will be controlling its revenue. Since advertisers pay only for placement and then for each click, Goto.com has no way to predict revenue.

"Revenue and operating results generally depend upon the volume of the searches conducted on our service, the amounts bid by advertisers for keyword search listings on the service and the number of advertisers that bid on the service, none of which are under our control," the company said. "We may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall."

That's a lot of variables to worry about.

So far revenue has been ramping up, but from a very small base. In the September 1998 quarter, Goto.com had sales of $185,000. In the December quarter sales were $580,000. And for the quarter ending March 31, Goto.com had sales of $1.45 million with a loss of $7.3 million.

From Dec. 31 to April 30, Goto.com said the number of consumer searches jumped 85 percent to more than 100 million a month. Paying advertisers jumped 150 percent to about 7,500. And the number of paid click-throughs per month increased 400 percent to over 10 million.

If Goto.com does well with its auction-ad model, the competition will surely follow quickly. If Goto.com's business model is copied it will be difficult to get a mass of advertisers to enter a bidding war for position. The advertisers can simply shop around.

GoTo.com said in filings that it anticipates competition from Compaq's AltaVista, which plans to mirror the Goto.com model. Goto.com also competes with conventional portals and online advertising networks such as DoubleClick Inc. (Nasdaq: DCLK).

Other Goto.com issues to ponder:

The source of traffic: Goto.com gets almost 50 percent of its traffic from default links on the Microsoft and Netscape browsers and a service called Dogpile. The contract with Netscape expires at the end of June and the Microsoft pact ends in September. The costs could go up or the agreements could end.

Network growth: To make Goto.com's auction model fly, the company needs to increase advertisers to stimulate bidding for searches and click-throughs.

Stickiness: Goto.com doesn't interfere with advertisers and consumers by offering silly things like content. However, if the competition adopts Goto.com's model, the company may have to become more of a destination site to hang on to users.

Advisory

ZDII is scheduled to speak with Goto.com CEO Jeffrey Brewer, 30, at 11 a.m. EDT. Brewer has been CEO of Goto.com since March 1998 and previously served as chief technology officer for Ticketmaster Online-CitySearch, Inc.

Brewer makes $85,000 a year and has 1,586,869 options with an exercise price of 15 cents a share. At the offering price of $15, Brewer's options are worth $23.5 million. We assume he'll be in a good mood.

If you have any questions for Brewer feel free to drop them in the talkback below. We'll check them before we talk to Brewer.