By Nick Patience
A year to the day since Compaq Computer Corp announced its acquisition of Digital Equipment Corp, the PC manufacturer has finally done what DEC executives must wish they had had the nerve to do, and spun out the AltaVista search engine and related services as a separate company with a view to taking it public some time this year. The AltaVista Company will be led by president and chief executive Rod Schrock, previously Compaq’s senior VP and general manager of its consumer PC division and based in Palo Alto, California. Schrock is promising a new business model for the unit, based not on page views or audience reach, but on revenue growth. The AltaVista site has an annual run rate of about $50m at the end of 1998 and he expects to at least double or triple that by the end of this year. Compaq is capitalizing AltaVista Co and will provide the necessary cash and facilities to see it through its first year of existence and after that it’s on its own. Schrock says the company will be in the red for the next two years due to investment in technology and marketing. The irony is that DEC decided against spinning out AltaVista in June 1997 because it wanted to retain the value of an internet-based company in-house. Compaq realized that that cannot be done these days without letting the internet company go free to find its own valuation as a pure internet play in the market. Similar thinking is also behind AT&T Corp’s reported plans to sell its WorldNet ISP to its affiliate cable-based ISP, @Home Networks Inc. However, when Compaq launches AltaVista’s IPO, it is only expected to sell a small proportion of the company to the public in order to retain control. The unit is expected to be valued at anywhere between $1.5bn and $2.0bn at today’s prices, according to reports. To enhance the AltaVista service, Compaq has signed a cross- sharing technology agreement with Microsoft Corp to license the use of its Hotmail free web-based email service which will replace the current AltaVista mail provided by iName. The reciprocal agreement is bad news for Microsoft’s search engine provider, Inktomi, which will see its engine replaced by AltaVista as the preferred search engine on the Microsoft Network (MSN). Along with the current Hotmail, AltaVista is also looking forward to some of the instant messaging and community-building technologies Microsoft is apparently readying for Hotmail, the details of which are unclear, but they are likely to include calendars and schedulers, as well as the instant messaging itself. The email service will be co-branded, but users will be offered an address ending in altavista.com. The inclusion of instant messaging will enable AltaVista users to communicate with MSN’s users, once the technology has been launched. Along with the Microsoft services, AltaVista will also integrate Shopping.com’s e-commerce services once Compaq’s acquisition of the troubled site has been completed. Schrock showed a screen shot of what the site would look like. Since AltaVista’s refresh in late September, Schrock claims traffic has grown by 43% over the previous quarter and revenues in the same time have increased by 64%. Schrock compared the revenue-driven business model with that of Yahoo and Amazon.com. Yahoo has gross margins of around 90%, but high operating expenses, while Amazon has greater revenue potential, but lower margins and expenses of around 15% or less. AltaVista will be a hybrid of the two, he says, with revenues of about three and a half times Yahoo’s by year-end 2002 and gross margins of 30% or less, with operating expenses of 18% or less. AltaVista has always had a good reputation for being one of the most comprehensive search engines on the web, but DEC didn’t wake up to its potential until Compaq was about to acquire it. Schrock says he knows getting the AltaVista brand better known will require great execution, and content partners will be signed he says. Schrock’s successor has not been named yet, but joining him at AltaVista Co will be Ken Barber, former VP finance at the Tandem division as CFO; Kurt Losert, who will continue in his role as VP and general manager AltaVista Search, having been overlooked for the CEO’s role; Greg Memo formerly VP and general manger Presario mobile as the new VP and GM, business and technology strategy; Mike Rubin, previously director of Presario desktops, now VP and GM, e-commerce; and Ronnie Ward, previously VP enterprise solutions division and now the VP and GM, e- services at AltaVista Co. Credit Suisse First Boston analyst Michael Kwatinetz views the deal as positive for Compaq because it enables a valuation to be placed on AltaVista, previously it detracted from earnings and value, he believes. Compaq closed up $2.4375, or 5.2% at $49.125, while Inktomi closed down $18.4375 or 12.4% at $129.8125. (see related story, this issue).
