A Hidden Goldmine Called Inktomi

The Web site supplier could be the Net's toll collector

Three years ago, it was a hard-knock world for Inktomi Corp. The startup set out with grand plans to become as important to the Internet as Microsoft Corp. was to the PC. But its beginnings were anything but regal. The company's six employees were crammed into a 1,200-square-foot office that they could only reach by stepping over homeless people congregating in front of the door. Their conference room was just big enough for a card table and four fold-up chairs--and its porthole-size window peeked out into an elevator shaft.

How times have changed. This month, Inktomi will move into its spiffy new digs--two 100,000-square-foot buildings with breathtaking views of the San Francisco Bay. The company's market cap is $5.5 billion--five times that of Sybase Inc., the onetime software highflier that Inktomi CEO David C. Peterschmidt once led. Its customer list includes such Net heavyweights as Yahoo!, NBC, America Online, and Excite@Home--making it the world's No. 1 search-technology provider. And it's rapidly expanding into promising new markets--like e-commerce. "I want to make sure that when all is said and done, Inktomi will be a company that is core to the Internet," says Peterschmidt.

For now, though, his company is one of the Net's best-kept secrets. That's because Inktomi operates behind the scenes--supplying Web sites with top-of-the-line software in four product areas: searches, directories, comparison shopping, and speeding Web-page delivery.

The company's low profile conceals an astonishing fact, however. While critics feared Microsoft's dominance would make it the toll collector of the Net, that could instead become upstart Inktomi's oh-so-lucrative lot. When someone searches for info on any of the 50 sites that rely on Inktomi's software, the startup collects a fee of around a half-cent per Web page retrieved. And when a Netizen stops by one of 20 sites that use Inktomi's new comparison shopping service--such as J. Crew or Barnes & Noble--Inktomi and its Web portal partners split commissions, ranging from 5% to 20%.

ROSY FUTURE. It's a Net goldmine in the making. The company is on track to ring up $68 million in sales this year, more than double its 1998 revenues. Analysts estimate sales will again nearly double to $136 million in 2000--when they believe the company will become profitable. Inktomi's stock price has risen from $30 a year ago to about $130 today. "Inktomi is in a great position," says analyst Michael A. Parekh of Goldman Sachs. "Their products are in areas that are key to the future of the Internet." And all indications are that demand for its technology will increase for years to come.

Indeed, if Inktomi continues to live up to its potential, it might start to look more like Microsoft. It's even trying to mimic the software giant's strategy. The key to Microsoft's success is its Windows operating system, for which other software makers have developed thousands of software programs. Inktomi is attempting to create a similar software "platform" with technology for delivering Web pages ultra-fast--signing up software makers that are using it to improve the performance of their products.

But Inktomi isn't home free yet. While no one competes against its entire range of products, the company's offerings are being attacked on all sides--from networking powerhouse Cisco Systems Inc. to whizzy search engine startup Google Inc. Compounding the problem: While Inktomi made its name in search, its other services are less well known, making its expansion into new markets more difficult. And, longer-term, Inktomi faces an even bigger hurdle: Its continued success relies on its ability to solve some of the Internet's biggest technical challenges, like making the Net as reliable as the telephone.

Fortunately for Inktomi and its shareholders, innovation has always been the company's strong suit. The company was founded by Eric A. Brewer and Paul Gauthier, then computer scientists at the University of California at Berkeley. Under a federally funded project, Brewer was trying to prove his PhD thesis--that inexpensive desktop computers wired together could match the sheer data processing power of one pricey supercomputer. To test the computer system, Brewer and Gauthier, a grad student at the time, created a Web search engine, software that sifts through millions of Web pages to quickly retrieve information. The search technology worked so well that they decided to quit academe and start a company.

Inktomi, a Native American word meaning "clever spider," could never have gotten this far based on whizzy technology alone. Its founders realized immediately that they would need management help. Six months later, Peterschmidt, the CEO who oversaw database software maker Sybase's growth from $60 million to $1 billion in six years, came on board. At Sybase, Peterschmidt had beefed up the sales force and targeted new markets such as the financial-services industry. From the beginning at Inktomi, he had expansion on his mind. The day he arrived, he asked the company's 13 employees how they could use their technology in new ways. The answer: Caching, the Net speed-up technology. Peterschmidt set an engineering team to work on it the day they finished the search engine.

Peterschmidt's other crucial move was strategic. Search companies like Excite and Lycos decided to mimic Yahoo and become Web directories and, ultimately, gateways to the Web. But rather than turn Inktomi into yet another Yahoo copycat, Peterschmidt positioned it as a behind-the-scenes provider of essential technology that all of the major Web sites needed. "We are arms merchants," says Peterschmidt. That approach has paid off handsomely for Inktomi. By not competing with its potential customers, the company has avoided conflicts, enabling it to sell its products to the fiercest of rivals, like Yahoo and AOL.

Luckily for Peterschmidt, there's no end in sight when it comes to demand for ever more powerful search capabilities. The number of publicly accessible Web pages is expected to grow from 800 million today to 8 billion by 2002, according to researcher International Data Corp. To deal with that tsunami of data, Inktomi this summer introduced a new directory of Web pages, called the Inktomi Directory Engine, designed to help speed and improve the accuracy of searches.

WAKE-UP CALL. With the explosive growth in the number of Web pages, though, it's no surprise that new search-engine companies are intent on stealing some of Inktomi's lucre. Earlier this year, Inktomi got a major wake-up call when its first customer, the HotBot Web site, announced it was adding a second search service from Direct Hit Inc., a year-old Wellesley (Mass.) startup. The reason? While Inktomi is considered good at getting results from basic queries, Direct Hit's analysis of many similar searches improves the relevancy of search results. According to market researcher Media Metrix, 53% of all Web searches now use Direct Hit's technology in addition to traditional search engines.

Now comes Google, a new search-technology provider that claims its searches are faster and more accurate than Inktomi's. "We think that there is a lot of room for innovation in the world of search," says Larry Page, co-founder of Google, which is based in Mountain View, Calif. Google has raised $25 million from backers, including the influential Kleiner Perkins Caufield & Byers.

Inktomi isn't running scared. It plans on continually beefing up its search technology. And with the competition in search heating up, Peterschmidt's diversification push is starting to look smart, indeed. Early last year, the company introduced its Traffic Server software, which lets Internet service providers (ISPs) store often-viewed Web pages on computers scattered around the world where they're just a quick click from consumers' screens--a practice called caching. Already, more than a half-dozen companies have signed on, including Net video leader Real Networks Inc.

Caching radically improves the performance of Web sites. For Excite@Home, which is using Inktomi's software, at least half of the traffic running on the network doesn't have to travel across the Internet backbone, says Milo Medin, Excite@Home's chief technology officer. On a busy day, that can shave crucial seconds off the time it takes for a viewer to see a Web page.

TROJAN HORSE. Unfortunately for Inktomi, this market is under attack from competitors, too. And they're the giants like Cisco Systems and Novell Inc., which tower over Inktomi in size and resources. The market for caching is now about $100 million and is expected to grow to $1.6 billion by the year 2002, according to the Internet Research Group. So chances are Inktomi will have more adversaries in the future. Even Microsoft is expected to add some basic caching capabilities to its Web server software, something that it bundles for free with Windows NT software.

Wary of all the competitive threats, Peterschmidt is hoping to improve Inktomi's prospects by targeting new kinds of customers--not just the large ISPs and mega-portals. Recently, he has inked deals with dozens of smaller, niche players like music site kadoodle.com, set to launch in October. The rationale, say Inktomi executives, is that because the search technology is so flexible, it can be tailored for specialized searches. A music site like kadoodle.com can get a search engine designed by Inktomi to filter out any unrelated Web pages. A search for the rock group REM, for instance, wouldn't return any pages related to dreaming and rapid eye movement, also known as REM.

Peterschmidt's hope is that search is the Trojan horse that gets Inktomi's foot in the door of new customers--making it easier to sell them the rest of the company's portfolio of products. Especially promising in this market are the new shopping service and technology that helps sites build and maintain their own Web site directories. For example, when someone does a search on a site focused on backpacking, not only would the search engine deliver a long list of Web pages based on the key words supplied, but it could also dish up a list of backpack merchants, plus a directory that lists related sites or subjects.

The way the Net is expanding, there's no end in demand for the basic network plumbing that Inktomi supplies. The question is: How quickly can it expand into new markets? For its founders, the pace has been dizzying. "When you hire folks, especially in the early days, you sell them a bill of goods and a promise," Brewer says. "Then you have the on-going burden of making that vision come true." Brewer and Peterschmidt have kept their promises so far. And they no longer stumble over homeless people when they go to work. Now they just have to worry about tripping over themselves as they race to capitalize on what may be some of the sweetest of sweetspots on the Web.

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