Searching for Solid Ground at Terra Lycos

Now a global portal, it's still dependent on a sickly online ad market. Plus, it's shy of compelling content and management depth

By David Shook

Less than a year after Spain's Terra Networks acquired Massachusetts-based Lycos -- forming a global network of free Web portals under the Terra Lycos (TRLY ) name -- the once-famed portal pioneer is facing a tough situation in an even tougher online advertising market in the U.S. The company has a strategy in place to be a key player selling mobile Net access in Europe and Latin America, but it may be difficult to pull off.

Already, longtime Lycos CEO Bob Davis has resigned. He's not alone. Among the recently departed are Chief Operating Officer Abel Linares and Executive Vice-President Ron Sege. And Chief Financial Officer Ted Philip has been reassigned to a senior vice-president post.

The company didn't attribute the departures to managers not seeing eye-to-eye with Chairman Joaquim Agut, but observers say such clashes were apparent from the start. "There were some real differences in opinion," says Goldman, Sachs & Co. analyst John Segrich. Compounding the problem is a report in a respected Spanish weekly magazine that Agut made anti-Semitic remarks at a recent dinner party. Agut has vehemently denied he made the comments. The company could not be reached this week.


  The management departures and uproar over Agut's alleged comments come in the wake of a widespread online advertising downturn that has crippled even the biggest free Web portal of them all: Yahoo! Terra Lycos, whose biggest shareholder is Spanish phone giant Telefónica, is no doubt vulnerable to the slowdown, too. Its stock price reflects the ad-market exposure: Shares are trading at $11.25, down 90% from a 52-week high of $109.

Given that Terra Lycos is in such a state of flux, investors may want to wait to see if the company resolves its apparent leadership turmoil and until dire forecasts about the ad market subside. Ad revenue is a huge chunk of Terra Lycos' bottom line -- although the company claims to be emphasizing the potential for subscription services and pay-per-use mobile access plans in Europe, where many people connect to the Net from cell phones. Still, without ad-revenue growth next year, this company's worst days may still be ahead of it.

"We are now expecting the online advertising market to decline by 25% in 2001," wrote Merrill Lynch & Co. analyst Peter Bradshaw in a Mar. 14 note to investors on Terra Lycos' prospects for the year. "Around 55% of Terra Lycos' sales originate in the U.S., primarily from advertising. With the U.S. online advertising market expected to contract from $8 billion to $6 billion in 2001, Terra is clearly not immune."


  One look at offers a picture of a portal struggling with not enough content deals and far less news and entertainment variety than Yahoo! or America Online. Consider the Lycos auction channel On Mar. 14, in the cycling section, only two bicycles were for sale. Meanwhile, the news channels are fed almost entirely by wire services. These are the same Associated Press and Reuters stories any Web user can find on dozens of sites.

How much pain is there on the bottom line? On Feb. 27, Terra Lycos said its net loss for fiscal 2000 widened to $507 million, from $71 million a year earlier -- due in large part to a series of Web acquisitions last year. For first-quarter 2001, analysts are forecasting sales of about $160 million to $170 million -- below the company's own forecasts of $174 million.

What can stop the bleeding? Perhaps a new leader at the helm in Europe could coalesce the portal's strengths into Telefónica's mobile Internet businesses. This is where much of Terra Lycos' growth may be derived. "In both the European and South American markets, there is strong growth in the field of mobile services, and in Europe broadband is gearing up," says Monique van Dusseldorp, CEO of Dusseldorp & Partners, an Amsterdam-based research company focused on European Internet initiatives.

The idea is that Terra Lycos would be the portal through which all those mobile-phone users would reach the Internet and receive content -- not just from Terra Lycos but from its major partners -- conglomerates such as Germany's Bertelsmann. "The Latin American market is where this company should see a significant amount of growth over time," says Goldman Sachs' Segrich.


  But it's unclear whether Terra Lycos has the right person in charge in Europe to accomplish this huge task, and it may still be looking for that special someone. For the past few months, the former head of Yahoo! Europe, Fabiola Arrendondo, has been rumored as a possible candidate. One European Internet consultant says the company is very much interested in Arrendondo. But one analyst who knows Arrendondo says they are probably just rumors. "We had dinner with her a few weeks ago, and she said she wasn't interested," the analyst says. Arrendondo could not be reached for comment.

In fairness to Terra Lycos, it hasn't been given enough time to live up to its goals -- one of which is surpassing Yahoo! as the dominant free Internet portal on the Web. Terra Lycos' average daily page views rose 227%, to 350 million in December, compared to the same period a year earlier. But Yahoo! boasted traffic of 900 million page views per day in December. Clearly, Terra Lycos has a ways to go, but the Spanish and American outfits completed their merger only five months ago.

Having Telefónica and Bertelsmann as partners can be a huge advantage for Terra Lycos because it can supply them with customers. "Here in the U.S., we have free Internet service providers and free portals. In Europe, there is so much revenue derived from Web users just being online. Users pay by the minute for access," says one European Internet consultant who has worked with Terra Lycos. The biggest challenge Terra Lycos faces in Europe may be that the company has yet to create a strategy to compete against companies like France Telecom and Vodafone in the mobile-access market.

Before Terra and Lycos merged, Lycos called itself the leading Internet network and a sprawling presence that reached half the people on the Web. Right now, however, it sounds like little more than hype. Given that the company's prospects will very likely get worse before they improve, investors who wait before peering into this portal may be the wisest.

Shook covers financial markets for BW Online in New York

Edited by Beth Belton

Before it's here, it's on the Bloomberg Terminal.