Inktomi Scours the Net for Profits

CEO David Peterschmidt explains why the top provider of search-engine technology can recover despite its rough year

The name is a Native-American word for clever spider, and a few years ago Inktomi seemed to be just that. The Foster City (Calif.) company had emerged as the biggest provider of search-engine technology. It was building a business in caching and content-distribution software that would allow users to store information on frequently viewed Web pages to speed up surfing. But as the Internet bubble burst, so did Inktomi's prospects. Perceived as a pure Web play, the company's stock nosedived from an eye-popping high of $241.5 a share a year ago to about $5 today. Analysts remain wary. The company has flirted with profitability but still isn't solidly in the black.

It's been a rough year, but Inktomi President and CEO David Peterschmidt remains upbeat. He believes the spider will regain its balance through the company's research and development initiatives and new products that will help companies build streaming-media networks and broadcast more information over the Internet. Peterschmidt recently met with BusinessWeek Online's and to talk about investors' concerns, Inktomi's new initiatives, and its future. Here are edited excerpts from their conversation:

Q: How do you explain the drop in your share price?


Well, I think the stock dropped like everybody else's. The whole market is down 60% to 70%. The sector collapsed, and I think what's happening now is the market's struggling with the question of what are valuation models. How are we going to value these companies? Quite frankly, I don't think the market's going to figure that out for another six to nine months. I expect stock prices to continue to drift lower, and once they find their bottom, to go flat and stay flat for a couple of quarters. There just isn't any expectation right now about how to value these companies.

Q: You became profitable last year. What are your expectations for profitability this year?


What we told the Street was that we expect to break even. That's because of the slowdown in revenue growth. I expect we'll probably drop below the profit line for a couple of quarters. And that's because I'm not going to cut back on our R&D spending. We have a very aggressive product roadmap, and we're not going to pull back on spending in R&D.

Q: What are some of your R&D efforts?


Well, we're doing something called content networking. That's a network which is aware of the type of content it's carrying, where it's carried, and who sees it. Networks have never been able to do that before. Our R&D effort is in a unified management view of the network -- the ability to control that network out to the edges.

Q: The reason why network intelligence has never really developed was because businesses felt they didn't need intelligent networks. It was easier to [have] big networks with a lot of capacity. Why would they now change their minds?


What makes it different now is you've got streaming going on. But there are a lot of business reasons. Before, it wasn't necessary to know what content got transmitted and where. Now it's important to know how many live streams viewed the Madonna concert, for example. Were there 9 million or 8 million? That becomes important and valuable to a network operator if they want to monetize that network.

Here's an example: We're talking to a retail drugstore chain that's got about 300 stores in England. They want the live-broadcast capability with all of that monitoring capability to do distance learning with all of their retail stores simultaneously. They've gone to their suppliers and said: "We can guarantee you that our sales force in every store can be trained within [a] 12-hour notice when you release a new product into the market. And in return for that, we want either a further discount on the purchase price, or we want a two-week exclusive on that product. We'll guarantee you that product gets properly sold." So that content has to be delivered, and it's important to check it gets there.

Q: But those involve mostly future revenues. What product lines do you expect to be most profitable this year?


The real part of Inktomi's business that has generated profits is the network-product side of our business. That's about 70% of our revenue. There are actually three products in there: The original network-cache product that's called Traffic Server, our content-distribution software, and our MediaBridge software, which allows for live broadcasting over the Internet. Both Traffic Server and MediaBridge will be the fastest growing of our product line and will really constitute the bulk of our revenue and profit.

Q: There are a lot of people trying their hand at caching. What do you think will happen to margins there?


Well, there are two things going on. On one side, edge-of-network caching [placing most-often viewed pages at an Internet node closest to surfers] is becoming commoditized. You saw us announce agreements with HP, and you're going to see us announce agreements with other hardware companies. They want to embed our product in their hardware and sell it as appliances. What I anticipate is all of the new live broadcasting and streaming software that we're bringing online, that's going to be the value-added part. That's where you're going to maintain pretty healthy margins, and you'll see volume pick up in caching. But overall margins will go down because it's being commoditized. And that's why we're letting the hardware guys take it -- because they can dramatically increase our volumes. They've got big sales horses, and they'll go out and do that for us. We'll make fatter margins on things we sell on top of the caching.

Q: You recently began charging sites for being listed in your searches. How's that working out?


Because we have such a large share of the search business -- it's estimated we have somewhere between 45% and 60% of the worldwide search business -- content sites want to know that they're in our database so that they'll be found if people do research. So, for a fee, we'll guarantee that your site is in the database, and additionally, we'll guarantee that your site gets refreshed at a faster rate than we might normally refresh the entire database. And we're getting very good acceptance of that. There's also an agreement that we announced with VeriSign: When people go to get their URL, they can pay an extra fee to VeriSign, which we split with VeriSign, that says that when you turn on your new URL, Inktomi will guarantee that it's in the Inktomi database.

Q: You recently expanded your services for the wireless market. Do you expect wireless to be a big part of your business?


It's early for wireless. We believe that revenue for us of any substance starts probably in late summer, and I think the wireless business for us will take a year or two to really get up and be a significant part of our revenue.

Edited by Douglas Harbrecht