Questions raised on USA Networks, Lycos integration

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Independent portals crept closer to extinction last week when USA Networks announced a deal to merge some of its properties with Lycos. At the time of the deal, some financial analysts estimated its worth between $18 billion and $20 billion.

While Lycos and USA executives stressed the electronic commerce potential of merging Lycos with USA properties, they were considerably more vague about how this would affect advertising across the multitude of Internet and offline brands involved.

Wall Street didn't react kindly to the news. On Feb. 9, the day the news was released, Lycos' stock fell $33 to $94.25 per share, in the midst of a general market sell-off. Lycos' stock continued to fall the following day with investment banks citing concerns of how this would affect USA Networks' revenue, how the properties would be integrated and if the deal would be approved.


Under the terms of the deal, Lycos would merge with USA's subsidiary Ticketmaster-CitySearch Online (USA owns 60% of the company), as well as other USA Networks commerce units, including Home Shopping Network, Internet Shopping Network/First Auction and Ticketmaster. The new company will be called USA/Lycos Interactive Networks and have combined revenue of more than $1.5 billion. It will reach 70 million TV homes and 30 million people on the Web.

USA Networks Chairman-CEO Barry Diller will continue as chairman, and Lycos' Robert Davis will remain president-CEO and will be a member of the new company's board of directors.

But just how closely USA/Lycos will be aligned with USA Networks remains to be seen. A Lycos statement described the new company as having a "significant relationship" with USA, with promotional opportunities across its broadcast and cable assets, which include USA Network, the Sci-Fi Channel, Studios USA and USA Broadcasting. USA says its TV reach is 90% of U.S. TV-viewing households.

"This is being positioned as a commerce play," said Drew Ianni, analyst at Jupiter Communications. "I think it could be potentially a powerful addition to the Lycos Network." Yet, he added, "it remains to be seen who owns ad sales."

He noted that Lycos has established itself as a portal by successfully leveraging a network ad sales strategy. In '98, it purchased online communities Tripod and Angelfire, as well as Wired Digital, which runs the HotBot search engine, and began selling ad packages across the network.

"I don't think people understand how well these pieces are going to fit together," said Jan Horsfall, Lycos VP-marketing. "The line between direct marketing and advertising on the Web has been blurring for a while--that's why advertisers have been so fixated on click-throughs."


With Home Shopping Network and its Web site merged into Lycos, Mr. Horsfall said, "Now I have this whole commerce platform I can attach to the ad buy."

Lycos sales staff were meeting last week to start thinking about how to integrate sales between the various services. Mr. Horsfall said he sees cross-promotional opportunities between Lycos and offline assets such as Home Shopping Network and Ticketmaster. He also sees ways to link Lycos with sites such as the CitySearch guides.

While an important deal for Lycos, most analysts agreed it wouldn't propel the site into the top tier.


"Lycos needed a partner," said Chris Charron, analyst at Forrester Research. And while the deal strengthens Lycos strategically, Mr. Charron said he doesn't see the new company challenging America Online or Yahoo! "in the short term or at all."

However, he does see the deal's ripple effects in the form of more mergers, particularly between commerce sites and portals.

How Lycos will brand the new company and the subsidiaries is still being decided. Mr. Horsfall said to expect a USA/Lycos ad campaign in the next four to six months, when the deal is expected to close. He also said he expected Lycos' agency of record, Bozell Worldwide, New York, to create that campaign because Lycos was happy with its last work. The TV and print campaign broke late last year and featured a black Labrador retriever named Lycos.

Until now, Lycos has been supporting multiple brands in the Lycos Network. For instance, Wired Digital's HotBot is running a radio and TV campaign from Goodby, Silverstein & Partners, San Francisco. But how long Lycos can afford to support all its brands, in additional to the new ones, is unclear.


"I think that might be an Achilles' heel for them," said Mr. Charron, adding that the strategy might become difficult to sustain.'

Mr. Horsfall defended Lycos' multiple brand strategy, pointing out that sites such as Angelfire had continued to grow organically without offline branding campaigns. But he added, "it's always safe to say you evaluate your portfolio," and take action with brands that aren't performing well.

Copyright February 1999, Crain Communications Inc.

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