AltaVista opportunity slipping away?

Summary:After its spinoff from Compaq was announced, the search engine has been grinding gears.

When Compaq Computer Corp. announced plans to spin off its AltaVista portal Web site in January, conventional wisdom held it would be the biggest Internet initial public offering of 1999. Compaq pledged aggressive enhancements that would impress investors and make AltaVista competitive with the likes of Yahoo!, Excite, Lycos and MSN.com.

But four months and $500 million worth of acquisitions later, not much has changed at AltaVista.com. The site has slipped out of the Internet's top 10 list, its chief technology officer just quit and many analysts think AltaVista's window of opportunity is closing fast.

When then-CEO Eckhard Pfeiffer announced Jan. 26 that Compaq (NYSE:CPQ) planned to spin off its AltaVista search engine (See story), there was little surprise. With portal sites like Yahoo, Excite and Lycos commanding huge valuations from investors, it seemed obvious that Compaq would try to cash in on its valuable Internet asset.

Soon after, the company gobbled up two portal-enhancing Web sites: Shopping.com, an e-commerce mall, for $220 million, and Zip2.com, a city guide that competes with Microsoft's (Nasdaq:MSFT) Sidewalk and America Online's (NYSE:AOL) Digital Cities, for a reported $300 million. (Microsoft is a partner in MSNBC.)

It's been all downhill
But Compaq's rocky ride since has included a dismal fourth quarter, a stock slide, the ouster of Pfeiffer and little evidence that Zip2 or Shopping.com was becoming part of an AltaVista portal.

And now comes word that AltaVista's co-creator and chief technology officer, Louis Monier, who stood to make a huge windfall from the IPO, has quit the company to join a start-up called Doublebill.com.

Does this mean the AltaVista IPO is in jeopardy? Not at all, said AltaVista CEO Rod Schrock.

"The IPO is going to happen this year," Schrock said. "We're going to be very bold and decisive."

But there's been nothing bold and decisive about AltaVista so far this year. In fact, Altavista.com doesn't even link to Zip2.com, and its links to Shopping.com are barely noticeable, mixed in among links to other e-commerce sites. That has some analysts wondering about the company's ability to make the nimble changes necessarily to compete in the fast-paced portal arena.

"You'd think at this point in time they'd put up a link or at least not promote competitors like Ticketmaster," said Lisa Allen, an analyst with Forrester Research. "You've got to act quickly. Is this Internet time? No, it's downtime."

Reflects Compaq's problems
Art Russell, an analyst at Edward Jones, said problems at AltaVista mimic problems the rest of Compaq has had.

"There's a lot of bureaucracy at Compaq," he said. "They're spinning their wheels. You haven't seen the kind of changes you would expect if they're trying to pull the sites into a portal."

And there's more bad news. Despite AltaVista's integration of Shopping.com during the past two months, traffic to that site has actually slipped, according to NetRatings. In fact, traffic to all of AltaVista slipped from March to April, dropping the search engine out of the top 10. Further, its visitors are the "least sticky" of any Net portal's: While the average visitor to Yahoo stays on Yahoo sites for more than an hour, according to NetRatings, AltaVista's users leave after 11 minutes. And they don't head to Shopping.com, Zip2.com or even Compaq.com to shop for Compaq products. Most of them head to Yahoo-owned Geocities, Lycos-owned Tripod or AOL.com

Focus needed?
"If they're trying to be a consumery search site ... then driving traffic to Geocities or Tripod is OK," said Peggy O'Neill, Internet analyst at NetRatings. "But if it's supposed to be a commerce vehicle to push Compaq boxes, then there's a problem."

All this is easily explained, says Schrock. Compaq is simply pulling its punches while it works behind the scenes, planning to re-launch a bold new AltaVista site later this year. He said the site has consciously held back on integration of new services while it ramps up back-end technology.

"We're going to take press criticism. I'm not worried about that," he said. "Behind the scenes we're putting together a transaction infrastructure and supply chain to handle a 10-times increase in traffic.... We have focused the last three months on building the company."

And the company hasn't been completely inactive - just Wednesday, Shopping.com announced its "125 percent satisfaction guarantee" come-on. Customers can return any product they buy at Shopping.com for any reason and get a full refund plus a shopping.com gift certificate worth 25 percent of the purchase price. Standing still
That offers little comfort to analysts who see Yahoo, Excite and other top portals securing their leadership positions while AltaVista stands still.

"They were late to the table to turn themselves into a portal and think they could compete," Allen said. "There's also an element of them not having the right people in place who can integrate these new properties and turn them into a new business. Developing content and e-commerce is not like building PCs."

And the loss of Monier had to sting. He wrote the complex algorithm that is the basis of AltaVista's robust search engine.

"My departure was purely for personal reasons," Monier said in an e-mail to MSNBC. "I have pulled AltaVista for four years now, so it was time for me to move onto something new." On April 26, Monier announced he would take a position on the board of directors of a Web site called DoubleBill.com, which has financial backing from Silicon Valley investment banking firm Kleiner Perkins Caufield & Byers. The company is not yet disclosing details of its business.

But a former co-worker suggested to MSNBC that Monier left because he was simply fed up with Compaq's indecision.

"It's got to be a huge frustration for him to see this thing moving so slowly," Russell, the Edward Jones analyst, said. "The longer they screw around with it, the shorter the time frame that window will remain open."

The post-PC sales market
AltaVista is critical to Compaq as it tries to recover lost earnings. Compaq's online PC sales strategy has been in flux - in February, it ordered all Web resellers, including shopping.com, to stop offering Compaq PCs online for 90 days to give the company time to consider its plans. Chief rival Dell currently enjoys an advantage in online PC sales (Dell claims $14 million in daily sales; Compaq says it sells $10 million at compaq.com), but it can't match the Internet eyeballs Compaq commands through the popular search engine.

And with profit margins on PC sales fast eroding, Web sites will be key to tapping a much more profitable business for PC makers - peripheral sales.

"There's a lot of price competition going on with PC market - companies looking to develop alternative revenue streams," Russell said. Each new PC user spends about $500 on joysticks, speakers and other additional hardware and software within 90 days of their PC purchase, he said.

PC makers want consumers to spend that $500 on their Web site instead of in brick-and-mortar stores like CompUSA - particularly because profit margins are much higher on peripherals than PCs.

But Compaq's changes to AltaVista to encourage user loyalty have been slow in coming, as shown by the fact that the Zip2.com community site doesn't show up at all yet.

Compaq has "Probably bitten off more than they can chew," Allen said. "There have been bigger beasts before them to try to crack the local city guide market. These players are still fighting through the muck and mire.... It was probably a bit naive."

What's the rush?
But not all analysts are alarmed by Compaq's seemingly sluggish pace. NetRatings' O'Neill says AltaVista still has a devoted following among the "technical types," who consider it the most powerful and complete search engine. And not everyone thinks the portal window of opportunity is shrinking at the pace of Internet time.

"It's not reasonable to write them off," said Piper Jaffray analyst Ashok Kumar. "It's right in saying so far performance has been lackluster and disappointing.... They have stalled a little bit, but once the new management team is in place, I think they'll be right up there with the big boys."

He added that AltaVista still has some important technological edges over its portal competitors. For one, current Compaq CEO Ben Rosen sits on the board of start-up firm AskJeeves.com, a new site that lets users search the Web by typing questions asked in normal conversational language, using so-called natural language processing. Kumar thinks AltaVista will have an easier time layering in such additional features than other portals.

That's just the kind of patience Schrock is looking for.

"It's too early to make the call. Judge us when we launch the new AltaVista," Schrock said. He would not commit to a time frame for the launch, other than to say: "It's going to be new before the holiday season."

Topics: PCs, Dell, E-Commerce, Microsoft, Start-Ups

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