The economics of the new economy are not exactly evident. Internet portals like Yahoo! and AOL, for example, had to invent whole new business models, finding revenue streams among the variety of free services they provide. In essence this has been the Holy Grail for portals: how to get people to pay for services that others are giving away and how to capitalize on the huge number of eyeballs streaming through ones portal.
In this Case Study, Theodoros Evgeniou, Assistant Professor of Information Systems, looks at Terra Lycos, considered by some to be a second-tier Internet portal, as it tries to compete with the big three AOL-Time Warner, Microsoft/MSN, and Yahoo! by finding new revenue streams.
Terra Lycos was born in October 2000 out of a merger between Terra Networks, a subsidiary of Spanish telecommunications giant Telefónica and US-based Lycos, an Internet portal and service provider. The merger also included a strong role for German media giant Bertelsmann, which agreed to a five-year US$1 billion deal to buy advertising and services from Terra Lycos and offered Terra Lycos exclusive access to its content.
The deal was positively viewed as it combined Terras strength in Latin American markets, the deep pockets of Telefónica, and access to one of the worlds largest wireless networks, with Lycos brand name, online properties, strong US presence and positive bottom line. One shareholder wrote: It makes it a real equal of the Yahoo!s of the world and a great near-equal to AOL. Yet despite a spectacular year in 2000, Terra Lycos was hit hard by the Internet downturn and by 2001 was offering a negative shareholder return of minus 87%. Given that its revenue mix was heavily dependent on advertising (75%) Terra Lycos would need to find new revenue streams.
Getting users to pay for content seemed a likely start. But very few sites in 2001, other than pornography sites, were actually charging for content. AOL had borrowed the subscription concept from cable companies that succeeded in getting people to pay because their programming was considered premium. Yahoo! followed suit, introducing more paid services, and Terra Lycos was looking to do the same.
To build up its content, Terra Lycos began buying stakes in or launching new companies in areas where it did not already have expertise. It invested in travel sites, acquiring a 55% stake in the US booking site OneTravel.com and entered a 50-50 joint venture with the Latin America travel site Rumbo. The company also moved into B2B car sales and B2E (business-to-employee) e-business centers offering administrative functions to small and medium-sized companies. In addition, Terra had acquired two financial sites Raging Bull and Quote.com when it merged with Lycos, boosting content in an area (personal finance) where user-generated income was high.
In the process of acquiring and diversifying its content to attractive more paying customers, Terra Lycos ran across some stumbling blocks: switching acquired companies over to the same platforms and software; resolving branding issues; getting new employees from different countries to embrace a single company culture; and trying to create a coherent range of services. The issues revolving around brand identity got even fuzzier when the company expanded into non-Internet-related sites, such as television programming and print publications. With a new CEO pushing cost-cutting and revenue diversification, Terra Lycos was moving toward the cant miss goal of positive EBIDTA in 2002. Yet given its strong cash position and advantageous geographic positioning, Terra Lycos still trailed the big three in market reach, brand recognition and profits. At this stage in the game, what should Terra Lycos do next?