Terra Lycos, Inc.

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Terra Lycos, Inc.

Calle Nicaragua, 54
Barcelona
Spain
Telephone: 34-91452-3000
Web site:http://www.terralycos.com
400-2 Totten Pond Road
Waltham, Massachusetts 02451
U.S.A.
Telephone: (781) 370-2700
Fax: (781) 370-2600

Public Subsidiary of Telefonica, S.A.
Incorporated: 1995 as Lycos, Inc.
Employees: 3,196
Sales: $40.6 million (1999)
Stock Exchanges: New York Mercado Continuo
Ticker Symbols: TRLY (ADR); TRR
NAIC: 514191 On-Line Information Services

Terra Lycos, Inc. was formed in October 2000 by the merger of Spain’s Terra Networks, S.A. and the popular Internet portal and search engine firm Lycos, Inc. Pittsburgh-based Lycos grew from its origin in 1995 as a search engine to become a multi-branded Internet portal operating several different web sites that offered a variety of services. Lycos formed partnerships with numerous content providers for such areas as books, health information, news, and more. After going public in 1996 it acquired a wide range of companies providing content and services. It also expanded internationally by forming joint ventures in Asia, Japan, Latin America, and Europe. The acquisition of Lycos by Terra Networks gave Terra Lycos unprecedented access to more than 50 million telephony and wireless customers throughout the world.

A Leading Internet Search Engine: 1995-97

Lycos, Inc. was created in 1995 when CMG@ Ventures, the strategic investment and development arm of CMG Information Services, Inc., purchased the exclusive rights to Lycos Spider Technology from Carnegie Mellon University. Lycos was established as a subsidiary of CMG @Ventures, which later became CMGI Inc., to develop and market the technology. Lycos Spider Technology utilized software “robots” to scan the Internet and abstract the home pages that it found. Michael Mauldin, who led the development of the technology at Carnegie Mellon, became Lycos’s chief scientist. Carnegie Mellon received $500,000 in cash, a 20 percent stake in the company, and royalties. Later, when a patent was awarded for the spidering technology that Lycos used, it was granted to Carnegie Mellon University but was owned by Lycos. The name Lycos was derived from a Latin word for a special kind of spider that leaves its web to hunt.

At the time Lycos was established as a separate company, it had built a catalog of more than 3.7 million Internet pages and had nearly 3.5 million hits a week. Lycos planned to offer advertising space on its site, to license key components of its search technology, and to develop products based on its technology. One of the first products under development was called Spider in a Box. Lycos planned to ship this shrink-wrapped version of its web crawler in 1996 for use in corporate intranets and wide-area networks (WANs). In early 1996 Lycos offered a free product called a2z, which categorized Lycos’s database of 19 million URLs by subject. However, a2z was dropped later in the year, but Lycos would continue to try to create a classified directory of web sites.

In April 1996 Lycos was one of four search engine companies that had their IPOs that year. Yahoo!, the best-known search engine, InfoSeek, and Excite.com, which was produced by Architext, also went public. Following their successful IPOs, other companies announced plans to go public or provide commercial searching products. Digital Equipment Company (DEC), which developed the AltaVista searching technology, planned to develop products for the corporate intranet market.

Lycos launched its licensing program in April 1996 through an agreement with the Scandinavian newspaper the Swedish Post. Lycos was the first Internet search engine to license its search and index technology to smaller sites. In another partnership Lycos and book publisher Simon & Schuster formed the Lycos Press as a three-year co-publishing venture. The first title was to be called Lycos’ 250,000 Best World Wide Web Sites.

Throughout 1996 Lycos continued to upgrade its search engine. The first upgrade, called CentiSpeed, performed 4,000 queries per second, four times as many as its nearest competitor. It also supported multiple search crawlers and employed a technology that let the spider continue to search while waiting for a slow site to connect. Through an agreement with InfoSpace Inc., Lycos users could access InfoSpace’s People Directory, which contained more than 100 million U.S. and Canadian business and public telephone numbers, and AccuMail, a large e-mail directory. Later in 1996 Lycos added the capability to search for individual sound, video, and other multimedia files. Lycos claimed that it was the first search engine to enable users to search for individual multimedia files. Lycos also added a city guide that featured 400 cities, and it established a Club Lycos for users that provided them with discounts with merchants such as Southwest Airlines and Avis car rentals. In addition to adding new features and upgrading its search engine in 1996, Lycos redesigned its graphic interface to look like an Internet portal.

Lycos’s first international venture was Lycos Europe, which was formed in May 1997 as a joint venture with German media conglomerate Bertelsmann AG. The venture planned to provide native-language Internet navigation centers in 37 European countries.

In mid-1997 Lycos announced it would introduce two Intranet search engines that combined Lycos search technology with a publishing engine from Inmagic Inc. The Lycos Intranet Spider, priced at $995, performed basic intranet searches and navigation, while DB/Text Index Spider ($7,500) performed database searches.

For its fiscal year ending July 31, Lycos’s revenue jumped from $5.3 million in fiscal 1996 to $22.3 million in 1997. Later in the year Lycos surprised analysts when it reported its first profitable quarter ending October 31, 1997. Analysts noted that Lycos had recently signed a three-year agreement with Barnes & Noble, whereby BarnesandNoble.com became the exclusive bookseller for Lycos. Lycos would receive a percentage of book sales Generaled through its site.

Adding Content Providers, Making Acquisitions, Pursuing Multiple Branding Strategy: 1998

In early 1998 Lycos announced it would acquire Tripod Inc., for $58 million in stock. Tripod provided free web pages to about one million users, with news and commentary tailored to young adults. The acquisition was expected to increase traffic to the Lycos site and was part of Lycos’s strategy to build online communities around targeted content. Both Lycos and Tripod were among the top ten most visited sites on the Web, with Lycos recently introducing e-mail and chat capabilities.

Throughout 1998 Lycos continued to add content providers to its site. In March, Preview Travel became the exclusive multi-service provider of travel reservations on Lycos’s Travel Web Guide and Travel Network in a deal valued at $4.2 million. CDNow became the exclusive retailer of music-related products on Lycos and Tripod sites, with CDNow paying Lycos $18.5 million over three years to be featured on Lycos’s Shopping Network and Entertainment Web Guides as well as on music-related search results pages, banner ads, and links. Other deals were struck with contact management site PlanetAll and career sites The Monster Board and Online Career Center. Lycos also took a minority interest in its e-mail provider, GlobeComm Inc., for about $4 million.

According to one survey, Lycos ranked sixth among popular sites with 15 million unique visitors in March 1998, behind leader Yahoo! with 32 million. Lycos acquired Pittsburgh-based WiseWire, a software firm whose technology Lycos had been licensing since November 1997, for nearly $40 million in stock. WiseWire software was used to create Lycos’s search categories as well as to rate sites by Lycos users. Lycos CEO Bob Davis claimed that Lycos’s categories were “incredibly more expansive” than Yahoo!’s because of the software, and Lycos planned to build a directory of web sites, a project it had started in 1996 with a2z but later abandoned. Ken Lang, who founded WiseWire in 1995 and was a former student of Michael Mauldin at Carnegie Mellon, became Lycos’s chief technology officer.

In mid-1998 Lycos entered into a three-year agreement with AT&T Corp. to market each other’s services online, under the banner “Lycos Online Powered by AT&T WorldNet Service.” Lycos users would begin to see promotions for AT&T services, and AT&T would promote the Lycos site and its roster of services. In addition, a co-branded AT&T Communication Center was launched on the Lycos site.

In July 1998 Lycos introduced its free SafetyNet service, which filtered out objectionable content from web site searches. The company also became the designated content provider for Juno Web, which had 5.5 million subscribers to its free e-mail service. New content on the Lycos site included the science fiction web comic strip “WhirlGirl.”

Lycos took a big step toward becoming the gateway to the Internet with the $133 million stock purchase of Who Where Inc. in August 1998. The acquisition included the popular Who Where Internet white pages; MailCity, a free electronic mail system; and Angelfire, a free web page hosting service. MailCity had 9.3 million registered users, and Angelfire had 1.3 million users. Lycos also acquired GuestWorld, a publishing services site, for $4 million in August.

Company Perspectives:

Terra Lycos’s mission is to become the world’s leading online destination. Through a unique platform that combines the benefits of the convergence of Internet services and next-generation communication technologies with the broadest, most comprehensive array of popular products and services, Terra Lycos provides users a compelling network of web brands and gives advertisers access to a vast and diverse audience.

In its September 1, 1998 review of Lycos, PC Magazine wrote, “If you want to make friends on the Internet, no portal offers you more opportunities than Lycos, from its chat and gaming features to its free Tripod Web-page community.” The review noted that the Lycos community was “a vast and varied body,” but it also complained that the site was difficult to navigate and could frustrate users. It concluded by ranking Lycos behind America Online, Excite, and Yahoo! in terms of ease of use.

In September 1998 Lycos became one of four search engines to be listed on Microsoft’s MSN.com web portal. The four search engines—Lycos, AltaVista, Infoseek, and Snap!—together with a new MSN-branded search engine to be launched later in the year, would be rotated as the default search engine on MSN.com.

Lycos made another major acquisition in October 1998 when it purchased Wired Digital Inc.’s online products, including the popular HotBot search engine, Wired News and HotWired news sites, and other content sites offering shopping, e-mail, chat, and travel services. Wired Digital was the last remaining piece of Wired Ventures Inc., which debuted Wired magazine in 1993 and sold it to Condé Nast Publications in 1998.

Lycos’s acquisitions were part of the company’s new strategy for growth through multiple brands and products. In acquiring a variety of brands and products, Lycos was becoming a “super site” that offered a portfolio of products for a variety of users. As one Lycos spokesperson told the San Jose Mercury News, ‘ ‘We are looking more and more like a traditional media company, having multiple brands across the network.” For fiscal 1998 Lycos reported revenue of $56 million but still posted a loss.

In November Lycos introduced its first national TV advertising campaign, which featured a black Labrador named Lycos under the tagline, “Lycos, go get it.” The campaign also included radio spots in 11 major cities and was estimated to cost $25 million. Around this time Lycos added technology from Bidder’s Edge that monitored several online auction sites. Lycos also began running services for other web sites, renaming its Lycos Affiliates Program as Lycos Network Services. Lycos was providing services for more than 80 sites, including The New York Times Company, Salon, and iVillage, and planned to expand its co-branding efforts through syndicated distribution of its e-mail, web site building, and other services. At the end of 1998 it was announced that Lycos and the National Football League would create Superbowl.com, the official web site for Super Bowl XXXIII in 1999.

Remaining Independent: 1999

At the beginning of 1999 Lycos was enjoying tremendous growth. According to a Media Metrix report, Lycos attracted 26.3 million visitors monthly and was the fastest-growing web portal. Its audience reach had grown to 46.5 percent of Internet users, only three percentage points behind Yahoo! Inc.

In February 1999 Lycos announced it would be the first major portal site to provide a directory of online songs available for downloading through MP3 technology, which coded music into compact files. Through a joint venture with Norway’s Fast Search & Transfer, Lycos’s directory would provide links to more than a half a million songs. Following the announcement, Lycos agreed to work with the Recording Industry Association of America (RIAA) to develop procedures for eliminating sites with pirated recordings from its directory.

In early 1999 Lycos was one of the few remaining independent Internet portals. Walt Disney Company owned a significant portion of Infoseek, Netscape was sold to AOL, Snap was 60 percent owned by NBC, and Excite was being absorbed by @Home (At Home Corporation). Compaq Computer planned to spin off AltaVista stock to the public while retaining a majority share. In February 1999 it was announced that cable company USA Networks, which also owned Ticketmaster and Home Shopping Network, would acquire Lycos to create USA/Lycos Interactive Networks Inc. in a deal valued at $22 billion. However, the takeover was opposed by CMGI Inc., Lycos’s largest shareholder with a 22 percent interest in the company. One reason for CMGI’s opposition was that in the two days following the merger announcement, Lycos’s shares lost nearly one-third of their value. Lycos’s fate was in limbo, until the deal was declared officially dead in May 1999.

Meanwhile, Lycos’s revenue continued to climb. Under a three-year agreement, WebMD would pay Lycos $52.5 million to be its exclusive health information provider. In April 1999 Lycos launched Lycos Clubs, which included a suite of communication tools that let members create virtual clubhouses around shared interests. While Lycos established some clubs based on the known interests of its users, the company expected more clubs to form organically.

According to figures released by Media Metrix Inc., Lycos passed Yahoo! in number of users for the first time. Just under 32 million people, or 51.8 percent of U.S. Internet users, visited Lycos in March 1999, compared to 31.2 million visitors, or 50.8 percent, to Yahoo!. The figure for Lycos included the Tripod and Angelfire web site hosting services, the Who Where Internet directory service, the Wired Digital news service, and the Lycos and HotBot Internet search sites, all of which were run as separate entities under the Lycos Network.

Key Dates:

1995:: Lycos, Inc. is founded.
1996:: Lycos goes public and raises $46 million in its initial public offering (IPO).
1997:: Lycos Europe is formed through a joint venture with German media conglomerate Bertelsmann AG.
1998:: Spanish telephone company Telefónica creates Telefónica Interactiva, an Internet company.
1999:: Telefonica Interactiva goes public and becomes Terra Networks, S.A.
2000:: Terra Networks acquires Lycos, Inc. for $12.5 billion; the two companies combine to form Terra Lycos, Inc.

In April 1999 Lycos replaced its proprietary directories on Lycos and Hotbot with the Open Directory, a guide to the web that was operated by some 8,000 volunteers. The Open Directory had been acquired by Netscape Communications in December 1998. It became part of Netscape’s Mozilla.org group, and Netscape released the source code for free. Lycos’s attempt to build its own directory using WiseWire technology had not paid off.

Also in April the Lycos Radio Network was introduced, making Lycos the first portal to incorporate streaming audio and video. The Lycos Radio player browser interface featured an embedded video playback area, an area for banner ads, and navigational links.

In mid-1999 Lycos acquired search engine technology from IntelliSeek, giving it access to more than 7,000 databases from Invisible Web, a previously inaccessible index of information. During the same period Bertelsmann, Lycos’s international joint venture partner, invested $12 million for the expansion of Tripod Europe. Launched in October 1998, Tripod was the fastest growing online community in Europe. In addition, Lycos’s largest shareholder, CMGI Inc., acquired AltaVista from Compaq for $2.3 billion.

In July 1999 Lycos integrated auctions into its Lycos and Tripod Networks of web sites. Dubbed auctions.lycos.com and auctions.tripod.com, the two services shared listings and started with 7,000 to 8,000 items for auction. Also in July Lycos formed Lycos Ventures, a $70 million venture capital fund whose partners included Microsoft cofounder Paul Allen. For the fiscal year ending July 31,1999, Lycos reported a net loss of $4.4 million on revenue of $40.6 million.

In August Lycos strengthened its position among music-oriented users by acquiring Internet Music Distribution Inc. for about $38 million in stock. Internet Music’s music-playing software, Sonique, allowed users to download music files and play them on their personal computers. Lycos planned to give away Sonique through free downloads, hoping it would boost the popularity of its music-oriented web sites. Later in the year Lycos announced the formation of music.lycos.com, a comprehensive online music destination that offered MP3 search and hosting areas, legal MP3 downloads, 35 radio channels, music news, reviews, chat rooms, message boards, commerce, and an MP3 player download. The site also served independent musicians by offering a hosting service for artists to create their own home page, add songs to the download directory, and provide other information.

Continuing its string of acquisitions, Lycos purchased Quote.com Inc. for about $78 million in stock. Quote.comprovided stock quotes and other financial information and had over 600,000 Internet visitors in the most recent month. The company also operated a service that provided real-time stock quotes to the web sites of other financial companies. Lycos planned to build chat rooms, message boards, and other features linked to Quote.com to create a community of users interested in financial information.

Lycos expanded internationally in the final four months of calendar 1999. In September Lycos and Singapore Telecom formed a pan-Asian joint venture, Lycos Asia. In December 1999 Lycos Asia launched a site in Singapore and planned to go online in Malaysia and the Philippines. Other plans called for setting up customized versions of Lycos in ten Asian cities.

In October 1999 Lycos launched 12 country-specific sites for Latin America and two sites for Spanish speakers in the United States. In November Lycos Japan gained a $32 million investment from Kadokawa Shoten Publishing Co. Ltd., a major Japanese media company, which became one of several joint venture partners there. Lycos also launched a Japanese version of Tripod, its community web site subsidiary.

In November 1999 Lycos purchased Gamesville.com, an online game company that had 2.2 million registered users, for $207 million in stock. In preparation for the 1999 holiday shopping season, Lycos announced it would offer a range of new shopping services, including product reviews, comparison shopping, and consumer ratings. The Lycos WebShopper was a new comparison shopping tool, and Lycos added links to epinions.com and other sites that provided consumer and professional product reviews. The company also launched Lycoshop, which featured listings from major retailers as well as the abovementioned services. As a result, Lycos was able to report a 450 percent increase in the number of unique shoppers for the holiday season over the previous year. As of December 1999 Lycos claimed an audience of 29 million users.

Merger with Spain’s Terra Networks: 2000

In February 2000 Lycos made investments in two software firms that specialized in building web sites and online communities by taking a minority interest in Trellix Corp. and acquiring Valent Software Corp. for $45 million in stock. Around this time Lycos also formed a joint venture with Bell Canada.

In May 2000 news surfaced that Lycos was holding merger talks with Terra Networks, the Internet unit of Spanish telephone company Telefonica, S.A. Unlike the 1999 announcement of USA Networks’ proposed takeover of Lycos, though, this information had the effect of boosting Lycos’s stock by about 12 percent. Before the month was over, it was announced that Lycos would be acquired for $12.5 billion by Terra Networks. Wall Street jitters then sent Lycos’s stock down more than 20 percent. With support from CMGI, the merger closed in October 2000, and Lycos combined with Terra Networks to create Terra Lycos, Inc.

Terra Networks was originally established in December 1998 as Telefónica Interactiva by Spain’s largest telephone company, Telefonica, S.A. In April 1999 Telefónica Interactiva acquired a Spanish portal company and an Internet service provider (ISP) to become the top-ranked portal and ISP in Spain. Later in 1999 the company acquired ISPs and Internet portals in Brazil, Central America, Mexico, Argentina, Chile, and Peru. In November 1999 Telefónica Interactiva went public and changed its name to Terra Networks, S.A.

Bertelsmann, a longtime partner of Lycos, also participated in the formation of Terra Lycos. Bertelsmann agreed to provide content to Terra Lycos and to purchase $325 million of services from Terra Lycos in the first two years. It also committed to purchase up to $675 million of services in years three through five, with Telefónica committing to purchase any portion of those services not bought by Bertelsmann. Bertelsmann was the third largest media company in the world, with operations in 54 countries.

Through its alliances with Bertelsmann and Telefonica, Terra Lycos was in a unique position to benefit from the convergence of media, wireless communications, and interactive content. A joint venture with Telefónica Móviles, S.A., gave Terra Lycos access to 20 million wireless users, for whom Terra Lycos planned to develop unique content and e-commerce products. Terra Lycos also had access to Telefónica’s 35 million telephony subscribers, for whom it planned to offer expanded services.

At the end of 2000 Terra Lycos was providing Internet access to more than five million customers worldwide. The company offered both paid and free subscription services and was the leading ISP in Spain, Chile, Peru, and Guatemala. It was also expanding in Asia through Lycos Asia, its joint venture with Singapore Telecom. In September 2000 Lycos Asia received permission from the Chinese government to operate a web portal from Shanghai. Lycos Indonesia was launched in October 2000, and the launch of Lycos Thailand in December 2000 gave Terra Lycos an international presence in 41 countries.

Lycos also appeared committed to adding new content and services to its web portal. In July 2000 Lycos acquired Match-maker.com, a Texas-based online dating service, for $44 million. Other new services introduced in selected markets during 2000 included Lycos TV Online and a voice-based information service. The company also continued to strengthen its brand through a $20 million national advertising campaign and high-profile partnerships that included building web sites for the 2000 Olympics in Sydney, Australia.