A few days ago, with little disruption, a small Internet company called Iwon began operating the remains of the Web portal Excite.com. Iwon picked up Excite -- which was valued at US$6.7 billion just three years ago -- at the fire-sale price of under US$10 million, part of the messy bankruptcy of Excite@Home.
It was the latest sign that the Internet has entered a reconstruction phase similar to the ones that followed every other frenzied introduction of a new technology, from railroads to automobiles to PCs.
It's a predictable cycle of growth, collapse, rebirth: There is an initial land grab as people rush to get in first and get big fast. But then, as often as not, the leaders collapse of their own unsupportable weight and others pick up the pieces and turn the good ideas into real businesses.
PHOTO: NY TIMES
Picking up the pieces
But the Internet is proving to be different in one way: Internet vultures have no interest in the sort of physical assets -- railroad tracks, factories or office buildings -- that were bought for a song out of bankruptcy court in earlier eras. Indeed, it is the things with three dimensions, and the bills to pay for them, that dragged down most Internet companies that have failed.
Instead, what is being valued most are the designs of the sites and the loyalty and traffic they developed before their demise. So KB Toys, for example, now operates an online store that has the name and colors of the defunct but popular E-toys that mirrors its own Web site. Amazon is similarly presenting the face of Egghead.com, which is no more.
Iwon, in the same way, has copied virtually all of Excite, using its own vastly less expensive systems.
Iwon started business only two years ago in this Hudson River suburb as a me-too entrant in an already crowded portal market. Its only distinction was that with every click, users were entered in a US$25 million sweepstakes.
At the time, it was of no concern to Excite, a Web pioneer with blue chip backers. But now Iwon is among a small group of Internet companies that have managed, by not overextending themselves, to survive and pick gems from the remains of the fallen dot-com giants.
"I feel like a guy who lived through a hurricane, got pounded and pounded, and managed to survive when everyone else was destroyed," said Bill Daugherty, Iwon's co-chief executive.
"Suddenly you walk outside, and because of the storm you have beachfront property. That's what Excite is to us," he said.
What makes one company a survivor and another extinct? It turns out that everything that Excite@Home seemed to have going for it -- like its early start, its rapid expansion and its powerful backers -- created an insurmountable drag as business slowed.
Combining one of the most popular portals with the leading provider of high-speed Internet access, it saw itself destined to topple America Online. At its peak, Excite@Home had 3,300 employees, 1,500 of them working on the Web portal.
It built a gleaming blue glass headquarters perched on Route 101, the main thoroughfare of California's Silicon Valley, with a two-story twisty slide for employees to let off steam.
Iwon, by contrast, was lucky to be late. It didn't go public and never has employed more than 230 workers.
With offices rented in a converted furnace factory here, Iwon gave employees free bagels and views of the Metro-North railroad tracks.
As an underdog, Iwon clearly understood its mission was to make money, not to change the rules or the world. So when the advertising market turned down, Iwon was early to develop the big, talking, moving sorts of advertising that other sites like Excite said were too intrusive for users. Now, loud, intrusive Web ads are the norm.
While Iwon has outlasted the Internet bubble, it would never have been born absent the unusually fertile conditions of 1999. At one of their regular lunches, Bill Daugherty and Jonas Steinman, two buddies from Harvard Business School, were kicking around ideas for starting an Internet company.
They had little experience between them in media or technology, let alone the Internet. But they had an idea: Other startup dot-coms were paying so much money to advertise on Web portals that the two friends figured they could make a profit starting a portal that lured users to surf with promises of riches.
They were able to get their idea to Mel Karmazin, then the chairman of CBS, which was being criticized for being an Internet laggard.
Karmazin backed it with US$15 million in cash and US$70 million worth of advertising (Iwon actually offered to sell part of the company to Excite in return for portal technology, but at the time US$85 million in backing from CBS wasn't enough to get the giant Web company to meet with them).
A stealthy beginning
Moving quickly and secretly, Daugherty and Steinman built an Internet portal almost entirely out of software and information available from other companies. On the day it began, Oct. 5, 1999, Iwon had eight employees.
The concept proved easy to communicate in the plentiful CBS commercials that compared ordinary portals like Yahoo and Excite to Iwon with the chance of winning cash. The slogan: "Why wouldn't you?"
By April 2000, Iwon had vaulted to the 31st most popular site with 7 million monthly users. It had raised another US$100 million and was just days away from filing for an initial public offering underwritten by Goldman Sachs.
Then the market for Internet stocks started what would be a 98 percent decline. The public offering never happened, and Iwon had to tighten its belt, laying off about 15 percent of its employees last spring and cutting back its pool of prizes.
"There were a couple of months when Bill and I were worth untold amounts of money on paper," Steinman said. "Then we spent the next 18 months in survival mode."
Still, with its costs low and revenue bouncing back because of the loud ads, Iwon turned its first small profit in October.
"We figure if you can be profitable in Oct. 2001, the worst advertising market in 30 years, when the ad market comes back we will hit the cover off the ball," Daugherty said.
The harsh environment was far more brutal to Excite. Many of its biggest advertisers went out of business, and the rest slashed their budgets. Meanwhile, AT&T, its largest shareholder, was locked in a series of battles with Comcast and Cox Communications, its other big shareholders.
At times, AT&T seemed to be battling within itself to figure out how exactly Excite@Home fit into its broader and, in hindsight, confused Internet strategy.
Drastic reductions
Despite a series of drastic staff cuts, asset sales and financing with terms bordering on usury, Excite was ultimately overwhelmed by its US$1.3 billion in debt and filed for protection from creditors under Chapter 11 of the bankruptcy laws in September.
"The lesson for me is go slower," said George Bell, who was chief executive of Excite and later Excite@Home.
"When I look back on it, I wonder did we need to make important strategic decisions at 10pm on Sunday night after another 80-hour week," quipped Bell.
Even before Excite filed for bankruptcy, Steinman and Daugherty started thinking about whether they could buy the portal.
Even though Excite@Home had hardly invested a penny in new development for Excite.com as its troubles mounted and multiplied this year, the site still had 14 million monthly visitors, and 600,000 people each month still register on Excite to receive e-mail and other personalized services.
Iwon secured the help of Infospace, a Seattle Internet company, to bid jointly for the Excite portal. Infospace would run the Web search and directory section of the site, and Iwon would run the rest.
In October, as the bankruptcy process began to gather steam, Steinman and Daugherty began to realize that if they won the bidding they would have no more than 30 days to take over Excite, too little to actually build it.
So Iwon dropped most of its other development projects and started building a carbon copy of Excite.com.
That meant designing more than 1,000 separate Web pages and reaching agreements with 130 providers of news and information. Iwon made one major change to the look of Excite: The ads are bigger.
On Nov. 28, the court approved the US$10 million bid by Iwon and Infospace. That gave them less than three weeks to take over operations of the portal.
To operate Excite, Iwon rushed to buy 270 servers from Dell Computer and enough storage from EMC Networks to hold 12 terabytes of information, most of which is Excite users' e-mail. Iwon figures it needs only eight extra employees to operate Excite on top of the 220 it has now.
Steinman figures that Excite was spending 10 times what Iwon will for technology, content and other components used in operating a Web portal.
In all, Iwon's share of the purchase price of Excite, the hardware, software, content and employees will cost a bit more than US$5 million in the first year, the company figures. Daugherty said he hoped Excite will increase Iwon's revenue, which will come to about US$70 million in 2001, by 40 percent to 50 percent.
At US$100 million a year in sales, Iwon, which is renaming itself Excite Networks, is still far smaller than Yahoo, the top portal, which expects to achieve at least US$725 million in sales next year.
But the company is big enough to plan to buy other distressed dotcoms, Steinman said.
"The Internet was supposed to be one thing and it ended up being something significantly less," said Daugherty. "Fortunately for us, we never let our costs get out of control in the way that led to everyone else's demise."
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