Google dominates searches

After emerging victorious from the search engine bloodbath of the late 1990s, Yahoo Inc. now faces a fight against a company it helped put on the map.

Over the past couple of years, online users have been dumping one-time favorite Yahoo for Google Inc. as their search Web site of choice, according to a new report.

“Yahoo and Google have been battling neck-and-neck for months,” according

Google’s gain is Yahoo’s loss

BY DAVID SPEAKMAN

After emerging victorious from the search engine bloodbath of the late 1990s, Yahoo Inc. now faces a fight against a company it helped put on the map.

Over the past couple of years, online users have been dumping one-time favorite Yahoo for Google Inc. as their search Web site of choice, according to a new report.

“Yahoo and Google have been battling neck-and-neck for months,” according Geoff Johnston, a vice president at WebSideStory, which analyzes 30 billion Web page views each month.

He says Google’s growth has been nothing short of phenomenal — as well as a little ironic — since he says Sunnyvale’s Yahoo Inc. is partially responsible for it.

When it comes to search technology, Mountain View-based Google Inc. has been in the lead for years.

The company first gained prominence in summer 2000 when Yahoo chose Google’s technology to replace that of Foster City-based Inktomi Corp. for Yahoo’s search engine.

Without that deal, Johnston says, “there would be no Google as we know it today.”

At the time of the summer 2000 deal, WebSideStory’s numbers showed Yahoo with about a 50 percent share of online searches, with the slack taken up by a Who’s Who list of once-giant, but now-dead — or arguably comatose — Silicon Valley-based search engines.

Remember search dot-coms Infoseek, Excite, Lycos and AltaVista?

“Those other guys really fell off the map,” Johnston says as he points out Yahoo also lost market share as Google witnessed astounding growth.

Overtaking Yahoo was not part of the early plan at Google.

“The focus at that time was on delivering a useful service,” says Cindy McCaffery, Google’s vice president of marketing.

“No Super Bowl ads here,” she says, explaining Google only recently launched small targeted advertising campaigns to increase corporate sales.

This low-key approach worked as users adopted Google on their own.

“Google has grown with little or no advertising,” confirms Jill Whalen, owner of Boston-based search engine advising firm Highranking.com. “It’s all been word of mouth and Google just spirals upward.”

One Internet user who left Yahoo for Google is Laura Straub, local manager of client services for Indianapolis-based advertising measuring service Marketing Resources Plus.

Straub says the main reason she switched was Yahoo’s intrusive use of pop-up advertising.

The numbers show Straub was not alone as droves of Web users abandoned Yahoo and went to the source of its search technology.

Using a measuring system that counts search referrals from Yahoo.com and those originating from its Google.com Web site, WebSideStory says the horse race began almost immediately.

In the first 12 months, Johnston says Google went from virtually no traffic at its own Web site to capturing 17.5 percent of the market by July 2001, while Yahoo’s share fell from about half the market to 38 percent.

Tack on another year and by July 2002, both Yahoo and Google each claimed about 35 percent of the online search referral marketplace, Johnston says.

“In the past three to four months,” he says, “it really has been neck-and-neck. Depending on the month, either Yahoo or Google come out on top.”

But, Yahoo says Google should not be crowned king yet as it’s still asserting its claim to the search engine throne.

Yahoo spokesperson Diana Lee says WebSideStory’s numbers only measure search referrals outside the Yahoo network of Web sites.

“We have been trying to keep our users on [our] site and we are seeing success with click-through rates,” she says.

Those numbers show as of the week ending Dec. 1, the average visitor stayed at Yahoo for 44 minutes. Google users on average stayed there about 7 minutes.

“Everyone knows us as a search engine,” Lee says, “and we are investing to ensure we continue to be the leader.”

“Many people are loyal to Yahoo, and use it for its robust content offerings” such as e-mail and the HotJobs help wanted classified ads, Johnston says.

But, he says, for the down-and-dirty Web search, Google comes out on top.

“When people use Google,” Johnston says, “they only want to do one thing.”

Lee says Yahoo is not resting on its laurels and is improving its service and says another advantage Yahoo has is its people.

She brushed aside Google’s publicity, which touts its use of mathematical algorithms instead of people to interpret and present its search directory.

“Our people understand the mindset of users,” she says, “and can provide more intuitive results — something ones and zeros cannot do.”

McCaffery says Google does offer a people-powered directory option through the Open Directory Project.

And if the numbers are right, Web users already know which player is best.

“It’s Google’s game to lose,” says Highranking.com’s Whalen.

Venture capital fund raising at seven-year low

Although Silicon Valley still grabs the lion’s share of startup money, a new study shows venture capital investment nationwide continues to lose steam.

San Francisco-based private equity watcher VentureOne says third-quarter venture investment fund-raising of $1.2 billion was at its lowest level since the second quarter of 1995 when only $520 million was raised.

VentureOne says less money was raised because funds are investing less in startups.

“That fund-raising drop is

BY DAVID SPEAKMAN

Although Silicon Valley still grabs the lion’s share of startup money, a new study shows venture capital investment nationwide continues to lose steam.

San Francisco-based private equity watcher VentureOne says third-quarter venture investment fund-raising of $1.2 billion was at its lowest level since the second quarter of 1995 when only $520 million was raised.

VentureOne says less money was raised because funds are investing less in startups.

“That fund-raising drop is not due to a lack of capital,” says John Gabbert, VentureOne’s vice president of worldwide research. “There is still a tremendous amount of money available.”

He says there are many healthy VC funds sitting on billions of dollars and that will affect Silicon Valley.

As in the past, “a good portion of the funding — about 51 percent — goes to Silicon Valley and California,” Gabbert says. But those investment dollars are shrinking.

On thing possibly spooking new investment is that valuations of existing venture-backed companies seeking additional funding continued to fall in the third quarter.

VentureOne says the median pre-money valuation of such firms was about $10 million — a drop of $1 million in three months. Those are levels not seen since 1996.

With these figures, it’s not hard to understand why funds would rather keep their equity in money markets than investing in businesses where on average first and second round investments are losing value.

“It’s a terrible climate,” says Tim Williams, CEO of Somerset, N.J.-based storage technology maker Tacit Networks, which plans to market its products to Santa Clara’s Hitachi Data Systems and Palo Alto-based Hewlett-Packard Co.

“It was hard to find investors,” Williams said after Tacit closed a $7.3 million first round of funding Dec. 9, “but those [VC firms] that did invest made their decisions fast.”

“I think it’s fair to say the long-term impact hasn’t been realized yet,” Gabbert says.

“As the decline of funding sets in and fewer startups receive financing,” he says, “it will have a ripple effect on the region — especially for an economy that relies heavily upon business and innovations from early stage and new tech companies.”

Gabbert says the current drop in median first and secondary rounds of financing is hitting most companies — even successful companies with solid business models.

That, he says, could mean fewer Bay Area jobs as companies with good, vigorous ideas are being stunted like bonsai trees.

TRW-Northrop deal won’t sting valley

When Los Angeles-based Northrup Grumman consummates its marriage to fellow defense contractor TRW Inc. this month, layoffs may not hit the Bay Area.

“The place where jobs will be eliminated is corporate headquarters operations,” Northrop Grumman spokesman Randy Belote says, explaining TRW’s Cleveland home base is the most likely target.

That’s welcome news in Silicon Valley and Sunnyvale in particular; defense contractors have been the largest employers in the South

BY DAVID SPEAKMAN

When Los Angeles-based Northrup Grumman consummates its marriage to fellow defense contractor TRW Inc. this month, layoffs may not hit the Bay Area.

“The place where jobs will be eliminated is corporate headquarters operations,” Northrop Grumman spokesman Randy Belote says, explaining TRW’s Cleveland home base is the most likely target.

That’s welcome news in Silicon Valley and Sunnyvale in particular; defense contractors have been the largest employers in the South Bay’s second-largest city for decades.

Sunnyvale already has felt the loss of jobs from TRW — once the city’s sixth-largest employer.

But after 34 years, TRW blamed Silicon Valley’s high cost of living as it closed up the Sunnyvale headquarters of its electromagnetic systems laboratory unit earlier this year.

That left 130 TRW workers in Sunnyvale, down considerably from a peak of 1,390 in 1995.

But Sunnyvale still is home to large campuses for defense giants Northrop Grumman and Denver-based Lockheed Martin Corp.

“I think the TRW merger will strengthen Northrup Grumman,” Brice McQueen, Sunnyvale’s office industrial development manager says. “The company already has strong business here.”

Some of that business is de-nuking part of the missile systems of the U.S. submarine fleet due to the lowered threat of nuclear war.

“It’s a big program,” Northrop Grumman spokesman Bob Bishop says. “We’re reconfiguring nuclear submarine missile systems to fire conventional missiles.”

Belote says that won’t change with the purchase of TRW.

“We don’t anticipate any layoffs in the Bay Area,” he says. “There is not much overlap at all in Northrop Grumman and TRW’s business. They are very complimentary.”

In fact, he says TRW’s local operations will allow Northrop to reach into new sectors and expand current high tech offerings.

“It will allow us to expand missile defense and add space payload and information technology,” Belote says.

Roxio burning a new channel with Napster

Buying the brains behind file-sharing bad-boy Napster Inc. has Wall Street wondering whether Roxio Inc. has its sights set on becoming a full-fledged media distribution company.

What is certain, though, is the Santa Clara company is one step closer to leaving its software pure-play days behind.

Roxio closed its $5.3 million acquisition of Napster on Nov. 27 after a Delaware bankruptcy judge cleared the sale.

Under the terms, Roxio paid $5

BY DAVID SPEAKMAN

Buying the brains behind file-sharing bad-boy Napster Inc. has Wall Street wondering whether Roxio Inc. has its sights set on becoming a full-fledged media distribution company.

What is certain, though, is the Santa Clara company is one step closer to leaving its software pure-play days behind.

Roxio closed its $5.3 million acquisition of Napster on Nov. 27 after a Delaware bankruptcy judge cleared the sale.

Under the terms, Roxio paid $5 million in cash and forgave about $300,000 in warrants for its common stock.

The purchase came over many objections, including former Napster chairman John Fanning, who claims he owned some of the intellectual property bought by Roxio.

But the deal got the blessing of German media giant Bertelsmann AG, which as Napster’s largest media shareholder, lost millions of dollars in the bankrupt file-swapping service.

After a quick makeover of the Napster Web site and a terse press release about the deal, Roxio officials — who declined to be interviewed for this story — are keeping tight-lipped, saying “plans will be outlined in the coming months.”

But Wall Street analysts were talking plenty.

Buying all of Napster’s assets and none of its legal problems leaves Roxio at a crossroad, says Phil Leigh, digital media analyst at Raymond James & Associates in St. Petersburg, Fla.

“With $43 million in cash at the end of the September quarter and a weak short-term outlook for its core [software] business,” Leigh says, “this deal is inexpensive and opens the door for Roxio to shift its long-term focus from software sales to digital media distribution.”

Stock traders have rewarded Roxio shares, which by the time of the deal close were up about 50 percent since the buyout was announced in November. But, at under $6 a share, Roxio is still trading well below its $25.30 52-week high set in April.

Roxio has obtained two potentially significant assets through the Napster acquisition, Leigh explained, a distribution platform for digital content and a well-recognized brand name.

Leigh believes that to fully take advantage of Napster, Roxio must strike licensing deals with major music labels and movie studios.

“The value of a reincarnated Napster service is ultimately dependent on the rights that Roxio is able to negotiate,” Leigh says.

Just six months ago, Leigh says the outlook for any company hoping to license content from Hollywood was bleak.

“However, since that time, licensing deals have accelerated and three major legitimate Internet music services [MusicNet, Pressplay and Listen.com’s Rhapsody] have gradually negotiated deals with the five major music labels.”

Those “big five” music labels are Vivendi’s Universal, AOL’s Warner Music, EMI, Sony and Bertelsmann’s BMG.

Before the Napster buy, Roxio had a licensing deal with EMI under its cap and provides CD-burning software for Pressplay.

Jefferies & Co. analyst James Lin is more dubious, saying, “Beside the Napster brand name, Roxio acquires very little in the transaction.”

While applauding management’s efforts to find new ways of reinvigorating business, Jefferies is “somewhat skeptical about the company’s ability to [generate] meaningful revenue from the assets that it is acquiring.”

As for the Napster brand name, Roxio has finally snagged ownership of a household name.

“The Napster name brand is the second significant asset acquired by Roxio,” Leigh says, “and it’s importance should not be underestimated.”

“Many people would be eager to investigate a reincarnated Napster, even if it only remotely resembled the original,” Leigh says.

But, Leigh did say some of those people may not like Napster’s rebirth as a pay service. He says with that brand name, it will undoubtedly draw traffic and media attention, something Roxio could use more of.

Even though Roxio faces stiff competition from already-established legitimate online music services, Leigh says Roxio would have “a significant advantage over the current music services, which have much less brand recognition than Napster.”

And with Roxio’s DVD background, the new Napster may not be limited to music, such as the offerings from Pressplay, MusicNet and Rhapsody.

“An important realization to make is that digital [content] is not limited to music,” Leigh says. “Despite the high degree of focus in this area, there are reports that as much as 70 percent of the network traffic on KaZaA is for content other than music.”

In that space, the new Napster faces competition from Movielink, a joint venture of MGM, Sony, Universal, Paramount and Warner Bros. Leigh points out that Movielink is a rental service only and does not allow outright purchase of a movie.

For digital distribution of movies to the home, Leigh says broadband availability is critical and cash generation will be stunted as downloading full-length feature films from the Internet is all but impossible on a dial-up modem.

According to IDC Research, broadband penetration only reached 10 percent of U.S. households in 2001, and is scheduled to rise to just 33 percent by 2005.

But, Leigh thinks Roxio could use the Napster name to reinvigorate its successful, but aging, stable of CD- and DVD-burning software.

“This could stimulate demand by piquing the interest of consumers walking the aisles of a computer retailer or other store,” Leigh says.

BofA pulls back from investment banking

Looking at recent news churned out by Bank of America’s PR machine, it’s hard to tell the San Francisco-founded bank once dominated corporate financial services in Silicon Valley.

The bank, now based in Charlotte, N.C., is reducing its investment banking portfolio, cutting staff and slashing its corporate loan portfolio in half.

In a recent meeting with analysts, the banking giant said its focus is on improving earnings growth and productivity

BY DAVID SPEAKMAN

Looking at recent news churned out by Bank of America’s PR machine, it’s hard to tell the San Francisco-founded bank once dominated corporate financial services in Silicon Valley.

The bank, now based in Charlotte, N.C., is reducing its investment banking portfolio, cutting staff and slashing its corporate loan portfolio in half.

In a recent meeting with analysts, the banking giant said its focus is on improving earnings growth and productivity through what it calls “traditional banking.” And, it said it plans to cut billions from its corporate and investment banking portfolio over the next few months.

As for those press releases, the emphasis on traditional banking is perhaps most evident by the bank’s touting of a major expansion into the Chicago consumer banking arena, which is now dominated by Bank One.

In comparison, the company is relatively quiet about its involvement in tech-related corporate and venture funding.

For instance, there was no press release in the closing days of November when Bank of America Capital Partners was part of a $3.5 million funding round for European startup Plastic Logic, which is developing semiconductors based on plastic — not
silicon.

Looking forward to 2003, Bank of America CEO Kenneth Lewis told reporters during a Dec. 3 investor Webcast that the weakness in investment banking will continue.

Lewis said he thinks 2003 “will be another year where we will be very focused on expense controls and getting productivity gains so we can reinvest in these businesses when they come back.”

He said his company has a goal to squeeze out $1 billion in productivity savings in 2003.

“To say this management team is focused would be an understatement,” says Susan Roth, a New York-based equity research analyst with Credit Suisse First Boston.

After meeting with BofA management recently, Roth came away with numbers that show a major shift in the bank’s Global Corporate and Investment Banking (GCIB) division operations, which could be sobering to Silicon Valley.

In its most recent quarterly report, Bank of America said its GCIB unit’s profit fell 18 percent from last year to $428 million on revenue of $2.04 billion.

Squeezing out productivity, so far, over the past two years has meant BofA slashing GCIB headcount by 12 percent, or eliminating about 1,000 jobs.

As for that reinvesting in its investment banking business, Roth says BofA plans to trim employee compensation and bonus packages. She says that cost savings will most likely be the money reinvested in GIBC.

As for its corporate loans portfolio, Roth says BofA has about $60 billion in outstanding corporate loans, down from its $100 billion peak in August 2000.

Bank of America said recently that it expects to trim an additional $10 billion off its outstanding loans within the next 12 to 18 months.

According to New York-based Goldman Sachs analyst Lori Applebaum, that could mean BofA taking quarterly charges of up to $100 million on bad loans until its portfolio is trimmed sufficiently.

Long term, BofA says it expects a 10 to 12 percent growth rate from its investment banking business, which it sees coming from equity holdings and mergers and acquisitions — not corporate loans.

Sun insists it will meet analyst expectations

Sun Microsystems Inc. shed light on its current quarter sales numbers Nov. 26, saying pricing competition will hit the bottom line. The Santa Clara-based server maker says sales margins for the all-important holiday quarter are tracking below last quarter’s by 41 percent. But the company claims it will meet analysts’ expectations of $2.9 billion in quarterly revenue by the new year.

Not including one-time expenses, that’s a projected loss of a

Sun Microsystems Inc. shed light on its current quarter sales numbers Nov. 26, saying pricing competition will hit the bottom line. The Santa Clara-based server maker says sales margins for the all-important holiday quarter are tracking below last quarter’s by 41 percent. But the company claims it will meet analysts’ expectations of $2.9 billion in quarterly revenue by the new year.

Not including one-time expenses, that’s a projected loss of a penny a share for the current quarter, still much better than the 3 cents per share loss for the same quarter last year.

With eight weeks down and five to go in the quarter, Sun CFO Steven McGowan says it’s too early to give specific business details. He was even more tight-lipped in October when the company released its fiscal first quarter numbers, which showed revenue of $2.7 billion.

This latest financial dipstick test by the company says the current quarter is on track to beat last quarter by a hefty margin, despite tough pricing competition by Microsoft and IBM.

Sun, once one of the bluest of Silicon Valley blue chips, has been singing the blues recently as many of the customers for its high-end servers and workstations fell on hard times or succumbed to the dot-com bust and turned belly up.