Terra Lycos, Inc

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TERRA LYCOS, INC.

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, Lycos, Inc. Pittsburgh-based Lycos originated as an Internet search engine in 1995. Through partnerships and acquisitions it became an Internet portal operating several Web sites under different brands, from dating service Matchmaker to financial chat service Quote.com. Lycos expanded internationally by forming joint ventures in Asia, Japan, Latin America, and Europe. Following the acquisition of Lycos by Terra Networks, Terra Lycos had 98 million registered users in 41 countries in mid-2001, making it the third most popular online network in the world.

A LEADING INTERNET SEARCH ENGINE, 1995-1997

Lycos, Inc. was created in 1995 by CMG@ Ventures, which 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. Lycos built a catalog of more than 3.7 million Internet pages and had nearly 3.5 million hits a week. The name Lycos was derived from a Latin word for a special kind of spider that leaves its web to hunt.

Lycos went public in April 1996 and raised $40 million. It was one of four search engine companies that had their IPOs that year. Yahoo!, the best-known search engine, InfoSeek, and Excite.com also went public. Following their successful IPOs, other companies announced plans to go public or provide commercial searching products.

Throughout 1996 Lycos continued to upgrade its search engine by increasing its speed and making it possible to search for telephone numbers and e-mail addresses as well as individual sound, video, and other 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. In addition Lycos redesigned its graphic interface to look like an Internet portal.

Lycos Europe was formed in May 1997 as a joint venture with German media conglomerate Bertels-mann AG. Later, when Lycos was acquired by Terra Networks in 2000, Bertelsmann pledged $1 billion to advertise and purchase services on Lycos. In the United States, Lycos signed a three-year agreement with Barnes & Noble that made BarnesandNoble.com the exclusive bookseller for Lycos. For fiscal 1997 ending July 31, Lycos had revenue of $22.3 million, up from $5.3 million in fiscal 1996.

PURSUED PORTAL STRATEGY, 1998-2000

In 1998 Lycos introduced e-mail and chat capabilities. It added content to its portal-like site through partnerships and acquisitions. It acquired Tripod Inc. for $58 million as part of its strategy to increase traffic and build online communities around targeted content. Tripod provided free Web pages to about one million users, with news and commentary tailored to young adults. Both Lycos and Tripod were among the top 10 most-visited sites on the Web. Following the acquisition, Lycos and Tripod would continue to operate under their own names as part of Lycos's multi-branding strategy.

Other content partnerships were formed with Preview Travel, which became the exclusive multi-service provider of travel reservations on Lycos's Travel Web Guide and Travel Network, and CDNow, which became the exclusive retailer of music-related products on Lycos and Tripod sites. CDNow paid 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. During 1998 Lycos introduced its free SafetyNet service, which filtered out objectionable content from Web site searches. Lycos also became the designated content provider for Juno Web, which had 5.5 million subscribers to its free e-mail service.

Lycos's $133 million stock purchase of WhoWhere Inc. was a major step in its portal strategy. The acquisition included the popular WhoWhere 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 made another major acquisition in October 1998 when it purchased Wired Digital Inc.'s online products, which included 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 launched Wired magazine in 1993 and subsequently sold it to Conde Nast Publications in 1998.

Lycos's acquisitions of different brands and products were designed to make it a "super site" that offered a portfolio of products for a variety of users. Lycos was also developing a community of users by offering features such as chat and gaming. For fiscal 1998 ending July 31 Lycos reported revenue of $56 million but still posted a loss.

ENJOYED GROWTH AS AN INDEPENDENT PORTAL, 1999

At the beginning of 1999 Lycos was enjoying tremendous growth. Its audience reach had grown to 46.5 percent, only three percentage points behind Yahoo!. According to a Media Metrix report, Lycos attracted 26.3 million visitors monthly and was the fastest-growing Web portal. The company had recently launched its first national TV advertising campaign, which also included radio spots in 11 major cities and was estimated to cost $25 million. Lycos and the National Football League announced Lycos would create Superbowl.com, the official Web site for Super Bowl XXXIII, in 1999.

In early 1999 Lycos was one of the few remaining independent Internet portals. Walt Disney Co. 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. In early 1999 USA Networks, which also owned Ticketmaster and Home Shopping Network, and Lycos were negotiating a deal valued at $22 billion to merge and create USA/Lycos Interactive Networks Inc. However, CMGI Inc., Lycos's largest shareholder with a 22 percent interest in the company, opposed the combination. By May 1999 the deal was declared officially dead.

Meanwhile, Lycos's revenue continued to climb. According to figures released by Media Metrix Inc., Lycos surpassed Yahoo! for the first time in March 1999, when nearly 32 million people, or 51.8 percent of U.S. Internet users, visited Lycos, compared to 31.2 million visitors, or 50.8 percent, to Yahoo!. Lycos's visitors included those at the Tripod and Angelfire Web site hosting services, the WhoWhere 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. To further develop its community of users, Lycos launched Lycos Clubs, which enabled members to create virtual clubhouses around shared interests.

Other initiatives in 1999 included the Open Directory, a guide to the Web that was operated by some 8,000 volunteers. Lycos Radio Network was introduced in April 1999, making Lycos the first portal to incorporate streaming audio and video. Bertelsmann, Lycos's international joint venture partner, invested $12 million for the expansion of Tripod Europe, which was the fastest growing online community in Europe. Meanwhile, Lycos's largest shareholder CMGI Inc. acquired AltaVista from Compaq Computer Corp. for $2.3 billion. For its fiscal year ending July 31, 1999, Lycos reported a net loss of $4.4 million on revenue of $40.6 million.

Later in 1999 Lycos established 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 company acquired 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.

To bolster its financial services and create a community of users interested in financial information, Lycos purchased Quote.com Inc. for about $78 million in stock. Quote.com provided stock quotes and other financial information. Lycos also expanded its gaming content with the purchase of Gamesville.com, which had 2.2 million registered users, for $207 million in stock.

Lycos expanded internationally in the final months of 1999. It formed a pan-Asian joint venture, Lycos Asia, with Singapore Telecom. 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 10 Asian cities. Lycos launched 12 country-specific sites in Latin America as well as two sites for Spanish speakers in the United States. The firm also launched a Japanese version of Tripod.

For the 1999 holiday shopping season, Lycos introduced the Lycos WebShopper, a new comparison-shopping tool, and added links to epinions.com and other sites that provided consumer and professional product reviews. Lycoshop, which featured listings from major retailers and comparative shopping services, was also launched. As a result, Lycos reported 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.

TERRA LYCOS CREATED BY MERGER WITH SPAIN'S TERRA NETWORKS, 2000-2001

In May 2000 it was announced that Lycos would be acquired for $12.5 billion by Terra Networks. Wall Street jitters sent Lycos's stock down more than 20 percent. With support from CMGI, Lycos combined with Terra Networks to create Terra Lycos, Inc. in October 2000. Estimates of the merger value ranged between $5.3 and $6.5 billion.

Terra Networks had been established in December 1998 as Telefonica Interactiva by Spain's largest telephone company, Telefonica, S.A. Through acquisitions Telefonica Interactiva quickly became the topranked portal and Internet service provider (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 Telefonica Interactiva went public and changed its name to Terra Networks, S.A.

Bertelsmann also participated in the formation of Terra Lycos. The German media giant agreed to provide content to Terra Lycos and to purchase $1 billion worth of services and advertising over a five-year period. With operations in 54 countries, Bertelsmann was the third-largest media company in the world.

At the end of 2000 Terra Lycos was providing Internet access to more than 5 million customers worldwide. The company was the leading ISP in Spain, Chile, Peru, and Guatemala, offering both paid and free subscription services. 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. Terra Lycos acquired portals in France and Sweden and in 2001 launched Terra Caribe in the Dominican Republic, its 42nd country, and a portal in Russia.

Terra Lycos continued to add new content and services to its Web portal through acquisitions and partnerships. It acquired Matchmaker.com, a Texas-based online dating service, for $44 million. The company 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. In 2001 it acquired financial Web site Raging Bull from Alta-Vista.

Although Terra Lycos continued to make acquisitions in 2001 that were funded in part by a multi-billion dollar rights offering, the company was forced to make some cutbacks as the economy slowed. Jobs were cut and revenue estimates were lowered. The company discontinued free Internet service in Brazil and planned to reduce its overall workforce by 15 percent. After first quarter revenues were lower than expected, Terra Lycos projected that it would return to a positive EBITDA (earnings before interest, taxes, depreciation, and amortization) in 2002. The company's stated goal was to become the first or second leading Internet destination in each of the countries in which it operated.