America Online forms alliance with Excite Deal will create new Internet search engine

November 26, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

America Online Inc. yesterday unveiled an alliance with one of the largest companies that make "search engines" for using the Internet, a move analysts said is another sign that AOL is abandoning its distinctive strategy for selling computing to the masses in favor of the emerging methods of the Internet.

The deal calls for AOL and Excite Inc. to create a new Internet search engine for AOL's 7 million-plus customers, marketed under both companies' names and positioned to make the new engine the primary way AOL subscribers gain access to the Internet. The new search engine is expected to be in place within 60 days, Excite Chief Executive George Bell said.

The deal could have a major effect on the consolidating market for Internet search engines, since an estimated 29 percent of consumers who use the Internet get there via AOL, said Peter Krasilovsky, senior analyst at Bethesda-based Arlen Communications Inc.

There are four public Internet search engine firms, and analysts expect to see consolidation soon. Search engines are World Wide Web sites that catalog and index the Internet, allowing users who know little more than a couple of words about the topic they want to research instantly to find hundreds of different places on the World Wide Web to look.

"Yahoo! [Inc.] is the brand to beat right now," said Krasilovsky, adding that other major search engine firms have all been seeking deals with AOL and its major competitors, Prodigy and CompuServe, in order to bring customers into their tents. "The search engine business is consolidating quickly. The online service providers are all choosing sides."

The search-engine companies, much like AOL itself, are all trying to distinguish themselves as a form of new media that survive by selling advertising on their Internet sites, rather than as simple software companies vulnerable to being crushed by Microsoft Corp. But they have struggled to convince advertisers that the Internet is a cost-effective way to reach consumers.

Bell said yesterday's deal helped assure his company will survive the shakeout because Excite's technology will be built into AOL's system for five years, and will be the only search engine built into AOL for the first two years of the deal.

"It gives Excite the most important distribution in the online market," Bell said. "As well as locking us in, it locks others out."

AOL customers who want to use other search engines will still be able to access the competition via the Internet, AOL Chairman Steve Case said.

In a different way, the deal also marks a turning point for AOL, which dropped yet another of the strategies that set it apart from the rest of the Internet industry by selling its existing WebCrawler search engine to Excite for 2 million shares of Excite stock.

"It's just a little piece, but it's a piece of something AOL is migrating toward," said Greg Vogel, an associate analyst at Montgomery Securities in San Francisco. "As far as short-term revenues go, it's not much. The strategic importance of [AOL's] focusing on the Internet is what's more important to this story."

Indeed, the market has been pushing AOL to make itself look more like the Internet, in part by driving AOL stock down to $22.375 a share by last month, from $71 earlier this year.

Wall Street has insisted that the emerging dominance of Internet-based technology will force AOL to change many of its practices, while the company insisted that its approach helped make searching for online information and entertainment unintimidating to computer newcomers.

But in recent months, AOL has changed its pricing plans to more closely resemble the flat-rate, unlimited-use prices offered by Internet service providers who do not supply AOL's array of private-label content. It has also dropped a controversial accounting practice that many on Wall Street insisted made the company look profitable when it actually isn't, and added new software to make it easier to use AOL as a conduit to the Internet itself.

Vogel said Wall Street's intuition that yesterday's announcement means AOL is moving even closer to Internet standards sparked yesterday's rise in AOL shares, which climbed $1.625 to $32.75.

The deal gives AOL a 20 percent share in Mountain View, Calif.-based Excite.

Pub Date: 11/26/96

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