AltaVista Deal May Allow CMGI to Start Livin' La Vida Local

Controlling Compaq's (CPQ - Cramer's Take - Stockpickr) AltaVista holdings allows CMGI (CMGI - Cramer's Take - Stockpickr) to become a worldwide Internet portal player. But CMGI also has the tools to become a powerhouse on the local scene.

CMGI is paying $2.3 billion for 83% the AltaVista portal, the shopping site Shopping.com and Zip2, a company that develops, hosts and maintains Web sites for newspapers and other local media properties. (The deal values AltaVista at $2.7 billion.)

Last year advertisers spent about $1.9 billion advertising on the Web, but that figure should grow to about $9 billion in 2002, according to investment bankers Hambrecht and Quist. Yet only about 10% of online advertising today is from local businesses, says Peter Krasilovsky, program director of consulting firm The Kelsey Group.

In the next three to five years, the share of local advertising (including localized versions of national ads) will grow to 35% to 40% of total online advertising, Krasilovsky adds.

He is not alone in this assesment: One hedge fund analyst predicts the online advertising model will echo the split between local and national cable advertising. The local element is "very important" for AltaVista, just as localized content is a strength of Excite@Home's (ATHM - Cramer's Take - Stockpickr) cable modem service. "It gives you one more revenue stream," says the analyst, who spoke on condition of anonymity. Not having it "would be like having a television set that doesn't have local news." (The analyst's fund is long CMGI.)

Based on current statistics from Paul Kagan Associates, local advertising makes up 25% of total cable TV advertising. But that is not good enough for AltaVista CEO Rod Schrock. "We definitely see a majority of [online] advertising at the local level," he says.

That depends on Zip2, which Compaq bought earlier this year for a reported $300 million from an investor group including The New York Times (NYT - Cramer's Take - Stockpickr), Knight Ridder (KRI - Cramer's Take - Stockpickr) and Hearst. At the moment, Zip2 is a long way away from winning a significant piece of the local market. The majority of Zip2's revenue is from software licensing and Web hosting, Schrock says. But with the official launch of Zip2's new Homebase portal this week, the goal is to boost revenue from advertising and e-commerce across the Homebase sites. Schrock, who counts 42 affiliates now, says once the site exceeds 100 affiliates, the majority of revenue will derive from local advertising and e-commerce.

A major issue, says Krasilovsky, is whether Zip2 can benefit from synergies with the various companies in CMGI's stable of companies. Krasilovsky sees only two promising candidates himself: KOZ.com, which develops tools people can use to build online communities, and ad-targeting firm Engage Technologies, which could be used in conjunction with Zip2 to direct advertising to people in specific locales.

It's unclear, though, how important the local market is to CMGI Chairman David Wetherell. In his conference call with reporters, Wetherell talked enthusiastically about the commercial potential of vertical portals, or portals customized for specific companies or affinity groups. He also alluded to a link between Zip2 and CMGI portal Planet Direct, which is a front-end for 700 Internet service providers and companies. But Wetherell had little to say about Homebase's local media partners.

"I don't see [the local sites] as very important," says George Tharakan, analyst with Roxbury Capital, who points out that America Online's (AOL - Cramer's Take - Stockpickr) Digital City, Microsoft's (MSFT - Cramer's Take - Stockpickr) Sidewalk and Ticketmaster Online-CitySearch (TMCS - Cramer's Take - Stockpickr) are all competing for the same local advertising dollars. Roxbury Capital doesn't hold a stake in CMGI.

Schrock says Zip2 has an advantage in being able to set up local sites more cheaply than its competitors -- which also include the Real Cities network from former Zip2 shareholder Knight-Ridder (which already works with KOZ.com).

But Krasilovsky cautions: "It's going to take a great deal of attention to fully appreciate any investment in local markets ... Newspapers bailed out of Zip2 -- they saw it as a black hole. Is CMGI going to be any different?"