IBM's Long Goodbye to NetObjects

Did buyers of the NetObjects IPO realize how far IBM has gone to distance itself from its former partner?
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In a kind of long, slow-motion wave,

IBM

(IBM) - Get Report

is bidding goodbye to its long relationship with

NetObjects

(NETO)

. The latest -- but perhaps not the last -- step in this corporate farewell is NetObjects' recent

IPO.

This means that those who bought into the company's IPO can no longer look to Big Blue to bulk up NetObjects' revenue stream. And a closer inspection of the company's products and marketing leaves a lot of unanswered questions -- too many, perhaps, for comfort.

NetObjects is best known for Fusion, the whiz-bang Net-authoring software that's supposed to help inexperienced Web users create really cool Web sites. Although it's supposed to make cool graphic effects easier to execute and complex sites easier to manage, the program fails to live up to its newbie promise: It's extremely difficult both to learn and to use, a severe handicap for reaching its target market of beginning small-business owners.

So, it's a good program for the professional, right? Well, not exactly, because Fusion can't handle very large Web sites -- those containing 500 pages or more -- which makes it of limited use to professionals.

But NetObjects is facing more than just a few technical glitches, as my new colleague

Adam Lashinsky

pointed out in a

column for the

San Jose Mercury News

. There he chronicled some of the stock's smellier aspects, including the fact that its auditors at

KPMG

have "substantial doubts" about the company as a going concern and that its formerly indulgent corporate parent IBM -- which owned 76% of the shares pre-offering and 54% post-offering -- plans to write itself checks for more than $24 million to repay some previous loans.

But there's even more to be concerned about here: namely, the accumulating evidence that IBM, as NetObjects' mentor and top customer, is doing everything it can to distance itself from its former protege.

The first degree of separation is financial: According to NetObjects' prospectus, $19 million of the $24 million that IBM banked Friday was repayment of a $19 million secured credit facility with

IBM Credit

. The problem is, as the prospectus goes on to say, "Our credit facility will terminate upon repayment and thus will not be available to us for future borrowings." That could be a problem down the road because the company has burned through almost $64 million since its founding in 1995 -- $51 million of that in the past 24 months.

When asked if IBM will help find a replacement, the company's lack of affirmation is conspicuous: "I can't comment on that," says Joe Stunkard, director of media relations for the

IBM Software Group

.

The second stage involves IBM's purchase of NetObjects' software and services, which accounted for $5 million of the $11.2 million that NetObjects booked as revenue during the six months ended March 31, 1999.

NetObjects will lose $2.7 million of service revenues it booked in those six months because the contract to integrate NetObjects' software with IBM's own Websphere line of products expired Feb. 28. The reason? IBM decided to bundle a competitor's products instead.

Also at risk are the $2.3 million in royalties IBM paid NetObjects in those six months to bundle the Fusion software with IBM-Lotus' own Designer for Domino products. That agreement expires in June, and NetObjects' prospectus says those revenues are "likely to decline, perhaps substantially." When asked, Stunkard said IBM can't say if it plans to continue the relationship.

On the Web, things look a little estranged as well. First of all, IBM is promoting its own competing Web-page-authoring software, TopPage. Not only is that described as "NetObjects TopPage" on the shrink-wrapped box, but IBM sells the software on the IBM e-commerce site for $59.95. That substantially undercuts NetObjects Fusion, which -- although it has many site management capabilities that TopPage lacks -- goes for a considerably higher $299.

Almost as disturbing is NetObjects' refusal to reveal just how many units of Fusion it has actually sold. The prospectus states that "more than 300,000" copies have been "delivered" but nowhere does it use the term "sold," leaving one to wonder if all of NetObjects' software was distributed through the company's agreements with IBM. NetObjects spokeswoman Priti Khare said the company could not comment on this or other questions because of quiet-period restrictions.

But even if NetObjects is able to make it without Big Blue's help, there's an even bigger threat in the form of

Microsoft

(MSFT) - Get Report

FrontPage, which already dominates the page-authoring-software market. Ron Rappaport, Internet industry analyst for Silicon Valley's

Zona Research

says the latest numbers (1997) indicate Front Page commands a 57% share of the Web-authoring-tool market, trailed by

Adobe

at 17% and NetObjects at 13%. The problem is, Microsoft has announced its intention to closely integrate FrontPage 2000 with Office and may even offer it as part of an Office 2000 suite,

gratis

. Rappaport says that scenario "could be a nightmare, but it's always been there for anyone competing with Microsoft."

Finally, the lockout periods on IBM's remaining 20.1 million shares of NetObjects all run out before the end of this year, with 1.9 million freely tradable in 90 days, another 1.4 million freely tradable in 180 days and the rest tradable in 180 days -- subject to Rule 144 volume limitations.

So, even though IBM still owns more than half of NetObjects' stock, it has made it pretty clear that its protege has to be able to make it in the world without additional handouts. And though NetObjects shares have largely managed to tread water above their IPO price of 12 a share, the company's new owners had better hope the old owner doesn't get into the lifeboat anytime soon.

Perdue helped launch three technology companies in roles ranging from marketing executive to chairman/CEO. He has written widely on technology for InfoWorld, PCWorld, Interactive Week, Forbes ASAP and many others. Perdue is also editor and publisher of

Wine Investment News. At time of publication, he held no positions in the stocks discussed in this column, although holdings can change at any time.