NeoMedia Technologies, Inc (NEOM)

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DD InfoSpace targets wireless delivery
By Tricia Duryee - Seattle Times technology reporter

Monday, July 3, 2006

http://seattletimes.nwsource.com/html/businesstechnology/2003101287_infospace03.html


If you haven't noticed, InfoSpace did not win the Internet war.

Its properties, including Dogpile, WebCrawler and Switchboard.com, never gained the status of a Google, a Yahoo! or even a Microsoft.

That is why the Bellevue company is now emphasizing its wireless business, and this time the results may be better.

It started the big leap earlier this year when it merged its Web and mobile divisions to bring to its wireless operations what it has learned in its online business. In doing so, InfoSpace hopes to sustain the fragile lead it has gained in the ultracompetitive and rapidly developing market for wireless content.

"We have a leadership position here [in mobile] and we don't online, and that's just a fact of the matter," said InfoSpace's Chief Executive Jim Voelker. "We are starting from a much better position [in wireless] than we hold today [online]."

The leadership comes in the business of helping wireless carriers sell ringtones, wallpapers and games for mobile phones. InfoSpace also provides search capabilities that reside on the phone to assist customers in finding content or local listings, such as the nearest pub, bank or dry cleaner.

InfoSpace's early strides in mobile include contracts with more than 40 wireless carriers, including the top four — Cingular Wireless, Verizon Wireless, SprintNextel and T-Mobile USA.

With those big-time connections, it claims to have 60 percent of the portal, or wireless storefront business, and to have assisted more than 150 million content downloads in 2005 for an estimated 45 percent market share.

For all this activity, sales of mobile content are only starting to take off. That places InfoSpace in a good position to take advantage of a potentially huge market.

Global revenues from mobile entertainment and content are expected to rise from $26.4 billion in 2005 to $91.8 billion in 2009, according to Strategy Analytics.

The focus on wireless is not a dramatic shift for InfoSpace, which has dabbled in mobile-phone applications almost since its inception in 1996.

In the company's early days, it grew quickly through acquisitions and, at one point, its market capitalization was higher than Boeing's. But the company came crashing down in the tech bust and became the subject of suits alleging that company officers misled shareholders about InfoSpace's prospects while profiting from selling its stock.

The company underwent an overhaul when Voelker came on board in 2002. He hired new management and settled a long-lasting feud with InfoSpace founder Naveen Jain, who was forced to pay the company $77.3 million.

Voelker focused the company on two divisions and now has narrowed it down to one — leveraging the online properties into mobile.

"It doesn't mean that our online business isn't important to us, or even aspects of it don't work together," but the growth is in wireless, he said.

In the first quarter, InfoSpace reported about $45 million in mobile revenues, compared with only $5 million a couple of years ago. "The growth trajectory is much greater," he said.

Voelker has committed to being a dominant player in the business and has pledged to spend up to $7 million a quarter on mobile initiatives. The company also expects to add 100 jobs to its work force of 620.

Share of success

With the growth of the wireless-content business, InfoSpace has had some success. But because the industry is so young, the company's foothold rests on thin ice.

For instance, a year ago, InfoSpace took a beating when it lost a large contract online and told Wall Street that its mobile-phone margins would be squeezed. The announcement led its stock to fall almost $11 a share to $23.95. It still hasn't recouped. On Friday, its stock closed at $22.67.

Although it has replaced some of the online business, it still grapples with how the mobile industry will play out.

Take ringtones, for example. Consumers are beginning to switch from popular polyphonic ringtones — a synthesized version of a song — to real tones, which use snippets of MP3 music.

But those are less profitable than the polyphonic versions. For InfoSpace, the impact is magnified when you consider 80 percent of its total content sales come from the ringers.

InfoSpace is also dependent on the carriers. Sales made through the company's top five customers represented 84 percent of its revenues in the first quarter. Cingular totaled more than 10 percent alone.

Although having relationships with carriers benefits InfoSpace, they aren't set in stone. Carriers control much of the network so they can give and take business freely.

"They own the networks, they own the subscribers and they, in large part, pay for the devices, so they have tremendous influence, and should by virtue of those things," Voelker said.

"I think I'm only hesitating because every day is a new day. We've been proving ourselves since 1999, and we do have good relationship with the carriers, but they are multifaceted," he said.

Sasa Zorovic, an analyst at Oppenheimer who has a "sell" rating on the company, said carrier control makes it a tough business.

If an InfoSpace does too well, carriers will demand a larger cut. If it doesn't do well enough, it could get cut off.

"Wireless carriers are just like cable operators," he said. "They own the customers. If they see you are starting to make money, they will squeeze you. They don't have to share their revenue."

With such tenuous relationships, InfoSpace has looked for ways to protect itself from a potential major revenue loss.

Last week, it launched Moviso, a Web site that sells directly to the wireless subscriber. By doing so, InfoSpace builds one of its first businesses not directly dependent on the carrier.

The site sells ringtones, graphics and games, and in the future may sell videos and search applications.

The service is considered "off-deck," meaning that content is not sold through the cellphone, but on a Web site.

To buy a ringtone, customers enter a phone number online and receive a text message describing where they can download the song to their phone. The charge, ranging typically from $1.99 to $2.99, appears on the customer's monthly cellphone bill.

Sprint, T-Mobile and Cingular subscribers can use the service, and InfoSpace pays a portion of the proceeds to the carrier for access to the subscribers.

The move by InfoSpace was a smart one, said Linda Barrabee, an analyst at the Yankee Group.

In 2005, she said, off-deck revenue represented only about 20 percent of the market. By the end of this year, she expects it to grow to 25 percent and over the next few years to 40 percent.

Although Moviso has promise, analysts say it won't be easy.

To start, there's plenty of competition. In the U.S., VeriSign operates a site called Jamster.com, Fox Mobile Entertainment has Mobizzo.com and several other smaller players, including Seattle-based Blue Frog Mobile, have offerings.

And, of course, there are the carrier's own portals. That's particularly difficult for InfoSpace, given that carriers are its largest customer. But Voelker said the carriers are warming up to the idea.

Until recently, they were reluctant to open up their networks to third parties like Moviso, but now they view them as a potential revenue source.

Stephen Fletcher, senior product marketing manager at Sprint, said his company's thinking is changing.

"We are of two minds," he said. "We do see it as revenue we may be missing out on and a threat, but this is a fairly young market and space, and anything out there that helps educate customers on how to personalize their phones is good."

Building a brand

Another question for InfoSpace involves building Moviso as a consumer brand.

Zorovic, the Oppenheimer analyst, said going directly to the consumer can be costly, often in the form of radio and television commercials.

"It was very expensive for VeriSign, and it hasn't worked out that well," he said.

The Mountain View, Calif.-based VeriSign reported marketing expenses increased $226.4 million as a result of promoting its brands in the U.S. and Europe during the first nine months of 2005.

Voelker said InfoSpace has an easy and inexpensive way to advertise Moviso, one that combines its online experience and wireless properties.

The way he sees it, InfoSpace would direct traffic from Dogpile and its other search engines to Moviso. The cost to the company is virtually free.

To Voelker, this is InfoSpace's advantage in the mobile industry. Not only does it know what is popular because it sees what people are searching for online, it can also direct consumers to its own site.

"It's a great way to leverage one business on to the other," he said.

How well it can bring the two together will go a long way to determining whether InfoSpace's big bet on wireless pays off in the end.
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InfoSpace


Founded:1996

Headquarters: Bellevue

Operations: Washington, California, Massachusetts; U.K., the Netherlands, Germany.

Employees: 620, with 100 job openings.

Brands: Dogpile.com; WebCrawler.com; MetaCrawler.com; InfoSpace.com; Switchboard.com; Moviso.com.

2005 financials: $340 million in revenue; $159.4 million in profit

Source: InfoSpace
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