Lycos Europe's Survival Instincts.

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Author: Ewing, Jack

COMPANIES

The Web outfit is relying on a new, more focused, search engine and cost cuts to deliver growth. Does it stand a chance against Google?

By most conventional financial measures, Lycos Europe should probably not exist. The Internet portal, search engine, and Web services provider, part owned by German media giant Bertelsmann and Spanish telco Telefonica (TEF), has had only two profitable quarters in its six-year history. It's competing in a business dominated by Google (GOOG) and Yahoo! (YHOO). And it must cope with the European market, where economies of scale are undercut by the need to offer content tailored to national tastes and languages.

Yet on Feb. 22, Lycos Europe Chief Executive Christoph Mohn stood bravely before a handful of reporters and analysts and explained why he believes the company will finally be profitable in 2006. "In a couple of years people will see that we're one of the few global players," said Mohn, while standing before a laptop at a Frankfurt hotel conference room and paging through a PowerPoint presentation on the company's 2005 results. Lycos' loss narrowed to $24 million on sales of $149 million last year, vs. a loss of $54 million in 2004.

Somebody believes Mohn. Shares of Lycos Europe, which is a separate company from U.S.-based Lycos, rose more than 60% last year. True, the recent price of 1.07 euros [$1.27] was still a long way from the 2000 Internet bubble price of more than 23 euros. And the shares fell sharply after the 2005 results were announced. But long after most highfliers from those days have been forgotten, Lycos still employs almost 700 people, primarily in Gutersloh, Germany, and offers services in eight European countries, plus the former Soviet republic of Armenia. It's also the largest chat service in Europe, with 5 million users.

WORLD AT YOUR FINGERTIPS.

Mohn is clearly true believer No. 1. With an enthusiasm that recalls the Internet euphoria of a few years ago, he describes the new technologies that he argues will someday allow Lycos to earn a decent return. The newest service, just introduced in Germany and currently being rolled out across Europe, is a search engine called Lycos iQ that's supposed to give more focused results than Google does.

Users can type in a question, which other users answer. Users rank answers the same way that eBay (EBAY) users rate sellers of goods. The idea is to build a database of questions and answers, with the best answers rising to the top of the list. [It works: This writer asked for advice on the best places to cross-country ski around Frankfurt, and within a few minutes received an e-mail with a link to a Web site devoted to the topic.] "Lycos allows you to tap into the knowledge of the whole population," Mohn said in an interview.

Will that be enough to compete against the huge resources of Google? "I don't think [Lycos Europe has] a chance, to be honest," says Hellen K. Omwando, an analyst at Forrester Research in Amsterdam. "Look at Yahoo and MSN -- even they can't manage to siphon away Google users."

"ONE OF THE SURVIVORS."

Omwando praises Lycos' cost-cutting measures, which included eliminating more than 200 jobs last year. She also has kudos for some of Lycos' business-to-business services, such as software that allows small businesses to easily set up online shops. But Omwando says the individual assets don't add up to long-term growth. "Lycos is one of those players waiting to be sold," she says.

Why has Mohn stuck with it so long? As he tells the story, Lycos was initially conceived as the European marketing arm for services developed by Lycos in the U.S. But after the Internet bubble burst, the U.S. partner drastically curtailed its product development, Mohn says. "It was as if we were a car dealer, and we had to start producing cars," he says.

Other Lycos partners in Asia have shut down, but Lycos Europe decided to build its own palette of products and services. Telefonica and Bertelsmann backed Mohn, though it probably helps that he happens to be a member of the family that controls Bertelsmann. "We knew it would take three or four years," Mohn says. "The turnaround from being a dealer to making Audis and BMWs is a long process." Mohn adds, "We are one of the survivors." About that last statement there is no dispute.

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By Jack Ewing