Would you rather strike an Internet partnership with Yahoo! or with Marriott? Emerick Woods, 44, CEO of Vicinity Corp., has been involved in deals with both companies -- and only one of them worked out well.
Guess what? It wasn't the Yahoo! deal, even though that alliance did provide a way for Vicinity to share Yahoo!'s online Yellow Pages listings and mapping services with millions of Internet users. Instead, Palo Alto-based Vicinity has discovered that a deal with the much less flashy Marriott is profitable, easy to manage, and a perfect partnership for gaining new business.
Such hit-and-miss experiences aren't anomalies. They are a fact of life in the fast-changing and sometimes-chaotic Internet economy. Nearly every Net company has decided that it can't conquer the world alone. These companies are feverishly signing deals, hoping that the right alliances can help them meet their business goals.
A recent survey conducted by Forrester Research Inc. found that Web media companies have an average of 14 partnerships each and that this number is expected to rise to 69 partnerships within three years. Yet partners say that in 30% to 50% of these cases, they either wouldn't renew the deal on current terms or they weren't sure that the pact was worth renewing.
So what does it take to strike a winning Internet alliance? Many of the answers to this question involve classic business principles that are being rediscovered by Internet executives. First, be sure to manage expectations of the partnership, so that neither side bets on a miracle. Second, don't get stuck in shotgun pairings with companies that have customers or goals that are incompatible with yours. Third, make room for revisions, because it's hard to know how companies' strategies and opportunities will change. And fourth, be sure that there's a personal bond between the companies that will sustain the alliance.
But another lesson is emerging that is very Net specific. As the Internet economy moves away from the idea of growth at all costs, companies are learning about the hazards of cash-for-traffic deals -- in which one partner bets a lot of money on the chance to pitch its wares on the other partner's heavily visited site. In the end, most Internet businesses don't need momentary exposure to a million tire kickers; they need a few thousand regular users who will do a lot of business. That understanding is causing companies to forgo seemingly glamorous deals that buy a lot of traffic for narrower but more-focused deals that can land a few vital customers.
Vicinity's early stumbles -- and its rebound -- embody such old-school business lessons. When Vicinity was founded in 1995, the executives of the e-retail marketing-services company viewed Yahoo! as a prized partner that was worth landing on almost any terms. Vicinity arranged to license Yellow Pages data from an outside vendor, and then to repackage that data and put it on the Yahoo! site. It wasn't clear how this could be done profitably, but Vicinity hoped that payments from Yahoo! would exceed the data costs.
It didn't take long for Vicinity to realize that the Yahoo! deal, for all of its cachet, was a business disaster. Third-party data was not only expensive, but often out-of-date, requiring constant revision. Payments from Yahoo! weren't nearly as generous as Vicinity had hoped. "At one point, we calculated that the Yahoo! partnership was using up 88% of our bandwidth and providing just 9% to 11% of our revenue,'' recalls Tim Bacci, 41, a Vicinity cofounder.
Making matters even worse, regional telephone companies decided to compete for Internet Yellow Pages contracts. Such big new rivals could sustain losses for far longer than Vicinity could. These companies could also extract synergies from their existing business that Vicinity could not. In late 1997, Vicinity had just recruited Woods to be its new CEO. He recalls that when he first looked at the Yahoo! contract, he knew that the economics of the deal just didn't make sense.
Deciding not to seek a renewal of the deal with Yahoo! in early 1998 was "a gut-wrenching decision,'' Woods recalls. But around that time, Vicinity discovered a more appealing way to sell its services. Executives at Toyota had seen Vicinity's initial Yellow Pages listing, and they were intrigued. They asked Vicinity if it could provide a similar service for Toyota's Web site that would showcase Toyota's 40,000 dealers, service centers, and parts stores in the United States, so that Internet users could find the closest Toyota facility. "Toyota's data was manageable, there wasn't any competition, and the company was ready to pay us a lot of money,'' Woods says.
Over the next two years, Vicinity retooled itself to focus on online business-locator services for big customers such as Federal Express and Marriott. It's less glamorous than serving Yahoo!, but it's far more viable business. Corporate Web-site visitors are more likely to make transactions -- and that makes them more valuable to Vicinity's strategic partners.
What's more, Vicinity is finding rich growth prospects for its accounts. The company is now offering locator services for cell-phone users who might want to find the nearest hotel, gas station, or FedEx drop box. This service is just starting out, but Vicinity hopes to charge corporate clients a bounty for every customer who is steered their way.
A different example shows the importance of using online partnerships to target a few key customers, instead of using a more scattershot approach. Last year, Stamps.com, which provides postage over the Internet as well as mailing and shipping services, was looking for a way to reach users of eBay. The obvious -- but expensive -- way to do this was to strike a partnership directly with eBay. That path was chosen by eStamps Corp., which agreed to pay $30 million over three years to market its service across the eBay site.
But Doug Walner, 31, senior VP for business development at Stamps.com, opted for another way to reach the eBay members he really wanted: by connecting with the 25,000 "power sellers" who constitute eBay's most active users among its nearly 16 million-member user base. Instead of trying to connect with these users through the entire eBay site, he negotiated cheaper, more-directly targeted deals with search engine AuctionRover and with other sites that cater to avid users of online auctions. These deals helped Walner hasten the adoption of Net postage while lowering customer-acquisition costs, he says.
Some of the most systematic thinking about how to partner on the Internet comes from Intuit, which is using its QuickBooks financial packages to strike up dozens of alliances that could benefit small businesses. While all sorts of new services sound exciting, Intuit manager Marc Spier, 35, wants to bet on more than his own hunches. "We test new ideas with focus groups in Cincinnati; Orange County, California; and other non-high-tech areas,'' he says. "If you go strictly by what people in Silicon Valley think, you'll get giddy.''
Spier and his team then spend time making sure that their partners have realistic views about what an alliance can accomplish. "We want to be their best-performing partner,'' he says, "but that's different from saying that we want to exceed their expectations. In some cases, the best thing that we can do is help them get their expectations under control.'' Finally, Spier ensures that the thrill-a-minute atmosphere of negotiating a deal is tempered by the active participation of line managers from both companies, who will be in charge of the project as soon as the deal is signed.
Yet for all of Intuit's planning, Spier acknowledges that he can only improve the odds of a good alliance; he can't guarantee the partnership's success. "It takes a leap of faith for both parties to believe that an Internet alliance will deliver what they want," he says. "Neither side knows enough to commit to a compelling marketing plan. In fact, if you waited until you knew everything, you'd act too late.''
George Anders (firstname.lastname@example.org), a Fast Company senior editor, is based in Silicon Valley.