NEW YORK (CNNfn) - Internet search engine and caching software provider Inktomi Corp. took aim at the burgeoning online broadcast market Wednesday, agreeing to buy closely held FastForward Networks for about† $1.3 billion in stock.|
The acquisition, expected to close by the end of the year, will provide Inktomi with an important software technology designed to distribute and manage live broadcasting over the Internet, a market company officials estimate will reach $40 billion by 2003.
Inktomi (INKT: Research, Estimates), based in Foster City, Calif., is known for its expertise in Internet caching software. Caching is a technique used to place frequently accessed content as close to the end user as possible so that messages don't have to travel back and forth between an end user and a distant, overloaded server. Inktomi has successfully used caching to dramatically speed the delivery of text and graphics over the Web; with the acquisition of FastForward, the company aims to do the same thing with streaming video, Inktomi executive vice president Richard Pierce said.††
Currently, the streaming video market is in its infancy because it suffers from quality and reliability problems. Even when viewed on a fast, high-bandwidth Internet connection, video can be choppy and sabotaged by congestion on the Web. If those quality problems can be overcome, the amount of streaming video content on the Web will expand dramatically, Pierce said.
"The Victoria's Secret fashion shows proved there was demand for streaming video, but they were a very poor experience from a Web infrastructure point of view," he said in an interview with CNNfn.com
FastForward makes software that enables streaming video to be delivered over the shortest, least-congested route and to be sent to an alternate route if a server goes down. In addition, its software can handle video encoded in several different formats, such as those used by Microsoft Corp. and RealNetworks. RealNetworks (RNWK: Research, Estimates), which pioneered the development and commercialization of streaming media delivery systems and has more than 95 million users of its RealPlayer software, is a re-seller of FastForward products.
"The work FastForward is doing is as important as the original pioneering work in network caching done 25 years ago," Pierce said. "They are removing a major infrastructure bottleneck."
FastForward's software also can monitor what content is being viewed in which locations and provide aggregate viewing data to the providers of streaming video. In that way, it can provide what resembles a Nielsen rating for content.
Valuation of FastForward is high
Terms of the transaction call for Intktomi to issue approximately 11.9 million new shares to acquire the outstanding FastForward shares and warrants it does not already own. Based on Inktomi's closing price of $111 per share Tuesday, that values the company at $1.32 billion.
Inktomi is paying a steep price for San Francisco, Calif.-based FastForward. The two-year old company is expected to have revenue of only $35 million to $45 million over the next 12 months. In fact, Inktomi's management said that the acquisition is likely to reduce its earnings per share in the first two quarters of fiscal 2001. Inktomi's Pierce conceded that the valuation is high, but said FastForward's technology will be worth it in the long run.
"FastForward is not a garage shop," he said. "It's 75 guys working for two years on what is fundamentally a very hard problem to solve."
Inktomi shares dropped $10.50 to $108.50 in late trading Wednesday, possibly in response to the high price paid for FastForward.