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Wetherell sees Net company valuations through a mathematical as much as a financial lens. He loves to cite Metcalfe's Law of Connectivity as the driving force behind his approach. The law, set down by Robert Metcalfe, founder of 3Com, states that the value of an interactive network--such as Lycos, Yahoo or AOL--is a function of the number of people attached to the network; and value increases exponentially when another person comes online. Thus a network of 10 people is at least four times as valuable as one with five. What this means is that every extra AOL subscriber is worth more than every extra cable subscriber. How much more is the umpty-billion-dollar question, because that new customer can be marketed to, advertised to, sold to, and may even be the impetus for a whole new form of commerce that will make the network more valuable still. "The growth is incredibly viral," says Wetherell, using one of his favorite words. "Online companies tend to grow along Metcalfe's Law. We have companies growing at a rate of 1% a day. The Internet is growing at a rate of 3% a day. If you can't make money in this business, then you might as well go pick oranges."
Wetherell's Internet world view is getting its fiercest test in a takeover tussle with Barry Diller--a real-economy mogul if ever there was one--who has made a bid for Lycos, the Internet portal that Wetherell financed and of which he owns 18.5%. While Diller and Wetherell agree that the partnering of Lycos' new-media assets and Diller's traditional media hodgepodge of USA Networks, Home Shopping Network and other film- and television-production interests makes strategic sense, they disagree sharply on the value Diller ascribes to Lycos.
In the world Diller comes from, you don't pay a premium for unprofitable businesses. But in the Internet economy, where almost nobody has made a profit yet (and certainly Lycos hasn't), that hasn't kept Yahoo from shelling out $4.35 billion for GeoCities, or stopped the Internet portal @Home from paying $6 billion for Excite--both deals made at hefty price premiums. Of course, they used their richly priced shares as currency. Diller's offer to merge part of his USA Networks with Lycos to form a new company, of which Lycos would own 30%, values Lycos at approximately $85 a share, substantially less than the $130 it was trading at when Diller made the offer. Wetherell, after initially supporting the bid, changed his mind, withdrew from the Lycos board and pledged to vote his shares against the deal at a shareholders' meeting next month.
Diller, who made an unsuccessful run at Paramount in 1994 using stock from the shop-at-home company QVC, has been seen by the Internet community as crashing the party with a most unwelcome piece of news: your companies aren't worth as much as you think. (And for a few wobbly days early last week, he was right.) Wetherell and his ilk are now seeking to show Diller the door. "He's Barry Diller, he's famous, he's a great dealmaker, but he may have overstepped," says Joe Butt, senior analyst at Forrester Research.