Bertelsmann Reconsiders $1B Terra Lycos Contract

German media conglomerate Bertelsmann AG is looking to renegotiate its $1 billion online advertising contract with Terra Lycos , a development that could set back the Web portal and ISP player’s plan for profitability.

The agreement, signed in May 2000, specified that Bertelsmann, a major advertiser on the Spanish-American company’s sites, would buy $325 million in advertising by October 2002. Through the same arrangement, Berlin-based Bertelsmann also agreed to purchase $675 million in inventory by October 2005 — with the stipulation that the amount could be reduced at Bertelsmann’s option.

That indeed has become the case, as sources at Bertelsmann confirmed that it’s in negotiations to significantly reduce the amount it would pay under the contract.

Spokespeople at Terra Lycos were not available for comment.

One reason behind the decision to renegotiate is the marked decline in the cost of online media since the deal’s signing, said Bertelsmann spokesman Frank Sarfeld. He also said Bertelsmann is looking to diversify its media partners and channels in an effort to better reach consumers.

The move also comes as Bertelsmann is shifting portions of its media budget back into traditional outlets, rather than Internet channels. During the past year, the media giant has shuttered or significantly cut back several of its online media and e-commerce ventures, “which is the reason we just don’t need as much advertising,” Sarfeld said.

While a final decision has yet to be made regarding its work with Madrid-based Terra Lycos, Sarfeld said Bertelsmann still plans to purchase at least some inventory on the company’s sites.

“We want to continue our successful cooperation with Terra Lycos, there’s no doubt,” he said.

Nevertheless, that could be cold comfort for Terra Lycos, since it’s expected that the buy will be well below the initial commitment, which severely dampens the portal’s revenue outlook. Last quarter, Terra Lycos posted a pro forma loss of 41 million euros (about $36 million), on revenues of 166 million euros ($145 million) — more than two-thirds of which came from advertising sales.

Executives at the firm last quarter gave guidance for pro forma breakeven at the end of 2002 — assuming the company meets the high ends of its operating forecasts. In light of the new development, that prediction now appears less realistic.

Terra Lycos’ parent and largest shareholder, Telefonica SA , could be expected to cover its online unit’s shortcomings in revenue, but it seems unlikely that the cash-strapped Spanish telecom giant would be willing to part with the full $675 million required to meet the portal’s earlier estimates.

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