NEW YORK -- Citigroup Inc., the No. 1 U.S. financial services firm, is learning one of the Internet's hard lessons -- the Web drains money and doesn't always deliver.
E-Citi, Citigroup's Internet think tank, faces growing criticism from Wall Street for lavish spending and lackluster results. Citigroup now is tying e-Citi more closely to its other Internet operations, causing some analysts to speculate e-Citi's top executive may quit.
"It's losing money and the revenue growth has been far less than expected, primarily because they don't have the product," Michael Rosinus, a hedge fund manager at New York-based Tiedemann Investment Group, said. "I guess, at some point, you're going to need new blood at that part of the company."
The electronic commerce unit is the brainchild of Citigroup's former co-chief executive, John Reed, who set it up in 1997 to develop Internet services. But e-Citi lost its most vocal champion when Reed quit Citigroup in April.
Without Reed as a backer and protector, some analysts said e-Citi's head, Ed Horowitz, could lose power to other Citigroup executives and possibly lose his job.
Citigroup, now under the sole leadership of CEO Sanford "Sandy" Weill, says it stands behind e-Citi and Horowitz, who insists he's there to stay and has a vital role to play.
"I am not intending to leave this company," Horowitz, 52, said in an interview on Friday. "I intend to go to the next stage."
Citigroup said it views e-Citi as a critical incubator for new products and a center for strategic investments in the Internet and related technology companies, even as it has formed other online units to team up with e-Citi.
"We're really paying a lot of attention to what we're doing on the Internet," Weill said in a recent interview. "We want people to understand that not everything that we try in that area will work."
But e-Citi has devoured hundreds of millions of dollars while producing widening losses.
The division spent $527 million last year, $378 million in 1998 and $236 million the year before that, according to Citigroup's annual report.
At the same time, its 1999 net loss increased to $179 million from a loss of $143 million in 1998 and a loss of $94 million in 1997, its filings showed. Its revenues rose to $233 million from $149 million in 1998 and $114 million in 1997.
"I have been awestruck by the amount of money that Citigroup has been willing to put into electronic banking," said Lawrence Cohn, an analyst at Ryan, Beck Southeast Research. "I cannot conceive where that money has gone."
Others disagree, saying e-Citi's profits have simply been folded into other businesses at Citigroup, disguising them, and noting most U.S. banks have invested large sums in the Internet with paltry results.
"Everyone has spent a lot of money and doesn't have a lot to show for it," said Robert Albertson, who runs financial services investment firm Pilot Financial. "They're not supposed to. To some extent, this is research and development."
But the center of power has shifted away from e-Citi and Horowitz, many analysts say.
Horowitz now reports to Citigroup vice chairman Deryck Maughan, who was put in charge of a new Internet operating committee in March shortly after Reed's departure was announced.
"Now Maughan is in charge of the Internet future at Citigroup," Rosinus said. "My view of it is, there is no way (Horowitz) stays. No way. This is a graceful way for him to step aside if he wants to, because he has an excuse now."
Maughan comes from Weill's Travelers, where he co-led securities firm Salomon Smith Barney. Horowitz, by contrast, came to Citicorp after leading the interactive media arm of Viacom Inc. and was in Reed's camp.
Weill also announced in a memo in April the formation of two more Internet ventures to complement e-Citi -- e-Consumer, focused on online payments and consumer financial services offerings, and e-Business, which would combine e-Citi business services with the corporate bank.
"It seems they are taking power away from (Horowitz) and putting it with the different divisions," said Steven Eisman, an analyst at CIBC World Markets.
Eisman, like Cohn and Rosinus, said he wouldn't be surprised if Horowitz were to leave.
Citigroup has called these steps part of a natural evolution of its Internet strategy, saying it had always planned to take ideas generated by e-Citi and move them to the units. The new Internet units employ technology created by e-Citi and will focus on the company's customers, rather than on innovation as e-Citi does, a Citigroup spokeswoman said.
"The operating units have the ability to make what has been developed by e-Citi more robust, and to build on it, to distribute it, and to get to new customers," Horowitz said. "It's just the first chapter, and what I intend to do is to continue to build the next layer."
E-Citi's initiatives include the creation of a small business website called Bizzed.com, an electronic commerce marketplace with Commerce One Inc. It also has an Internet-only bank, called Citi f/i, and a Web version of its Direct Access online banking service.
"Citigroup should be noted for what it hasn't done as much as for what it's done," said George Bicher, an analyst at Deutsche Banc Alex. Brown. "They didn't blindly enter with an Internet-only bank, which should be commended."
But other analysts say the recent structural moves at Citigroup's Internet operations highlight fundamental differences in the way Travelers and the old Citicorp did business.
"Travelers believes business lines drive businesses and you don't have a large independent staff function running around doing its own thing," Cohn said. "I think we are going to see e-Citi slowly wither away, function by function."
Others contend Citicorp's Direct Access online banking service, launched in 1984, has not changed much since then, nor has its online banking customer base altered much or expanded.
"They clearly have enormous potential, given the strength of their global brand name and their large infrastructure, which can absorb the needed investments," said Michael Mayo, an analyst at CS First Boston. "Nevertheless, they have not brought all of the resources together that they potentially can to build one coherent Internet strategy."
