YouTube has offered movies for rent for more than a year now, which is great news for fans of obscure independent flicks, the Jesse Ventura vehicle Wood Shop, dated Bollywood titles, or Scary Movie 4. And while some recognizable titles from Lionsgate and the Weinstein Company do appear at the YouTube store, those who rent more mainstream fare online are likely using Amazon, Netflix or iTunes—a fact not lost on the video-sharing giant. That may soon change. READ MORE
Geraldine Laybourne sweeps into a small conference room at the headquarters of Oxygen Media to watch a focus group getting under way one floor below. Most of Laybourne’s employees at Oxygen, the four-and-a-half-year-old cable TV channel for women, have left for the day, and the usually bustling office — located on three stories of a converted Nabisco factory in Manhattan’s Chelsea district — is quiet. Laybourne has been looking forward to this focus group, which she commissioned to gauge the interest of women in some kind of election-season special, an idea that is dear to her heart. Leading the discussion is Karen Ramspacher, a head of research at Oxygen, who sets the group at ease with friendly introductions and banter about everyone’s favorite television shows. Laybourne sits upstairs, watching the roundtable group via closed-circuit television. She happily munches popcorn while Ramspacher breaks the ice, offering soda to the seven participants and reminding them that pizza’s on the way. She starts off by asking them to describe their jobs and name their favorite TV shows. “The OC,” says Whitney, a 22-year-old college student. “Yeah,” the other women agree enthusiastically. “American Idol,” says Anna, a stay-at-home mother. “Reality TV…every one of them,” says Trisha, a fifth-grade teacher from New Jersey, adding that she has two televisions right next to each other so she doesn’t miss anything. After the introductions, Ramspacher wades into more serious subject matter. “Where do you guys get your news from?” she asks. The women, all between the ages of 19 and 28, are here because, during a screening process, they expressed apathy toward politics. They fidget nervously in their seats. The schoolteacher reads the Bergen Record, the New York Post, and the New York Daily News. “I don’t read them for politics,” she says. “I read them for Page Six [the Post's gossip section], that’s about it.” Her students receive copies of The New York Times every day, she mentions later — but she doesn’t encourage them to read it; she uses it to cover the tables when they paint. Switching gears, Ramspacher asks the group how political content could be presented in a more interesting way. “CliffsNotes,” jokes the student. Before long, two pizzas arrive, and Ramspacher asks the women to write down ways they could make their opinions known to politicians. Nobody mentions voting. Laybourne — who three years ago spearheaded a media campaign encouraging women to run for political office — is determined to pique the women’s interest. She scribbles a note to Ramspacher, telling her to ask the women how they would react if politicians started talking about drafting young women, along with young men, for military service. As the women dig into their pizza, Laybourne checks her watch. She’s late for another event. She slips out of the room and heads downstairs, handing Ramspacher the note before walking past the front desk to the elevator. As they say at the network: Oh! These are good days, at last, for Oxygen. Viewership is way up, and nearly five years after launching its TV channel, the company recently reported its first quarterly profit. But that certainly isn’t the result of trying to make better citizens of young women. It’s more a matter of ceasing to do so — via a business plan succinctly expressed by the show, and maybe just the title, Girls Behaving Badly. Is Laybourne, a schoolteacher turned TV exec turned TV entrepreneur, still struggling against that? For all her successes as a builder of hit shows and profitable cable channels, she has shown a persistent inclination toward wishful thinking about her audiences. Her high-mindedness (in TV terms, at least) is sometimes out of sync with the taste of her target audience — which at Oxygen is women between 18 and 49 years of age — and it’s sometimes tripped her up. Laybourne is one entrepreneur who sometimes needs to be reminded to think inside the box. When Laybourne formed Oxygen Media in 1998, the Lifetime Network had already been around for more than a decade and was the established leader in the women’s category. But Laybourne wanted to challenge female viewers with a funnier, more sophisticated alternative to tearjerkers and stalker movies — she was interested in what she often calls “smart fun.” On an early program called Pure Oxygen, for example, she served up Maya Angelou reading poetry. On Exhale, Candace Bergen interviewed distinguished guests like Hillary Rodham Clinton and architect Frank Gehry in what Bergen once described as “mini courses.” Laybourne was also determined to succeed at another first by linking the Oxygen television channel to the Internet, creating a kind of interactive megaportal chock-full of great information for women. After launching its TV channel in early 2000, Oxygen had a hard time getting picked up by cable providers in major cities, and during that year its ambitious Web operation nearly collapsed. Laybourne is not the kind of person who refuses to acknowledge mistakes. “I was totally wrong about how we would get to smart fun,” she says. “I thought it would be through the Internet.” She blames the website debacle partly on the bankers who advised her. “They said, ‘Build it and they will come,” she recalls. Anyway, she observes, she never would have gotten so much seed money without the Internet component. “Like everything in life,” she says, “it’s been a blessing and a curse.” Laybourne describes the past few years as messy but instructive. “You learn a hell of a lot more from a mistake than an early success,” she maintains. True, but, as she is starting to find out, success is a lot more fun. Last year, things finally started looking up. In December, the channel reached its original goal of being offered in 50 million of America’s 80 million cable-watching homes by 2004. The network finally has a big presence in its hometown. Advertisers are taking notice. Now the trick is getting viewers to tune in. By the time she founded Oxygen in the late 1990s, Laybourne was a superstar, best known for transforming the Nickelodeon network into must-see TV for kids. In that position, too, it took her a while to come down to the level of her audience. She offered up serious fare like a show about kids’ dreams (think Pure Oxygen for eight-year-olds). After seven years of struggle, she came up with a hit. Through extensive research, including focus groups with children, Laybourne and her team discovered that kids loved game shows, from Wheel of Fortune to The Newlywed Game. So they created a game show for kids and by kids. Double Dare, which premiered in 1986, starred armor-clad children racing through obstacle courses and getting covered in green slime. It was brilliant, a vivid contrast to typical product-driven cartoons like My Little Pony and Gummi Bears. It was different, it was new, and it was what kids wanted. Laybourne soon solidified her standing with the launch of Nick at Nite and other hits like Rugrats, a cartoon about a ragtag group of kids out to unravel the mysteries of life, like where the light goes when the refrigerator door is closed. Her early missteps all but forgotten, she was a hot commodity, and in 1995 she left Nickelodeon (then owned by Viacom) to work for archrival Disney, where she oversaw operations of a group of cable networks, including Lifetime. But halfway through her five-year agreement with Disney, Laybourne left. She had spent two decades creating brands and franchises, and now she wanted to strike out on her own. The money came easily — a reported $300 million in financing. “It was going to be an opportunity to be part of something great,” Laybourne recalls. She touted a grand vision of the convergence of television and the information superhighway. This wouldn’t be a regular old women’s channel like Lifetime. This would be interactive, whatever that actually meant. The idea attracted big backers like Oprah Winfrey, Paul Allen, and co-founders Marcy Carsey, Tom Werner, and Caryn Mandabach, the team that created hits like The Cosby Show and Roseanne. (Laybourne won’t say exactly how much of the company she or her various backers now own; she does say that her stake is less than 25%.) The Internet component of the business launched first, in 1998, and both that year and the next Laybourne was named the 20th most powerful woman in American business by Fortune magazine. The business, however, was a wreck. “We were trying a million different things,” she remembers. “It was a lot of mess.” By the time Paul Allen threw in an additional $100 million in December 2000, less than a year after the launch of the Oxygen TV channel, the situation was dire, and it was understood that Oxygen was going to have to undergo a major restructuring. Almost immediately, Laybourne laid off 65 employees, about 10% of her work force, most of whom worked on Oxygen’s Internet operations. Today, Oxygen’s website is much like every other cable network’s, offering basic information like show schedules and sweepstakes information. The bottom might have been when Oprah, Laybourne’s ace in the hole, seemed to be backing off. In exchange for a 25% founder’s stake (she currently has a smaller stake, according to Oxygen), Winfrey had invested $20 million in Oxygen and agreed to allow the network to air reruns of The Oprah Winfrey Show. But in an April 2002 profile that appeared in Fortune, Winfrey seemed less than pleased with Oxygen. “It is an investment,” she said, when asked if she was happy with it. She went on to express regret about handing over the rights to her show. That wasn’t great news for Laybourne, whose celebrity backers were important to her network’s cachet. She couldn’t afford to alienate a key ally with an ugly contract dispute. So she quickly struck a compromise with Winfrey, who took back the rights to her reruns but agreed to provide footage from the half hour after her show, when she kicks off her heels and relaxes with her guests. She called it, simply, Oprah After the Show. These days, any time you turn on Oxygen you’ll see the target audience getting what it wants. On Snapped, for example, horny, homicidal twins plot to kill one twin’s husband. With Laybourne’s reputation, and her network’s future, hanging in the balance, she turned over significant creative control to Debby Beece, her head of programming and marketing. Beece, who had worked for Laybourne at Nickelodeon, overhauled the channel’s lineup, which was clogged with two-hour blocks of bland informational shows. “I knew right away we needed to focus on entertainment,” she says. She shortened Pure Oxygen and other information-based shows on her way to eventually phasing out most of them. Since the network couldn’t afford to invest in original programming at that point, Beece searched for an affordable acquisition that would hint at Oxygen’s new direction. “For her, it was getting in and figuring out what, if anything, was salvageable,” Laybourne says. “It was getting out there, listening to focus groups, asking questions, listening to your consumers.” After all that research, Beece finally decided to buy the rights to reruns of Universal Studios’ Xena: Warrior Princess, a tongue-in-cheek show about a scantily clad, musclebound woman who slays evildoers. Laybourne liked the idea. “It was a good buy,” she says. “It was available, and it was going to shake people up about what they thought we were.” Laybourne says the name Oxygen came to her in a dream. She woke up thinking that, as consumers and creative people, women were being shouted at. They needed a breath of fresh air. Today, Beece talks of “oxygenating” the network’s programming. To oxygenate something, she explains, is to make it “bold, a little bit risque, with moments of funniness.” To that end, Oxygen is plowing tens of millions into saucy new original programming in 2004. (Industry monitor Kagan Research puts the figure for all programming at Oxygen at $113 million.) That’s a sizeable investment for the network, which hasn’t scored any outside financial help since late 2002, but it’s still small potatoes compared with Lifetime, which is now co-owned by Disney and the Hearst Corp. and has committed $800 million to a rollout of original programming that began last year. Laybourne has a lot riding on her network’s new lineup, which includes its first original sitcom, Good Girls Don’t, about two roommates — a tramp and a prude — and Nice Package, a home makeover program starring two beefcake handymen with penchants for whiskey sours and tight T-shirts. Add to those a stable of popular Oxygen standbys like Girls Behaving Badly, a naughty hidden camera show, Absolutely Fabulous, an English comedy about an over-the-hill trollop and her best friend, and Talk Sex With Sue Johanson, in which Johanson, a Canadian grandmother, talks about such things as lesbian foreplay and genital piercing (while also giving lots of sensible advice about sex and relationships), and Laybourne has one libidinous lineup in the works. If Laybourne is troubled by the occasionally lowbrow turn her once-brainy network has taken, she’s not showing it. For the most part, she seems comfortable with the new spin. It’s still smart fun, she maintains; it’s just more entertaining. But she has moments of uncertainty. Last winter, for instance, Oxygen was preparing a show with the title My Best Friend Is a Big Fat Slut. In January, New York Post television critic Linda Stasi wrote about it in an article that featured a picture of Laybourne under the headline “A Big, Fat Slut by Any Other Name.” Laybourne was obviously uncomfortable. The next month, in one of her bimonthly town hall meetings with her 220 employees, Laybourne announced she was switching the name to the much more innocuous Good Girls Don’t. Not because of the Post article, she insisted, but because the name was “more Oxygen.” The new Oxygen is clearly stronger than the old: The channel’s average number of daily viewers jumped 69% during the first quarter of 2004, compared with the same period last year. But that translated into just 56,000 viewers among the crucial 18- to 49-year-old women, compared with the 388,000 who tuned in to Lifetime. (That’s still better than WE, which drew 34,000 viewers in the same category.) Laybourne needs to jump-start ratings, and to do that she is relying on Beece. So far, research confirms that women like jokes, especially jokes that have to do with sex. “Younger women are completely comfortable with humor about sex,” says Laybourne, citing a survey of 1,849 women that the network commissioned and released last spring. The study reveals that women between 18 and 49 are just as likely as their male peers to think that sex and body parts can be funny. Focus groups give the same message. At a focus group about women and high-speed Internet access, for example, a stylish, young New York musician gave high marks to a commercial for Cox Communications because she thought the word Cox was funny. These days, any time you turn on Oxygen you’ll see the target audience getting what it wants. In an early episode of Good Girls Don’t, for instance, Jane, the promiscuous roommate, pretends to be pregnant in order to seduce a prenatal male nurse she meets in the grocery store. And during the premiere episode of Snapped — Oxygen’s new true-crime documentary series about women on the edge of insanity — horny, homicidal twins named Peggy and Betty plot to kill one twin’s husband. Viewership is way up, but that certainly isn’t the result of trying to make better citizens of young women. It’s more a matter of ceasing to do so. Laybourne, on the other hand, is finally coming back from the edge. Chief operating officer Lisa Gersh Hall expects 2004 to be Oxygen’s first profitable year, with revenue of $125 million, a 25% increase from last year. “It’s only done positive things,” says Andrew Donchin, director of national broadcasting at Carat USA, who buys $2 billion in ads (including some on Oxygen) for his clients each year. “It’s in a decent amount of homes, and it’s really trying to be a point of destination for women.” Donchin suggests, though, that Laybourne tread lightly when it comes to racy programming. Sexy storylines help set Oxygen apart from other women’s channels and also make a mark on popular culture: It was a watershed moment for the channel when Saturday Night Live parodied Sue Johanson. But too much bawdiness could also scare off advertisers. “It’s okay to push the envelope and be a little risque, but there’s that line you can’t go over,” notes Donchin. “They’ve walked that tightrope pretty well.” Recently, of course, programmers have been looking over their shoulders at the Federal Communications Commission, which has been on high alert ever since the Janet Jackson exposure episode. Laybourne says she isn’t worried about the FCC. “Our motivation is not for pure shock value,” she says. “It comes from what’s right for our audience, so I don’t think we’re going to be a target on this.” Laybourne was briefed on the conclusion of her focus group on politics. On the tape, her note about the draft doesn’t provoke much reaction. Things get a little livelier when Karen Ramspacher hands out pictures of an Urban Outfitters T-shirt emblazoned with the slogan, “Voting Is for Old People.” She asks the participants to write down what they think about the shirt, and a few minutes later checks on their responses. “Basically, it’s a true statement…I could be wrong, but that’s kind of how I feel about it personally,” says the fifth-grade teacher. Ramspacher asks the other women what they think. “The slogan shows that voting is just not popular,” says the stay-at-home mom. “It’s just not the thing to do. And like everyone else is saying… we’re just very much into reality, and reality TV.” That inspires the college student. She might follow presidential politics, she says, if the campaign could include a reality show — maybe George Bush and John Kerry sharing a loft for a week, with like five guys and five girls. Is Laybourne going to try to defy that kind of sentiment? Sort of. Not through extended programming on politics, but she’ll probably commission a series of quick, fun one-minute public service announcements about the importance of voting. “We must leave women better off than we found them,” she says. Then she catches herself. “That doesn’t mean we have to serve green vegetables and political forums. The problem with me is that when I talk about my mission, I sound deadly serious because I’m a former schoolmarm. I always have to interrupt myself and remind myself that I’m the woman who brought green slime to TV.” Nadine Heintz is a staff writer.
Customers: can’t live with ‘em, can’t live without ‘em. You need them to survive, but they can cause headaches. Customers don’t always pay their bills promptly. They cheat retail return policies. They pirate software and music. They even help themselves to soda refills. But while entrepreneurs have long accepted such petty outrages as simply the cost of doing business, a few innovators are discovering that technology can induce consumers — without alienating them — to play by the rules. Consider Payment Protection Systems. The company, based in Temecula, Calif., sells a dashboard device called On Time to used-car dealers. It starts blinking in the days leading up to a payment, and if the driver fails to cut a check, it disables the car’s starter. In so doing, On Time enables dealers to take a chance on customers with bad credit. “The majority of people don’t want to break the rules,” CEO Mike Simon says. “You change behavior through technology.” Repossessions at dealerships using these devices dropped 36% last year, and late payments fell by 64%. Roughly 100,000 units — priced at $225 each — are in circulation. But Simon calls the market “infinite”: independent dealers, On Time’s current bread and butter, sold 13 million used vehicles last year. In the same vein, Flexplay Technologies in New York invented a disc to curb software and copyright piracy. Once the DVD is opened and exposed to oxygen, it will play for 48 hours, until a chemical reaction renders it useless. The Mission Impossible-like product has since been found to have a wider application. Disney’s Buena Vista division plans to sell short-life DVDs through drug stores and gas stations. Ryan Jones of the Yankee Group in Boston says that this self-limiting technology can reduce liability and risk, and also expand a market as On Time and Flexplay have. These innovations can “plug the dike” or “look for new ways to sell the water,” Jones says. Either way, consumers’ bad habits are kept in check.
High concept Bond — James Bond — is the inspiration for the Q-PC, a new computing system that brings desktop technology to the dashboard. The logic is obvious: a certain British superagent never gets lost in foreign cities, even during car chases, and is well supplied with gadgets to make the drive comfortable. Derrick T. Copeland, CEO of ADT Inc. (#101), believes all motorists deserve to experience a bit of 007′s heaven. Even his product’s name is Bondian: the “Q” is an homage to the cantankerous gadget guru who suits James up for every mission. The Q-PC provides drivers and passengers with Internet access, MP3- and DVD-playing capability, and navigational tools such as maps and directions. With the system, a grueling family drive to Florida is “just three or four Disney movies away,” Copeland says. Although Copeland hopes the Q-PC will ultimately appear in roadsters of every racing stripe, he is initially marketing his hardware to makers of ambulances, limousines, and recreational vehicles. Consumers can pick up the Q-PC as an aftermarket add-on. Prices range from $3,500 to $5,500, although one professional basketball player recently dropped $40,000 on a custom job, replete with a full-screen plasma TV. For the company’s CEO, one pure joy of such a business is the opportunity to test- drive wired-up cars. But Copeland also appreciates the system’s practicality. Last year, when his transmission died on a lonely New Mexico byway at 5 a.m., “we went on the Internet and found the dealer who was the best service provider in the four-state area,” Copeland recalls. Eight hours later, his car was back on the road. View the 2001 Inc 500 list. High concept A Fruitful Endeavor Live and Let Drive Lick My Biceps Insect Inside Please e-mail your comments to editors@inc.com.
Newspaper headlines are filled with reports describing the demise of dot-com firms. The rapid reversal of fortunes, however, has not been limited to pure-play Internet companies. Some of the largest losses on the Internet have occurred on the books of Fortune 500 companies. Consider this: Disney recently reported that it would take a charge of more than $790 million related to restructurings within its Internet group. This amount was dwarfed, however, by an even greater icon of U.S. business. AT& T reported that it would take a noncash charge totaling $2.7 billion related to its investment and control of Excite@Home. Both Disney and AT& T are seasoned companies that have weathered numerous business cycles. It would be easy to believe that their management teams were caught up in Internet hype, which led to these massive losses. A deeper examination, however, shows a more subtle cause. In both cases, high executive turnover combined with hand-waving business plans that had a high assumption-to-knowledge ratio led to faulty decision-making at both companies. Business plans for new ventures involve many assumptions; that comes with the territory. Creating a vision of the future and then working backwards to assess how to achieve it requires educated guesswork. Inevitably, many guesses turn out to have been wrong. That is why companies entering unfamiliar markets must continually test assumptions, adjust their tactics, and then readjust their assumptions in a never-ending forward march. That, in part, was where things went awry at AT& T and Disney: A prolonged game of musical chairs in the executive corridors led to translation errors in the business plan. Just as in the childhood game of telephone, where a message is passed between a number of people and the ultimate message is grossly distorted from the original message, assumptions in the business plan were translated into certainties. Take Disney first. In 1995 the company was looking to enter the brave new World Wide Web arena. The depth of Disney’ s ambitions was widely noted. Jim Cramer, founder of TheStreet.com, a financial news and analysis website, reported that “there was a period of a couple of years where Disney acted as if it were the king of the web.” Despite its ambitions, Disney’ s online operations began in a modest manner. The first version was called Disney Online and consisted of interactive websites for Disney properties. Some of these were instant hits. ABCNews.com, ESPN.com, Mr. Showbiz, and Disney.com were all considered niche successes. Disney then decided to create a broad-based portal. The reasons were clear. Although the Disney stock was in a mild upward trend, it did not have the explosive growth of broad portals such as Yahoo or AOL. The Disney management saw this move as a way to rapidly create shareholder value. In addition, it allowed Michael Eisner to convey a clear, simple Internet strategy. It was easy for executives to rally around this strategy, and Disney had the media assets to make it plausible. Moreover, by 1996 the only metric of significance to portal performance was Media Metrix – a website that measures online traffic. By themselves, the focused Disney media sites would never be able to achieve enough traffic to register on this rating. In 1998 Disney created the Buena Vista Internet Group by merging its assets sites with a search engine, Infoseek. The deal was structured so that Infoseek got $70 million in cash, a $139 million five-year note, at least $165 million in promotion, and Starwave (a web-development outfit valued at approximately $350 million). Disney got 43% of Infoseek’ s shares, along with warrants, that when exercised would give Disney a 50.5% stake. However, the success of this new venture hinged on one critical assumption – that at this time in the portal wars, Disney’ s ability to promote across its “offline” network was sufficient to leverage itself into a new brand, Go.com At that time, this seemed a plausible assumption. Most portals had grown without any advertising simply as a result of word-of-mouth, or as some might say, word-of-mouse. Although Yahoo had the fastest growth rate among portals, absolute traffic numbers for Excite.com, Lycos, Yahoo, and Infoseek weren’ t that far apart. In comparison to pure-play portals, Disney also had another huge advantage: It was a bricks-and-mortar company with a vast arsenal of off-line promotion possibilities including theme parks, cruise ships, and retail stores. A member of a prominent strategy consulting firm that evaluated Disney’ s Internet operations says it just wasn’ t known how off-line promotion would deliver Internet traffic but that there was no logical reason it couldn’ t. That was one of Disney’ s most significant assumptions. Disney acted on its strategy cautiously, seemingly testing its assumptions. The Go.com portal rolled out slowly with only a small number of features. Some observers saw the slow rollout as a mistake, considering the immense growth rates of its competitors – but it did show that Disney was going through initial testing of product features. Harry Motro, CEO of Infoseek, told consulting firm Forrester Research that heavy offline promotion wouldn’ t start until the following year. Disney was not planning a major media blitz for more than six months as it tested various product/promotion bundles. The Go.com portal was making progress. Forrester reported that “offline media helped boost GO Networks’ reach from 25% of online users in December 1998 to 33% in June 1999.” At the same time, Disney executives were rapidly defecting. With a stagnant stock price, especially in comparison to pure-play Internet companies, and the scarcity of experienced media executives, Disney was ground-zero for recruiters. Jim Cramer recently described his experience with Disney at that time. “People kept getting deposed and new rulers were installed with regularity.” Akther Ahmed, president of Xavient Technologies, said “having Disney on your resume was all you needed for an offer.” Michael Eisner, CEO of Disney, acted to stop the defections. He bought the remainder of Infoseek and created a tracking stock in order to create Internet-style options-based compensation. Disney then began to marshal its massive “offline” assets to promote Go.com. The assumption that this would be effective had become a truism around the company. One former NBCi executive claims that the web-marketing notion that companies should “use offline assets to build online traffic” originated at Disney. By this time, however, the data was available to test this assumption. Go.com was getting some 50 million pageviews a day while Yahoo was getting more than 300 million daily pageviews and more. In addition, most of the Go.com traffic was coming from the Infoseek search engine, which was itself getting new competition from rivals such as Google.com and Dogpile.com. “If the slowdown in growth was known, Disney likely would have chosen a different organization of its assets and might have succeeded,” says Wharton marketing professor Peter Fader. “It likely wouldn’ t have stayed with the alternate (GO) brand.” Disney took another year to come to that realization. After months of heavy advertising, Go.com had little to show except for a $242 million operating loss. Following one last attempt to reposition Go.com into an “entertainment and leisure” destination site, Disney shut it down. Go.com continued to exist as a website, though in a much tamer form that primarily offered links to other Disney sites. On January 29, Disney announced that it would dissolve its online tracking stock, Disney Internet Group, converting its shares into common stock on the parent company as of March 20. Each outstanding share of the tracking stock was to be converted into a 0.19353 of a share of Disney common stock. As a result of the restructurings, a charge of $790 million was related to the write-off of intangible assets. Another $25-50 million in charges were attributed to severance and the write-off of fixed assets. Just as Disney’ s Go.com went astray, AT& T ran into serious trouble with Excite@Home. The company’ s long-standing profits from long-distance services were rapidly disintegrating, and it was looking for ways to capture a greater share of the consumer’ s wallet. One way to do this was to deliver both voice and Net access to consumers. Regulation prevented AT& T from getting direct access customers without going through the regional Bell companies, which still dominated the local phone services business. Cable access seemed like a promising way to reach the end consumer, and AT& T began a massive buying spree of cable properties. One of AT& T’ s most significant cable acquisitions was TCI, which owned a significant stake in Excite@Home and also used its exclusive high-speed Internet service by contract. By acquiring TCI, AT& T inherited the relationship. AT& T’ s management was primarily interested in gaining access to consumers and the Excite@Home assets just added value to the deal. AT& T made the assumption that this strategy would allow the company to create a content-access bundle that could get premium pricing. This was a foray into unknown territory for AT& T. According to Wharton professor G. Anandalingam, “It’ s okay to be opportunistic, but it’ s a very different matter to make the opportunism work.” AT& T repeatedly said that it did not want to be in the content business. Immediately, the assumption was put to a test on all these issues. Numerous counties, including Oregon’ s Multnomah County and Broward County in Florida, refused to transfer their local cable franchises over to AT& T. The accusation was the bundling of access-content, and the communities – and America Online – demanded that AT& T open its access channels to other content providers. AT& T, however, had a solid management team that understood this issue, led by Leo Hindery. A vice president at a large cable company who requests anonymity says that “TCI’ s CEO John Malone and Leo Hindery understood this assumption and how to navigate through it.” Hindery even made a speech at Stanford Graduate School of Business entitled “The Future of Content.” Through a variety of actions, Hindery made it known that AT& T would be better off selling access to its pipes to whatever content providers were willing to pay, rather than bundling proprietary content with access. The most plausible strategy seemed to be to divest the stake in Excite, a content portal, in order to allow open access to other content providers. Hindery then resigned to pursue personal interests. Malone was busy running Liberty Media and wasn’ t operationally near these issues. Also, the top leaders at Excite – Tom Jermoulak, followed soon after by George Bell – resigned. These events were followed by a continual departure of executives from AT& T and Excite@Home. The new management executed a plan that was based on a premium priced content-access bundle. Responding to America Online’ s acquisition of Time Warner, AT& T began to assemble its own broadband Internet service. It was as if an assumption that had already been proven wrong now was suddenly being acted upon, as if it were a given in the plan. AT& T offered to buy out the stakes of two minority partners in @Home, Comcast and Cox, at a 27% premium. AT& T also took over 74% of Excite@Home voting stock and consolidated financial statements which diluted its 2000 earnings by 20 cents a share. In addition, AT& T extended its own non-exclusive carriage of @Home to 2008, six years past the expiration of its exclusive carriage of @Home in June 2002. At the same time, it was stated that after June 2002, other Internet service providers and portals would share that space. Initial deals were struck with Mindspring and Earthlink. Not surprisingly, the value of Excite, already at a 52-week low, plummeted which showed up in AT& T’ s books. Ironically, Excite@Home took a $4.6 billion write-down of its assets from its content acquisitions. AT& T’ s 23% share of the noncash charge equaled $1.1 billion. Also, AT& T took another noncash charge of $1.6 billion because of the plummeting valuation of Excite@Home. A recent report in BusinessWeek Online offers a final footnote. “The end may be near for the once-mighty Excite Internet portal,” the publication writes. “Patti S. Hart, appointed chairman and CEO of Excite@Home on April 23, already is exploring opportunities to sell the money-losing Excite business and may shut it down in the next several months if no buyers emerge.” What overall conclusions may be drawn from these twin disaster stories? At Disney and AT& T, the companies began a careful process of entering unfamiliar territory by working their way through assumptions about the future. It appears, however, that accelerating executive departures led to translation errors in the operational plans. Assumptions were treated as realities, a formula that has often been known to lead to massive losses. The take-home lesson: Watch out for business plans with a high assumptions-to-knowledge ratio. They can get distorted as they pass through a rotating set of executives, and get you into a lot of trouble. All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.
Come April 21, Zeeks.com will face a new challenge — as if constantly coming up with “kewl” features for its ever-changing young audience wasn’t hard enough. As of that date, the one-and-a-half-year-old Internet playground and search engine for kids ages 6 to 13 will have to comply with the Children’s Online Privacy Protection Act (COPPA). COPPA, which emerged in response to widespread concern about the unregulated online collection of information from children, requires that commercial Web sites catering to the under-13 crowd obtain “verifiable parental consent” before collecting any information that could be used to identify or contact their preteen users. That includes the child’s name, telephone number, and E-mail and street addresses. While COPPA imposes the same requirements on all kid-oriented sites, two factors make the burden especially hard for smaller businesses to bear. One is cost. For instance, if Zeeks.com adds 1,000 members a day, the company would be looking at a compliance cost of at least $240,000 a year, including the tab for records storage and for five new employees, says cofounder Steven Bryan. But a larger problem is the potential loss of traffic. Once parents start receiving those permission requests, says Bryan, familiar brands like Disney will have an advantage over relative unknowns. That could spell trouble for sites that, like Zeeks.com, rely primarily on advertising revenues to stay afloat. Compounding the problem is the fact that some kids may choose to evade the consent process by heading for sites designed for teens or adults. Jorian Clarke, founder of Milwaukee-based KidsCom.com, a five-year-old online activities center for kids, dubs the dynamic the “peas and ice cream factor.” “If everything on a site becomes peas,” she explains, “kids are going to be looking elsewhere for the kind of content that meets their dessert needs.” Clarke worries that COPPA, which layers on extra costs, will help transform the Net into a playing field where only the large can compete. But others take a more optimistic view. Elizabeth Lascoutx, who directs the Children’s Advertising Review Unit at the Council of Better Business Bureaus, believes that the cost of complying with COPPA will soon decline. “I don’t think COPPA will have an enormous impact on the industry,” she says, “except for increasing parents’ comfort level with letting their kids surf the Web.” In fact, Bryan, who like Clarke supports COPPA’s goals, even sees a bright spot in the law. COPPA allows sites to retain information collected before April 2000 without obtaining parental consent. But Zeeks.com’s new competitors will have to comply with COPPA from day one. With 250,000 registered members as of January, Bryan observes, “I now have a position that is going to be very, very hard for a start-up to match.” Getting into the Act If your business must comply with COPPA, consider these tips from Toby Levin, team leader for Internet advertising at the Federal Trade Commission: Decide whether you need identifying information at all. There are lots of ways to provide content that don’t require you to collect information. For example, if you want your site to offer kids a personalized greeting, use screen names, not real ones. Take a look at the exceptions to the consent rule. For example, you can collect a child’s E-mail address in order to respond to a onetime request. If you delete the address after responding, you won’t trigger the other requirements of the rule. Consider methods other than print-and-send for collecting information, such as toll-free numbers, credit-card verification, or E-mail accompanied by a digital signature. For more information, visit www.ftc.gov or E-mail kidsprivacy@ftc.gov.
Myth 2: Traffic will make you rich REALITY CHECK: Selling well makes you rich. Traffic only provides eyeballs Cramer: Revenues are what will define things in the end, but people live and die by the Media Metrix site-traffic reports. Wall Street is obsessed with them. I swear to God, if you want to make big money in the stock market, go to Springfield High outside Philadelphia. Get a bunch of kids and say, “Surf this site all day long, and I’ll give you 20 Gs.” You’ll generate a huge amount of page views, which is what wins in the market today. Johnson: Sites like Blue Mountain Arts’ E-greeting-card site succeed because they provide something that attracts people, and in the Internet world that’s a useful model. It may make business-school people scratch their heads, but traffic to a portal gets a person to hit some other channel buttons and use other content. Morgan: A lot of companies, like Blue Mountain Arts, are specifically aggregating an audience, and they’ll figure out what to do with it later. The question is whether an audience used to doing things for free will ever pay for them. Randall: There is a common belief that you should basically spend an infinite amount of money to promote your site. What you’re starting to see is that at the end of the day, you have to have a real business model. Rich: Bottom line: you’ve got to have users and customers. Driving visitors to a site is not a guarantee for a viable business. THE TRUTHMONGERS To help us deconstruct the myths of the Web, we turned to expert observers of the Internet phenomenon. Their comments can be found after each of the case studies we presented. Here are their credentials: Martin Anderson , management professor at Babson College, in Wellesley, Mass., advises executives who are transforming their traditional companies into “click and mortar” businesses. James J. Cramer is the brash cofounder of and columnist at TheStreet.com. He has built successful careers as both a journalist/pundit and a hedge-fund manager. Kathleen Eisenhardt is a professor specializing in competitive strategy at Stanford’s School of Engineering. She recently coauthored Competing on the Edge: Strategy as Structured Chaos. Chip Hazard is a general partner and E-commerce specialist at the venture powerhouse Greylock, in Boston. He helped launch the e-Steel exchange. Tod Johnson , chairman and CEO of Media Metrix Inc., based in New York City, is a widely recognized expert on brand loyalty. Ted Leonsis is president of AOL Interactive Properties Group. In his first three years at America Online (starting in 1994), it grew from about $100 million in revenues to $1.5 billion. Kelly Mooney is director of intelligence at Resource Marketing Inc., a technology-marketing firm in Columbus, Ohio. She has helped companies such as Victoria’s Secret develop their on-line strategies. Allen Morgan is a general partner at Mayfield Fund, in Menlo Park, Calif. He has been involved in more than 350 venture-capital investments and public offerings. Bo Peabody is a cofounder of Tripod Inc. and vice-president of network strategy at Lycos Inc. When he was still in college, Peabody founded Tripod, which helps people build their own home pages. In 1998 he sold the company to Lycos. Scott Randall is founder and CEO of Internet-auction hosting service FairMarket Inc. Randall has been involved in E-commerce since 1995, when he launched an on-line store. He has been president of the Internet Shopping Network and Yahoo Marketplace. David Rich is vice-president of marketing and brand guru at Bigstep.com, which provides on-line services to small businesses. He previously orchestrated brand campaigns for Walt Disney, Pepsi, and Jamba Juice. THE 7 MYTHS OF THE WEB ECONOMY Myth 1: Building a Web site is easy The word from the experts Myth 2: Traffic will make you rich The word from the experts Myth 3: Smart money makes you smart The word from the experts Myth 4: Razzle-dazzle makes Web sites great The word from the experts Myth 5: Brand is everything The word from the experts Myth 6: Wild ads make Web stars The word from the experts Myth 7: Community, community, community The word from the experts Plus: Tales my guru told me Dispatches from the Web economy Back to Intro, ” I Was Seduced by the Web Economy”
Myth 4: Razzle-Dazzle Makes Web Sites Great REALITY CHECK: Bells and whistles are fun but not always functional Cramer: The look and feel of a site is meaningless. What matters is speed. People want to get in and get out. Until they get technology so that pictures and graphics don’t delay load time, all pictures should be banned. Eisenhardt: Fancy graphics and animation don’t buy you anything. There’s a minimum level of slickness you want to see when you go to a site, and people will probably add those features as broadband becomes more common, but I expect you’ll see a lot of diminishing returns as well. Hazard: Fancy front-end technology slows down the user experience. Ultimately, that will turn people off. I was shopping on toy sites from home the other night. One loaded in one second, and one loaded in 15. Guess which one I bought from? Leonsis: There are sites out there that are just functional. Look at Yahoo. It’s not fancy; it’s just gray and blue. Look at us at AOL. We’re pretty much a flat site. You want to make buying really fast and easy. No videos, no bells and whistles. Just get to the point. Mooney: This has been a big myth for the last couple of years. There’s a tremendous focus on the cool things you can do. Technology has gotten ahead of the concept in many cases. The more important thing is to know what people want. Peabody: As broadband becomes more common, you’ll have to have this stuff. But today it’s not to your advantage to have a lot of bells and whistles. Sites like that are sort of annoying. Rich: Stay true to what your customers value: more efficiency or a faster download. THE TRUTHMONGERS To help us deconstruct the myths of the Web, we turned to expert observers of the Internet phenomenon. Their comments can be found after each of the case studies we presented. Here are their credentials: Martin Anderson , management professor at Babson College, in Wellesley, Mass., advises executives who are transforming their traditional companies into “click and mortar” businesses. James J. Cramer is the brash cofounder of and columnist at TheStreet.com. He has built successful careers as both a journalist/pundit and a hedge-fund manager. Kathleen Eisenhardt is a professor specializing in competitive strategy at Stanford’s School of Engineering. She recently coauthored Competing on the Edge: Strategy as Structured Chaos. Chip Hazard is a general partner and E-commerce specialist at the venture powerhouse Greylock, in Boston. He helped launch the e-Steel exchange. Tod Johnson , chairman and CEO of Media Metrix Inc., based in New York City, is a widely recognized expert on brand loyalty. Ted Leonsis is president of AOL Interactive Properties Group. In his first three years at America Online (starting in 1994), it grew from about $100 million in revenues to $1.5 billion. Kelly Mooney is director of intelligence at Resource Marketing Inc., a technology-marketing firm in Columbus, Ohio. She has helped companies such as Victoria’s Secret develop their on-line strategies. Allen Morgan is a general partner at Mayfield Fund, in Menlo Park, Calif. He has been involved in more than 350 venture-capital investments and public offerings. Bo Peabody is a cofounder of Tripod Inc. and vice-president of network strategy at Lycos Inc. When he was still in college, Peabody founded Tripod, which helps people build their own home pages. In 1998 he sold the company to Lycos. Scott Randall is founder and CEO of Internet-auction hosting service FairMarket Inc. Randall has been involved in E-commerce since 1995, when he launched an on-line store. He has been president of the Internet Shopping Network and Yahoo Marketplace. David Rich is vice-president of marketing and brand guru at Bigstep.com, which provides on-line services to small businesses. He previously orchestrated brand campaigns for Walt Disney, Pepsi, and Jamba Juice. THE 7 MYTHS OF THE WEB ECONOMY Myth 1: Building a Web site is easy The word from the experts Myth 2: Traffic will make you rich The word from the experts Myth 3: Smart money makes you smart The word from the experts Myth 4: Razzle-dazzle makes Web sites great The word from the experts Myth 5: Brand is everything The word from the experts Myth 6: Wild ads make Web stars The word from the experts Myth 7: Community, community, community The word from the experts Plus: Tales my guru told me Dispatches from the Web economy Back to Intro, ” I Was Seduced by the Web Economy”
