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Dot-com Downturn Creates Web Woes

12/03/2000 7:00 PM Eastern


"The Internet? Is that thing still around?"-Homer Simpson

This whole dot-com craze-this silicon-injected, venture capital-fueled, wired Web world-it was all just a fad, right? We who grew up in the traditional world of passive, one-way, sit-and-do-as-you're-told media aren't surprised by the growing list of recent Web site failures. Right?

The dot-coms sure are getting theirs, boy. Web site after Web site is laying off staffers or shutting down altogether. High-flying stocks now sell for pennies.

Inside many big media companies, there has long been tension between the new-media faction-the tech-savvy
digerati

-and traditionalists, the folks who were skeptical of online involvement.

Maybe it's high time for the traditional media execs to march down to their online divisions and yell, "I told you so! Traditional media
rule
! Take your Pets.com sock puppet and stuff it!"

Well, not so fast. The Internet is not going the way of the citizen's band radio. The Web is experiencing an inevitable reality check, where companies built upon flimsy business plans or irrational exuberance are returning to earth, and unfortunately dragging down many employees with them.

In fact, with cable networks and other traditional media heading into a cyclical downturn in advertising revenue, new and old media may need each other now more than ever. Media convergence used to be regarded as a means of creating new business. Now it may be an economic necessity.

One executive who has successfully integrated new and old media, Dick Glover, executive vice president of Internet media for Walt Disney Internet Group and ABC Inc., likens the Internet to "a singing pig."

In an interview, Glover noted that a singing pig would attract tremendous attention, even if it sang badly. But if every pig could sing, the successful porkers would need to carry a tune and sing people's favorite songs.

Likewise, the Internet attracted tremendous attention, but many Web sites failed to meet consumers' increasing demands, he explained.

To succeed, sites must have a long-term consumer proposition, a solid infrastructure and a clear competitive advantage, Glover said.

The market downturn is particularly hard on start-ups and pure Web plays.

"The little guys who are stand-alones are toast," said Tom Wolzien, senior media analyst at Sanford C. Bernstein & Co. and formerly of NBC. "They'll either just go away or be vacuumed up by somebody for a song."

The big media companies are seeking to avoid the Web's snares.

Discovery Communications Inc. recently announced a layoff of 40 percent of its 200 Web staff to more closely align its Web and TV product. Two major interactive spin-offs-MTVi and NBCi-are undergoing layoffs and reorganizations in bids to improve financial ledgers.

The online operations of the media giants will finish the year with huge losses.

According to third-quarter Securities and Exchange Commission filings, Viacom Inc. reported online business losses of $144 million on $64 million in revenues; Time Warner Inc.'s Digital Media unit posted nine-month operating income losses totaling $147 million on revenues of $44 million; NBCi, a net loss of $417 on $92 million in net revenue; and Disney's Internet Group (for nine months, posted June 30), a net loss of $767 million on revenue of $286 million. Acquisition costs played a part in some losses.

Meanwhile, cable operators are moving ahead with high-speed access businesses, but efforts to establish branded portals by players like Excite@Home Corp. or Road Runner have been constrained by slow technological rollouts. And the biggest merger of new and old media, America Online Inc. and Time Warner Inc., has fallen in value since it was announced nearly a year ago.

So what are media companies to do? Should they give in to the traditional media guys, shut down their interactive divisions and rededicate themselves to bricks-and-mortar, cost-per-thousands and mindless sitcoms?

"You don't shut it down," said Wolzien. Most Web plays initially were designed to stake out territory, he noted. "Now you just have to hunker down and make it work."

Despite the posted losses, online revenues are growing. Glover attributed Disney's expenses largely to developing an infrastructure that can be used to publish content across its sites, drive down costs and leverage both offline and online brands, including ESPN.com, GO.com and Enhanced TV simulcasting.

"Now the infrastructure is in place and can be leveraged, and that's why the [financial] numbers are heading in the right direction," Glover said. The infrastructure paid off for ABCNEWS.com on election night, he added.

"By having that infrastructure in place, we were able to provide a better consumer experience for people who wanted up-to-the-second information on the election, whereas others failed because they had nowhere to go to find the excess capacity," he said.

Web business models remain complicated. But big media companies-with their extensive brands, assets and relationships-are well-equipped to take the Web to its next level.

By successfully marrying old and new media, perhaps they can even make pigs sing.


Craig Leddy is a digital-media analyst who likes both old and new media. Digital Dilemma runs every other week. Contact Leddy at
LeddyColumn@aol.com.

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