‘Net Effect: Old Media, New Tech

Barry Diller’s first experience with what he calls “the new math” of the Internet came the day his USA Networks combined two of its operations and sold their stock to the public as an online company.

“The stock,” as he recalled later, “shot straight to the moon. As it was happening, I thought, trained in the Old World, this just didn’t . . . compute.”

That was Dec. 3, when USA’s Ticketmaster Online and City Search subsidiaries came on the market at $14 a share and ended the day at $40.25, despite having combined losses of more than $73 million over the previous three years. (The stock would peak at $80.50 a few weeks later.)

Diller’s amazement that such companies’ shares could rocket out of sight long before their businesses were “out of the crib,” as he put it in a recent speech to a gathering of Web executives, is echoed by most of his fellow moguls in traditional media.

And that is one factor driving a genuine frenzy among television, cable, music and movie companies to seize a beachhead on the Internet. The trend may well usher in a historic consolidation of entertainment, technology and communications companies as online business transforms all three worlds.

To a great extent, the mass media conglomerates are acting defensively. It is not merely that Web companies command rapidly developing new technologies that threaten to radically change all entertainment business. Equally menacing to traditional media moguls is the extraordinary ease with which these young companies, some barely a year or two old, can raise billions of dollars in capital, often more cheaply than corporations with years of profits behind them.

“I guarantee you that within a year a new media company will buy a traditional media company, like America Online buying CBS,” says Joe Kraus, senior vice president and co-founder of the Web company Excite, referring to a merger that has been the subject of perennial market rumors. (Most market professionals still think such a deal is out of AOL’s financial reach, even though its stock market value, on paper, is more than five times that of CBS’.)

Entertainment executives have watched in amazement as investors transform the Web’s twentysomething entrepreneurs overnight into stock market billionaires, making themselves, mere multimillionaires, feel positively poverty-stricken after decades at the top of their own industry.

“What’s surprising to me is how much money is chasing these Internet companies,” says Tom Rogers, president of NBC Cable and head of the network’s Internet operations, observing that the most lavishly valued Web companies must rely on traditional media to provide the content that users hunger for.

That reliance is bound to increase as Web usage shifts over the next decade to “broadband,” that is, to ultra-fast connections that allow such material as feature-length videos to be downloaded by consumers in their homes.

Traditional Media’s ‘Net Acquisitions

“Since the Internet side is saying that traditional media has the ability to provide content,” he says, “if @Home [a service that provides fast Web connections over cable TV lines] is a $13-billion broadband play, why isn’t NBC valued more?”

Almost every major media company has made a significant purchase of an Internet property in the last year or otherwise signaled its determination to make a strong play on the Web.

Among the most notable deals:

* Walt Disney Co. paid $70 million and traded its interest in the Web site design firm Starwave for 43% of the Web company Infoseek, then used it to launch the Go Network (www.go.com). Go is a “portal,” meaning it is a convenient central Web site from which visitors can access Disney, ABC-TV, ESPN and other corporate Web sites, as well as the Internet at large.

* The NBC unit of General Electric paid $64 million for 5% of the Internet news company CNet and 19% of its portal site Snap.

* Viacom Inc. announced plans for a radical rehab of the Internet sites for its Nickelodeon and MTV cable channels. The company says it may eventually spin off the properties in an effort to claim the same lavish market valuations enjoyed by such “pure” Internet companies as Yahoo.

* Time Warner’s Warner Bros. Online announced plans to launch Entertaindom, an entertainment-oriented portal site that will feature entertainment content from its parent studio as well as competitors.

* CBS spun off its interest in the Marketwatch Web site as a public company and has hinted at plans to follow its sister networks onto the Web in earnest.

* USA Networks negotiated a $21.5-billion deal to merge some of its units, including the Home Shopping Network and Ticketmaster, with the Web portal Lycos.

Almost alone among the major media players in keeping out of this fray is News Corp., owner of the Fox television network and Fox Studios. News Corp. executives express outright skepticism about the wisdom of making any sizable investment in an industry in which start-up companies command such lavish market prices despite being devoid of profitability--or even of any prospects of profits soon.

“We’re on the record that we’re not interested [in investing in Internet companies] at these valuations,” says James Murdoch, the head of new media for News Corp. “I’ve never heard of anything where the dominant group is still looking for a business model. At the end of the day, it has to come down to earnings.”

The Old Media convergence with the Internet taking place now surely will transform the look and appeal of the new medium for a vast new audience--one that will include millions of users who may well discover cyberspace for the first time via Disney’s Go network, make their first online purchases through NBC’s Snap.com, or view sneak previews of hot films on Time Warner’s Entertaindom site.

Big Media Has TV-Centric Notion

What the Big Media approaches have in common is a peculiarly TV-centric notion of how to build a presence on the Web. Media sites are often designed around features that will attract and hold users on-site for as long as possible, much as the television networks once strived to grab viewers at the start of prime time and keep them from switching channels until bedtime. The longer the user remains on-site, the reasoning goes, the better the opportunity to sell merchandise or services.

But the traditional media companies will be transformed themselves, as the Web’s capacity to address customers in novel ways forces them to rethink how they create and market entertainment and use it to sell advertising.

While movies, music and television are likely to still be around in some form resembling today’s mass entertainment (“People will still want to come home and collapse on the sofa and watch what’s on TV,” says MTV Network Chairman Tom Freston) they will have to compete with new offerings. Some of these may use advanced technology in ways that make them more animated or vivid or allow audience members to maintain more control over what they want to watch, or when.

The entertainment companies “all know they have to play on the Web,” says Kraus. “But right now a lot of entertainment executives are saying, ‘I know the Internet is going to affect me, but I have no idea how.’ ”

The most recent deals represent a sea change in Big Media’s approach to the Internet.

“Entertainment companies at first saw the Internet as a promotional tool and used it by giving away their content for free,” says Jim Moloshok, president of Warner Bros. Online. “They are now trying to recapture their brands, their business and their future from the new media companies that at first moved faster and smarter.”

Indeed, among the forces driving traditional media onto the Web is a fear that Web companies may be nimble enough to seize a significant portion of the entertainment audience, much as specialized cable channels began siphoning viewers from the networks a few years ago.

Viacom’s MTV Networks first entered the Web five years ago, for example, when its market research began demonstrating that its young and technologically savvy audience was spending more time online.

Looking to Avoid the Cable Mistake

“We realized that if we didn’t do it, certainly someone else would fill the vacuum,” says Freston. MTV and Nickelodeon promptly established colorful Web sites that fed fans’ desire for background information about their favorite artists and shows. The next generation of MTV and Nick sites, to be launched this spring and summer, will allow fans to hear more music, play interactive games and make more purchases of merchandise.

Other companies, especially some whose fortunes had been tied to network television, are determined not to repeat the mistake the networks made with cable. Only after such cable upstarts as ESPN, CNN and Nickelodeon began cutting into the networks’ franchises in sports, news and programming did the networks race to catch up.

Today each of those cable channels is owned by a media conglomerate, and the entertainment industry is moving swiftly to avoid being outmaneuvered on the Web. “We’re all starting much earlier in this game” than in cable, NBC’s Rogers said.

Thus far, the conglomerates’ Web strategies fall into three general categories.

One is the creation, generally by the purchase of an existing Web company, of a brand-name “portal”--a site that aims to be users’ first stop on the Web and entry point to the rest of cyberspace. A portal might include preferred access to other company-related sites, a search engine, a large number of featured sites offering news, information, shopping and other services. Among the leading examples: Disney’s Go network and NBC’s Snap, a joint venture with the Internet company CNet.

A second strategy is the creation of specialized, or “vertical,” portals devoted to specific subject areas--an attempt to overcome the homogenized, generic appearance of many large portals. These include Warner’s Entertaindom site (to be formally launched later this spring) and the e-commerce portal envisioned in the merger of Lycos and USA Networks.

The last major strategy is to parlay already-powerful brand names in traditional entertainment sectors into audience magnets on the Web--the course pursued by Viacom, which hopes its redesigned Nick.com and MTV.com sites will become indispensable stops for music lovers and children.

No matter the approach, the entry of traditional media onto the Web promises to produce a host of cultural conflicts, false starts and pitched battles over which side genuinely understands, or “gets,” the Web.

Many of the Internet’s youthful pioneers maintain today that the traditional media companies have a hard time understanding them and have little to contribute to the growth of their industry (except, perhaps, money).

“Web companies come from an environment of speed and constant experimentation,” says Kraus. “They try to capitalize on opportunities before they disappear. The traditional media companies are more glacial; their movies take three years to develop.”

Some cultural strains have already surfaced. Disney Online President Ken Goldstein recalls being questioned closely by Disney executives about why the company’s Go.com Web portal, a key to its cyberspace strategy, featured a prominent link to Disney rival Nickelodeon’s Nick.com page in its “Kids” section.

That might be a reasonable question in the world of Old Media, where every percentage point of audience can be worth millions of dollars; but as Goldstein replied, if Go were to be a credible portal, it could not erect a wall between its users and any content on the Web.

One thing that traditional media executives tend to agree on is that their extensive libraries of material--old movies, television shows, news clips and so on--represent content that is the most highly sought on the Web and that can’t be created in a hurry.

Numerous surveys show that entertainment--whether games, video clips and music or information about the same--is what attracts the vast majority of users online. In one recent study by the consulting firm Cyber Dialogue, for example, entertainment was cited by 70% of experienced Web users as one of their top choices for content, ahead of business information (68%), local information (67%), news (52%), and health and medical information (36%).

Furthermore, it is likely that entertainment will become an even greater attraction over the next decade as Internet technology shifts to broadband, a speedier and more capacious means of transmitting data that will allow movies and video to be piped into the home on demand.

“In broadband, you need lots of video material,” says Rogers, “and it’s extremely difficult, if not impossible, to create a rich video library if you are not already in that business.”

To be sure, no major media company has yet spent the kind of money on cyberspace that would place the Web at the center of its business, rather than the periphery.

And no major entertainment-related site has yet turned a profit. As a revenue item within Time Warner, jokes Moloshok, “this year we’re a rounding error and next year we hope to be included in ‘other.’ ”

But there is a certainty now among entertainment executives that they have to move quickly. Bruce Judson, the co-founder of Time Warner’s Pathfinder Web site and the author of “HyperWars,” a book of Web commerce strategies, says, “In the media industries, you’re seeing that everyone recognizes the power of this technology.”