BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE
INFORMATION TECHNOLOGY

PointCast: The Rise and Fall of an Internet Star
Its saga tells of hope and hubris in a high-risk business

On Apr. 9, Christopher R. Hassett settled into his home office overlooking the Hudson River on New York's West Side. The 37-year-old co-founder and ex-CEO of PointCast Inc., once the hottest Internet startup around, poured a glass of white wine and slipped a sheaf of paper into his fax machine. At 10 p.m., Hassett dialed the Silicon Valley home of PointCast's new CEO, Phil Koen. Within minutes, a tentative $20 million bid to retake control of PointCast, now a debt-laden shadow of its former self, was offered. Says Hassett, who was pushed out of the company two years ago: ''With the right capital and right management team, PointCast has a bright future. It's just a matter of making those things happen.''

The precariousness of PointCast's future demonstrates more than anything just how unforgiving the ever mutating Internet world can be. In an environment where revenues and profits seem to be afterthoughts, it serves as a sad but harrowing reminder that not every Internet deal or visionary concept blossoms into an Amazon.com (AMZN) or Yahoo! Inc.

MOBBED EXHIBIT. Just three years ago, PointCast was all the rage. Media and technology titans alike, from Rupert Murdoch to William H. Gates III, wanted a piece of the hot little startup with its so-called push technology. But its product fell victim to management missteps, poor execution, and frenetic technological changes. Now, the company is running out of money fast, laying off one-third of its workforce, and praying for fresh capital. ''We had a lot of luck and no luck at the same time,'' says Hassett. ''We just never had enough luck to get us over the top.''

Such is the tale of PointCast's slide. In 1996, before Yahoo! (YHOO), Excite Inc. (XCIT), and others, PointCast recognized the power of delivering personalized information over the Net. Its software allowed consumers to customize news automatically through the push technology. Selected content would be culled from the Web and delivered to an individual's computer screen--all for free. PointCast made its money from advertisers.

The idea caught fire. By the end of 1996, PointCast's network boasted 1.5 million users, $5 million in annual revenue, and a list of marquee advertisers. The company had attracted more than $48 million in funding from venture capitalists and corporations such as Softbank, Compaq Computer (CPQ), and General Electric Capital Services. On paper, PointCast had achieved a valuation of $240 million.

As if that wasn't enough, Microsoft Corp. (MSFT) added its muscle in December, 1996, by agreeing to bundle PointCast with its Internet Explorer browser. Not long after, at PointCast's first trade show--Internet World--in the spring of 1997 in Los Angeles, building inspectors almost shut down the company's exhibit because they feared the crowds surrounding the booth presented a danger. ''We sat around the table and worried a lot about PointCast and push technology,'' recalls Timothy A. Koogle, CEO of Yahoo!, then a PointCast rival.

That's when News Corp. (NWS) decided to give PointCast the once-over. Discussions got under way between Hassett and Rupert Murdoch's son James, who was in charge of News Corp.'s new-media strategy. Hassett flew down to Los Angeles and first met with the young Murdoch on the set of a police show at Fox Studios in January, 1997. Insiders say a tentative deal was struck in which News Corp. would acquire PointCast for $450 million. But before the papers could be drafted, issues surfaced over PointCast's revenue projections and the price tag, insiders say. The offer simply went away. James Murdoch, president of News America Digital Publishing, denies that the offer evaporated. Instead, he says PointCast didn't grab it fast enough. ''We wouldn't let our offer sit out there indefinitely,'' says Murdoch. ''They did have an opportunity to take an offer, and they didn't take it.''

''POOR BET.'' Either way, the failed pact was a blow, particularly as problems began to arise with PointCast's technology. Customers had begun to complain that the service was slow. It also was causing traffic jams on corporate networks because bandwidth was not big enough to carry all the information that users wanted. Customers began to abandon the service in favor of new offerings from the likes of Yahoo! and Excite. ''The market is pretty unforgiving of missteps,'' says Jonathan D. Feiber, a PointCast investor and board member. ''We just fell off the curve.''

The growing popularity of Web-based competitors put PointCast in a pickle--and illustrated why its entry to the market may have been premature. The company had already spent millions establishing a proprietary network and infrastructure to support its product. Shifting to the more efficient Web made sense strategically.

But the task seemed nearly impossible. PointCast had built its entire business around proprietary software. ''We placed a bet,'' says a former executive. ''In hindsight, it was a poor bet because the Web allowed people to innovate more quickly than we could.''

Another insider says that the issue of moving to a Web-based service was divisive: ''It became a religious war,'' recalls Jason B. Douglas, PointCast's former vice-president of products and programming.

Still, PointCast had a solid following and was on its way to tripling its revenue by the end of 1997. But investors worried about Hassett's leadership and ability to expand the company. Over his vehement objections, and those of his co-founder and brother Gregory, the board started looking in June for a high-profile executive to replace Hassett. ''It was time to bring in more seasoned leaders who could provide the right level of management for PointCast,'' says former board member Charles Geschke, president and chairman of software maker Adobe Systems Inc.

For five months, no seasoned leader materialized. Insiders say the company, out to land only a star-studded media executive, overshot. ''From the beginning, we were high on our own fumes,'' says a former employee.

Being rudderless for so long cost the company dearly. When a CEO did surface in October, it was not a media bigwig. Instead, it was David W. Dorman, the former CEO of Pacific Bell. Dorman was greeted enthusiastically by the PointCast troops. His first companywide meeting gave many hope about the future as he expressed unbridled confidence in the company's mission.

WINDOW SHOPPERS. That was before Dorman had a handle on PointCast's problems. Dorman says he soon realized that the troubles went beyond technology. Management was in turmoil, and spending was out of control. The company at times was blowing through as much as $2 million a month. ''I was in firefight mode from the minute I walked in the door,'' Dorman says. In addition to addressing the software problems, PointCast needed to raise more capital. So the company filed to go public in May, 1998, at a valuation of about $250 million. PointCast quickly abandoned that plan in July, however, explaining that it needed to pursue strategic partnerships instead.

PointCast spoke to scores of potential partners or acquirers, including Time Warner (TWX), Yahoo!, NBC (GE), and Softbank. ''We had no trouble getting people to look,'' says Dorman. ''But people were scared off by the negative stigma.''

One group of lookers that wasn't scared was a consortium of the Baby Bells--with which Dorman had close ties. In August, Dorman flew to his hometown of Atlanta for vacation and met with BellSouth Corp. executives. Dorman believed that Internet service providers could use PointCast to create a high-speed broadband portal to the Web to compete with At Home Corp. (ATHM). PointCast showed a prototype of such a service to BellSouth (BLS).

HIGH HOPES. The timing seemed perfect. BellSouth and some other Baby Bells had been grappling with ways to promote the use of digital subscriber lines (DSL) as an alternative to high-speed cable modems used by At Home. So BellSouth, joined by Microsoft, Bell Atlantic (BEL), US West (USW), and Bell Canada, launched a secret project, dubbed Newnet.

According to several sources, the plan called for the group to invest some $400 million to launch the venture. On top of that, they would buy PointCast for about $100 million and use it as the entry point for the new consumer service. The telecom companies would provide the wiring, billing, and customer support, while Microsoft provided capital, technology, and online content. ''This was going to be the third online network competing with AOL and At Home,'' says one insider. ''This was going to be huge.'' BellSouth, US West, Bell Canada, and Microsoft declined comment.

The partners signed a letter of intent on Dec. 16 and set a target launch date of April, 1999. The Baby Bells also sank $15 million into PointCast, which was running dangerously low on cash. Marketing teams met and came up with a new name. Sources say the leading contender was Corazon, the Spanish word for heart. Dorman says he preferred the name Macrame.

PointCast and Dorman had so much faith in their negotiations that the company signed an agreement preventing it from pursuing any other opportunities, at least until the end of January. It also required PointCast to retain 90% of its workforce, which kept the company from easing its cash crunch.

But when the January date came and went, PointCast grew nervous. Microsoft, which was at odds over some of the technology and was frustrated by the slow pace of the deal, soon dropped out. Without a heavyweight partner, the Baby Bells worried about their ability to compete effectively. They tried unsuccessfully to add heft to their team by recruiting SBC Communications Inc. (SBC).

Dorman's patience wore thin. Frustrated by seemingly endless delays, he announced his resignation on Mar. 4 and his intention to head a new joint venture between AT&T (T) and British Telecommunications PLC (BTY). ''I just couldn't go on any longer,'' he says. To many, Dorman's departure deep-sixed any hopes of keeping Project Newnet alive. Despite assurances that a deal was still on track, PointCast executives began crafting an alternate strategy. Good thing they did: On Mar. 17, the Bells notified PointCast that their plan was dead.

Left at the altar, PointCast has begun the painstaking task of reconfiguring its business. It has laid off nearly a third of its 220 employees and is pursuing a narrower strategy. ''PointCast intends to refocus itself and leverage its assets,'' says spokeswoman Wendy McCarthy. What are those assets? McCarthy says PointCast still has 1.2 million users, 6 million unique E-mail addresses, and 700 content partners.

What it doesn't have is cash. PointCast is seeking at least $15 million to stay alive. Hassett, Microsoft, and Softbank, among others, have looked over the company. But the majority of shoppers have been wary. PointCast's tarnished image and a serious drop in ad revenue--from $18 million for all of 1998 to just $2 million in the most recent quarter--are turnoffs. Says Softbank Technology Ventures Managing Partner Gary Rieschel: ''It's going to take a great amount of effort to turn the company around, and we didn't feel it was the best use of our time.''

Still, along with Hasett's bid, sources say multiple offers for the company are being considered. Should Hassett prevail, he says he has no intention of running the company himself, a la Apple Computer Inc.'s Steven P. Jobs. He's too busy with his new Web startup, PrizePoint Entertainment Corp. Rather, Hassett hopes to bring in new management and do what he says the company should have done long ago: become a Web-based service. ''I believe we will come to terms one way or another,'' predicts Hassett. For the sake of the Internet's latest fallen star, one of these deals may be the only way to keep it from fading away altogether.

By Linda Himelstein in Silicon Valley, with Richard Siklos in New York

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