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Nothing pleases Levy more than figuring out what is beneath the surface of things, especially when it comes to turning creative companies into viable businesses. These days, he's set on finding the winning combination for art and commerce at the online entertainment hub Shockwave.com. Just four months into his job as CEO, Levy certainly has his work cut out for him. The entertainment site is struggling to find itself as competitors fall by the wayside -- unable to pull in enough revenues or raise money to get off the ground. An independent subsidiary of multimedia software publisher Macromedia, Shockwave.com was launched in July, 1999, as part of a far-reaching consumer Net business intended to promote the company's software "players," which are similar to those already offered by rivals Real Networks, Microsoft, and Apple. The idea was to allow Web users to play media-rich interactive games, watch videos and animated shows, and listen to uninterrupted audio even with narrowband, dial-up Net connections. "We wanted to introduce the next level in online entertainment," says Macromedia Chairman and CEO Rob Burgess. "And what better way to do that than with our own destination site." MANY BURST BUBBLES. Initially, Shockwave.com was spearheaded by former Walt Disney Co. executive Stephen Fields. The plan was to take it public. The site was to feature original cartoons, music videos, and games, as well as movie clips and shorts with popular television characters that could be used to make online animated greeting cards. Deals were struck and partners announced: Comedy Central's South Park crowd, Marvel Comics' Spider-Man, and United Media's Dilbert were among the characters expected to come on board. Users were told they would be able to personalize their content with a free interface resembling a TV remote control that would let them save four or five pieces of content for later viewing. Those willing to shell out $19.99 could get a Shockmachine, whose extra features included a larger display screen and the ability to download content for playing or viewing offline. The company planned on making money the same way as other content sites: mainly through advertisers and sponsors willing to spend whatever it took to gain access to the large, devoted audience drawn to its compelling content. But a month after the launch, the Shockmachine and most of the top-billed content had yet to show up, and Fields quietly resigned as CEO after only about four months on the job. What's more, other sites such as Warner Bros.' Entertaindom, iFilm, and Pop.com -- the original live-action and animated-film site backed by celluloid heavyweights Steven Spielberg and Ron Howard -- cropped up with the same business plan and mantra: to be the Yahoo! of online entertainment. Entertainment sites tried to beat Hollywood at its own game -- namely spend heavily on Grade A talent to bring consumers to the Web. But many of these content companies have run out of money before they could convince advertisers -- or viewers -- that they had access to the next Net sensation such as The Blair Witch Project had been. Most sites didn't even attract enough visitors to show up on the radar screen of online traffic measurement firms. Those that are still around have changed their business plan. Starting with the demise of Digital Entertainment Network (DEN) last May, news wires have buzzed with the details of entertainment sites' final hours. Pop.com burst its bubble before ever airing a second of programming, and live Webcaster Pseudo Networks, media darling at the 2000 Republican National Convention with its 360-degree Webcam, bargained until the 11th hour before shuttering its doors for good in mid-September. By October, even cable-music giant MTV shelved plans to take its Internet unit public. BIG BUCKS. Enter Levy, who is determined that Shockwave.com will succeed where other sites have failed. He's starting out with some advantages over other sites -- the enviable position of Shockwave.com's parent, for example. Macromedia's Shockwave and Flash design tools are supported by all browser software vendors and have become the de facto standard for adding animation and sound to Web-based graphics. Consequently, its Shockwave and Flash players are required by most sites to watch animation on the Web and are currently downloaded an average of 81 million times a month. And once Net users download a player, they are prompted to visit Shockwave.com, which offers them more than 1,000 animated shows, games, music videos, or greeting cards. That has helped Shockwave.com to register nearly 27 million users, and the site boasts an average these days of 7.4 million unique visitors a month, ranking it second only to Disney.com in entertainment-site traffic. Levy's challenge now? Produce high-quality work on a lean budget. Before Levy came on board, Shockwave led the pack of Hollywood-style Net plays in a race to woo Tinseltown's finest animators and TV writers with big bucks and the kind of creative freedom not usually granted by the networks. And the emphasis was on big bucks. Director Tim Burton was persuaded to create 39 Web installments of his dirt-spewing crime fighter saga, Stain Boy, for more than $1 million. A raft of similarly priced arrangements with high-profile creators followed: Shockwave paid $5 million for a stake in Stan Lee Media, the Spider-Man creator's company, and that gave the site an exclusive online license for its 7th Portal action-adventure cartoon series. And the company inked a multimillion-dollar promotion deal with Michael Ovitz and his talent factory, Artists Management Group, with the hopes of hitting it big by creating hot animation that can bounce from the Net to TV or theaters. That deal also marked the first time an entertainment site ponied up its own development funds in partnership with a Hollywood heavy hitter. When all the deals were added up, Shockwave.com was spending as much as $15,000 a minute to produce some series -- a budget more than triple that of most Net players. But it soon became clear to Levy that the company had been focusing too much on flamboyant content deals and not enough on building business practices that could support the company's entertainment goals. Even by spending minimally on marketing and relying on Shockwave downloads to generate traffic, the site lost a huge $28.5 million in its first year, on $8.2 million in revenues, according to Macromedia filings. BLUNT TALK. On Sept. 6, Levy issued pink slips to 20 employees, then gathered his remaining 150 employees in the main conference room of the company's San Francisco headquarters. The soft-spoken leader was blunt. No longer would the company suffer from inefficient production budgets. Instead, Levy told the troops: "We'll continue the relationships we've already made, but we're going to make smaller commitments, focus on fewer things, and create more of our own content." While only a third of Shockwave's content was produced in-house before, Levy says, he now looks to double that. He's hiring about a dozen people to do that creative work. And finally, the company launched the Shockmachine, and made it free. Levy says it has already been downloaded 5 million times. He's betting he can cover costs with loftier ad rates once traffic climbs even higher. And he's hedging his bets by gearing up new revenue sources, including interactive games linked to most of its new shows, along with content available only by subscription and sponsors who will be written into the story line of the shows. Levy says the company eventually intends to charge users for premium content recorded on the Shockmachine that they can watch offline as many times as they want. "FANNING THE FLAMES." Levy also hopes the site will reap heady revenues not only from the shows but also from merchandise or as films. And Shockwave has enough money to give it a shot, having raised $50 million from the likes of Silicon Graphics founder Jim Clark. The first episode of Tim Burton's Stain Boy debuted on Sept. 27, and Levy says he already has some material in the can from Twin Peaks director David Lynch and others but is still experimenting with how to launch the new properties. The most important quality of the site, he says, is that it leverages the unique characteristics of the Web, namely community and interactivity. "Linear, passive entertainment experiences are already well taken care of on television." Instead, Levy will be "fanning the flames of what works," as he puts it and spending for episodes one at a time to see which ones are most popular. At last, it seems as if Shockwave.com is under stable management. It took Burgess, who filled in as interim CEO, nearly 10 months to find Fields's successor. The problem, Burgess says, is that few people in the entertainment industry have experience with the day-to-day operations of running a company. "There just aren't a lot of public entertainment companies or people who are ready to take them public," he says. Burgess had a short list of 5 to 10 people "mainly from Hollywood and the gaming industry" when he met Levy. "Lawrence had such a unique background in technology and entertainment, and he was quick on the uptake," Burgess says. "I knew right away I had found my man." ENGLISH CHILDHOOD. Levy earned his stripes at Pixar. As Pixar CFO, Levy orchestrated the computer filmmaker's original deal with Disney to get its first feature-length film made. He then ushered the company through a $140 million initial public offering in 1995 and renegotiated the Disney contract to include five more films and half the pictures' merchandising revenues. For its first Toy Story saga, Pixar ended up with an Academy Award and $40 million in profits -- a mere 10% of the movie's total income. "The strategy was to get enough leverage so that we became owners of the films," Levy says of the first deal with Disney. The second time he sat at the negotiating table, he made sure the scales weighed evenly. When the company went public, Levy was worth $62 million on paper -- on the first day of trading. He currently sits on the company's board of directors and says he owns a small percentage of shares. As a 15-year-old English preparatory school transplant, Levy moved with his family to Indiana in 1973. "I came from an environment of caps, blazers, and knee-high socks," he says. "America was a completely different way of living life." His entrepreneurial spirit he inherited from his father, a dabbler in startups that ranged from retail to commercial cleaners. Britain's poor economy in the 1970s and the chance for his father to work more closely with a business partner in the U.S. is what brought him to America's heartland in the first place. But other than a slight accent and reserved manner, Levy, who routinely practices yoga, is pure Californian. "I consider myself an adaptable type," he says. After attending the University of Illinois and earning a business degree, Levy decided to test his talents at Harvard Law School. He then headed out to Silicon Valley and first made a name for himself at the law offices of Wilson, Sonsini, Goodrich & Rosati in Palo Alto, where he built and managed the firm's technology licensing and intellectual-property department. Bored as a partner at the age of 30, Levy decided to take his finance magic to Electronics for Imaging, a San Mateo (Calif.) company that provides hardware and software products for the digital color printing market. As vice-president for corporate strategy, Levy learned his first lessons about taking a company public. When he left at the end of 1994, EFI had become one of the country's fastest growing public companies, with annual revenues surpassing $130 million in less than five years. Then he got a phone call from Steve Jobs, who took him to some rather unremarkable industrial offices in Northern California, where Levy discovered something most remarkable: Pixar Animation Studios. "I got the same feeling about Shockwave as I did about Pixar almost six years ago," Levy says. "I like being at the forefront of technology, and Shockwave is not only at the cutting edge of what's happening in entertainment, it also has more assets in terms of money, talent, and technology to give it a real shot at doing something special." "BREATHING ROOM." Levy shies from the spotlight. Press him for personal details, and the 41-year-old vegetarian is likely to reveal nothing more than a penchant for cheddar cheese sandwiches. Ask him how he spent the past year of his life -- a sabbatical from his professional duties meant to "create space and breathing room so other parts of me don't wither away" -- and he'll say he did little more than visit bookstores in his Palo Alto neighborhood, drive his children to and from school, and read a lot of philosophy and the Harry Potter books. Yet the understated media star is the first to put one of his companies under the microscope. "I like to dissect things and really understand them at their core," Levy says. "If there are harsh realities, I'd rather see them for what they are." One of the first things Levy did at Pixar, for example, was to close the company's interactive projects and animated commercials divisions. "Rather than get distracted, I focused on fewer things and executing them well," he says. With Levy at the helm, Shockwave stands a reasonable chance of succeeding. It has more money, more deals, and more traffic than its competitors. All this adds up to the momentum necessary to take Shockwave.com to the top, Levy says. But he has yet to prove its business model. No matter, Levy's doing what he loves best -- getting under the hood to figure out how to make a business work. Eads covers the Internet for Business Week Online in New York |
