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Media Giants: Dot.Com Or Bust


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Media Giants: Dot.com or Bust

Can traditional outfits hitch onto the Internet rocket?

On the surface, it was oh-so-chummy. A Wednesday night in July, with the attendees of investment bank Allen & Co.'s annual media mogulfest sipping cocktails and scarfing hors d'oeuvres on the terrace of a rustic lodge in Sun Valley, Idaho. Dressed in variations of country chic were the likes of Viacom's Sumner M. Redstone, Liberty Media's John C. Malone, Yahoo!'s Jerry Yang, and Amazon.com's Jeffrey P. Bezos.

But make no mistake, there was tension in the crisp mountain air--the tension of media barons who have spent decades building powerful empires, suddenly sharing the spotlight with Internet arrivistes who had amassed fortunes (albeit largely on paper) rivaling theirs in a few short years, even months. Indeed, the obsession among media players at the end of the 20th century is the race among "old" and "new" media to rule the Web. "Everyone's wandering around here, trying to find the Promised Land," says veteran media investor Larry Haverty of State Street Research.

Never mind wandering. At times, it seems more like the mosh pit at Woodstock '99--a lot of bouncing around but little sense being made. Just a sampling of recent activity: Walt Disney Co. announces plans to buy the 57% of Infoseek Corp. it doesn't already own and create a Web unit tied to its Go Network portal. Time Warner and Sony team up to buy CDnow, creating the biggest online music seller. USA Networks acquires Microsoft's Sidewalk.com city sites to merge with its Ticketmaster Online-CitySearch. Rupert Murdoch's News Corp. launches a Web venture-capital arm, while CBS takes its umpteenth big stake in a Net company, Medscape. Meanwhile, Web titans Yahoo! and America Online separately hold talks with cable giant AT&T in hopes of hitching on to its high-speed Net access pipe and related assets.OLIGOPOLY. Don't expect the gyrations to end anytime soon. With the Web's rampant growth and the nascent move to high-speed broadband links that will bring on the vaunted convergence of TV and PCs, the Net is shaking up the media giants' hard-fought oligopoly. Says Michael J. Wolf, head of the media practice at consultant Booz, Allen & Hamilton Inc.: "While traditional media companies are slowly pushing their way online, Internet companies are going after the revenues that come from the media business."

As a result, media companies are in a mad scramble to overtake or at the very least form alliances with Web rivals. After all, their online competitors boast powerful stock valuations, global reach, and a range of services--from auctions to instant messaging--that go far beyond traditional offerings. No two media strategies are alike (table, page 80): Some think portals are the way to go. Others believe that interactive TV will be the Web's ultimate "killer app."

For now, the media moguls are confident--publicly, at least--that their existing content will ensure them prominence in the wild new digital world. Says Disney CEO Michael D. Eisner: "When the choices become vast, the only things that will matter are brand names." News Corp. Chairman Murdoch envisions a "Fox World" based on his sports, news, and entertainment channels that will give his TV audience a familiar place to go. "The danger of the Internet is total confusion," says Murdoch. "That's why I think there will certainly be leading sites and leading positions." Redstone, whose Viacom Inc. includes the MTV and Nickelodeon cable channels, predicts that "in five years, I can guarantee you, we will have done on the Internet what we did in cable."

But can the media moguls really recreate the Web in their own image? The rapid success of Web newcomers is eerily reminiscent of the rise under the Big Three networks' noses of niche cable channels such as CNN and ESPN. Already, there are small signs of erosion in TV viewing as people log on. "A few years ago, there wasn't an Amazon, and now, it's one of the most powerful brands in the Internet world," says Robert A. Iger, the ABC Group chairman who also oversees Disney's international operations. "That has to scare the heck out of any media company."

And Big Media's Web efforts have fallen short before, such as Murdoch's mid-'90s bid to create an AOL rival and Time Warner's ill-fated Pathfinder magazine site. Add to that the fact that top Web players have the currency to buy up media assets such as TV networks. So far, they haven't made a major acquisition yet, preferring to draw largely on other media's offerings when it comes to information or entertainment. "Media is a part of what we do, but we're a lot bigger than a media company," says AOL President Robert Pittman. (An MTV founder, Pittman has been known to call up Viacom Vice-Chairman Thomas E. Dooley and greet him with: "Hey, Tom, how's the Rust Belt?" To which Dooley has been known to reply: "Well, we're just making money here--you ever try that?")

Equally daunting is the global reach of the online giants. Disney, News Corp., and other media titans circle the globe, locking up local distribution deals to assure their prominence on TV screens. But they don't come close to Yahoo! in attracting audiences online. The four-year-old portal already has more than 80 million users worldwide, with dedicated services in 18 countries and 12 languages.

Yahoo! also boasts more than 2,700 advertisers on its portal, while AOL maintains a commanding lead in selling Web access, at 19 million subscribers and growing. Indeed, nearly 40% of the time Americans spend online is on AOL-controlled sites. "You can't buy the delivery route," says Timothy A. Koogle, Yahoo!'s chairman and CEO. "And that gives--with good reason--traditional media companies some pause."

Those lagging in the cyberspace race can take comfort in the knowledge that it's still early. Communications consultant Francis O. McInerney of North River Ventures Inc. in New York notes thatnewspapers failed to control the broadcasting business, and there's no guarantee that early Web leaders--which feature mainly text and images--will make the transition to full video. Fresh from his Web-obsessed schmoozefest, Allen & Co. CEO Herbert A. Allen says: "There has never been a time in business history when there has been such a potent force that's so indescribable and inconclusive."

According to Jupiter Communications, the Web accounted for only $1.8 billion, or 1.2%, of the $156 billion spent on overall advertising last year. By 2002, Jupiter expects Web advertising tO jump to $7.7 billion, or 4% of overall spending, as more Americans go online. But ads are only part of the story. A bigger game may be the $250 billion direct-marketing business and the virtually endless prospects for E-commerce. Web direct marketing is young but growing, with sales expected to rise from $190 million in 1998, to $353 million this year and $1.3 billion by 2002.REVIVAL. Already, though, the Web has proved a mixed blessing for media companies. While it threatens established businesses with everything from pirated music to online classified ads, it has also shown it can breathe life into what were considered fading markets. Murdoch folded his unexciting TV Guide magazine into an interactive onscreen guide business with Malone. News Corp. has since seen its investment increase by as much as $1 billion in stock market value. In a similar vein, by emphasizing its transactional acumen, USA Networks Chief Barry Diller has elevated Wall Street's view of his Home Shopping Network from declasse to cutting edge.

Meanwhile, even as network TV audiences continue to decline, that business is enjoying a kind of revival as CBS and NBC demonstrate that their promotional heft can drive their still-big audiences to Web sites they hold stakes in--such as CBS's SportsLine USA. And NBC has deliberately favored a low-tech, touchy-feely ad campaign to pump up its Snap.com portal, recognizing that 70% of Americans are not yet online. "This isn't about the AOL people," says NBC CEO Robert C. Wright. "It's about taking a percentage of the new joiners."

Moreover, for some companies, such as Disney and Time Warner, selling merchandise and services is already an arm of their businesses. "Everybody talks about old media's transition to new media, but Yahoo! has to `transition' just as much as I do," says Richard J. Bressler, chairman and CEO of the newly created Time Warner Digital Media. "So what starting point would you rather have?"

At the same time that media companies have been expanding their Web presence, they have been boosting their forays into interactive TV. Using digital technology and new cable boxes (rather than PCs and browsers), some couch potatoes are already able to order shows on demand, shop, and get on the Net via such devices as Microsoft's WebTV. "Interactive TV is where we start to have home-court advantage," says Thomas S. Rogers, president of NBC Cable and the network's chief Web strategist. "It's one thing to use your PC to dial up Amazon.com. It's another when you're watching the Today show and an author has just been interviewed, and you click on an icon and order the book."

Disney is also conjuring just such a future. At its "telefusion" lab located in a string of warehouses in Glendale, Calif., focus groups play with a TV rigged to a supercomputer. Here they can watch a simulated segment of Good Morning America featuring chef Wolfgang Puck. The viewers can freeze the show, go online, and print a copy of his recipe, or buy related products instantly.

Not to be outdone, both Yahoo! and AOL have been working toward adding video to their arsenals, most notably through the recent acquisition by Yahoo! of Broadcast.com. And AOL has long been planning its own TV gizmo that could let subscribers watch shows, chat on the TV screen with friends about it, and buy the book instantly, bypassing Amazon.com or the networks' direct-sales efforts altogether.

To keep up, some companies, such as USA Networks and NBC, have set up Internet subsidiaries in hopes of creating higher-valued "currencies" to gobble up other Web businesses. CBS and Viacom have also said they plan Web stock issues, and even Microsoft--no slouch in the valuation department--has been considering a tracking stock for its Web businesses.

Another imperative for media companies to create "Web currency" is to quell the stream of media types leaving for Web riches. Disney has lost a dozen senior online folk including its top exec, Jake J. Winebaum. But companies also face the prospect of water-cooler revolts if a new class of "dot.com" workers gets rich options while the rest are compensated traditionally. "That is a very tough issue for media companies," says Lehman Brothers Inc. analyst Larry C. Petrella.

So far, no one is panicking. As at Sun Valley, everyone is talking to everyone, smiling, doing deals that might give them a leg up--or at least jack their stock nicely. "This is the Cambrian explosion 550 million years ago, when multicelled life first appeared on the scene," says Amazon's Bezos. "It was the greatest speciation ever seen, but it was also--which people forget--the greatest rate of extinction ever seen. We're going to see all kinds of ideas tried, and the majority of them are probably going to fail." And when it comes to media's cyberspace race, the dinosaurs aren't giving up without a fight.By Richard Siklos in New York, with Linda Himelstein in San Mateo, Calif., Ronald Grover in Los Angeles, and Catherine Yang in WashingtonReturn to top


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