Bamboozled at the Revolution: How Big Media Lost Billions in the Battle for the Internetby John Motavalli, Nancy Resnick
It was one of the most remarkable epochs in American business history -- a time when technology and finance joined forces to create so novel a paradigm, such phenomenal growth, and so unfettered an enthusiasm for making money that the scenario couldn't possibly last. Of course, it didn't, but even the most doomsaying bears couldn't have predicted that the Age of the Internet would be both so short-lived and so catastrophic for the dreamers of its impossible dreams. Nowhere did the black dotcomedy prove to have greater repercussions than in the world of big media, the domain of long-established giants like Time, Disney, Newscorp, and the TV networks. These venerable companies, which had been carefully developing their business models -- and loyal audiences -- for years, suddenly found themselves facing in the Web a new world for which they were ill-prepared and underfunded. Baffled by this sudden eruption of URLs and hits-per-day, but well aware they could not stand by on the sidelines while fortunes were being made by know-nothing novices in the flash of an IPO, Old Media set out to claim what it believed was its own rightful territory on this lawless frontier. By the time the dust had settled less than a decade later, it had lost hundreds of millions of dollars, laid off thousands of people, and suffered the infinite scorn of media critics, while the largest and most revered of the bunch, Time Warner, finally sold out to a scrappy company almost no one had heard of at the dawn of the '90s called AOL.
The tale of Old Media's misadventures in cyberspace is the story of one of the great business follies of the twentieth century, and one whose repercussions will be felt for years to come. In Bamboozled at the Revolution, John Motavalli, a media reporter who was on the front lines of this disaster from its earliest days, gives an account of this remarkable period in all its madness, confusion, desperation, hubris, drama, and sheer absurdity. Central to the book is his account of Time Warner, blessed with a huge catalogue of successful magazines, a flourishing cable business, and powerful movie and music interests. But its leader, Jerry Levin, was a technophile with a Vision, and he was determined to lead his company to stand astride the Internet age just as forcefully as it had dominated the age of print. Learning little from a cable debacle called Full Service Network, Levin sped ahead with Pathfinder, Time Inc.'s ill-conceived web site that promised everything but delivered practically nothing of value. When, in January 2000, Time announced that it was "merging" with AOL, most observers recognized that it was a virtual surrender -- the almost inevitable culmination of years of bad business decisions.
Bamboozled at the Revolution also looks at many other companies that were led astray by the siren song of the Web and, through interviews with leading players in the field, reconstructs the heady and often ludicrous rush online. From Rupert Murdoch's stillborn Delphi to Hollywood stars eager to be in the digital vanguard to Michael Eisner's Disney making one of its rare expensive misjudgments, the book is a terrifically entertaining and frequently shocking look at irrational exuberance at its most colorful.
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BAMBOOZLED AT THE REVOLUTION
How Big Media Lost Billions in the Battle for the Internet
By JOHN MOTAVALLI
VIKING "I Stake My Career on the Full-Service Network"
Copyright © 2002 John Motavalli.
All rights reserved.
On December 14, 1993, Time Warner CEO Gerald Levin stood on a stage in Orlando, Florida, and promised the future. It would be found, he explained, in an unassuming cable box produced by Silicon Graphics, the key to a futuristic cable system called the Full Service Network.
Five hundred invited journalists and a gaggle of top technology executives had gathered at the Sheraton Hotel to hear Levin introduce the interactive two-way cable system that would revolutionize communications. "Sooner isn't only better," Levin told the enthusiastic crowd. "Often it's everything. FSN will drive home this lesson with unforgiving velocity."
A somewhat ungainly man who then sported a cropped moustache, Levin was in his element. Uncomfortable in one-on-one encounters, he was a classic corporate creation, most at home in boardrooms and on the stages of big auditoriums, where his public pronouncements were carefully managed. He liked to make big proclamations, announcing he was transforming the world with a flick of a switch, convinced he could translate the dreams of his engineers into massive business success.
That day Levin stated, without fear of contradiction, that Time Warner would invest $5 billion in building FSN-stylesystems throughout the millions of homes served by Time Warner Cable. Within Time Warner, there was little challenge to Levin's vision, and that situation was institutional. With a compliant board and no strong executives challenging his rule, Levin was free to indulge his ideas with few checks and balances, despite the fact that the cost of developing the infrastructure needed to carry out Levin's promises was staggering. Levin and the CEO of Time Warner Cable, the burly Joe Collins, weren't underplaying that; in fact, they were celebrating it.
"FSN required more lines of computer code than was needed to put men on the moon," Collins boasted. Collins has a deep, rumbling voice and a demeanor so intimidating that reporters likened him to Lurch, the sepulchral butler on The Addams Family. But he was a Levin man, owing his promotions up through HBO to the top cable job solely to Levin. While he may have had private reservations about the FSN, they have never seen print.
In the 1993 Time Warner annual report, Levin was explicit about how much was riding on the FSN, noting that FSN venture partner US West was also fully committed. "In total, including US West's billion-dollar investment, we plan to spend $5 billion over the next five years on the FSN," he told shareholders. The FSN wasn't just a "cable strategy," he emphasized, but a complete, overarching event that would revolutionize operations at the media giant. "As we see it, the FSN is a uniquely powerful tool for achieving new levels of growth in all our businesses, enabling us to market and distribute our creative material in print, audio, video and film directly to consumers, on demand. Equally, it endows us with an unprecedented ability to meet the individual needs of consumers for information, entertainment, personal transactions and telecommunications."
In a Q&A-format interview included in the annual report, Levin was even more expansive. "You're spending billions of dollars to build Full Service Network systems," his unidentified questioner noted. "What convinces you this investment will generate a good return?"
"We're not just comfortable with this investment, we're excited about it," Levin replied. "Even if you're conservative in your assumptions, even if you simply look at existing dollars spent today by consumers and advertisers and you project only a modest shift of revenues to electronic delivery, this investment makes sense. Our assumptions aren't based on the creation of wholly new forms of expression or of consumer behaviorthough we're convinced those will ultimately be very significant."
Levin noted that home catalog shopping brought in $51 billion in 1993, while local telephony generated $80 billion and home video $17 billion. The dear implication to shareholders was that, by encompassing all these businesses, the FSN would ultimately deliver similar numbers.
"Then consider that we will be able to add value, convenience and enjoyment for the consumer. We can cost-justify our investment strategy even if we capture only a small percentage of those revenue opportunitiesand even if the pies weren't to grow significantly larger." Levin went on to speak of the "vision" that created Time Warner and firmly established FSN as being in line with that same vision. The FSN, he stressed, "is the ideal model for information superhighway convergence."
There's that pesky term, "information superhighway," the precursor of the World Wide Web and the dry run for the Internet. It was also, in fact, the first inkling that media companies had that they could scope out a future beyond the confines of their newspapers, magazines, cable systems, and TV networks. Most people have probably heard the expression hundreds of times without knowing exactly what it meant. When deployed in the early 1990s, the term had a certain Rashomon quality to it, into which media types and journalists tended to read whatever they wanted.
In 1995 the U.S. Department of Commerce attempted to define it this way: "The `Information Superhighway' is an expression used to cover the global network of telecommunications and information technologies used by the international community to conduct commerce, educate, entertain, and inform its citizens." In other words, the idea referred to virtually any form of electronic communications, an amorphous mass that broadly promised amazing new applications that were themselves no easier to explain.
Like a lot of catchphrases, the "information superhighway" was really a marketing slogan, arising out of a planned merger between the so-called RBOCs (regional Bell operating companies) and cable. Until the early '90s, phone companies and the cable-TV industry didn't really work together much, seeing each other as eventual competitors. But cable's greatest visionary, John Malone, CEO of TeleCommunications, Inc., had a different concept. In Malone's grand vision, cable's programming services would combine with the superior switching power and universal network power of the RBOCs to create a mammoth, high-speed pipe into every American home. This vision was, for Malone, primarily a way of pumping TCI stock with promises of future revenue from interactive services. Like Levin, Malone was well aware that promising stock analysts expansive new revenue from interactive services was good business. Unlike Levin, Malone never committed much R&D and actual development costs, because, as a trained engineer, he knew much of what he was promising wasn't economically feasible.
In the early '90s, TCI tested Video on Demand, the supposed killer app of broadband services. The test actually used young people on roller skates feeding a huge well of video tapes into a bank of VCRs. If someone requested a movie, a TCI minion would skate over to the tape library, fetch the appropriate tape, and feed it into a VCR. What the test found was that customers would buy three or four movies a month priced at $3 or $4 each. This proved that VOD wouldn't bring in much more than, say, HBO, which was priced to consumers at about $10 per month and was much cheaper to deliver. After this test, Malone and his top lieutenant, John Sie, decided to compete with pay channels HBO and Showtime with their own pay movie channels, Encore and Starz. But they still paid lots of lip service to the information superhighway.
In the late 1980s, TCI, with its complicated financial structure and tendency to hold back investing in physical plant, was not an exciting company for many analysts, who believed that the days of fast growth for cable were over. Now that cable had become fully "penetrated" and most Americans could subscribe if they wanted to, how could TCI hope to get the financial community to become fully engaged with the stock again? For Malone, the answer lay in a union of cable and telco, a union that wasn't a proven entity but one that nevertheless had huge promise.
Malone's argument did seem sound: Cable on its own is not really an interactive medium. While you can use it to change the channel, when it comes time to order from the Home Shopping Network, you have to dial an 800 number to do it. You can't, in other words, talk back to your TV set, even with a digital box. In TV-industry jargon, that would require "two-way capability," the ability for cable lines to carry a signal a consumer generates back to the headquarters or "head-end" of the cable system for processing. If your system were capable of doing that, it could generate revenue that would be much greater than the $75 or so an individual customer paid for a complete package.
In the late '80s and early '90s, phone companies began to claim that they could offer precisely this kind of interactive power to the cable-TV world. Bell Atlantic (later Verizon), for example, among the largest RBOCs and the one that served the Northeast, announced that it had developed a technology called Stargazer that would enable consumers to view any movie they wanted, simply by pressing a button on a keypad and accessing a menu featuring thousands of films. While this was the same kind of capability cable operators were promising, the telcos claimed they could accomplish this by using ordinary copper "twisted pair" telephone lines, which were already delivering phone service into more than 100 million households, and a new "box" that sat on top of a TV set and could process these complex two-way signals.
If this was really possible as claimed, the telcos could instantly make cable seem outdated. The Stargazer technology was showcased at the industry's Western Cable Show in Anaheim in 1992, although the movie being shown broke up and froze halfway through the demonstration.
Movies were hardly the only service promised. The phone companies, mindful of their own stock prices, were promising an entire array of services delivered through this new form of interactive television, ranging from home banking to travel and restaurant reservations and home shopping. Everything that is accessible today via the Internetthrough services like Amazon.com, eBay, or AOLwas announced as immediately available in the early '90s by the RBOCs, made possible by an alphabet-soup array of new technologies like ADSL and ISDN. Each of these fast-paced technologies promised to deliver only the TV images and information that a given consumer would want. In this way, an information superhighway could be conceived in which information went two ways, not just one. This is a classic cornerstone of the consumer marketplace: that choice is always best. True happiness is always just a purchase away. That halcyon promise of two-way technology was enough to inspire floods of flowery prose about "empowering" the consumer, and publications like Time Inc.'s Fortune devoted breathless cover stories to the oncoming revolution in the once-stodgy world of telecommunications. The real goal was to get the consumer to buy more things and use more services over a two-way cable device.
The key to this plan was getting consumers to transfer a lot of their offline purchasing to their cable boxes. To this end, early efforts in interactive TV, such as GTE's experimental shopping service Main Street, had nomenclature that heralded a revolution that would eliminate the need for giant shopping malls. Just as the mall had once eclipsed America's Main Streets, interactive TV would now eclipse the mall.
Not surprisingly, such brave promises by the likes of Ray Smith, CEO of Bell Atlantic in the early '90s, caused a brief panic among cable operators, who worried that telephone companies could simply "overbuild" or bypass their cable systems, which had cost billions of dollars to construct. If their stocks weren't going to be demolished, they had to come up with an alternative plan, and quickly. When the hugely hyped merger between Bell Atlantic and TCI (then the biggest corporate merger in history) fell through and a series of similar alliances also failed to materialize, the cable industry had to think fast to protect its interests. Cable had to deliver what the telcos had promised, and do it in a big way.
Its solution was to duplicate the very same hype regarding expanded services that the RBOCs had started, and to insist that it could do it better. For Jerry Levin, presiding over the second-largest cable company (Time Warner Cable), it became almost an article of faith that his engineers, working with New Economy companies like Silicon Graphics and Microsoft, could actually deliver on the promises made by the telcos.
To understand why Levin placed so much faith in cable-delivered interactive television, you also have to delve into his psyche a bit, a task made somewhat harder by Levin's unwillingness to subject himself to close scrutiny. Few journalists have gotten close to this stiff, formal man, who scrupulously avoids one-on-one interview situations in which his views and vision would be questioned by an informed interrogator, and who is known for feeling the burden, as one wag put it, of always being the smartest person in the room. "If he wants your opinion, he'll give it to you," quips Curt Viebranz, a former new-media executive at Time Inc.
Levin's belief in the power of new technologies as a panacea has been strongly shaped by his own history in moving Time Inc. away from its sole reliance on print into television, helping the cable industry to explode, and changing the way Americans entertain themselves. This was a time when the concept of putting a TV signal on a satellite transponder, for distribution through cable wires, had never occurred to the big-three networks (ABC, CBS, and NBC), which relied on broadcasting their signals to TV antennas. It was cable mavericks like Levin and Ted Turner who realized it could and should happen.
Significantly, Levin never worked at any of the company's print properties and always had a decidedly video-centric view of media. A 1960 graduate of Haverford College, a small institution that would play a significant role in his life (he would later recruit several key executives who had attended the school), Levin got his law degree from the University of Pennsylvania in 1963. During the only part of his life that he actually practiced law, from graduation until 1967 Levin worked as a lawyer for a Manhattan firm, Simpson Thacher, and Bartlett. From 1967 until 1971, he worked at the Development and Resources Corp., ending up as general manager and chief operating officer of the investing and management company. When that company was acquired by International Basic Economy Corp. in 1971, Levin served as IBEC's representative in the Shah's Iran for a year.
When he joined Time Inc. in 1972, it was as vice president of programming at the still-gestating HBO. He had no experience in programming anything, but in 1972 his willingness to take on this tricky assignment and his belief in the premium TV concept were probably enough to recommend him. The pay-TV service had been the brainchild of Charles E ("Chuck") Dolan, who dubbed it initially the Green Channel, but then sold the fledgling concept to Time Inc. in 1972, going off to start his Cablevision Systems cable operation the following year. Levin rose quickly at HBO and was named president and CEO of the service in March 1973. In an important decision that few around him have been allowed to forget, Levin came up with the idea of distributing HBO by satellite in 1975, effectively setting in motion what became the cable programming industry.
Bob Pittman explained the phenomenal success of cable quite well in a 1998 interview with Upside magazine: "The three broadcast networks looked at the cable business and chose not to start a cable network because they didn't want to ding their earnings to build a new business," he noted. "They said, `If it ever gets big, then we'll come in.' But by the time they got in, Ted Turner had news, ESPN had sports, MTV had music, Nickelodeon had kids, and there was no opportunity. So if you don't ding [your earnings], you lose the opportunity."
Excerpted from BAMBOOZLED AT THE REVOLUTION by JOHN MOTAVALLI. Copyright © 2002 by John Motavalli. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Meet the Author
John Motavalli is a media consultant and was the first computer/Internet columnist for the New York Post. He has worked at Inside Media, AdWeek, and MCI Communications and has appeared on MSNBC, CNN, and other cable networks.
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