The entertainment challenge - Broadcasting & Cable

The entertainment challenge

Digital Entertainment Network's demise shows that venture capital can do only so much
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When Digital Entertainment Network (then www.DEN.net) filed for Chapter 11 bankruptcy protection last month, there were reports that the sky was falling on online entertainment. But the DEN failure may just be another example of Internet Darwinism and a poorly run company's meeting its maker-with lessons for both new- and traditional-media companies on the Internet.

Like others, DEN saw the Internet as a potential distribution tool for video content. It produced short-form entertainment targeted at niche audiences-the type of programming not found on television. But its lavish spending and high production values led to troubles.

The sad reality of the Internet is that its greatest strength, the means to serve individual needs, is also its biggest weakness: It's hard to build a business based on offering 30 programs a week aimed at 15-year-old skateboarders who play the cello.

"The folding of DEN is indicative of the inherent problems not only in the Internet-content creation space, but in original-content creation anywhere," says Hollywood.com executive vice president Eric Illowksy. "TV programs fail all the time, so I don't think you can generalize that there won't be successful original content for the Internet. At the same time, it's important to find the middle ground where you aren't spending $100 million but you still spend enough to give content good production values."

Industry insiders were not surprised at the DEN announcement, given the company's recent troubles. Reports focused on overpaid executives, wildly expensive marketing costs and a product for which the Internet medium wasn't ready.

"DEN has been the whipping boy for all kinds of mistakes that Internet companies are making," says Joanne Meyer, senior vice president, marketing, of Pseudo.com. "The first mistake was, you can't overhype and under-deliver. Save the hype for when the programming is there."

There are, however, lessons to be learned from the DEN experience. Robert Whyte, vice president of Daniels & Associates, a financial services company specializing in the media, Internet and telecommunications industries, believes DEN's problem was that its target audience was too broad. "Sites that aren't focused on a specific market will probably fall to the side," he says. "Companies like TVradio.com, Visionary Media, KnitMedia.com are very focused. For example, Knit Media has picked jazz and alternative music, and they figure that the market is big enough that they can market to those listeners and do well.

"If you don't have a small audience," he adds, "how are you going to market the site?"

Warner Bros. Executive Vice President, New Media, Kevin Tsujihara doesn't quite agree. "There's going to be a million incredible things on the Internet that no one is ever going to see," he says. "You could post a movie tomorrow, and the only person who would know about it is you."

Tsujihara believes that the winners in Internet entertainment will be the people who find an audience and speak to that audience. "What's going to lead it," he contends, "is the site's content."

AtomFilms Chief Marketing and Online Officer Matt Hulett sees the problem in a lack of patience. "In the traditional entertainment world, it can take six or seven years for a company to be profitable," he says. "In the Internet space, it's like Americans' distaste for long wars: If it isn't quick, they lose interest."

His company, he points out, has built its business around purchasing preproduced short-form content and then licensing it both online and off-line.

The trick, he claims, is that AtomFilms does not see itself as an Internet company. "We're really an entertainment company. We're structured as a distributor and a brand and soon as a full-functioning studio. We have multiple distribution methods because most people watch content off-line." One example of this approach is a deal AtomFilms signed with DirecTV covering the airing of a number of Oscar-nominated short films on DirecTV's pay-per-view service.

"I think, brandingwise and strategically, it's very important [to have an off-line presence]," adds Hulett. "We've seen more convergence deals, like USA Networks' buying content for their sci-fi programming as well as for their Web site. And we're seeing properties that might be potential TV properties being incubated on the Internet."

Making a brand isn't easy

Branding may well be the difference between the winners and losers. The challenge facing Internet start-ups competing with Web offerings from traditional television and radio companies is that they don't have the built-in brands, talent and reach in traditional media that the networks have. And the need, or desire, to compete with companies that have the brands, talent and reach has caused a great deal of money to be spent without a guaranteed return.

In fact, it's a lack of fiscal responsibility in the quest for creating brand that can lead companies to burn through capital too quickly.

At SeeItFirst.com, which is not in the entertainment business directly but provides streaming products and services, Chairman and CEO Narayana Ram has kept the head count small to control costs. He says he has seen too many Internet companies that believe making the company bigger will attract more financing. With financing drying up, those companies have to lay off employees, which makes them less attractive to venture capitalists.

Making things even cloudier is that even the major networks, with well-recognized brands and hooks to pull people into Web sites, are still searching for a business model. For example, CBS continues to wait patiently for a profitable business model to emerge before considering a spin-off of its CBS Internet Group.

"Companies like DEN, Pseudo, AtomFilms are very valuable creative explorations," says ABC.com Vice President and General Manager Brian Bowman. "We as an industry need to find out how consumers want to interact with content. However, it's clear that we're all struggling with finding a profitable business model for online entertainment."

The challenge of finding a business model may very well be the downfall of Internet entertainment networks. If the company that can offer an interactive Who Wants to Be a Millionaire? can't find a suitable business model, who can?

AtomFilms' Hulett, though, thinks his company understands the challenge. "The three core competencies that people are going to need to succeed," he says, "are, first, owning rights. If you build a hit, you're going to want to own the rights. Next, you need to have technology know-how that is deeper than knowing how to post Macromedia Flash animations on your site. And third is a brand. Those three things can be expensive, but we can get them."

Wanna buy an ad?

Another problem facing all Internet companies is that many were started in the belief that advertising would lead the way. Even if the Internet turns out to be a good advertising tool, the revenue is concentrated in the top 20 Web sites, with all the rest sharing the thinly spread leftovers. As a result, the business model is a loser if advertising is the only source of revenue. E-commerce and premium subscription services are now being viewed as a necessity.

"Already the most popular sites are targeting commerce, selling videotapes or scripts of programs," says Illowsky. "And the subscription for premium service will also start to take on new meaning. Can we create a new service that someone will pay $5 a month for? I don't know. But we'll certainly try."

Meyer says the Wall Street mania has diminished, but that doesn't mean the window of opportunity has closed on new-media companies with great business plans. "You need to show a good product and real potential."

She may be more optimistic about her own company's future, considering that Pseudo Programs' recent round of financing raised more than $14 million. The financing was led by LVMH-backed media unit Desfosses International. Other participants in the financing round included FD5 S.A., Intel Capital, Prospect Street Ventures and Tribune Ventures.

"That's a very good sign for them," says Daniels & Associates' Whyte. "It's a sign that they're doing something right and they're obviously a player. And that money will allow them to roll out more of their plans."

AtomFilms is in its third round of financing, having raised $20 million in a second round in January. The current round should be completed by the third quarter, according to Hulett.

Guilt by association

Internet companies are hampered by the perception of a market in trouble, which is compounded by published reports that lump dissimilar companies in with DEN to suggest a bigger problem than really exists.

For example, LoadTV.com recently laid off some employees and changed management. But one published report pointed to its woes as another example of an online entertainment site in trouble. LoadTV isn't an entertainment site.

"We're a backend infrastructure company that provides delivery services for content and advertising," says CEO Jack Kennedy. "To this point, the content we've delivered was given to us so we could test out the networks for clients."

LoadTV's client list includes print magazines like gear, record companies such as Death Row, and movie studios like DreamWorks. "It was never our intention to be a content company, but we needed content to demonstrate the product," he explains. "So we were borrowing content and making it so that people could get an idea of our services. But we are much more akin to an Akamai or Digital Island than an entertainment site."

The frustration Kennedy feels is that the reports can affect company morale. "We have a lot of people who have poured blood, sweat and tears into this," he notes. "It's momentarily demoralizing, but we know what we're doing and the value we're creating."

Make it different

Meyer believes the key clearly is to differentiate the Internet content from that offered on television, something she says DEN didn't do. "They did beautifully produced, slick television, and then they put it on the Internet. There was nothing different from what was on television other than that the shows were shorter."

She points to Pseudo.com's Games Channel, which brings information and, more important, an experience to viewers that they can't get over the TV: "Interactivity wasn't really a part of the consumer's experience at DEN."

Bowman, too, believes the Internet needs to provide a new experience, not a television experience. "The emotional extension of TV in an interactive form is something people want, whether it's a 24/7 game or synchronized enhanced television experience," he says. "To have that extension of television in an emotionally passionate way gives you an advantage."

Another mistake DEN made (and others have made as well) was to assemble a talented team of entertainment executives who tried to create a Hollywood-style business on the Internet. "It's sort of like taking an amazingly trained elephant and squeezing him into a keyhole," Bowman says. "It doesn't work. They were an old-media-style and-scale company that was trying to squeeze what they were doing into an Internet economy."

Hulett agrees that traditional-media executives have a hard time jumping into new media. "There's a concern that, if you have people from Hollywood getting involved, there are huge marketing budgets and salaries out of whack with expectations," he says. "We cheer every time an online entertainment company hires somebody from the traditional-media world because it rarely works."

But big names from traditional media do work-names like George Clooney or Jennifer Aniston. Warner New Media's Tsujihara notes that such names drive traffic to the sites. "If you create something in this medium," he explains, "it's a tough proposition if you can't leverage it across television, film or consumer products."

ABC.com's Bowman concurs, noting the success of Millionaire, which has had more than 95 million gameplays, with more than 5.25 million "virtual millionaires." The television success fuels the online success.

"There's no patent on game play, so you can put a game on the Internet that looks just like Millionaire," he points out. "But you won't have Regis telling you to log on now for a chance to play while it's on TV."

Whyte believes, though, that entertainment Web sites can compete with the traditional networks, just not today on a one-to-one basis. "Over time, as there is a convergence of electronics, the Internet programmers will be able to compete with the big networks," he says. "But the limitation today is speed and how quickly you can download frames of video."

Traditional broadcasters will continue have an edge in the battle for eyeballs in being able to tap the broadcast pipeline, according to Bowman. "Having access to 160 million homes for promotion gives us an enormous competitive advantage," he explains. "The audiences we can drive online are so much broader than those companies without traditional-media backing. And, in my opinion, you need traditional media to drive Internet awareness. If not, the audiences you talk to are small.

"At the end of the day they need to be driven for a specific reason, and my gut tells me it's television."

One problem facing entertainment sites is one they have little control over: the quality of the streaming experience. "All my experience with streaming media on the Internet has been that, at best, it's consistently inconsistent," says Illowsky.

"There are many points of failure, and it's not overgeneralizing to say that anyone involved with streaming media is having continual problems dealing with constant upgrades and ongoing confusion regarding the abilities of various streaming suppliers. But the market is definitely headed in the right direction."

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