The online blues

Casualties increase as Internet entertainment viewers don't
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Man cannot live on hype alone. That seems to be the tough lesson being learned in the Internet-entertainment business as the list of casualties such as DEN, Pop, and FasTV grows. The companies create the content, and get advertisers, but it appears that viewer eyeballs are just not there.

Pseudo.com, which claimed to be the largest producer of original Internet-TV entertainment, shut down operations last week in a move that surprised company outsiders, many of whom thought Pseudo.com would be one of the online-entertainment companies to make it.

And iCast has pared its operations, letting 32 employees go in a move the company says is to reduce redundancy. In recent months, trimming head counts has been a precursor to shutting down completely.

What's particularly surprising to some observers is that Pseudo.com picked up $14.1 million in financing in May, an amount that some believed would help it survive to the next round of financing. But operating costs were $6 million a month, according to a source. And that "burn rate" has proved too steep in a market that some analysts believe is still two to three years from viability.

"We've been out for a while trying to raise money for the next year or so, but investors are paralyzed," explains Pseudo.com CEO Dave Bohrman. "Their mood is fear, especially in light of someone like Jeffrey Katzenberg and Pop not being able to make it. And, while our product is radically different, it's close enough to resonate in the minds of some of these investors."

The problem facing the entire market segment is that, while each company claims to be "radically different," they are all after the same concept: offering streaming video and interactive entertainment and programming. Rapid growth in broadband subscribers is expected to help solve the problem, but as yet subscriber numbers are too low to give businesses a critical mass of visitors.

"This is just not the time for broadband entertainment, and it won't be for a while," says Josh Bernoff, TV analyst for Forrester Research. "The problem is that, if you look at commerce sites, you can draw lines at certain points in the future when they could theoretically become profitable. But the burn rate on this sort of rich media is so high, and the number of users who can access it.is so low, that there's just no way to expect this to pay off for three or four years."

Bernoff says that, even at that point, there is still the problem of finding a business model. Bohrman counters that Pseudo.com had found advertisers; it was just that the audience wasn't there.

Jonathan Klein, president and CEO of The FeedRoom, a broadband-delivered TV news service, observes that a small audience was in keeping with Pseudo.com's approach. "They were a fringe play, so, starting out, their proposition was never going to attract a lot of people," he says. "Their brand identity was edgy, and then suddenly they tried to be mainstream, and it was all over the map."

To Klein, the failures on the Internet are analogous to TV shows that don't make it. "When it comes to content, quality rules. You have to offer viewers a compelling reason to watch because they have too many alternatives."

Bohrman laments, "We had streaming-media ads, and we won that advertising battle and had very high CPM. We just didn't have the viewers. To [get them], we needed marketing, and, to do that, we needed money." Two rounds of financing that pulled in more than $32 million plus investments from individual investors, though, fell short.

iCast Vice President, Public Relations, Stuart Zakim says that iCast is immune to such shortfalls because its funding is from one source: CMGI, a global Internet operating and investment company with more than 65 majority-owned and venture investment companies.

"That's really a nice position to be in," he notes. Nonetheless, the company recently laid off 32 staffers (it now has approximately 220), a move usually considered a bad sign in a jittery Internet space.

The move is in keeping with what Bernoff believes is the new strategy in the Internet-entertainment business: "Lay low, spend as little money as possible."

Whether any of today's companies will survive the next 18 months is anyone's guess. One thing is clear: They will have a tough time. Says Bernoff, "At this point, all people are doing is a dress rehearsal, and it's a very expensive one."

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