Posted at 6:40 p.m. PDT Sunday, July 11, 1999
Media moguls, tech titans
acknowledge Web's reach
USA Today
SUN VALLEY, Idaho - The digital economy can't live off the
stock market forever. Sooner or later, those dazzling young
companies that have driven the stock market to historic heights
must produce real profits or fall to earth.
That was the warning from billionaire investor Warren Buffett as
investment bank Allen & Co.'s annual retreat for media,
entertainment and technology moguls drew to a close over the
weekend.
Talk of the Internet dominated the four-day gathering, set beneath the ancient chiseled peaks of the
Sawtooth Range. About 150 executives - from Barry Diller of USA Networks and Hollywood
deal maker Michael Ovitz to freshly minted Internet billionaires Jeff Bezos of Amazon.com and
Jerry Yang of Yahoo - strolled in the sun, socialized and set about the task of transforming a new
media into a new industry, one with real revenue and profits.
Winners and losers
''We clearly believe that the future of society is going to be something that looks vaguely like the
Internet. It will evolve over time, but we think it is going to be a major tectonic plate that all of
advanced society is going to ride on,'' said John Malone, the billionaire cable TV pioneer who sold
Tele-Communications Inc. last year to AT&T.
Just two or three years ago, the media titans wondered how seriously to take the Internet. Who
could blame them? In 1995, Yahoo had just 12 employees and operated from a 1,000-square-foot
office with a hole in the ceiling that dripped water onto the refrigerator. That debate is finished. As
of today, Yahoo has 80 million members around the world who sign up for access to free e-mail,
chat rooms, custom news reports and e-commerce services.
The new economy is booming, Yahoo CEO Tim Koogle says. The value of business-to-consumer
Internet commerce was $10 billion in 1999 and will triple during the next couple of years.
Online advertising revenue, a scant $40 million during an inaugural four-month period in 1995, hit
$1.8 billion last year. It will increase to $3.5 billion this year and reach $10 billion during the next
two or three years, he says.
Another sign of the Internet's power: Small businesses that have gone to Yahoo for help establishing
online stores have seen their revenue increase by up to 40 percent, Koogle says.
Malone - whose ambition is ''to make our shareholders rich'' - says the debate has advanced to
issues of Internet strategy.
''Right now, it's a puzzle as to who the winners and losers will be,'' he said. ''But clearly,
everybody has to play.''
Diverging views
Two schools of thought were evident here, investor Mario Gabelli says.
Entrepreneurs ''native'' to the Internet, whose companies rose from the amorphous digital ocean,
were more comfortable with the idea of a money-losing start-up. They say Internet companies
deserve their remarkable stock market valuations even though most have not made a dime.
''When the market is growing this fast, it doesn't make sense to turn a profit,'' said venture capitalist
David Wetherell, CEO of CMGI, which has launched Internet start-ups such as Lycos. ''You
should be investing in the business to grow market share.''
Buffett represented the more traditional, value-oriented approach. In a Saturday presentation that
was closed to the media, participants say Buffett reminded them that stocks won't go up forever
unless profits justify the rise.
The architects of several profitable models were here. There was Michael Dell, whose Dell
Computer makes money selling computers over the Internet. And Koogle and Yang of Yahoo,
which surprised stock analysts last week when its earnings for the quarter ended in June exceeded
expectations.
The profitable companies have some common characteristics:
- Huge reach. ''Those who have the best chance have 'viral' modes of distribution, such as e-mail
or personal home pages,'' CMGI's Wetherell said. They typically spread with the speed of a virus
by giving away a product or service. Then they sell other services to that customer base.
Yahoo, for example, attracts so many users to its e-mail, chat rooms and news reports that
companies pay to advertise on the site.
''Our model is one in which we give away a free service and monetize it indirectly with advertising
revenue,'' Koogle said. In that respect it is similar to radio and TV.
But he says the model has advantages over broadcast media: a lower cost structure and an ability
to create new services. The Internet is a two-way medium, so consumers can immediately respond
to an ad by requesting more information or making a purchase.
- A strong brand. ''When you have a very cluttered environment, strong brands, supported by
strong content, supported by strong marketing are going to win,'' said Richard Bressler, head of
new media at Time Warner.
Case in point: Consumers can download music from thousands of Web sites, but about half the
music taken from the Web is downloaded from Viacom sites, which owns MTV and VH1.
A popular site such as Yahoo can share the strength of its brand with other companies. Yahoo has
partnerships with dozens of Internet sites that hope consumers will get to their sites through Yahoo.
The partners pay Yahoo for advertising space, a fee for every new customer and a percentage of
each transaction.
- Satisfied customers. When barnesandnoble.com came along two years ago, ''we were branded
Amazon.toast,'' recalls Amazon.com's Bezos. ''Today, we have 10 million customers. The key to
this is the customer experience, the ease of use.''
Let's make a deal
While Allen's conference showcased the Internet's arrival as a major economic force, it also served
its traditional role in bringing together deal-makers. The cost of creating an online business is much
higher than it was three or four years ago. The need for a quick entry into the market is driving
mergers and acquisitions at a furious pace.
''I wouldn't rule out the possibility of an alliance with a major portal company,'' said Viacom CEO
Sumner Redstone. A portal is a site, such as Yahoo and Lycos, that people visit first as they log
onto the Web.
Did Redstone talk to the leaders of those firms at the conference? ''I would rather not say,'' he said
with a Cheshire cat smile.
Quest for customers
Lycos walked away from the conference with one deal. RCN Communications, a pioneer in the
construction of fiber-optic networks for delivering TV, phone service and high-speed Internet
access to consumers, came to the conference looking for a portal partner. RCN founder and CEO
David McCourt ran into Lycos CEO Bob Davis, and they hammered out a deal on the spot, which
was announced as the conference began.
''The content people are looking for distribution, and the distribution people are looking for
content,'' said Disney executive Bob Iger. ''And everyone is looking for customers. We're all part
of the same business.''
It can be difficult for established media players to move onto the Internet. They run the risk that
online businesses will cannibalize their existing sources of revenue.
But Viacom's Redstone says he isn't worried that the firm's Internet ventures will take business from
its cable TV operations, which include MTV, VH1 and Nickelodeon. Company research shows
consumers are starting to watch TV and use the computer simultaneously.
Viacom recently said it is buying Imagine Radio, a company that allows people to download music
from the Web. Viacom music sites have 700,000 customers and add 2,000 new ones every day,
increasing their appeal to advertisers.
''We are convinced we will do with the Internet what we have done with cable,'' Redstone said.
''For us, the Internet is not an add-on business, it is a way to build an enormous new business.''
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