Burn Rate

by Michael Wolff

  For Walter, Content is King.

  For Judson, marketing is, well, democracy.

  It’s 800-numbers, it’s catalogues, it’s one-on-one.

  With this perception—seeing the Web as some kind of direct marketing solution, a medium that can cut the cost of a response—the scramble began. Suddenly there was a sense of what people were doing here, of what the pot of gold was going to be, of how the geeks would be moved out and America moved in.

  Judson, representing Time, perhaps the most respected media company in the advertising business—followed close behind by Wired, the new hot magazine (there is little the ad industry likes better than a “hot book”) representing the digital generation (there is nothing the ad business likes better than the word “generation”)—told the marketing community that a kind of direct-response heaven on earth was close at hand.

  The potential here was boggling lots of minds. Every consumer, in theory, could become a distinct entity in cyberspace. “Clickstream” began to be the metaphor. We would be able to follow a consumer’s every click of the mouse! We, as marketers, would have that information! This was holy grail stuff! The rah rah was a little like what the advertising business must have felt after the war, with the coming of television.

  Suddenly, you would have been hard-pressed to find anybody but some old fools who didn’t think the future of marketing was in interactive media.

  Big brand names flowed into cyberspace—AT&T, MCI, Ford, Club Med, Chrysler . . .

  What’s more, for a lovely moment, Time Warner pretty much controlled 100 percent of cyber advertising budgets.

  By spring 1995, certain analysts on the Street were ascribing an independent valuation to Pathfinder, which had yet to earn a real dime of revenue, of $300 to $500 million. And as a stand-alone business, Judson said, spinning it out, the market would give it a premium value as a pure play (that is, as a business not compromised by any influence or strain beyond the Internet) of possibly a billion dollars.

  “Spin,” I said, “is the word.” But he wasn’t listening to me.

  Oddly, I became the voice of moderation and concern.

  Success in advertising is built on two fairly immutable factors: (1) the number of people the advertising medium can expose to the advertisement and (2) the propensity of those people who are exposed to the advertisement to act upon it (to take up “the call to action”). Without reasonable measurements, it was of course impossible to say how many people were exposed to an ad on the Internet—or even how many people were on the Internet. By early 1995, though, a numbers game had begun in earnest, with Internet promoters (including myself) accepting and passing along the exaggerations of other promoters (the Wall Street Journal turned claims we made up on the spot—absolute, if well-intentioned, fabrications—into very authoritative-looking charts). The gap between the claims and the reality were easily as high as forty to one. That is, the commonly ascribed number of people with “access to the Internet” was forty million, while the real number of people who could access the Web was probably no greater than one million, and perhaps half that. The second element of a successful advertising business—the propensity of those seeing the ad to act (i.e., to buy)—was sorely compromised by the lack of actual consumers in the group of users. It would be reasonable to argue that in 1995, there were very few, if any, innocent consumers online. More likely, most people using the Net were people who thought that maybe they could get rich from the Net.

  Interestingly, claims versus reality did not lead to a crushing credibility gap. This was partly because the world of the Net was expanding so quickly—today’s lie so often became tomorrow’s fact—and partly because the people who would have most questioned the medium’s credibility couldn’t use the medium and so acquiesced to what they were told about it and partly because there was this belief that no matter what problems and issues arose, technology would offer better and better solutions.

  “The Internet is the single most important development in communications in this century. It not only combines radio, television, and telephone but dwarfs them and has begun the process of making them obsolete. The Internet is changing our lives, and we can look forward to it changing our economy,” I said with great rectitude, addressing an Internet conference in early 1995.

  Why did I say this other than the fact that I could get away with saying it? Not that it wasn’t possibly true. But it was true like astrology. New technologies are advances over old technologies. Our habits and behavior change in response to those advances, which, in many instances, change the economic focus of the time. What was wrong was not the sentiments expressed, but the attitude—a revivalist certainty that caused people to be reborn in cyberspace.

  Still. On the one hand there was the juggernaut of momentum (a bandwagon which anyone could get onto without regard to skills, experience, and personal hygiene) and on the other hand these fearful balance sheets.

  The people at Time especially—and Judson particularly—knew the economics of businesses that sold advertising. And they knew that for the foreseeable future, if ever, advertising as the sole source of revenue could not support online content. Simple.

  “Mostly,” said Judson, “the people who think they can build advertising-supported businesses have never sold advertising before.”

  The solution? Simple, too: as it does with the more than fifty million magazines it produces every month, Time would not only sell advertising on the Web but charge for content, too. Without that assumption it is unlikely that Time Warner would have agreed to launch a business that, supported by advertising alone, had no chance of ever achieving profitability.

  The assumption of subscription income was not unfounded. AOL and CompuServe and Prodigy, after all, charged users for their content. Online service bills for active users could average as much as fifty, sixty, seventy dollars per month. Time was talking about magazine subscription rates, a few dollars a month. Who wouldn’t pay a few dollars a month for the mother lode of Time’s content?

  The Pathfinder plan called for limited charges to begin in early 1995. There had been initial resistance to even free registration, however, and this first deadline was allowed to pass (other efforts to register users, notably at HotWired, petered out, too). September ’95 was the next goal.

  This is where a little chaos theory sets in. The chaos breeds two important outcomes:

  1. In its rudimentary form (and all sites were rudimentary in 1995), it is so cheap to produce and mount a Web site, and so easy to do, that a once-barren landscape becomes Los Angeles overnight. Time’s Pathfinder, which is now running at the staffing size of a weekly magazine—and paying Time Warner salary and benefits—finds itself competing with thousands of self-created and self-funded Web producers everywhere and finds that users are at least as interested in, and certainly more charmed by, these amateur sites.

  2. Because no enterprise has found the formula to create a profitable business, this failure, oddly, inspires a host of others to try. The thinking (my own included) goes something like, Hell, if that’s success, you can’t fail. Indeed, the worst that will happen is that I won’t do it any better than Time Warner does. A further mutation of this thinking went something like: A company with the opposite attributes of Time Warner would succeed, i.e., a start-up company without experience, capital, or business know-how to hold it back. The “logic” then almost becomes “Time Warner can’t do it; therefore, I can.” Between Pathfinder’s launch in October ’94 and September ’95, a new generation of companies is born to compete with Time on the Internet, including Yahoo, Excite, Infoseek, and CNet.

  Having to fight for audience share, Time allows the September ’95 subscription deadline at Pathfinder to pass. This means that for its first twelve months of operation, running at an annual cost of more than $10 million, but less, I am told (perhaps not so reliably), than $20 million, Pathfinder will have revenues of $2 million. In 1996, it will look to achieve total revenues of $4 million, with its costs exceedin
g $20 million. With no plan for how to charge its users, Pathfinder is now formally a business without a viable business plan. This becomes clear to greater and greater levels of senior managers throughout Time Warner.

  I pick up a rumor in early 1996, filtered through the West Coast, that I immediately report to Judson.

  “I hear Walter is leaving,” I call Judson and say.

  “Not possible. Where did you hear that?”

  “Middlingly reliable source,” I say.

  Judson calls me back at the end of the day: “I just spoke to Walter and he categorically—cat-e-gor-i-cal-ly—denies that he is leaving.”

  “Well,” I say, “if it’s a categorical denial.”

  Judson ruefully compliments me on my sources when some time later the announcement is made that Walter will leave Pathfinder to become the managing editor of Time. Paul Sagan, who started NY1, the all-news channel in New York, and is often described as Walter’s consigliere, will take over at Pathfinder.

  The most sophisticated analysis says that Time Warner management has gotten Walter out of harm’s way. You don’t want to waste one of your key stars on a vehicle which, it’s clear to accountants, can’t succeed. (This could be overanalyzed, of course. It’s just as logical to assume that the Time job opened up and, of course, Walter had to take it. Perhaps.)

  What if Time’s interest and belief in the Internet is waning? What does that mean?

  Well, cyber mania quickly turns this into good news:

  In the death star battle between the East Coast (content) and the West Coast (technology) for the soul of the Internet, the East Coast’s most significant planet is imperiled. Time Warner, the King of Content, has failed to make it on the Web. That means the technology players are ascendant.

  It does not, in fact, mean the technology players are making more money, or losing less money, than Time. It does mean, however, that their money is different from Time’s money. West Coast capital is a technology play. Technology investors can rationalize losses in a way that Time Warner’s investors can’t. Technology money follows different assumptions than content money. Technology money believes that for a more or less extended period a lot of different entities and approaches duke it out for market share, which leads to market dominance. The dominant player then provides a historic return on investment to its investors (there are often positive outcomes for the losers, too, as the industry and products consolidate). Content money is of an altogether different mind-set and experience. Content, by its nature, doesn’t usually dominate a market: Stephen King, no matter how successful, won’t force all other fiction writers off the shelves (exceptions to this include local newspapers with monopoly positions, which have higher profit margins than even the software business). Content is also a business that tends to be driven by hits instead of by market share dominance. With content, what you see is what you get. The weekend grosses or the response rate on a mailing or the advances at Barnes & Noble or the position on the Billboard charts usually don’t lie.

  While the Internet on the Time Warner balance sheet looks only like a black hole, at Microsoft, which will lose significantly more on the Internet than Time Warner, such losses appear to be the key to the future. Go figure.

  Walter’s departure takes place, relatively speaking, still in the nineteenth century of the Internet. The Internet is still a business that has the feel of, well, businesses as we’re used to them. You build a staff. You build a customer base. You invest against a more or less predictable outcome. If you do your job well, you do well.

  But it begins to be clear by the start of 1996, with the growth of the Web sweeping away all prior assumptions, that something different is happening. Anyone who has lived through twelve months of the business is beginning to understand that it’s not an industry based on a developmental model (i.e., we will get better and better at our job) but an industry based on radical obsolescence—what you are doing now will be meaningless tomorrow.

  We begin 1993 thinking the information superhighway will be based on set-top boxes and services accessed through the television. The year isn’t finished before it’s clear that the interactive future will be spearheaded by the online services, suddenly growing at a fantastic clip. Then, by the spring of 1994 the Web is clearly coming. It’s not even referred to much as the Web but as Mosaic, the free, University-supported Web browser that makes the Web visible. Paid online services are, therefore, doomed. Then Mosaic, by the end of the year, gurgles and dies. In the course of several months, Netscape, an improved version of Mosaic with a for-profit software business model, transmogrifies from a start-up company with zero market share to the Model-T of the industry with a near-total market share (i.e., it “achieves ubiquity”). The effect of this is that overnight a widely dispersed, anarchic, unregulated, come-as-you-may audience is now owned by a single company. In some measure, Netscape challenges the original premises that had drawn Walter Isaacson to the medium in the first place—free distribution. It’s now no longer a medium without the cost of distribution. The distribution bugaboo is as big as ever, and suddenly there’s a monopoly player. Netscape has become the Web’s exclusive distributor. The mere fact that when Web surfers open the Netscape Web browser, they open to Netscape’s home page means that Netscape holds the power to anoint the next Web successes—and this does not include Pathfinder.

  Each of these chapters in the development of the industry, little more than a year old, come to be regarded as something blithely, even affectionately, referred to as a “paradigm shift.” In other words, it is not that every few months there’s an upgrade or natural growth and progress but that there’s an event or altered state that requires you to rethink every assumption about the business—from who pays whom, to if people will pay at all, to the tools that will be used and the language that will be spoken, to the accepted morality, to the fundamental system of organization and governance (“We must keep rethinking our rethinking”). Each of these developments impacts the interactive business in about the same way the atomic bomb affected warfare.

  There is the odd time–space synapse whereby if you haven’t spoken to someone in a few months, you start to think of them, based on your last conversation, as a dinosaur.

  The notion of “Internet time” gets invented to excuse the laggards. After all, who could keep up? “The industry reinvents itself every three or four months,” sighed Judson.

  Around the time of Walter’s departure, they start to say at Time Warner, echoing a favorite Silicon Valley taunt, “If you eat lunch, you are lunch.”

  But, actually, they do eat long, mannerly Manhattan lunches at Time Warner. The software business basis of round-the-clock workers, of an industry built on twenty-four-year-olds without families at home needing attention, of hermetic environments, of a team psychology, of companies directed forward by a weird, cultish rah-rah marketing, is hardly Time Warner.

  In fact, what happens at Pathfinder is the exact opposite of the carnivorous, guerrilla, chameleon, reinvent-yourself-every-day approach.

  Time and Pathfinder display, well, just about the worst thing you could display in the technology business: ambivalence.

  In part it’s personality. Paul Sagan, running the show after Walter, is a laconic, bemused, remote leader, perhaps most successful at avoiding phone calls. Don Logan, who runs the Time side of Time Warner and reports to Jerry Levin, and bears responsibility for Pathfinder, is a gruff mid-fifties magazine executive out of Alabama (he ran a company that Time bought called Southern Progress). In a moment of incomprehension and frustration, Logan characterizes Time’s interactive ventures to a New York Times reporter as a “black hole,” thereby sending something less than a rah-rah signal.

  And then there is Norm Pearlstine.

  Pearlstine joins Time in early 1995, the first outsider to run the church side. Pearlstine is a glamorous and flashy figure—he led the Wall Street Journal during the 1980s and managed to give money and business a dramatic persona. Remember how boring busi
ness used to be? Pearlstine filled his Wall Street Journal with larger-than-life figures and great morality tales. Plus, Pearlstine had married Nancy Friday, famous for her sex fantasy books. Then, too, he was an advocate of technology. When he left the Journal, he started a company, called Friday Holdings and backed by Barry Diller, Paramount, and Texas investor Richard Rainwater, to invest in new information technologies. But Pearlstine is also a strangely brooding figure, marked more by doubt and ambivalence than by the certainty and optimism and devil-may-care that glamour usually requires.

  It is perhaps his ambivalence most of all that comes to overshadow Pathfinder and Time Warner’s plans for the Internet.

  When he speaks at the industry conference in Laguna Beach about Time Warner’s interactive future and the threat of Microsoft and the integrity of journalism, he fails to mention Pathfinder even once, sending murmurs through the room.

  As other cyber companies make alliances, change their business models, turn from technology companies to content companies and back again, Time and Pathfinder, well, do nothing. In its single largest initiative, a personalized news service, in late 1996, Time Warner goes into partnership with CompuServe; the latter will sell this news service to its users (this is a kind of backdoor way for Time to sell information and secure subscription income). It is, however, a clear dumber dumbest transaction; CompuServe is even more clueless than Time in its understanding of where the industry is heading.