Party Is Ending for Hollywood Internet Companies

At one time, Web sites could flash a little shiny animation on the screen and attract thousands of visitors a day. But online visitors are becoming more sophisticated. And that spells bad news for local entertainment sites. As more and more entertainment content sites crowd the market, investors are growing very cool to such operations. Meanwhile, entertainment sites are watching visitor numbers fall precipitously, forcing some local companies to rethink their strategies in the face of potential failure. The downturn isn’t surprising, considering the explosion of Internet use and the maturing of users over the past couple years. “Imagine that the first day you turned on your television, instead of four channels, there were 200,000 channels,” said Lew Harris, chief executive of E! Online. That’s what happened with the Internet, but now the novelty is wearing off. “People are going back to the sites they like,” Harris said. “The infatuation with new media is over.” According to Media Metrix, an online usage tracking firm, the number of total Web users is exploding growing from 65 million to 70 million just between December and February. Nonetheless, Media Metrix data also show that many entertainment sites including America Online Inc.’s Entertainment Asylum (www.asylum.com), Hollywood.com and Time Warner Inc.’s Entertaindom.com saw their usage drop during that time frame. Meanwhile, amid a serious downturn for technology stocks, startups that had hoped to go public within a year or two of their founding are being forced to change their plans. One such company is Digital Entertainment Network. Founded in 1998, DEN started off by offering digital programming to Generation Y. But in the time since, most of its top executives have left, it has been forced to drop plans for an initial public offering, it laid off about 20 percent of its employees and revamped its revenue structure essentially starting over from scratch in the course of about six months. With new Chairman Gary Gersh and new CEO Greg Carpenter on board, the Santa Monica-based company is overhauling its operations. Considering the current state of the market, its IPO plans are now on indefinite hold. “Before, we were on the fast IPO track. We very concerned about what was going on in the marketplace,” said DEN spokeswoman Anna Caldwell. “We’re still very concerned about that, but now we’re regrouping and figuring out what works for a better business model for DEN and putting that together.” Back to the drawing board Other entertainment-oriented sites are suffering from serious internal disarray. Entertaindom.com, Time Warner’s online venture, garnered high hopes as a site that would offer original content in addition to material from the Warner Bros. film and cartoon library. More than 4.3 million visitors went to the site in January, falling slightly to 4.2 million in February, according to Media Metrix. Original plans called for Time Warner to spin off the site, allowing it to operate with greater autonomy while still maintaining close ties to its powerful and wealthy parent. But in the wake of the planned merger between America Online and Time Warner, announced in January, the spin-off was canceled. Possibly in reaction to that decision, President and CEO Jim Moloshok, Chief Operating Officer Jeff Weiner and Chief Development Officer James Bannister announced they would leave the company. None of the executives have given reasons for their departure, and Entertaindom officials did not return calls last week. Moloshok, Weiner and Bannister probably won’t have a tough time finding new jobs. Despite the troubles at content sites, there is still a frenzied demand for experienced entertainment executives at Internet startups. But many believe that trend is beginning to slow. “People will realize, and are beginning to realize now, that IPOs aren’t what they were supposed to be,” Harris said. “They’re all looking to make a buck, they’re not interested in what they’re producing. They wouldn’t be moving around every three months if they were looking for careers.” As many IPOs are put on hold, tech employees at all levels are wising up. “The IPO dream is still alive and well in most employees’ minds, however there’s no longer an IPO fantasy. Bottom line, employees are being much more realistic,” said Jim Urbanic, Internet and employment attorney at a downtown law firm that has many entertainment clients. “That means employees don’t hop from startup to startup willy-nilly. The trend is, I think, the market is tightening, and both management and employees realize this.” One success story While fluctuations are seen as a given in today’s economy, at least one local site E! Online has grown steadily in usage, with 1.95 million unique visitors in December, 2.57 million in January and 3.2 million in February, Media Metrix data show. CEO Harris attributed the company’s continued growth since its inception in 1996 to the adherence to a simple formula: 80 percent original content and 20 percent promotion of parent E! Entertainment Television’s programming. E! Online has also benefited from its association with the cable network, which promotes the site on television. “We say, ‘Who is our audience and what does this audience want?’ not ‘What can I give this audience?'” Harris said. “People don’t want to watch television on their computers.” As for his take on why his competitors are facing so many troubles, Harris pointed to a lack of focus.”They don’t know what they’re doing. They don’t know what they are, they don’t know where they’re going,” Harris said. “I don’t want to just sit here and put down the competition. They’re trying very hard. But we are thinking with the end user in mind more than our competition ever has.” Many entertainment sites are hedging their bets against business-to-consumer problems by bolstering their business-to-business elements, as B-to-B grows in popularity with investors.