Spin Offs Come Back To Papa

Suddenly, those dot-com offspring are turning into "spin-ins"

The logic seemed unassailable just a year or so ago. For any brick-and- mortar company serious about becoming a powerhouse Internet player, the game was to bundle rudimentary Internet operations into a new company, spin it off, and let the money rain down from Wall Street. And, as with most fads, for a while it was a great deal: Outside investors shouldered risk while sky-high valuations wooed scarce Internet talent and provided the currency to cut pricey deals.

How times have changed. Now, with Internet valuations in the tank, a procession of companies are racing just as quickly to reel in the earlier spin-offs. In the latest such move, on Jan. 31, USA Networks Inc. "properly rejoined" its Ticketmaster unit with offspring Ticketmaster Online-Citysearch, according to CEO Barry Diller. Earlier, teen retail cataloguer Delia's integrated its once-soaring iTurf Web operation. Others have gone even further, pulling the plug on their spin-offs altogether. On Jan. 29, The Walt Disney Co. announced it will shutter its Go.com Web portal, taking a $790 million charge to earnings, and redeem the Internet group's separate stock.

"NEED FOR GREED." For many, spin-offs today have become an embarrassing liability. Getting rid of them, most analysts now agree, marks a return to the sensible pre-Net days of centralized brand building. And nobody, but nobody, is choosing a job these days because they would rather have options in a spin-off than in the parent. "The need for greed led to a massive wall being built within or between organizations," says Simon C. Williams, chairman of brand consultant Sterling Group Inc. "Now, organizations are taking those walls down and reconnecting."

Expect to see more such reclamation efforts as companies rein in runaway Internet spending. Money-losing spin-offs "need to be cut back," says International Data Group Chairman Patrick J. McGovern, who resisted the urge to spin off his publishing empire's Internet properties in order to retain tight control of the company's brand image. One candidate for a pullback: NBCinteractive, which has failed to lure much of a following and has been losing big money. Its executives aren't commenting, but NBCi has delayed the reporting of its quarterly earnings until Feb. 13 amid speculation it may shut down its portal.

FIEFDOMS. For all the seeming logic behind Net spin-offs at the height of the dot-com craze, executives and investors chose to ignore the downside at the time. Although financially they made for good deals, it did not work operationally to run separate online and offline fiefdoms. The result was a lack of coordination that caused problems ranging from store-only return policies that annoyed online customers to marketing campaigns that were jarringly inconsistent. At times, retailers such as Barnes & Noble Inc. almost seemed to be competing with their own online siblings. Delia's had another problem with its money-losing Net operation: It sold the same merchandise to both online and offline customers but only offered margin-draining free shipping online. "You have these bizarre competitive positions that make for irrational decisions," says CEO Stephen I. Kahn. "Thank God [iTurf is] back in."

Trying to remedy such disconnects, Barnes & Noble and its dot-com are now working to coordinate everything from return policies to a joint frequent-buyer program. By yearend, the two operations hope to offer a "seamless network" between stores and the Internet, says Stephen Riggio, vice-chairman of both companies. Although he's standing by the spin-off structure, Riggio acknowledges that now is the time to integrate because the biggest B&N spenders shop energetically both online and off. So is a "spin-in" next for Riggio? He says no. That may be because his hands are tied: Media giant Bertelsmann owns a 40% stake in barnesandnoble.com.

Too bad. Such spin-offs are a distraction that managers could surely do without. Others have found that getting rid of those once-trendy Internet spin-offs is as refreshing as throwing out a bunch of out-of-style old neckties.

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