Digital Entertainment Network: Startup Or Non Starter?

It has all the makings of a great turn-of-the-millennium Hollywood saga: flamboyant characters, big dollars, giant corporations, and a sizzling Internet concept. With its plans to create the online equivalent of a TV network targeting the mercurial tastes of 18- to 24-year-olds, Digital Entertainment Network Inc. has already raised close to $50 million from the likes of Microsoft, Dell Computer, two Chase Manhattan venture-capital units, and several top executives at Lazard Freres. No less than Ford Motor, Microsoft, and PepsiCo have signed on as charter sponsors. And since filing in September to raise $75 million more through an initial public offering led by Credit Suisse First Boston, the stage has been set for DEN to burst out of the pack of Web wannabes.

But don't bookmark this one just yet. DEN is looking more and more like a cautionary tale of what problems can erupt when Hollywood excess meets Internet euphoria and blue-chip backers pile on board. Although it has yet to book a dollar in revenues, DEN has raised eyebrows for paying salaries to its executives that are steep even by standards of the TV networks it hopes to displace. And on Oct. 25, its three founders, including 39-year-old chairman and controlling shareholder Marc Collins-Rector, abruptly resigned. That came soon after Collins-Rector settled a lawsuit alleging that he had a sexual relationship with a minor from 1993 to 1996, BUSINESS WEEK reported in its online edition on Nov. 1. Collins-Rector's lawyer, Ronald J. Palmieri, says his client denies all the allegations in the complaint but confirms the case was settled and dismissed. The company says it was Collins-Rector's decision to move up the founders' previously planned departure from DEN. "His idea was to immediately protect the company," says Palmieri. "It would be a travesty for the millions of dollars invested [in DEN] to be affected by these unverified allegations."