Behind The Mess At Nbc's Floundering Nb Ci
It started with the grandest of intentions. NBC Internet Inc., more commonly known as NBCi, was formed last year from the combination of the NBC-controlled search engine Snap.com; Xoom.com, which lets visitors create their own home pages; and several other sites. By combining the ventures under one umbrella, the idea was to create a family of online properties that could swap traffic and take advantage of $380 million in free advertising that the NBC television network would chip in. The new company could become an Internet powerhouse that would rival Yahoo! Inc. and America Online Inc. Chris Kitze, the company's chief executive until April, spoke frequently about harnessing the "power of the peacock" in order to garner a sizable slice of the Internet's advertising and electronic commerce.
Now, less than a year after the merger was completed, NBCi is in a shambles. Traffic to the company's most popular Web sites has stagnated or fallen since the merger was finalized last November. NBCi's publicly traded stock, which once sold for $106 a share, has fallen 92%, to about $8. In June, the company said it would generate sales of only $135 million this year, 19% less than the $167 million analysts were expecting. Operating losses for the year will probably hit $220 million, instead of the $180 million analysts projected. In a bid to cut costs, NBCi announced in mid-August that it was laying off 170 people, or about 20% of its staff.
The official explanation for the reduced estimates was a softness in dot-com advertising and problems that NBCi experienced in integrating two acquisitions. But interviews with more than two dozen people, including current and former executives of the company, customers, and industry analysts, reveal problems far beyond those disclosed publicly. These sources say NBCi has suffered from an unwieldy corporate structure, dizzying changes in strategy, and a relationship with its corporate parent, NBC, that can best be described as dysfunctional. In several cases, NBC execs simply didn't work with NBCi and started up competing Net operations. Without the full support of its parent company, NBCi has fallen far behind in the race to create a leading Net media company. "There was an enormous squandered opportunity," says Halsey Minor, the chairman of computer information site CNET who founded Snap.com and sold control to NBC. "I don't regret having done the deal. I regret that we let go of operating control."
The poor performance of NBCi is an unusually sour note for General Electric Co. Chairman John F. Welch, whose company owns NBC and thus 40% of NBCi. Welch urged all of GE's managers to develop Web units that challenged their own operations in a program he called "destroy your business." The success is clear: GE expects to generate more than $5 billion in sales over the Web this year, out of total projected sales of $125 billion. But GE's normally sharp management and spirit of intracompany cooperation have badly failed its highest-profile Web venture. "NBCi tried to create a mass-reach portal by smashing two unrelated companies together," says Brian Monahan, president of Inrhythm Marketing, an outfit that places ads on Web sites. "They never created a unified culture, and they will never catch up to the more trafficked sites if they don't find a way to differentiate themselves."
William J. Lansing, who took over as CEO from Kitze in April, admits that the company has made mistakes, but he insists that NBCi is headed for a turnaround. In an interview at the company's swank new headquarters in San Francisco's financial district, Lansing says the company is planning a major reorganization in which Snap.com and Xoom.com will be rolled into one site called NBCi.com. With help from a $50 million ad campaign on NBC, Lansing expects visitors to come to the portal to use Snap.com's search engine and see original content tied to NBC's television shows. Once they visit, Lansing will use Xoom.com's e-mail-based direct marketing to sell them merchandise from e-commerce partners. "We have work to do, but we've got the right strategy now," he says.
OLYMPIC MEDDLING. NBC is pledging more support. "You'll see a great deal more integration," says Martin Yudkovitz, president of NBC's corporate Internet investments. Lansing promises that "the coordination will be much better."
It couldn't get much worse. Executives at NBC's other divisions have been reluctant to give up the Web portion of their business to a company in which they have no direct responsibility. NBC Sports, for example, signed a deal with a company called Quokka Sports Inc. to create nbcolympics.com, which will be featured prominently during NBC's coverage of the Olympics in Sydney next month. That relationship began after NBC had invested in Snap.com and has been expanded in recent months with no participation on the part of NBCi. NBC has also backed the popular MSNBC.com news site, in which NBCi has no interest. In April, NBC unveiled NBCX.com, an entertainment site that announced plans to compete directly with NBCi, which is only a minority investor in that project.
While the connection with NBC wasn't helping the company much within NBC, it may have hurt in developing some new businesses. For example, NBCi established a division called Interactive Neighborhood to supply Web content to local television station sites. But it was forbidden to contract with anyone but NBC stations. Then many of NBC's affiliates preferred to develop their own sites or work with independent companies. "We didn't want to have a lot of other brands on our site," explains Alan Frank, president of the Post-Newsweek Stations Inc. television group, which owns two NBC affiliates and cut a deal with an independent operator. The bottom line: Interactive Neighborhood is not the revenue generator originally envisioned.
Former executives of NBCi say there were often competing agendas between NBC executives and those of the Internet operation. In one instance, HealthGate.com agreed to pay NBCi $75 million to market the Internet health site. As part of that deal, NBCi negotiated a $500,000 package to get advertising on NBC's Today show. But when Yudkovitz got wind of all the money NBCi was getting, he tried to boost its price to $10 million, a former NBCi exec says. The Today deal never got done. Yudkovitz says he doesn't remember the incident.
At the same time NBCi was getting little help from its parent company it was struggling to settle on a business strategy. Last year, when consumer online commerce was the rage, Kitze spent $45 million in stock to acquire Liquid Market, which was developing an electronic "wallet" to hold credit-card information and make it easier for consumers to buy things on NBCi's site. Kitze rushed to get the product out before Christmas and backed the program with $45 million in advertising on the NBC network. But users had problems with the wallet, including being charged several times for a single purchase. In spite of all the TV spending, NBCi generated only $5.1 million in e-commerce revenues in last year's fourth quarter.
In February, Kitze shifted gears. As B2B sites were perceived as the next big thing, Kitze spent $250 million in stock to buy Allbusiness.com, a portal for small businesses that attracts only 325,000 visitors a month, according to Media Metrix. Kitze's successor, Lansing, admits that he isn't sure how a small-business site will benefit from the mass-market NBC network connection.
While NBCi was floundering, Kitze was cashing out. He sold $24 million worth of stock in February--on top of the $55 million in Xoom.com stock he sold last year. Kitze, who was bumped up to vice-chairman when Lansing was brought in, did not return phone calls for comment.
Lansing got a sweet package to take the job. At NBCi, the GE veteran and former chief executive of Fingerhut Cos. is receiving a minimum of $1.8 million a year in salary and bonus, one million shares in stock options, and $12 million in restricted stock. He's also getting $4 million to buy a house in San Francisco. Still, if he can turn around the troubled NBCi, he may be worth every penny.