Holly Web Flops

Now that the vision of quick and easy film downloads has faded, Hollywood dot-coms are struggling to stay alive

Like many others in show business, Alan Sternfeld chucked his designer suits and Guccis last year to hook up with a dot-com. A 20-year veteran of network television and the guy who brought America's Funniest Home Videos to TV, Sternfeld moved north to San Francisco to join upstart video site Eveo.com Inc. Flush with $15 million in venture capital, Eveo.com planned to make a business of posting three-minute videos by amateur filmmakers. The payoff for the aspiring artist: a nickel payment each time her flick was downloaded.

Eveo.com is still waiting for its payoff. The seven-month-old site had a modest early hit in a sex-laced short, A Little Betrayal, for which it paid $1,200 to a Columbia University film student. The site itself has few paying advertisers and sparse traffic. Sternfeld says the company just completed its second strategy overhaul in four months, and now supplements its existing business by enlisting its amateur Spielbergs to make music videos for rock bands. Still, that's not enough. So Eveo.com is trying to convince consumer-product companies to sponsor contests for amateur filmmakers. And it will soon start selling its videomaking talent to companies that want to put video on their own sites. "We started with the simplistic notion that you make some shorts, get an audience, and get some advertising," says Sternfeld, who is chief creative officer. "We realized you could do all that and lose a lot of money."

If this were a movie in the making, now would be a good time to call in a script doctor. Despite the early hype, Hollywood has not morphed into HollyWeb--not yet, anyway. Competing for eyeballs with everything from network television to the local multiplex, Hollywood dot-coms are finding they have to quickly change their business strategies simply to stay afloat and avoid being cast in the sequel, Hollywood.com: The Great Shakeout.

Indeed, the shakeout already has begun. In May, Digital Entertainment Network Inc. closed its doors--scarcely six months after raising $50 million from the likes of giants Microsoft Corp. (MSFT), Dell Computer Corp. (DELL), and two venture capital funds. Then came Black September. First, the high-profile site pop.com disclosed it was going into limbo--indefinitely. Days later, San Francisco-based Shockwave.com, which had loaded up on deals with pricey Hollywood talent, said it was scaling back. Then, on Sept. 19, Webcaster Pseudo Programs issued pink slips to its remaining 180 workers and shut its doors for good.

Now, even diehard believers in Hollyweb might have a better chance selling a movie script than pitching a business plan. The reason? Venture capital is drying up too. At a recent conference in Los Angeles, a panel of five venture capitalists all admitted that they're reluctant to invest in companies that try to produce original content for the Web. "I have a list of more than 30 of those companies, and I can't figure out how any of them are going to make compelling content that they can make money off of," says Lee Masters, president of John Malone's Liberty Digital Inc. (LDIG) The only entertainment Web site Masters has backed is IFILM, which has remade itself into an online service that tracks the progress of film and TV productions.

Casting calls. What's a HollyWeb entrepreneur to do? Entertainment sites that once exclusively posted short animation films now are also doing casting calls for upcoming films, or hiring out their animators and computers to make shorts for other sites or for traditional entertainment outlets. And after pledging to break Hollywood's stranglehold on content and distribution by creating a new style of entertainment exclusively for the Web, many startups have hired talent agents to help them get jobs making the same movies and TV shows they once openly derided. Indeed, Hollywood studios have been happy to let Internet entrepreneurs take all the risks. But that could change if a large enough broadband market develops to make entertainment on the Net viable. "We know what doesn't work," says former Viacom President Frank Biondi Jr., whose Waterview Partners has investments in several Hollywood sites. "But what will work is far less clear to us."

About as clear as the smog-draped Hollywood Hills. Targeting their fare primarily at teenage boys and college kids, the dot-com entertainment business features mostly programs that would never see the light of network television. Filled with violence, sex, and politically incorrect slurs of all types, most made-for-the-Web series are a Catch-22 for Web-content providers. Today, a lot of the programming is seen only in college dorms, most of which are hooked to superfast communication lines. But those kids, accustomed to snatching what they want from the Internet, aren't likely to pay for whatever entertainment sites are offering. And without paying customers--or enough viewers to convince advertisers to climb aboard--those sites are finding it hard to justify the expense it will take to create the programming they'll need to compete with glossier entertainment like movies and TV. "There just isn't a market out there, at least not now," says DreamWorks SKG Principal Jeffrey Katzenberg.

Katzenberg knows that all too well. DreamWorks, along with its partners Paul Allen and Imagine Entertainment, decided in early September to lay off most of its 70 staffers and to "indefinitely" postpone the launch of their heavily anticipated pop.com site. Even with such A-list directors as Steven Spielberg and Ron Howard as backers, pop.com had to face the harsh reality of entertainment on the Net. There simply weren't enough folks out there willing to pay for what they intended to produce. And with operating costs projected to climb to $2.25 million a month, even Hollywood's big-spending moguls blanched. "We were looking at throwing a lot of money away," says Katzenberg. "We think we did what was financially responsible."

Content for hire. Katzenberg and other key Hollywood Net figures had been counting on more people having superfast connections to their homes and offices, creating a direct line to sell short programs--and even movies--over the Internet. But the day of quick and easy downloads is still a ways off. A recent study by Morgan Stanley Dean Witter forecasts 35% of the country will be hooked to cable modems and digital subscriber lines by 2004. "It will be a lot longer than any of the folks in Hollywood think," says analyst David Card of Internet research firm Jupiter Communications Inc.

First, though, Hollywood dot-coms are just trying to figure out what it takes to survive. David Wertheimer, CEO and chairman of Wirebreak.com, has chucked his initial business plan and started over. Launched late last year as a site that made and distributed its own content, Wirebreak changed its plan this summer when it had trouble lining up advertisers. It laid off seven of its 42 staffers and decided it wouldn't pay to create content for its own site. Instead, Wirebreak is hiring out its computer artists to make programming for other sites. Talks are underway as well with cable channels, says Wertheimer, a onetime head of Paramount Pictures' digital-entertainment unit.

That's one approach. But with so many entertainment sites struggling, the Web-content-for-hire business could get crowded fast. Alternatively, some established Hollywood players are using Net properties to support old media. In June, former Walt Disney Studios chairman Joe Roth bought MediaTrip.com Inc., a site that made and distributed short films. Its biggest hit was a parody of Shakespeare in Love called George Lucas in Love, which portrayed George Lucas as a film student with writer's block. The film was heavily downloaded and is now out on video. Roth also intends to take the year-old site in another direction: to help promote films he'll produce. He has already used MediaTrip.com to put out a casting call for extras in Roth's upcoming comedy Tomcats. "We still believe in what we're doing, it just may take us a little while longer to get there," says Austin Harrison, chief executive of MediaTrip.com Inc.

Make that a lot longer. That's why, in the hope that they could be turned into movies or TV shows, so many entertainment sites spent this summer negotiating deals to sell the rights to their content to Hollywood. The plan was simple: find money anywhere you could, in hopes that, somewhere down the road, folks would surf the Net for their entertainment. One of the biggest deals so far is the $2 million that Universal Studios Inc. paid UrbanEntertainment.com, a site that caters to the African American market, for the movie rights to the animated short Undercover Brother. AtomFilms, which focuses on shorts, signed a deal with Paramount Pictures to jointly create shows online that might form the basis for a TV show or movie. "The Internet by itself just isn't a business," says Mika Salmi, chairman of AtomFilms.

Salmi knew that right off the bat. From its start in early 1999, the Seattle company considered the Internet to be only one of several outlets to peddle its library of 1,400 short films, like its animated Frog in a Blender. Today, says Salmi, AtomFilms gets more than 60% of its revenues offline, selling shorts to airlines and shopping malls. AtomFilms also has deals to show its shorts in hotel rooms and on wireless devices from such companies as Compaq (CPQ), Sanyo (SANYY), and Texas Instruments (TXN). "Our goal is to be everywhere," says Salmi.

He'd better move fast, because the landscape could change abruptly if the large media companies decide to get aggressive. So far, Hollywood studios have been slow to jump onto the Net. But if the arrival of the broadband age brings with it a rush of users surfing the Net for entertainment, you can bet the biggest players will use their clout---not to mention money--to become players. And with their ability to grab market share by using their movies and TV shows to lure a large number of eyeballs, they could very well force smaller players from the market almost overnight. To head that off, Salmi says, he recently hired investment banker J.P. Morgan Chase to seek out partnerships with large media companies. Among those he intends to approach, he says, is Viacom (VIA.B), which owns Paramount and CBS.

Universal already made its move. In March, the studio quietly took a major stake in Reelshort.com, a New York site that works with young filmmakers. Universal intends to use the site to discover new talent--a Hollywood version of the baseball farm team. In a Los Angeles theater, the studio held what it called the Alfred Hitchcock New Directors Film Showcase, featuring short films made for the Web. Two new directors were selected for honors. Universal intends to pump in marketing resources to raise its profile, says Marc Shmuger, president of the studio's marketing unit. "We have some pretty strong assets we can put together with Reelshort," he says.

Name recognition. Those assets are exactly what Web startups long for: content that comes with its own built-in name recognition. Millions of folks have grown up on Walt Disney cartoons and Looney Tunes, the Warner Brothers cartoon. Little wonder that Disney (DIS) and Warner (TWX) sent some of their animators off to create cartoons for their own Web sites. Same with News Corp.'s (NWS) Fox studio, which in October is expected to launch its TooHotForFox site, offering up tasteless fare that couldn't make it on the chronically lowbrow Fox Network. Imagine what didn't get into Cops or When Animals Attack.

That makes battling for Net space all the more difficult. No doubt some startups will be squeezed out, but others are just too scrappy, kooky, or original to give up their dreams. Take Nibblebox.com. Launched by three friends who met in college, the site has signed on the student associations of 74 colleges, including Harvard University and Stanford University, and provides the streaming music for 37 college radio stations. Handing out videocameras to students, they intend to show short films to an audience that can't or won't pay. Why? "Those are the kids with broadband," says co-founder Doug Liman. "And when they graduate, they're going to want fast wires in their own homes. That's when they'll be our market." Now, that's hoping for a classic Hollywood happy ending.

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For a Profile of Shockwave.com CEO Lawrence Levy, go to ebiz.businessweek.com.

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