Electrifying Shockwave

Lawrence Levy helped work magic at Pixar. Can he do the same in the tough biz of Web entertainment sites?

In the past five years, Lawrence Levy has attracted loads of attention in the Valley as Steve Jobs's right-hand man and chief financial officer of Pixar Animation Studios (PIXR). Levy orchestrated the computer filmmaker's partnership with Walt Disney Co. (DIS) that yielded the Oscar-winning Toy Story. He shepherded the company through a $140 million initial public offering in 1995 and extended Pixar's Disney contract to include five more films.

These days, Levy is on his own as chief executive of entertainment site Shockwave.com. Just four months into the job, he's out to find another winning formula, even though he's up against some long odds. Shockwave is struggling to find itself in a niche where rivals are falling by the wayside, unable to pull in enough revenues or raise money to get off the ground.

A stand-alone unit of software publisher Macromedia Inc. (MACR), Shockwave.com was launched in July, 1999, as a way to promote the company's software "players." Like software offered by rivals RealNetworks (RNWK), Microsoft (MSFT), and Apple (AAPL), the Shockwave player lets Web users play media-rich interactive games, watch videos and animated shows, and listen to uninterrupted audio, even over dial-up Net connections. "We wanted to introduce the next level in online entertainment," says Macromedia Chairman and CEO Robert Burgess. "And what better way to do that than with our own destination site?"

Burgess' ambitious game plan was first led by former Disney executive Stephen Fields. The idea was to take Shockwave public after stocking it with original cartoons, music videos, and games, as well as movie clips and shorts with popular TV characters that could be used to make online animated greeting cards. Deals were struck and potential partners announced: Comedy Central's South Park crowd, Marvel Comics' The Amazing Spider-Man, and United Media's Dilbert were among the characters expected to come on board. Users were told they would be able to personalize their content with software that worked like a TV remote control and would also let them save clips for later viewing. Those willing to shell out $19.99 could get a Shockmachine, which would allow downloading of content for off-line use. Revenues would flow from advertisers and sponsors who wanted access to fans of online interactivity.

BUSTED. But only a month after the launch, Shockmachine and most of the top-billed content had yet to show up, and Fields resigned as CEO after only about four months on the job. What's more, other sites such as Warner's Entertaindom, iFilm, and Pop.com--the original live-action and animated-film site backed by celluloid heavyweights Steven Spielberg and Ron Howard--cropped up with the same idea.

Shockwave and the rest were taking a leaf from Hollywood's book: spending heavily on grade-A talent to bring consumers to the Web. But now many are running out of upfront money, and advertisers aren't signing on. Most sites didn't even attract enough visitors to show up on the radar screen of online audience tracking services. First to go, last May, was Digital Entertainment Network. Pop.com's bubble burst before it ever aired a second of programming. And live Webcaster Pseudo Networks, the darling of the 2000 Republican National Convention with its 360-degree Webcam, shut down in mid-September. By October, even cable-music giant MTV had shelved plans to take its Internet unit public.

Enter Levy, who is determined to make Shockwave.com succeed where other sites have failed. He's starting out with some advantages over other sites--for example, the enviable technical position of Shockwave.com's parent. Macromedia's Shockwave and Flash design tools have become the standard for adding animation and sound to Web-based graphics. Shockwave and Flash software is required to watch animation on most Web sites and are downloaded an average of 81 million times a month. Once Net users download a player, they are prompted to visit Shockwave.com, which offers them over 1,000 animated shows, games, music videos, or greeting cards. That helped Shockwave.com register 27 million users, and the site boasts 7.4 million unique visitors a month, ranking it No. 2 only to Disney.com in entertainment-site traffic.

Levy's challenge now? Produce high-quality work on a lean budget. Before Levy came on board, Shockwave led the pack of Hollywood-style Net plays in a race to woo Tinseltown's finest animators and TV writers with big bucks and the kind of creative freedom not usually granted by the networks.

And the emphasis was on big bucks. Director Tim Burton created 39 Web installments of his crime-fighter Stain Boy, for a $1 million budget. A raft of similarly priced arrangements with high-profile creators followed: Shockwave paid $5 million for a stake in Stan Lee Media Inc. (SLEE), the Spider-Man creator's company, and that gave the site an exclusive online license for its 7th Portal action-adventure cartoon series. And the company inked a multimillion-dollar deal with Michael Ovitz and his talent factory, Artists Management Group, with hopes of hitting it big by creating animation that could bounce from the Net to TV or theaters. When all the deals were added up, Shockwave.com was spending as much as $15,000 a minute to produce some series, triple that of most Net entertainers.

"FOUND MY MAN." But it soon became clear to Levy that the company had been focusing too much on flamboyant content deals and not enough on building a sustainable business. Even by spending minimally on marketing and relying on Shockwave downloads to generate traffic, in its first year the site lost $28.5 million on $8.2 million in revenues, according to Macromedia filings. On Sept. 6, Levy issued pink slips to 20 employees, then gathered his remaining 150 in the conference room of the San Francisco offices. The normally soft-spoken leader was blunt. No longer would the company endure inefficient production budgets. Instead, Levy told the troops, "we'll continue the relationships we've already made, but we're going to make smaller commitments, focus on fewer things, and create more of our own content."

While only a third of Shockwave's content was produced in-house before, Levy now looks to double that. He has also made the Shockmachine free. It has already been downloaded 5 million times, and he's betting he can cover costs with loftier ad rates, once traffic climbs even higher. And he's also gearing up new revenue sources, including interactive games linked to most of Shockwave's new shows, along with content available only by subscription and sponsors who will be written into the shows.

Levy also hopes the site will reap heady revenues not only from the online shows but also from toys and clothing and even spinoff films. And Shockwave has enough money to give it a shot, having raised $50 million from the likes of Silicon Graphics Inc.'s (SGI) Jim Clark. The first episode of Burton's Stain Boy appeared on Sept. 27, and Levy says he already has content from Twin Peaks director David Lynch and others that could be launched in other media forms.

Macromedia's Burgess thinks he has the right executive. "Lawrence had such a unique background in technology and entertainment, and he was quick on the uptake," Burgess says. "I knew right away I had found my man."

Levy's background and training seem to have prepared him for the ups and downs of Silicon Valley business. Levy moved to Indiana in 1973 as a 15-year-old British transplant. "I came from an environment of blazers and knee-high socks," Levy says. His entrepreneurial spirit he inherited from his father, a dabbler in startups. Britain's faltering economy in the 1970s and the chance for his father to work more closely with a business partner in the U.S. brought the family to America. But other than a slight accent and reserved manner, Levy, who routinely practices yoga, is pure California. "I consider myself an adaptable type," he says.

Levy graduated from the University of Illinois and went on to Harvard Law School. He then headed to the Valley, where he made a name for himself at law firm Wilson, Sonsini, Goodrich & Rosati in Palo Alto, where he specialized in technology licensing and intellectual property. Bored as a partner at the age of 30, Levy decided to try his hand at business, going to work for Electronics For Imaging Inc. (EFI), a Foster City (Calif.) company that provides hardware and software products for digital color printing. As vice-president for corporate strategy, Levy learned his first lessons about taking a company public. When he left at the end of 1994, EFI had become a hot company with annual revenues of $130 million after less than five years. Then he got a call from Steve Jobs, who took him to some unremarkable industrial offices in Northern California, where Levy discovered something most remarkable: Pixar Animation Studios. He left Pixar with stock worth $62 million.

Levy shies away from discussing personal details. Ask him about himself, and the 41-year-old vegetarian is likely to reveal nothing more than a penchant for cheddar cheese sandwiches. Ask how he spent the past year of his life--a sabbatical from his professional duties meant to "create space and breathing room so other parts of me don't wither away"--and he'll reply he did little more than visit bookstores, drive his children to school, and read a lot of philosophy and the Harry Potter books.

With Levy at the helm, Shockwave may stay in the game. It has more money, more deals, and more traffic than rivals do. That's important momentum, but Levy has to prove that it adds up to a real business.

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