Newspaper headlines are filled with reports describing the demise of dot-com firms. The rapid reversal of fortunes, however, has not been limited to pure-play Internet companies. Some of the largest losses on the Internet have occurred on the books of Fortune 500 companies.
Consider this: Disney recently reported that it would take a charge of more than $790 million related to restructurings within its Internet group. This amount was dwarfed, however, by an even greater icon of U.S. business. AT& T reported that it would take a noncash charge totaling $2.7 billion related to its investment and control of Excite@Home.
Both Disney and AT& T are seasoned companies that have weathered numerous business cycles. It would be easy to believe that their management teams were caught up in Internet hype, which led to these massive losses. A deeper examination, however, shows a more subtle cause. In both cases, high executive turnover combined with hand-waving business plans that had a high assumption-to-knowledge ratio led to faulty decision-making at both companies.
Business plans for new ventures involve many assumptions; that comes with the territory. Creating a vision of the future and then working backwards to assess how to achieve it requires educated guesswork. Inevitably, many guesses turn out to have been wrong. That is why companies entering unfamiliar markets must continually test assumptions, adjust their tactics, and then readjust their assumptions in a never-ending forward march.
That, in part, was where things went awry at AT& T and Disney: A prolonged game of musical chairs in the executive corridors led to translation errors in the business plan. Just as in the childhood game of telephone, where a message is passed between a number of people and the ultimate message is grossly distorted from the original message, assumptions in the business plan were translated into certainties.
Take Disney first. In 1995 the company was looking to enter the brave new World Wide Web arena. The depth of Disney' s ambitions was widely noted. Jim Cramer, founder of TheStreet.com, a financial news and analysis website, reported that "there was a period of a couple of years where Disney acted as if it were the king of the web." Despite its ambitions, Disney' s online operations began in a modest manner. The first version was called Disney Online and consisted of interactive websites for Disney properties. Some of these were instant hits. ABCNews.com, ESPN.com, Mr. Showbiz, and Disney.com were all considered niche successes.
Disney then decided to create a broad-based portal. The reasons were clear. Although the Disney stock was in a mild upward trend, it did not have the explosive growth of broad portals such as Yahoo or AOL. The Disney management saw this move as a way to rapidly create shareholder value. In addition, it allowed Michael Eisner to convey a clear, simple Internet strategy. It was easy for executives to rally around this strategy, and Disney had the media assets to make it plausible. Moreover, by 1996 the only metric of significance to portal performance was Media Metrix - a website that measures online traffic. By themselves, the focused Disney media sites would never be able to achieve enough traffic to register on this rating.
In 1998 Disney created the Buena Vista Internet Group by merging its assets sites with a search engine, Infoseek. The deal was structured so that Infoseek got $70 million in cash, a $139 million five-year note, at least $165 million in promotion, and Starwave (a web-development outfit valued at approximately $350 million). Disney got 43% of Infoseek' s shares, along with warrants, that when exercised would give Disney a 50.5% stake. However, the success of this new venture hinged on one critical assumption - that at this time in the portal wars, Disney' s ability to promote across its "offline" network was sufficient to leverage itself into a new brand, Go.com
At that time, this seemed a plausible assumption. Most portals had grown without any advertising simply as a result of word-of-mouth, or as some might say, word-of-mouse. Although Yahoo had the fastest growth rate among portals, absolute traffic numbers for Excite.com, Lycos, Yahoo, and Infoseek weren' t that far apart. In comparison to pure-play portals, Disney also had another huge advantage: It was a bricks-and-mortar company with a vast arsenal of off-line promotion possibilities including theme parks, cruise ships, and retail stores. A member of a prominent strategy consulting firm that evaluated Disney' s Internet operations says it just wasn' t known how off-line promotion would deliver Internet traffic but that there was no logical reason it couldn' t. That was one of Disney' s most significant assumptions.
Disney acted on its strategy cautiously, seemingly testing its assumptions. The Go.com portal rolled out slowly with only a small number of features. Some observers saw the slow rollout as a mistake, considering the immense growth rates of its competitors - but it did show that Disney was going through initial testing of product features. Harry Motro, CEO of Infoseek, told consulting firm Forrester Research that heavy offline promotion wouldn' t start until the following year. Disney was not planning a major media blitz for more than six months as it tested various product/promotion bundles. The Go.com portal was making progress. Forrester reported that "offline media helped boost GO Networks' reach from 25% of online users in December 1998 to 33% in June 1999."
At the same time, Disney executives were rapidly defecting. With a stagnant stock price, especially in comparison to pure-play Internet companies, and the scarcity of experienced media executives, Disney was ground-zero for recruiters. Jim Cramer recently described his experience with Disney at that time. "People kept getting deposed and new rulers were installed with regularity." Akther Ahmed, president of Xavient Technologies, said "having Disney on your resume was all you needed for an offer." Michael Eisner, CEO of Disney, acted to stop the defections. He bought the remainder of Infoseek and created a tracking stock in order to create Internet-style options-based compensation.
Disney then began to marshal its massive "offline" assets to promote Go.com. The assumption that this would be effective had become a truism around the company. One former NBCi executive claims that the web-marketing notion that companies should "use offline assets to build online traffic" originated at Disney. By this time, however, the data was available to test this assumption. Go.com was getting some 50 million pageviews a day while Yahoo was getting more than 300 million daily pageviews and more. In addition, most of the Go.com traffic was coming from the Infoseek search engine, which was itself getting new competition from rivals such as Google.com and Dogpile.com.
