NEWS ANALYSIS: New-media discord for MCI, News Corp. venture

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Online venture buffeted by turmoil, delays; Microsoft, Oracle play new roles

Behind the crumbling of News Corp.'s online joint venture with MCI Communications Corp.--which last week announced it was instead "pushing [its] boat into Microsoft's waters"--lies a tale of corporate culture clashes and political infighting.

The venture's fate was probably sealed before it was even formed, underscored by two telling moments that occurred last summer 10,000 miles apart.

EARLY RED FLAGS

Anthea Disney, News Corp.'s top editorial talent, was in Australia attending a company retreat, where she was introduced to MCI Communications Corp. Chairman-CEO Bert Roberts. MCI had just invested $1 billion in News Corp., and said it was going to pump in another billion. When Ms. Disney told Mr. Roberts that she was the editor in chief of TV Guide, he is said to have asked her what an editor did.

Half a world away, Scott Kurnit, recently hired away from the Prodigy online service by MCI to lead its charge into cyberspace, was in a sales meeting. During the meeting he good-naturedly suggested everyone laugh at the jokes of the next speaker, Tim Price, president-chief operating officer of MCI Telecommunications. "Price," said one insider, "was not amused."

Mr. Price, one of MCI's early Internet gurus, hired Mr. Kurnit but wasn't happy to cede that territory to him, the executive said, adding, "When MCI hires from the outside, some company insiders have been known to attack and eat them like piranhas. Scott didn't have a chance."

Mr. Kurnit, brought in just weeks before the MCI/News Corp. online venture was announced--though he was not told the deal was in the works--was named president-CEO. Ms. Disney, the second-in-command, was put in charge of all content.

THE BIGGEST BLOW

But last week, the venture, already plagued by numerous delays, was hit with the latest and biggest bombshell when MCI announced a broad online alliance with Microsoft Corp.

The effects of that shift are many. MCI will become a silent minority partner in the News Corp. venture, while Oracle Corp. is finalizing details of becoming an equal partner with News Corp. Launch is delayed until at least mid-March. And Mr. Kurnit's role is shaky; he would like to stay with the venture for now, but may be forced out by News Corp. and Oracle or forced back in-house by MCI, where his next role is far from clear.

DIDN'T MAKE SENSE

From the beginning the News Corp./MCI joint venture didn't make sense to many.

"News Corp.'s big content plays are the Fox material and TV Guide. They are interested in promoting those vehicles," said one executive familiar with the venture. "MCI's big interest has been finding advertising vehicles to reach new phone customers and transactions. Tell me where these two interests meet. What's the vision?"

It was clear to many analysts that MCI's investment in News Corp. really only made sense if the two companies teamed in a direct broadcast satellite venture, where MCI's marketing and technology prowess really does mesh with Fox content.

Still, the online venture was announced last year with great fanfare, bringing together News Corp.'s entertainment brands and struggling Delphi Internet Services and MCI's internetMCI and marketplaceMCI businesses.

NO STRATEGY

"Cyberspace was the hot thing last spring," said one insider. "Vision? Strategy? There wasn't one. It was shoot from the hip, grab the PR for all it was worth."

The bickering started almost immediately. News Corp. didn't want to lose control of the Fox content, and Fox's West Coast studio wanted to go directly to the World Wide Web without going through the joint venture.

Meanwhile, MCI was secretly continuing to court Microsoft, a company it had sought to partner with for several years.

"They had been talking to Microsoft for a long time," one executive said. "Most people thought those talks were dead ... because of the joint venture [with News Corp.]. But Price and Scott Ross [president of business operations and finance, MCI Telecommunications] really wanted the Microsoft deal. It would give them back control of MCI's Internet play."

MCI executives declined to comment on the News Corp. venture.

FIGHTS OVER MONEY

The biggest squabbles were over money. MCI is said to have demanded detailed records about Delphi. Delphi had about $25 million in losses, and MCI didn't want to foot the bill for any of it. And the business plan for the first year of the joint venture projected losses of about $125 million.

Not only did MCI keep delaying signing off on a budget, the company also kept putting off, and ultimately never signed, a definitive agreement legally forming the joint venture itself.

Meanwhile, before a spending freeze was instituted in October, the venture spent lavishly--to the tune of about $50 million--on salaries, equipment and 75,000 feet of office space in Manhattan's cyber-trendy Chelsea neighborhood.

WHAT PRODUCTS?

Another debate surrounded the products the venture was to produce. A lavish electronic newspaper plan was scrapped in favor of an elaborate Internet directory, dubbed iGuide.

Then, for the 400 to 500 employees of the venture, who have been living with uncertainty for months, came word that MCI was all but abandoning the venture and going with Microsoft.

MCI will reduce its stake in the joint venture to a non-voting 15%, a number chosen so it won't have negative tax implications.

News Corp. is close to announcing Oracle Corp. will join the venture, with each company winding up with about 40%. Mr. Murdoch and Oracle CEO Larry Ellison became fast friends while sailing together recently, insiders said.

Now everything is on hold until Oracle can come in and develop a new business plan. But in Chelsea, MCI is already taking a back seat. A receptionist late last week answered the phones at what had been News Corp./MCI Internet Ventures with "News Corp. Internet. How may I help you?"

Copyright February 1996 Crain Communications Inc.

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