Time team: Michael Wolff (l.), Walter Isaacson (top l.) and Bruce Judson, along with Curt Viebranz, made up Time's Online Steering Committee. BURN RATE -- BOOK EXCERPT: MICHAEL WOLFF TELLS THE BEHIND-THE-SCENES STORY OF TIME WARNER'S INTERNET STUMBLE

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As part of his forthcoming memoir, "Burn Rate: How I Survived the Gold Rush Years on the Internet," publishing entrepreneur Michael Wolff discusses his ill-fated experience with Time Warner as the media giant struggled to define a business model for its Pathfinder Web site. The following excerpt begins in 1994, just as the first Web browsers are starting to spread, and the publishing community begins to see the possibility of advertising on the Web: On the thirty-fourth floor of the Time Life Building, the Online Steering Committee met each week in a purposeful fashion that resembled a trial, and maybe even a court-martial.

[Walter] Isaacson [then editor, Time Inc. New Media] was prosecutor and, representing an authoritarian state, virtually all-powerful. [Bruce] Judson [then division general manager] served as both clerk to the court and an assistant in the prosecutor's office. [Curt] Viebranz [then exec VP-new media] was judge and jury. It was left to me, oddly, to be the hapless defense attorney representing the online services.

This was a good example of the dexterity with which Walter could work a meeting. How was it that I had come to argue for the online services? I had spent the past year saying to anyone who would listen, "Hey, you've got to see the Internet!" Hell, I was the only person in the room who had ever been on the Internet.

One of the ways Isaacson took control of a meeting was to be on his feet when everyone else was sitting, and he now paced restlessly, his shirt pulling from his pants, his arms held tight across his chest (he was a sloppier version of William F. Buckley), waiting to pounce as you hit the period or paused too long at a comma in your sentence, or to dash to diagram a concept on the white board.

"The Web puts us back into the driver's seat. We can control our content. We can target our audience. We can use our resources to reach that audience. We can sell that audience."

This seemed like a grand and wonderful notion to me, but it also seemed highly theoretical. There were no real examples of a magazine making the transition to the Web. It was still amateurs and academics out there.

"OK, but why do you think that people are going to come to Time when it's on the Web? These are young men. This isn't Time's audience," I said, trying to be a responsible consultant.

"Not now!" shouted Judson. "Not now! But tomorrow, the next day. You're the one who says this is going to be a mass medium. Like TV!"

"But I don't really believe that!" I said with my best Cheshire smile. "You've got to see it. The voyeurs. Alt.sex.voyeurs. You can find what room to request in a hotel for the best view."

"Really?" Viebranz said.

I was annoying Walter.

`WIRED'S' WEB EFFORTS

Out in San Francisco, Wired was laying the groundwork for a Web presence of its own. While Wired's vision was transcendent -- it believed it was truly inventing a new medium and through that medium a new way of life -- its efforts were more like Time's than not.

Both Time and Wired, separated by coasts and sensibility but united as print publishers, shared two assumptions. They both wanted to stay out of the business of providing people with connections to the Internet, and they both believed they could create a revenue stream selling advertising on the Web.

As they each in turn expressed it, the goal was to be CNN (creating shows for the cable system) rather than TCI (wiring the nation's homes).

Which brought both (Wired founder) Louis Rosetto and Walter, at nearly the same time, to begin to believe that the Web could be an advertising medium.

This is an important and not necessarily inevitable moment. Almost right up until Wired made this dialectical breakthrough -- that users prefer to accept advertising rather than pay for the cost of content and that the Web is part of the Net where advertising will be acceptable -- most people who knew anything at all about the medium would have considered advertising on the Internet an unlikely outcome.

"We don't want to do anything to offend the community, of course," said Judson.

But Wired's stature in the Internet community, and Time's stature in the advertising community nearly overnight made advertising part of everyone's plans for the Web. ("What's your business model?" "Oh, advertising.")

WEB TUTORIAL

There was a kind of tutorial going on among the editorial select at Time Warner. Walter was the master. He in turn had sought out almost anyone with an Internet expertise that came to his attention.

"We did a Barry Diller," said Judson, meaning that, like Diller, who after he left Fox went on a literal and emotional journey talking to experts in new technologies (from which experience he decided to buy QVC), Isaacson and Judson sought out the experts in the new medium.

Walter went out to Wired to visit with Andrew Ankar, who was leading HotWired, Wired's Web effort.

"Walter acted somewhat like an anthropologist or biologist," recalled a HotWired staffer. "Lots of poking and prodding and dissecting of the subject under study. Made some people here feel like lab animals."

Walter returned from his journey of technological discovery to mobilize 1271 Sixth Ave., Time's headquarters. Overnight, "digital" and "cyberspace" became part of the Time lexicon. Time ran a series of cover stories about the new digital generation. (It recalled Time's embrace, in 1967 or so, of the counterculture.) Elite editors from across Time's titles were assigned to the Online Content Committee, which in turn reported to the Online Steering Committee.

There was a cascade of memos: how Entertainment Weekly would go online, a structure for Sports Illustrated online, thoughts for a health fitness node . . . kids . . . games . . . shopping!

PATHFINDER'S LAUNCH

Pathfinder launched in October 1994. It was unveiled at the Time Warner annual meeting by Jerry Levin and Walter. Levin pronounced it a natural evolution of Time Warner's plans to be the leader in interactive media.

Overnight, Pathfinder became the most popular site on the Web. It had a real audience. It was selling real advertising. Everything about it was real. It was professional, businesslike, managed. It had real executives, it had a growing staff (soon to reach 100 people), it had professionally written content. It had a sales force! And it had promotion. It had Time behind it! It had users. Traffic!

There was an astounding (and, as it turned out, astoundingly brief) moment when it appeared that Time's bet would pay off massively, that Time would tame and own the Internet. This period, the first part of 1995, may have been the most purely optimistic moment in the development of the Internet business. Whatever you were doing, you couldn't do it fast enough. Interest seemed geometric. Every day offered a doubling effect -- sites doubled, e-mail doubled, traffic doubled, friends-who-didn't-want-to-hear-about-the-techy-thing-you-were-doing-but-were-now-saying-hey-can-you-show-me doubled.

Suddenly, you would have been hard-pressed to find anybody but some old fools who didn't think the future of marketing was in interactive media.

By spring 1995, certain analysts on the street were ascribing an independent valuation to Pathfinder, which had yet to earn a real dime of revenue, of $300 million to $500 million. And as a stand-alone business, Judson said, spinning it out, the market would give it a premium value as pure play (that is, as a business not compromised by any influence or strain beyond the Internet) of possibly $1 billion dollars.

"Spin," I said, "is the word." But he wasn't listening to me. Oddly, I became the voice of moderation and concern.

MEASURING TRAFFIC

Success in advertising is built on two fairly immutable factors: 1) the number of people the advertising medium can expose to the advertisement and 2) the propensity of those people who are exposed to the advertisement to act upon it. Without reasonable measurements, it was of course impossible to say how many people were exposed to an ad on the Internet -- or even how many people were on the Internet.

By early 1995, though, a numbers game had begun in earnest, with Internet promoters (including myself) accept- ing and passing along the exaggerations of other promoters (The Wall Street Journal turned claims we made up on the spot -- absolute, if well-intentioned fabrications -- into very authoritative-looking charts).

The gap between the claims and the reality was easily as high as 40-to-1. That is, the commonly ascribed number of people with "access to the Internet" was 40 million, while the real number of people who could access the Web was probably no greater than 1 million, and perhaps half that.

The second element of a successful advertising business -- the propensity of those seeing the ad to act (i.e., to buy) -- was sorely compromised by the lack of actual consumers in the group of users. It would be reasonable to argue that in 1995, there were very few, if any, innocent consumers online. More likely, most people using the Net were people who thought that maybe they could get rich from the Net.

Interestingly, claims vs. reality did not lead to a crushing credibility gap. This was partly because the world of the Net was expanding so quickly -- today's lie often became tomorrow's fact -- and partly because the people who would have most questioned the medium's credibility couldn't use the medium and so acquiesced to what they were told about it, and partly because there was this belief that no matter what problems and issues arose, technology would offer better and better solutions.

Still. On the one hand there was the juggernaut of momentum (a bandwagon onto which anyone could get on without regard to skills, experience and personal hygiene) and on the other hand these fearful balance sheets.

The people at Time especially -- and Judson particularly -- knew the economics of businesses that sold advertising. And they knew that for the foreseeable future, if ever, advertising as the sole source of revenue could not support online content. Simple.

"Mostly," said Judson, "the people who think they can build advertising-supported businesses have never sold advertising before."

The solution? Simple, too: As it does with the more than 50 million magazines it produces every month, Time would not only sell advertising on the Web but charge for content, too. Without that assumption, it is unlikely Time Warner would have agreed to launch a business that, by its own numbers and projections, had no chance of ever achieving profitability.

NOT UNFOUNDED

The assumption of subscription income was not unfounded. [America Online], CompuServe and Prodigy, after all, charged users for their content. Online service bills for active users could average as much as $50, $60, $70 per month. Time was talking about magazine subscription rates, a few dollars a month. Who wouldn't pay a few dollars a month for the mother lode of Time's content?

The Pathfinder plan called for limited charges to begin in early 1995. There had been initial resistance to even free registration, however, and this first deadline was allowed to pass (other efforts to register users, notably at HotWired, petered out, too). September '95 was the next goal.

This is where a little chaos theory sets in. The chaos breeds two important outcomes.

1) In its rudimentary form (and all sites were rudimentary in 1995), it is so cheap to produce and mount a Web site, and so easy to do, that a once-barren landscape becomes Los Angeles overnight. Time's Pathfinder, which is now running at the staffing size of a weekly magazine -- and paying Time Warner salary and benefits -- finds itself competing with thousands of self-created and self-funded Web producers everywhere and finds that users are at least as interested in, and certainly more charmed by, these amateur sites.

2) No enterprise has found the formula to create a profitable business, and this failure, oddly, inspires a host of others to try. The thinking (my own included) goes something like this: "Hell, if that's success, you can't fail. Indeed, the worst that will happen is that I won't do it any better than Time Warner does."

FURTHER MUTATION

A further mutation of this thinking comes about when a company with the opposite attributes of Time Warner (i.e., a start-up company without experience, capital or business know-how to hold it back) does succeed. The "logic" then almost becomes "Time Warner can't do it; therefore, I can." Between Pathfinder's launch in October '94 and September '95, a new generation of companies was born to compete with Time on the Internet, including Yahoo!, Excite, Infoseek and CNET.

Having to fight for audience share, Time allows the September '95 subscription deadline at Pathfinder to pass. This means that for its first 12 months of operation, running at an annual cost of more than $10 million but less, I am told, than $20 million, Pathfinder will have revenues of $2 million. In 1996, it will look to achieve total revenues of $4 million, with its costs exceeding $20 million.

With no plan for how to charge its users, Pathfinder is now formally a business without a viable business plan. This becomes clear to greater and greater levels of senior managers throughout Time Warner.

CATEGORICAL DENIAL

I pick up a rumor in early 1996, filtered through the West Coast, that I immediately report to Judson.

"I hear Walter is leaving," I call Judson and say.

"Not possible. Where did you hear that?"

"Middlingly reliable source," I say.

Judson calls me back at the end of the day. "I just spoke to Walter and he categorically -- cat-e-gor-i-cal-ly -- denies that he is leaving."

"Well," I say, "if it's a categorical denial."

Judson ruefully compliments me on my sources when some time later the announcement is made that Walter will leave Pathfinder to become the managing editor of Time. Paul Sagan, who started NY1, the all-news channel in New York, and is often described as Walter's consigliere, will take over at Pathfinder.

The most sophisticated analysis says that Time Warner management has gotten Walter out of harm's way. You don't want to waste one of your key stars on a vehicle that, it's clear to accountants, can't succeed. (This could be overanalyzed, of course. It's just as logical to assume that the Time job opened up and, of course, Walter had to take it. Perhaps.)

What if Time's interest and belief in the Internet is waning? What does that mean? Well, cybermania quickly turns this into good news.

In the death star battle between East Coast (content) and the West Coast (technology) for the soul of the Internet, the East Coast's most significant planet is imperiled. Time Warner, the king of content, has failed to make it on the Web. That means the technology players are ascendant.

It does not, in fact, mean the technology players are making more money, or losing less money, than Time. It does mean, however, that their money is different from Time's money. West Coast capital is a technology play. Technology investors can rationalize losses in a way that Time Warner's investors can't.

Technology money follows different assumptions than content money. Technology money believes that for a more or less extended period a lot of different entities and approaches duke it out for market share, which leads to market dominance. The dominant player then provides a historic return on investment to its investors (there are often positive outcomes for the losers, too, as the industry and products consolidate).

Content money is of an altogether different mind-set and experience. Content, by its nature, doesn't usually dominate a market: Stephen King, no matter how successful, won't force all other fiction writers off the shelves.

While the Internet on the Time Warner balance sheet looks only like a black hole, at Microsoft, which will lose significantly more on the Internet than Time Warner, such losses appear to be the key to the future. Go figure.

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