The first wave on the Web was spun out of romance. All of a sudden there was a new space, uncharted, open, free — cyberspace — with few requirements and fewer rules. It was open to exploration and self-expression, and an unspoken etiquette was all that was needed to maintain order among its members. It was Web-stock.
The second wave on the Web was spun out of greed. All of a sudden anything with "net" or "web" in its name could attract venture capital or go public; in the last 18 months, investors have thrown something like $3.5 billion at the Web. The Web was a place you went if you wanted to cash in and cash out — fast. It was Web-rush.
Now we are into the third wave on the Web — and it is spun out of a newfound seriousness of purpose. All of a sudden, the bubble has popped and there's talk of a shakeout — the heady IPOs and sky-high stock market multiples look like a passing phase in the Web's evolution rather than a permanent destination. Now it's time for a long hard look at what it takes to build a serious company on the Web. It's Web-business.
On the outskirts of Seattle, the men and women of Starwave Corp. are betting that the third wave will be their wave — and they are taking the Web very seriously. Backed by billionaire Paul Allen, boasting a collection of the best and brightest talent from the converging worlds of publishing, broadcasting, entertainment, and software, and offering a stable of some of the Web's most successful programming, Starwave is making a serious bid to be considered the Web's first real company.
This isn't a romantic fantasy, and it certainly isn't a get-rich-quick scheme. In fact, in the course of building a serious company, Starwave has lost serious money.
Starwave's model isn't the only one for doing business on the Web. Jeff Bezos, founder and CEO of Seattle-based Amazon.com, has thought long and hard about the business of Web business. He chose not to enter Starwave's market — multimedia content — and to conquer another front in the Net revolution, electronic commerce. In two years, Bezos has built the world's largest online bookstore — and a business model that more and more companies want to emulate. (See "Who's Writing the Book on Web Business?")
Building a Web site is easy. Building a Web business is anything but. A close look at the challenges facing Starwave reveals the still-emerging shape of business on the Web. The company's challenges suggest the nature and scale of what lies ahead for any group of ambitious, committed pioneers who set out to create a defining company on the Web.
Challenge Number One
How far can egoless leadership and patient capital take you?
if you want to know CEO Mike Slade's idea of running Starwave, look at the two magazines on the coffee table in his office: Nation's Business and MAD magazine. That's the dichotomy — call it casual intensity — that runs through all of Starwave right to its CEO.
Starwave is headquartered in an anonymous office building next to a drab Seattle freeway. It isn't until you get off the elevator and enter the open and bright reception area that you get the feeling you've arrived someplace a little ... different.
On this day, a crew from Ziff-Davis TV is visiting the company, gathering up its gear beneath a bizarre mural spatter-painted directly onto the wall by noted illustrator Ralph Steadman. The slightly ominous painting shows, amidst Steadman's trademark swirls and drools, a weird buglike creature trapped in a pond. It bears the title, "Thus Spokane Methuselaa."
Slade, 39, wears khakis and a knit shirt, and his hair is thick and spiky — the look of a man just back from two sets of tennis and a quick shower. But once he starts talking, the words come spilling out in a flood that barely leaves room for questions.
Ask to see Slade's business plan for Starwave and he laughs: "Which one?" Since he joined the company in February 1993, Slade has generated more business plans built on more financial models than most CEOs do in their entire lives. The reason for the proliferation is simple. There is no single plan or model for doing business on the Web because there is no business — yet.
"Opening a site on the Web is kind of like opening a restaurant in SoHo or Greenwich Village," he says. "You can do whatever you want. You own the building. You can decorate it. You don't have to adhere to building codes. On the other hand, there might be a couple of homeless people sleeping outside the door when you wake up in the morning."
If that sounds like a skeptic rather than a cheerleader, listen to what Slade says about making money on the Web. "If you're a venture capitalist investing in Web site number 677," he warns, "the best strategy you can have is to sell it to an even bigger fool."
Slade has come by his skepticism the old-fashioned way — he's earned it. Under Slade's leadership, Starwave has gone from 8 people to more than 280, including 55 top-flight software engineers. It has created some of the best-known and most-visited programming on the Web : ESPNET SportsZone, Mr. Showbiz, Outside Online, Family Planet. It has also reportedly spent something on the order of $60 million. The only way Slade and his colleagues can make sense of all this red ink is to treat the entire Web as an R&D laboratory.
"What we have right now is a kind of access schizophrenia," says Slade. "There's a lot of sound and fury targeted at people who aren't especially good customers while everybody waits for the real customers to catch up."
Slade has a big advantage in this R&D waiting game. Sitting behind him is Starwave's main investor, Microsoft cofounder Paul Allen. Having access to Allen's patient money has enabled the company to develop a long-term strategy that's otherwise impossible in a hyperpaced, Web-based IPO market that expects a company to go public within 18 months of its founding.
"Paul understands that you have to seek risk — that a new medium plus big risk equals a big reward. And because of that he's allowed us to run this company like the new media operation of a big company rather than like a startup," says Slade.
Allen has also given Slade the chance to change his mind — and the company's fundamental direction. When Slade joined Starwave, the company had no content or product focus — it was trying to make something happen in interactive media, possibly as a tools company, possibly as a content company. Slade focused Starwave on opportunities in sports, entertainment, kids, and families — and identified a three-pronged strategy of online services, CD-ROMs, and broadcast. Then, one year later, Starwave did a sharp turn onto the Net. The credit for the strategy, says Allen, goes to Slade.
"It was Mike who really restarted this company," Allen says. "He was excited about Net-based vehicles for things like sports and family information. I was anticipating the birth of something — we placed our bets in a number of different areas, not knowing exactly which would mature. It turned out to be the instantiation of those opportunities Mike had identified."
Most startups wouldn't have survived such a wrenching reinvention. But Slade could afford to take his time and get it right — and that freedom has made him an uncommonly egoless executive. "It's been quite an education," he says. "When I joined Starwave, I viewed it as a software-company type of management challenge. As I've gotten educated, mostly by the people I've hired, I've realized that Starwave is really a next-generation media company."
The promise of new media has always been about convergence : the digitization of everything that makes possible a combining of text, graphics, video, audio — delivered through another convergence that combines television and computing. If Slade's experience is any indication, convergence is still at the heart of new media — but not technological convergence. What really matters is human convergence : melding talents from a wide variety of existing media — every medium, in fact, that predates the Web, from radio to film - and existing industries — from software to entertainment.
The management challenge associated with convergence, he says, is to blend people's experiences into a shared vision. "Try asking a Hollywood person and a Microsoft employee to define 'development,'" Slade suggests. "Or try to get publishing people to think about interactive media instead of linear media. It's like night and day. Managing expectations and uncertainty is a basic job description."
But if the management challenge is new, Slade sees the competitive challenge as not particularly different from other media. "In theory," he says, "the Web is this big, wide-open field where a thousand flowers can bloom and anyone can prosper. That's bull. The Web is already dominated by big, well-funded media entities that are seeking to 'aggregate' and 'brand' and 'lock out' competitors. The marketing challenges are the same as in any other type of media. In most large categories on the Web there will be only one, two, or three winners. So the race to get ahead or to catch up is furious."
It's a race Slade enjoys running. "This is the coolest and funnest thing I've seen since the Apple Macintosh," he says. "We're a proud bunch. We try to do things in a super-excellent, super-high-quality, blow-away-the-competition manner. That's not always the right approach, but when it works, it shows."
Challenge Number Two
Can your technology keep pace — or even better, set the pace?
If Mike Slade is an egoless leader, Patrick Naughton, Starwave's senior vice president of technology, is an angry young man. Eight years ago, when he joined Sun Microsystems as a brash young programmer, he took great pride in his status as an outsider. But now he's 31 and widely accorded the status that goes with being one of the most gifted programmers in the world. So he bristles at being left outside — and today, he's bristling at three old friends from Sun.
In their presentations at a recent conference on Java — the wildly popular programming language for the Web that Naughton had a big role in inventing — Sun's CEO (and Naughton's longtime hockey teammate) Scott McNealy, cofounder and Vice President for Research Bill Joy, and Chief Scientist of JavaSoft James Gosling (another friend) managed never to mention Naughton's name. To Naughton it's a slight with epic meaning, a conscious effort to rewrite the history of Java now that Naughton has left Sun. "It's like 1984," he says, "and I've gone down the memory hole."
Naughton has a genuine claim as a founding father of Java. In 1990, a 25-year-old Naughton told McNealy he was quitting Sun to join Steve Jobs at NeXT. Sun was hopeless when it came to software and user interfaces, he complained, and he wanted to go to a company that knew what it was doing. McNealy asked Naughton to write a memo outlining his indictment. The CEO forwarded the email up and down the management chain; the electronic conversations it sparked created the research project that became Java.
Naughton left Sun in the fall of 1994, but he has far from disappeared. Indeed, his decision to join Starwave is generally considered one of the company's biggest coups. His programming skills give the company a major weapon in an uncertain competition where technology both defines the medium and continually reinvents it. Naughton and his engineers are scrambling to figure out ways to create distinctive Web experiences. Why would someone of Naughton's reputation join a startup to design clever screen presentations of NBA box scores?
"Well," he says with typical intensity, "one answer is that you don't get to do a Java — that is, to revolutionize the way a million programmers work — more than a couple of times in your life. We created Java precisely because we felt that Sun had lost track of its customers. We wanted to build software that would allow consumers to have a satisfying experience again. That's always been my goal. I try to bring all my experiences to bear to make my work invisible, to create a Starwave experience for consumers that's so positive that they come away saying, 'That's really cool.'"
One of those "experiences" is Starwave TV, and it's already in prototype. Imagine that you could watch the NBA finals on your computer, see footage of, say, Dennis Rodman going up for a rebound, touch the cursor to his moving figure — and instantly call up his entire career statistics. "Just think of Bloomberg TV and make it SportsZone on the PC," says Naughton.
The prospect of reinventing the technological experience of the Net is enough of a challenge to keep Patrick Naughton at Starwave — at least for now. "For the next two years," he says, "technology is going to be vitally important here. Desire is still ahead of development. People want stuff we haven't written software for." Then he adds, with typical self-assurance, "But we're already finishing the architectures, so I can tell you that the Web of 1997 will look radically different than it does now."
Challenge Number Three
Can you assemble a team of unparalleled editorial talents — who are willing to obsolete their proven skills in pursuit of an unproven new business?
If Mike Slade is the heart of Starwave, then Senior Vice President Tom Phillips is its soul.
Tall and angular, with a frame that practically vibrates with nervous tension, topped by a thick shock of black hair, Phillips hardly looks the part. And, at age 41, he already holds the distinction of being one of the oldest people at Starwave. But alone among the people at the company, perhaps in the whole world of the commercial Web, Phillips knows what it means to ride the zeitgeist, to feel both the exhilaration and the decompression of the ride. As a founder of Spy magazine — one of the defining publications of the 1980s — he has seen what it's like to be in the hottest enterprise in your medium, what it takes to hold such an emotional business together, and what it feels like when the air goes out of the balloon.
He also knows what building a creative, on-the-pulse-of-the-times company is ultimately all about: finding and recruiting those few people with the rare combination of great talent in their current career and a willingness to throw away that success to take a flier on something totally new, dangerously unproven — and potentially spectacular.
What Phillips has been trying to create with his eclectic team is the workplace equivalent of a thriving new community. In addition to hiring talent, he explains, he's been looking to avoid "prospectors" and bring in "homesteaders." Prospectors are strictly focused on the short term. Their goal is to make the quick strike — if it doesn't happen fast, they tend to grow bored and move on. Homesteaders, on the other hand, are people who leave their successful careers, looking for that one big adventure in which they can stake out their claim, regain control over their lives, and settle down in a safe place for their families. It's only partly in jest that Phillips's wife, an aspiring novelist, calls herself a "pioneer wife."
As homey as all this sounds, and as clever as Phillips's categories are, the problem Starwave faces is the same that confronts most start-from-scratch communities: Is it a new town they all share, or just a random collection of neighborhoods? The answer may determine whether Starwave becomes the first big Web company, or instead remains a series of loosely linked Web projects. At the moment, the company's various editorial departments are very much next-door neighbors but operate in separate realities: these homesteaders are a far cry from collaborating to build one town they can all inhabit.
"It's important to have diversity in our services, but at the same time tying them all together is problematic," Phillips acknowledges. "Especially when they're all competing for engineering and advertising resources. When it comes to building a corporate culture, sharing learning, that sort of thing, we're not there yet."
Challenge Number Four
How do you produce as much original material as possible — and leverage relationships with brand-name partners for the rest?
"I think you can accurately describe this as bedlam," says Susan Mulcahy, editor-in-chief and publisher of Mr. Showbiz, as she walks through its offices and gestures at the posters and Hollywood detritus.
In cultural terms, no one has come as far to Starwave as Mulcahy. Witness a short inventory of items in her office : a copy of a 1952 New Yorker cover, a postcard of the St. Regis Hotel bar, a Henry Alford column about walking around Manhattan in pajamas, a metal desk-spike from the New York Post city room, Norma Shearer and Rudolph Valentino paper dolls, a cheesy Mexican comic book (Páginas Intimas), and a 1950s plastic doll from New Jersey.
This office, combined with her languid-yet-nervous style emblematic of a proto-New York City magazine editor, makes Mulcahy seem like a rare orchid lost in the Olympic rainforest. In fact, however, Mulcahy's journey to Starwave was shorter — in miles — than almost any other recruit's.
When she agreed to develop an online entertainment service for Starwave in 1994, Mulcahy was burned out from the New York scene and living in a trailer in Joseph, a small town in eastern Oregon. "I was tired of the downsizing, the chronic kvetching, and the overwhelming sense of going nowhere," she says. So she had lit out for Oregon and a self-created life, struggling to make a living writing articles and screenplays.
When Phillips first contacted her, Mulcahy had never so much as gone online. So she bought a 2400-baud modem and signed up with America Online. "A few days later," she recalls, "I called him up and said, 'Why is anybody interested in this? It takes an hour to get a page.'" But Phillips was insistent, and six months later, Mulcahy moved north — "partly because I wanted to eat again," she laughs.
The service she created and now directs, Mr. Showbiz, offers perhaps the best view into the challenges facing Starwave both externally, as it tries to build a business on the Web, and internally, as it struggles to coordinate its various operations. Mr. Showbiz has more than 20,000 users per day, generating about 600,000 visits and 12 million hits per month. Those numbers make Mr. Showbiz a hit by Web standards — but they're just a fraction of the traffic at the mighty SportsZone. As a result, Mr. Showbiz commands ad rates of only $4,500 per month, about a third of the rates charged by its neighbor down the hall.
Moreover, unlike SportsZone or Outside Online, Mr. Showbiz has yet to find a strategic partner — which puts a lot of pressure on the staff to generate original material and to create a powerful enough Web presence on its own to become a brand. Add to that the ongoing education of a print journalist to the technological and editorial demands of the Web, and you begin to appreciate the pressure on Mulcahy and her group to make Mr. Showbiz come to life.
Mulcahy and her team of well-schooled magazine writers have had to contend with a fundamental redefinition of the nature of the product. Writing for print and writing for the Web, it turns out, are two different things. "I won't say that the Web totally changes the nature of writing," she says. "But it will transform the nature of feature writing. For one thing, you have to think visually. It's not just that you need pictures with your story; it's also mechanical things. You can't put all the visual elements of the story in the first few paragraphs. And the Web doesn't allow you to write stories that go on forever. The fact is that people just don't want to read much online. So you have all of this apparent freedom, where you don't have to worry about column inches, but in the end you've still got to keep your copy short and to the point."
At this point, what happens with Mr. Showbiz may be the best test of Starwave's ability to create a brand. For Mulcahy, the challenge is worth it. "Look," she says, calling from her old trailer in Joseph, to which she still retires to work on her novel during her rare days off, "I can go back to New York and get a magazine job anytime. But nobody's going to offer me a chance to create a whole new magazine in a whole new medium. At Starwave I've got that chance."
Then she adds one final thought. "I do wish we had a hell of a lot more advertising."
Challenge Number Five
Can you maintain your editorial integrity — when 'integrity' is still undefined?
It's a non-obvious question, and a nontrivial problem : how do you define integrity in a medium with no publishing tradition, no boundary between advertising and editorial, and an insatiable appetite for advertising revenues? It is precisely this question that worries ESPNET SportsZone's Mitch Gelman.
In a company filled with distinguished veterans, the soft-spoken Gelman, SportZone's editor, is among the most distinguished of all. The author of a critically acclaimed book about his life as a cub reporter, Crime Scene (Random House, 1992), he also shared a Pulitzer Prize in 1991 for his work at New York Newsday. Credentials like these usually mean a lifetime sinecure at a fat daily newspaper. But last summer, Gelman's paper died beneath him. Around the same time, he saw an article in Sports Illustrated about the new world of sports online.
"I realized that I was seeing the creation of a whole new industry, the next wave of journalism," says Gelman. "It reminded me of all those newspaper reporters coming home from World War II and going into this new medium called television. I wanted to be part of the adventure."
He signed on with the right explorers. SportsZone's numbers are staggering — one of the most tantalizing hints of the Web's promise as a mass medium. Gelman's site contains 60,000 pages of material, 6,000 photos, 2,500 audio clips, and 1,000 video clips. This massive content draws huge numbers of visitors. SportsZone averages 7.5 million hits per day; it generated almost 12 million hits per day during the Summer Olympics. Its fans are almost exclusively male (95%), young (82% are under 35 years old), and affluent for their age, with an average household income of $55,000 per year.
All of which translates into serious advertising: sponsors pay up to $100,000 for a three-month advertising presence on the site. SportsZone is one of the leading generators of revenue on the Web and reportedly produces roughly 80% of Starwave's estimated $7 million in total revenues.
But as SportsZone attracts more readers and its readers attract more advertisers, tough questions inevitably emerge. Ask online editors how they think about their services and they invariably draw parallels between themselves and the newspaper business. Ask these same editors about the all-too-cozy links to advertisers that appear on their Web pages, and suddenly they redefine themselves as part of the entertainment industry and compare their offerings to television infomercials.
But what happens when editorial copy becomes just a hook to pull the user into the virtual mall? Is that really the same thing as ads in the newspaper or commercials on network television? Or does the Web, by its very nature, produce a different kind of experience that erases the demarcation between editorial and ads? Where are the standards governing such matters?
"I think about it all the time," Gelman says. "This is a business and we have to make a profit. But advertisers come to where the users are — and though this business is slightly different from print journalism, the one thing we have in common is credibility. If we do anything that jeopardizes that, we will lose those users, and then we'll lose our advertisers."
Good ethics equals good business. It is a conclusion that other industries have taken years to reach. Many still haven't. Will the Web world one day come to the same conclusion? "The rules of the game?" Gelman quips. "We have to figure them out first."
And yet . . . there is something wonderfully perverse about the Web. It rewards a kind of cranky honesty while eviscerating the insincere and calculating, no matter how slick the presentation. In this cyberreality, companies that answer the siren call of selling out to advertisers may exchange short-term gain for long-term oblivion.
Meanwhile, attitudes like Mitch Gelman's, which might seem an anachronistic remnant of another medium and another time, may prove to be the defining difference between success and failure for companies like Starwave. For one thing, Gelman takes seriously his role as mentor to the new generation of reporters enrolling in the new medium. "We can learn from them how to do this business, and we can teach them what to do in terms of accuracy and ethical standards," he says.
And that suggests one final convergence. Beyond technology and people, success on the Web will also depend on a convergence of philosophies between those pursuing technology and those chasing commerce, between the desire to break barriers with the new medium and the need to retain lessons learned by its predecessors. Defining how business should be conducted on the Web may be the first requirement to defining what it means to be the first Web-based business.
Michael S. Malone (firstname.lastname@example.org) is one of Silicon Valley's most respected journalists.