Kara Swisher

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Big Media Firms May Regret Their Retreat From the Internet

This BoomTown column was first published in The Wall Street Journal on January 15, 2001. All rights reserved.

The best way to describe what Scott Kurnit felt might be to call it deja Ru.

That’s Ru as in Rupert Murdoch, the global media baron. Mr. Kurnit was reacting to the news that Mr. Murdoch’s News Corp. would basically gut its online division, which produces three major Web sites: Fox.com, Foxsports.com and Foxnews.com. The company said earlier this month it planned to lay off about half the division’s 400 employees and exile the rest to the TV networks with which they are associated.

The move was a blast from the past for Mr. Kurnit, who was there the last time Mr. Murdoch made a bid to become a major Internet player, but then pulled back. As early as 1993, Mr. Murdoch presciently snapped up a then-hot Internet access provider called Delphi and two years later formed a joint venture with long-distance phone giant MCI to start a massive Web programming and rating service called iGuide.

But despite the hiring of hundreds of employees, the construction of a Star Trek-like office in Manhattan and splashy press conferences, the venture fell apart after MCI linked up instead with Microsoft. Without the clout of a major marketing and distribution partner, Mr. Murdoch lost the nerve to commit to an online venture that had the potential of becoming Yahoo! or even America Online.

“It feels like the same headlines, the same story, the same outcome,” says Mr. Kurnit, who ran the iGuide project for MCI along with News Corp. veteran Anthea Disney. “Which makes you wonder what would have happened if we had all stuck it out.”

It’s an even more important point to ponder today, now that the one of the biggest deals in history–the AOL-Time Warner merger–has finally won government approval. That combination is a doubling of the bet on the value of the Internet to media companies. The new AOL Time Warner will venture into the unknown digital future just as Mr. Murdoch seems to be heading back to concentrating on News Corp.’s established businesses.

News Corp. disagrees that the scaling back of its narrowband Web operations represents a retrenchment of its Internet aims, noting the company is more interested in concentrating its major digital moves on high-speed interactive television initiatives. The company, in fact, has been preparing to sell shares in Sky Global Networks, its large satellite-TV broadcasting subsidiary, while also expressing interest in acquiring more such assets, including the top U.S. satellite concern, DirecTV.

“We are being incredibly aggressive in betting heavily on our greatest strengths…and that is in our interactive distribution platforms and interactive television,” says News Corp. spokesman Gary Ginsberg.

And not on the more traditional Web ventures, and he’s not alone. In fact, the rumbling you’ve been hearing has been the sound of old media businesses stampeding out of their once-aggressive Web ventures. Starting in the fall and continuing into the new year, online divisions of major media companies–including the New York Times , Knight Ridder , NBC and Viacom–have initiated layoffs and restructurings, seen multiple executives depart and abandoned dreams of stock offerings.

These moves aren’t unexpected, given the Web sector’s collapse. That has been especially true for those sites heavily reliant on advertising–a market with problems of its own. With no frothy valuations to support any business that called for growth before profits, most of these traditional companies have had little choice but to cut. The new credo: Out with the new, in with the old.

Many leaders of these companies probably welcome the return to normalcy after years of wild experimentation. The Web hit most of the old media world like an unexpected storm. After a period of disdain (“This Web thing is a fad.”), followed by horror at how quickly it caught on (“Who is this Steve Case character, anyway?”), most jumped in (“If someone is going to eat our lunch, it might as well be us.”).

News Corp. expects the closing of its online unit to cut in half its annual Internet losses of $50 million to $60 million. The president of News Digital Media, Jon Richmond, said the move also will promote convergence among its old and new media operations. “We are a digital media company and not an Internet company,” says Mr. Richmond. “This is not necessarily a retreat. This has nothing to do with commitment [to the Internet], but about skepticism of Web-based revenue models.” Still, the current sites might not get adequate funding to keep growing strongly.

Others, though, think that traditional media companies shouldn’t pull back, because now is the time they can regain ground lost to Web start-ups. Media companies need to ensure their online operations are working in harmony with their old-media units. That’s the theory behind the AOL-Time Warner marriage, and one that Mr. Kurnit agrees with. He engineered a much smaller version of that deal when he sold his Web directory, About.com, in October for about $690 million in stock to an off-line media firm called Primedia , which owns a giant stable of niche magazines. The hope is that both will feed off each other, giving the magazines new marketing, audience and content venues and the online business new opportunities for profits, sales help and stability.

“Bar none, this is the time to invest and not act like the pack, if you can afford to look around the corner,” says Mr. Kurnit. “If you keep on going in the weak periods, when you come out the other end you possibly have an enormously powerful content model and can blow everyone else away.”

That kind of stick-to-it mentality doesn’t mean that inordinate monies should be spent or that old media firms get caught up in froth. But, he notes, one needs only to look at recent audience growth at many Web-only firms to see the enormous potential of the Internet. “The Internet is for real, even if its stocks got inflated,” he says.

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— From the fact sheet for a fake product entitled Useless Plasticbox 1.2 (an actual empty plastic box) placed in L.A.-area Best Buy stores by an artist called Plastic Jesus