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Vivendi treads choppy waters online

The media conglomerate sends mixed signals about its long-term Web strategy and raises persistent questions about the health of the online media business.

Vivendi Universal CEO Jean-Marie Messier has good reason to be wary of the Internet these days.

Just last week, his company was forced to throw out its annual stockholder vote amid charges that hackers may have tampered with the electronic poll results. Add a stack of housekeeping troubles at Vivendi, mixed signals about its long-term Web strategy and persistent questions about the health of the online media business, and it's hard to blame the besieged chief executive for wanting to distance his media conglomerate from the whole Internet mess.

But the head of Vivendi Universal's online unit in the United States says the company is not turning its back on the Web, flatly denying a published report that said the company is considering shutting down its cash-draining Vizzavi Web portal amid a general retreat in its online operations.

"Let me be perfectly clear: We are totally committed to Vizzavi," said Robin Richards, CEO of Vivendi Universal Net (VUNet) USA. "Those are rumors; they are false."

Richards' comments come as the media giant has been battling a slew of corporate governance headaches. The turmoil has clouded the future of Messier's ambitious makeover of what had been a sleepy French water and sewage utility. Like other media giants, the company has poured hundreds of millions of dollars into online acquisitions, such as its $372 million purchase of MP3.com last year. Now the timing and wisdom of the company's media strategy is in doubt, brought on by a sharp downturn in the advertising market and exacerbated by a backlash in Messier's homeland.

Other alleged missteps aside, Messier has been assailed by critics who charge that he plans to sell out France's cherished "cultural exception" to crass Americanism, citing such acts of betrayal as his relocation from Paris to New York and the recent firing of Pierre Lescure, head of pay TV channel Canal Plus and a French cable-TV legend. Governance problems stacked up last week, when a French court found a "malfunction" had occurred in the tabulation of the votes at Vivendi's April 24 shareholders meeting and authorized a new vote.

Problems at Vivendi recall the second-guessing surrounding America Online's purchase of Time Warner last year, a deal that for many has crystallized the warped reality of the dot-com bubble and the hype machine that drove it to unsustainable heights.

Having acquired Universal in June 2000 for $34 billion in stock, Vivendi has been hit with a wave of setbacks: In the first quarter of 2002, it wrote off some $13.2 billion in accounting charges related to the deal. Its stock has plunged by some 57 percent in the past year. And debt ratings agency Moody's on Friday downgraded its long-term senior debt. (The company Friday said the downgrade will have no effect on its cash position, nor change the loan payback schedule. In its April 24 earnings report, Vivendi reported outstanding debt of around $17 billion, under U.S. accounting rules.)

Vivendi's reversal of fortune stems partly from broader market conditions that have sent several media companies back to the drawing board with their Internet plans. Analysts said Vivendi appears prepared to stay in the depressed online sector, with some downplaying the immediate significance of the Net in the scope of its sprawling operations.

"Their ambitions are still there--to accelerate downloading of music via Internet or phone," said Michael Nathanson, an equity analyst at investment research firm Sanford Bernstein. "But it's such a small piece of their business. It's an afterthought. It's not that material."

Manning the barricades
Richards, Vivendi's U.S.-based online chief, insists the Internet is still a major focus in the company.

"We believe in Jean-Marie (Messier)'s vision as it has been stated very consistently over the last couple of years, which is we will make our content available in multiple access devices and we believe in the digital distribution of content," he said.

In fact, Vivendi has sent mixed signals about its online strategy in recent months.

The company came close to acquiring Web portal Yahoo last year and was an interested party when AT&T was shopping its cable unit, according to people familiar with both discussions. Either deal would have added the major online distribution element that Messier so desperately desires to push Vivendi's trove of music and movies to consumers.

When the company put in a bid for USA Networks last year, however, it took control only of the entertainment division and bypassed its Web businesses.

The $10.3 billion acquisition, which encompasses USA Network's cable TV stations, TV production and film studios, has raised some questions about the direction of Vivendi's Internet strategy. Although USA Networks boss Barry Diller will officially serve as Vivendi's studio head, the deal has unleashed the Hollywood power broker to focus more closely on running his Internet assets, which include shopping site HSN.com, Ticketmaster.com, Match.com, Hotels.com and travel site Expedia.

Vivendi will have no control over Diller's e-commerce empire, fueling further speculation that Messier's Internet intentions have been tempered.

Last week, meanwhile, the Financial Times in London reported that the company is considering pulling the plug on Vizzavi, citing comments from Messier in a board meeting. The Vizzavi wireless Web portal is a joint venture with mobile phone service Vodafone that Vivendi once pegged as the centerpiece of its Internet strategy.

On Friday, Richards flatly denied that the company plans to back off from Vizzavi or its other Internet operations.

Speeding out of the gate
Nevertheless, as of this moment, Vivendi's Internet strategy is at a standstill. That's a far cry from last year.

Soon after the Vivendi-Universal merger was completed, the combined company burst out of the gates preaching to investors that the Internet would be the glue that holds together its various businesses. The idea was that the company would use Vizzavi as the new gateway for consumers to download songs, play movie clips and watch TV programs on their phones and computers.

Vivendi began buying its way into the Internet. In May 2001, the company acquired MP3.com, a music service that was sued by the Big Five record labels--led by Vivendi-owned Universal Music Group--for copyright infringement. Vivendi also acquired online music subscription service EMusic and its Rollingstone.com subsidiary. The company continued on its buying spree, adding online gaming sites Uproar and Flipside, sweepstakes site Iwin.com, and music editorial site GetMusic.com.

Vivendi consolidated this grab bag of Internet companies into VUNet USA under the management of Richards, and VUNet Paris, which oversees Vizzavi, under Agnes Audier. Both divisions report to VUNet CEO Philippe Germond.

VUNet USA serves two main roles. The division provides technology, Web site development, online distribution and content for Vivendi's sites. The division also oversees the development of a service called Moviso, which sells mobile phone perks such as ring tones and celebrity voicemails. Consumers can download applications that let their cell phones ring to the tune of "Enter the Sandman" by Metallica or "Hard Knock Life" by Jay-Z, both of whom are Universal Music Group artists.

Richards would not disclose which cellular companies have deals with Moviso, saying only that he's struck deals with "most" of the major mobile services.

For a company that believes in the Internet so fervently, it seems anticlimactic that its digital ambitions rest on dissonant ring tones. But reaching the promised land of accessing content any time, anywhere has so far proved elusive. Media companies suffering through the advertising slump have more serious issues to deal with than formulating their digital dreams.

For now, the top item on Messier's agenda is to restore investor confidence in the company's rapidly deteriorating stock. That means putting more emphasis on creating repeat film hits such as "The Scorpion King" and ensuring its stable of music stars produce chart-toppers.

In contrast to its film studio and music unit, VUNet amounts to a hill of beans, having pulled in about $168 million in revenue in 2001 and posting a whopping $192 million loss in earnings before interest, taxes, interest and amortization--the most closely watched metric for the financial performance of media companies. Vivendi as a whole earned about $25.8 billion in revenue that year.

"It's clear that the strategy has not worked up to this point, and it will continue to be that way in the short term," said Mark Harrington, an equity analyst at financial firm JP Morgan, regarding the vision of combining the Internet with traditional media content. "Even beyond the short term, the strategy will continue to struggle to demonstrate any justifiability."