Cutbacks push dot-coms toward profits

Last week, Walt Disney Chairman Michael Eisner offered a prediction that seemed unthinkable a year ago: The company's beleaguered Internet operations will be in the black by September.

Disney isn't alone. New York Times Digital in 2001 reported positive net income in the third quarter and two consecutive fiscal quarters of positive earnings before income, taxes, depreciation and amortization (EBIDTA)--a key measure of financial health in the media business. A small crop of lesser-known sites, including online entertainment network eUniverse and sweepstakes site iWon, also say they have earned, or are close to earning, elusive Web profits.

Don't call it a comeback. The online media sector is still at a low point, primarily because advertising is in the pits and shows few signs of recovering anytime soon. But brutal layoffs and a sharp dose of fiscal discipline over the past 18 months are now offering a surprising number of Web publishers the hope of profitability at one of the worst times on record for the sector.

"The staff levels, the marketing, the scope of the business markets they're trying to bite off have been right-sized," said Lanny Baker, an analyst at Salomon Smith Barney. "There was a day when New York Times Digital and Disney had wireless strategies, portal strategies, content strategies and (so on). Now they're focusing on what it is they do well and building a cost structure that works."

To be sure, the list of online troubles remains depressingly long for Net media executives and investors. Internet giant AOL Time Warner on Monday lowered guidance on its revenue and earnings expectations. Web portal Yahoo is struggling to recover from a year in which its revenue plummeted by well over a third. Although Microsoft does not break out financial results for its MSN Network, the division's history of steep losses has become the stuff of legend.

Far from signaling a rebound in the sector, signs of a pending trickle of online profits show the success of a simple formula: cut first, and ask questions later.

Take Disney. Over the past year, the company has put its Internet division under the knife, shedding 100 positions in November from its Walt Disney Internet Group, which includes Disney.com and technology resources such as Web hosting and wireless content delivery. ABC.com and ABCNews.com have also undergone significant cuts, with nearly 85 percent of ABC.com's staff let go in October. Those cuts came on top of 400 employees shorn last January from Disney's Go.com Web portal.

Go.com is still live. But it exists as a poster child for the new austerity, a "content aggregator" featuring nothing more than links to stories published by sister sites ABCNews.com, ABC.com, ESPN.com and others under the Disney umbrella.

"They cut us back so much that all we're doing is re-purposing promotional material," said one executive from a Disney Internet property, who requested anonymity. "But when the ad market and the Internet market kick back into gear, we'll be caught flat-footed because we won't have the resources to do new, interesting, involved work on the Web."

Tightening the Gray Lady's belt
Martin Nisenholtz, chief executive of New York Times Digital, says his division's turnaround has come with both cutbacks and rebuilding.

The division trimmed its staff from nearly 400 people to about 230 in two rounds of layoffs. It clipped independent units including Winetoday.com and NYToday.com, folding them into general operations, and slashed marketing and promotions budgets for the site.

Gartner analyst Charles Abrams and GartnerG2 analyst Carol Rozwell say success is almost inevitable for Web content providers that have sound business models, a wealth of content, and deep pockets. see commentary

But Nisenholtz said he also decided to spend money on areas he felt needed more investment, increasing budgets for infrastructure and editorial.

He also invested heavily in weaning the site from advertising revenue, beefing up classifieds for the New York real estate and job markets, creating premium subscription services for crossword lovers and op-ed fans, and licensing New York Times Digital archives to other sites.

The efforts have paid off. In the third quarter, advertising comprised 27 percent of the division's revenue, compared with 40 percent in the same period a year before. Classified sales jumped to 26 percent from 20 percent. Non-advertising revenue, including its digital archive distribution business and subscription premium content, jumped to 42 percent of the mix from 36 percent.

The results are also showing on the bottom line: After losing $70 million in 2000, the publishing unit twice reported profits of $800,000 in the second and third quarters of 2001.

Meanwhile, in a bid to court reluctant advertisers, Nisenholtz has turned New York Times Digital into one of the most aggressive experimenters on the Web. The site has become known for running obtrusive promotions such as pop-under or layover ads, which are displayed atop story text. It has also pioneered an ad format called surround sessions that is meant to help advertisers stay in front of readers for longer periods, a move the division hopes will attract offline companies.

"By the end of 2000, we had to go back to a discipline and measure the business based on being profitable," Nisenholtz said.

Cutting back at what cost?
Such financial discipline may eventually play well on Wall Street, but some media watchers worry that cutbacks could lead to a less interesting Web, dominated by cookie-cutter sites run by skeleton editorial crews.

"On many sites you see the lack of energy and commitment and content that's just kind of hanging, with less thoughtful visual presentation," said Kenny Irby, a visual journalism group leader at the Poynter Institute journalism school. "It's the kind of impact from a lack of resources."

Whether or not this proves to be the future of the Web, a handful of sites are successfully executing on shoestring business plans.

Los Angeles-based eUniverse, for example, has reported four consecutive quarters of positive EBITDA and two straight quarters of net profit. It expects to report positive net income in 2002 from its network of entertainment sites. In December, it raised its 2002 financial expectations to $31.7 million in revenue and $5 million in net income.

The company claims 19 million readers visit its sites to play games and take in its daily humor postings, which recently included an animated baby Elvis dancing to the tune of "All Shook Up." It spent less than $1 million for its content in the third quarter of 2001, according to securities filings.

Sweepstakes site iWon--recently redubbed The Excite Network after buying the assets of the well-known Web portal from InfoSpace--also says its revenue and earnings are on the rise.

Because it is privately held, the new Excite Network does not break out specific earnings figures. According to co-CEO Bill Daugherty, however, the company returned net income in October after two years in business, based almost entirely on advertising revenue.

Daugherty said the company benefited by coming late to the Internet party, having operated just two months during the dot-com "excess life." As a result, he said, iWon avoided some of the pitfalls that tripped other Internet companies, such as taking on excessive staff and expensive office leases.

The Excite Network is a classic content aggregator, licensing material from more than 175 news feeds such as the Associated Press and Reuters. It creates no original content, luring readers to its site with the promise of cash and prizes.

That model starkly contrasts the costly ambitions of a wave of failed online media ventures that tried to chart a new direction for media on the Web. Defunct crime news site APBNews.com was among the most celebrated, and short-lived.

Staffed by Pulitzer Prize-winning journalists, it offered costly perks to readers such as a live, 24-hour police scanner that people could access from the site. It also created numerous in-depth special reports that were bandwidth- and technology-intensive.

The idea was cutting-edge, but APBNews couldn't support its costs once the capital markets and venture capitalists retreated. It was one of the first high-profile dot-coms to fold once advertising started to contract.

As the pendulum now swings to the other extreme, it may be too early to tell whether sites have found the right balance between cost and quality. But the wave of budget cutbacks from last year may be priming the sector to satisfy at least some of the demands of Wall Street. The hard part will be to revive interest among media companies to continue pouring their hearts into the Net.

A Disney executive pointed to such a change of attitude in Eisner's annual letter to shareholders, where the Disney CEO tersely predicted online profitability by the end of the year.

"Two years ago, it was all about the Go Network," the executive said. "Now the Internet has become boiled down to two sentences."