Teen site DEN struggles with cost, bandwidth issues

Hoping to persuade teenagers to view TV-like programs online, the Digital Entertainment Network faces a host of obstacles, such as the sudden resignation of its founders a few weeks ago.

4 min read
"Look into my eyes," visitors to the newly launched Digital Entertainment Network are told in an extended, pseudo-hypnotic riff. "You won't see television the same way again."

Although the company may not be able to summon supernatural help in its bid to become an alternative to the boob tube, it can't hurt to try. With an IPO in the offing, Digital Entertainment Network (DEN) yesterday unveiled new programming and music aimed at teens.

Hoping to persuade teenagers to view TV-like programs online instead of on cable networks such as the WB, DEN is targeting Net users aged 14 through 24 by streaming original programs, music, and sports and offering chat rooms. The company plans to make money through e-commerce, album sales, and sponsorships from such companies as Blockbuster, Microsoft, and Pepsi.

The network is no doubt targeting the most ferocious consumer and media market. But because of low production quality and internal management shake-ups, DEN faces major challenges when it comes to impressing Wall Street and viewers alike, analysts say.

"The most wired people on the Net tend to belong to 'Generation Y,' and they are also the most bored," said Ed Winter, DEN's chief marketing officer. "They discover the Blair Witches and South Parks--they have an appetite for original content."

DEN's new shows include AggroNation, an extreme sports show; ConfiDential, in which young people talk about their lives in a documentary-style setting; and Direct Drive, which is about the music DJ culture. On the music side, DEN has set up "listening posts" for streaming and purchasing CDs. The company also plans to sign recording artists and introduce them on the Net.

A chief obstacle facing DEN as it readies to try to raise $75 million through an IPO is that its programs could be crippled by the overall shortage of high-speed Net pipes, and that its shows are costly to produce. DEN reported a net loss of $20 million in the six months ended June 30, 1999, and did not generate any revenue during that period.

"The Net is not ready for linear, TV-style programming--the experience isn't great," said Patrick Keane, a senior analyst at Jupiter Communications. "It's going to cost a hell of a lot to build this brand without TV content partners as anchors. I just question if they can build an audience quick enough to support this model."

DEN's music strategy, on the other hand, is being closely watched.

"Video as entertainment is not going to be the killer application for the Web anytime soon," said Jupiter music analyst Mark Mooradian. "But downloading a song has gotten to be realistic for people, and signing bands and distributing them offline and online is their good idea here."

Despite its critics, DEN contends there is a market for six- to eight-minute shows based on research about teenagers and the box-office demand for independent films.

"The programs are grainy and not perfect, but it's more about originality, not production values and big screens," said DEN's Winter. "This generation wants original content, so the audience has been very forgiving."

Although some analysts are skeptical about the immediate future of TV-style programming for the Net, entertainment heavyweights are turning to the medium as a way to test ideas and distribute content. Animation and short films are especially heating up online.

Imagine Entertainment and DreamWorks SKG teamed with Microsoft cofounder Paul Allen to launch a Web entertainment company, Pop.com, last month. The site will allow users to view short live-action or animation clips, live events, and video on demand, which will last one to six minutes per episode.

With investors such as Warner Bros. Online, Seattle-based AtomFilms is gaining ground with its strategy to market short films online as well as offline to television stations and airlines. Since it launched in August, the company says it has delivered 1.5 million video steams per month via the Net.

"We are finding top talent and creating properties around them--the content is unique enough to drive an audience that is large," said Matt Hulett, chief marketing officer for Atom. "Short films work well online. People can fit us in like a digital water cooler break."

Atom said today that it plans to sell itself or take itself public next year, according to Bloomberg.

DEN's management turmoil a setback
Even with growing investment in the online video entertainment space and an estimated 1.5 million consumers already using high-speed Net connections, DEN faces other issues that could affect its IPO.

After filing to go public in September, three prominent executives abruptly left the company last month, including chairman and founder Marc Collins-Rector and executive vice presidents Chad Shackley and Brock Pierce.

The company also is trying to deflect reports that its executives are overpaid compared to those at other Net companies in which stock options outweigh salaries. For example, company president David Neuman makes $765,030 per year, according to DEN's filings with the Securities and Exchange Commission.

"The people that have been running this company and are running our company are our biggest asset right now," said DEN spokeswoman Anna Caldwell. "In terms of financials, I can't comment because we're in our quiet period."

The management issues could temper investors, however.

"Hollywood is late to the game, and they are catching Net equity at a quick rate, but its unsettling if you're an investor to see what has gone on at the company so far," Keane said.

Bloomberg contributed to this report.