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Viacom may be reorganizing MTVi Group

The media giant is considering reorganizing the Internet division now that the prospects of an initial public offering for the unit have dimmed.

Media giant Viacom is considering reorganizing its MTVi Group now that the prospects of an initial public offering for the Internet division have dimmed, according to sources close to the company.

Viacom executives have expressed repeated faith in the unit, which was created late last year as a holding company for a basket of MTV's Internet properties, including MTV.com, VH1.com and SonicNet. But like many traditional media companies' Net plays, MTVi is at a crossroads.

A recent management shake-up has fueled uncertainty about the unit's direction. Viacom has all but called off plans for an IPO for the unit in the near future, sparking an exodus of top executives. In addition, the division has run up substantial expenses, an issue that has become a source of increasing friction with top management, according to sources, who say the company has grown obsessed with cost-cutting in the wake of its acquisition of CBS.

Several people close to the company said Viacom is actively talking about several options for the unit, including potentially dismantling the holding company and folding MTV.com and VH1.com back under the management of their accompanying TV stations.

This reunion would remove the need for a separate Internet holding company, the sources said.

"It didn't make sense as a standalone business," said one source close to MTVi. "It was losing money and had no clear path to profitability."

An MTVi representative said the company is looking at ways to become profitable and to be a "successful long-term business" but denied that the unit will be dismantled.

A dream deferred
MTVi was created partly so Viacom would have the possibility of an Internet spinoff to cash in on the sector's astronomical stock market rise during the past two years. But this spring's market downturn has tempered investor demand for Internet media stocks and consequently has dashed MTVi's hopes for its own IPO.

Viacom's MTV Networks unveiled its plans for MTVi in November 1999. The idea was to cross-promote the site with MTV and VH1 and to create the most popular music destination on the Web. Nicholas Butterworth, former president of SonicNet, was tapped to head MTVi as chief executive.

The ranks of MTVi's management organization have since been shuffled during the past few months. In June, MTV Networks appointed company veteran Judy McGrath to oversee MTV and MTVi, putting her above Butterworth in the company's pecking order.

MTVi has also witnessed a brain drain in high-level talent during the past six months. Departures have included Alex Mahgen, the former chief technology officer; Peggy Mansfield, former head of sales; Michael Goldberg, former editor in chief of SonicNet; Justin Hertz, former general manager of SonicNet; and David Hyman, former head of marketing at MTVi.

Like many Net start-ups, MTVi's drive to build itself into a standalone business came at a considerable cost. In 1999, it reported a loss of $46.4 million on revenues of $18.2 million, according a filing with the Securities and Exchange Commission.

Viacom has already indicated that MTVi's proposed IPO may been suspended. During a quarterly earnings call earlier this month, Viacom's new president, Mel Karmazin, hailed the unit as a "terrific business model" that was "important" to the parent company. However, the market correction has caused Viacom to take a wait-and-see attitude with its Internet play.

"There's not a reason on earth that we would spin off something if the market isn't going to appreciate the value of it," Karmazin said during Viacom's earnings call.

Stepping into a hornet's nest
MTVi's uncertain future marks another example of the difficulties traditional media companies have experienced in their attempts to spin off their Internet businesses. Media companies including Time Warner, Walt Disney, General Electric's NBC, The New York Times Co. and Dow Jones, to name a few, have either suspended their Net IPOs or have experienced hard times in creating formidable Net plays.

Media companies in 1998 and 1999 generally watched from the wings as smaller, scrappier Net companies such as Yahoo, America Online and Lycos became Wall Street darlings. Desperate to get a piece of the action and pressured by investor demand, it became a necessity for media companies to develop their own Internet plans.

Many of these efforts became money pits yielding few benefits, however. Traditional media companies realized they had to move fast to take advantage of the new medium and the bull market. But many discovered that catching their more nimble new media counterparts was more difficult than expected.

Time Warner, before it agreed to merge with AOL, scrapped its portal precursor Pathfinder. The company then tried to launch a handful of Web "hubs" under a new division, Time Warner Digital Media. But the planned merger with AOL has disposed of the need for Time Warner's own Net initiative.

Earlier this year, Disney's Go.com said it was dropping out of the Web portal race and redesigning its site to focus more on entertainment and leisure.

Last week, NBC's Internet arm said it would lay off 170 employees as a way to cut costs and hasten profitability. The staff reduction followed cuts at Viacom's newly purchased CBS, which said in June it was laying off one-fourth of its online division employees.

The efforts by media companies to tap the Net stock market last year became a "short-term necessity and a long-term folly," according to Mark Mooradian, an analyst at Jupiter Communications. Media companies saw the opportunities to rest on their offline dominance to grow their online progeny. But the expenses of creating separate divisions to oversee their Net ventures soon outweighed their benefits."

With MTVi's IPO in limbo, the question of how it will work within Viacom's larger family has been placed squarely back on the table.

"The most value will be created in the information that (Web ventures) give back to traditional properties and the cross-promotion that traditional properties give them," Mooradian said. "There are so many ways for two entities to work together that it doesn't necessarily make sense for them to spin out their (Web) properties."