Anybody out there remember Hytron Corp.?
Sometime back in the early l950s, when television was the Internet of its day, Hytron was a second-tier manufacturer of TV sets, somewhere behind Dumont but ahead of Muntz.
Sometime around l953, CBS acquired Hytron for stock in the Tiffany network equal to nearly 20% of its then-outstanding shares.
Bill Paley, usually a miser when it came to issuing CBS stock, was convinced by his technical people that owning a TV set manufacturer was critical to the development of its “single-gun” color television system.
Well, that system was rapidly eclipsed by RCA’s far superior color TV technology, and Hytron, after years of losses, was given a quiet burial by the CBS brass. But for decades to come, the lucky shareholders of little Hytron continued to own a significant minority of mighty CBS.
Lesson from the past
For this charming bit of corporate history, I am indebted to my former Warner associate Manny Gerard, whose history lesson touches on more recent merger lore involving Disney and the Internet.
Having bought Internet technology company Starwave in 1997, Disney swapped it plus $70 million in cash to buy part of Internet search engine Infoseek in 1998, and then acquired the rest of Infoseek in late 1999 to become part of Disney’s Go.com tracking stock.
This company aggregated all of Disney’s and ABC’s Internet activities with Infoseek, allowing the lucky shareholders of Go.com to participate in a “pure” Internet play, as was so desperately in fashion way back in the fall of ’99.
Had Disney sought to issue its own stock for Infoseek, a la CBS and Hytron, it would have had to pony up more than 100 million shares, given the $3 billion-plus market cap Infoseek then sported.
But thankfully for Disney, the shareholders of Infoseek would never have accepted stodgy old Mouse House stock for their Internet jewel. As a result, creative financial types at Disney, or more likely its investment banker Goldman Sachs, came up with the tracking stock idea.
So how did things go at Go.com?
They didn’t. In Disney’s fiscal 2000, which ended last September, Go — now named Walt Disney Internet Group — reported revenues from all Internet activities of $254 million, on which it lost an astounding $371 million from operations, excluding a minor $800 million write-off of intangible assets.
DIG stock, off the standard Internet 80% last year, was last week quietly folded back into parent Disney, which issued about 10 million of its shares to the hapless holders of DIG.
That sure beats having expended 100 million shares, as it might have back in 1999, had Infoseekers been willing to accept such a deal.
What actually occurred is that Disney swapped its market-inflated Internet assets for the even more inflated shares of Infoseek. Technology may have a bad name on Wall Street these days, but deal technology is ever in vogue.
The transaction puts me in mind of Oscar Wilde’s line about the humble Irish village where “the inhabitants eked out a precarious living by taking in each other’s washing.” Disney may have acquired a mess of pottage, but it fortunately gave no better than it got.
Disney was, of course, not the only major media company to embark on ambitious Web-based schemes.
Viacom and Time Warner each created their own digital domains, where more modest ambitions — rather than any greater success — kept the flow of red ink below the tsunami level.
For the first nine months of 2000, Viacom reported a loss of $144 million on revenues of $64 million. TW’s Digital Media division managed, over the same period, to lose only $62 million, but its revenues from Entertaindom.com and similar activities — $20 million — were also more modest.
Of course, Time Warner has succumbed to a decidedly immodest embrace of the digital future in its merger with AOL.
The absurd enthusiasm of Internet entrepreneurs, venture capitalists and investment bankers are explainable — all of them were making pots full of money from stoking Web fever.
The bigger question is: Why did reasonably sane media execs fall into the trap of thinking that they had to quickly stake their claim to Internet territory before it all disappeared? Pressure on them from Wall Street and institutional shareholders to prove that they “got it” is only part of the story.
With the benefit of hindsight, it is clear they committed that classic fundamental error of forgetting what business they were in: mass media.
Each of these companies had built content libraries and distribution fiefdoms by knowing how to appeal to very large audiences. The Internet, however, is an extraordinary method of reaching thousands or even millions of tiny audiences with incredibly specific needs or desires.
Want to know the average annual rainfall in Katmandu? Need the 1987 GNP of Brazil? The Internet’s the place. What AOL and a very few others have shown is that you can make money from the Internet — provided someone else is supplying the product. (Think chatrooms and message boards.)
As an outlet for traditional entertainment products, the Internet is quite simply inferior to every other known method of distribution, certainly so if you insist on the old-fashioned concept of being paid for your efforts.
Will this always be true? No. But, for now, cooler heads will wait until the Internet’s proper window — and precise revenue model — emerges.