A good idea can whip Silicon Valley into a frenzy of optimism, observes Ken Auletta. But in IT, as PointCast was to find with its 'push' technology, being the next big thing is no sure thing.
Silicon Valley and Wall Street, like the press, usually heed the 'three dogs barking' rule. Let one dog bark, and soon another joins in, and then another. The dogs barked in 1996 and early 1997 over 'push' technology and its creator, a Sunnyvale, California, company called PointCast Inc. The very thought of the riches to be made set off a virtual baying. The venture capitalists of the Valley were dazzled, and so were Wall Street and the press. One investment analyst suggested that PointCast - a company then adding five employees a week while having almost zero revenue - deserved to be valued at $750 million. The March 1997 cover of the magazine Wired read, 'Push! Kiss your browser goodbye: the radical future of the media beyond the web.'
In 1996, PointCast's founder and chief executive, Christopher Hassett, who was then 34, had been saluted as CNET's newsmaker of the year, an honour whose former recipients included Marc Andreesen of Netscape; Bill Gates of Microsoft; Larry Ellison of Oracle; and Scott McNealy of Sun Microsystems. Hassett became a regular speaker at the many buzz-generating conferences that new-media devotees attend, and he was invited to pose on his motorcycle for Fortune. That photograph showed a lean young man with tousled sandy hair and a taut, seemingly joyless smile.
The software product that Hassett and his brother Gregory, an engineer, had invented allowed users to customise the internet: it would keep users who were surfing the internet ocean and downloading information from getting lost, or from being beached by wheezing modems. PointCast aimed at pushing the information a customer requested and delivering it when computers were idle. After a customer registered with the PointCast web site, this information - the front page of The Times, perhaps, or health news or up-to-date stock prices from 15 companies - appeared as a screensaver or was scrolled across the bottom of their computer screens. PointCast's revenues, like those of free broadcast television and radio, came from selling advertising. 'We've combined the power of the internet with the convenience of broadcast news,' Hassett declared in early 1996, when the service was launched. 'This is the news format for the 21st Century.'
The noise surrounding PointCast captured the attention of Rupert Murdoch's News Corp, the world's sixth-largest communications company. Murdoch's son James, who is 25, had just been put in charge of new-media ventures for News Corp, and he reached out to Hassett in December 1996. 'They were planning to go public that summer,' James Murdoch says of PointCast. 'We approached them and talked about working together.' News Corp's initial offer was to buy PointCast for about $450 million. Teams of lawyers and investment bankers negotiated over this for weeks. Eventually, the Murdochs reduced the offer to about $400 million, with incentive clauses that would bring it closer to the original price, provided that PointCast met its financial projections. Although there is some dispute about whether Hassett or the PointCast board was to blame - or both - the bid was rejected. Not long afterwards, PointCast and 'push' became yesterday's news, as often happens in the Valley. The new buzz surrounded 'portals' - windows into the internet, such as Yahoo! and Lycos, which assemble information from many sites.
PointCast executives and investors, meanwhile, reject analogies to such Silicon Valley meteors as General Magic, GO, Catapult, Wolff New Media and Hayes Modems, which once streaked across the sky. They say their product will again be as attractive as it was. Today, an estimated 120 million computers are hooked into the world wide web, and the internet economy - online shopping, business-to-business purchasing, and advertising - is expected to climb from $200 billion this year to nearly $1,000 billion by 2002, says International Data, the market research company. In this environment, everyone is guessing the way to the future.
The short history of PointCast is more than a story of the highs and lows of a new-media company swept up in the latest gold rush: today's gold rush is more complex. The Valley is home to more high-tech computer, communications and software companies than any other place on the planet, and these companies now generate more than a fourth of all economic growth in the US.
'For me, money is not the big deal,' says Parik Rao, a 26-year-old engineer who became a millionaire during two years at Microsoft, and who was at PointCast until a few months ago. 'Work is the big deal. Seeing hundreds of millions of people using your software is really neat. I have friends who are artists, and they say the same thing I say about software.'
Silicon Valley may occupy a large space in our imaginations, but the peninsula that harbours the Valley stretches a mere 33 miles. The Valley itself, which includes San Jose, now California's third-largest city, is an extended tree-lined suburb with one-and two-storey, high-tech, glassed-in office buildings. Workers tend to wear Gap rather than Armani, to talk about software more than about Monica Lewinsky, to consult the gyrating price of their stock options before the baseball scores, and to unwind by engaging in extreme sports such as bungee jumping, skydiving, hang-gliding, white-water rafting and wind-surfing. People like to say that they 'multitask'. Attention spans are reduced by e-mail beeps, mouse clicks, mobile phones and pagers, by news, stock prices and sports scores streaming across a computer screen, and by cubbyhole offices without walls where interruptions are frequent.
California may have a reputation for a languid lifestyle, but the Valley moves with the speed of a Chaplin movie. Fifteen new companies are founded every week. According to Jaleh Bisharat, a Harvard Business School graduate who until recently was senior vice-president of marketing at PointCast, people move from job to job like nomads. 'Here, someone who has been in a job two years is considered a loyal employee,' Bisharat says.
PointCast was founded in 1992 by Christopher and Gregory Hassett and Chris' wife, Janet. Earlier, after earning a degree from the University of Lowell in Massachusetts in 1984, Chris Hassett had started a company which made a computer chip that allowed laser printers to work faster, and he sold that company to Adobe Systems in 1990. He worked a couple of years at Adobe before the three Hassetts pooled assets and launched ped Software, a company that made software enabling users to devise a personalised newspaper using online services such as Prodigy and CompuServe.
'The internet wasn't the internet,' Hassett recalls. 'It was government and a few online services.' Soon Ped had attracted $12 million in venture capital funds from such Valley firms as Mohr, Davidow Ventures, Benchmark Capital, and Merrill, Pickard, Anderson & Eyre. By 1996, the internet had become a chaos of proliferating web sites, and the Hassetts saw that their software might bring order to it for baffled users. The Hassetts broadened their mission, renamed their company PointCast and, with their trademarked technology, announced that this free service could be downloaded from the internet starting on 13 February 1996.
The applause commenced, and so did deals with such content providers as the New York Times, the Boston Globe, Fox, and CNN, as well as a joint marketing partnership with Netscape, among others. By the autumn of 1996, PointCast was registering 250,000 new viewers each month, and had enticed $36 million more in venture capital from such investors as General Electric Capital Corporation, Compaq Computers, Softbank Holdings and three newspaper chains - Knight-Ridder, Gannett and Times Mirror. By September, nearly 40 companies had signed on to buy advertising. By that December, Hassett had a deal with Microsoft to feature a PointCast icon in the next version of Windows.
'It was incredibly heady. It was the next big thing,' recalls Jonathan Feiber, a member of PointCast's board and a partner in the venture capital firm of Mohr, Davidow, one of the initial investors in PointCast.
Because the internet was an unknown, Feiber remembers, the company bet that its customers would be individual consumers rather than corporations, and that revenues might come from subscriptions as well as from advertising. And, because this new medium was mysterious, novelty and hype mattered more than they otherwise might have. In April 1997, Forrester Research issued a report that began: 'The hysteria around push is mind-boggling. Everywhere you turn, there is an article on the topic or one of 40 vendors hyping their plans.'
Looking back, Hassett recalls, 'I spent 30% of my time outside the company addressing conferences or media groups. It was very exciting.' Although he denies that the experience was addictive, his former attorney, Allen Morgan, who is now a partner in the firm of Latham & Watkins, disagrees. 'The problem was that for Andy Warhol's 15 minutes Chris was the most famous guy on the internet. He didn't always deal well with the attention. Chris is one among many. He started believing the company's press releases.'
Morgan says that once, during the negotiations with Murdoch, he needed to reach Hassett and learned that 'he was doing some magazine photo shoot at his house' and didn't want to be interrupted. Hassett denies this.
The negotiations in late 1996 with Murdoch came about because he had been dazzled by PointCast's software, describing it as 'a change-the-world kind of product if done right'. Murdoch's vision was of using PointCast as 'a billboard in the home', as a link to, say, News Corp's broadcast-satellite offerings or TV Guide. Of course, PointCast would also be a way to transmit a worldwide Fox News service to computer screens as well as to TV screens. James' opinion carried weight with his father (who got his first PC last autumn). And Rupert Murdoch's company had embarrassingly failed to plant its flag on the internet.
There are several views on why the takeover went sour. According to James Murdoch, Hassett wanted to do the deal, but the PointCast board, led by the venture capitalists, who owned about a third of the company, spurned the offer. 'People involved in the company thought they'd be the next Netscape. They hung out for more,' Murdoch says. Hassett, who with his wife and brother still owns 22% of the company, acknowledges that the negotiations were tortuous. 'There's a story to tell,' he says, but he won't tell it. Kevin Harvey of Benchmark Capital, which owns 7% of the company, says the discussions 'just kind of went away'.
'It may go down as one of the biggest mistakes in internet history,' Martin Nisenholtz, the president of the Times' Electronic Media Company, says of the failed negotiations. The true culprit is hubris, according to Nathan Myhrvold, who is the chief technology officer of Microsoft, a company that is not immune from accusations of hubris.
The Murdoch offer and the celebration notices probably blinded Hassett and PointCast. For example, PointCast couldn't deliver data to PCs at night or in the early morning, because it overlooked a simple fact - that many people don't leave their computers on overnight. When PointCast tried to speed its data during regular hours, the narrow bandwidth became clogged with traffic, resulting in delays. The servers linking the PointCast network to the information suppliers and to the customers became choked. The company concedes that, although new customers continued to sign on, two-thirds of them soon fled the service because of what they considered poor performance.
PointCast's weakness, at bottom, was management. Although well into the spring of 1997 Chris Hassett continued to make speeches championing PointCast as a media company, and a worthy rival to such emerging giants as AOL and Yahoo!, his directors came to feel that, as an entrepreneur, he lacked the management experience to fix the service, and to take the company to the next level. 'You're always trying to balance the needs of an entrepreneur with the needs of the business,' says Feiber, who measures his words as if they could cost him money. 'We talked to Chris at length and decided the right thing to do was to bring in a CEO,' he added. This was not uncommon in the Valley. At PointCast, Hassett resisted the effort, at first suggesting that the board simply recruit a manager to report to him, but the board insisted on hiring a new chief executive.
The company announced in June that Hassett would step down as chief executive but remain as chairman, and in the meantime it would search for a world-class media executive. Hassett and the board then signed a severance agreement. (This agreement, which was not initially made public, called on him to resign as chairman 'when asked', and specified that as chairman he would 'not be involved in operations'.) The hunt for a new CEO included a roster of candidates that reads like a Who's Who of up-and-coming media executives. Most spurned the overture.
One who did not was David Dorman, who was the CEO of Pacific Bell when the Baby Bell company was acquired by SBC Communications in early 1997. By saying yes, Dorman was leaving a company with 50,000 employees for one with 260. Upon announcing, in October 1997, that Dorman would become PointCast's new chairman and CEO, Kevin Harvey, a board member, said Dorman's mission would be to build 'the biggest new-media company in existence'. It was a case of three dogs barking - or so PointCast hoped.
All this appealed to Dorman. At 44, and after 17 years with phone companies, he was ready for an entrepreneurial dalliance.
From the beginning, Dorman was blunt. He praised the company's product, but cautioned that it had been overhyped. He urged PointCast to focus on problems: why it was losing as many customers as it was gaining, and whether it had the right customers. The company needed to shift its emphasis from individual to corporate customers. Dorman accelerated technical changes to improve the product, to speed the service, and to eliminate traffic jams. Within the company, he is given credit for turning it around. 'Chris had been more of an entrepreneurial CEO,' says Lev Belov, PointCast's Russian-born senior director of engineering, who is 30. 'Lots of ideas. Lots of energy. But less focus. Less methodology. Dave clearly is a great combination of both.'
Hassett, who now lives in New York, challenged this chronology. He praised PointCast as 'a valuable asset', but his refusal to disparage the company weakened, and he said, 'PointCast lost its buzz beginning in June, when I left. There wasn't the ability at the company to articulate its message when I left.' Actually, the buzz had vanished before June and, more troubling, the demand for push was diminishing. The difference between push and pull blurs when one sets aside, say, 20 favourite web sites with 'bookmarks', or when corporations can program their internal intranet to pull, or push, a steady stream of up-to-the-minute sales and inventory figures.
Despite this altered landscape, PointCast decided in the spring of 1998 to offer its stock to the public. According to papers filed with the Securities and Exchange Commission, it would auction 17% of the company to the public at an initial price of between $10 and $12 per share.
Since PointCast had nearly 25 million total shares, it was valuing the company at approximately $250 million, or about $200 million less than the failed Murdoch offer.
An initial public offering (IPO), however, requires full disclosure to investors of any looming dangers, and this one contained many warnings: PointCast, for instance, not only had the same number of customers - 1.2 million - in the first quarter of 1998 that it had had a year earlier but had 'experienced a low retention rate' because of 'poor performance'. Moreover, although the company had improved its performance with new software upgrades, its losses had doubled from 1996 to 1997, leaving it with 'an accumulated deficit' of $57 million, and these losses would continue 'for the foreseeable future'. And there was this: Microsoft was expected to introduce 'a directly competitive product'.
Who would invest in a company with so many red flags? I asked the question of Feiber. 'I don't think this document is significantly different from others,' he said. And, according to the Wall Street Journal, of the nearly 5,000 IPOs initiated between May and July 1998, nearly a third no longer trade their shares and 44% sell them for less than the original price. In any case, PointCast withdrew the IPO in July, and for the rest of the summer Dorman maintained a gruelling schedule of visits to potential strategic partners, including Murdoch, Michael Bloomberg, the TV networks and computer, portal and phone companies. Few pursued the overture.
On the east coast, Hassett's life has changed. He has more time, and a new start-up company, Prizepoint Entertainment. He will not discuss this project except to say that it will be an entertainment web site that 'you go to for a particular purpose', and that his wife, Janet, will work with him. 'We aim to be as successful as, or more successful than, the previous company I started,' he says. He settled in New York, he said, because 'technology and media have always been sisters'. He went on, 'The internet five years ago was technology. Now it's media. Media, in my mind, is centred in New York. I can buy technology. What I have to do is hook into a media company.' East coast or west coast, Hassett hasn't forgotten the value of spin. After consulting with his public relations agency, he urged me to hold my story until it could coincide with the expected launch of his new company.
On the west coast, I'm not sure whether Dorman is spinning when he tells me of the 'magic' of the Valley: 'The last two years have been a time we'll look back on and say never has more money been made in a shorter period of time. The convergence of the economy and the stock market and the internet phenomenon - it's magic. We've never seen anything like the internet. The Amazons, the companies that supply the plumbing for it - the Ciscos - and the market got behind it in a big way.' When Dorman graduated from college in 1975, he and his peers gravitated to big companies. 'I talk to college students today and they say, "I'm packing my Saturn and going to San Francisco and going to work for a start-up".'
It's the magic of Cisco, whose stock price is eight times as great today as it was three years ago, and many of whose employees, like those at Microsoft, are millionaires. It's the magic of Yahoo!, which took its stock public in 1996 for just over $8 a share and today trades at more than 15 times that, though its earnings are relatively modest. It's the magic of eBay Inc, an online auction company. Despite a shaky stock market, its 31-year-old chairman, Pierre Omidyar, watched his shares jump in value nearly three times, to $611 million, on the day the stock went public. Benchmark Capital, a PointCast investor, has watched its $6.5 million investment in eBay multiply to $700 million.
But it's also the magic of biotech stocks earlier in the decade, and how they rocketed, then crashed. It's the magic of three dogs barking.
(C) This article was first printed in full in The New Yorker.