by Paul Allen
Within a year, as online traffic exploded, Bill realized that the threat wasn’t America Online, after all. It was Netscape Navigator, the newly hatched Web browser that became the centerpiece of the Internet. Blackbird was aborted. In May 1995, Bill issued his famous memo, “The Internet Tidal Wave,” and fast-tracked the release of Internet Explorer. The browser wars were on.
Out of Bill’s crosshairs, AOL thrived through the go-go years of the late nineties. The company had obvious points of vulnerability, from its slow adoption of broadband to the growing migration of content to the Web. But the tech boom masked AOL’s weaknesses, and sometimes scale alone carries the day, at least until something a lot better comes along. In January 2000, five years after I’d sold my stock, AOL announced the acquisition of Time Warner. When I first heard the rumors, I thought that AOL’s market cap (an outlandish $163 billion) was wildly overvalued. Just three years later, the New York Times would call the merger “the greatest enduring monument to the folly of the Internet boom.”
Still, one hard fact remains. Had I held on to my 24.9 percent of America Online, I would have been sitting on a $40 billion bonanza, more than all the money I’d make from my stake in Microsoft.
AS I LOOKED for more commercial opportunities in the Wired World, the ticket business seemed like a natural fit. It had a mass clientele, and I could add value with a range of interactive features: search functions, preorders, seat location graphics. In November 1993, after Microsoft backed off from a last-minute bid, I paid over $300 million for 80 percent of Ticketmaster. Thrown into the deal were the services of the company’s tough-talking president and CEO, Fred Rosen. Since joining Ticketmaster in 1982, Fred had built it from a group of straggling regional ticketing services into a billion-dollar behemoth that dominated the industry. He cut deals with venues and paid preemptive fees for exclusive rights. Nobody dared cross him.
I thought that Fred and I should get to know each other, so I flew to Los Angeles to join him for dinner and then Steely Dan’s reunion tour at the Hollywood Bowl. We got great Ticketmaster seats, tenth row center, and Fred slept through most of the concert. He wasn’t much of a music fan.
Ticketmaster had built its dominance via two modes of customer service. Say you wanted to go to a U2 concert. You could: (a) stand in line at one of Fred’s retail outlets at a record store or (b) call a Ticketmaster phone bank and hope you wouldn’t be on hold for too long. My solution was to move the operation online. We could create a Web site and link our service to sites in the sports and entertainment fields, from the Super Bowl to the Rolling Stones’ next U.S. tour. These were fresh ideas; Amazon.com was two years away, and e-commerce still in its infancy. A few people made airline and hotel reservations online with AOL or Prodigy, but the Web had yet to catch on as a way of selling entertainment.
It definitely hadn’t caught on with Fred Rosen. Though his business had been computerized for years, he fought me tooth and nail over taking it online. Every so often, I’d ask him how development of the new ticketing system was going, and Fred would metamorphose into a high-decibel, old-school promoter. “I’m not selling tickets online,” he’d roar, “because the banks won’t take the credit cards and the customers won’t trust the security! You have to go with me on this, Paul!”
I’d hold the phone three feet from my ear as I tried to get a word in: “But Fred …”
“You don’t understand this business, Paul! I’ve been doing this forever, and people aren’t going to print out their tickets at home—it ain’t gonna work, Paul! I’m not going to do it! And the tickets can be forged or stolen, and then what do we do?”
“But Fred …”
“My customer isn’t the guy who buys the ticket. My customer is the venue, and they’re not going to go for this! It’s just not gonna fly!” Finally, after twenty minutes of bluster, he’d run down and mutter, “It’s OK, we’re making progress. It’s coming along.”
Two years later, Fred grudgingly gave his blessing to our ticketing Web site. It was a complex piece of software engineering that tackled credit-card clearance, user authentication, and real-time database updates. At last all was at the ready. When customer number one had completed the first transaction, our Web people called him and said, “Congratulations, you just bought the first concert ticket in the history of the Internet! Can you tell us why you decided to buy online?”
The man said, “Because I don’t like talking to people, and I don’t like talking to you.” And he hung up.
Rosen fatigue took its toll. In 1997 I sold my stake in Ticketmaster to Barry Diller’s Home Shopping Network, receiving equity in return in Diller’s USA Networks, Inc. I sold that stock in 2002 and doubled my original investment. Barry parted company with Fred, and before long Ticketmaster was conducting 90 percent of its business online.
AROUND THE TIME I bought Ticketmaster, I was addressing a central question for the Wired World: What kind of content would people want most from a broadband network? To find an answer, I founded a start-up called Starwave as a new-medium software publishing company and hired an ambitious president, a former Microsoft executive named Mike Slade. We brainstormed as a test market of two. We were both obsessive sports fans, and our first idea was probably our best: to develop the world’s most comprehensive sports information source.
Sports is intrinsically data driven, the natural raw material for computer software. A fair portion of the population tracks it on a daily basis. Mike and I wanted more in-depth coverage than we could get in the Seattle Times, whose sports section could barely hold all of the box scores. We wanted to keep up with games inning by inning, even pitch by pitch. Most of all, we wanted stats, lots of stats, that people could sort as they pleased.
Existing Internet services were simply dumping the Associated Press sports wire online, which meant their products wouldn’t be hard to beat. After flirting with a pair of AOL competitors, who quickly went belly up, our new plan was to partner with a recognized sports brand and publish directly to the Internet. The Web was sparsely populated, and page downloads slower than slow; Mike’s staff was building a Web site for an infrastructure that didn’t yet exist. But our strategy turned out to be correct. An independent site, with hyperlinks to many others, could deliver richer, more imaginative content than any walled garden. And, as we’d discover, it could make a lot more money.
Sports Illustrated passed, but we found a warmer reception at ESPN, the young TV network then owned by Cap Cities. After making a splash with a half-hour national broadcast called SportsCenter, ESPN was eager to expand online. Under a five-year licensing deal we signed in 1995, Starwave would generate original content and operate the Web site. ESPN would lend its on-air muscle to promote the site with twice-hourly address crawls. Revenues would be divided.
We turned on the site that spring, and SportsZone reinvented sports coverage on the fly. It combined the local focus of newspapers with the depth of magazines, the immediacy of TV, and the real-time power of the Internet. The site debuted during the NCAA’s Final Four weekend, which happened to be held in Seattle that year, and we seized the opportunity to post the first online sports video clip: Bryant “Big Country” Reeves shattering a backboard at a Kingdome practice session. Though the clip was the size of a postage stamp and wouldn’t work without a high-speed connection, it caused a sensation.
SportsZone pioneered real-time game stats. (Our NBA scores were updated three times a quarter, which was unheard of.) We were the first to organize wire-service copy into interactive hierarchies (sports/baseball/clubhouse/Giants/Barry Bonds), the first to offer an interactive database of statistics. We had the original sports fantasy games, online polling, and live sports chats. By Labor Day, we were supplementing SportsZone’s free “front porch” with a paid premium area, which demonstrated that strong online content could sell ads and win subscribers.
We quickly built a massive content base of 60,000 text pages, 6,000 photos, 2,500 audio clips, 1,000 video clips. SportsZone became the wo
rld’s biggest sports section, hands down. But only 7 percent of American households were online in 1995, almost all of them on dial-up modems. Low bandwidth rendered much of our site too slow to be practical. We had the best product of its kind, but how would it reach the public?
Fortunately, we hadn’t reckoned with the size of the “goof off at work” market. People might not feel comfortable cracking open a newspaper at their desk, but they could steal two minutes to check on a fantasy team on their computer screen. SportsZone traffic spiked highest on Monday mornings, when young men used Ethernet hookups at their offices to peruse the weekend scores and recaps. We had another surge at noon, as people headed out to lunch and the West Coast folks were sitting down, and another at five, as people prepared to head home. By mid-1996, the site was recording 7.5 million hits a day, up to 12 million during the summer Olympics in Atlanta. Our core demographic, affluent males under thirty-five, would maximize dollars per click. SportsZone didn’t merely change the pattern of sports news consumption. It set the standard for commercial, content-based Web sites.
Encouraged, Starwave developed sponsored sites for the NBA, the NFL, and NASCAR, and also branched into entertainment. Another Starwave site, Outside Online, broke the Mount Everest story by Jon Krakauer that later became the bestselling book Into Thin Air. The New York Times rewrote our posts and credited Outside Online, one of the first uses of the Internet as a real-time news medium.
In 1998, shortly before our licensing contract was set to expire, I sold my interest in Starwave for $350 million to Disney, ESPN’s new owner. SportsZone’s legacy survives today as ESPN.com, still the leading sports content Web site.
I NEVER FORGOT my sneak peek into the future at Xerox PARC, one of a long line of seminal think tanks that dreamed up the electric light, the phonograph, and the transistor. By the early 1990s, it seemed to me that we needed a similar wellspring for digital technology and media. Most R & D in the field was skewed to short-term development, with an eye to that year’s profits. Who would take a longer view and bring home the next wave of breakthroughs?
In 1992 I founded Interval Research in Palo Alto, California, just a short walk from PARC. To direct it, I hired David Liddle, a former PARC scientist who’d led the development team for the Xerox Star, the commercialized version of the Alto. In announcing Interval, I said:
There are a number of interesting technologies just over the horizon, but they aren’t ready for a typical two-year product cycle. … David and I have a vision of future computing that is far from anything we see today. We intend Interval to pursue that vision.
Interval was designed as a for-profit venture with an exploratory approach, what Wired would call “an unusual hybrid between an industrial research lab and a venture capital fund.” Or as Liddle put it, “a PARC without a Xerox.” Like PARC, Interval had a mandate to incubate next-generation applications. Unlike PARC, it aimed to turn those innovations into licensed products or spin them off as new companies. The plan was for it to become self-sustaining within ten years.
At full strength, Interval employed more than a hundred scientists and researchers, recruited from top institutions like Stanford, MIT, and Bell Labs. We had stars like Lee Felsenstein, designer of the Osborne 1, the first portable computer; Jim Boyden, a father of the inkjet printer; and David Reed, inventor of the communications protocols that made the Internet possible. The staff was nothing if not eclectic. Liddle hired journalists and virtual-reality artists, anthropologists and musicians, even a parapsychologist. Artists were essential, as Liddle told Fortune, to push new technology “to the edge of what’s possible. … You need unreasonable people doing things for reasons they can’t verbalize.”
On paper, Interval had it all: talent, resources, and the time to pursue the frontiers of technology. Its leader was ferociously smart, articulate, and unafraid of risk. In the end, though, the lab was a case study of good intentions gone wrong. My heart sank when David told me that he relied on the researchers to decide when to discontinue their own projects, a prescription for what I call the running-man syndrome. Picture a man running uphill toward a goal. He gets tired and thirsty, but he’ll keep running until management applies a fitness test and winnows out ideas without promise. “When Interval began, we just did cool things,” one of our video artists told Wired. “It was 100 percent research, 0 percent development.” Lacking focus on the marketplace, Interval got sidetracked into paranormal phenomena, interactive robots, and alternative art installations—or “sidelines and weirdness,” as one of the scientists put it. In our effort to buffer people from bottom-line pressures, we went too far the other way.
The Wired World was a wide-ranging vision, and Bill Savoy, the point man for my private investment firm, Vulcan Capital, was a compulsive dealmaker. I should have slowed him down. By the midnineties, involved in 140 companies, I wasn’t able to give Interval sufficient direction or keep it focused on the Internet. Over its eight-year life span, Interval spun off seven start-ups. They were generally ill-conceived or premature, and all but one or two foundered in the marketplace. None made real money.
Among the lab’s more tantalizing, ahead-of-its-time ideas was the Mouse of Life, a “magic wand” that could be waved at any barcode for instant product information, from the supermarket price of a can of corn to the ownership history of a used Buick. (This concept is now reemerging as a cell-phone application.) Then there was WebPad, an experimental touch-screen platform—an amalgam of a Web browser, e-mail terminal, GPS mapping display, PDA, and home television remote control. With a 10.7-inch display and a weight of less than two pounds, WebPad was a conceptual forerunner of the iPad. But it would have cost at least a thousand dollars to retail, a major obstacle to consumer acceptance back then.
In 1999, I made a last-ditch stab to redirect Interval toward interactive video and broadband cable television projects. After a foray into three-dimensional cameras, a progenitor of 3-D TV and movies, I conceded defeat. Though Interval developed several potentially groundbreaking ideas and registered about three hundred patents (some of which may turn out to be quite valuable), the lab and its spin-offs had proven ineffective in exploiting them. In April 2000, after investing $300 million, I shut it down. Like others who have tried to walk the same path, I concluded that Xerox PARC was probably unique to its time and place. It would not be easily replicated.
These days, I’m disinclined to invest in completely open-ended research. I’ve learned that creativity needs tangible goals and hard choices to have a chance to flourish.
IN THE EARLY nineties, the Ticketmaster business had me flying to Los Angeles twice a month and into the Hollywood orbit. My higher profile brought an invitation to the Sun Valley summer retreat hosted by Herb Allen, the financier with deep ties to the entertainment industry. I met David Geffen there and found that we had common passions, notably art and music. Geffen was smart, charming, and full of advice on how to run your business and your life.
He was a great persuader. One day he called me with the news that he was starting a new film studio called DreamWorks SKG with Steven Spielberg and Jeffrey Katzenberg. It was a masterful soft sell. “I don’t know if you’re interested,” he told me, “but you can have your financial guys contact my guys. We’d love to have you be part of our team.”
I didn’t need much coaxing; I was flattered that he’d asked and intrigued by the venture. I’d been a passionate movie buff since growing up with genre triple-features at Seattle’s Colonial Theater. (Sometime later, when Seattle’s classic movie palace, the Cinerama, was about to be torn down, I stepped in to buy it and restored it to its former glory.) I’d already been scouting movie studios as possible investments before Geffen called.
DreamWorks represented something special, the first new major Hollywood studio in decades. It was a chance to get involved with some of the most creative minds in the business: Spielberg, the genius auteur; Katzenberg, the razor-sharp perfectionist; Geffen, the consummate dealmaker. Together they seemed re
ady to join me in creating a new convergence of entertainment and digital technology. Maybe we’d use content from the studio to enrich the value of the broadband pipe. Or we might form a strategic partnership with Starwave. It was the beginning of the dot-com bubble, and anything seemed possible.
In March 1995, I put up $500 million, the single biggest investment I’d made to that point. In hindsight, it wasn’t such a great deal. While my half-billion dollars bought an 18.5 percent stake, the three principals put up a total of $100 million for two thirds; I paid eighteen times more per point of equity. Worse, I was taking the lion’s share of the risk without equivalent voting rights.
The principals’ pitch was that they’d be putting in valuable sweat equity. But as Tom King wrote in The Operator, the deal was structured according to Geffen’s MO:
In his previous businesses, Geffen had proven to be a risk-averse executive, masterful at limiting overhead. But with such capital intensive plans as building an animation company from the ground up, Geffen realized that staggering overhead would be unavoidable for DreamWorks. Thus, he brilliantly employed another tactic that had worked so well for him in the past: Use other people’s money.
I didn’t plan to be a passive investor in DreamWorks. While I wouldn’t have dreamed of intruding on the moviemaking, I was given to believe that I’d have a say in the company’s broad direction. A press release described me as a member of the studio’s board of directors who would “also have input on DreamWorks’ strategy, particularly in the areas of multimedia and interactive development.” The three principals went on to say: