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How a Visionary Venture on the Web Unraveled

SUNDAY REPORT

Start-up firm's white-hot bid to redefine entertainment turned into a cautionary tale amid financial excesses and a sexual abuse lawsuit. Site relaunch is planned.

May 07, 2000|JOSEPH MENN and GREG MILLER | TIMES STAFF WRITERS

"The boob tube zombie television is dead. . . . Global entertainment will be delivered over the Internet. . . . Digital Entertainment Network will create the last network."

These were the visions of a Santa Monica company known as DEN, spelled out in a fiery 38-page manifesto written two years ago by its founder. And for a while, the venture was white-hot, pioneering the fusion of Hollywood and the Silicon Valley.

Executives from Disney and other major companies flocked to join the company. Digital Entertainment Network hired Hollywood directors and actors to create original programs for its Web site. Advertisers including Ford and Pepsi eagerly plastered their logos on the DEN.net home page, and industry giants such as Microsoft invested millions of dollars.

But after two years of trying to build an audience for TV-style entertainment over the Internet, DEN has yet to produce a program as compelling as the unraveling of the company itself.

Beset by business blunders and allegations of sexual misconduct against its founder, the company squandered an opportunity to define the intersection of California's two premier industries. Instead, as a rival executive said in a recent interview, "they have become poster boys for what not to do."

The founder, Marc Collins-Rector, was forced to leave the company after a lawsuit accused him of molesting a teenage boy, a charge he denies. A planned stock offering that could have netted him and his executives hundreds of millions of dollars was abandoned. More than a third of the company's 300 employees were recently laid off and sources say the company is scrambling to find new financing.

Production of shows has been halted, and the vast audience that DEN's founders promised is now so tiny it doesn't even register with top Internet ratings services.

The implosion raises questions about how carefully some of the most powerful backers of the Internet economy scrutinize the companies they support. Most seemed oblivious to flaws in the Digital Entertainment business model and the exorbitant salaries its executives were paying themselves. Investors also knew little about Collins-Rector, the entertainment novice they entrusted with their money.

"It is one of the leading cautionary tales that come up in Internet conversations," said an executive at another online entertainment company. "It comes up in terms of overpaying executives, oversetting expectations, burning too bright too soon."

Ken Andersen, managing editor of the VentureWire electronic newsletter in New York, added: DEN shows that "anybody can raise a million dollars in dumb money."

Collins-Rector declined to be interviewed. His attorney, Ronald Palmieri, denied that his client has done anything wrong.

Hoping to salvage some of the company's promise, a revamped executive team, led by former Capitol Records President Gary Gersh and former Microsoft executive Greg Carpenter, is planning a relaunch of the site this month. They say the new DEN will be larger but leaner, still offering TV-style programs, but also music, news, chat and other content aimed at a college audience. They are also being careful to steer clear of their predecessors' bombast.

"DEN was slated to be big, to be huge, to take over," said Gersh, a company executive and director since last May. "We were going to change the world and we were going to get rich quick. All we're trying to do now is tell people there's no substitute for rolling up your sleeves and going to work."

Saw Potential of New Technology

The convergence of entertainment and technology only now seems at hand, after years of false starts. In the early 1990s, Hollywood and high-tech firms lost millions on bets that viewers were ready to leave their television sets to click through interactive entertainment on CD-ROMs.

Later, as the Internet began to bloom, early episodic shows such as the online soap opera "The Spot" generated curiosity but not much revenue.

But what seemed farfetched after those failures now appears inevitable. Many teenagers now get the bulk of their music online, and many Hollywood and high-tech executives believe that consumers will soon get much, if not most, of their entertainment via the Net.

So far, only about 2% of U.S. households have the high-speed Internet connections necessary to stream video smoothly. And even then, the images appear in a box about the size of a postcard. But analysts expect those technological barriers to crumble over the next five years. Already, they estimate that 7 million college students have high-speed access in their dorms or elsewhere on campus, and 15 million adults have such access in the workplace.

Collins-Rector saw the potential of this booming technology earlier than most. He lined up major investors, grabbed key advertisers, and his company was the first entertainment site to file for an initial public stock offering, positioning executives for the kinds of Internet riches that Hollywood moguls have come to envy.

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