The Last Sure Thing

(you probably want to print this one - it's long)

© Ken Auletta

Used with Permission of the author

First published in New Yorker November 19, 1988

PointCast was once Silicon Valley’s hottest startup. Rupert Murdoch’s empire tried to buy it for almost half a billion dollars. What went wrong?

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 cacophony. The V.C.'s (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 but having almost zero revenue) deserved to be valued at seven hundred and fifty million dollars. 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 C.E.O., Christopher R. Hassett, who was then thirty-four, had been saluted as CNET's newsmaker of the year, an honor whose former recipients included, among others, Marc Andreesen, of Netscape; Bill Gates, of Microsoft and Larry Ellison, of Oracle. Hassett became a regular speaker at the many buzz-generating conferences that "new media" devotees attended, 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 engineer brother, Gregory, had invented allowed users to customize the Internet: to keep users from getting lost surfing the Internet ocean and "pulling" information off it, or getting beached by wheezing modems, PointCast aimed at "pushing" the information that a customer requested and delivering it when the computer was idle. After a customer registered with the PointCast Web site, this information - the front page of the Times, perhaps, or health-related news or up-to-date stock prices from fifteen companies - appeared as a screen saver, or was scrolled across the bottom of the computer screen. 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," Chris Hassett declared in early 1996, when the service was launched. "This is the news format for the twenty-first 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 twenty-five, had just been put in charge of new media ventures for News Corp., and he reached out to Chris 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 four hundred and fifty million dollars. Teams of lawyers and investment bankers negotiated over this for weeks. Eventually, the Murdochs reduced the offer to about four hundred million dollars, 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 - or both - was to blame, the bid was rejected. Not long afterward, PointCast and "push" became yesterday's news, as often happens in the Valley. The new buzz surrounded "portals" --- windows onto the Internet, like Yahoo! and Lycos, which assemble information from many sites.

PointCast executives and investors, meanwhile, reject analogies to other Silicon Valley meteors --- General Magic, Go, Catapult, Wolff New Media, Hayes modems-that once streaked across the sky. They say that their product will again be as attractive as it was, and perhaps they are right. Today, an estimated hundred and twenty million computers are hooked into the World Wide Web, and the Internet economy - on-line shopping, business-to-business purchasing, and advertising – is expected to climb from about two hundred billion dollars this year to nearly a trillion dollars by 2002, according to the market-research company International Data. 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. It is also a lens through which to observe the lust that Mark Twain and Charles Dudley Warner wrote about in “The Gilded Age: A Tale of Today” – “golden road to fortune” pursued by those who moved West after the Civil War. The novel is populated by people who worship success and who dream that “the country will ring with the fame of Beriah Sellers’ Infallible Imperial Oriental Optic, Liniment and Salvation for Sore Eyes – the Medical Wonder of the Age!”

But Silicon Valley is not the hollow place that Twain and Warner’s West was; 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 United States. “For me, money is not the big deal,” says Parik Rao, a twenty-six-year-old engineer who became a millionaire during two years at Microsoft, and who was at PointCast until two weeks 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 harbors the Valley stretches a mere thirty-three miles. The Valley itself, which includes San Jose, now California’s third-largest city, is an extended tree-lined suburb with one and two-story high tech glassed-in office buildings with strip malls that include more Taco Bells than perhaps any other locale in America. The cities have familiar names – Paolo Alto, Santa Clara, Sunnyvale, Mountain View, Menlo Park – but they don’t have real downtowns. Workers tend to wear Gap rather than Armani, to talk about software more than about Monica, to consult the gyrating price of their stock options before the baseball scores, and to unwind by engaging in “extreme sports” – 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, cell 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 life style, 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 was until recently the senior vice-president of marketing at PointCast," people move from job to job like nomads. Anywhere I ever lived, anyone who jumped around a job before five years had elapsed was suspect. Here someone who has been in a job two years is considered a loyal employee,” Bisharat says. Even the Valley’s promotional literature inadvertently betrays the milieu’s frenzy. “Peninsula & Silicon Valley Guide", published by Good Life Publications, cautions those seeking housing:

The market is so hot many landlords don’t even advertise. They just stick up a For Rent or For Sale sign … Whether you’re buying or renting, be prepared to move fast. If you wait even a few hours to act on a place you like, someone else will snatch it up ….. Carry your checkbook so you can make a payment on the spot.

Real estate is so scarce that until this year PointCast was divided between two locations. To get to its new headquarters, a green-tinted glass two-story building in Sunnyvale, one drives past palm trees and squat town houses and condominiums, past the strip malls and back up against the one- and two-story glassed-in high-tech-company headquarters – Silicon Magic, US Web, Sensory, Identix, Avcom, Conductus, which may or may not exist in a few years – past avenues with names like Mary and Maude, and an array of cranes and construction sites, including one across from PointCast.

PointCast was founded in 1992 by Christopher and Gregory Hassett and Chris’s wife, Janet. After earning a degree from the University of Lowell, in Massachusetts, in 1984, Chriss Hasset started a company that 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, and then the three Hassetts pooled assets and launched PED Software, a company that made software that enabled customers to devise a personalized newspaper using on-line services like Prodigy and CompuServe. “The Internet wasn’t the Internet,” Chriss Hassett recalls. “It was government and a few on-line services.” Soon PED had attracted 12 million dollars in venture-capital funds from such Valley firms as Mohr, Davidow Ventures, Benchmark Capital and Merrill, Pickard, Anderson and 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, changed their company’s name from PED Software to PointCast, and, with their trademarked technology, announced that this free service could be downloaded off the internet starting on February 13, 1996.

The applause commenced, and so did deals with content providers like the Times, the Boston Globe, Fox and CNN, and so did a joint marketing partnership with Netscape, among others. By the fall of 1996, PointCast was registering two hundred and fifty thousand new viewers each month, and had enticed thirty-six million dollars more in venture capital from such investors as General Electric Capital Corporation, the Compaq Computer Corporation, Softbank Holdings, and three newspaper chains – Knight-Ridder, Gannett, and Times Mirror. By September, nearly forty 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 D. Feiber, a member of PointCasts’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 of 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 the 40 vendors hypeing their plans.”

One such vendor was FreeLoader, a browser company that pushed data from the Internet to desktops. As Stephanie Gruneer has recounted in the magazine Inc., this company – which has been launched in 1995 by two thirty-something pals in Washington, D.C., and had no income --- spent ten thousand dollars a month to retain a New York public-relations agency to convince the press that FreeLoader was the “next big thing.” Mark Pincus, a co-founder of the company, told Gruner, “The way to get real mind share is to realize that the media is a gigantic wind tunnel. It’s a black hole that can never get enough content to suck through it.” In late 1996, when the buzz surrounding “push” was peaking, the partners sold FreeLoader for thirty-eight million dollars. Today, the company is out of business, its Web site swallowed for a pittance by PointCast’s.

Looking back, Chris Hassett recalls, “I spent thirty per cent 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 L. Morgan, who is now a partner in the firm of Latham & Watkins, disagrees. “The problem was that for Andy Warhol’s fifteen 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 remembers that once, during the negotiations with James 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 envisioned using PointCast as “a billboard in the home,” as a link to, say, News Corp’s broadcast-satellite-TV offerings to 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’s opinion carried weight with his father (who just this fall got his first P.C.). And Rupert Murdoch’s company had embarrassingly failed to stake its flag on the Internet.

There are several views on why the takeover went sour. According to James Murdoch, Chriss 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. Chris Hassett, who with his wife and brother still owns twenty-two percent of the company, acknowledges that the negotiations were torturous. “There’s a story to tell,” he says, but he won’t tell it. Kevin R. Harvey, of Benchmark Capital, which owns seven per cent of the company, says that 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. In an E-mail exchange with me, Myhrvold wrote, “Starting a company requires more suspension of disbelief than any fairy tale. You must envision something – a company – where there is nothing and hold that vision in your head …. I know something about this syndrome because much of this happened to me when my company was talking to Microsoft about being acquired. My company was low-profile compared to Hassett. But, even so, many people advised me not to sell out, that I was selling out cheaply, etc. .. With all this heady talk swirling around, it is hard to be rational.”

The Murdoch offer and the celebratory notices probably blinded Hassett and PointCast. For example, PointCast couldn’t deliver data to P.C.’s 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 clotted with traffic, resulting in delays. The servers linking the PointCast network to the information suppliers and to the customers became choked with traffic. 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 A.O.L. 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 Jonathan 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 C.E.O., “ he added. This was not uncommon in the Valley; for instance, Netscape recruited the former telephone and Federal Express executive James Barksdale to direct a talented programmer, Marc Andreesen, and the Yahoo! founders recruited Timothy A. Koogle, a forty-seven-year-old former Motorola executive, as their C.E.O. 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 C.E.O..

The company announced in June that Hassett would step down as C.E.O. but remain as chairman, and in the meantime it would search for a world-class media executive. Hassett and the board then designed 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 C.E.O. 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 C.E.O. of Pacific Bell when that Baby Bell company was acquired by SBC Communications in early 1997. By saying yes, Dorman was leaving a company with fifty thousand employees for one with two hundred and sixty. He had turned aside bigger job offers, one of them @Home, a cable-modem company offering high-speed access to the Internet, and another Apple Computer which had talked to him about replacing its acting C.E.O., Steven Jobs. Upon announcing, in October 1997, that Dorman would become PointCast’s new chairman and C.E.O., Kevin Harvey, a board member, said that 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 forty-four, and after seventeen years with phone companies, he was ready for an entrepreneurial dalliance, and he liked the model of Barksdale at Netscape. Seated in his glassed-in office this September, and wearing a striped open-necked shirt, dark slacks, and polished tasseled loafers, Dorman, who retains an Atlanta drawl from his boyhood, offered another reason for saying yes: convergence. PointCast would identify its audience (the media model), and then take its free service (the service model) and ram that audience – an upscale one --- down the throats of advertisers.

Dorman did not mention a further inducement, which can be found in papers filed with the S.E.C. in 1998. Outlined there are the generous terms of Dorman’s employment agreement, which included a signing bonus of $1.43 million, an annual salary of two hundred and fifty thousand dollars, a bonus of $1.8 million in 1999 if the company reached three million viewers, and a low-interest loan to buy nearly two million shares of common and preferred stock. Another unannounced condition of Dorman’s employment appears to be that Chris Hassett would depart as chairman, and he did so, quietly (with the added stipulation that he not disparage the company). Gregory Hassett remained on the board but had a reduced operating role.

From the beginning, Dorman was blunt. He praised the company’s product, but cautioned that it had been over-hyped. 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 learn what customers expected, and improve the service, but it also needed to shift its emphasis from individual to corporate customers. “This thing had taken off beyond anyone’s imagination,” he explains,” and it wasn’t ready for prime time.” 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 C.E.O.,” says Lev Belov, PointCast’s Russian-born senior director of engineering, who is thirty. “Lots of ideas. Lots of energy. But less focus. Less methodology. Dave clearly is a great combination of both.”

Chris Hassett, who now lives in New York, challenged this chronology when I spoke with him recently. 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, what was more troublesome, the demand for “push” was diminishing. The difference between “push” and “pull” blurs when one sets aside, say, twenty favorite 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 seventeen per cent of the company to the public at an initial price of between ten and twelve dollars per share. Since PointCast had nearly twenty-five million shares, which was valuing the company at approximately two hundred and fifty million dollars, or about two hundred million dollars less than the failed Murdoch offer.

An I.P.O., 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 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 fifty-seven million dollars, 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 Jonathan Feiber. “I don’t think this document is significantly different from others,” he said. And, according to the Wall Street Journal, of the nearly five thousand I.P.O.s initiated between May, 1988, and July, 1998, nearly a third no longer trade their stock and forty–four per cent sell at a market price below the original offering price. In any case, Point Cast withdrew the I.P.O. in July, and for the rest of the summer David Dorman maintained a grueling schedule of visits to potential strategic partners, including the television networks, Michael Bloomberg, Murdoch, and portal and computer telephone companies. Few pursued the overture. Unquestionably, the competition that PointCast confronts is fiercer today than it was at any earlier point. With technology evolving to a point where customers may have “instant access” to the sometimes slow Internet, the cable and telephone industries have become rivals, and so have portal services like Snap! and Infoseek, which were recently acquired by NBC and Disney, respectively. In mid-September, in his deliberate drawl, Dorman told me that he was confident that PointCast has solved the service problems, and he rejected the notion that the passive-viewing model is finished. Rather, he said, “it’s the passive delivery that matters.” Dorman compared PointCast to the home delivery of newspapers, which induced people to read more because it was so convenient. “With PointCast,” he said, “you don’t have to log on, go to a Web site. As with broadcasting, people don’t want to work hard to retrieve information”. Television is a “lean-back” medium, he says, while computers are a “lean-forward” medium. PointCast, he believes, can be both, since users can either sit back and receive data or lean forward and retrieve more in-depth information. Dorman, in short, wants to persuade a listener that PointCast remains, if not the next big thing, an ongoing big thing.

On the East Coast, Chris Hassett’s life has changed. He has more time, and a new startup 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. Hassett works out of an old building with a creaky elevator in the garment district where, he says, most of the electronics were sewing machines and thus he had to replace copper wires with fibre wires. When I spoke with him, in a windowless, bare-walled conference room, his posture was ramrod straight. 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 centered 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 later this year, when it could coincide with the expected launching of his new company.

On the West Coast, I’m not sure whether Dorman is spinning when he tells me that soon he expects to announce the major alliance or sale he has been seeking. (In September, he had expected to announce one by mid-October. “A deal’s not done,” he said then. “But the prospects are high.”) I’m even less sure about the spin after hearing Dorman describe 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 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 classmates gravitated naturally 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 startup.”

It’s the magic of Cisco, whose stock price is eight times as great today as it was three years ago, and many of those employees, like those at Microsoft, are millionaires. It’s the magic of Yahoo!, which took its stock public in 1996 for just over eight dollars a share and today trades at more than fifteen times that. Though its earnings are relatively modest. It’s the magic of eBay, Inc., an on-line auction company. Despite a shaky stock market, its thirty-one-year-old chairman, Pierre Omidyar, watched his shares jump in value nearly three times, to six hundred and eleven million dollars, on September 24th, the day the stock went public; Benchmark Capital, a PointCast investor, has watched its six-and-a-half –million-dollar investment in eBay multiply to seven hundred million dollars. 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.

© Ken Auletta

Used with Permission of the author

First published in New Yorker November 19, 1988