Shockwave ready to explore bold new territory

From...

by Laura Rich

(IDG) -- It was one week after Pseudo had fizzled and a few weeks since Pop.com died. People were still talking about the disaster of the Digital Entertainment Network and the shrinking of Entertaindom. And here were four Shockwave executives, including the company's new CEO, on a press tour to present the kind of online entertainment two industries (Hollywood and Silicon Valley) were saying wasn't working.

In a shared corporate conference room in a bank building on Los Angeles' Miracle Mile, these executives had opened a laptop and clicked open a demonstration of a Shockwave video for Madonna's new "Music" single. The driving house beat blasted out of speakers on the table, but only one executive was grooving to the music. The rest of them were too nervous to tap their feet.

Shockwave executives have plenty to be concerned about: Content of any kind is hard to sell these days. The failed examples are too many. Venture capitalists aren't exactly throwing new millions at the sector; few online entertainment firms are still focused on developing destination sites. And IPOs? Forget about them. "Nobody's doing content deals," says one leading investment banker.

At a time when online entertainment companies are throwing in the chips or finding ways to diversify into offline media, Shockwave is staying firmly online -- mainly because it has to. As a spinoff of Macromedia, the creator of the Flash and Shockwave online animation technologies, the only way it can build its business is to make an entertainment medium out of the Web. So far, it's doing okay: The company seems to be weathering the market's shakeout and its burn rate is comparatively reasonable. In the second quarter of this year, Shockwave logged $4.45 million in revenues on operating expenses of $12 million. By contrast, the defunct Digital Entertainment Network, in the Securities and Exchange registration statement it filed last fall, reported no revenues for the first half of 1999 and a net loss of $20 million.

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Lawrence Levy, the company's new CEO, believes the winning formula breaks down into three ingredients: "You need technology, traffic and content. Shockwave has these in place."

No question that the technology and traffic are there. Shockwave, after all, helped create online animation.

And with its 5.4 million monthly users, Shockwave is in a stronger position than the competition. Icebox, for example, records 326,000 unique users per month; Z.com logs 206,000. (All figures are from Media Metrix (MMXI) for August.)

But nailing the content has proven elusive for many online entertainment operations. Shockwave's smartest move of late may be its decision to ditch the expensive and still unproven Webisode genre that brought down DEN and Pop, and focus on games and heightened interactivity instead. Last fall and winter, the company grabbed headlines for signing big-name talent -- directors Tim Burton and David Lynch, as well as South Park co-creators Matt Stone and Trey Parker -- to create linear episodic content. These relationships brought the company credibility in Hollywood, but industry sources criticized the deals for giving too much control and too great a share of potential revenue to the big names.

Levy won't slam last year's agreements explicitly, but he has wasted no time distancing himself from that strategy. "We're still going to do deals with outside talent like Hollywood, but it may be more experimental rather than big upfront commitments," he says. "The secret is leveraging this medium."

Levy came to Shockwave by way of a sabbatical. He had left digital animation studio Pixar last year with the intention of doing nothing for a while. "The thesis was to have an unplanned experience," he says. "My life had been way too planned up until that point." For months, Levy hung around his house in Palo Alto, Calif., spent time with his family and read. By last spring, he decided it was time to go back to work. "I knew there was still more in me," he adds.

When Levy returned to work, he took what he calls a "half step" to become the CFO of MyCustoms.com, a third-party provider of international e-commerce transactions. He lasted two months.

In June, he decided to run his own show as CEO of Shockwave.com. Since taking the top spot in June, Levy has acted fast to put Shockwave on course to become a profitable, independent company. First, he laid off 10 percent of its staff and nixed further big-ticket Hollywood deals. As part of the retrenching, Levy and his team created Shockwave Studios to jump on ideas generated internally, with Shockwave retaining all rights.

Macromedia has been slowly spinning off the site, and one source involved in merger talks with the company says Macromedia executives had planned on an April 2000 public offering for the unit. Shockwave says it has always focused on a year's end target, but sources close to the company don't anticipate it'll be ready to go public even then.

Shockwave still has to implement a workable business model and win the confidence of bankers. "Content in general is an iffy thing," says one investment banker who has met with the company. "You have to throw up a lot to get something that works."

Last week, Shockwave launched several new features that its executives hope will illustrate the company's new direction and increased emphasis on interactivity. The animated Madonna video, however, is a weak example. The production -- a showcase for Shockwave animations -- is impressive, but the video's interactivity is uninspired. Users are expected to click on pale icons as they flash for a few seconds on the screen, each representing a clip that can later be rearranged with the rest of the segments from the video.

Other interactive features on Shockwave's site are more engaging. Net surfers can remix songs -- manipulating melodies from artists like Britney Spears with a variety of backup styles, from rap to orchestral.

Among other Shockwave content debuting this week is the first production to come out of the company's roster of high-profile celebrity deals: the Stainboy series from director Tim Burton. Stainboy is a linear Webisode -- a throwback to the pre-Levy era -- in which the hero uses his ability to leave stains as a means to thwart enemies such as Stare Girl, who wreaks evil by staring down her enemies, and Toxic Boy, who leaves a variety of life forms dead in his wake. Since Levy has decreed that the company move away from purely linear storytelling, Shockwave developers created an interactive "world" around Stainboy, including trading cards, character bios and Stainboy games. Compaq Computer (CPQ) has signed on to sponsor the series.

"The fact that Compaq is willing to do this at all is a very good sign," says Levy. He is counting on advertising to support the site until the company can establish licensing and syndication deals. Levy also says he wants to fatten the pipeline of content coming out of Shockwave Studios to give him flexibility in canceling games and shows that aren't winning audiences.

But does Levy like the content that's on the site? It was hard to tell that day in the conference room. And when asked later, he was diplomatic: "We have a good start. We have an excellent in-house team and we're pretty strong in attracting talent." And he though back to his Pixar days. "It took us a little while. We had a core nucleus. We have the same thing here." Now Levy just has to prove that content -- linear or not -- can win audience approval and make money.

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