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Fool On The Hill

Wednesday, July 7, 1999

An Investment Opinion
by Louis Corrigan

PointCast's Push Got Shoved

In the world of hot Internet companies, PointCast was da bomb in March of 1997. The editors at forward-looking Wired magazine tapped out a breathless cover story declaring the "push" revolution, "the radical future of media beyond the Web." PointCast was the vanguard of that revolution, having distributed 1.6 million copies of its proprietary webcasting software during 1996 alone.

Just as important, dozens of advertisers had signed on to support the free service. The company also enjoyed a strong pedigree, having raised $48 million from venture capital firm Benchmark, Japan's Softbank, General Electric's (NYSE: GE) GE Capital, and several media or technology companies, including Times Mirror (NYSE: TMC), Knight-Ridder (NYSE: KRI), Compaq (NYSE: CPQ), and Adobe (Nasdaq: ADBE). Even News Corp.'s (NYSE: NWS) Rupert Murdoch, the antithesis of the wild-eyed Netizen, wanted to buy the firm, reportedly for $450 million. That was a stunning value for a company with just $5.2 million in unprofitable trailing 12-month revenues. When PointCast didn't embrace Murdoch's offer, some speculated that a Netscape-like rocket-ride IPO was imminent.

And why not? The financial media fawned over the company. In January of 1997, Business Week profiled 34-year old CEO Chris Hassett right next to's (Nasdaq: AMZN) 32-year old CEO Jeff Bezos as among the best entrepreneurs of 1996. A month later, it celebrated PointCast in its February 1997 cover story on webcasting. "We are defining a new medium," Hassett was quoted as saying. "We're the first broadcast network on the Internet." Wow, what's that worth?

The idea behind push is simple. Rather than searching the Web for the info you want, which you then "pull" in via your browser, wouldn't it be better if your PC did the grunt work for you, automatically delivering updates of the cool content you're looking for (news headlines, stock quotes, sports scores, etc.)? This content would either be displayed in real time on the screensaver when your computer is inactive, or stored on the hard drive for later viewing.

Even better, PointCast offered a customer-specific version of the traditional ads that TV pushes at the viewer. Thirty-second spots pitched at a customer with the proper profile are highly effective. For example, The Sharper Image reported that such advertising generated 10 times more sales than its other ads. So with push, consumers benefit from news they can use while the ad folks get to narrowcast their pitch in living color. That's a win-win.

In short, PointCast sounded like a great business with a workable model for turning a profit and all the buzz and connections you could ask for. Yet, as it turns out, only Marc Andreessen, Netscape's wunderkind, had it right. "PointCast," he told Business Week in February 1997, "is going to get squeezed completely out of existence."

Indeed, the PointCast revolution got co-opted after its first full season on the Web's primetime lineup of hot new companies. Push got shoved first by corporate clients who found that the constant downloads bogged down their local area networks. PointCast found a fix for that, but not for innovative solutions generated by the Web itself. Yahoo! (NYSE: YHOO) and others began showing how to do push via the non-proprietary Internet channel. Sure, Microsoft (Nasdaq: MSFT) incorporated PointCast's software with its Explorer browser while Netscape included webcasting technology from Marimba (Nasdaq: MRBA) with its browser. Most of us now use some form of personalized push, like news alerts, to stay on top of things. PointCast's revenues also kept climbing -- to $18 million last year. Still, the company's cutting edge appeal became blunt pretty rapidly.

By June 1997, Hassett was booted from his CEO spot. The board wanted a more experienced leader. Former Pacific Bell CEO David Dorman eventually signed on for the job in October of that year. Since then, PointCast has tried to redefine its niche while raising additional financing. It apparently talked to NBC about injecting $20 million for a 16% stake, valuing the company at $120 million. The company also flirted with going public last summer in a deal that would have valued it at $250 million. But Dorman pulled the plug last July, citing the need to hook up with strategic partners.

The company then signed a letter of intent to work with a group of Baby Bells -- BellSouth (NYSE: BLS), U.S. West (NYSE: USW), and Bell Canada (Nasdaq: BCICF) -- and Microsoft. With cable companies using @Home (Nasdaq: ATHM) to create a broadband portal that might eventually rival America Online (NYSE: AOL), the thinking was that the Bells could use PointCast as an interface for their own high-speed DSL Internet access service. The project, called Newnet, would have joined the Bell's wires, billing, and tech support with a $400 million cash injection and content from Microsoft. The partners planned to acquire PointCast for about $100 million. The Bells even put up $16 million to keep PointCast going while the negotiations continued.

But Microsoft eventually backed out, and BellSouth demurred after the remaining partners failed to win the support of SBC Communications (NYSE: SBC), which soon signed a marketing alliance with AOL. With the writing on the wall, Dorman bailed out of the cash-strapped company in March. On April 1, new CEO Phil Koen announced that a third of PointCast's 220 workers would be let go, as the company was burning $2.5 million a month and had already run through nearly all the Bell money. Koen said PointCast needed to cut its burn rate to $1 million a month and raise another $15 million to $20 million so it could keep afloat while refocusing its business. By April 9, Hassett had himself made a preliminary $20 million bid to take back the company he founded.

Woulda, coulda, shoulda. On May 10, PointCast was acquired by Internet incubator company Idealab, reportedly for between $7 million and $10 million in cash and stock. If that's accurate, it leaves the equity holders with nothing and the outside investors with almost nothing given that they had purchased $72 million in preferred stock as of last summer. In any case, the price tag is a far cry from the billion dollar valuations discussed two years ago, even before Internet stocks habitually traded in the stratosphere. Talk about cautionary tales!

Led by Bill Gross, Idealab has helped found more than 20 Web companies, including the newly public eToys (Nasdaq: ETYS) and (Nasdaq: GOTO). Gross is a logical buyer given that he's the man behind and NetZero, companies that offer free personal computers and Internet access, respectively, to customers willing to subject themselves to "pushed" ads. Idealab reportedly will merge PointCast with Launchpad Technologies. That firm has created the eWallet, an electronic profile technology that makes it easier for consumers to buy goods online.

Today, PointCast has around 1.2 million users plus some 700 content partners, according to Business Week. But quarterly revenue has dropped to just $2 million, and it has yet to embrace a totally Web-centric approach. So while it's still in business, PointCast has managed to fall from Internet darling to also-ran in just over two years. That despite an apparently visionary founder, a presumably seasoned CEO, and the interest of virtually everyone in the not-so-virtual converging worlds of media, technology and the Internet.

It's hard to pinpoint lessons from PointCast's travails, only because there would seem to be so many. But one seems obvious: Things might have turned out differently if PointCast had either gone public sooner, or cashed out to a deep-pocketed partner back in 1997. Part of surviving in a competitive, technology-driven market entails being able to evolve, and that requires resources like access to capital. America Online, Yahoo!, and Amazon have all used their cash and stock to pick up companies that have helped them extend and alter their mission to address new opportunities and competitive challenges. In each case, the executives that led the firms to mainstream success are still running, or at least helping to run, the business.

Then again, maybe PointCast never really had a sustainable business. Or, at least, not a business worth $450 million, or 87 times trailing sales. Yet, dozens of Internet companies now trade at equal or greater market values but with perhaps less justification. These are companies that will never get backed by Benchmark or Softbank; never merit a cover story in Wired or a CEO interview in Business Week; never get looked at twice by a Bell company.

The bottom line is this: PointCast was once as well-connected and buzz-worthy as an Internet company can hope to be. Yet, it was apparently just sold for less than 1x sales. Such things do happen.

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