BLACK DOTCOM SHAKE-UP.

Many Internet start-ups that gambled on a big payoff are now rolling snake-eyes

IT WAS JUST LAST YEAR THAT BRASH DOTCOM upstarts were the toast of Silicon Alley and Silicon Valley. Everyone--from venture capitalists to John Q. Investor--had caught dotcom fever. If you were and entrepreneur with a catchy name and a glimmer of a good idea, money was yours for the taking.

What a difference 12 months make. As many start-ups burned through capital at a phenomenal--and alarming--rate, investors started stepping back. The gamble no longer seemed worth the risk.

Now, when it comes to making a investment in an emerging dotcom, investors ask: "Where's the return?"

Experts say it was inevitable that the tide would turn. And African American-focused Websites have not been immune to the investment community's cold shoulder. One by one, the black and urban Websites that sprang up--fed by venture capital and spurred by technology and the thriving economy--have been forced to close shop or partner with major corporations.

Here are some of the sites that have been shook up by the shakeout:

* In August, BlackFamilies.com ceased operations.

* After an April launch, Onelevel.com pulled the plug on its site in August.

* The launching of HBO's Volume.com has suffered a series of delays.

* In September, hip-hopreneur Russell Simmons finalized a deal with BET.com to keep his 3-month-old company, 360hiphop.com, alive.

* World-renowned historian Henry Louis Gates decided not to go solo and sold his cultural site, Africana.com, to Time Warner for an undisclosed sum.

As industry stalwarts like NetNoir, BlackVoices.com, and BET.com strike deals with major corporations--and the crowded field thins considerably--many question whether, in the future, any money can be made online.

But analysts say that recent events are simply a natural evolution of the space, similar to what was seen in the women's market more than a year ago or among general-market entertainment sites today.

Once the dust settles among African American-focused sites, there'll be one major player in the arena, predicts Ekaterina Walsh, senior analyst at Cambridge, Massachusetts-based Forrester Research. She places her bet on BET.com.

E. David Ellington, NetNoir's pioneering chairman and CEO, puts the number at four, including his own venture, of course. "It's a normal process," says Ellington, who's been in the Internet game since he developed his site in 1995. "There were too many sites that launched without developing a realistic business model, way too many."

Adds BlackPlanet.com's executive director, Omar Wasow, "There are some trends that are about the whole industry, and there are some that are about the black space. For example in the magazine space, there are relatively few that remain independent; most usually join with large entities because of economies of scale."

Another challenge, maintains Wasow, has been "confusion in the market about sites that aren't sure whether they're `black' or `urban.' Those are two different markets. They both have their respective audiences, but some [sites] are trying to appeal to both, and you really can't."

Urban Box Office's (www.UBO.net) co-founder and executive vice president, Frank Cooper, agrees. "One problem is that the term `urban' has been tortured and has been used as a description for `black' and `inner city'--and now it's being used to describe a lifestyle." At the core, says Cooper, it's still African American and Hispanic, but UBO.net's audience is "a multicultural audience that has an interest in urban culture."

Confusion and semantics aside, the reasons for the shakeout are simple: lack of a viable revenue model, failure to identify the target audience, and lack of market intelligence. And with such fierce competition online, it's simply not enough for a dotcom to have a great-looking site with high-end graphics and content--or even thousands of hits. At the end of the day, the name of the game is profits.

Some maintain that the fatal flaw of dotcom entrepreneurs has been a need to "get rich quick" at the expense of developing a plan to create long-term value. Asserts Ellington: "The problem is that they should be thinking more in terms of longevity, rather than building a dotcom, going public, and getting rich overnight."

But Cooper reads a different message in the tea leaves. He believes the fast-paced nature of the industry gives the impression that Web entrepreneurs are just seeking the big payoff. Moreover, the venture capital community isn't just giving away cash (although the burn rate of some sites may make one wonder), they want dotcoms to show returns--and sooner, rather than later.

AN ENTREPRENEURIAL WAKE-UP CALL

Many believe the shakeout is a wake-up call for black and urban sites. They view the trend as an opportunity for the remaining dotcoms to reevaluate their strategies for claiming their share of the multibilliondollar industry (analysts put the figure at anywhere from $550 billion to $800 billion). Key to their sites' survival: an e-commerce component.

"If a site isn't getting banner advertising or building revenue, they'll have to close shop once the investment dollars run out," says Robert Rucker, co-founder of BlackWebPortal.com, a business-to-business hub and marketplace for black-owned businesses, which launched in 1999.

Clearly, that fact is sinking in. Emerging dotcoms are learning from the mistakes of their predecessors. For instance, hip-hop-oriented Hookt.com recently teamed up with rap mogul Scan "Puffy" Combs to hawk his Scan John clothing line as well as music from artists on his record label. Combs is expected to gain an equity stake in the company and serve as a member of the company's advisory board. And BlackVoices.com, a venture owned by Tribune Co. and run by black digerati Barry Cooper, has just inked a three-year, $10 million to $15 million deal with General Motors Corp. that will not only make e-commerce available to BlackVoices.com visitors but provide a wider, more affluent market to GM. The deal will include scholarships, sponsorship of the site's offline publication, BVQ, as well as original programming on the site.

As for the much-hyped 360hiphop.com, Russell Simmons' deal with BET.com provides the site with the element that it has lacked thus far: entree into the young, hip hop/urban space--and some much-needed street cred. Moreover, the acquisition comes at a time when 360hip hop.com has been burning through its cash at a rate of $1.5 million a month, according to industry insiders. So, just how will the deal be structured? BET.com and 360hiphop.com will function as one unit with "integrated teams." Translation: Simmons will have to lay offmore employees. Prior to the acquisition, Simmons had already cut about 30% of his staff.

UBO.net has not been spared its share of growing pains. The site was launched by Cooper, the late George Jackson, and Adam Kidron last July after a year of planning and an infusion of $37 million in financing from such venture firms as Flatiron Partners and the New York City Investment Fund. Like other newly minted dotcoms, the site has been immersed in turmoil, including tight cash flow, staff defections, and marketing missteps such as its now infamous--and expensive--launch party on Ellis Island.

So while the remaining sites reposition themselves and jockey for more investment dollars and partnerships, the issue of profitability remains.

OPERATING IN A NEW ENVIRONMENT

The common scenario for these dotcoms has been that they spend loads of dough before figuring out how to make it. In fact, even the most popular `urban' entertainment sites have become cash-strapped within months of a launch.

Take DME Interactive. Last year, Darien Dash, CEO of 5-year-old Digital Mafia Entertainment, transformed his privately held Internet services firm into a company publicly traded on the Nasdaq exchange. (DME was listed after it acquired the assets of Pride Automotive Group, a publicly traded automotive leasing company, in a transaction known as a reverse merger.) Shortly after going public, the company, which received much fanfare, and enough credibility to ink a multimillion-dollar deal with AOL Inc. and CompuServe Interactive Services Inc. to launch Places of Color, an urban Internet access community. Yet just a few months later, rumors began to circulate that the company was in trouble. The rumors were confirmed by the third quarter of this year. SEC filings revealed that as of June 30, DME had only $27,222 in cash. During the summer, the cash-strapped enterprise laid off 60 employees--and halted plans to launch Places of Color and Fan4Life.com.

DME and other dotcoms are operating in a far more discriminating environment. Cooper believes the current shakeout will bring more instability to what was an increasingly segmented space and "force companies that don't have a sustainable business model out of the marketplace."

He adds, "Now, venture capitalists are stepping back and waiting to see whether companies are viable before they fund them. Given those constraints, the question is, `How do you generate traffic and show a profit?'"

Rucker believes the failure to pay attention to the true demographics of the African American community is yet another hurdle the dotcoms face. "There are people in the 35- to 60-year-old market who buy homes and cars, go on vacations, take cruises, and have money to spend," he says. "Not everyone in the African American community is `urban' or `ghetto.' The African American population is getting older and more affluent; and these sites are just not leveraging that and marketing to the [black] middle class."

Ellington agrees. From the beginning, NetNoir has focused on attracting affluent African Americans in the 25- to 54-year-old segment. "[NetNoir] targets black people who are educated, have money, and own homes," says Ellington. "We were not trying to be a hip, cool urban crossover site. If you can build an Internet business model for the 14- to 25-year-old group, I applaud you, but that is not our focus." Currently, AOL holds a 15% share and Radio One owns "slightly less," says Ellington.

Counters Forrester's Walsh, the focus on a target demographics is one reason many of these sites will not survive. "Income, education, age, similar interests and background play a greater role in determining a site's success than race or ethnicity," she says. "The assumption is that people who share the same ethnic background and race share the same interests, but you can't do that. It's arrogant and ignorant."

Meanwhile, Wasow believes conversation is king. More than 95% of BlackPlanet's traffic is generated by members who interact with one another, says Wasow. The site's revenues come from "banner ads, sponsorships, and a variety of campaigns." Unlike other sites in cyberspace, he maintains, BlackPlanet.com has lower operating costs because it's not focused on building expensive content. Because the high-bandwidth content of entertainment-oriented sites is costly to produce, they have been forced to find a corporate partner with deep pockets or shut down. "It takes a lot of technology to run these sites, so it's very expensive to build all the technology for just one site. They're also finding that a lot of the high-end stuff just doesn't work for many people who have slow dial-up connections."

But Cooper says relative to television or motion pictures, UBO.net's content is "a fraction of the cost. Animated content is about one-tenth the cost of an offline piece," he says. But the reality is that compared with, say, BlackPlanet.com, which is community-based, entertainment sites like UBO.net and Hookt.com are producing expensive content.

THE POWER OF BRANDING

The consensus seems to be that lack of business savvy and insight into the online audience have prevented these companies from making money. But Cooper disagrees: "The major challenge right now is to preserve cash and grow at the same time. Until April, most of these companies were focused on building traffic without generating revenue." Additionally, he counters, UBO.net has "multiple sources" of revenue. "We develop content for distribution television, satellite, and wireless" he adds. "We have an extensive strategic research department devoted to understanding the urban market."

But will that translate into profits? And how will these sites fare against branded sites operated by such mainstay media companies as BET, Johnson Publishing Co. (which owns Ebony and Jet), Essence Communications Inc., and Earl G. Graves Ltd., which publishes BLACK ENTERPRISE. These companies own household franchises that have already established niches and customer bases.

Cooper doesn't buy that argument, though. "In the short history of the Net, that hasn't necessarily proven true," says Cooper. "Large, branded companies, although they have the name recognition, tend to have blind spots and aren't able to move as quickly to address changes."

The shakeout of black dotcoms isn't just an issue of content versus commerce. It's a question of market savvy--and common sense. In the age of Internet economics, the "if you build it, they will come" mentality no longer applies. "There's likely to be further carnage in the space," says Cooper. "Sites that have the ability to preserve their cash and grow their audience are the ones that will survive."

STATUS OF BLACK-FOCUSED WEBSITES

SITE                     LAUNCH DATE   STATUS

africana.com            January 1999   Acquired by Time Warner in
                                       September 2000; will be part
                                       of AOL site

afronet.com                     1995   Black-owned

blackfamilies.com       January 1999   Owned by Cox Media;
                                       closed August 2000

blackplanet.com       September 1999   Produced by Community
                                       Connect, which also backs
                                       asianavenue.com

blackvoices.com                 1997   Produced by Tribune Co.

blackwebportal.com     November 1999   Black-owned

blackworldtoday.com        July 1996   Black-owned

netnoir.com                June 1995   Black-owned;
                                       AOL holds 15% stake

ubo.net                    July 2000   Black-owned;
                                       Privately held

blackenterprise.com     January 1996   Black-owned

bet.com                  August 1999   Black-owned;
                                       partnered with Microsoft,
                                       USA Networks, News Corp.,
                                       and Liberty Digital

ebony.com              February 1997   Black-owned

essence.com                Late 1995   Black-owned;
                                       In partnership with Time
                                       Inc. publications

                        VISITS
SITE                  PER MONTH

africana.com          575,000

afronet.com           436,000

blackfamilies.com          NA

blackplanet.com       439,954(*)

blackvoices.com       250,000

blackwebportal.com    138,810

blackworldtoday.com   300,000

netnoir.com           250,000(**)

ubo.net               500,000

blackenterprise.com   500,000

bet.com               800,000

ebony.com              72,487(***)

essence.com            77,656(***)

EXCEPT WHERE NOTED, NUMBERS WERE PROVIDED BY THE COMPANIES.

(*) MEDIA METRIX RATING

(**) UNIQUE VISITORS PER MONTH

(***) DOUBLECLICK DART