Dotcom distress.

The downturn in the cyber economy is leading gay Internet firms to develop new strategies for survival

In March 2000, lesbian and gay media giants PlanetOut and Liberation Publications unveiled a merger agreement that would have created the country's largest lesbian and gay media company. But on March 8 of this year, they announced the marriage was off. PlanetOut is a leading lesbian and gay Web site. Liberation Publications publishes The Advocate, Out, and HIV Plus and owns lesbian and gay book publisher Alyson Publications.

The end of the merger talks underscores the changing fortunes of gay Internet companies. Like all Net firms, gay companies have suffered from the precipitous decline in the cyber industry. Investment capital in general has become much harder to come by since the heady days when nothing with a dotcom after its name could seem to go wrong. The drive to make a profit has replaced the urge to grow at whatever cost, and the sudden extinction of dozens of Internet companies has chilled the atmosphere. The companies that remain standing, including the gay firms, are having to develop a strategy that will allow them to survive the industry shakeout and emerge stronger on the other side of it.

The changing economic environment was one of two major factors that significantly altered the deal between LPI and PlanetOut. "That's certainly one reason we stepped back," Jim Franklin, president of LPI, says.

Furthermore, eight months after PlanetOut declared its intention to merge with Liberation, it also announced plans to unite with Online Partners, owner of former rival Gay.com. That merger was expected to be complete by the end of March. The new company will be called PlanetOut Partners. "It's important for them to focus on conserving their resources and managing the new company," Franklin says.

Neither Franklin nor Megan Smith, former CEO of PlanetOut and president of PlanetOut Partners, would discuss the details of the canceled merger between Liberation Publications and PlanetOut. Smith would say only that about one third of the proffer--which she estimated at $30 million--to Liberation had been for cash. The remainder took the form of shares in PlanetOut.

But "with dotcom valuations as dreadfully low as they are these days," says Rachel Terrace, an analyst with Jupiter Media Metrix, a New York City-based research group that studies Internet commerce, "equity in PlanetOut is virtually worthless. Its value at the bank isn't going to come anywhere close to what it is on paper."

Like multitudes of dotcoms, PlanetOut and Gay.com have, until now, survived on the good graces and big bucks of investors. Combined, the two have garnered almost $60 million in funding in the past few years, Smith says. She refused to say how much money the two had raised through revenues other than fundraising. And neither Smith nor Lowell Selvin, former CEO of Online Partners and now CEO of PlanetOut Partners, would say how much money remains in the bank. But both companies have spent freely. Last year alone, for example, analysts estimate that PlanetOut shelled out about $12 million in advertising and distribution.

One sign that the new company is working to rein in overhead costs came in February, when 29 of 126 PlanetOut and Gay.com employees lost their jobs. Selvin says he hopes no more layoffs will be necessary, "but there are no guarantees."

In recent months the stream of capital previously gushing to Internet businesses has slowed to a trickle, and the Internet economy now sees dotcoms crashing daily. Gone are the days of huge cash infusions for companies that can't turn a profit. "Gay and lesbian Web sites are suffering like everyone else," Terrace says. Indeed, investors in PlanetOut Partners have demanded the company turn a profit by year's end.

That's no problem, according to CEO Selvin, who says a new round of fund-raising to be announced in the coming weeks would "put us into profitability and beyond." He would not state the amount of funding or its source. Still, Selvin admits, "funding isn't the answer. Generating cash and profits is the goal."

PlanetOut Partners has four ways of making money, he says: About 70% of the company's revenue comes from advertising, events, and sponsorships; about 15% from selling goods through its E-commerce arm, kleptomaniac.com; another 10% from online services such as paid personals; and the remaining 5% from publishing interests, including the gay travel newsletter "Out & About." In the future, says Selvin, he expects the percentage of the company's money coming from advertising to shrink, and the amount it makes from paid subscription services to expand "significantly."

PlanetOut now charges $9.95 per month, or $39.95 per year, for its premium personal ads. Selvin says PlanetOut Partners is researching how it might charge for "enhanced" chat room services that, say, connect subscribers by audio and video. The company is also developing subscriber directories that might, for example, allow paying members to download club listings or city gay guides. "Research on our site has told us people are willing to pay for these things," he says.

But Internet analysts say that convincing people to spend money for content is an uphill battle. "They are trying to develop paid content," says Jupiter's Terrace. "In the past, paid content on the Web has just not proven very successful. People expect a lot from the Internet for free." Until the public's expectations change, she doubts if paid services can support large enterprises like PlanetOut and Gay.com. With most companies hacking away at their Internet ad budgets and the economy cooling considerably, Terrace generally characterizes as "abysmal" the prospects for ad-based Internet companies to turn a profit. The same week PlanetOut and Liberation Publications announced their merger was off, money spent on Internet advertising dropped another 8%.

"Internet advertising is a scary place to look for revenues," agrees Carl Pritzkat, cofounder of Mediapolis Inc., a New York City Web engineering and software development firm that produces DataLounge.com, a gay Web site. Dotcoms garner a mere penny per ad from banners and other popular forms of Internet advertising, he says. He would not discuss DataLounge's revenues but said it is profitable thanks to its sister service, a dating site known as Edwina.com that costs $7.98 per month. "The difference between something like DataLounge and PlanetOut is scale," he says. DataLounge has a single paid editor, limits its content to news and gossip, requires no additional housing beyond Mediapolis's offices, and has almost no overhead costs. Its advertising budget is nonexistent. The site claims to draw 500,000 unique visitors each month.

Other lesbian and gay Web sites are doing similar things to survive. "Until we picked them up, GayWired and LesbiaNation depended on investors for their financing too," says Ken Stanton, vice president of sales and marketing for GSociety Inc. In addition to the two Web sites, GSociety owns a video distribution business to gay bars and clubs as well as a publishing business. Also, the Web sites partner with gay and lesbian businesses to sell products online. Stanton admits that GSociety's other businesses have shored up GayWired and LesbiaNation, but insists they are the core of the company, since they are the tools to reach customers. Stanton says GayWired has witnessed a 300% growth from December 2000 through February, to 500,000 unique visitors per month, while he claims that LesbiaNation has seen a 600% increase, to 200,000 unique visitors per month. And GSociety's revenues, he says, have doubled every month for the past six months. He says the company is "so close to profitability, we can taste it." He expects to get more than a taste within nine months.

Other gay and lesbian Web sites, though, have all but given up on profits. "We used to dream of being bought and making our riches off the Internet," laughs David Foucher, president and CEO of Gayaway.com, a gay and lesbian travel site. Attempting to survive, the company, founded in 1996, has changed its business model three times. Today, he and his coworkers--all of whom have other jobs to pay their bills--stay in the business as a labor of love. "Now that we're resigned to not making profits, we're not letting it burn holes in us anymore either."

Despite the gathering clouds on the dotcom horizon, however, some hardy companies are likely to weather any storm. PlanetOut Partners, which claims 3.8 million unique visitors per month, is determined to be among their number. "Right now, being in the dotcom world is like a game of Survivor," says PlanetOut Partners' Smith. "And just like Richard Hatch, we're committed to showing gays and lesbians can win."

THE ADVOCATE POLL SPONSORED BY SAAB 

Have you ever registered as a member of a gay or lesbian Web site?

Sign on To The Advocate's Web site before April 24 to cast your vote and leave your comments. Results will appear in the May 22 issue.

www.advocate.com

Find more on the future of gay and lesbian Internet firms at www.advocate.com

Dahir also writes for the Industry Standard, Time, and Redbook.