DEN: The Party's Over

SAN FRANCISCO (05/21/2000) - After two sizable rounds of funding, three relaunches and one major management overhaul following a major scandal, the Digital Entertainment Network has given up the ghost, sources said.

Management threw a closing-down party Tuesday night for remaining DEN staffers at Toppers, a restaurant at the top of the Radisson Hotel in Santa Monica, Calif. The mood was surreal, said one attendee. "People were drinking heavily," he said. "[DEN CEO] Greg Carpenter said, 'It's over.'" DEN executives did not return repeated calls for comment, but a source close to the company who requested anonymity confirmed that the company had laid off its employees on Wednesday night and said that it would probably file for Chapter 7 bankruptcy.

"DEN is pretty much done," he said. DEN ran into trouble when the $24 million it raised in February ran out and a bridge loan from Chase H&Q fell through.

Several news reports and several sources said Credit Suisse First Boston had been retained to find the company a buyer.

Companies such as WireBreak and Sony held discussions with DEN about a merger or acquisition scenario. DEN officially launched last fall, with content targeted at the Gen Y demographic, including live-action TV-quality shows like Redemption High for Christian youths and Frat Ratz for the college Greek set.

DEN endeavored to create technology that would allow its shows to be easily viewed on the Net, but the player it developed never managed to outpace users of Windows Media Player and RealPlayer on its site.

In February, the company announced a $24 million round of funding that was led by Chase Capital Entertainment Partners and included Enron Broadband and Intel.

That announcement came on the heels of $30 million raised last year from Chase (then in partnership with indicted asset manager Dana Giachetto's Cassandra Group), Dell, Microsoft and executives at Lazard Freres, an investment banking firm based in New York.

Two weeks ago, the New York Post reported that DEN had run out of money and that investors were unwilling to put any more money into the company, preferring instead to seek a merger or acquisition partner. One investor, who asked not to be named, last week called the report "pretty much accurate."

Wednesday, one DEN board member said the company was continuing to seek "all avenues to raise additional money or find an appropriate buyer or sale partner."

Tell that to DEN employees, who received their last paychecks on Monday -- not that they couldn't have seen it coming. DEN's first blow came last fall, when its founder and former CEO, Marc Collins-Rector, was accused of sexual molestation by a young man. Collins-Rector, who previously founded Concentric Networks in 1991, settled out of court and resigned from the company. Jim Ritts, a former Channel One and Ladies Professional Golf Association executive, was then named CEO. Further disruption occurred last fall when DEN's S-1 filing revealed that the company's president, former Walt Disney Television executive David Neuman, earned an annual cash salary of $1 million, extremely high by Internet standards.

It also revealed that Collins-Rector had personally funded the company for a 45 percent ownership stake. That fall, DEN investors came down on the company for its indiscretions and worked rigorously toward "correcting all past sins," as one investor put it. In January, the site was relaunched, 140 of its 300 programming and production staffers were laid off, and Ritts, who had his own ideas about where the company should go, was replaced by DEN's CTO, former Microsoft exec Greg Carpenter. Ritts has since joined Primedia. Then the company pulled its IPO plans, and DEN's traffic continued to languish because of broadband limitations -- only 5.8 million U.S. households have broadband access, according to Forrester Research.

Also, DEN's content failed to create any real stir. Meanwhile, the company was blowing through cash as it continued acquiring content, such as Mondo Media's "Like, News" and signed director Steve Oedekerk to create more original content. Although DEN officials maintained that they were trying to change the way entertainment was created and consumed, they continued to behave much like big studios with lavish budgets. "They still spend money like crazy," a source close to the company said last week. "They shoot stuff, and nothing ever happens. And they're still taking expensive trips to New York."

Maybe that's why DEN continued to attract Hollywood heavyweights like Frank Mancuso, former CEO of MGM. And as recently as March, NBC announced that it had taken a stake in DEN. Still, DEN scandal rumors flourished. Several sources say that a "whistle-blower" call to Macromedia alerted the Silicon Valley developer of Flash technology that DEN had created dozens of illegal copies of Flash. One source said Macromedia was seeking $45 million in damages.

Macromedia did not return calls for comment. Another tale from current and former employees involves a production manager in charge of inventory who was embezzling goods, services and cash to fund his own production project. DEN officials could not be reached for comment on the rumor.

Despite DEN's troubles, one former employee says there haven't been any major morale problems. "To a tech guy, it's great," he says. To be sure, if DEN has any assets at all, they're in the technology department. One source close to the company says DEN's method of encoding video to turn it into an easily deliverable digital asset is one of the best he's seen in the industry. Other online entertainment ventures that create original content are also facing financial troubles. LoadTV, based in Hollywood, has laid off 42 people -- about half its staff -- as part of a move away from developing LoadTV "shows" for clients like Death Row Records and Gear Magazine. Instead, sources say, the company, which is under new management, will become a business-to-business play and offer a video-download technology for corporations.

New clients might use Load technology to stream sales presentations to representatives in the field. Jack Kennedy, LoadTV's new CEO, comes most recently from Teledesic. As part of his plans to reorganize the company, he dismissed former CEO and founder Morgan Warstler, who had a reputation for being a celebrity-seeker and hothead. Warstler could not be reached for comment, but President Matt McFee confirmed the layoffs. However, McFee said the company would continue a two-prong consumer- and business-focus approach.

In New York, On2.com, a streaming video technology developer, let five people go who had produced original, TV-quality programming to showcase On2's technology. The original content that the company will now produce will have more of a Web quality, according to COO Randy Cohen.

Entertaindom, the Warner Bros. online entertainment venture, is in a holding pattern as it weathers the transition of new ownership under AOL. Last month, its top three execs left: Jim Moloshok, president; Jim Banister, executive VP; and Jeff Weiner, VP of planning, development and administration.

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