February 22, 2000 8:00 AM PST

Digital Entertainment: Everything that can go wrong...

In the wake of yet another managerial shakeup, Digital Entertainment Network, a Santa Monica, Calif.-based developer of original Internet programming, has scrapped its $75 million initial public offering and initiated some serious restructuring.

Earlier this month, DEN filed with the Securities and Exchange Commission to withdraw its initial public offering, originally filed in September. The company was set to trade under the ticker "DENX." Credit Suisse First Boston was to be the offering's lead underwriter.

But things unraveled quickly, starting with the departure of founder Marc Collins-Rector who resigned in October after settling a civil suit alleging he sexually abused a 13-year-old boy.

In came Jim Ritts, former head of the Ladies Professional Golf Association and a leading executive at ChannelOne.

But the hasty reshuffling did little to change DEN's fortunes. At the time of its IPO filing, the company said it had more than 140 employees, no revenues and a loss exceeding $27 million.

Analysts questioned how a company that develops broadband TV-style shows and short films could afford to pay seven-figure salaries to top executives while absorbing the expensive costs of producing original content.

In the meantime, DEN's headcount swelled to around 300 employees.

"One of the biggest problems for DEN is the reality that we're still living in a narrowband world that's not quite ready for entertainment to be delivered over the 'Net," said Patrick Keane, an analyst at Jupiter Communications, based in New York City. "There isn't an audience for this yet considering that only about 5 percent of the people online use a DSL or cable modem connection."

On the same day DEN shelved its IPO, it announced that Ritts and chief operating officer Bruce Gamache were on their way out.

Greg Carpenter, who cut his teeth at Microsoft and served as DEN's chief technology officer, assumed the CEO duties while former Capitol Records President Gary Gersh, who had led DEN's music division with partner John Silva, now serves as its chairman.

Carpenter said the company has already landed $14 million in sponsorships this year and is in the process of reducing its headcount and slashing salaries.

"It makes sense to get our business model more inline with that of an Internet startup," Carpenter said. "There are a lot more people in this space now so we'll be doing more outsourcing and looking to acquire content from other sources."

DEN still plans to develop short live-action video features for the Generation Y market between the ages of 14 and 24, a group that's essentially grown up on the 'Net and has the expendable income that makes advertisers salivate.

The company is clearly distancing itself from Collins-Rector, who also founded Concentric Network Corp. (Nasdaq: CNCX). At the time of the IPO filing, Collins-Rector held more than 56 percent of DEN's shares.

Carpenter said that figure has been reduced and that "he has nothing to do with the company."

While the concept of delivering digital entertainment over the Internet is still in its infancy, DEN hopes to capitalize on the estimated 7 million college students who have broadband access.

However, DEN still has some believers.

It received $24 million in investments last week from Chase Capital Partners, Enron Broadband Services and Intel, bring its total raised to more than $65 million. Sources close to the company said it's also negotiating for an investment from NBC.

DEN already has the backing of Microsoft (Nasdaq: MSFT), Dell (Nasdaq: DELL) and former Warner Bros. Studios co-head Terry Semel, who sank $2 million into the venture.

"People need to see the passion and direction of our management team," Carpenter said. "Our audience has changed over time. Now we have to work on adjusting the content to the audience.">

 

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