The Worst Investment Ever Made

Tuesday, 15 March 2011 16:54 by The Lunatic

The height of the “dot com” boom was a pretty crazy time for investors; venture capitalists were investing huge sums of cash with any entrepreneur who could type the word “internet” without using a spell checker. People made some really BAD investments and only a few of the startups from that period are still operating today.

But there’s one deal that really takes the cake. This acquisition was so absurd in its reasoning and so insidious in scale that I’m surprised the story hasn’t been made into a Hollywood feature film.

Let’s back up a few years, to 1996. This was the year that yours truly joined a small internet startup called VXtreme, an early pioneer in streaming video on the web. VXtreme had actually developed a viable technology and we created what was arguably the best streaming video platform (codecs, encoder, player, server) in the world at the time.

Remember that in 1996, people were connected to the internet with 28.8Kbps modems – or if you could afford it, you might have one of the spanking new 56K modems.  Whoo-Hooo! Blazing fast internet it was, indeed. Delivering real time streaming video over such a connection was problematic at best – but it was SO exciting to see a media player embedded in a web page, rendering real time video with a resolution of 160x120 pixels at a whopping 15 frames per second refresh rate! We were truly on the bleeding edge.

In just over ten months, we built the company, produced the product, engaged a bunch of high profile customers, and sold the whole thing to Microsoft for about $74 Million (and to set the record straight, I was not one of the founders or shareholders – just a “late hire” marketing manager, with options that were only worth about 1/10th of 1% of the company).

It was a fair valuation for VXtreme.  Our technology was merged in with the “NetShow” product that Microsoft had been struggling with, and the platform was eventually renamed “Windows Media”. Even today, the Windows Media Player, Windows Media Audio/Windows Media Video file formats, Silverlight, and the VC-1 Codec used on high definition Blu-Ray disks, are all descendants of the base technology developed at VXtreme in 1996.

VXtreme was NOT the worst investment ever made. I’m getting to that.

One of our customers was a small company called AudioNet.  Right around that time, AudioNet changed their name to Broadcast.com – since they started streaming video as well as audio they didn’t want to be pigeonholed with an “audio” name – and they wanted to be the portal for broadcasting media on the internet.

Do these names sound familiar?  Probably not, they are long forgotten by now.  If you haven’t heard of AudioNet or Broadcast.com, you’ve probably heard of their CEO.

In 1997, before VXtreme was acquired by Microsoft, our CEO went to visit their CEO. Our CEO made the suggestion of a possible merger. It could have been a great fit; the best backend software platform and the content delivery portal rolled into one would have been a heck of a combination.

But the CEO of Broadcast.com wasn’t that interested in such a deal.  It was too much trouble. “Frankly,” he said, “all I want to do is make at least $30 million so I can retire and watch basketball.”

Hmmm ... so he likes to watch basketball. Does that give you a clue?

The CEO of Broadcast.com was not the founder of the company, and he was not a technology guy. In fact, he was completely clueless about the actual technology behind streaming video. But he had sold his first company, MicroSolutions (a fairly successful systems integration and software reseller) to CompuServe, and walked away with about $2 million in his pocket after taxes. It was enough to resurrect a dying company called Cameron Broadcast Systems, rename it (first to AudioNet, then to Broadcast.com), and set himself up as CEO.

Two years later, in 1999, Broadcast.com was acquired by Yahoo ... for $5.9 BILLION.

You heard me right: 5.9 BILLION UNITED STATES DOLLARS!

And who was the mysterious CEO of Broadcast.com?

His name is Mark Cuban – he became a household name when he used the profits from the sale of Broadcast.com to purchase the Dallas Mavericks basketball team (and a number of other high profile investments).

So how did a struggling company with a measly $13 million dollars in gross sales, who’s CEO would have been very happy with a $30 Million valuation two years before, suddenly become a six BILLION dollar company???

Part of it was due to the fact that it was the middle of the Dot Com bubble, and people just weren’t thinking right.  Part of it was that Yahoo wanted to be in the “Media” business – whatever that meant – and they were eager to snatch up the only “Media Portal” before anyone else did.

But mostly, the Yahoo executives were amateurs and got bamboozled by a fast talking CEO who made all sorts of promises that he never delivered on. The Broadcast.com business unit immediately floundered under the incompetent Yahoo management, and today both the AudioNet and Broadcast.com web addresses unceremoniously forward to the homepage of Yahoo. It was a total bomb from day one.

At the absolute very most, Broadcast.com was worth maybe $50 to $100 million – and only then if it was paid out over five years, contingent on the management team meeting strict performance targets. After all, they had no technology of their own – they purchased everything that made their system work from companies like VXtreme. They had no profits, the $13 million in gross income barely paid their bills. What they had was a catchy domain name, a fairly good reputation, and a small handful of cash-paying customers.

Yahoo paid $5.9 billion dollars ... for a domain name ... which they did nothing with ... making Mark Cuban and his business partner Todd Wagner into instant billionaires ... without any accountability for the ongoing success of the business.

And THAT’S why I give it my vote for the worst investment ever made.

I’m surprised that there wasn’t a shareholder lawsuit against the Yahoo board of directors; I can’t imagine a more blatant misuse and unconscionable dilution of shareholder equity.

To put it into perspective how ludicrous the price was, a few years later when streaming video finally became ubiquitous, Google acquired YouTube for $1.65 Billion – less than a third of what Yahoo paid for Broadcast.com! (and making the Microsoft acquisition of VXtreme – a company with real technology and a professional management team – look like an absolute BARGAIN at $73 million!)

I had two personal interactions with Mark Cuban after that. About six months after Yahoo squandered their shareholders wealth on such a horrid acquisition, Mark and I were both invited to speak at the “Streaming Media West” trade show in Los Angeles. I was a Product Marketing Manager at Microsoft at the time, promoting the Windows Media technology platform, and my talk was scheduled immediately after Mr. Cuban’s. We had a chance to chat for a few minutes before he went up on stage.

Now don’t get me wrong, the purpose of my blog isn’t to make personal attacks on individual people – but Mark Cuban’s speech was abysmal. His PowerPoint slides consisted of hastily thrown together black text on a plain white background.  And even though he was now a billionaire, he somehow couldn’t find someone to go through and spell check his presentation. But besides the bad slides, he just didn’t make any sense.  His talk was unfocussed, his presentation skills were high school level at best, he got sidetracked a few times and then realized he wasn’t following his slides – so he’d just stop in the middle of what he was talking about and switched back to the topic on the PowerPoint. And he really didn’t say anything meaningful about streaming media that the 2,000 people in the audience didn’t already know. Frankly, I was embarrassed to go up on stage after him for fear that I would be associated with his presentation. It was really hard to get the crowd’s attention when everyone was rolling their eyes, wondering if they could slip out without being noticed.

A few years later, after I had transitioned from marketing into Business Development at Microsoft, I had a meeting with Mr. Cuban to talk about Digital Cinema.  George Lucas had filmed Star Wars Episode II: Attack of the Clones completely in a digital format (the first ever feature movie to be shot completely digitally) and select movie theaters were outfitted with digital projectors for the premiere.

We were really interested in Digital Cinema, so my team at Microsoft rented a movie theater in Seattle and did a “split screen” test – comparing a movie with a standard film projector on one side of the screen, and a digital projection from a high definition Windows Media file on the other side. It was amazing how much better the digital projection looked. Although film has higher overall resolution, the “sprocket slop” makes it so that each frame moves around just a tiniest bit – effectively reducing the resolution and blurring the picture. And each 35mm film master cost $40,000 to process, plus it cost a bundle to ship each print to the theaters. A Windows Media file could be distributed on a DVD. The writing was on the wall – Digital Cinema was the way of the future.

By that time, Mark Cuban had purchased a movie theater chain, Landmark Cinemas, and we (Microsoft) wanted to establish Windows Media as the standard delivery format for Digital Cinema. It was an ironic repeat of the earlier encounter with my old CEO from VXtreme – Mark Cuban had the content and we had the delivery technology. Our proposal was to install the new “dark chip” DLP projectors in Landmark theaters (at a cost of about $120K each, which we would help fund) and use them to showcase all the new movies that were being shot digitally. As before, the talks didn’t go anywhere.  We did get Windows Media (officially called VC-1) adopted as a standard codec for HD-DVD – and subsequently, Blu-Ray – but we lost the battle for Digital Cinema.

So here we are in 2011, and after seeing the clips of the Oscar nominees they played during the broadcast of the Academy Awards, I broke down and watched The Social Network a few days ago. I don’t know how accurate the story really is, but I couldn’t help but notice that the movie was based on a book called The Accidental Billionaires. Even if Mark Zuckerberg really is the arrogant asshole portrayed in the movie, at the very least he has superb technical skills, marketing vision, and really has created a global phenomenon which has some intrinsic value that could be used to justify his billionaire status.

Mark Cuban has no such skills and built no such company. He just got lucky – he is the true “accidental billionaire”.

Categories:   Economics | Miscellaneous | Science
Actions:   E-mail | Permalink | Comments (3) | Comment RSSRSS comment feed

Comments (3) -

March 16. 2011 01:09

David,
An excellent side note on the "lunacy' that occasionally infects elements of our economy and population.  If we broaden your definition of investment...I suggest that the USA's investment to date in Afghanistan is really The Worst Investment Ever Made.  Thanks for the cool history lesson on streaming media as well.  Doug

Doug

March 16. 2011 10:51

Yes, that should be a movie.

I liked Social Network a lot, partly because I like Aaron Sorkin a lot. There was a lot of "rearanging" of facts in it, if you go even skin deep, but the basic ideas were accurate, and, yes, even if the guy was an asshole, he knows a thing or two and got some very good advice.

Geoff

Geoff

March 16. 2011 14:17

Doug - good point ... gotta agree that the war in Afghanistan is a complete waste of time and money, but that's a whole different subject.

Also forgot to mention ... the high definition streaming technology that Netflix uses is also based on Silverlight (VC-1). It's still the best codec out there Smile

The Lunatic

Add comment