High Anxiety The days of wine and IPOs of six months ago a fading memory, L.A.'s dot-coms are suddenly fighting for their livelihoods. September, 2000 John Collier should be basking in this moment. Standing on a red carpet, his face lit by banks of swiveling klieg lights, Collier watches as a pair of sweet young things in snakeskin pants glide through the front door of the West Hollywood nightclub rented out tonight for the launch of Icebox, an animation Web site he dreamed up a year ago while sitting at a kitchen table with an old Harvard writing buddy. "Everything about this is bigger than we ever planned," says Collier, one of Icebox's four cofounders and a television writer whose credits include The Simpsons. "We planned on getting 8 writers to contribute -- we ended up getting 60. We planned on raising a million. We got $17 million." Inside, a whirlpool of Web-shop workers, development execs and animators swirls around a 10-foot-long ice statue molded into the company's logo. Run-D.M.C., hired as the evening's entertainment, plays for a packed house of 1,300 from the entertainment and Internet arenas -- EarthLink founder Sky Dayton is nibbling a stick of satay across the room from Rod Stewart; Tori Spelling is lounging in the back near Mike Judge. The bar is open, the hors d'oeuvres are plentiful, and the guests are madly cross-pollinating. Collier is showing few signs of satisfaction. In fact, he's looking downright depressed. "I would have preferred to charge admission for this," he says. "I see an open bar and my heart just stops." Call it a symptom of the new Internet anxiety. All across L.A., Internet execs who just months ago were posing for Helmut Newton portraits and pontificating on their part in the information revolution are suddenly scrutinizing bar tabs and retooling business models. Meanwhile, capital is fast drying up on a whole category of locally produced Web attractions that were billed as the beginning of a new era of interactive entertainment. "We knew the bubble was going to burst sometime," says Web consultant Liz Heller, doyenne of L.A.'s digital set and former vice president of new media at Capitol Records. "All we talked about before April was `When's it going to happen?' Then it happened, and we were all, like, `waaaaaah!'" The meltdown of the Nasdaq in April marked a turning point for the whole wired economy, but nowhere has the depression been felt more keenly than in the region boosters call "the digital coast." That's because the very things that Hollywood is so good at -- spending money! looking fabulous! making mediocre television! -- have suddenly become big no-no's in the world of new media. Frugality is in, along with a concept altogether absent from most Web sites spawned in the image of Hollywood: profitability. And just as fast as they have popped up, L.A.'s dot-com enterprises have been scaling back or biting the dust. The Web broadcaster Digital Entertainment Network was first to go, flaming out in March amid lurid tales of mismanagement, profligate spending and a lawsuit alleging that the founder molested a teenage boy. Farther down the coast, the founder of the San Juan Capistrano start-up Pixelon was ousted after hosting a fall-of-Rome launch party that cost upwards of $15 million (it didn't help that he was later exposed as a convicted con artist and fugitive wanted by authorities in Virginia and Tennessee). Then there are the more mundane cutbacks and consolidations, claiming such previously red-hot L.A. start-ups as eToys (which saw its stock plummet from a high of $84 per share to a lowly $6), FasTV (which closed suddenly in July and laid off its entire staff), Sony's on-line game division (which laid off 60 Los Angeles workers), eParties (which closed its Santa Monica office) and LOADtv (which laid off 42 people). Amid the open-plan workspaces of L.A. Web shops -- which have lately gone from funky and cheerful to creepy and oppressive -- watercooler chatter has turned from stock options to severance packages. "The Web is turning out to be Hollywood's Vietnam," says David Wertheimer, a former executive at Paramount who heads the entertainment site WireBreak.com. "You've got a lot of people who came in with no idea what they were doing and got beaten up badly. Now they're retreating and claiming victory." So now that prickly skepticism has set in, what's a pumped-up Hollywood dot-commer to do? Some industry refugees have cut their losses and fled back to jobs they ditched to join the gold rush, or headed north to more stable and less sexy outfits in Silicon Valley. Those staying the course are eliminating perks, shelving plans for mind-boggling IPOs and reinventing themselves as skinflint technologists while boldly crowing about the removal of fringe competitors. In private, nearly everyone admits to a wistful nostalgia for the easy-money glory days of ... six months ago. "People in this space built fast, hired fast and spent fast," says Heller. "Now, all of a sudden, it's all very scary and very competitive." ••• FOR MANY WORKING IN THE L.A. INTERNET industry, the recent mood swing feels like deja vu all over again. A similar outburst of anxiety swept across the basin in 1998, when the first crop of Hollywood's on-line experiments withered and died. The Internet industry in Los Angeles actually dates to October 29, 1969, when a Bronx-born computer scientist at UCLA named Leonard Kleinrock flipped a switch on a refrigerator-size processor that sent information spewing through a phone line to a campus computer. He called it "packet switching." The idea was picked up by computer scientists at MIT and Stanford, who further developed the vast shared network that became the Internet. And while fortunes were eventually made on the new technology in Silicon Valley and Seattle, entrepreneurs in Los Angeles were late to the game. It took the arrival of out-of-town emissaries from Microsoft, America Online and Intel to get the L.A. Internet industry off the ground. Big tech companies hit Hollywood in the mid-'90s with a mission: Add pizzazz and production values to a network originally used to transmit academic and military data. Microsoft enlisted a staff of fringe Hollywood players to build the Microsoft Network (MSN), an on-line broadcaster featuring "channels" and "shows." America Online wooed television legend Brandon Tartikoff to develop a slate of Web attractions. Intel invested heavily in a Marina del Rey start-up called American Cybercast that produced an on-line Melrose Place knockoff called The Spot. While buzz began to build about this new genre of entertainment, the people doing the work -- mostly techies who had previously worked in CD-ROMs and video games -- were still very much outsiders in Hollywood. "I remember when I first moved here and told people I made Web pages. I might as well have told them I made shoes," says Peter Luttrell, a software engineer who got his start in the digital stone age of 1994. "They couldn't have cared less." Web producers like The Spot's Scott Zakarin fought hard against the geek rep, casting themselves as rogue pioneers leading the way toward the ballyhooed "convergence" of the Internet and broadcasting. But a funny thing happened on the way to the promised land: Everyone went bust. Facing fierce competition from AOL, MSN scrapped its original programming in 1996. The death of Tartikoff came two months before the launch of America Online's doomed Entertainment Asylum. And after burning through $6 million in one year, American Cybercast declared bankruptcy in 1997. The problem for these entertainment-oriented sites remains the problem today: The vast majority of people who spend time on the Internet chug along on dial-up modems, and for them, video and other so-called broadband content are pretty much unwatchable. Besides the technical difficulties, the economics are messy (as would-be Web programmers discovered, content is appallingly costly--even the subcable drivel that appeared on most Web sites), and on-line ads generated more irritation than revenue. The first wave of entertainment-based sites had scarcely vanished into the ether when a second, more moneyed Hollywood player began poking around for a piece of the action, and on-line entertainment once again got hot. Among the dealmakers who launched Internet initiatives in 1999 were DreamWorks chiefs Steven Spielberg, David Geffen and Jeffrey Katzenberg, Imagine Entertainment heads Ron Howard and Brian Grazer (who teamed up on the short-film Web site Pop.com), former Nickelodeon president Geraldine Laybourne (whose Oxygen Media is built around a Web site), superstar manager Brad Grey (a backer of the entertainment site Z.com) and former Universal CEO Frank Biondi (who formed a venture capital fund). In less than a year, Disney lost the heads of its movie studio and cable operations as well as two top theme-park designers to dot-com start-ups. What lured Hollywood to the Net a second time was simple envy. The huge run-ups in Web stock prices created enough millionaires that Industry execs accustomed customed to making obscene amounts of money looked on longingly as Internet entrepreneurs set new standards for obscenity. One January morning in 1999, a collective gasp went up in Tinseltown when news that a scrappy little Marina del Rey Web start-up called GeoCities had just sold out to Yahoo! for a reported $3.56 billion (mostly stock, but still ...). "What the Web did in Los Angeles is something no industry has ever managed to do in this town: It made entertainment executives feel out of touch and uncool," says Sean Suhl, a 25-year-old Web whiz kid who began his career designing sites for studios and TV shows. "They all wanted in." Meanwhile, another wave of marketing and corporate players began rushing in from the rapidly consolidating music industry. "We all looked around for something with the same sense of excitement as the music business in its nascent period," says producer Bob Ezrin, who quit the recording industry after producing such acts as Pink Floyd and KISS to launch a site called Enigma Digital. "We were drawn in by the allure of the pioneering spirit, the informality, the constant drip of adrenaline," Ezrin adds. "And, of course, the possibility of getting very rich very quick." Mostly, these entertainment-industry refugees were not disappointed. Jeff Pollack and Benny Medina, creators of the sitcom Fresh Prince of Bel-Air, are still awed by their experience shopping around the idea for Thirsty.com, a Web site that delivers youth-oriented news on fashion, music and celebrities with the speed and seriousness of a Wall Street stock report. "Everywhere we went, we had unbridled enthusiasm across the board," says Pollack. "We would walk into a room, and the desire to say yes was palpable." He remembers one meeting with a Web company called Boundary that had previously expressed guarded interest in investing: "We walked into this meeting with a bunch of guys just grinning from ear to ear. They were particularly happy because Boundary had made $800 million that day." Along with the fatter paychecks came oversize attitudes. Hollywood's high-tech insta-moguls emerged as altogether different creatures from the socially stunted brainiacs who rule Silicon Valley. "A lot of the new-media guys are basically geeks who couldn't get dates in high school--and they get a tremendous thrill from being courted by these entertainment guys," says Jeff Haber, an actor and screenwriter who launched the Web start-up Point-Click-Purchase. "And then you've got the entertainment guys who just want the money that the geek guys have. So everyone's one's wearing black, and everyone desperately wants to be a star." This high-school-with-money model became the norm at Web shops like LOADtv, cofounded by a 29-year-old junk-mail mogul named Morgan Warstler. Flush with venture capital, Warstler rented an old bank building on the Sunset Strip and filled it with staff from his native Canton, Ohio. Former and current employees say they logged 75-hour workweeks producing Web programming targeted at what current CEO Jack Kennedy calls "low-hanging fruit" -- Gen Y computer nerds and skate punks. Employees, say sources at the company, were regaled with plans to topple the Hollywood studio system; one former staffer and a job applicant were told the black and white tiles in front of the building had been arranged in a pattern that resembled digital code. The secret message: FUCK YOU. (LOADtv cofounder Matt McFee says he's "never heard that one" and that employees were under no obligation to work such long hours. Warstler did not return calls for comment.) Such hubris was not only tolerated but practically celebrated in a marketplace suddenly awash in venture capital. In 1999, $2.5 billion was funneled into Internet ventures in L.A. and Orange Counties, 200 percent more than in 1998, according to the PriceWaterhouseCoopers Money Tree Survey. One start-up that embraced the windfall was StreamSearch.com, a St. Louis-based search engine for broadband content that hosted a party at the Playboy Mansion in April featuring dinner for 500, tours of the grounds led by Playboy Bunnies and a concert by the Brian Setzer Orchestra. StreamSearch CEO Robert Shambro says he took some heat for the event, especially coming the week of the first trembles of the Nasdaq. "It wasn't like we just went and burned a million bucks," Shambro says. "It was a chance to bring together major investors and major talent. I would do it again in a second." At the height of the boom, even the lowliest worker bees developed a hearty sense of entitlement. Luttrell, one of the first employees of the Digital Entertainment Network, remembers the stone-faced salary demands of staffers hired to proofread text: "I kept telling them, `Dude, you're copy editors--copy editors don't make $78,000 a year.'" An executive at an L.A.-based Web start-up recalls interviewing freelance programmers. "They wanted catered lunches, stock options, overtime pay after six o'clock--or else they'd walk," she says. "I'd look at these guys right out of college and want to tell them, `Look, that's just not how business works.' But what could I say? That's the way it did work." ••• MOST OF WHAT Hollywood has done wrong in its rush to go digital is summed up in the story of the Digital Entertainment Network. The smoking crater of this once white-hot Santa Monica start-up has become an instant object lesson in the L.A. dot-com community. DEN was established in late 1998 by a 40-year-old technologist named Marc Collins-Rector, who convinced investors, including onetime senatorial candidate Michael Huffington, that DEN would rival network television in programming for the Gen Y set. Collins-Rector's cofounders were a 24-year-old computer enthusiast from Michigan named Chad Shackley and a 17-year-old child actor named Brock Pierce. The three lived together in a hilltop estate in Encino rumored to have been owned by hip-hop kingpin Suge Knight. Within a year, the company had raised more than $33 million and amassed a staff that would number more than 250. The founders threw lavish parties and lured top executives from Disney and Capitol Records with salaries topping $1 million. Luttrell says DEN management wanted nothing less than to reinvent the Web. "They came into this like, `We've arrived -- the Web can start now,'" he says. "The thing was that they hired these people who knew a great deal about the Internet, and then never listened to any of them." Programming kicked off with an amateurish serial called Chad's World, which revolved around a teen runaway from Michigan who shacks up with a gay couple in a California estate. The show failed to gain a following, setting an example for such programs as the T&A bonanza Frat Ratz and the pandering Latino drama Tales from the Eastside. None of these omens stopped DEN's founders from filing a $75 million IPO and chartering a 747 to New York to celebrate the occasion. Afshin David Youssefyeh, who worked as DEN's director of on-line marketing, remembers the IPO party as a tony affair at the SoHo Grand Hotel, where employees shared an open bar with the likes of Michael Stipe and Leonardo DiCaprio. As it turned out, DEN's founders never got their stock windfall. Two days before the IPO party in New York, a lawsuit was filed in New Jersey accusing Collins-Rector of sexual misconduct with a 13-year-old former employee. Collins-Rector denied the charges but settled the suit a month later. The lawsuit was a public embarrassment, dashing the company's hopes of a public offering and forcing all three of a DEN's founders to resign. New management headed by former Disney executive David Neuman tried to salvage the company, to no avail. The end finally came in May as the remaining 200 employees were issued curt apologies and pink slips. To those who worked there, the failure of DEN had less to do with the legal troubles of the founder than with the mind-set of Hollywood newcomers. "For a start-up to succeed, you need to work your ass off," says Youssefyeh, who fled Hollywood for a job in Silicon Valley after DEN's demise. "These Hollywood guys just don't want to get their hands dirty. It's against everything they're about." Journalist Matt Welch, who was hired to develop a news division for the network, says the collapse will go down as a monument to mammoth egos. "DEN was the poster child of Internet excess," he says. "In terms of grossly overpaying executives who don't know anything about the Internet, this was the ultimate." ••• DEN DID NOT GO DOWN ALONE. Its collapse came on the heels of a widespread retreat from the local Internet arena. Investment in Los Angeles- and Orange County-based Web businesses plummeted from $850 million in the last three months of 1999 to $421 million between January and April 2000. Hardest hit were e-tailers, but the tide had also turned against those sites that focus on creating content. In the heyday of DEN, the catchphrase was "Content is king." Post-DEN, content is barely royalty. The tune has definitely changed at LOADtv, the would-be digital update of an old Hollywood studio, producing and delivering programs on the Internet via its own branded video player. Initial programming included cooking shows, movie-clip packages and a comedy starring NewsRadio ham Andy Dick. But when capital ran low in April, cofounder Warstler stepped aside, and Kennedy, the new CEO, promptly laid off nearly half of the 97 employees and scrapped all original programming. "Big changes had to be made," says Kennedy. "We had to concentrate on delivery, not the programming itself -- these are two entirely different animals." In appeals to investors, Kennedy has done everything possible to shake the glitzy rep that had become the hallmark of DEN. "We're no sexier than FedEx," he says proudly. "Our goal is to be as invisible as possible. That runs counter to the culture of this industry, but if we're going to make it, we've got to stay focused on our core business." Other wanna-be Web programmers have become champions of even more humdrum "revenue streams." Webstation.com was founded by a pair of entrepreneurs with no previous Web experience: actress Soleil Moon Frye, who starred in the '80s sitcom Punky Brewster, and securities trader Steve Fischer. When DEN was at its peak, the pair filed for an IPO totaling $36 million, planning a Web network that would broadcast concerts, fashion shows and extreme sporting events. But with DEN in ashes, Webstation was drastically restructured. "Once that deal was killed, so was ours," says Fischer. "We saw the writing on the wall." Today, Fischer and Frye run an on-line marketplace for discount DVDs. "I guess it's about crawling before you walk," says a humbled Frye. ••• THE CHEST-THUMPING ARROGANCE common among Internet execs six months ago has been replaced with a levelheadedness that borders on gloom. When cash was flowing, Webheads talked about the Internet as an uncharted world of vast possibilities. Now it's all about "multitiered revenue models" and "traditional valuation metrics." The new mantra is "Monetize it!" -- a bottom-line call to arms that's Greek to most Industry dealmakers, says Jose Royo, a former instructor at Harvard who is now chief technical officer of the Santa Monica Web site Broadband Sports. "You just can't run an Internet company the same way you run a Hollywood studio," Royo says. "The more extravagant Hollywood attitudes, all the chauffeurs and parties--that really doesn't work in this space." Many Internet executives claim to revel in the new thriftiness. Wertheimer, a former executive at Oracle and NeXT, says he never gave in to the indulgences that sank other Hollywood start-ups. His entertainment site WireBreak.com operates with a small staff and few frills; visitors to his Venice studio, seated in the lobby on a bench ripped out of the back of a company van, got the message immediately. "That's what our company is all about," Wertheimer says. "It's about how to do more with less." According to Wertheimer, all the recent shakeout did was cull the weak and deluded, who were in the game for the wrong reasons. "It weeded out the people who thought they could add a dot-com to the name of their production company and start printing money," he says. "The shakeout pressed the RESET button. People have to start working for a living again, which is a good thing." The work ethic has been taken up most ardently by the suits financing the industry who until recently seemed to base decisions more on hunches than on due diligence. Randall Kaplan formed the Brentwood-based JUMP Investors after ditching a career as a corporate lawyer. Kaplan says high-tech venture capitalists have become obsessed with the fine print. "I know investors who saw their portfolio values fall as much as 80 percent this year," he notes. "That's a big hit. Now they're carefully going through the methodology to determine if these start-ups are ever going to turn a profit." In this new climate, the kinds of on-line start-ups hatched in Hollywood are having a tough time justifying their existence. "You can't name any successful entertainment Internet companies, because they don't exist," says Kaplan. Others maintain that the conventional wisdom will soon swing back in favor of on-line entertainment. Steve Stanford, a former ICM agent and now CEO of Icebox, says the name of the game is longevity. Start-ups that hang on to see capital swarm back toward content -- which Stanford says is inevitable once DSL and other broadband connections become common -- will be richly rewarded. "The Internet today is radically different from what it will be in three years," he says. "Anybody who takes a too narrow view will miss the boat." And as long as Web sites are hosted in Hollywood, the local Internet industry will never be completely overrun by pennypinchers or techies. Kevin Wendle, a former Fox vice president who runs the site iFilm, says that Internet execs who reject Hollywood turn their backs on tremendous talent -- and potential financiers. "Right now a lot of Internet companies are trying to take a wrecking ball to Hollywood," he says. "That's a mistake -- you've got some of the smartest and most creative people in the world here. We should embrace this town." Still, no self-respecting Hollywood dealmaker would miss the chance to become the Louis B. Mayer of a whole new medium. And if Hollywood is good at anything, it's forgetting the past. So expect another round of wretched excess as the Industry and the Internet -- seemingly the most inevitable yet diffident of bedfellows -- pursue their balky pas de deux. "Hollywood is always going to produce elements of Babylon," says DEN's Welch. "There're always going to be great parties in mansions with prostitutes and tons of cocaine--and thank God for that."