Latest Update: September 27, 2000

(This story was stolen from Bill Sharp, editor of the Surf News and will be included in the next issue of the magazine. Look for it in your local surf shop next week.)

THE END OF THE INNOCENCE
Dot-Com Bomb: Inside the Internet Collapse of Bluetorch and Harldcloud

by Bill Sharp © SurfNews 2000

Take cover, everyone. The sky is falling.

After a supersonic, high-flying year of hirings, hype, buildup, bluster, claims and controversy, two flagships of the much-ballyhooed surfing internet revolution have suddenly crashed to the ground, scattering broken dreams and broken promises like so much Concorde wreckage on the California beachscape.

Over the span of eight brief days in mid-September, two major players in the world of surfing and extreme sports content on the World Wide Web closed or vastly scaled back their operations, handing out pink slips to at least 129 employees.

For some of the believers, it was a total shock. For some of the naysayers, it was inevitable and overdue. And for those carrying on, we’re advised that this should not be considered an indictment on the genre as a whole. So just what the hell happened here? Based on interviews with close to a dozen individuals who were right in the midst of this amazing chapter in surfing history, it went something like this....

In the third quarter of 1999, a similar idea sprouted simultaneously in boardrooms and e-business incubators between the Silicon Valley and the Velcro Valley—becoming the dominant player in bringing surfing and extreme sports to the internet would be a good thing. Each had (or still has) their own, vastly different plan on how it should pay off big in the end. And all were confident their business plan was the right one. Of the major players obsessed with the notion of becoming a "Category Killer" in this new world of surf and extreme sports on the internet, Broadband Interactive Group (BIG) and its Bluetorch.com site, was by most accounts the most likely to persevere. Its pockets were almost unfathomably deep, with its acknowledged owners being the two multi-billionaire founders of computer chip giant Broadcom, Dr. Henry T. Nicholas III and Dr. Henry Samueli.

Moreover, the sketch of the business plan drawn out by Nicholas was that the goal of the company was not to turn a profit by selling surf trunks online or by selling puny ad banners, but rather to prove the validity of interactive entertainment coming through your computer. If a "sexy" topic like extreme sports looked good streaming over your desktop, then you could apply that to a million other areas of interest for computer users worldwide. And that, a few years down the line, might sell more Broadcom microchips by the million.

This was bigger than the miniscule surf scene. This was immense-scale capitalism with global vision. And the splash Bluetorch made in the surfing world was unprecedented, to put it mildly. It was a potent package, with a finger or two in everything, and enough money behind it to command attention. Along the way BIG absorbed a publishing group owned by Gotcha boss Marvin Winker and then-ASP North America head Ian Cairns, and went about distributing free magazines on surfing, bodyboarding, snowboarding, wakeboarding and on and on. By early 2000 BIG had settled on the Bluetorch handle, and was at work putting together some of the slickest TV shows ever done on board sports. BIG was producing successful world-class events and transmitting them live online around the planet from distant, exotic reefs in the South Pacific. It was bigger and slicker and growing faster than anything the surf world had ever seen. Hell, Bluetorch even put in a bid to sponsor the entire ASP World Tour.

It was a manic time for BIG, the first seven months of 2000. There were cross-promotional deals being cut right and left with big names like Excite@home, Activision and Earthlink. Lots of press about this amazing new vision of the future.

And lots of money going out. Beyond lots. But not much coming in. There were arrangements with Right Guard for deodorant and Panasonic for CD players, but from within the surf industry, sponsorship of events was non-existent beyond the Winkler-owned Gotcha and MCD brands. And advertising from endemic companies in the magazines and website were anemic at best. It would be safe to say there was a "Wait and see" mentality among many of surfing’s key marketing minds when it came to getting in bed with Bluetorch. At least right away. It was hard for anyone to really know where all this was heading.

And indeed, by mid-summer that failure to be embraced by surfing’s Old-Boy network may have started to force some shifts in the Bluetorch masterplan. Around the time of the Bluetorch Pro and US Open events in Huntington Beach, BIG CEO Matt Jacobson departed his post in a move never clearly explained to employees, taking a job at another Broadcom division. "It was kept really hush-hush," said one former executive with the company. "They didn’t want people to freak out about it."

Longtime television programming executive and head of TV for Bluetorch, C.J. Olivares, quietly took over the reigns of the BIG operations. If Jacobson’s departure was a portend for more ominous changes looming for certain BIG employees, they were easily glossed over by a visit to the office by the two incredibly wealthy men making things happen behind the scenes.

"I was a little concerned," said one former employee of the CEO news. " But then again every once and a while the Broadcom guys would come in and give everyone a big pep talk. It was like, here’s God looking at you."

Dr. Nicholas, especially, was attributed supernatural powers by his fans. "He has a very powerful presence," said the star-struck worker. "It’s one thing to be a millionaire, but to be a billionaire... This guy would come in and I would just think, gosh, what kind of car did the guy just drive up in?

Was he dropped off by a limo? Does he have to park in a normal underground structure like everybody else? Does he take the elevator or does he just float up, you know?

"They’re like superstars. They would come into the building and they were like rock stars. I mean they are bigger than any rock star, they’re bigger than any movie star. They’re more powerful. Major. It would be like God’s here. God’s in the building. Everyone would get so excited to hear what he had to say."

And by the time the Henrys left the office and floated back down to the street, the motivational magic had been worked.

"It was so positive," another employee said. "It was like, ‘Oh, Hardcloud, Swell—those guys are like done. We’ve got the deep pockets in Broadcom, oh yeah!’ I was so into it!"

At the glamorous Bluetorch offices on the Seventeenth Floor of the 5 Park Plaza building in Irvine, California, the week leading up the the September 8-10 Action Sport Retailer Trade Show was one of great anticipation. The long-awaited move to the custom-designed building was coming the following Monday. Employees were busy scheduling meetings with prospective advertisers at the ASR show and getting the next issues of the magazines ready to go to the printer. There was enthusiasm galore. Yet sharp-eyed employees were harboring a growing concern about the goings on "down the block" at the end of the floor where the Vice President offices are grouped, where all-day locked-door meetings were underway.

And well they should have. Unbeknownst to the rank and file of Bluetorch employees, a Board of Directors meeting had gone down "within a few days" of ASR wherein Nicholas and Samueli had demanded a clearer vision of BIG’s future. According to BIG’s Olivares, "We were directed by our board to reevaluate our existing business plan and come up with a plan that had a clearer, faster path to profitability. "

Since the start there had been a mandate to reach profitability within five years. And for the tens of millions of dollars that had been already invested in the company’s three main divisions in the first year of operations, there was still little to show in terms of revenue, or even the likelihood of future revenue. But of the three, Olivares’ TV division had shown the most promise.

Most of the titles in the magazine group, including Wave Action, Pit, Launch, MX Rage, Swerve and others, still carried a fair amount of bad-will surrounding their lives before being brought into the BIG fold. Some of them, Olivares allowed, "had perhaps a little too much ‘history.’

"We realized the magazine portion of our business...would continue to present a challenge to us in terms of creating profitability," said Olivares.

And there was the problem of their own magazines making it almost impossible for the TV operations to partner up with industry powerhouses Surfer, Surfing and TransWorldSurf Magazines and their powerful parent companies, EMAP, Primedia and Times/Mirror respectively.

Not only were the main publishers in surfing not supporting Bluetorch, Olivares said, "In some cases there was an active effort on their part not to do business with us or do everything they could against us. We felt like, OK, we’re struggling to make these books profitable and they’re hurting us in trying to partner with people and get involved with certain events like the Op Boat Challenge. The logical step for us at that point was to shut the magazines down and move on."

When the board addressed the financial prospects of the internet piece of the Bluetorch portfolio, it was an enormous, inevitable reality check. "We were spending a lot of money and time to build out this massive beast, and the revenue against that started shrinking," said Olivares, "or at least the possibilities for revenue. A year ago everybody was talking about e-commerce and pay-per-view and all these opportunities, and the reality is that the user base isn’t really ready for that yet. And the user experience, while we’ve had some nice success in terms of delivering webcasts like Teehupoo, there’s no way to monetize that, really—to make money on it."

Not only that, Olivares was ready to make concessions about the quality of the internet show being delivered to the average consumer. "While it provides a pretty interesting experience for people who have a broadband connection," said Olivares, "for those people who still have their 28.8 or 56k modem, it’s not a really compelling medium."

More reality was hitting home in terms of how many loyalists were truly tuning in to the Bluetorch internet message. According to one employee who worked on the live webcast from the East Coast Surfing Championships in Virginia Beach in late August, the number of viewers actually taking in the action were embarrassingly small.

"I’d check sometimes and there’s be like six people logged on," said the former Bluetorcher. "There were way more people working on it that watching it."

For Dr. Henry Nicholas and Dr. Henry Samueli, men whose personal fortunes were just this month valued by Forbes Magazine at $10 billion each, that simply was not good enough. At the board meeting it was decided the axe would fall and fall hard. But not until the time was right. In the interim, it was business as usual at Bluetorch. High-level marketing and branding people sat down to meetings with top surf industry leaders at ASR and sold their plans for 2001 for the internet, magazine and TV triad. Press releases were being sent out trumpeting Bluetorch’s freshly-signed content-sharing deals with Earthlink and Sprint. Wide-eyed editors, freshly recruited and still unpacking from moving cross-country to join the team, prepared for an exciting week of work. And all were just about to have the rug pulled out from under them.

"You can understand why we wouldn’t have taken Monday’s actions before ASR," Olivares later said of the bloodletting. "Talk about a rumor-mill.... That would have been crazy."

Crazy or not, by the morning of Black Monday, September 11, 2000 the in-house rumor mill on the seventeenth floor was spinning out of control. The company’s director of human resources put out a memo announcing a pair of meetings for all of BIG 130 staffers: the employees on one list—mostly TV people—would convene at 11:00; the rest would gather at 11:30. By then some administrative employees privy to the impending doom had leaked the word, but many of the Bluetorch torchbearers, including many who had been lured away from lucrative jobs by the promise of stock options and career growth were in denial. Not me, they thought. No way.

Even when the e-mail system was shut down, many still clung to bright-eyed hope. And when it became apparent that all the attendees of the 11:00 meeting had left the building, some still couldn’t see it coming.

"I was excited," recalled one of the fallen. "Whenever they called a "BIG ALL" meeting that always meant we were going to hear some exciting news, we’ve acquired someone or something great. I mean there were rumors going around, but I was just, ‘Won’t be me. They need me.’"

Others were not so näive. Some spent the last hour before the meeting copying information from hard drives and shuttling rolodexes, files and equipment to their cars.

Once the moment for the meeting arrived, the remaining bodies were herded into one of the larger rooms in the vast office where their icy gaze turned to Vice President Chris Lightburne. His voice choked by emotion, Lightburne broke the news, reading from a prepared statement. Due to unforeseen economic circumstances, all those present were terminated—effective immediately.

"It was a real weird moment...he read from a piece of paper, shaking, almost with tears in his eyes, you know, like telling everybody," said one of those present. "It was a real shocker when he said this is everybody."

Sixty-four were affected. Each employee was given two months pay, and six months of heath insurance and required to sign a document assuring they would say nothing bad about BIG in return for BIG doing the same. Employees were given until 2 p.m. to remove all personal effects from the premises but were admonished that police would be present to make sure no one got out of line (a threat that was not actually carried out, according to those who were there).

The mood was generally one of glum resignation—with a few exceptions. One young lady went ballistic, shouting profanities and cursing all things Bluetorch. Wouldn’t you know it, she had given her two-week notice a few days before—no severance.

[Conversely, some made out beautifully. Take the case of the photographer who found himself the subject of an escalating bidding war between Bluetorch and Surfer Magazine. After numerous back-and forths the lensman signed with Surfer—a couple of days before Bluetorch flamed out.]

But for most, the dream of the big tech killing was dead. Instantly, the stock options in BIG which had been issued like candy, a perk which had made the difference for many workers in deciding to leave their prior jobs, were now worthless.

Magazine workers were rushed out the door without the opportunity to tell out-of-the-office contributors to stop working on the next issue. If those contributors haven’t heard already, they’re figure it out soon enough—a substantial list of photographers and writers will now have to get by without the bloated retainer checks Bluetorch had been issuing them each month.

Certainly, the Bluetorch pattern of spending like a drunk sailor will be sorely missed by portions of the surfing community. Let’s put it simply...since the day the first polynesian stood on a slab of wood and slid shoreward, never before has one company spent so much money in and around the surfing world in a single year. How much? Tens of millions, to be sure. From writers to photographers to pro surfers to marketing executives to Hollywood agents—anyone with influence—BIG was not afraid to spend money to curry favor.

The epic Tahiti junket for the BIG-produced Gotcha Pro dispensed well over a million dollars in VIP pampering, contest logistics, sanction fees, local payola and cold, hard prizemoney cash. Same deal for the massive presentation put forth for the Panasonic Beach Games/Bluetorch Pro/US Open juggernaut. The rent alone paid to the Irvine Company to house the BIG operations for the last year would dwarf the entire operating budgets for most traditional surf companies.

Times have changed, we’re now told.

"Certainly when the business was conceived in the summer of ’99, the prospects for the internet space were much more favorable than the reality of today..." said Olivares. "Everybody in the world was throwing piles of money at anything with a dot-com associated with it.

"It was originally envisioned as, OK, let’s build this killer youth portal that is action sports oriented and let’s make it the best one out there...and supporting what we’re doing with TV and build toward this vision of interactive television.

"We’re kind of back to the world of Old Economy theory, as opposed to the No-Economy Theory of last year," said Olivares, "and the reality is that if a company like Amazon can’t make money, it would be very grandiose for us to think that we could."

The new-improved BIG will focus on the Bluetorch TV project, now airing on Fox Sports Net, and will use the Bluetorch.com site to support the TV presence. The events division, still headed by Ian Cairns, will continue to put on most of the major surfing competitions it ran in 2000.

"We look at events as a tremendous source of content for us," said Olivares. "That’s why we do them. Because then we can control the media rights and we can control the TV for Teehupoo and the wild atmosphere of Huntington."

And, Olivares adds, the regional events in Santa Cruz and at Trestles are still on the BIG schedule.

Less certain is what will become of some of the BIG acquisitions of the last year. Specifically, the SurFax surf forecasting service, and ChickSticks.com, the female-oriented website which were both brought under the Bluetorch wing. According to Olivares, the disposition of those assets is still being determined.

One ex-employee told SurfNews he felt the turning point for Bluetorch’s resolve may have come in July, during the annual Waterman’s Ball at the Ritz Carlton in Monarch Beach, where the surfing industry gathered to honor those who were making a difference.

"It was gnarly," said the insider of the BIG table at the $175 a plate fete. "I could see in the VPs faces when they were sitting there at the table...they didn’t know a person in that room. They saw some of the people who got awards, and they realized, these people in the surf industry have been there for decades. I think they were sitting there just going, ‘Wow, we’re full Johnny-come-latelys.’ And no mention the whole night of the Bluetorch Pro that was going on at that moment. I was, geez, you know what, if there was a big thing going on with Bluetorch there would have been some pretty heavy talk about them there at the Waterman’s Ball.

"I imagine it must have felt real uncomfortable for them to sit in that room that night, especially for Ian Cairns to not be mentioned or not one mention of the Bluetorch Pro or the US Open. Right in the middle of the biggest contest anyone has ever seen."

"I don't know if it's good or bad, or just smart business," said the same ex-employee. "BIG went for the cream of the crop, managed to swipe all these talented people away from excellent jobs, promise them the world with cash and stock options, then let them go less than a year later. BIG tested the waters and decided to shun the wetsuit."

On Tuesday, September 19, eight days after the Bluetorch debacle, the word spread out from their San Clemente office that Hardcloud.com was closing down and releasing 65 employees. If the impending blast at Bluetorch was a well-kept secret, that the end of the Hardcloud ride might be nearing was known far and wide. Indeed, that the operating capital from the initial round of financing would run out in September was part of the Hardcloud plan when it was cooked up a year ago—as was nailing down the second round of financing from the numerous sources writing fat checks to dot-com concerns in the latter part of 1999.

"The plan," said Jim Kempton, Hardcloud’s Editor-in-Chief, "was to put something together with a larger media company that we could be the internet platform for. We found financing through [internet incubator and venture capitalist group] e-Companies...and we were certain that we would find second-round financing with a larger company. And that just simply didn’t happen.

"We were trying to refuel in mid-air and nobody could hook up their faucet to it."

Founded by a group of San Francisco internet veterans headed by Wayne Tsuchitani, Hardcloud was just one of several groups who independently came up with the concept of creating a potent surf/skate/snowboard portal and seeking revenue through e-commerce retailing of related product, advertising banner sales and whatever great and glorious new opportunities the medium was bound to reveal.

Hardcloud, like fellow web powerhouses Bluetorch and Swell.com, went on a hiring binge [well documented in the pages of SurfNews], paying top dollar for the services of a cadre of veteran surf editors, photographers and writers.

And for those without the Broadcom billionaire billfolds, the landscape took a dramatic turn in February of this year when most of the high-flying tech and internet stocks on the NASDAQ took a dramatic plunge in value, falling from favor with investors. But by then there was no going back. "Internet venture capital literally came crashing down in February," said Kempton. "It was Black Monday for the internet world, that was when venture capital just dried up for internet startups. Before that you could literally throw a business plan written on a napkin at people and they would throw $50 million at you. And the reality of taking things and going public and then having the companies go out of business by the hundreds and then having people walking away with millions of dollars in their pockets was something that only lasted so long. Like most gold rushes, only a few people strike it big."

Nonetheless, the Hardcloud team continued to beat the bushes in search of additional funding. And by the latter months of its life, they were looking to arrange a partnership, or merger, or acquisition—anything—with one of the other web companies, including Bluetorch and Swell. Confident to the end, Hardcloud hosted an impressive "Internet Cafe" at the ASR show, offering attendees free internet lessons, e-mail access and beer. And while discussions with Swell had made some progress, the bowing out of Bluetorch may have sealed Hardcloud’s fate as well. According to sources near the negotiation, whatever positive prospects Swell may have found in the partnership were damaged by double-edged sword of the Bluetorch situation.

The loss of a key competitor also put a cloud on the industry in general, and it was no time to be distracted from the larger mission. On Monday, Swell management gave Hardcloud principals the word; there would be no deal. By 2 p.m. the following day, the internal plans for the end of Hardcloud had been finalized and implementation was underway.

"We made a collective decision that it was better to pay all of our bills and walk away with professionalism than to hang on and end up owing people money and looking bad," said Kempton. "It was time to make it clean and to know when to fold. That was just a decision we made that we thought was best for everyone in the company. We’d strung it out as long as we could because we really felt like so many potentials were right on the brink of happening. So we didn’t want to give up until we were literally at the final paycheck, so to speak."

Sixty-five employees got that final paycheck, 15 at the San Clemente office and the balance in San Francisco. There was no comment on what kind of severance package the displaced received. And what will happen to some of Hardcloud’s acquisitions—including the juiciest asset, SurfCheck.com and its network of surfcams—was still being decided at press time.

What the loss of Hardcloud and the bulk of Bluetorch’s internet operations means to the remaining internet players depends on who you ask, naturally. BIG’s Olivares believes that the internet is still a great source for information, and its time will come—once technology rolls on—as an entertainment source. At that point, Olivares reserves the right for Bluetorch to reassert itself in the medium. But for now he doesn’t like its cash flow opportunities...or lack thereof.

"The internet, essentially, is a place where people are going to lose money right now, and for the next couple of years," said Olivares. "It is a very hard place to make money—or you can make money, but it’s hard to make a profit.

"I would look like such an idiot if I was trying to say, ‘Hey, the prospects for the internet are really great right now!’ It’s a changing medium and we’re not the only ones realizing this. It’s time for reality."

Swell.com E.V.P. Doug Palladini bristles at the suggestion that because Bluetorch was unable to generate revenue, others are somehow doomed to fail. "Our business model is substantially different and unique," said Palladini. "Our model involves retailing product, not just on the Internet, but in other mediums, such as catalog. There are numerous instances of profitable endeavors in action sports retailing.... Additionally, our media model is substantially different. Bluetorch spent massive dollars promoting and webcasting surf events in a format that was, in our opinion, economic suicide. Our ability to form launch partnerships with many of surfing’s marquis brands, including Billabong, Oakley, Quiksilver and Reef speaks to the validity of our plans.

"Their model didn’t work," said Palladini. "Bluetorch isn’t proof that others won’t."

Let us not forget that while two net players have already come and gone, Swell.com has still not had its official launch, a landmark currently set to occur during the first week of October.

And for some of the internet companies which have taken a more frugal approach to their business, there have been no surprises in the recent events.

"Nothing has suddenly changed," said Alan Gibby of ExtremeSports.com. "The internet is not suddenly closing down. In fact it is going to keep growing. Great opportunities will continue to appear because there will always be a demand for good content and services.

"As for ExtremeSports.com, I told my staff from the beginning that we would offer the most creative and solid content while watching our dollars closely. We have stayed lean and mean and have simply focused on building a solid business first."

And there may well be an advantage for those companies which are enhancing existing businesses, like Gibby’s site which evolved out of his television production company, Dynocomm. Retailers like PacSun and Becker, who are growing internet businesses slowly as a sidelight may find the path easier than those blazing an entirely new trail.

And above all, surf internet businesses may well benefit from the time-tested advice of "finding a need and fulfilling it" rather than creating a new product and hoping someone buys into it.

Accordingly, even Bluetorch’s head allows that Swell’s report and forecast property may be perfectly suited to today’s internet capabilities.

"The one killer function that is out there," said Olivares, "is Surfline. That is the stickiest thing for the action sport genre, if you will right now. Every surfer wants to know what it looks like, what is going on up the coast or down the coast. It’s useful. You can do something with that."

Whether that’s enough to create vast prosperity for the remaining web firms will be proven out over the next year as revenues and later rounds of financing chase the reality of cash burn rates. And that’s about as much of a forecast as you’re likely to get at this point.

"This is a medium that is still evolving," said Hardcloud’s Kempton. "Nobody—no matter what they say and how much they claim guru-ship—nobody really knows where this is going."

—BILL SHARP

Previous Bags o' Crapola:
-September 22, 2000
-September 15, 2000
-September 9 , 2000
-August 29, 2000

Special thanks: to Jim Romenesko's MediaGossip.com.