04/07/2003
E-Vanity Of E-Vanities
The further we get from the heady days of the Internet bubble, the more and more classic its lessons begin to appear
Book Review of "Leaving Reality Behind: etoy vs eToys.com & Other Battles To Control Cyberspace" by Adam Wishart and Regula Bochsler; HarperCollins; 344 pages
Here in the fibrillating heartland of the battered New Economy, stages of grieving over the bursting of the bubble have gone through a sort of reverse Kübler-Ross process: from irony to nostalgia to contrition to depression as the tech nuclear winter has settled in, seemingly world without end. Who has the energy or desire to read yet another tale of Internet gold rush greed and folly? But Adam Wishart and Regula Bochsler have given us the occasion for a good-natured smile and nod, plus a frisson of recognition about those deliriously excessive, oh-so-bad, good old days. Leaving Reality Behind is a nicely silly fable for our time. It tells the story of the collision of commerce, art, and law in the founding era of a new technology. What could be a more exemplary American train wreck?
In September 1999 online toy retailer eToys.com sued the Swiss art collective etoy Corporation over the group's use of the etoy.com domain name, alleging trademark infringement, unfair competition, and interference with prospective economic advantage. It sought an injunction to shut down etoy's cyberpunk Web site. That's not exactly a "once upon a time" sort of beginning, but there's a Rumpelstiltskin-esque fairy tale here, nonetheless.
Etoys had gone public in May 1999 with a market capitalization of $2 billion. Its stock nearly quadrupled the first day of trading, to more than $75 a share. That gave it a valuation of $8.6 billion, 50 percent more than the valuation of Toys "R" Us, Inc. ($11.2 billion in revenue, $376 million in profits), even though eToys had a mere $30 million in revenue and had already lost more than $49 million since its 1997 founding. How's that for spinning straw into gold? Meanwhile, etoy—a shadowy group of hackers, prankster, and performance artists hanging out in Zurich—had increasingly gained international recognition for its clever parodies of the dot com frenzy. Etoy promoted its "brand" (its anonymous members all sporting identical orange bomber jackets, black pants, mirror shades, and shaved heads), sold neo-Dadaist poster art as "shares," and spoofed search engines to direct unwitting Web surfers to its decidedly noncommercial, occasionally pornographic Web site. Those antics held up, the authors write, "an intriguing mirror, as only art could, to a corporate and financial world that was being seduced by its own cheerleading."
The two organizations had first encountered each other in 1997, when newly formed eToys e-mailed etoy, offering to buy the etoy.com domain name. Wishart (an English documentary filmmaker and journalist) and Bochsler (a Swiss TV reporter and producer) use the ensuing struggle over control of the name "etoy" as a model of the worldwide conflict between rival visions of the emerging wired world as it invented itself during the 1990s.
For the authors, etoy represents the idealistic, communitarian, egalitarian strand of the Internet's technical and political DNA. The basic transport protocol and network topology of the World Wide Web enable the decentralized, peer-to-peer, anonymous, many-to-many communication style, known as packets of information. The academic researchers who created those technologies (most famously Jon Postel and Tim Berners-Lee) wanted them to foster open, nonhierarchical, self‑governing communities of scholars and citizens. Etoy inherited those purportedly an‑archistic genes. It was the brainchild of "Agent ZAI," a Zurich teenager who got his start in the art biz as one of the hosts of a local youth culture TV show, and who recruited six fellow Gen Xers to form the "corporation" in 1994. The "agents" dedicated themselves to using the nascent Web to cultivate an "antagonistic sensibility…standing against the banality of the ordinary…They would steal the clothes of corporations—the branding, the rhetoric, the aesthetic—to create an absurdist critique of corporate culture." In October 1995 the group registered etoy.com, and the boys immersed themselves in creating their Web site, a destination that violently yoked the trappings of corporate identity—mongering to images of death, destruction, and torture. "They had left their hair, their clothes, their names, and, of course, their personal freedom on the altar of the etoy brand" to live an all‑consuming, if rather monastic, digital existence in cyberspace. Their motto: "etoy, leaving reality behind."
To Wishart and Bochsler, eToys of course represents etoy's dialectical opposite: the commercial, competitive business culture that saw the Internet as just another resource to exploit for private gain. The demonic counterpoint to Postel's and Berners-Lee's establishment of democratic bodies to oversee open standards for the Net's infrastructure is Marc Andreesen's parlaying of the Mosaic Web browser he initially developed at the University of Illinois in 1993 into the proprietary technology on which he founded Netscape the following year. Netscape Communication Corporation's spectacular 1995 IPO (spectacular, despite its lack of revenue, accumulated losses, and speculative business model) and Andreesen's sudden paper millions prefigured the bubble to come.
Etoys inherited those purportedly selfish genes. It was the brainchild of Toby Lenk, a Harvard MBA who spend the first half of the nineties at The Walt Disney Company as a vice president of strategic planning, then lit out for the cyberterritories. He joined idea‑lab, the red‑hot e‑commerce incubator, as an entrepreneur in residence in 1996. Lenk researched the potential of various online markets and settled on toys as one in which an Internet-based retailer could capitalize on parents' apparent hatred of the bricks‑and‑mortar shopping experience. Lenk and his cofounders contributed about $150,000 toward starting the company in June 1997, setting up offices in Santa Monica and a small warehouse in Fremont, California. Venture capitalists were initially skeptical, but after the company's first Christmas season netted 30,000 unique daily visitors to its Web site and $500,000 in sales, the cash poured in. Household‑name funds (Sequoia Capital, Intel Capital, The Bessemer Group, Inc., Highland Capital Partners, Inc.) invested $27 million at increasingly heady multiples of the company' seed‑round valuation—for a stake in a company that had shipped less merchandise overall than a typical Toys "R" Us store sells every two weeks. Even before the company's gravity‑defying IPO, one could only call this, too, "leaving reality behind."
Wishart and Bochsler's double helix of rival cultural legacies, unfortunately, is a little too schematic. The inaugural flaw: The "anarchic" design of TCP/IP (the Internet communications protocol) and the Net's decentralized topology is the pure fruit of a military R&D project to develop a self‑healing command and control network that could withstand a nuclear attack. And the early pioneers of the commercialization of the World Wide Web were often as idealistic as their counterparts in academe and the arts. I have a vivid memory of my days at General Magic, Inc.—another revenueless "concept company" that went public in 1995, right before Netscape, and after developing the first wireless hand‑held personal communicators. We held an all‑company meeting after the IPO, to chart our future. After several hours of passionate speeches from the floor about how to use our new pot of $90 million to improve the lot of humanity by creating cool technology, I spoiled the party by reminding everyone that the only choice we had, as a public company, was to spend the money to create shareholder value. The booing was surpassed only by my reception at the company meeting that preceded the IPO, when I explained the lockup that prohibited sales of employees' stock until six months after the deal.
The more details the author's provide about the inner operations of etoy and eToys, the more eerily similar to each other they seem. Wishart and Bochsler are excellent reporters and good storytellers, and they brilliantly capture the cultlike intensity of life in a start‑up. For the etoy gang, it ranged from the brute‑force, real‑world labor of converting a shipping container into an orange‑painted headquarters to nonstop programming to Agent ZAI's ultimately self‑destructive insistence on prolonging the legal battle with eToys over the etoy name. For eToys, it ranged from the brute‑force, real‑world labor of all‑hands‑on‑deck all‑nighters picking and packing toys in the warehouse as the company's inadequate back office systems were overwhelmed by orders to life in the reality—distortion field of a charismatic founder: "The company was Toby's fiefdom, and surrounding him was a tight circle of acolytes whose individual success seemed to depend on his patronage and favor."
That leads us to the third—and perhaps unanticipated—mode of "leaving reality behind" in Wishart and Bochsler's tale. eToys's marketing strategy was predicated on being "child‑sensitive" and G‑rated. Management was understandably worried that parents or kids who inadvertently visited etoy.com might confuse the artists' intentionally offensive site with eToys's domain. Its trademark infringement lawsuit was predicated on characterizing etoy as just another evil cyber‑squatter diluting the huge value of the eToys brand. Etoy's lawyers (Los Angeles—based Irell & Manella) filed papers that were like "a delicately curated catalog" of etoy's antics, but transposed into a grotesquely sinister key: "What had been built for the intention of art, or at least irony, was now an unfair and unscrupulous business practice used willfully against the highest‑value toy company on earth." The law, too, had left reality behind. The consequences were all too predictable. Agent ZAI and his minions launched "toy‑war," a Web‑based, viral counterattack on eToys modeled on protests against the World Trade Organization occurring almost simultaneously in Seattle. Their stance as artistic Davids confronting a greedy commercial Goliath generated lots of attention and sympathy from the mainstream press. It's not clear how much, if any, effect the bad publicity had on eToys, which was already living on borrowed time by late 1999 a analysts finally focused on is lack of business fundamentals. That didn't deter the collective from gleefully publishing charts mapping the downward plunge of eToys's stock price in relation to the expanding scope of etoy's "virtual sit‑in" against the company.
In any case, we all know—or can guess—the end of the story. As of this writing, eToys is long gone. It disappeared after the bubble burst in the spring of 2000. The company lost $189 million on revenues of $151 million in 1999; the coup de grâce was a poor Christmas quarter in 2000. The stock dropped from $60 to 28 cents a share, the company filed for bankruptcy, and it was liquidated for a few million dollars in 2001. while some early investors won their lottery (Bob Gross, the head of idealab, made $200 million on his eToys stock, according to the authors), Toby Lenk rode his $600 million in paper wealth all the way down to zero and netted only the salary he was paid as CEO.
The once freewheeling slackers of etoy fell out—of course—in a struggle over fame and money. Agent ZAI hogged the spotlight as the toy‑war impresario and imperiously refused to settle the eToys lawsuit in the all‑too‑bubbleish hope of striking it rich if he held out for more (at one point turning down a cash and stock package worth $500,000). The boys stopped speaking to each other: "In the end they all grew tired of ZAI's self‑righteousness, and came to feel he owed them something as he had exploited etoy's…brand and corporate identity which they had jointly worked so hard to create." One of the collective's cofounders, in an ironic coda to the original struggle over the "etoy" mark with eToys, filed trademark registrations on the "etoy" name in other European jurisdictions and started a rival group.
At the end of Vanity Fair, Thackeray's great novel of Victorian lost illusions, when Jos Sedley dies, "it was found that all his property had been muddled away in speculation, and was represented by valueless shares in different bubble companies." Becky Sharp gets his life insurance money and a new start as poseur and social climber (whoops, I mean "entrepreneur"). "Ah! Vanitatus Vanitatum!" Thackeray writes. "Which of us is happy in this world? Which of us has his desire or, having it, is satisfied?" Thus it was in 1847, and thus it every shall be—but that doesn't mean it isn't still fun to read all about it.
Michael Stern, a former journalist and English professor, is the head of Cooley Godward's technology transactions group. He was vice president of business affairs and general counsel of General Magic, Inc., from 1991 until 1996. E-mail: sternmd@cooley.com.