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February 8, 1996

Betting on the Internet, Murdoch Will Shelve On-Line Service

By MARK LANDLER

News Corp. is joining the growing roster of communications companies that are shelving their on-line services and placing their bets on the Internet.

Executives close to News Corp. said Wednesday that the company's on-line service, News Corp. Internet, would dismiss nearly half its 515 employees Thursday. The cutbacks will come a week after MCI Communications announced that it would reduce its 50 percent stake in the service, and would back a rival on-line service just started by Microsoft Corp.

One person close to News Corp. said that Scott Kurnit, the chief executive of the venture, would probably resign soon. Kurnit, who was hired by MCI, declined to comment on his plans beyond saying that he would "oversee the transition" of the venture as it seeks new partners to replace MCI.

News Corp. chairman Rupert Murdoch has been in protracted -- and so far fruitless -- negotiations to sell a stake in the service to Oracle Corp., a software developer. News Corp. Internet is best known for its struggling on-line service, Delphi Internet Services.

The action by News Corp. is part of a broader shakeout in the on-line industry, which is grappling with the explosive growth of the Internet and its World Wide Web. General Electric recently sold off its on-line service, Genie, while the three biggest on-line services -- Prodigy, Compuserve, and America Online -- have announced plans to offer an Internet-access service.

"In order to move forward, they've got to get stuck in the Web," said Greg Wester, director of Internet research at Yankee Group, a consulting firm in Boston. "The on-line service model is bankrupt."

Traditional on-line services charge users a flat fee to browse through content that is licensed exclusively to the service. Internet-based services are more open, and often provide users with a navigation device to sort through information. These services will eventually make most of their revenue by selling advertising.

Several analysts said News Corp.'s troubles laid bare another reality of the cyber-age: Even well-financed companies with strong editorial content cannot succeed without a coherent strategy.

Greg Clark, president of News Corp.'s technology group, said the company planned to overhaul the division from a proprietary on-line service to an Internet-based service. He acknowledged that News Corp. had encountered trouble translating its vast resources in print and electronic media to the new medium of the Internet.

"We were slow in getting started," Clark said.

Murdoch made his foray into cyberspace in 1993 by acquiring Delphi Internet Services, an on-line service based in Cambridge, Mass., with roughly 100,000 subscribers.

News Corp., based in Sydney, Australia, planned to use Delphi as a foundation for an expanded service that would harness the company's other media properties, which range from TV Guide and the publisher HarperCollins to the Fox television network and the 20th Century Fox film studio.

But current and former employees said the venture had been dogged by constant delays and frequent shifts in strategy. In a bitter twist, the venture plans to open its Web site on the Internet on Tuesday so that browsers on the Internet can get their first peek at News Corp.'s efforts just as the company undergoes a wrenching restructuring.

"The sad thing about News Corp. is that they've always had the most visionary approach," Wester said. "But they've had extraordinary difficulty in executing on that approach."

At the loft-like offices of News Corp. Internet in the Chelsea section of Manhattan on Wednesday, were updating their resumes and trading the latest rumors about how deeply the layoffs were going to cut.

"At the very moment that our work is going up on the Web and we're supposed to be celebrating, we all assume we're going to be fired," said one young editor, who asked not to be identified.

Executives close to the venture said MCI's departure made the job cuts unavoidable. Although MCI will retain an equity stake in the venture of about 15 percent, it is channeling its cash into the new Microsoft service, which is called the Microsoft Network.

A spokesman for MCI declined to comment Wednesday. But one executive close to the company said that MCI had been impatient with the sluggish pace of developments at News Corp. Internet. "We've got a better brand name with Microsoft anyway," the executive said.

MCI, the long distance carrier based in Washington, has a broader alliance with News Corp. and has agreed to invest up to $2 billion in Murdoch's company. Several executives said the Internet had become a peripheral part of that relationship.

MCI and News Corp. are teaming to build a satellite broadcasting service using an orbital slot that MCI recently acquired for $685 million in an auction held by the Federal Communications Commission.

"News Corporation is fundamentally a broadcasting company and film company, and the corporation's strategy is very focused on how to grow those assets," said Mark Benerofe, a former executive vice president of News Corp. Internet, who now owns his own consulting firm.

Separately, News Corp. reported that net income dropped 24 percent in its second quarter, which ended Dec. 31., to $294 million, on weak results at 20th Century Fox and HarperCollins.

The company's results were announced after the market closed in New York. Earlier, the American depository receipts of News Corp. rose 12.5 cents, to $21.125, on the New York Stock Exchange. Each ADRrepresents four shares of the company.

A spokesman said Murdoch was unavailable for comment. Clark said that despite the on-line retrenchment, Murdoch had not given up hope of becoming a player on the Internet.

"Rupert is still absolutely committed to this being a crucial distribution channel," he said. "But we want to invest in where the Internet industry is going, not where the on-line industry has been."

One area of focus for the venture will now be the 24-hour cable news channel that Murdoch recently announced. Clark said News Corp. would provide on-line text and video to supplement the material on its new service. Murdoch recently hired Roger Ailes, the former chief executive of the CNBC cable channel, to start the 24-hour news service.

As a result, executives close to News Corp. said the editorial staff of the venture would not be hit as hard by job reductions as the customer service and marketing departments. In particular, they said, News Corp.'s sophisticated customer service center in Lowell, Mass., will be almost completely dismantled.

One senior editor at the on-line service, Jonathan Miller, resigned Wednesday. But people close to News Corp. said Anthea Disney, the editor in chief of the venture and the former editor of TV Guide, was probably secure.

Murdoch's plan to use the service as an adjunct to his cable news service would seem to put MCI into an awkward position. The company's new on-line partner, Microsoft, has an alliance with NBC to develop a 24-hour news service called MSNBC. But MCI remains an equity investor in News Corp. Internet, which will be developing a competing on-line news service.

"No telecommunications or media company wants to be left out of this game," said Benerofe, the former News Corp. Internet executive. "As a result, there will be many more annulments, divorces, and separations than lifelong marriages."


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