Mark Cuban And Todd Wagner

Richard Murphy

MARK CUBAN AND TODD WAGNER built a $3 billion the founders of stock-market sweetheart Broadcast.com show you how it’s done

ONE OF THE HOTTEST COMPANIES in cyberspace occupies a converted warehouse in Deep Ellum, an old, honky-tonk neighborhood nestled near the glass towers of Dallas’s central business district. The warehouse roof bristles with satellite dishes that pull in TV and radio broadcasts from all over the country and, increasingly, the world. Downstairs, in a large room full of rack-mounted computer equipment, technicians transfer the sound and images to a Web site called www.broadcast.com.

Out on the main warehouse floor, several hundred casually dressed, heavily caffeinated young people toil in a cubicle maze. A blond Mohawk appears just above a cube wall. Nearby, a young woman in frayed jeans talks intently on the phone while she swigs Evian and peruses an e-mail about the company’s latest employee stock-option plan.

At the heart of this enterprise are Mark Cuban and Todd Wagner, the visionary odd couple who run Broadcast.com Inc. Together, these men have built the Internet’s leading broadcast company. Their initial public offering (IPO) was one of the most successful in Wall Street history. Broadcast.com stock rose by 249 percent on its first day of trading, July 17, 1998. Cuban, Wagner, and the other original investors became instant paper millionaires; the company raised more than $40 million in operating capital.

Who are these guys? Think of Cuban, 40, as Oscar Madison: fast-talking, sports mad, a little sloppy. He began his entrepreneurial career when he was 12, selling garbage bags door to door, and started a profitable computer consulting company right out of college.

His old Indiana University buddy Wagner is more like Felix Unger: logical, precise, a former corporate attorney who spent his early career rising through the ranks of big law firms. Cuban is a technology whiz and master salesman; Wagner is a master negotiator and deal maker.

In the beginning

It all started in the summer of 1995, when Wagner came up with the idea that it would be cool if he and Cuban could listen to Indiana basketball games on the Internet. “Todd was like, `You’re the geek, you know this Internet stuff, figure something out,'” Cuban recalls.

Guessing that Internet broadcasting might have commercial potential, they assembled what would become Broadcast.com in Cuban’s spare bedroom, for less than $5,000. Cuban put up $2,995 for a Packard Bell 486 PC, about $1,000 for network equipment, and $60 per month for an ISDN line.

“And so we let ‘er rip,” Cuban says. In July 1995 they approached local Dallas talk-radio station KLIF and asked whether they could use its programming to test the idea. “We walked in and said, `You know, someday there are going to be radio superstations on the Internet. Let’s work together and test it, to see if there’s really a business here.'”

KLIF agreed, and the trial began. At first Cuban and Wagner couldn’t even broadcast live; instead, they would tape KLIF’s broadcasts, digitize the recordings, and post them on their Web site, where surfers could access the programming.

By September 3995 the fledgling media moguls had figured out how to hook a $15 radio tuner to the sound card of Cuban’s computer and broadcast live. That system wasn’t exactly foolproof either, as Wagner learned when he accidentally disconnected the entire network by getting up to go to the bathroom. “I kicked over the tuner, which disconnected the plug,” he recalls. “And Mark was like, `We’re off the Internet!'”

Their initial marketing strategy was equally homespun. Cuban went on the Internet and started talking up a new, free service for Dallas sports fans. “I was like, `Hi, gang, if you’re interested in Dallas sports and stuff, come to our Web site and tell me what you think.’ It seemed to make sense, but really we had no idea what to expect.”

As e-mail flooded in from office workers in Dallas and homesick Dallas natives everywhere, Cuban and Wagner realized they might actually have a viable business on their hands. They launched a company called AudioNet and started pitching Internet distribution to radio stations and sports teams all over the country. The business model: Content providers interested in expanding their listenership over the Web would pay AudioNet to Web-cast their programs. “We licensed a lot of content for multiple years because nobody else cared about it,” Wagner says. “I mean, we were creating something that didn’t even exist. Internet-broadcast rights — what were those?”

The bottom line

Unlike many Web entrepreneurs, Cuban and Wagner focused on revenue from the beginning. Some broadcasters paid cash for Internet distribution; others bartered commercial time. Cuban and Wagner could either resell bartered spots to advertisers or use them to promote their own business.

The content providers were happy: Internet broadcasting drove traffic to their own Web sites, where they could make money through promotions, sponsorships, and product sales. And, crucially, stations discovered that Internet broadcasting boosted ratings. In the broadcasting world, ratings are everything: the more people you reach, the more ads you can sell.

Having created a viable revenue model, Cuban and Wagner needed a way to keep competitors out of their territory. So, they began putting together a sizable inventory of Internet programming that Web users would be able to find only at their site. The more content they controlled, the more difficult it would be for potential rivals to enter the market.

To achieve that advantage, they were even willing to give up equity. Early on, AudioNet did a deal with Host Communications, which owned the radio-broadcast rights for a dozen college basketball teams in the NCAA tournament. Cuban and Wagner gave up 5 percent of AudioNet in exchange for exclusive Internet-broadcast rights to those teams. “If we do well, you guys do well,” Cuban told Host. “If we’re schlumps and it goes to hell in a handbasket, you haven’t lost anything.”

By late 1995 the business had burned close to a million dollars, most of it Cuban’s. But by then, word had spread through the Dallas business community that AudioNet was onto something big. “We had friends threatening us,” Cuban says. “They were like, `Guys, you’ve gotta let us invest.'”

Cuban and Wagner valued AudioNet at $3 million and started selling off $30,000 increments to friends around Dallas. That kept the business alive until the investment-banking firm Alex. Brown organized their first private placement, in 1996. And in May 1998, AudioNet changed its name to Broadcast.com to reflect the company’s move into video broadcasting.

The way they are

Cuban and Wagner have come a long way since they powered up their company in 1995. Wherever you are in the world, 24 hours a day, seven days a week, you can tune in your hometown radio station, listen to CNN, or watch local television news from around the United States, simply by turning on your computer and surfing over to www.broadcast.com. You can also watch movies, listen to CDs and audio books, or catch special events, such as the Victoria’s Secret live New York fashion show, a Broadcast.com exclusive that drew 1.5 million viewers — the biggest live event in the history of the Internet.

But even without scantily clad supermodels prancing down a virtual runway, Broadcast.com’s fare is sufficiently compelling to draw more than 800,000 visitors every day. Apart from pushing a dizzying range of consumer media content, the company has established a lucrative niche broadcasting corporate shareholder meetings, conference calls, and other live business events. Broadcast.com’s ability to serve both consumers and companies with the same technology is part of what makes it so appealing to investors, who are betting on rapid growth and, eventually, fat profit margins (yes, that’s right, profit margins).

Strange business

This is the Internet, mind you, so Broadcast.com has yet to make a dime in profits. Although revenue has grown dramatically in the past three years, operating and marketing costs have grown even faster. The company lost $14.9 million last year on revenue of $22.4 million. And the company’s stock prospectus contains this chilling little disclaimer: “The Company expects to continue to incur significant losses on a quarterly and annual basis for the foreseeable future.”

Sitting in his modest cubicle on the main warehouse floor at Broadcast.com, Cuban waves a dismissive paw when I bring this up. “That’s just lawyer stuff. If I thought there was a chance that we would never make a profit, I wouldn’t bother running this company. I’m not doing it for my health,” says Cuban, a fitness enthusiast who has been known to recruit employees during workouts at his local gym. “I think we have a chance to change the way the world communicates and just make an obscene amount of money along the way.”

At press time the company’s market capitalization was around $3 billion, with the stock trading at 96 1/2. As Lehman Brothers gushed in a recent investment report, “While Broadcast.com’s valuation is rich, we believe plenty of upside remains as the company tackles this untapped market with tremendous opportunities.”

Speaking of which, going public has made it possible for Cuban and Wagner to grow quickly by using Broadcast.com stock to acquire other companies. Last November, for example, they paid $20.75 million in stock to buy SimpleNet, a Web-site-hosting company that serves more than 15,000 individuals and small businesses. That single transaction drove Broadcast.com into the top 20 properties on the Web.

So, unlike many entrepreneurs, they never viewed their IPO as an exit strategy. “Going public is not an end point,” says Cuban emphatically. “It’s presented as this big graduation ceremony. You’d think the stock market would give you a cap with a tassel to flip once they start trading your stock. And really it’s the opposite.”

Broadcast.com’s IPO was, however, an extraordinary branding event. “We went from being a company that very few had heard of to being a company that most have now heard of,” Wagner says. “People think, Wow, they’re one of the survivors, they’re one of the companies that are going to be around. And in this space that means a lot, because a lot of companies will not be around.”

Public headaches

But it’s not easy having one of America’s hottest Internet stocks. There was a time when Cuban and Wagner, weary from their grueling pre-offering road show, hoped that completing the IPO would finally give them a chance to relax. “You’re up at 5 A.M., and you don’t get to bed until midnight,” Cuban says. “You’re exhausted from spitting out the exact same presentation. You’re getting stupid, dumb-ass questions from some of these guys, when you were expecting them to challenge your intellect.”

And the stupidest question was? Cuban doesn’t miss a beat here: “`How many CD players do you have back there to play all that music?’ And that guy’s one of our biggest shareholders.”

Once their company went public, did the dynamic duo catch a break? No way. The IPO brought an entirely new set of responsibilities. First and foremost, being public means answering to all the people who have poured their money into your stock. Like most stocks in the Internet casino, Broadcast.com shares have fluctuated wildly since last year. At one low point, Cuban received an e-mail message from an anxious woman who had been counting on her Broadcast.com investment to raise the down payment on a house.

“I wrote back saying, `All I can tell you is that everybody at this company is going to give every ounce of their energy to make you a financial genius.’ When the stock was back up in the 90s, she sent me this really grateful e-mail,” he recalls. “The point is, you realize, as the valuation goes up, that it’s not a celebration; it’s a responsibility. However hard you thought you were working, you’ve got to work harder, faster, and smarter to meet those expectations.”

Don’t look back

Most Wall Street analysts expect Broadcast.com to become profitable toward the end of next year. That target date puts enormous pressure on Cuban and Wagner, who are currently spending obscene amounts of money on a marketing effort designed to ensure that Broadcast.com remains the Web’s leading broadcaster for years to come. “Online businesses need to spend on sales and marketing,” says analyst Daniel King of LaSalle St. Securities in Chicago.

Especially nowadays. In the looking-glass world of the Internet, where the most successful companies lose more money than their rivals do, all the emphasis is on building a sufficiently high profile that you become one of the coveted “portals,” the sites that most people go to automatically whenever they want a given service.

Just as Amazon.com is the top book portal and Yahoo is the leading portal for text-based Web pages, Broadcast.com is sprinting to become the Internet’s unchallenged broadcasting portal. “Broadcast.com is a marketing machine,” says John O’Halloran, CEO of the interactive-broadcasting-software start-up Netpodium Inc., which last month cohosted an interactive PBS Web-cast with Broadcast.com. “I’m impressed by the level of aggression they’ve shown in making deals.”

As Cuban and Wagner never tire of saying, their business strategy is really quite simple: provide compelling content, build barriers to shut out potential rivals, differentiate yourself from the competition. And do it all very, very quickly, because this is the Internet, the world’s newest and potentially richest media market, and there are plenty of wealthy competitors drooling over your visibility and market share. “Broadcast.com has leader and first-mover status, but they’re not operating alone,” says LaSalle’s King.

In 1997, MCI and streaming-software manufacturer RealNetworks launched a Web-broadcasting joint venture called Real Broadcast Network. Earlier this year, former NBC president Nell Braun announced that he was starting a new Internet-broadcasting company, backed with $100 million from the Massachusetts-based Internet-investment firm CMGI. Those are just two of many companies circling around the Web-broadcasting market, which is currently thought to be worth about $50 billion per year in potential direct fees and ad sales.

The road ahead

Cuban and Wagner, nevertheless, have a big lead: they’ve already differentiated themselves by building a proprietary data network that allows Broadcast.com to bypass traffic jams on the Internet. As of February 1999, the company had Internet-broadcasting agreements with 385 radio stations, 40 television stations and cable networks, and more than 420 sports teams. They also boast more than 600 business customers, including such deep-pocketed corporate behemoths as AT&T and General Motors.

All those deals take a lot of negotiating, which is the deceptively laid-back-seeming Wagner’s forte. Chatting with him at Broadcast.com, one could forget that this amiable man has closed some 900 broadcasting deals in the past three and a half years: roughly one deal every 36 hours. “We do deals constantly,” Wagner says. “We have contracts with all our radio stations, all our television stations, all our colleges. We try to make the contracts very simple, but they are negotiated deals, and they have to be moved quickly.”

Adding fuel to the fire, Broadcast.com has been hiring salespeople at a frantic dip. To put it very mildly, Mark Cuban is a sales enthusiast. “Sales is king,” he says. “The technology is an enabler, but being a quick-moving sales organization is going to make us strong for a long time to come. Because if I’m selling, you can’t knock me over.”

But in a competitive market, it’s not enough to sign up new clients; you must also keep existing clients happy. And how do you do that? “It’s like being a good lover,” Cuban says. “You ask your customers what they like, then you give it to them, then you ask them if they liked it. And if they say yes, you do it again.” (Both Cuban and Wagner are single.)

Broadcast.com was quick to recognize, for example, that its radio-station clients had little interest in reaching listeners beyond the local market. So, Cuban and Wagner quickly switched their marketing focus, explaining that Interact streaming allowed stations to reach vast numbers of office workers who didn’t have a radio on their desk but did have a computer. “The value proposition for radio stations was the ability to reach someone in the office,” Wagner explains. “They didn’t care about worldwide, so we quickly realized we didn’t care about worldwide.”

Wagner argues that the rest of the world is just now catching up with Broadcast.com’s vision of a multimedia Internet. “Nineteen ninety-nine was the year when lightbulbs started going off in people,” says Wagner, who tends to speak as though he already lived in the next millennium. “They started saying, `Oh, my God, it’s not a text Internet. It’s going from that silent-movie phase; it’s now the talkies; it’s audio and video.’ One company has done nothing but focus on that for three and a half years. That’s us.”

From a technical point of view, Wagner’s vision is still ahead of its time. Because most Interact users still access the Web via slow, dial-up modems, they can watch only low-quality video: grainy, jerky images no bigger than a business card. And unlike TV broadcasts, Web broadcasts are accessible to only a limited viewership. During popular live events like the Victoria’s Secret show, many viewers couldn’t even get onto the site, and some complained about system crashes. Still, Internet broadcasting currently enjoys one significant advantage over regular broadcasting: Web content can be archived forever and accessed at will.

Most experts think it will take another three to five years before a critical mass of Internet users have high-speed connections to the Web, which is when Internet broadcasting may finally emerge as a credible alternative to conventional TV. When that day comes, Cuban and Wagner will be ready. Not long after wrapping up this interview, both men were back on the road, selling their new media to new customers. “We always try to accelerate so there’s no room for someone to pass us,” Cuban concludes. “To get to the front of the parade, you jump in front.”

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