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Posted at 5:33 p.m. PST Sunday, December 28, 1997

Net magazine Salon epitomizes fate of mind over matter

Mercury News Staff Writer

David Talbot summons a scene from a Woody Allen movie to describe why he left the San Francisco Examiner to start Salon, an online magazine that emphasizes books, travel, politics, and sex.

''In the beginning, he has this nightmare,'' Talbot explains. ''He's on a train pulling out of a station. It's really cheerless and grim. He looks across the platform, and sees a train going the other way. It's a train out of the '30s, sort of romantic comedies, beautiful women in gowns. For me, it was like, 'Why am I not on that train?' ''

In the last two years, Talbot's new train has chugged well down the tracks of literary acclaim. Backed by Adobe Systems Inc., the San Jose software company, Salon has distinguished itself with sprightly writing, inventive graphics, and a provocative urban voice.

Among serious readers on the Web, Talbot, a 46-year-old journalistic evangelist, has emerged as one of the most talked-about luminaries. From his San Francisco-based virtual perch at www.salonmagazine.com, he's published such authors as John Le Carre, Amy Tan, and Jan Morris.

But as 1998 begins, serious questions loom: Can Salon, or any other Internet content site, survive by itself?

The brutal arithmetic says advertising and promotions still do not cover the cost of online publishing, particularly for a Web publication that has no paper-and-ink counterpart to generate articles.

And Salon's fate may underscore a bigger point: How it survives -- and if it survives -- will say something about what the Web can be: Is it a new forum for ideas inherited from the world of print? Or is it a very different and possibly crasser medium where quality matters much less than reach?

''Think of this as a steeplechase on a dark, moonlit light,'' says David Coursey, who writes Coursey.com, an electronic newsletter about Silicon Valley. ''You face the same hurdle every other kind of publication faces. But what readers want is different, your relationship with advertisers is different, and you're dealing with an immature market.''

Silicon Valley's venture capitalists, who have funded such losing causes as pen computing, are largely shunning the Internet content world, worrying that its business model remains unproven.

''For the most part, VCs are taking a very cautious approach, since the model for building content-based companies is so different,'' says Yogen Dalal, a general partner in Mayfield Fund. ''Webzines require lots of money to generate content. And existing magazines will enter the space, since they already have the content and will learn how to package it for the Web.''

Others have folded

Already, a couple of online content sites have folded or faced serious cutbacks. CNet Inc., the tech-based news site, reported higher-than-expected losses for the third quarter of 1997. And even Slate Magazine, buoyed by mighty Microsoft Corp., had to drop its plan to charge for subscriptions in the face of reader revolt -- though it says it will try again in 1998.

None of this dissuades the Salon people from their chosen platform. The top editors say they have a circulation of about 150,000 people, and that the number of ''page views'' -- the number of separate pages viewed by readers -- has grown more than four-fold this year to 6 million per month. They say the average viewer spends 35 minutes on the site, well above the Web's average.

''We think we're well-positioned for the next wave of people coming to the Web,'' says Michael O'Donnell, Salon's publisher, a former Bellarmine Prep football player who is Salon's publisher. ''We think the kind of coverage we have is really appealing to a general interest audience.''

Salon has its roots in Talbot's dissatisfaction with established newspapers. A smooth-faced man who speaks in the rapid-fire of a literary salesman, he was raised in a show-business family in Hollywood, where his father, Lyle, was an early actor in the talkies. Between two stints at the Examiner -- he was part of a talented cadre brought in by ex-publisher Will Hearst -- Talbot wrote a book on the lefties of Hollywood.

''When I came of age in the '70s, there was a real premium on colorful, gonzo, distinctive journalism,'' he said. ''But for various reasons, financial and political, journalism has become very dumbed down, very banal.''

The turning point for Talbot was the San Francisco newspaper strike of 1994, when striking writers put out their own newspaper on the Web. Struck by the potential of the new medium, he began calling potential investors to pitch his idea of a literary-oriented Webzine.

He finally found one in Richard Gingras, a bearded Apple Computer Inc. executive who was married to the daughter of Dalton Trumbo, among the most famous of Hollywood's blacklisted writers. Talbot and Gingras hit it off immediately and Gingras found $60,000 in seed money from Apple.

Four quit jobs

Talbot and three others -- Examiner veterans Andrew Ross and Mignon Khargie and Salon's first publisher, David Zweig -- quit their jobs to begin the magazine. Talbot says he and his wife had $40,000 in credit card debt at the time.

''I thought, 'Gosh, what have I done,' '' recalls Gingras, now a vice-president at At Home Corp. in Redwood City. ''Sixty-thousand wasn't going to last for very long. I said, 'I just want to make sure you're comfortable with this.'''

The $60,000 was enough to create a prototype -- designed by Khargie -- that Talbot used to attract the attention of John Warnock, the chairman of Adobe Systems Inc. Talbot says he called Warnock's secretary, who put the proposal before her boss. And Warnock, an antiquarian book collector, visited the Salon offices and came away impressed.

Since then, Adobe, in partnership with Hambrecht & Quist, has put in three rounds of funding, the latest of which closed early this month. While neither Salon nor Adobe will say exactly how much has been invested, San Francisco Focus magazine reported recently that the first two rounds amounted to $5.5 million. Talbot says the total is less than $10 million.

The result appeals largely to an affluent, hip, leftish crowd: Salon has a mix of opinionated stories -- executive editor Gary Kamiya recently did an insightful piece on the Latrell Sprewell controversy -- and sections that appeal to particular interests: books, travel, politics and motherhood. Its ''Table Talk'' feature, which allows readers to contribute on particular threads, remains a popular feature.

The Webzine also features regular discussions of sex. One of Salon's young writers, Courtney Weaver, has written pieces on penis size, the wisdom of sleeping with ex-boyfriends, and fears of anal sex. ''David has always had a thing about sex,'' says one of his former colleagues at the Examiner.

While Salon officials won't say how much advertising covers of their budget, it's assumed, as with many online publications, to be only a small fraction.

Banner advertising

Salon gets banner advertising from Borders Books Inc., one of the big three of chain bookhouses. But Borders has been slower than Amazon.com Inc. or Barnes and Noble Inc. to establish a Web site: Its site is scheduled to open in January.

To supplement the income from advertising, Salon editors have talked about creating a Salon club that might give readers who pay a fee access to special parts of the site -- say an in-depth interview or chat with a famous author -- or to goodies like a Salon sweatshirt or T-shirt.

And in a piece of irony for the digerati, they've even toyed with the retro idea of creating a print version that could be sold at newstands. O'Donnell notes that Salon already sells its articles to print publications.

But a firm break-even point isn't in sight. Though Salon had talked about breaking even in the last quarter of 1998, the editors now say that it's more likely to occur in 1999. For that to happen, they think readership must roughly triple.

A lot of people doubt this model can work. Forrester Research Inc., the Cambridge, Ma. research firm, estimates that the total American advertising budget is around $180 billion per year. But only about $500 million is being spent this year on the Web. ''You're talking about something that's kind of a rounding error in the advertising world,'' says Bill Bass, a Forrester analyst.

Competing for attention

''They're competing for the time and attention of an online crowd that's pretty big,'' says David Carlick, a venture capitalist and former president of PowerAgent, a direct mail Internet firm. '''But the competition for that is everything. Salon is only one of an infinite number of sites competing for people's time.''

The theory behind online publications was that they would have an easier time breaking in because they could forgo the mailing or printing costs that often cripple young publications. But in the race for daily content, Salon and the others are taking on much more established media players, like Time, Newsweek, or ESPN.

''Salon has to develop new content. It has to develop new circulation. And they're up against people who have the content and the circulation,'' Carlick says. ''The theory was that this would be a level playing field, and that's just not the case.''

Even Salon's critical acclaim has not necessarily swayed advertisers, who have fallen into two broad categories on the net: Those who like the assurance of standard brands, like the New York Times, and the direct marketers who care far less about the quality of the publication more than the cost per viewer.

And whether Salon can get much money from referring readers to book or travel sites is still an open question. Forrester, for example, estimates that less than 8 percent of online book sales are referred by other sites. Savvy readers click directly on the sites of Amazon.com or Barnes & Noble.

Valuable alliances

Already, Salon's investors have made some changes that indicate they're aware of the problems they face. They've brought in a new publisher, O'Donnell, to replace Zweig, who has left to join City Search, a Pasadena-based Internet firm. And the magazine's editors say they have made valuable alliances with WebTV and America On-Line Inc.

Salon's future seems assured for at least another year through the largesse of Adobe, which did extraordinarily well in venture investing in 1995, in part by placing an early bet on Netscape Communications Corp. The Adobe people say they expect more from their investment in Salon than a platform for their graphics products.

''We've always stressed building a great product, and the readership will come,'' said Fred Mitchell, the vice-president of business development for Adobe. ''The challenge they have is a branding challenge. It's promoting the brand to people who are surfing the Web, so they're a known entity.''

Yet to people who invest in the Internet, the fate of content publications remains extraordinarily precarious. Unlike the maturing of a typical hardware or software company, where the early money goes to solving a technological problem, the sledding does not get easier.

''The problem with many of the Internet content companies is that there is no risk-reduction strategy that can take place before consumer acceptance or denial,'' says Jim Breyer, a venture capitalist with Accel Partners in Palo Alto. ''Therefore, the initial money remains high-risk.''

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