Newspaper headlines are filled with reports describing the demise of dot-com firms. The rapid reversal of fortunes, however, has not been limited to pure-play Internet companies. Some of the largest losses on the Internet have occurred on the books of Fortune 500 companies.

Consider this: Disney recently reported that it would take a charge of more than $790 million related to restructurings within its Internet group. This amount was dwarfed, however, by an even greater icon of U.S. business. AT&T reported that it would take a noncash charge totaling $2.7 billion related to its investment and control of Excite@Home.

Both Disney and AT&T are seasoned companies that have weathered numerous business cycles. It would be easy to believe that their management teams were caught up in Internet hype, which led to these massive losses. A deeper examination, however, shows a more subtle cause. In both cases, high executive turnover combined with hand-waving business plans that had a high assumption-to-knowledge ratio led to faulty decision-making at both companies.

Business plans for new ventures involve many assumptions; that comes with the territory. Creating a vision of the future and then working backwards to assess how to achieve it requires educated guesswork. Inevitably, many guesses turn out to have been wrong. That is why companies entering unfamiliar markets must continually test assumptions, adjust their tactics, and then readjust their assumptions in a never-ending forward march.

That, in part, was where things went awry at AT&T and Disney: A prolonged game of musical chairs in the executive corridors led to translation errors in the business plan. Just as in the childhood game of telephone, where a message is passed between a number of people and the ultimate message is grossly distorted from the original message, assumptions in the business plan were translated into certainties.

Take Disney first. In 1995 the company was looking to enter the brave new World Wide Web arena. The depth of Disney’s ambitions was widely noted. Jim Cramer, founder of, a financial news and analysis website, reported that “there was a period of a couple of years where Disney acted as if it were the king of the web.” Despite its ambitions, Disney’s online operations began in a modest manner. The first version was called Disney Online and consisted of interactive websites for Disney properties. Some of these were instant hits.,, Mr. Showbiz, and were all considered niche successes.

Disney then decided to create a broad-based portal. The reasons were clear. Although the Disney stock was in a mild upward trend, it did not have the explosive growth of broad portals such as Yahoo or AOL. The Disney management saw this move as a way to rapidly create shareholder value. In addition, it allowed Michael Eisner to convey a clear, simple Internet strategy. It was easy for executives to rally around this strategy, and Disney had the media assets to make it plausible. Moreover, by 1996 the only metric of significance to portal performance was Media Metrix – a website that measures online traffic. By themselves, the focused Disney media sites would never be able to achieve enough traffic to register on this rating.

In 1998 Disney created the Buena Vista Internet Group by merging its assets sites with a search engine, Infoseek. The deal was structured so that Infoseek got $70 million in cash, a $139 million five-year note, at least $165 million in promotion, and Starwave (a web-development outfit valued at approximately $350 million). Disney got 43% of Infoseek’s shares, along with warrants, that when exercised would give Disney a 50.5% stake. However, the success of this new venture hinged on one critical assumption – that at this time in the portal wars, Disney’s ability to promote across its “offline” network was sufficient to leverage itself into a new brand,

At that time, this seemed a plausible assumption. Most portals had grown without any advertising simply as a result of word-of-mouth, or as some might say, word-of-mouse. Although Yahoo had the fastest growth rate among portals, absolute traffic numbers for, Lycos, Yahoo, and Infoseek weren’t that far apart. In comparison to pure-play portals, Disney also had another huge advantage: It was a bricks-and-mortar company with a vast arsenal of off-line promotion possibilities including theme parks, cruise ships, and retail stores. A member of a prominent strategy consulting firm that evaluated Disney’s Internet operations says it just wasn’t known how off-line promotion would deliver Internet traffic but that there was no logical reason it couldn’t. That was one of Disney’s most significant assumptions.

Disney acted on its strategy cautiously, seemingly testing its assumptions. The portal rolled out slowly with only a small number of features. Some observers saw the slow rollout as a mistake, considering the immense growth rates of its competitors – but it did show that Disney was going through initial testing of product features. Harry Motro, CEO of Infoseek, told consulting firm Forrester Research that heavy offline promotion wouldn’t start until the following year. Disney was not planning a major media blitz for more than six months as it tested various product/promotion bundles. The portal was making progress. Forrester reported that “offline media helped boost GO Networks’ reach from 25% of online users in December 1998 to 33% in June 1999.”

At the same time, Disney executives were rapidly defecting. With a stagnant stock price, especially in comparison to pure-play Internet companies, and the scarcity of experienced media executives, Disney was ground-zero for recruiters. Jim Cramer recently described his experience with Disney at that time. “People kept getting deposed and new rulers were installed with regularity.” Akther Ahmed, president of Xavient Technologies, said “having Disney on your resume was all you needed for an offer.” Michael Eisner, CEO of Disney, acted to stop the defections. He bought the remainder of Infoseek and created a tracking stock in order to create Internet-style options-based compensation.

Disney then began to marshal its massive “offline” assets to promote The assumption that this would be effective had become a truism around the company. One former NBCi executive claims that the web-marketing notion that companies should “use offline assets to build online traffic” originated at Disney. By this time, however, the data was available to test this assumption. was getting some 50 million pageviews a day while Yahoo was getting more than 300 million daily pageviews and more. In addition, most of the traffic was coming from the Infoseek search engine, which was itself getting new competition from rivals such as and

“If the slowdown in growth was known, Disney likely would have chosen a different organization of its assets and might have succeeded,” says Wharton marketing professor Peter Fader. “It likely wouldn’t have stayed with the alternate (GO) brand.” Disney took another year to come to that realization. After months of heavy advertising, had little to show except for a $242 million operating loss. Following one last attempt to reposition into an “entertainment and leisure” destination site, Disney shut it down. continued to exist as a website, though in a much tamer form that primarily offered links to other Disney sites.

On January 29, Disney announced that it would dissolve its online tracking stock, Disney Internet Group, converting its shares into common stock on the parent company as of March 20. Each outstanding share of the tracking stock was to be converted into a 0.19353 of a share of Disney common stock. As a result of the restructurings, a charge of $790 million was related to the write-off of intangible assets. Another $25-50 million in charges were attributed to severance and the write-off of fixed assets.

Just as Disney’s went astray, AT&T ran into serious trouble with Excite@Home. The company’s long-standing profits from long-distance services were rapidly disintegrating, and it was looking for ways to capture a greater share of the consumer’s wallet. One way to do this was to deliver both voice and Net access to consumers. Regulation prevented AT&T from getting direct access customers without going through the regional Bell companies, which still dominated the local phone services business. Cable access seemed like a promising way to reach the end consumer, and AT&T began a massive buying spree of cable properties.

One of AT&T’s most significant cable acquisitions was TCI, which owned a significant stake in Excite@Home and also used its exclusive high-speed Internet service by contract. By acquiring TCI, AT&T inherited the relationship. AT&T’s management was primarily interested in gaining access to consumers and the Excite@Home assets just added value to the deal. AT&T made the assumption that this strategy would allow the company to create a content-access bundle that could get premium pricing.

This was a foray into unknown territory for AT&T. According to Wharton professor G. Anandalingam, “It’s okay to be opportunistic, but it’s a very different matter to make the opportunism work.” AT&T repeatedly said that it did not want to be in the content business. Immediately, the assumption was put to a test on all these issues. Numerous counties, including Oregon’s Multnomah County and Broward County in Florida, refused to transfer their local cable franchises over to AT&T. The accusation was the bundling of access-content, and the communities – and America Online – demanded that AT&T open its access channels to other content providers. AT&T, however, had a solid management team that understood this issue, led by Leo Hindery. A vice president at a large cable company who requests anonymity says that “TCI’s CEO John Malone and Leo Hindery understood this assumption and how to navigate through it.”

Hindery even made a speech at Stanford Graduate School of Business entitled “The Future of Content.” Through a variety of actions, Hindery made it known that AT&T would be better off selling access to its pipes to whatever content providers were willing to pay, rather than bundling proprietary content with access. The most plausible strategy seemed to be to divest the stake in Excite, a content portal, in order to allow open access to other content providers.

Hindery then resigned to pursue personal interests. Malone was busy running Liberty Media and wasn’t operationally near these issues. Also, the top leaders at Excite – Tom Jermoulak, followed soon after by George Bell – resigned. These events were followed by a continual departure of executives from AT&T and Excite@Home. The new management executed a plan that was based on a premium priced content-access bundle. Responding to America Online’s acquisition of Time Warner, AT&T began to assemble its own broadband Internet service. It was as if an assumption that had already been proven wrong now was suddenly being acted upon, as if it were a given in the plan. AT&T offered to buy out the stakes of two minority partners in @Home, Comcast and Cox, at a 27% premium. AT&T also took over 74% of Excite@Home voting stock and consolidated financial statements which diluted its 2000 earnings by 20 cents a share.

In addition, AT&T extended its own non-exclusive carriage of @Home to 2008, six years past the expiration of its exclusive carriage of @Home in June 2002. At the same time, it was stated that after June 2002, other Internet service providers and portals would share that space. Initial deals were struck with Mindspring and Earthlink. Not surprisingly, the value of Excite, already at a 52-week low, plummeted which showed up in AT&T’s books. Ironically, Excite@Home took a $4.6 billion write-down of its assets from its content acquisitions. AT&T’s 23% share of the noncash charge equaled $1.1 billion. Also, AT&T took another noncash charge of $1.6 billion because of the plummeting valuation of Excite@Home.

A recent report in BusinessWeek Online offers a final footnote. “The end may be near for the once-mighty Excite Internet portal,” the publication writes. “Patti S. Hart, appointed chairman and CEO of Excite@Home on April 23, already is exploring opportunities to sell the money-losing Excite business and may shut it down in the next several months if no buyers emerge.”

What overall conclusions may be drawn from these twin disaster stories? At Disney and AT&T, the companies began a careful process of entering unfamiliar territory by working their way through assumptions about the future. It appears, however, that accelerating executive departures led to translation errors in the operational plans. Assumptions were treated as realities, a formula that has often been known to lead to massive losses. The take-home lesson: Watch out for business plans with a high assumptions-to-knowledge ratio. They can get distorted as they pass through a rotating set of executives, and get you into a lot of trouble.