This is the sixth story in a Re/code Special Series about the Los Angeles tech scene. In these LA Stories, we’ll take you behind the scenes of a playful, powerful and potentially game-changing tech boom taking place across the Southland.
The Internet was, in many important ways, developed in Los Angeles as a Defense Department project — a communications network that could survive nuclear war.
For that job, a lot of government money in the late 1960s went to Southern California universities, to such Internet pioneers as Leonard Kleinrock at the University of California at Los Angeles and Jon Postel at the University of Southern California.
From this foundation of hard-core engineers, many of the Internet’s important commercial players emerged.
That includes Sky Dayton, who built up EarthLink, one of the earliest and largest Internet service providers. And Bill Gross, founder of many tech companies, such as the pioneering paid-search company GoTo.com, which later become Overture. And Chris DeWolfe and Tom Anderson, who built Myspace, the early social network that was once the most-visited site on the Internet. And Richard Rosenblatt, who created Demand Media, the content-creation startup, as well as many other tech companies in the LA area in the sector’s early days.
All impressive, except that many of these early rock-star entrepreneurs in the LA area were quickly chastened by dramatic failure, which may have made them more cautious. Today, some of them are actually pretty down on LA tech. But if you ask them about what has been happening in the last year, their eyes do seem to light up.
So I asked them about it.
Sky Dayton and laying the pipes of the early Internet
Sky Dayton, who founded the early Internet provider EarthLink, said LA was the perfect city for him to build his startup in. That’s because he didn’t need programmers — he needed engineers, and those engineers had to come from nearby places like Raytheon, Boeing and Lockheed Martin.
“It was raw physical infrastructure. We literally had to pull fiber to our building. There was no cloud. Our CIO had been the CIO of Southern California Edison, a giant power company. The people who knew how to build networks in those days were these kind of old-school physical-network-builder guys. They did serious fundamental research,” Dayton said in a recent phone interview. “They weren’t just learning to program. Writing code is not engineering. It’s the architecture and how everything fits together. That’s the hard part. The coding is the easy part.”
Dayton was an unlikely founder for a company like Earthlink.
In 1993, in fact, he was running a coffee shop called Cafe Mocha in West Hollywood. MTV would film there; Vogue did photo shoots. One afternoon, he read about the Internet and thought it seemed interesting. He said he even called 411 asking what the number for the Internet was.
“There was not a lot to work with back then,” he recalled.
The rest is Internet history: Dayton set up his own network, going to a CompUSA store, purchasing 14-kilobyte modems and connecting them all together in Atwater Village, a location he picked because it was the widest possible area to which you could make a local call.
“You could be in the Valley, you could be at the beach, you could be downtown,” he said.
So Dayton hacked the phone system and began to expand his operations. Business boomed. Soon, the telephone company called and said he was melting down their central office. Moving to Pasadena, he hired thousands of employees and, in 1996, became the largest private employer in the city.
“It’s funny, but the infrastructure was happening in LA,” he said. “Silicon Valley was more like the early software, like Netscape. Apple really wasn’t doing anything in the Internet at all — I mean, they made it as hard as possible to connect their computers to the Internet.”
In the early days, Dayton said, he rarely felt the need to go up to Silicon Valley for anything. “The only reason I went there was to argue with Netscape. But otherwise, no, I never thought about the Valley,” Dayton said. “It was like the Renaissance. You had Rome, you had Florence. Maybe something else was happening in the Valley, but we were focused on building in LA.”
And even as Silicon Valley emerged as the center of tech, Dayton stayed in LA for its diversity.
“As the Internet became a real thing and people started paying attention, I would get invited to CAA to meet with the top talent agents or to MGM and meet with the studio head,” he said. “If I were in Silicon Valley, I think I might have been invited to meet [legendary Intel executive] Andy Grove. It would have been technical people talking to technical people; in LA, it was creative people.”
Bill Gross and the challenge of building a startup mentality
At the end of 1995, Bill Gross started recruiting entrepreneurs and engineers to build startups at his incubator, Idealab, in Pasadena. It was a challenge.
“I took candidates out to dinner. People really thought this was a path to doom,” Gross said in a conversation at Idealab’s HQ. “Enough people hadn’t seen exits yet, where early founders had made out well enough to appreciate the possibility. It was different up north by that time. Entrepreneurs were already much more celebrated up north. Down here, there were just very few tech IPOs. There were not startup rags-to-riches stories.”
He blamed the universities, in part: “There just wasn’t a culture of startup mentality. We had colleges that were great, but there was no mindset of taking that risk. Now, finally they all have entrepreneurship programs. Now finally they’re aware of it.”
Even recruiters had no idea how to hire, said Gross: “We had a low batting average. We started using recruiters, but even they didn’t understand salary versus equity trade-offs. Working with us, someone wouldn’t have a whole team of assistants helping them. It’s very hard to figure out who will make that transition well. We had one person leave us to go somewhere more stable, and he went to Enron.”
Over time, Gross founded 125 companies. By 1998, five of his companies — including eToys, CitySearch and GoTo.com (which became Overture) — had IPOed. Each of these were significant moments for LA tech. He also had failures (40, by his count).
But the successes were bittersweet — mostly, the successful companies moved up north. GoTo.com/Overture, for example, grew to $300 million in revenue very quickly, and was sold to Yahoo, also giving Google the idea and technology for paid search that it exploited more deftly.
“If Overture had remained an independent company, that would have been a huge asset for LA tech,” Gross said. But Yahoo moved the company to Burbank, and then siphoned employees off to Northern California.
“That was a shame for LA. That was 2,000 people. So, yes, it was really sad,” he said. “I wish the company had stayed independent. I wish Yahoo put more into it down here.”
Myspace rises, falls
After the dot-com bust in the early 2000s, LA tech went through a very quiet period. And then there was Myspace.
Launched in August 2003 by Chris DeWolfe, Josh Berman and Tom Anderson, the early social networking site was just a little part of another company called eUniverse when Richard Rosenblatt discovered it.
Rosenblatt came in to head the company, and found the three young founders working in a closet: “They actually sold scooters through email, that’s how they got into eUniverse. Spammy email stuff. No one likes to talk about that,” Rosenblatt recalled. But he became receptive to the social networking idea they developed. “They came to me and said, ‘Hey, what do you think about this? No one pays attention to it.'”
Rosenblatt did and threw the weight of eUniverse (which became Intermix) behind it. And Myspace grew — from 2005 to 2008, it was the most-visited social networking site in the world.
“In 2004, almost every phone had a camera, but people didn’t know where to put their pictures; then there was Myspace,” said co-founder Chris DeWolfe. “As soon as there was Myspace drama happening around us, we knew that it had entered the lexicon.”
Early Myspace employee Jamie Kantrowitz joined the team in 2003 to focus on the profiles that weren’t people — bands, celebrities, political affiliations.
“To me, MySpace was like MTV, which was more than a music channel. MTV delivered the cultural temperature of a generation,” she said. “Now, maybe Snapchat is doing that. They’re personal-expression platforms.”
When Myspace had had 2,000 employees in 12 countries, Rosenblatt negotiated a sale to News Corp.
In the room: Rosenblatt, News Corp. CEO Rupert Murdoch, top exec Peter Chernin and News Corp digital exec Ross Levinsohn. After a 20-minute pitch from Rosenblatt, Murdoch stood up, said he heard it was $12 a share, and that he would buy it.
Or as Peter Chernin remembered it: “Buying Myspace with Ross, it had nothing to do with geography,” he said, meaning nothing to do with the company being in LA or not. “To be blunt, we were just looking to buy some scale.”
Not for long, as Facebook soon entered the landscape in a big way.
“At a certain point after the company was sold, there was a little bit of lack of direction,” DeWolfe said. “And everyone kind of did their own thing. I don’t think there was this ‘gotcha’ moment. Everyone just started leaving at a certain point. It became a different place. It became less important.”
Nonetheless, Myspace was the first mainstream large consumer Internet company that emerged from LA. “And to a certain degree, it made it okay to start a tech company in LA,” said DeWolfe. “It proved that we could do it.”
Although it carved out the possibility for tech success in LA, its later slow and painful failure was also a setback for the region.
“Myspace was a blow,” Science co-founder Peter Pham said. “We had a monumental, iconic brand that fell to the wayside.”
Demand Media gets squashed (twice) by Google
Richard Rosenblatt, who now lives between Sky Dayton and Dr. Dre in the Palisades, has some experience in the widely held notion there that Silicon Valley has it out for LA tech — and he points to what happened at Demand Media as one example.
“People don’t like success — and they don’t like LA people who are successful,” said Rosenblatt, talking specifically about Google and how the search giant decimated a lot of legitimate content businesses like the company Demand Media in what was an effort to purge its results of weaker material.
To be clear, Rosenblatt’s thoughts are not uncommon at all — you hear such things a lot when you spend any time in LA and the topic gets to the arrogance of techies to the north and how creating common ground has continued to be tough going.
The turnabout at Demand was sudden, for example. And, it came after Rosenblatt had tried more than any other LA area exec to forge stronger ties between North and South. He traveled to meet Google execs and built relationships with them; he partnered with a lot of Silicon Valley investors and tried to build ties all over the region; he touted the idea of the two sides more closely working together, especially in bringing content (which LA was known for) together with technology (which Silicon Valley was known for).
A prenaturally friendly person, Rosenblatt is not someone with a trace of bitterness nor someone who seems prone to running others down, so his point about the difficulty of making nice is well taken.
He has also been a critical tech pioneer in the LA area, having been involved in a lot of key deals at the heart of modern LA tech before Demand vaunted him to a higher profile. Well before the place was known for tech outside of Hollywood and aerospace, Rosenblatt sold iMall to Excite@Home for $425 million, led growth for Myspace (which was part of another company he ran) and negotiated its sale to News Corp. in what was a stunning deal at the time. Rosenblatt then went on to found Demand, which he took public.
“My whole concept was, leaving Myspace — there was this huge new platform of people creating content that could be useful,” he said in a recent interview at his Beverly Hills office. “What if we created a platform about what you know, not what you show?”
Through products such as eHow and Livestrong, Rosenblatt’s Demand Media made popular search-optimized answers to every sort of Googled question, such as how to make a garden gnome and why apples are healthy. At the company’s peak, Rosenblatt had a team of more than 1,000 copy editors, and each article they made cost about $20.
“It was 2008, and newspapers were laying off writers left and right, so our writers were like ex-LA Times and New York Times,” he said.
Demand Media had a $2 billion IPO. And then, quickly, the game was up.
“Ninety days in, with no warning, [Google CEO] Larry Page decided to change search optimization rules. The articles stopped appearing in search results,” Rosenblatt said. “EHow’s traffic dropped from 100 million to 10 million.”
He tweaked his methods. “I was humble. We fixed it. And then they hit us again,” he said, recalling the business challenge of being, essentially, de-Googled.
After that, Demand Media’s stock price collapsed. While many think Google was right to try to surface better content for its users, Rosenblatt still thinks the move was unfair and more of a blunt instrument than a combing out of bad content, born of a lack of knowledge about each other’s businesses. “Silicon Valley was happy to see us going down. They never want LA to succeed,” he said, talking about the Google move. “Being an LA tech company, they want us to fail.”
And then he reflected better on the idea, which many in the LA area have, even as they look to create bridges and foster better cooperation. “The problem is, a lot of us who built these companies, they didn’t turn out that great,” said Rosenblatt. “So, they’re almost kind of right a little bit, which you hate to see.”
In other words, nothing succeeds like success — which is perhaps what is happening now. Rosenblatt, for example, has been a big supporter of Snapchat’s Evan Spiegel and also many other young tech entrepreneurs, helping them navigate the shoals he had to endure largely alone. He’s also hard at work on another stealth startup that looks very promising and will, with any luck, surely attract the interest of Silicon Valley and perhaps, more importantly, its admiration.
Or so Rosenblatt — a hopeful guy, if anything else, who seems to truly want a convergence between north and south — can hope.
The wrong time and the right time
Bobby Kotick moved Activision from Menlo Park to LA in 1993. And, he said, it was a huge mistake at the time.
He thought games would become more like film and television, that they would develop a capacity to do storytelling. He thought it would be much easy to take great storytellers and teach them to be engineers.
But he found Hollywood and its fleet of storytellers to be completely resistant.
“I was totally misinformed that the storytellers were relevant, that they could become engineers,” he said. “The resources that came from film and television, I thought would be more applicable to videogames than they were. It was not smart thinking at the time. I was wrong, really. I was wrong.”
He still grew the company from insolvency to one of the largest and most profitable videogame companies in the world.
And now, finally, the technology may have caught up with his vision.
“The next 10 years, that will be the big change I predicted,” Kotick said. “For the first time, the technology will allow you to deliver dialogue, which is what you need to create empathy. So, finally.”
The key will be to not get bought by companies up north, he said, which recently happened with virtual-reality headset company Oculus (bought by Facebook) and headphone maker and music service Beats (bought by Apple).
As early Myspace employee Jamie Kantrowitz said, “When something like Beats gets sold to Apple, it’s hard to even see it as an LA victory. No one could be happier for Ian Rogers than we are — what we don’t see is how those acquisitions reinvest into the community.”
That’s why many of LA’s influential entrepreneurs pointed to Snapchat as a particularly promising company.
“Snapchat not selling — there are a lot of people in LA who think that was a great decision, even though there are a lot who disagree,” Kantrowitz said. “[Snapchat CEO Evan Spiegel] has just put his foot on the ground that he does not have to go anywhere.”
Bill Gross agreed that the future will be these “magic” and “viral” new companies.
“There’s a category of company that has this viral nature, where users bring in more users, and those things, if they work — and they take magic to work — those things can scale very, very big with a low number of people,” Gross said. “And if one of those stays here, that will be the turning point.”
Going forward, Sky Dayton said, innovation won’t be around content: “Ultimately, it’s not the pipes that matter, it’s what you do with the pipes,” he said. “There’s a big world out there. The Internet, it shouldn’t be a thing, it’s just a part of everything. And I think in that respect, LA is just getting started.”
It certainly is, if you think about it. And considering the history, it’s well past time to do so.