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BUSINESS WWWeb MASTER JEFF ARNOLD

The dot.com genius behind WebMD is back, and his business model is better than ever.
November 2005

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WORDS CHRISTIAN SYLT

If you thought that the burst of the dotcom bubble killed off internet entrepreneurs, think again. One of the web’s original wunderkind is back, and his business model is better than ever.

Jeff Arnold is one of a rare breed. In 1998, he founded dotcom darling WebMD, which soared to a stock valuation of $20 billion, before its shares collapsed from a high of $71 to below $10 in 2000. But, unlike many other e-business entrepreneurs, Arnold got out as the bubble was bursting and left with a $100-million war chest and— more importantly—knowledge of what works on the internet and what does not. Now he’s implementing it.

Arnold is a 35-year-old University of Georgia dropout who started his career as a pharmaceutical salesman. His first fortune came when he made $25 million from selling a heart-monitoring business he had set up aged 24. Then, in 1998, he founded WebMD, with the grand plan of using the internet to link doctors, patients, hospitals, insurers, labs and pharmacies. It was an overnight success, and attracted the big guns: Microsoft made a $250-million investment; DuPont $220 million and a $100-million investment gave News Corp an 11% stake.

Arnold lapped up the excess of the internet boom, buying himself a massive mansion in the affluent Buckhead area of Atlanta and holding private parties with Elton John performing. But it came to an abrupt end when WebMD shares went into free fall and he resigned as CEO to be replaced by someone twice his age.

In 2002, Arnold set up a private investment vehicle called Convex Group and raised $20 million—in the ashes of a burnt-out sector, this was no mean feat. In 2003, the group acquired encyclopedia website HowStuffWorks. Two years later, Arnold is beginning his big push with the luxury of hindsight.

“When I started off in the internet, it was really important to create a destination site. So, if you were looking for health information, in general people were aware that the one-stop-shop was WebMD,” he says. But now users want more targeted information. “Somebody doesn’t want to go to a grocery store and walk all the way to the back of the store to buy the milk. They want to walk in the front door, grab the milk and go,” he explains.

The turning point was Google’s success, as it allowed users to get very narrow results very fast. While WebMD was looking at buying domains like diabetes.com, Google users could get even more specific information by typing, say, “type 2 diabetes” into the search engine. As Arnold reflects, “Google comes along and says it’s much more targeted—you give me the keyword, and I’ll let you grab the milk right at the front door.” HowStuffWorks has been designed to capitalize on this trend.

“Search is the ultimate front door,” says Arnold.

Around 70% of web users start with a search to find what they are looking for. Accordingly, Arnold has spent the last few years studying search methods, “so we know at the front door, are they there for milk or ice cream?” To match consumers with their keyword, HowStuffWorks has 4,000 articles focused on price comparison or explanation.

Type “autofocus camera” into Google, and HowStuffWorks is the first result out of about two million. Type in “laser printer,” and the site is the third out of around 22 million. These rankings aren’t bought, they are high,

“because our roots are so ingrained in the internet, our content is so relevant, and because we have 25,000
.edus, .govs and .orgs who link to us,” says Arnold.

He believes HowStuffWorks is well placed to ride through another change that web usage will undergo. “Today, there are actually more publishers online than there are readers, and we believe there’s going to be a big backlash over the consumer not being able to understand if this is credible content or not,” he says. HowStuffWorks has a network of experts creating its content—intensive and expensive work, even for just 4,000 articles. But Arnold has even grander plans.

He says HowStuffWorks currently gets six million visitors per month, but Arnold’s goal is to balloon the site to over 200,000 articles, sending visitor numbers soaring. To ensure credibility is retained and overheads are kept low, Arnold hopes by the end of the year to seal deals with traditional offline publishers that would bring their content online.

Arnold also has plans to take HowStuffWorks to wireless devices such as cell phones and nothing less than global expansion is on his radar screen. “We currently get over two million international users every 30 days,” he says. Partnership deals could play a key role in expanding into foreign languages.

Long term, Arnold’s goal is to make HowStuffWorks a hub, with “spokes” of websites offering services connected to the listed topics. “In auto, we don’t just want to explain the hybrid cars, we want to review the hybrid cars that are on the market and ultimately hand them off to car dealerships,” he says.

The business model is surprisingly robust. For example, HowStuffWorks has around 500,000 hits each month for “hybrid cars,” and Arnold approaches relevant advertisers, such as Honda or Toyota, with this data. “What more targeted user could you ask for?” he says.

In 2003, Convex bought its second asset—a product called LidRock, which embeds CDs in watertight packaging in the lids of fountain drinks. LidRock content ranges from promotions for websites, such as HowStuffWorks, to videogame tips, movies and audio tracks. And, unlike many giveaway products, the content is often exclusive. Convex programs LidRocks before selling them to venues such as theater chain Regal CineMedia and fast-food chain Sbarro. The LidRock-equipped drink is then sold for an extra 99 cents, and Arnold says Sbarro has reported a 30% increase in sales as a result.

Convex has an esteemed list of LidRock content partners that includes Britney Spears, Janet Jackson and Ashanti. Each program is profitable, says Arnold, and, as Convex has tied up the relevant patents, it has cornered the niche in the fountain drinks industry, which sells over 20 billion units annually. Total LidRock distribution since launch has been 50 million—enough for the Recording Industry Association of America to keep a running tally.

There are also synergies between LidRock and Convex’s other asset, Flexplay, which it acquired a year ago. In short, Arnold’s innovative LidRock venture marries liquid refreshment to digital technology, with exclusive audio and video content on a disk that pops out of the lid of your soft drink.

Flexplay technology makes disposable DVDs. An adhesive is baked into the DVD that, when exposed to oxygen, prevents it from being read after 48 hours. The disks come in sealed packs and sell for $5, like traditional rentals—except they can be recycled after being watched. Disney has been an early Flexplay adopter, and last Christmas’ film Noel was released simultaneously on Flexplay and in theaters. The film wasn’t a critical success, but promotion through Flexplay and LidRock helped it stand up against big-budget holiday blockbusters. Arnold says, “We used the unique launch to educate the market and consumers about Flexplay in a creative, hands-on way.”

With the intellectual property tied up, Flexplay’s sole competitor is the $7-billion rental industry—and Arnold wants a slice. He gushes that the benefit for retailers is that, “there is no infrastructure required to offer movies and games at rental prices.” Flexplay has even developed technology to allow content such as trailers to be left on the DVD after the movie is no longer readable. “It is the ultimate in convenience,” says Arnold.

Testimony to this, in September Flexplay signed a partnership with Nippon Shuppan Hanbai, Japan’s largest distributor of DVDs. Arnold says Flexplay Nippon plans to roll out over 200 titles a year. New technology is a hit in Japan, but the home market is crucial, and Arnold adds that Convex is in discussions with a potential partner in the US.

The biggest challenge with LidRock and Flexplay is, “to align the goals of the distribution, content and sponsorship partners,” says Arnold. In other words, finding the right material and outlets. Over the next year, Arnold’s goal is to continue to launch LidRock and Flexplay in new territories.

Full synergy between the two isn’t currently possible, since the Flexplay packaging needs to be airtight, and a straw has to go through a LidRock. But if there is a way, it seems likely that Arnold will find it. He won’t say whether LidRock or Flexplay are turning a profit yet, although he does say that no acquisitions are in the pipeline as, “at this point in time, we have our hands full.”

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