They Coulda Been Contenders Once upon a time, Delphi was fighting it out with AOL. Then along came Rupert.
(FORTUNE Small Business) – The online world in the early 1990s looked a lot like Detroit in the 1950s. America Online, CompuServe, and Prodigy were the infant industry's version of the Big Three. Each offered solid, well-built, mass-market services that allowed users access only to news and features the companies or their partners produced. The Internet was still largely the domain of of academics, and "www" looked more like a typo than the future. Then in 1992, Delphi Internet Services rolled onto the scene. It was the first commercial service to offer real-time chats, online auctions, and full access to the Internet--all the stuff that has become so popular today.
Less than six months later, its subscriptions tripled. Despite Delphi's small staff of 30 and its humble quarters above Barsamain's grocery near Harvard Square, in Cambridge, Mass., many predicted that it would soon make roadkill of the online Big Three.
Well, not exactly. Nowadays, if you mention Delphi--especially to anyone under 30--most people think you're talking Greek. Those who know better often ask, "Oh yeah, whatever happened to them?" This is what happened: By the end of summer 1999, Delphi still had only 30 employees and was headquartered in the same space above Barsamain's. The company has been reinvented as Delphi Forums and is now a Web-based hub for online communities and discussion groups. The new Delphi is once again a player in a crowded field. Why didn't it become the dominant force many thought it would? No surprises there. Delphi's tale of woe has a familiar plot line to it: A small company was seduced by a corporate big brother and, ultimately, sidetracked by someone else's business plan.
Delphi began taking detours in 1992 on its way to success. "To a lot of people at the time, we seemed to be in an enviable position," says Dan Bruns, Delphi's past and present CEO. "But we didn't have a lot of financing to fuel our growth." Money wasn't easy to come by in the early 1990s, when potential investors thought the Internet might end up being a fad like CB radio. So when media mogul Rupert Murdoch came courting, Bruns didn't play hard to get. Murdoch's News Corp. bought Delphi for $15 million in 1993 and made it a wholly owned subsidiary. "We were still in fourth place," says Rusty Williams, Delphi's general manager before and after the acquisition. "But all of a sudden, we had the resources to take first."
Instead of becoming the online industry's leader, Delphi would quickly become one of its early casualties. Murdoch had hoped that his new company would be the vehicle to carry his vast print and broadcast holdings onto the Internet. Delphi was supposed to be The Simpsons' new home and Beverly Hills 90210's online address. To take it to that next level, Murdoch hired away IBM's director of high-performance computing and communications, Alan Baratz, in 1994. Bruns and Williams stayed on but took a back seat. Under Baratz, Delphi peaked with 500,000 paid subscribers and about 600 employees.
Those were the kinds of numbers News Corp. management and industry analysts thought they could bank on. But the figures hid the fact that Delphi was losing its competitive edge. By 1995, each of the new Big Three was offering Internet access, and so were dozens of other local ISPs. It didn't help that Delphi had never redesigned its all-text service into the simple point-and-click model AOL was using to push ahead of the pack. While others were rapidly revamping their offerings, Delphi was busy moving from Cambridge to New York City. Baratz and other News Corp. heavies were also preoccupied with a plan to build I-Guide, a mega-online service with MCI that never fully materialized.
Instead of being buoyed by News Corp., Delphi was getting bogged down by its bureaucracy, say Bruns and Williams. It didn't help that Baratz brought many IBM management techniques with him. "We were used to running with good ideas," remembers Williams. "We had to get used to focus-testing before we could execute anything. I was proposing projects but kept getting shot down." Among them was a prescient plan to offer free Web-based e-mail service. Williams told Baratz that free e-mail would increase traffic and probably spark growth, but Baratz never pursued it. (Despite several attempts, Baratz did not answer our calls for comment.) As it turns out, free e-mail did prove popular to the originators of Hotmail, who sold the service to Microsoft in 1998, reportedly for about $400 million.
By 1995, Delphi had lost its edge and many of its subscribers, and it was about to lose Bruns and Williams. "It was too hard watching our baby become a monster," says Bruns. "There was really no role left for me, so I moved on." He camped again in Cambridge and launched Knowledge Factory, a business-news Website.
Then in the winter of 1996, Bruns was confronted with a rare business opportunity: a second chance. After the failure of its megadeal with MCI, News Corp. was backing out of the online-service business. It was laying off almost half of Delphi's nearly 600 employees and looking to dump the company altogether. Bruns made a few calls and reacquired his old business. Though he won't disclose the exact purchase price, he paid relatively little cash but assumed several million dollars in equipment- and office-lease obligations. With only 50,000 paying subscribers left, Delphi looked ironically like the company Bruns had sold to Murdoch three years earlier. "We were on the same growth slope, but this time we were going down instead of up," he says. "It felt a little poetic."
Yet it must have also seemed tragic the day Bruns walked back into Delphi's Cambridge offices. Though most of its operations had moved to New York City and another facility in Lowell, Mass., News Corp. had housed Delphi's computer hardware systems in its original headquarters. "There were floors of empty office space filled with rows of computer equipment, and dozens of empty cubicles housing just two News Corp. employees," says Bruns. With the help of some former Delphi employees, Bruns tore down the cubicles and democratically rearranged the desks into a circle.
But office furniture wasn't the only thing that needed reorganizing. Faced with office space he didn't need, Bruns worked with News Corp. to sublet all the extra square footage as quickly as possible. He resold what computer equipment he could and also sold off Delphi's dial-up Internet access business to MindSpring for about $200,000. That gave an infusion of cash to the company, which then had only eight employees, whom Bruns was often having to pay out of his personal checking account. He also reteamed with Williams, who was working for Newspage.com, a personalized news Website.
Over numerous pints of Samuel Adams and Iron City beer, Bruns and Williams thought up ways to rebuild. "We'd missed our chance to be AOL," says Williams. "There was no reason to aim for that anymore." Instead, Bruns, Williams, and other members of the original management team decided to give the old company a new name and mission. In 1998, Delphi morphed into Delphi Forums, a free virtual meeting place for Web surfers looking to chat about news, pets, religion, or just about anything else. To make money, Delphi sells ads that appear throughout the site. It has also built successful discussion forums for companies such as Hasbro and for Web portals and e-commerce sites such as About.com and Xoom.com.
Even with its late start in a new race, Delphi Forums is doing very well. More than 11 million messages have been posted on the site's more than 100,000 active forums. To keep up, Delphi will have to double its staff to 60 by the end of the year. Fortunately, the company is no longer cash-strapped. Last year, Delphi closed on a $7 million round of financing, mostly from angel investors. That and a steady stream of advertising revenue have enabled the company to move from its offices above the grocery in Cambridge to an upscale office building across the Charles River in Boston.
The company had better not get too comfortable just yet. While Delphi Forums is dominating the Web's "community creation" niche, its future is hardly secure. It now has to compete with the discussion groups on sites such as the Go Network and Yahoo. Bruns and Williams know better than to slow down now, especially if they want to reach their next milestone: an IPO. "We don't want to waste this second chance," says Bruns. "We're on track again, and we're going to stay that way."