• by John Motavalli , Columnist, September 21, 2016

Of all the bizarre mysteries haunting the Internet world, one of the most interesting is the saga of Mode Media, a kind of women-oriented fashion and beauty ad network that was once ranked the No. 7 Web site. Back in May, Programmatic Insider asked the question, “Why Is Mode Media In Quiet Mode? At the time, we experienced the phenomenon of calling the then 10th largest Web site — once valuated at $1 billion — and getting voicemail.

Mode Media suddenly announced its demise last week without actually explaining what happened. Because what is left of Mode now is controlled by Germany’s Hubert Burda Media, we would expect some kind of public statement from them, but no dice.

Communication does not seem to be Burda’s strong point, as the last press release put out on its site was in June, and that Web page offers no contact info. That’s odd behavior for a big company. The only way we found their press email address was from an obscure financial filing. Burda did not respond to our email. But here is some of what we know, based on interviews with informed sources.

Even now, comScore’s latest rankings from July proclaim Mode as the 15th largest Web property, with 111 million uniques. That’s bigger than eBay and Yelp. So Germany’s Burda gave Mode and its New Delhi-born Samir Arora, Mode’s founder, $40 million on the promise that Mode would dominate fashion and beauty advertising online.

“Arora was included by MIN magazine in the The Digital Hot List 2008 and was named Web 2.0's Don Draper as one of the 30 men shaping our digital future by GQ magazine,” Wikipedia notes. (Because of the fashion content he blogged, Arora may have been one of the few Internet execs GQ had heard of.) Back then, Mode Media’s future looked bright.

Keep in mind that Mode Media content creators are some of the biggest names in the fashion and beauty business, such as Molly Sims, a “supermodel” who, according to the Mode Web site, “has joined forces with Mode via a strategic advertising relationship.”

But on September 15, a group of armed guards hired by Burda invaded the Brisbane, Calif., headquarters of Mode Media and told all 300 or so employees to leave. A memo accompanied this drastic action.

“We deeply regret having to take this action and we wish we could have provided you with greater notice,” it proclaimed without explaining what would have prevented earlier notification. One insider notes that the decision not to pay any of the employees the money owed to them is particularly perplexing because Burda certainly could have afforded to pay them off.

What Two Venture Capitalists Say
We talked to a couple of venture capitalists who invest in Web properties. They both find what’s left of Mode to be of interest. Many links at Mode were not operative Monday, though the “About” section still existed. It claimed Mode to be the No. 7 video platform on the Web. Will all that traffic simply vanish? The betting now is that Mode will declare bankruptcy and the assets will be offered at an auction or distress sale. Or, as some think, Burda will re-activate the site without the liabilities involved with providing benefits to 300 U.S.-based employees.

Let’s put this in perspective. As of July, according to comScore, Mode had more traffic than Hearst (103 million uniques), and way more than Condé Nast Digital (80 million uniques). This despite the huge promotional value those companies bring to the table, and despite the evident distress Mode has been in at least since April, when Arora resigned from the board, if not longer.

So if you are a venture capitalist and want to obtain 111 million uniques — at its height Mode was claiming 80% of Millennial women — at flea market prices, possibly, what do you do next? Says one venture guy with an impressive track record in the Internet space, “I am assuming it will now go into bankruptcy and whatever will happen will happen through that. Another option would be to call the primary debtors and see if some type of deal can be done. This type of a thing generally happens when they showed their biz around but were unrealistic on pricing and ran out and hit some type of debt covenant.”

The principal debtors are Hubert Burda Media, BDCA Venture, Inc. and Aeris Capital. From various accounts, Burda dominated the board in recent months and was making all decisions. Burda appears to have bought out the other investors, though we can’t confirm that with them.

Adds another guy with an equally impressive entrepreneurial record in the Web space, “I find it hard to believe that they couldn't cut costs to make $100 million in revenue profitable. But maybe the $100 million was about to be $50 million since the model may be broken. It would also be interesting if they're being shut down with cash still in the bank that will be returned to investors. A board can vote a dividend to shareholders that takes all the money out of the operating entity and kills the business ... and it's also possible that there's some kind of fraud — so the investors would rush to get their money out before the lawsuits begin.”

According to insiders, Mode’s founders made the original $40 million investment with Hubert Burda, the longtime patriarch of Burda. I’ve met him; a courtlier gentleman you couldn’t imagine. Things went fine for a while, but when Burda retired from an active role, a new generation of leaders took a more activist role in Mode, especially CEO Paul-Bernhard Kallen. Last March, in particular, there was a showdown between Burda board members and both Arora and board member Marc Andreessen, the venture capitalist and cofounder of Netscape.

Here is where this really gets interesting. How do you screw up so bad if you are reporting $100 million in revenue and most of your activity is simply rounding up a bunch of fashionista blogs and consolidating their traffic? Creating content is expensive. Linking to it isn’t. Media companies have a terrible record on the Internet. Remember what happened to MySpace after its takeover by News Corp. Is this simply a case of a clueless foreign media company manhandling a great Web property?

Hard To Compete In Programmatic
Insiders say that Mode, like many other Web companies, was left reeling by the 2008 economic downturn. Increasingly, though Mode had been a pioneer with native advertising and as a video platform, it was finding it hard to compete with Google and Facebook in programmatic, as most content-based Web properties have found. The company’s “zero tolerance” for programmatic fraud also caused waves. But some think that if the proven entrepreneurs Arora and Andreessen had stayed on the board, Mode would have survived.

Arora is not a neophyte. He founded and sold NetObjects, which was later acquired by IBM and went public. He went to the celebrated Birla Institute of Technology and Science in India, attended Harvard, and holds a diploma in sales and marketing from the London Business School. He had an impressive run at Apple. On his personal Web site, Arora quotes this: “You can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your heart, gut, destiny, life, karma …”

Arora’s Web site has a lot of cosmic stuff on it, and we learn that he studied Zen Buddhism and is the chairman of the non-profit organization International ZenTherapy Institute, Inc. (IZII) in the U.S. We think Burda should have listened to Arora and Andreessen.

Burda has more than 200 magazines, and a digital division operates the hotel rating and travel site Holidaycheck, the dating site Elitepartne, FOCUS Online, which is described as a news and information site, as well as XING, a “career-oriented social networking site” popular in Europe. In a 2015 financial filing, Burda declared, “Another focus in the expansion of digital activities was penetration of core Internet technologies — browsers und (sic) search engines — with in-house products. Targeted investments were also made in technologically advanced consumer Internet companies, in order to guide their growth as long-term partners.”

Guiding their growth is not what happened at Mode; it was more like guiding their demise. Still, insiders are more than puzzled by Burda’s actions in recent weeks. Why, if the traffic is still an asset, and could presumably be sold, would you kill a bunch of the links and drastically reduce the remaining traffic? Why cut off all the Mode contributors when, according to one estimate, a couple of million dollars would have settled the claims? That’s chicken feed for a company the size of Burda.

Content Creators Very, Very Upset
As Arora put it, the dots will somehow connect in the future, but they’re not now. We can presume that companies like Hearst and Condé Nast kicked the tires, but balked at the price that was asked. But now? People are very, very upset.

Ontario-based Dana Fox wrote a post titled “Why I Am So Angry At The Mode Media Shut Down” on her blog.

“The last campaign I did with Mode was a video promotion and social media job. It took me 3 whole working days to prep, shoot and edit the photos accompanying the video, film the video according to their extremely specific directions, additional hours to edit the first draft, then re-edit it (three times I might add!) after receiving comments from the brand,” she reports. “I uploaded that video 4 times, created an original 500+ word blog post to go alongside it, edited some Instagram photos according to their specifications once again, and then made sure to schedule the final posts on certain provided dates, meaning my regular content would be pushed aside for these promotions. I don’t know about you, but that sounds like a decent employable amount of work to me. 

“I will probably never see my payment for that job.”

Jaime of GirlLovesGloss.comread Dana’s post, and responded, “OMG I had no idea!! They owe me money too — money that I was supposed to get paid this month and next month. I am so upset, MODE was the major source of my income :-( How can they do this without even notifying us? I don't even know what to do at this point :-(.”

Jaime, I don’t know if there’s anything you can do. One blogger claims there is a total of 365 bloggers who haven’t been paid. Many of them had signed exclusive advertising contracts that tied them down for at least a year. Maybe journalists and bloggers are used to getting screwed, but can you do this kind of thing to supermodels and get away with it? Are the rules for media companies different in Europe, because we cannot imagine an American media company acting this way?

We shall see what happens next. If they start up again, will the same bloggers and fashionistas come back? Probably. Where else would they go?

We’re betting that a smart entrepreneur will buy out Burda and do something smart with Mode. But there could be something scarier at work here. One person close to the situation asks this question: “If Mode wasn’t viable, what about big content sites like BuzzFeed?” It’s starting to look like programmatic is killing big time Web content operations, especially when big media gets involved.

We welcome input below from Mode Media insiders who can shed more light on this situation.