Prophet & loss: How the web's hottest gossip empire lost its mojo

Within 24 hours of the death of John Travolta's 16-year-old son Jett last week, a new explanation for the tragedy was being put forward by one of America's most influential media organisations. The teenager's death, it suggested, had not been due simply to a seizure suffered by Jett in the Travoltas' holiday home in the Bahamas, but was the result of neglectful parenting stemming from the Hollywood star's sexuality and religion.

Alongside a photograph of Travolta kissing Jeff Kathrein, the carer who had discovered Jett's body, the Gawker story made provocative suggestions as to the nature of their relationship. The item also referred snidely to Kathrein, who is married to a woman, as a "faux nanny". In a boast that seemed to recognise the depths to which it had stooped, the blog observed that the theory it had just outlined was one "you won't read about in the trashiest of internet tabloids".

If this is just another snippet of wildly outrageous internet gossip, the Gawker blog itself – and its ancillary sites – form a media powerhouse that demands to be taken seriously. Last March, the New York-based company Gawker Media was valued at $150m. It has been named the world's most valuable blog operation in a survey by the website 24/7 Wall St and Gawker's British founder Nick Denton has beaten off bids from the biggest media conglomerates.

More than any company, Gawker Media has defined the tone of the blogosphere. Yesterday, its sites were speculating on the health of Michael Jackson and wondering whether he might "moonshuffle off this mortal coil"; musing on the appointment as surgeon general of CNN's Sanjay Gupta – "What the hell is this, really?"; rooting through the Facebook entries of Illinois senator Rod Blagojevich. Together, the blogs under the Gawker Media banner collectively generate around a quarter of a billion page views per month, outstripping more established news organisation rivals including the Los Angeles Times. In short, it is required reading for senior figures across the traditional media world, even though they might pretend otherwise.

And it has earned Denton a fortune estimated at £140m and a place in the Sunday Times Rich List. Five years ago, it was said that London-born Denton, 42, a former public schoolboy and Financial Times journalist who now lives in Manhattan, might have the nous to "transform blogging from a pastime into an industry" – and he has surely gone on to do just that.

But now there are signs that the Gawker empire, seen by countless businesses around the world as a model for online success, is in trouble. One title, Consumerist, a popular site set up to give a voice to dissatisfied shoppers, was sold off last month. Defamer, its Hollywood gossip site, has been put up for sale. Wonkette, which was set up in 2004 to satirise the political establishment in Washington DC, was sold off last April to the site's editor, reportedly for a nominal fee. Two other sites, the travel blog Gridskipper and the Idolator, which carries music news and gossip, were also spun off. In October, Denton wrote to staff with "some bad news", laying off 19 of his team, including three of the five writers on the site Valleywag, which reports gossip from Silicon Valley.

Then, in November, Denton himself posted on his own blog a gloomy vision of the future, under the title "Doom-mongering". He claimed that predictions of a 16 per cent decline in online display advertising revenues in America this year were overly optimistic. "From conglomerates to internet ventures," he wrote, "executives should be planning now on a decline of up to 40 per cent in advertising spending during this cycle... instead, they're sleep-walking into economic extinction."

Denton went on to spell out his survival plan. "Most websites are still way too small to register with the audience-tracking services that [advertising] agencies rely upon. Of 18 titles launched at Gawker Media, we've already spun off or shuttered six. Even now, 91 per cent of advertising revenues come from the top six remaining titles. Every media group has a similarly lopsided distribution. It's time to choose which properties make it aboard the lifeboat."

The Travolta story is symptomatic of another of Gawker's ills. Many believed it had simply gone too far. "Hey Gawker, Leave the Travoltas Alone," argued New York magazine, accusing the site of "random mean-spirited speculation". Respondents to that article agreed. "They may have cut off their nose to spite their face this time," said one. "Like they're effing Woodward and Bernstein over there. A**holes," said another.

Denton is defiant over the coverage, which suggested that Travolta's faith in Scientology may have led to Jett being neglected for treatment for a condition identified by some as autism and by the family as Kawasaki syndrome. A year ago, Denton managed to acquire a cringe-inducing video of an intense Tom Cruise talking about Scientologists as being the "authorities" on conquering drug addiction and on rehabilitating criminals. Having been posted as an "exclusive" on Gawker with the personal Denton message that "on the scale of scary, this is a 10", it generated more than 2.5m hits.

Of the backlash against Gawker's Travolta story, Denton tells The Independent: "Gawker brought to public scrutiny Tom Cruise's crazed Scientology recruitment video; and we make no apology for identifying the 'nanny' as a wedding photographer, last snapped himself in a smooch with John Travolta, that other celebrity adherent of the cult."

Denton had been similarly irreverent towards George Clooney when the actor took issue with "Gawker Stalker", a feature that encourages readers to spot celebrities so that they can be located on a Google map. Clooney encouraged his fans to undermine the site by reporting false sightings, claiming that the website was encouraging stalkers. Denton held firm and thanked the film star for the free publicity. Gawker Stalker currently features Manhattan sightings of Justin Timberlake, Ricky Gervais and Bill Clinton.

As for "traditional" media critics, such as New York magazine, Denton observes: "If these pompous American magazines and newspapers weren't so busy defending good taste, they might occasionally break a story." This comment is classic "Snark", the language that Gawker was instrumental in creating. Cutting, cynical, sarcastic and knowing, it is the lingua franca for countless blog sites and celebrity magazines, such as Heat in Britain. The prevalence and impact of this culture has been recognised by David Denby, film reviewer for New Yorker magazine, in a new book, Snark: It's Mean, It's Personal and It's Ruining Our Conversation.

Criticism by an old-media figure such as Denby, who is 65, should hardly be damaging to a portfolio of websites that draws its audience overwhelmingly from the advertiser-friendly 16-34 demographic. But more threatening are the question marks about the quality of reporting. It is no use being cynical and knowing when the readers no longer believe that the blogger is as close to the story as the arch tone of the writing would suggest.

Gawker Media's first site was Gizmodo, launched in 2002, when Denton decided to pay a salary to a smart amateur blogger with an inside track on the gadgets industry. Gawker itself followed four months later, with the talented Elizabeth Spiers nailing the gossip among the New York media set in a dozen posts a day. Spiers left Gawker in 2006 to set up her own blog network, Dead Horse Media. Ana Marie Cox, the founding editor of Wonkette, which launched in 2004, also left in 2006, going on to join Time magazine. Other Gawker editors Jessica Coen and Jessie Oxfeld went on to Vanity Fair's website and New York magazine respectively.

Another former Gawker editor, Emily Gould, wrote a piece for the New York Times magazine last May, in which she described how she had been savaged on the television show Larry King Live by presenter Jimmy Kimmel, who accused her of having previously violated his privacy. After her appearance on the show, Gould found herself subjected to thousands of derogatory emails, including one that told her "you truly are a cheap, heartless human being".

Gould later found herself lying on the floor of the Gawker office having panic attacks. Denton might find it difficult to retain staff because of his insistence on paying writers according to the number of page views they generate. Maggie Shnayerson, an associate editor of Gawker, was emailed by Denton last year with the following message: "I don't think you're suited to the pace of Gawker. Last month, you got about 400,000 page views; this month you're at 160,000. You should be doing some 670,000 views a month to justify your advance."

Denton justifies the flat-rate payment – said to be $7.50 per thousand views – on the grounds that it mirrors the way that authors of books are remunerated. Although an internal Gawker media memo acknowledged that an obsession with page views "can overstate the value of cheap items with superficial appeal but which damage a site's reputation", Gould has since said that the system encouraged writers to focus on the most populist issues and to be more "sensational and even more brain candyish than Gawker was to start with". Readers began to take notice. "When do we just start straight-up outsourcing this shit to India?" commented one, subjecting the site to the sort of snarking which has become its signature. Meanwhile, Hacker News, a specialist tech website, has refused to take stories from Gawker Media site Valleywag because it claims so many of its posts are "deliberate linkbait", aimed merely at generating traffic.

Denton himself is unlikely to be too worried by claims that he has gone too far down market. In his November plan he suggested that commercial media should abandon subjects "such as politics, to which advertisers are adverse", suggesting that "media groups cannot afford in the current environment to fund their most noble missions; they should leave that to public-spirited non-profit [organisations]."

His track record demands that his views are taken seriously. Few have recognised the potential power of the internet like Denton, who says he has spent more than eight hours a day online for most of his adult life. Having left the FT in 1998, he made his first fortune from Moreover.com, aggregating stories for specialist sites, and he made another killing from First Tuesday, a networking organisation for internet entrepreneurs. Then he got in at the start of the blogging revolution.

It's also the case that Denton has made dark predictions in the past. In 2006, he put two of his sites, Sploid and Screenhead, up for sale. "Better to sober up now, before the end of the party," he said. "We are becoming a lot more like a traditional media company. You launch a site, you have great hopes for it and it does not grow as much as you wanted. You have to have the discipline to recognise what isn't working."

Like a traditional media company, Gawker Media has seen key members of staff lured away by rivals, and seen its audience become less willing to allow it to operate by a different set of values. And like a traditional media company, it is feeling the pain of the violent adver-tising downturn.

In his prophecy of doom, Denton acknowledges that some will regard his warnings as an exercise in "gamesmanship" designed to put off investment by potential rivals. "My motives are indeed not entirely pure," he admitted.

Could the founder of Gawker Stalker himself be finally running scared?

By Tim Walker and Alexis Ashman