Recently installed Time-Warner CEO Jeff Bewkes is apparently kicking ass and taking names over at the struggling media and entertainment giant, talking about cutting costs by 15 per cent and restructuring the conglomerate’s cable division — but for some unfathomable reason, he still can’t bring himself to say that TW is planning to dump the declining AOL Internet access business. All he will say is that the company is splitting AOL into the access business and the content business, so as to “increase the strategic choices” available to the company.
Strategic choices? At this point, the only strategic choice for Time-Warner when it comes to AOL is the choice between whether to use a .45 pistol or a shotgun to administer the killing blow. I realize that when you’re a big-time CEO running a gigantic corporation with many moving parts, you can’t just come out and say “We are selling this dog,” but come on — everyone has to know that this is coming, right? AOL has been shedding subscribers by the millions every quarter for as long as I can remember. The access business is dying, and the body has already begun to smell bad.
If anything, the death of the access unit is the easy part. Sell it for parts to an income fund or someone who wants to play the declining margins game, and then move on. But the content business is a bit more problematic, as Cynthia Brumfield wisely points out at IPDemocracy. Although the shift from walled garden to free and advertising-supported content has been a relative success for the company — in the sense that advertising revenue has been growing — it still hasn’t come close to making up for the revenue that AOL gave up by making the shift.
America Online — what a long, strange trip it’s been. One of the first to make the jump from the old bulletin board days to the new visual Web, back when Netscape was just a toy that Mark Andreesen came up with at university, America Online was like the Google of its time. Sure, it was annoying, and it blanketed the globe in free signup disks, but for many people just getting used to the Internet it was friendly and safe; the “You’ve got mail!” tagline became so famous it became a movie. Then AOL hit the peak — it effectively acquired one of the largest media companies in the world for hundreds of billions of dollars.
Since then, it’s been pretty much downhill all the way. The bubble burst within minutes of the Time Warner deal being signed, the market value of the two companies disappeared like a ghost in the night, and TW has spent the past few years trying desperately to figure out what the hell to do with AOL — as millions of people have deserted the once mighty service. According to the latest figures, more than 15 million people have signed off and never signed on again since 2001 (although AOL still has 18 million left). The company has taken down much of the “walled garden” approach that it became famous for, but it hasn’t helped all that much.
Now there are reports that Time Warner is considering radical surgery: namely, making all (or virtually all) of the service’s content free, with the hope that increased traffic and advertising-related strategies will compensate for the loss of revenue. But will it? That’s a multibillion-dollar question. According to one estimate, TW could be giving up in the range of $2-billion in revenue by going free. Can it make enough deals that bring in new dollars to fill that hole? Maybe the real question is whether the company has any real choice.
The only other option is to spin the thing off and hope someone else wants it (at one point, there was talk that founder Steve Case might), or watch it continue to shrink until someone puts a bullet in its head. More coverage in the Washington Post and Fortune magazine, which notes that there is already a company pursuing the strategy AOL has in mind — it’s called Yahoo.
According to a blizzard of reports, starting with the Wall Street Journal and now including the New York Times, the Washington Post, and Reuters, Google is close to a deal to take a five-per-cent stake in America Online for $1-billion (U.S.). This, of course, is only the latest in a series of rumours about what’s going to happen to AOL – first Microsoft was close to a deal to buy the whole enchilada, then Google’s’s name was brought up, then Microsoft was seen as being back on top.
At one point, the speculation was that Time Warner CEO Dick Parsons was trying to get the takeover rumours going so that he could cut a better deal with Google, which AOL uses to power its search results. Then AOL founder Steve Case came out with his impassioned plea to split up the company – the same thing Carl Icahn seems to want to do – in an op-ed piece in the Washington Post, which I wrote about, and which was hilariously satirized in a commentary piece here.
Most analysts seem to think that Google taking a piece of AOL – if only so that Microsoft or Yahoo don’t get it – makes sense. The former walled wasteland… er, garden is estimated to account for about 11 per cent of Google’s annual search revenue, and that wouldn’t be a good thing to give up. And it’s only a billion, right? Pocket change for a company with a market value of almost $130-billion.
Several people, including O’Reilly Radar and John Battelle, have noticed a potentially ominous sentence in the New York Times piece: “Google, which prides itself on the purity of its search results, agreed to give favored placement to content from AOL throughout its site, something it has never done before.” Don’t jump the shark, says Battelle. Henry Blodget says it’s a good deal for Google, and a bad one for Microsoft. And Rafat over at paidcontent.org has a nice roundup of the various twists and turns this story has taken.
Cynthia Brumfield over at IPDemocracy.com points to a fascinating opinion piece by AOL founder Steve Case that appears in Sunday’s Washington Post (which obviously appears on the website Saturday night). In the piece, Case argues that the merger between America Online and Time Warner — which was actually a $165-billion acquisition of Time Warner — hasn’t worked, and therefore the two companies should be split apart again.
Cynthia notes that complaining about a lack of integration between Time Warner and AOL is a little disingenuous, considering AOL was the one in the driver’s seat after the deal closed, and Case himself became chairman (although Time Warner chairman Gerald Levin was CEO). In fact, there were reports at the time that Time Warner executives were more than a little peeved at being sidelined by their counterparts at the online company. As the dot-com bubble deflated, of course, it became harder and harder to justify that, and Time Warner reasserted control.
In any case — no pun intended — the AOL founder says that by last July he had come to the conclusion that the company should be split not just in two, but into four: Time Warner Cable, Time Warner Entertainment, Time and AOL. The board disagreed, and Case left. At the end of his piece, it’s clear that he would like to draw a comparison between AOL’s somewhat tattered reputation and another company that was once dismissed as a has-been: Apple.
It’s unlikely AOL would ever be able to pull off a similar rejuvenation, however, since it would likely be bought by Microsoft or Google first.
Mark Evans says the piece is part of Steve Case’s ongoing attempts at “reputation rehab.” And Om Malik writes a post in which he appears to be comparing Case to Brutus in Julius Caesar. As I mentioned in a comment on Om’s blog, I think he’s being a little hard on Case. IÃ¢â‚¬â„¢m not saying heÃ¢â‚¬â„¢s a candidate for sainthood, and much of what he did at AOL made things worse instead of better. But he didnÃ¢â‚¬â„¢t manufacture the market value that allowed AOL to take over Time Warner, nor did he slip something into Gerald LevinÃ¢â‚¬â„¢s coffee that made him or the board accept the deal.