You've Got Mail

Capsule:  How drastic a transformation will most media companies make to grow again?  As AOL announces 2,500 planned lay-offs on a base of 6,900 employees pre-December-9th spin-off, what's the message inside the medium? Will an ailing media and advertising world once warned unveil dramatic new business plans or return to its fundamentals or both?  How about broadband distribution giving some thought to graduated mail delivery charges as a start?  (http://www.thewrap.com/article/bloodbath-aol-2500-cuts-announced-10409) 


AOL is in the news again along with its new Google-harvested leader Tim Armstrong. Within the past few weeks, AOL has chosen a new post-spin-off Board that includes the usual media luminary suspects while announcing its massive lay-off plans to skinny down the company as a new independent investment prospect. While skinny-ing down will help the new AOL throw off cash, it won't guarantee its ability to improve its top-line financials quarter after quarter as Wall Street ultimately requires.
 
Control Video Corporation and Quantum Computer Services were AOL's earliest screen names, circa 1983-1985. AOL didn't become American Online until 1989, only eleven years before the fateful 2000 merger with Time Warner that spurred many a story, book, modern investment crisis and good old-fashioned ulcer.
 
Within four years of the AOL Time Warner marriage, AOL had 20,000 employees. More important, it had close to 27 million subscribers in the 2002-2004 timeframe. A whole "You've Got Mail" generation, today's 20-somethings, was formatively raised on the iconic blue triangle, the running man, the killer IM app and the transformation that consumer-friendly brilliantly designed dial-up internet brought to American mass media.
 
Looking back, everyone knows that the AOL Time Warner merger was a barn-burner of a mistake. What made it a mistake is judged differently according to which tour guide of the American media landscape you use. The structure of the deal and the valuations of the principals were clearly flawed: AOL's future potential was grossly over-stated and Time Warner's potential was judged roughly as rich as it has turned out to be, but only as a media company benefiting from its opportunistic mating with an internet juggernaut.
 
In spite of its AOL marriage, Time Warner and its spin-off Time Warner Cable have turned out to be tremendous assets on a fundamental level. Time Warner has understood the necessity of content innovation through its cable networks to a level unmet by any other US content company with the possible exception of Disney. It's still struggling to get its magazine properties to a point of either fundamentally solid growth or radical innovation within the internet and mobile space. But Time Warner's magazines have the benefit of time and financial support from their wealthy cable network partners.
 
Time Warner Cable has continued to grow both organically and through savvy M&A transactions. Since AOL was knee-high-to-a-grasshopper, Time Warner Cable has been a US growth leader through well-conceived and managed mergers and through a fundamental understanding of the core cable distribution business that is arguably superior to the entire cable field, with the possible exception of Comcast.
 
Why couldn't Time Warner and Time Warner Cable save AOL from its shrinking fate? Since 2002, in seven years, AOL has lost 21.3 million subscribers, bringing its customer base from 26.7 million down to 5.4 million today. Most of these customers upgraded from AOL's dial-up service, most memorably priced at just under $25 per month, to cable broadband service, priced on offer roughly $5 above AOL and over time at least $15 higher, and marketed, sold and serviced by Time Warner Cable and Comcast. The next best alternative during the period of AOL's troubles was telco DSL, priced as low as $15 a month, but without the fast track expansion capability or the speed of its cable competition.
 
What's the lesson here?  It may be that you have to respect fundamentals even while you're worshiping at the altar of change. AOL was a subscription business with an ingenious design and a high respect for quality service as long as it was inside its comfort zone of dial-up internet connectivity. With the emergence of cable distribution exemplified by partner Time Warner Cable and pals, AOL seems to have sustained a broadband meteor hit that left it at least partially frozen in time.  
 
There are hundreds of examples of media and service companies on ice past the point of having been bested by the competition. Broadcasting got iced with cable's expansion, particularly because of the advertising competition offered by cable content. Rather than sit on ice, broadcasters started leveraging their government-support fundamentals early to force their way onto the competitive cable menu.  
 
What makes AOL excruciating is that it wouldn't transform itself into a true broadband service that competed on content while partnering on distribution. AOL's original genius was in understanding its symbiotic reliance on dial-up internet. Once mastered, AOL refused to understand its new symbiotic reliance on cable.  
 
The stumbling block: the broadband conquerors' requirement that AOL surrender a piece of its subscription profit to its cable benefactors. To make this happen, AOL would have had to increase its capacity to include a new revenue source based on either better content or better product attributes in a cable broadband world. You would think that a company with at its height 27,000 US employees--many of whom brought the internet from a science experiment to a mass media marvel by, of all things, inventing a better game of post office--would have been able to take its game to the next level.
 
How much of AOL's intransigence was its own hubris versus its merger-magnified hubris once inside the legendary warrior walls of Time Warner is open to debate. The most important takeaway is not for AOL; it's already setting its course as a smaller cash distributor that, once transformed, may live to fight another day.  
      
AOL's larger lessons can benefit the whole media content universe as well as monster distributors Google and Yahoo/Microsoft, Time Warner Cable, Comcast, Verizon and AT&T. When your business models fail, you need to fix what's broken in traditional capitalist terms (the fundamentals part); and, you need to introduce new products and business models that will siphon off revenue and cash flow from alternative sources. Cable siphoned off revenue from dial-up internet by undoing AOL as dial-up's brand face. Emboldened in victory, cable went on to undo most of its subsequent telco DSL competition. In doing so, it played more than a few crucial hands in determining the extent of Google's growth.
 
Despite their transformational power proven over media generations, today's cable distributors are moping around a bit about their inability to claim the revenue they believe they deserve as an offset to increasingly costly bandwidth utilization by their customers. Capping bandwidth won't work and shaping utilization will only work to a point. More vexing, cable has an AOL problem. It needs to develop a new business model that presages the transformation of its video business from a small oligopoly with a very small number of cable, satellite and telco tv players to an open frontier business where customers can get TV from twice the number of distributors in market today.
 
Maybe part of the answer can be gained by playing post office, just like AOL did when it jumped on top of telephony distribution to claim its fortune. Today's US Postal Service is upside down, threatening to go belly-up by increments, beginning with the elimination of Saturday mail. As traditional mail deteriorates,  cable and telco broadband are becoming our new post office. As if the global warming effects of all those retail catalogues aren't enough to herald a transformation, AOL's existential irony may be enough to inspire a new business model for something as basic and high-utilization as e-mail.  
 
What if broadband charged for the transmission of certain types of mail--mail with large attachments, mail delivered over long distances, mail from commercial sources, mail with heavy bandwidth links? It would have to offer something more in the transformation in order to protect its customer relationship fundamentals. But, if broadband internet could make more and ultimately increase its delivery capacity and quality by taking on a very fundamental model--paying for the delivery of a message of varying weight across varying distances--it might accomplish a great future transformation for itself, as well as potentially for the government apparatus it's replacing, in the process.