When Time Warner announced last week it will be acquired by America Online, I was alone in dumping on the deal. Now I'm going to compound that with some more details, and discuss how you can profit in the new environment.
First, let's get one thing straight. AOL needed Time Warner a lot more than Time Warner needed AOL. AOL's U.S. market share keeps falling despite the fact that it continues to carpet-bomb American mailboxes like Serbs over Sarajevo (or if you prefer NATO over the Serbs in Kosovo). AOL also had no broadband strategy, and Time Warner is the second-largest cable operator.
Why did Gerry Levin bite? He faced a succession problem, namely Ted Turner. When Time bought Turner it promised Ted the CEO chair when Levin retired, and he's older than he looks. Now Bob Pittman (currently AOL #2, but formerly an MTV executive) is in line for the big job, and Turner signs-off on it because his fortune doubles instantly. Also, Levin never had an online strategy, and he'd pushed CNN.Com (which had one) down long enough - Wall Street was starting to notice. More important, Levin was out of ideas for raising Time's value, and AOL was offering double what the company was worth. True, it's all in "confederate money" (stock) but what's a media conglomerate for if not to convince people that your birthday suit is actually double-breasted Armani?
Now that you know what they get out of it, what do you get out of it? For this deal to work everything - Time and CNN and Warner Brothers - has to go inside the AOL firewall, except for snippets tied directly to merchandise. AOL may be able to hold onto market share that way in the long run, but for media companies looking to the online world, the good news is there's less competition. There's already talk about Yahoo buying CBS or AT&T buying Disney but these are not equivalent deals. AT&T's cable may play favorites, but it can't deny paying customers the Web the way AOL's firewall can.
There's one exception to that rule, however, the motivation behind the whole deal, interactive TV.
Interactive TV is a free, gated Internet experience delivered by cable companies through new set-top boxes. While the "open access" battle until now has concentrated on the delivery of ISP service, the fact is that since the cable operators are giving interactive TV away they're under no obligation to offer the whole Web. The thinking is, as Leo Hindery (now of Global Crossing) explained at @d:tech, that you can subsidize the set-top box, tie everything into the TV experience, and in this way get the Internet into poor neighborhoods where PCs are unaffordable. Just as AOL sees Time as its key to keeping market share, so cable sees interactive TV halting the DirecTV rot.
The assumption is flawed, but Wall Street buys it so let's continue. This leaves five potential "content-delivery" deals yet to do. The players to watch are AT&T, Paul Allen's Vulcan Ventures, Cablevision and (assuming they feel forced to play) Hughes' DirecTv and EchoStar , which owns Dish Network. (Some fancy technology will be needed for Dish and DirecTv, but if the first three go down watch for MCI Worldcom to make it happen.) So Microsoft buys AT&T (they're worth $562 billion and can afford a premium on AT&T's $166 billion) or Cablevision buys Lycos. (Allen already has money in Go2Net.) That's the way Wall Street sees it - as one First Union banker told CBS Marketwatch "it's all about distribution" . But just remember the deals don't make sense unless you have a "gated community," because otherwise your competition is just a click away.
Now, why am I challenging the assumption behind these deals? (The assumption gets the deals done whether it's right or wrong.) It's because the Internet is about unlimited choices and people, in the long run, won't take less. Over time people leave AOL, and keeping Time's stuff behind the firewall limits distribution - it doesn't expand it. (Netscape is irrelevant because AOL has already effectively destroyed it as a market force.)
What's your play? Don't just concentrate on "content," concentrate on interaction. If you build sound, safe interaction among people you'll beat all these plays in your chosen niche. For an example of what works look no further than Andover's Slashdot.org. (Or, if you prefer, JuniorNet , a gated community for kids delivered via TCP/IP.)
You'll need more effective moderation because most people, unlike programmers, don't argue fairly, and you'll need a business model to make that profitable. But that's a model the big media companies don't have, it's one they're not interested in, and that's their Achilles Heel. Make moderation pay for the moderators, not just the media moguls, and you'll beat them at their own game.
I have begun my adventure at Voxcap.Com, discussing how next year's elections might impact the future of the Internet. I had two features in a recent special section of the Chicago Tribune as well.
I write daily for ClickZ, and appear on TechEdge Radio. I write monthly columns for NetMarketing, Boardwatch, and Intellectual Capital. Once every other month I'm in CLEC Magazine. The lead item here is also the Monday e-commerce column of Andover.News. You can still buy my book . Subscription instructions are at the bottom of each issue.
Remember that it's still journalism that keeps the Clues coming. Give me a call at 404-373-7634. (Yes, I do some commercial writing.) Now back to the show...
Takes on the News
The Clue Barry Diller Missed
The formula is E=I/2, or Internet values are worth half what we pay in the real world. It's been around for some time, but Barry Diller got it backwards, and that's why his acquisition of Lycos ran aground. Work the formula again, as Gerry Levin did, and you find that Ex2=I as well. By making the Internet outfit the acquirer (even if the real world outfit gets nearly half the deal) you double the value of your real world equity. Thus Time Warner, worth $84 billion a week earlier, is now worth $166 billion.
Your Clue here is simple - don't just do the math, work the formula.
New Horizons in CSPs
The most important part of the e-tailing industry, in terms of maintaining competition, are the Commerce Service Providers (CSPs) like ICOMS, OrderTrust, Cybersource and Sunset Direct .
Last year the big news here was their extension into "brick and mortar," things like fulfillment and delivery. This year the news is their extension into their partners' applications.
An example was offered to me last week from OpenOrders of Newton, Mass. It comes in the form of "OpenWebConnect," a software system that combines fulfillment with inventory management, customer support and marketing. The result links the work of e-tailing with all competing channels, including direct marketing, catalogs, call centers, service bureaus and fulfillment houses. In this way CSPs become ASPs, extending their reach across the realm from First USA to ModemMedia to EDS. That's quite a stretch, and it will be interesting to see how it all evolves.
Using E-Mail Profitably
The battle has now been joined between the Direct Marketing Association and anti-spam activists (http://www.spamfree.org) over opt-out and opt-in e-mail marketing. The DMA has launched its "e-Mail Preference Service (eMPS), while the anti-spammers have called for laws against e-mail marketing.
The DMA's aggressive Cluelessness is about to get the whole Internet industry into big trouble. The fact is e-mail is a horrible prospecting tool. It's great for nurturing and building a customer relationship, but the only lists with decent clickthroughs are pure opt-in. Users know instinctively that, unlike direct mail, telemarketing, or even fax marketing, the costs of e-mail marketing are borne by them, not the sender. Do you want to pay for people to send you advertising? Of course you don't. And if the postmaster brought you junk mail postage due, saying you'd be cut-off from future deliveries unless you paid, you'd want something done about it. That's precisely what the DMA is insisting upon with its opt-out list.
There are plenty of good uses for e-mail in marketing. It can be used for building loyalty. It can be used to bring people down the "sales funnel," qualifying them and delivering the best pitch. It's great for customer service. It's useful in educating customers and the channel. Used carefully it can be used for upsells and cross-sells. When used for prospecting without the prospect's permission it's theft.
The DMA knows nothing will happen in Congress this year. The DMA knows it can outgun all the consumer advocates in the world during the coming election season. But in taking this stance the DMA is creating political enemies, a bloc of votes (and advocates in Congress) who will make a difference. Anyone involved in the Internet industry that joins the DMA from this day forward is an idiot. Anyone involved in the Internet who currently belongs to the DMA - or any of its affiliated organizations has some serious explaining to do.
To start the ball rolling let's push smart organizations in this space to leave the DMA's Association for Interactive Media . That, I think, would send a more powerful message than any petition.
Clued-in is Wal-Mart (yes, Wal-Mart) for putting its dot-com operation in Palo Alto instead of Bentonville, Arkansas. (Now will you believe etailing is a different business?)
Clueless is Microsoft's legal team, for a poorly worded rebate offer that had to be cancelled within a few days. Now you know how they lost the anti-trust case.
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