| AOL - Grown Ups Back in
Charge! OK - first a declaration of interest. I have a soft spot for AOL. One of our games, Federation, was available on AOL for several years, and we would go back with newer games if we got the chance. Early this month AOL held a big press conference at which they revealed what their situation was and explained what their proposals were for dealing with the problems. AOL has a number of underlying problems, but probably the most pressing is the way in which AOL financed itself during the dot com boom. What it did in the main was to sell access to its customer base to third parties. That is to say, AOL did a series of extremely lucrative deals with other companies to allow them to display, and sell, their wares to AOL's customers. At first sight this strategy seemed a brilliant stroke. It was, after all, the height of the boom, and the dot com kiddies queued to sign five year deals and pay the millions it cost from what appeared to be an endless supply of venture capital. At the same time, advertisers had not yet realised that no-one was buying as a result of their banner ads, and they continued to pour money into on-line advertising. It seemed like everyone had arrived in the land of milk and honey. AOL was able to post the high level of growth that was so characteristic of the dot com boom. Share price soared. But behind the glitter those who were perceptive could see problems growing. The first problem was that most of the existing content providers couldn't find the sort of money AOL wanted them to pay to stay on AOL, so the existing content evaporated off AOL and on to the web. That wouldn't have been too much of a problem, had it not been for the fact that the incoming 'content' providers had no content! They weren't short of imagination and creativity, as their spread-sheets testified, but they didn't actually have any product. AOL always (correctly in my view) aspired to be a total experience. The problem it faced was that with diminishing content they were starting to feel like just another ISP, albeit a very large one. Of course, the money continued to come in, the deals had been done and they ran for years. Where the problem really showed up was in a very high 'churn' rate. AOL was churning through its subscribers. OK, it was getting more in than were leaving, but a worryingly high proportion were leaving. This didn't seem to matter at first, because the number of new people coming on-line was very high, and a large proportion of first timers went to AOL because of its high profile. As the proportion of the population on-line grew though, the growth of new subscribers slowed down and the problem became more obvious. The analysts started to notice and draw attention to it. The fact was that AOL was carrying too much baggage to be a straight ISP, and not enough content to be more than an ISP. The second problem took longer to become obvious. It related to the sustainability of the 'partner' payments (made by those who coughed up millions for access to AOL subscribers). Although it was not obvious at the time, these were one-off payments, made out of working capital, not out of sustainable revenue streams. As such, they weren't going to be renewed when they ran out. Of course, at the time the deals were done five years seemed a long time into the future. But now the future has arrived - and there are no replacement deals. The venture capitalists have all packed their bags and the dot com companies have softly and silently vanished. Underpinning all this has been an ongoing struggle within AOL about how you actually make money when you have tens of millions of subscribers. At the bottom line there are two views. On the one hand there is the view that the way to handle it is to sell your customers extra, value added, services on top of their basic subscription. This is sometimes called the 'cable television' model. On the other hand there is the concept that you make your money by selling access to your customers to third parties. This is a precarious route to go down, because it comes perilously close to selling your customers to those third parties. Over the past five or so years it is the latter strategy that has predominated at AOL, and, as I indicated earlier, at first it seemed very successful. However, over the last eighteen months the downside has begun to show, while the chances of continuing to raise money from it diminished. This precipitated a struggle at the very top levels between the proponents of the different strategies with first one then the other side getting the upper hand. While this was going on AOL zigzagged all over the place. The turning point arrived when it became obvious that chunks of income were going to have to be restated because they weren't 'real' income. At this point the supporters of the cable television model finally gained control at a senior management level, if only because it was obviously that the alternative model couldn't even deliver on its own terms. So, is all going to be sweetness and light? Well, not exactly. Quite apart from the sheer scale of the problem of changing the culture of a behemoth like AOL, the new controllers of the company have to deal with the problems they inherited from their predecessors. Not least of these is the yawning hole in the income left by the five year partner contracts running out. AOL themselves estimate that it will take until 2004 for them to sort it out and restore growth. This may be optimistic. Then there are an extremely unhappy bunch of Time Warner senior executives who have seen the value of their shares slump since the merger. They want fast solutions, possibly even to break the company back into two independent entities. The new team at the head of AOL have defined their strategy in the phrase 'compelling, exclusive content'. It's a good description of what they need, but it's not a rapid turn around strategy, or in any sense a silver bullet. There are two reasons for this. First of all, compelling content is not a single simple thing in the sense of a killer application (spreadsheets were the killer app for desktop computers, e-mail that for the Internet). Compelling content is a package, and it takes time and experiment to find out what the components of that package should be. It took the cable networks years to figure out exactly what combinations of services their customers would pay extra for. While I don't think it will take AOL as long as the cable companies, I still think it's going to take time. The second reason is the lead time on the development of media content. To give one example from my own trade, producing a new game in less than two years would be considered quite an achievement, even for a large and dominant company like Electronic Arts. And that leads to another problem - the technical possibilities at the end of that two year cycle may be completely different from what they were when the game was designed and specced - and not always in an obvious 'forward' direction. For instance the growth of SMS text (txt, as it's called over here in Europe) messaging means that the version of the Federation text game we developed ten years ago for a client who charged customers by the 256 byte data packet could come back into fashion! So... Is it all hopeless? No. I don't think so. AOL has 35 million subscribers. Even if you screw up, it takes a long time to burn away that sort of asset. More importantly I believe the new strategy is fundamentally sound. The problem is whether those in charge can make themselves the time and space to sort out their inherited problems and bring the components of their new strategy on-line. Frankly, it's not going to be easy, and it will be painful, as the recent round of layoffs indicate, but I think they're in with a chance.
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