++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ WERBLIST -- Kevin Werbach's periodic email newsletter February 12, 2003 YOU ARE WELCOME TO RE-SEND THIS MESSAGE TO ANY NUMBER OF COLLEAGUES. Please cc: werblist@werbach.com. To subscribe or unsubscribe directly, visit http://two.pairlist.net/mailman/listinfo/werblist/. Please send your comments to kevin@werbach.com. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ As you probably know, one of my projects is a conference called Supernova about the decentralization of software, communications, and media. I'm in the process of planning Supernova 2003, which is scheduled for July 8-9 in Washington, DC. I've established a new email list, The Supernova Report, for my essays and links on topics related to decentralization. I'll continue to use the list you're reading now to distribute my published columns, personal notes, and thoughts on other topics. You can sign up for the Supernova Report at . -k- Kevin Werbach ---------------------------------------------------------------------- In this Issue: - Whither AOL - Links of the Month ---------------------------------------------------------------------- AOL KNOCKED OUT? 'Synergy' Became 'Convergence' Became a Broken Dream (Originally published January 19, 2003 in the Philadelphia Inquirer) Almost exactly two years ago, AOL CEO Steve Case and Time Warner CEO Gerald Levin announced the biggest corporate merger in history. Yet on that January day, something was amiss: the way the two men were dressed. Levin, the corporate titan and former lawyer, wore an open- collared shirt. Case, the boyish Internet entrepreneur and Hawaii native, was attired in a blue banker’s suit and gold tie. It was a fitting metaphor for AOL Time Warner, an agglomeration of two companies trying to be something they weren't. Like Tom Hanks in the movie Big, AOL saw the acquisition as a short-cut to growing up. Time Warner thought it had found the fountain of youth. Neither got its wish. AOL Time Warner has lost more than 60 percent of its value since the merger, and AOL’s online service, the supposed engine of growth, has struggled financially. Levin resigned in late 2001, and AOL’s Bob Pittman, a key architect of the deal, left last year. Case’s announcement that he would step down as chairman provides a certain closure. In hindsight, AOL Time Warner was born out of one dumb strategy and one smart one. The first idea is "synergy," and its failing are becoming apparent. The wisdom of the second insight may some day be appreciated. If so, credit should go to its architect: Steve Case. Synergy came into vogue in the media world in the 1980s. Companies rushed to combine content assets such as movie studios and record labels with distribution channels such as cable TV infrastructure. As digital technologies emerged, synergy turned into "convergence," a vision of one network delivering every product and service imaginable. The poster child was the first great media conglomerate, none other than Time Warner. Though some cost savings and cross-marketing opportunities proved out, no one noticed that the most advanced examples of convergence, including Time Warner’s Full Service Network and local phone companies’ forays into video programming, were abject failures. The AOL Time Warner merger made convergence an end in itself. Alas, reality was no match for the hype. Synergy in practice meant mundane efforts such as selling subscriptions to Fortune and Sports Illustrated via AOL pop-up ads. When it came to big opportunities straddling old and new media, such as digital music delivery, AOL Time Warner fared no better -- and sometimes worse -- coordinating its fractious internal divisions than competitors did negotiating between companies. Convergence is a technical reality. Today’s digital networks can deliver voice, video, music, and data across an array of devices. That doesn't mean that combining businesses across the digital divide will make one suddenly sexy and the other suddenly respectable. Furthermore, the AOL Time Warner merger assumed that combining content and distribution would produce an unbreakable hold on customers. That doesn't work on the open Internet, as AOL should know. AOL became the dominant online service despite owning neither the phone lines it rode on nor much of the content it distributed. It simply had the best user experience and the best community. Which leads to the smart reason for the merger: AOL is worth something. Wall Street is effectively valuing the online service at zero, despite its tens of millions of members and millions in annual profits. AOL’s troubles derive from the stock market crash, a precipitous drop in advertising, questionable accounting, a slow broadband transition, and reduced subscriber growth amid competition from Microsoft and others. These are serious problems, but they would have emerged even without the merger. Other highfliers from the Internet boom, such as WorldCom and Webvan, are in bankruptcy. Yet Steve Case steps down as chairman of a corporation worth over $60 billion more than when he founded it. Through skill or luck, he cashed in his dotcom chips for real assets at the very peak of irrational exuberance. AOL has been written off before. In 1996, facing the Internet tidal wave, AOL opened its proprietary service to the Web and switched to flat-rate pricing. Analysts predicted it would be trounced. Instead it leveraged the Net for its own advantage, becoming an easy-to-use gateway and an aggregation point for killer applications such as e- commerce, chat and instant messaging. The shift to a broadband Internet will be nearly as disruptive as the Web was. Once again, convergence proponents see control over content and conduit as the path to success. AOL Time Warner may not be the company that proves them wrong. But someone will. And wherever he is, Steve Case will be smiling. ---------------------------------------------------------------------- LINKS OF THE MONTH http://www.shirky.com/writings/powerlaw_weblog.html Clay Shirky on Weblogs, Power Laws, and Inequality http://www.amasci.com/amateur/traffic/traffic1.html Traffic Waves http://www.hyperorg.com/blogger/mtarchive/001055.html The Problem With Metadata (a hilarious photo) ---------------------------------------------------------------------- Please forward this email to others, and copy werblist@werbach.com; we will provide them with a subscription. To join or leave the list, visit http://two.pairlist.net/mailman/listinfo/werblist/ or send "subscribe" or "unsubscribe" to werblist-request@werbach.com. Send your comments and feedback to kevin@werbach.com. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Werblist is licensed under the Creative Commons Attribution License. To view the license, visit http://creativecommons.org/licenses/by/1.0.