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A mere 11 days after the world woke up to the Year 2000—and discovered that the television still worked, the Rose parade floated across the screen, and everything was pretty much normal—America Online and Time Warner pulled the trigger on the biggest merger in history. The mere existence of this new entity will accelerate the makeover of publishing, entertainment, and advertising, which could end up as the defining change of the new century’s first decade.
AOL CEO Steve Case is suddenly everywhere. The kid made it; most doubted him but now he’s the top media mogul. The Federal Trade Commission (FTC) will have to weigh in before this deal is done, which means that the companies may not truly come together until after the official beginning of the 21st century. But assuming the deal goes through, AOL and Time Warner will take a bold leap into the uncharted territory of interactive TV, broadband Web, or whatever we call the fusion of television and the Internet.
It’s important to remember that we’re not talking about the bleeding edge here: this is America Online, the favored email and Internet portal for millions of people who have no expertise in technology and still have trouble programming their VCRs. Quite simply, AOL put America online. Like Microsoft with personal productivity software, AOL’s business innovation was in packaging Internet access for the masses and then building a fortress of services around a critical mass. As for Time Warner: Well, the publishing and entertainment businesses will forever be flakier than most, but the heritage of this media conglomerate is pretty conservative, with many of its properties dating back well into the Age of Mortar. However, beginning with Time magazine, the firm has been similarly adept at packaging content for the mass market.
AOL, frustrated at trying to become the dominant “medium,” to borrow philosopher Marshall McLuhan’s phrase, is betting its future on providing the dominant “message.” Despite its status as a blue-chip Internet company, AOL had begun to look a little hollow. Michael Lewis speculated in the Wall Street Journal (Jan. 13) that the company sought Time Warner because “the people who run AOL believe that their own stock price is inflated, and so are using it to buy some assets before their bubble bursts.” However, more likely, Lewis writes, “the people who run AOL believe, or want to believe, that Time Warner is worth nearly twice as much to them as it is the stock market.”
Bursting the Bubble
If anything, the deal represents a master stroke by Time Warner chief executive Gerald Levin, who brought home the bacon for his shareholders thanks to a very favorable valuation of Time Warner’s stock compared with AOL’s Internet-enhanced market valuation. But ironically, as Holman W. Jenkins Jr. pointed out in the Journal on Jan. 12, “the vulnerability of the deal is also the thing that made it possible, AOL’s large but volatile share price.” In other words, serious deflation in AOL’s stock value could kill the merger before it passes FTC muster. This is a danger: how will investors react now that AOL’s days as a pure Internet play are numbered?
In fact, the biggest repercussion of the deal could be the deflation of many high-flying business-to-consumer (B2C) Internet stocks. Both to beat the bursting bubble and to realign for battle against AOL Time Warner, we will undoubtedly see companies engage in a rapid succession of “click and mortar” mergers. Investors will evaluate these conglomerates under traditional measures of profitability and growth potential. A major contribution from this deal will be to set the metrics to determine the market values of new versus old economy businesses.
Where will Wall Street’s speculative energies head? Most likely toward opportunities in business-to-business (B2B) e-commerce, which some predict will create a $1 trillion market within a few years. We are already seeing a major shift in investment capital toward infrastructure providers and new companies that can facilitate auctions, exchanges, and collaborative commerce networks, which are in their infancy and still offer first-to-market opportunities.
However, the AOL Time Warner entity may begin to blur some B2B and B2C distinctions by bringing customer relationship management (CRM) and other components of B2B relationships to bear. Both companies are known for their advanced IT, including high-performance data warehouses and Web applications.
The conglomerate will surely use the Web to drive down costs and exploit e-commerce for greater operational efficiency: Imagine an AOL Time Warner “creative” supply chain network similar to what Ford or General Motors are creating. No doubt, we consumers will be downloading entertainment like crazy, to the detriment of a whole layer of infomediaries like Amazon.com and Tower Records. Just as in the B2B world, instituting such efficiencies will create opportunities for the application of data-driven CRM techniques. Maybe AOL Time Warner will come to view itself as a vast ESP: an entertainment service provider, hosting Bugs Bunny, Wolf Blitzer, the Atlanta Braves, and other favorite characters for access from personal digital devices in our houses, cars, pockets, and bathtubs.
Finally, what about interactive TV? After a generation of exaggerated predictions, will it really take off? AOL Time Warner could have the clout—and deep pockets—to make it happen. We can be sure that the emphasis will be on e-commerce, again borrowing ideas from the B2B world to bind consumers to the medium. It will be home shopping on steroids. The conglomerate will also be in a position to establish mixed media advertising packages, with interactive abilities thrown in not just to sell products, but to collect data. Suddenly more intelligent, advertising could truly evolve from mass media approaches to pitches that support one-to-one marketing concepts.
Winning in the Market Age
“About 30 years ago, Americans were living in the Age of Aquarius. That’s over. The Age of the Market has begun.” Never missing a chance to tweak post-hippie baby boomers, the Journal’s Jan. 12 editorial proclaimed a new era heralded by the merger. Historical digs aside, the Journal is on to something. New efficiencies made possible by e-commerce are hugely important, but the most shattering changes will affect marketing and customer relationships. College marketing texts will have to be completely rewritten. The growth in information systems that support customer-centric computing could shut the door on many legacy systems designed to support industrial age and mass-market business processes.
For both efficiency and marketing reasons, very few pure “brick-and-mortar” companies will exist in three to five years. But what about the pure “click” companies: how many will survive once the click-and-mortar mergers change the playing field? In the news and entertainment business, the AOL/Time Warner merger seems to signify that in the Age of the Market, the dominant position is to have access to all media, not just the net, and a brand backed by respected content. From this base, the organization can use its enhanced knowledge of customers, markets, and competitors to deploy its resources strategically and quickly.
Let’s consider three other key questions AOL Time Warner’s business and IT strategists will have to answer once they push forward:
Do we have sufficient tools with which to analyze our customers? The race is on in the business intelligence community to become the premier provider of customer analysis software. Business Objects, Cognos, Hyperion, Microstrategy, and others have produced significant acquisitions, partnerships, and some homegrown software to address classic customer analysis problems. But hovering over the established players has been the question: Having grown up as specialists in financially oriented BI, can they switch gears and excel at customer analysis?
Some dispute that traditional BI players are at a disadvantage. Richard Clayton and Steve Fioretti, marketing vice presidents at Hyperion, informed me recently that more than 25 percent of the company’s Essbase OLAP server customers use the product for customer analysis. Also, as companies such as AOL Time Warner commit resources to huge customer databases and BI analysis, they will put current tool capabilities to the test for measuring customer profitability and return on investment. Nonetheless, the heat on customer analysis opens up the arena to new players as well as packaged offerings that combine BI tools with CRM products from Siebel Systems and others.
How do we make sure that security and privacy problems don’t blow up in our faces? The credit-card number extortion suffered by online retailer CD Universe was a disaster. The hacker, reportedly based in Russia, hinted that he actually has a much larger credit card database than what he posted on a Web site over Christmas. Online credit card transactions are vulnerable. As AOL Time Warner consolidates its servers and networks for massive e-commerce, it will have to assuage nervous customers that its systems are safe.
The new organization will also have to address privacy concerns. It’s no secret that a major advantage delivered by such mergers will be found by integrating customer data. Case and Levin, who seem to sense the social responsibility implicit in their new power, will have to lead an honest debate about the rights and wrongs of using customer data.
Are we ready to scale? Scalability remains the toughest design and performance issue in e-business. Across a vast enterprise like AOL Time Warner, Web, database, and application managers will have to make sure they understand each others’ objectives—and constraints.
Speaking of scalability, I’d like to close with a quick plug for Richard Winter, one of Intelligent Enterprise’s contributing editors. Richard is inviting readers to participate in his Database Scalability Program, the only survey to focus on this critical element of e-business success. We will be publishing the results later this year; see www.wintercorp.com
David Stodder is editorial director of Intelligent Enterprise. You can reach him at dstodder@cmp.com.
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