AOL’s languishing online service was supposed to be the growth engine for the world’s largest media company. But now the best minds at Time Warner are working to create new television-like content solutions for AOL’s subscriber and earnings problems.
It’s not clear which will be the bigger challenge: devising a new brand of streaming entertainment and information content to attract new and upgraded AOL users, or getting conventional media types to do it.
Both are top priorities for Bob Pittman, AOL Time Warner chief operating officer, who has been asked to resume the role of CEO of the troubled AOL online service.
Under the new leadership of CEO-elect Richard Parsons, who formally takes control in May, AOL Time Warner is acknowledging that AOL must offer more than e-mail, chat, instant messaging, movie trailers, pop-up ads and links to other AOL and Time Warner products if it wants to leverage and grow an online business that reaches one-third of all U.S. TV households. Analysts fear AOL’s performance may turn out to be worse than expected when AOL Time Warner reports first-quarter earnings on April 24.
Achieving integration
The creation of a new breed of in-motion content that will stimulate market support for AOL Broadband is competitively imperative. It’s also critical to integrating AOL and Time Warner in ways that still haven’t been accomplished but which would improve its bottom line and stock price.
The content-driven revival of AOL and the complex unraveling of the Time Warner Entertainment partnership will be key parts of a strategic plan that management is preparing to unveil to the board and investors at AOL TW’s May 13 shareholders meeting.
These new content efforts could begin appearing in the fall on AOL’s broadband service on DSL and digital cable systems, where it is desperate to gain traction. Surely, must-have content would help AOL’s long-suffering negotiations with major cable system operators to carry its new broadband service.
AOL Time Warner insiders who are in the throes of developing content say they don’t know what form it will take, although clearly Time Warner’s television and film product and capabilities will be paramount in the process.
Tom Wolzien, analyst at Sanford Bernstein, says he envisions AOL Broadband evolving as a cross between online services and television: “chunks of video geared for the Internet user and not in competition with cable programming.”
Integrated niche content in high-interest areas such as health, pets and lifestyles could be “surfed” and selected more as it is on television rather than on a computer. For instance, recipes could be integrated with a 15-minute video on how to make bread, and could include local food store coupons, Mr. Wolzien said.
A serial could be created-a la “Big Brother” or daytime soaps-that would run in 15-minute episodes that could be selected and manipulated at will by users. The serial could be packaged with information on the characters, performers or subject matter, archived episodes and peeks at behind-the-scenes production.
The key will be to create clusters of compelling, valuable enough information and entertainment content for users to cultivate a daily habit, off of which AOL can promote and sell advertising.
The possibilities to create new forms of high-interest content for AOL Broadband just from what AOL Time Warner already owns are boundless. It can offer best-of sequences from hit series such as Warner Bros.-produced “Friends,” humorous outtakes from any of its first-run or syndicated series, clips from comedic skits or music performances, or pre-release clips from high-interest films such as “Harry Potter.”
Until now, there has been a struggle between AOL and Time Warner factions over such matters as which divisions will pay for converting existing content or creating new content for AOL Broadband, sources say.
Worse, there has been virtually no effort to creatively use Time Warner content-one of the primary reasons investors bought into the merger. “You’d hardly know there was any connection between the online service and Time Warner content when you use the AOL high-speed service, regardless of how you connect,” Mr. Wolzien said. “In fact, the company’s management structure is not oriented toward using Time Warner video content on AOL.”
Creating demand
Sorting out the mix, exclusivity and cost of AOL Broadband content is essential to create demand for a new level of content that will entice AOL’s slow-speed users to upgrade and convince other cable operators and their subscribers to sign on to the new AOL service.
But first, AOL Time Warner needs to convince its own employees that this is important and necessary. Mr. Wolzien says there are examples where Time Warner content is being “squandered, pointing to the use of CNN News on AOL Broadband.
In recent months, AOL Broadband has replaced a content-rich, high-quality broadband presentation of the most recent hour of CNN Headline News with what Mr. Wolzien considers to be “a cheap commodity news service” called CNN Quickcast. Making matters worse, CNN has since sold its content to RealNetworks as part of a subscription service that now charges users when they want to access CNN video on the Web.
“It’s a missed opportunity for the consumer to be told that he can subscribe to CNN materials a la carte, or get it for free as part of the AOL Broadband service,” he said.
But the jury is still out on whether AOL and the Time Warner factions can reconcile their political, structural and cultural differences to work together well enough to create this critical level of new TV-like broadband content.
At stake are the economic fundamentals on which the merger was based.
Recent sum-of-the-parts valuations of AOL Time Warner, in the face of the company’s plummeting stock price, suggest anyone holding company stock at about $20 a share is virtually getting the AOL service for free; the stock today essentially reflects the value of Time Warner assets at the time of the merger. The individual businesses would be worth more today on a stand-alone basis.
Put another way, AOL Time Warner has failed miserably at building on and even maintaining the value it had at the outset.
Potential pitfalls
Although AOL Time Warner appeared to have a handle on the physical integration and management of the parts right after the merger, there has been less effective intertwining of creative collaboration and cultures throughout, which is what would be needed to address the new broadband content challenge, sources say. The AOL online services has been little more than a sprawling cross-platform marketing and promotions platform for Time Inc. magazines, Warner Bros. films and series on The WB.
The danger now in a consolidating marketplace would be for AOL Time Warner to become even more distracted and unwieldy by acquiring still more assets, such as the 50 percent of the debt-laden AOL Europe it doesn’t already own. While more cable systems would make sense, trying new distribution forms such as TV station ownership, while strategically sound, would cause even more diffusion.
AOL Time Warner must stay focused on and committed to putting its content resources to work in a way that creates new product and revenues while bolstering its existing businesses. It must be willing to concede that if AOL is to be the combined company’s growth engine, then Time Warner content is the fuel needed to make a go of it.
The catalyst for improving AOL Time Warner’s overall performance lies within its grasp. But if AOL Time Warner can’t get its act together to meet the broadband content challenges it faces, “then, quite simply, all of the company’s employee stock options will die together.” Mr. Wolzien said.