Brainstorming about an America Online recovery

Aug 12, 2002  •  Post A Comment

Jonathan Miller’s first congratulatory phone call last week was from the vacationing Jamie Kellner, chairman of Turner Broadcasting Systems.
“That just tells you going in, if you conduct yourself right, the opportunities inside this company are huge,” Mr. Miller said the day after he was named chairman and chief executive of the beleaguered America Online service.
The ability of the 45-year-old Harvard University graduate and former USA Interactive president and CEO to bridge new and traditional media assets and cultures at AOL Time Warner will be key to his success in what has proved to be a perilous position for more flashy executives, such as Bob Pittman, the company’s recently resigned chief operating officer.
Mr. Miller’s ability to tap into a company’s natural resources and consumers’ rudimentary love of transacting helped Barry Diller to grow his USA Interactive empire against all odds by developing the likes of Ticketmaster and Home Shopping Network.
“In a going-forward media world where you have proliferation of different choices for everyone, it’s all about differentiated products and services and content,” he said.
In an interview last week, Mr. Miller told me his mind was racing with ideas as he huddled with 20 of AOL’s top senior executives and then immersed himself in issues with several hundred online employees at AOL’s Dulles, Va., headquarters in meetings hosted by AOL Time Warner Chairman Steve Case and Mr. Miller’s immediate boss, Don Logan, chairman of the company’s communications and new media units.
The “easy opportunities” are things such as exploiting Turner’s sports relationship with NASCAR by cross-promoting it with America Online. That could include select race telecasts, managing the official NASCAR Web site and working with USA Interactive on NASCAR commerce services.
Mr. Miller appreciates the power of mainstream television, having been involved in USA’s defunct broadcasting unit, Viacom’s Nickelodeon, the National Basketball Association’s home-video efforts and Boston’s WGBH-TV.
But Mr. Miller insists that even more ambitious applications are easily within his reach. Starting with a series of internal meetings this week, the challenge will be to shift the focus inside AOL Time Warner from the political free-for-all and turmoil to mining the underlying innovations being developed at every level across the company that have yet to burst into the mass market. These include everything from video-on-demand and AOL music to some of Time Warner Cable’s new digital products. All of them can be integrated into or paired with the AOL service as it struggles to transition from narrowband to broadband.
HBO will be one of the key assets AOL taps in developing new premium services for subscribers, following cable’s pay TV model, sources said.
Capitalizing on HBO
With 38.5 million of its own subscribers, HBO has revived its core service with hit original series and events, providing a new model for branded subscription TV. Among other things, AOL could offer a broadband version of HBO video-on-demand over computers that runs parallel to digital cable’s gradual rollout of HBO VOD and digital movie tiers.
Also viewed as major aggregating forces are AOL’s new developing online music platform and AOL Time Warner’s dominant, fast-growing Road Runner service. In an effort to provide AOL subscribers with more value, AOL Time Warner could transform America Online into a clearinghouse for music downloading services while offering more differentiated music features, such as the new “Sessions@AOL.” It could make a bigger push to offer cable subscribers the Road Runner high-speed Internet access service with AOL as a discounted add-on to boost its lagging broadband reach.
“I see these opportunities as HBO 1990 all over again, when Blockbuster and videocassette and PPV were going to put HBO out of business,” Mr. Miller said. “It has come roaring back by offering product you can’t find anywhere else on television. That’s the key to turning things around at AOL.”
It doesn’t hurt that HBO’s turnaround was orchestrated by Jeff Bewkes, the new chairman of AOL Time Warner’s entertainment and network units and counterpart to Mr. Logan, who similarly revived Time Inc.’s magazines.
However, re-energizing America Online and its underused and stagnating 35 million-subscriber base with a new business plan due this fall will be no small task, given its financials.
In fact, AOL Time Warner’s ability to make its modest financial growth targets in 2002 hinges on Mr. Miller and his new bosses being able to immediately begin to reverse AOL’s fortunes. Once expected to be the company’s 20 percent-growth engine, it’s now the core of its credibility gap that has prompted probes of America Online’s accounting practices by the Securities and Exchange Commission and the Department of Justice. Mr. Miller said he is undeterred by the uncertain outcome of the probes, AOL Time Warner’s larger financial problems and the high-profile rift between America Online and other company divisions.
“We simply have to get to work,” Mr. Miller said.
Here are the most immediate issues he said he will begin tackling this week:
* Changing the metrics used to measure AOL’s success
Mr. Miller wants to create more accurate ways to measure the growth and strength of the America Online service instead of measuring the usual number of subscribers and advertising revenues. The SEC and DOJ are investigating whether AOL has factored in some questionable elements to boost subscriber and ad revenue numbers. Some of the new metrics could include measuring the growth of commerce, marketing and promotion sponsorships and the adoption of new services by subscribers, he said. “Whatever it is, we have to articulate clearly how we want to be measured and then perform against it,” he said.
* Putting a more traditional, cash advertising sales infrastructure in place
Clearly AOL is hungry to sell and quantify more conventional cash ad sales, separate from the much-ballyhooed cross-platform deals it has secured with advertisers and agencies that were Mr. Pittman’s legacy. One new draw could be offering video-quality commercials online, sources said. Internal tests are under way, and such commercials could be produced by year-end.
* Getting an AOL ISP-broadband deal with cable operators
AOL Time Warner CEO Richard Parsons’ primary focus is to clear up uncertainty about the media giant. Even the most routine ISP agreement with AT&T-Comcast would be a perceptual boost to investors, even though it represents a $10 billion cash and stock hit to the company with no immediate financial upside.
Sources close to the situation said critical issues such as subscriber and ad revenue splits and managing customers would favor AT&T-Comcast. But AOL would have immediate access to sign up the merged company’s 22 million customers and rapidly grow its lagging broadband service.
* Aggressively tapping Time Warner content and distribution
Short new forms of HBO, CNN and other branded program services will be adapted as specially tailored broadband offerings on AOL. “We have the huge opportunity to add value in each of those parts,” Mr. Miller said. Mr. Case said Mr. Miller’s mandate is to refocus on subscribers and “maximize” their satisfaction, retention and online experiences.
* More e-commerce on the radar
“What USA and Barry have done so well is to show consumers, given a better way, will absolutely transact online,” Mr. Miller said. USA Interactive advertising and commerce revenues grew 25 percent to more than $1 billion in the second quarter, while AOL’s combined advertising and commerce revenues fell 42 percent. New e-commerce extensions will be developed at all levels and in all spaces of the AOL service, first in high-demand areas such as travel. America Online is considering partnering with e-commerce entities such as USA Interactive, sources said.
* Improving AOL morale
Although e-mail and face-to-face communication have increased between management and employees at AOL, nothing will
substitute for a boost in the company’s stock price, which has fallen more than 90 percent from its December 1999 high of $95.81 a share.
* Reversing AOL’s multibillion-dollar losses outside the United States
Opportunities Mr. Case cited in 2000 for growing the company’s cash flow by 50 percent through overseas expansion have disappeared. In addition to buying out A.G. Bertelsmann’s $650 million stake in AOL Europe, the company will pay $725 million for Vivendi Universal’s stake in AOL France next year. It will have suffered $1 billion in losses at AOL Europe in 2001 and 2002. The faster Mr. Miller can jump-start AOL’s narrowband and broadband service abroad, the better.