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AOL and ABC should emphasize content

Dec 2, 2002  •  Post A Comment

AOL Time Warner and The Walt Disney Co. have a lot in common as they struggle to redefine the value proposition of their core AOL and ABC brands, respectively, for consumers and advertisers who are inundated with choice.
But their contrasting qualities and problem-solving approaches will more likely determine the outcome of the financial and competitive challenges facing the dominant Internet service provider and a Big 3 broadcast network.
First, a reality check. Both America Online and ABC are worth substantially more than the limp stock prices their corporate parents would suggest in a whining stock market. The America Online unit is expected to deliver $1.6 billion in cash flow on $9 billion in revenues in 2002 to AOL Time Warner, with 2003 cash flow expected to struggle to $1.4 billion on $8.8 billion in revenues.
Despite any ratings gains it musters this season, ABC seeks footing on a sliding slope. It is set to lose a record $500 million for a second consecutive year in fiscal 2003-a negative swing of more than $1 billion from 2000-on about $2.4 billion in annual revenues.
Still, analysts generally estimated the ABC TV Network’s fair market value at just under $3 billion-a mere fraction of the $20 billion ESPN franchise and only about 6 percent of Disney’s total $40 billion asset value. AOL, on a pure sum-of-parts analysis, is valued at about $13 billion, representing several dollars of AOL Time Warner’s current share price.
Such financial metrics establish AOL and ABC as important content distribution platforms in a fragmented media landscape whose function, worth and even identities are being reinvented by corporate powerbrokers who view them strictly as part of a bigger whole. What happens to these premier brands in the next year will go a long way toward determining their future in media and on Wall Street, where they have lost credibility with investors.
Content is key
The success of their content is key. But it is interesting and ironic that both AOL and ABC are turning to some of the most rudimentary practices in the much-maligned medium of television to bolster their fortunes, even though both are owned by media conglomerates that rely on advertising for less than one-fourth of their overall revenues.
On Dec. 3, America Online’s new Chairman and CEO Jonathan Miller, who clearly is drawing on his experiences at USA Networks and USA Interactive, will detail for investors and the press his modest game plan for AOL’s makeover.
As I reported months ago, AOL will organize much of its combined original and AOL Time Warner franchise content around nearly a dozen niche interest areas (including news, sports, health, entertainment, travel and family). Advertising in those “dayparts” will be priced according to target audience delivery, following cable’s lead. In fact, Mr. Miller talks about AOL’s eventual development into a multiple system operator-like online gatekeeper of interactive content and services.
More than $300 million in cost cuts, including as much as a 15 percent head-count reduction and cuts in marketing and network costs, also will have to be part of AOL’s plan next year to gradually offset plummeting advertising and marketing revenues (which could fall another two-thirds by 2004), and only mild AOL subscriber response to exclusive content features such as radio and pictures@AOL.
The silver bullet will be the kind of compelling collective content and services that will make AOL a “Must-Be” destination, which sounds on face value a lot like ABC’s goal. The important difference is AOL can begin layering in fees for a mix of original AOL, Time Inc., Warner Bros., CNN, HBO and other company product to generate multiple revenue streams-something it should have been doing in the months following the January 2000 merger.
The HBO of the Internet
Content, broadly defined-from downloading music and films to exclusive movie and news clips to prime-time series previews (“The Sopranos” and “Friends”) to the pages of Time magazine-also will be the catalyst that entices dial-up, narrowband subscribers to the more lucrative broadband front as AOL transforms itself into the HBO of the Internet. For instance, AOL’s new 30-minute Wednesday night “show” called “Hot Gossip” features print columnists and real stars wrapped in cyber chat and e-mail.
With nothing dramatic or revolutionary expected from the five-hour presentation in New York, Mr. Miller’s biggest challenge will be resetting painfully pragmatic expectation levels for AOL’s financial and competitive performance amid continuing serious regulatory accounting probes, the outcome of which could overshadow efforts to reinvigorate AOL.
Analysts estimated that at the very least, wringing more revenues out of its 34 million subscribers and stabilizing its financial results should ensure that AOL Time Warner can be a 10 percent to 13 percent growth company in 2003.
Symbolically, Mr. Miller’s game plan signals how online interactivity is settling into the old media world as a way to extend brands, showcase differentiated content and create new business and revenue sources.
For those still foolhardy enough to think this isn’t about AOL competing with ABC for consumer and advertiser support, consider the loads of new legitimate research quantifying how a growing number of viewers who consider the Internet the more “essential” medium watch television while they are surfing the Web and prefer to control their timing and selection of content with personal video recording devices, which will be in more than half of all TV homes within five years.
It is that sea change that makes Disney’s revitalization of ABC more like a cat chasing its tail.
Embattled ABC Chairman Michael Eisner and President Bob Iger deserve high marks for aggressively empowering a new creative management team-ABC Chairman Lloyd Braun and Entertainment President Susan Lyne-at ABC to reverse its fortunes. But Mr. Eisner and Mr. Iger have been less than forthright about addressing the depth of ABC’s financial prospects during a well-orchestrated Wall Street blitz of late.
These are the same executives who stripped ABC’s only prime-time mega-hit, “Who Wants to Be a Millionaire,” across four nights each week and then reduced the programming budget instead of reinvesting their revenue bonanza into developing the next generation of hit series.
With a fortified program budget behind them now, Mr. Eisner and Mr. Iger are offering up the predictable assessment, “We’re well positioned,” while ABC is running hard to find that rare superhit the old-fashioned way: one show at a time in the hopes of building strength on one or two nights.
From that will flow abundant advertising revenues and, maybe, syndication fees-that is if personal recording devices and the networks’ own repurposing practices don’t destroy what remains of that sector.
The fact is ABC is rebuilding the hard way-and the only way broadcast networks still know how to do it-because it does nothing to maximize reach or sampling or appeal of content.
Viewers, who appear to like the option of better managing their time by ordering media and entertainment when they want it, are still being expected to check in at one designated time each week for one mere series episode in a flurry of new offerings.
These new network series aren’t just competing with each other anymore across multiple broadcast and cable networks. They are now competing with other forms of content on other media that, like AOL, are taking a page or two from TV’s guidebook.
Competition with other media
That is the single biggest threat to ABC’s cyclical rebuilding process, which no broadcast network will ever be able to approach again as they have historically. It truly is a situation of minimal return.
Any prime-time gains ABC makes in the current season will do nothing to alter the $500 million in losses it is destined to suffer again this fiscal year due in part to heftier program spending. Falling just 5 percent short of the flat 3 ratings guarantees in the adults 18 to 49 demo ABC generally offered to
advertisers in the prime-time upfront will generate at least $75 million in make-goods, exacerbating its financial woes, CIBC analyst Michael Gallante said.
By the time ABC breaks even in a few years, which would boost Disney’s profits just because it would be covering its own high-cost, low-margin base, it could be relegated to a less valuable secondary brand, analysts said.
For now, the only true change of note is the way Mr. Eisner and Mr. Iger said they are horizontally integrating much of Disney’s and ABC’s like resources and expenses for major program dayparts and areas of interest-such as daytime, children, prime time, sports and news-across broadcast and cable network operations.
It is a little-understood move that will have major cost and organizational implications going forward, if the plan is effectively carried out to better facilitate Disney’s reinstated 20 percent earnings growth targets.
By operating the ABC TV network as a glorified distribution platform to support the more powerful Disney and ESPN brands, Disney-either by design or by default-is taking a page out of AOL’s new rulebook.
In the time it takes to decisively reverse ABC’s prime-time fortunes, AOL could have re-energized its business and brand and could be siphoning even more advertiser and consumer spending from all competing media.
The difference between AOL’s immediate, relatively low-cost execution of a new interactive content game plan and ABC’s more expensive, static launch of new product could wind up being profoundly important in the long run.
Success in any medium still comes down to content. But entire company fortunes may rest, in the future, on what you can do with it.
The Deals page is edited by Diane Mermigas, who can be reached by phone at 708-352-5849, by fax at 708-352-0515 or by e-mail at dmermigas@crain.com.