Aol the emergence of an internet media company
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AOL and Time Warner announced a merger in 2000 to combine AOL's online presence with Time Warner's media assets. AOL grew rapidly in the 1990s through aggressive marketing of its easy-to-use online service. It transitioned to an unlimited usage pricing model in 1996 to compete with flat-rate ISPs. Time Warner was a large media conglomerate owning cable systems, publishing, music, and filmed entertainment. The merger aimed to leverage both companies' media properties through cross-promotion online and off. Critics argued Time Warner had not fully exploited synergies between its divisions previously.
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Aol the emergence of an internet media company
- 1. AOL-AMERICA ONLINE GROUP 12 ARUN KUMAR NAPOLEON NIJANTHA KUMAR PRADEEP S RAJARAMAN S SWAMINATHAN G
- 2. COMPANY VISION Envisioned by Steve Case as a consumer services company, not a technology company focused on customer experience. This led to a graphical user interface (GUI) for the service derided by many observers as the "Internet on training wheels." AOL realized early that the overwhelming majority of U.S. consumers wanted their online service to be easy to use above all else. According to Chip Bayers, the mass market appeal and the lack of sophistication is the key to AOIs success. Average AOL user in 1999 spent 544 minutes on the service per day.
- 3. Case became the CEO in 1992. Main rivals-Prodigy and CompuServe 1985-company renamed to quantum computer services-Q link online service COMPANY HISTORY 1983- Steve Case started as pizza and using Source- joined control video in a marketing job. 1989-debut of AOL as a service, for macintosh. 1991-renamed formally At the end of fiscal year 1992, AOL had 181,000 paid subscribers less than half the number of Prodigy
- 4. SILVER COASTERS-LAUNCHING INTO THE FORAY In 1994 and 1995, AOL launched a major direct marketing blitz. Direct Marketing by AOL. A 3 month free trial version with a version of AOL that enabled login. 300 million disks and 1 million subscribers by August 1994.
- 5. Emerging threats in 1994 and 1995-ISPs and internet browsers. ISPs afforded their users the freedom to browse the World Wide Web for content. AOL tried to compete by purchasing Booklink technologies in 1994 and integrated it with its service.. While AOL members had easy access to the Internet, chat rooms remained closed to nonservice members. FACING NEW THREATS-ISPS AND INTERNET BROWSERS
- 6. ISPs-fixed price focus ($19.95) a month; AOL-focus on the online experience. AOL -welcome during login, Youve got mail, the "buddy list" , the "Instant Message" etc. AOL parental controls. February 1992-2 million paid subscribers-average 250,000 new subscribers per month. Market leader and responsible for 30% of internet access. AOL-FOCUS MORE ON THE EXPERIENCE
- 7. ALL YOU CAN EAT-THE INITIAL PRICING Feb 1996-AOL had 5 million members-but in came a new threat: price pressure. AOLs subscription fee=Monthly fee($9.95 per month for 5 hours) + Hourly charge($2.95 in excess of 5 hours per month). For moderate users, monthly fee-$30; for heavy users, bill ranged from $100 to $200. ISP Charge-flat fee of $19.95 for a month of unlimited access. Another major challenge in March 1996-Microsofts switch in price to $19.93 per month on unlimited basis.
- 8. A new flat rate of $19.99 for unlimited access was set in 1996. New joiners: more than1 in the first month of the change; plummeting of traffic levels. In the press, America Online became known as America On Hold. THE REVISED PRICING.AND ITS CHALLENGES
- 9. Advertising, transaction royalties, and merchandising-contributed >10% of AOLs first quarter revenue in 1996-with advertising as a large revenue source. By 2000, 60 to 70 percent of AOLs revenue came from members. Most observers expected that percentage to decrease as access increasingly became a commodity. EFFECT OF NEW CHANGES IN PRICING
- 10. On the cost side, the industry had three primary expense categories: (1) Telecommunications, (2) Customer Acquisition, and (3) Content Royalties. Telecommunications expenses: Substantial in the industry. Customer acquisition : Increasingly more expensive due to competition. Content royalties: Traditionally amounted to 15% to 30% of overall revenues in aggregate. EVOLUTION OF STRATEGY
- 11. AOL launched the Greenhouse Program-the company took equity stakes in over 50 start-up studios. AOL-did investment and provided support to these studios. Early 1996-AOL had 23 greenhouse services running; planned to have over 100 by June 1996. This success of Motley Fool led to perusal of other programs. THE GREENHOUSE PROGRAM
- 12. President of AOL services-Ted Leonsis, directed greenhouse services. Increase in membership: tenfold; revenues jumped from less than $100 million to more than $1.5 billion. AOL downplayed the importance of its relationships with traditional media companies. Lost some content to major companies-NBC content to Microsoft and Time Warner content to CompuServe-but that didnt deter them. 1996-Leonsis became president of a new division called AOL Studios to focus on content creation. DOWNPLAYING TRADITIONAL SERVICES
- 13. In 1996-enter Bob Pittman, founder of MTV, to run AOLs day-to-day operations while Case stayed on as company CEO, focusing on corporate strategy and product development. Two goals for AOL: to make the company profitable and to make AOL one of the leading brands in the world. Customer acquisition costs-reduced from $375 to $90.31. Focus was given more in solving network traffic problems and in settling lawsuits. New strategy in February 1996-scaling back developing and producing entertainment and used content providers to pay for carriage. .AND ENTER NEW LEADERSHIP, NEW STRATEGIES
- 14. AOL PARTNERSHIP DEALS Partnership deals - Pittman with providers and advertisers involved a combination of cash payments & cross-marketing provided to AOL. This was provided in exchange for carriages on the AOL Service and a guaranteed number of impressions by AOL users. Price tag associated with a particular deal was determined by a number of factors: The level of exclusivity on AOL The areas in which placement was guaranteed on AOL The AOL brands on which a content partner gained carriage
- 15. AOL PARTNERSHIP DEALS CONTD Four types of partnership deals with AOL: Anchor tenancy: Each of AOLs 18 channels had up to 4 anchor tenants with fixed placements on their respective pages. Exclusive provider: USA ($500 million) & Barnes&Noble ($100 million) paid for its exclusive relationship with AOL. Primary provider: An AOL primary provider was the featured provider in a particular space; eToys ($18 million) & Preview Travel ($32 million) paid to be primary commerce provider of toys on AOL. Premier provider: Included a combination of Anchor Tenancy, some exclusive content, and multi-faceted placement and promotion; In 1999 CBS MarketWatch ($21 million) & Electronic Arts (EA) ($81 million) paid AOL.
- 16. PARTNERSHIPS/ACQUISITIONS In 1990s, AOL had established strategic alliances with dozens of companies including Time Warner, ABC,, Tribune, Hachette, IBM, American Express, etc This is to provide content, distribution, and the latest technology to its users. Early 1996 - Alliances with Microsoft and AT&T. AOL made Microsofts Explorer their featured Internet browser in exchange for an AOL icon in every copy of Windows 95. AOL and AT&T alliance- to offer a link to AOL from its WorldNet Internet access service providing AOL with potential access to AT&Ts 80 million customers. In 1999, AOL purchased Netscape Communications at a price of about $10 billion in stock.
- 17. INTERNATIONAL In fiscal year 1999, AOL International topped with 3 million members outside the United States. In 1999/2000, AOL partnered with Mexicos Cisneros group to launch AOL Latin America services in Brazil, Mexico, and Argentina. The company also launched AOL Japan and AOL Australia, and made a strategic investment in China.com. This is to strengthen AOLs role in that region and to set the stage for the launch of AOL Hong Kong in 2000. By August 2000, AOL operated in seventeen countries worldwide
- 18. TIME WARNER In 2000, Time Warner was the worlds largest media company. It published and distributed books and magazines, recorded music, movie and television programs. Owned and operated retail stores, Cable TV systems. Owned and administered music copyrights. The company owned 75 percent of Time Warner Entertainment which was comprised of Warner Bros., Time Warner Cable and several other entertainment holdings.
- 19. TIME WARNERS BUSINESSES Cable Networks Publishing Music Filmed Entertainment Cable Systems
- 20. TIME WARNERS BUSINESSES Cable Networks: TBS Entertainment: The Turner entertainment networks housing TBS Superstation, TNT, Cartoon Network, Turner Classic Movies, and the new Turner South. CNN News Group: CNN featured more than 77 million U.S. subscribers and over 600 news affiliates in the United States and Canada. Home Box Office: This division featured both HBO and Cinemax, with 35.7 million subscribers in the United States and 10 branded channels. Publishing: Time Inc., featured thirty-six magazines with a total of 130 million readers.
- 21. TIME WARNERS BUSINESSES Music: Warner Music International, Atlantic, Elektra, Rhino, Sire, Warner Bros. The Group had thirty-eight of the top 200 US albums in 1999 and owned 1 million music copyrights. Filmed Entertainment: Warner Bros. owned 5,700 feature films, 32,000 television titles, and 13,500 animated titles, including 1,500 classic cartoons. New Line Cinema produced four of 1998s top twenty-five box-office hits. Cable systems: Time Warner Cable featured the Road Runner high-speed online service. Time Warner cable had more than 12.6 million customers and passed 21.3 million homes.
- 22. CROSS-PROMOTION Time inc and warner bros merged in 1989 which brings together in the media platform and also to promote each other. Time warner failed to exploit its strategy of leveraging the media assets until acquisition of tuner broadcasting systems in 1996. Tuner asset is considered as third side of the triangle.
- 23. Main complaint-time and warner did not make much of their merger a decade ago. Main competitors: MSN network, investing $1 billion in Comcast and $5 billion in AT&T. Rupert Murdoch's News Corp. which had structured itself around a future in which consumers would demand wireless Web access and interactive TV. Sony, with the main unifying asset being video games and also a major part of their revenue. Viacom, which became even more expansive after its merger with CBS. General Electric: With MSNBC, CNBC, and NBC, General Electric, which earned $100 billionin 1998 revenue. AT&T was the largest telecom company in the United States, with more than 80 million customers. OTHER PLAYERS IN THE SYSTEM
- 24. WARNERS EARLIER EFFORT ON INTERNET Launch of pathfinder in 1994, a portal to its various media properties. Due to the problem arising in the pathfinder and the site is dropped in may 1999. Company also spent $15 million dollar on the portal. By changing the internet strategy to emphasize 5 vertical hub websites. The launch of entertainment hub called entertaindom. At February ,the website also ranked 664 in overall and 66 in the entertainment category due to this issue the top management is changed and some executives were forced out.
- 25. MERGER On January 10, 2000, $165 billion merger.
- 26. MERGER( CONTINUED) Within 5 weeks -2 companies - lost almost $50billion of market capitalization. Reminiscent of Barry Diller's failed $22 billion attempt to merge his USA networks with the internet portal Lycos. Disneys struggle to convince investors of the value of its $1.6 billion acquisition of internet portal Infoseek. Convergence of old and new media: Combination of hitherto separate Internet Service Providers (ISPs), portals, and content providers, and that AOL was uniquely suited to lead this convergence.
- 27. CONDUIT VS CONDUCT In 2000, growth outlook cable network industry good. In 1999, total cable network revenues $24 compared to the $16 broadcast network advertising Reason for the merger may have been plumbing rather than programming. Time Warners cable properties would give AOL control of valuable broadband distribution assets. AOL -lack of broadband distribution capability.
- 28. CONDUIT VS CONDUCT CONTD AOL needed fast, inexpensive connections to its customers to remain competitive as broadband delivery increased in popularity. Most vocal opponents to merger - The Walt Disney Company. Disney feared that AOL, acting as a broadband gatekeeper, could choke off access to Disneys crown jewelsｯ its content. NBC, General Electric, joined Disney.
- 29. NOW A WORD FROM OUR SPONSOR Advertising and e-commerce lifeblood of the merged AOL Time Warner. Revenue increased by 23 % at Time Warner-Q2, 2000. During AOLs Q4 2000 ending June 30, revenues increased more than 80 percent from the previous year
- 30. CALLING AOL Series of acquisitions - easy to access the service via any medium. AOL enabled access to its service (DSLs, announcing alliances with GTE, Ameritech Communications, and Bell Atlantic, (ADSL) service to subscribers. Voice service (VoIP). 5.4 % stake in Internet telephony company Net2Phone . 10 % stake in Palm.com
- 31. CALLING AOL CONTD AIM, ICQ and Buddy Lists made the company telecommunications player. ICQ had 62.4 million registered users - average of 75 minutes per day. AOL's AIM and ICQ software - 130 million users. Not allowing other ISPs to link to its ICQ system brought charges of anticompetitive behaviour from ISPs. Attention from the Federal Trade Commission (FTC).
- 32. CALLING AOL CONTD Competitors Microsoft and AT&T iCast and Tribal Voice criticized AOL for its refusal to allow people using other products to trade IM with its users. AOL tried to block competition. Renewed urgency for AOL Reviewing the Time Warner deal.
- 33. REGULATORY UNCERTAINTY Regulatory issues. Open access. Potential reclassification of internet over cable lines as a telecommunications service. U.S. Circuit court of appeals -internet service over cable should be classified ｯ and potentially regulated by the fccｯas a form of telecommunications service. Telecommunications services were regulated as "common carriers," forbidden from discrimination. Cable providers-allowed companies to select which channels their customer receive.
- 34. REGULATORY UNCERTAINTY CONTD Legal battles between ISPs and cable operators. Creating substantial uncertainty for investors and consumers. FCC Chairman William Kennard said the FCC might decide to conduct its own proceeding to reclassify Internet service over cable as something other than a telecommunications service or the agency might adopt the court's classification but exempt such service from telecom rules.
- 35. CONCLUSION After the merger was announced, the key roles were already determined. CEO -Gerald Levin. Bob Pittman, AOLs President and COO , co-COO role with Time Warners President, Dick Parsons. Pittman-subscription, advertising, and commerce businesses. Parsons-run content from film, television production, music, and books. Ted Turner, Time Warners Vice Chairman-Senior Advisor.
- 36. CONCLUSION The merger tested the ability of AOL (an Internet pure play with 12,000 employees) to make something greater than AOL and Time Warner (a 67,000-employee traditional media conglomerate would otherwise produce independently. AOL has evolved from an Internet Service Provider (ISP) to control a wide variety of Internet and media assets including vast content arms (e.g. Time Magazine), broadcasters (e.g. CNN) and cable systems. The business models sustaining many of AOL Time Warners assets are fundamentally different from that of an ISP.
- 37. QUESTIONS The skill sets needed to manage the conglomeration are very diverse. Was it necessary to bring these assets under one firm? How can AOL Time Warner incorporate these assets to create something greater than if ownership of the two companies stayed separate?