AOL: crisis and opportunity

AOL is in a state of crisis. Actually, AOL has been in a state of crisis ever since its founding. But the company has always managed to make a lot of money out of each new crisis. But things are different this time around.

  • AOLers are starting to wonder why Steve Case is still around now that the other culprits in the AOL/TW merger have fled the scene of the crime.
  • Most of the executives now running the company are for TW’s traditional media businesses.
  • AOL has discovered $49 million in phoney advertising revenue from the last few years.
  • AOL has begun to realize that it needs to cut back on the number of impossibly irritating pop-up ads it serves to its customers.
  • AOL/TW chief executive Richard D. Parsons says that AOL should be more like HBO, selling premium services, if it’s going to survive. But it’s not clear what he meant. I always get suspicious when an executive says “We can save this troubled property by grafting on the business model of this other, more successful, business we own.”
  • AOL’s software hasn’t had a real update in a long time and it’s beginning to show its age, and Netscape’s share of the browser market has declined until it is now insignificant. Look for AOL/TW to close Netscape soon.
  • AOL’s content strategy is too-heavily focused on promoting other TW properties.
  • AOL’s dominance of instant messaging continues to erode.
  • AOL has struck deals with cable companies that look like cable-channel contracts, providing cable co’s with nearly $40 per month per subscriber, letting the cable co’s provide the billing, and sharing each customer’s ecommerce revenue with the cable co’s. AOL is giving up virtually all of its revenue to cut these deals.
  • Broadband is making AOL’s core dial-up business look very risky, while AOL is still trying to establish its own broadband offering.

AOL is still a great company, with a terrific brand, loyal users, unique features, enormous cash flow, and dominant share of users and advertising. But it is (and always has been) easier to wreck AOL than to keep it going.
AOL already commands a premium price for what is looking less like a premium service. Its software desperately needs a overhaul and it needs to add some features that take advantage of its proprietary network.
The only way to generate AOL-only content is to give it a premium price to compensate content providers for foregoing the broader distribution of the Web. The good news is that AOL has the infrastructure the Web lacks to make premium content practical. But so far no one has found content consumer will pay for, and AOL’s predictable monthly subscription is a core strategic asset. One possibility: AOL has the end-to-end system to create a premium music service. This won’t be easy, but it’s a lot easier than creating a premium service based on print properties.
It’s about time that AOL reconsidered popups and restructured its advertising offerings. But it would be a mistake for the company to abandon its dominance of the online advertising market while the recession is killing off their competitors. They have the ability to emerge even more dominant in when the online advertising market returns.
AOL’s broadband strategy is an enigma. To make money in broadband, you need to own the pipe. AOL/TW owns a lot of pipe. But they’re not going to make much as a solutions provider to Comcast et al, because they’re in no position to add value to their networks.
My recommendation: AOL is one of a handful of companies who are in a position to make money from wireless access. It’s a challenging market because of the capital needed to build a network, but AOL has the financial and technical resources, the brand, the customer base, and the marketing ability to create such a network. It’s the only strategy that will give AOL/TW the growth it needs and rescue AOL before cable and DSL eat their lunch. But it’s going to require more guts than the merged corporation has shown in its brief life. Perhaps they should give the job to Ted Turner.