On March 12 2009, AOL replaced Randy Falco with Tim Armstrong, who previously ran Google’s North American sales operations. I attended the Media & Money conference yesterday at the Roosevelt Hotel in Midtown Manhattan and heard Tim talk about AOL’s future and past.
First 100 Days: Strategy vs. Cost Structure
Before even accepting the Chairman and CEO role at AOL, Armstrong got a ton of advice from experts and monday morning QBs alike.
Once he joined, his first 100 days were highlighted with an assessment of the company’s assets and position in the marketplace. He received thousands of employees’ suggestions. Subsequently, Armstrong decided to wipe the slate clean and formulate a new company strategy that fit on a single page.
The Strategy: Content, Ads and Communications
On this one-pager, Armstrong formulated AOL’s three pillars:
1 - Content
2 - Ads
3 - Communications.
AOL Time Warner: 50% of Marriages End in Divorce
Of course, to talk about AOL’s future, one must put the January 2000 merger with Time Warner in context:
AOL/Time Warner will be 55 percent owned by AOL and 45 percent owned by Time Warner. The combination will immediately boast a market capitalization of $350 billion and an annual revenue stream topping $30 billion.
That’s right, buoyed by the Nasdaq’s gains and AOL’s growth in the 1990s, AOL acquired Time Warner.
The Nasdaq peaked in March 2000 at over 5,000 and crashed down to 1,200 by the next year. To be fair, while there were macro-level causes for the result, there were also some unique factors at play.
From a 2009 article in TheDeal:
The new economy was never realized, and neither was AOL’s potential as the driver and distributor of Time Warner’s unmatched inventory of content. Not that AOL Time Warner, which dropped the scarlet letters A-O-L from its corporate name in 2003, didn’t keep trying. The efforts have already added two successive AOL heads — Jon Miller and Randy Falco — to the list of those the original deal beheaded.
It didn’t help that, as an Internet service provider, AOL has never been more than dial-up. That meant the transaction in which it figured so prominently (its shareholders received 55% of the combined entity’s equity) had built-in obsolescence. It also meant, arguably, that the promise misplaced in AOL kept its parent company from pursuing the potential of its much faster and technologically advanced cable-driven ISP, Time Warner Road Runner.
Throughout that decline and the increased obsolescence of dial-up technology, Time Warner’s size relative to AOL grew considerably and the AOL/Time Warner merger cost shareholders billions of dollars and after less than a decade, the powers that be at Time Warner decided that AOL had to go.
As a result, the Time Warner brass needed to sell AOL - the new stock - to institutional investors and few have the presence and track record of Tim Armstrong, Google’s former North American VP.
The Story Starts: Use of Funds is Main Divergent Issue
According to Armstrong, the main driver for the spin-off is how differently AOL and Time Warner would use cash. Oddly enough, while merger was doomed due to culture clashes and bad timing, in theory, the case for the merger is as sound today - on paper - as it was then:
“Together, they represent an unprecedented powerhouse,” said Scott Ehrens, a media analyst with Bear Stearns. “If their mantra is content, this alliance is unbeatable. Now they have this great platform they can cross-fertilize with content and redistribute.”
The problem, of course, is that big “transformative” mergers and acquisitions are transformative in good or bad ways. They can radically help grow a company (look at how much revenue eBay generates from Paypal from example) but they can also kill a company.
Let Bygones be Bygones
If content, ads and communications are the focus of the company, then the company’s objectives are:
Objective # 1 - To Become The Largest Producer of Content Online
Armstrong has talked a lot about AOL being the Time of the 21st century with regards to producing content, lots of it.
It’s worth noting that Time.com’s own Managing Editor Josh Tyrangiel admits that “long form journalism, a staple of magazines like Time, is not working online”. As such, maybe emulating Time too well won’t serve Armstrong either. Of course, time will tell.
”You are seeing more and more talk of content and scaling it.” AOL has hired hundreds of reports and is investing in systems to scale the production and distribution thereof. Armstrong said he wanted to bring “Silicon Valley’s platforms and mentality to content,” and echoing something I’ve been saying for a while, he added that “while there has been a lot of investment into technology, not much investment has been made in content.”
He’s right. But AOL’s not alone in investing in content, though companies are going about it differently.
Should be stated that we at WatchMojo are now one of the biggest supplier of premium video content online. We not only supply the usual suspects (YouTube, Hulu, etc.) but also vertical sites. Who else, do you know of, for example, supplies both business videos to Thomson Reuters and video game content to IGN.com?
As I also like to say, unlike technology, content isn’t a zero sum game, and in fact, as a content entrepreneur and executive, I love seeing more and more focus being put on content.
The heavily-funded startup Demand Media is also into producing hoardes of content. What sets AOL apart from Demand Media is that while Demand is intent to play the SEO/Google Ad Sense text advertisement arbitrate card, AOL’s second objective is to leverage the strong display advertisement business Armstrong inherits from previous executives such as Mike Kelly (who encouraged the Advertising.com deal, which we ranked as one of the best Internet M&A deals of all-time in our 2006 list here), Jon Miller and to some extent Randy Falco.
Objective # 2 - To Become the Biggest Seller of Display Advertising
AOL owns Advertising.com, the largest ad network in the world. Of course, AOL also owns Tacoda, Quigo and a barrage of other ad networks that were bundled and branded Platform A but have now been - shocking I know - separated as well.
The problem with AOL’s strategy under Falco was that it became a strictly quantitative approach to sell reach and networks, whereas advertising - and brand advertising in particular - is a different beast.
What is really shocking about Armstrong is that despite his pedigree at Google (a joint run by a bunch of quants, basically) is just how much he thinks like a media / content / advertising guy, which makes sense given his role and success at Google, but still, it’s refreshing to see.
Web’s phases
If Armstrong is singing the “contest is king” mantra, it’s because history suggests the next boom will be in content. Yes, this is also a theme in my ruminations, as the Web now shifts to an era of consumption of information and entertainment.
He broke down the Web’s phases as such:
1) Access: ISP, portals, search engines, etc.
2) Platforms: Facebook, MySpace, Twitter, etc.
3) Content: speaks for itself.
Across all new distribution platforms (TV, radio, print), over time, it’s content that becomes most valuable.
AOL isn’t merely interested in producing the right type of content, it’s also looking at scaling quality content, building systems and platforms to help content creators.
SMO Replaces SEO?
When asked about social media, Armstrong views it as a great way to distribute content.
I agree, I think in video at least, because search engines do a crappy job of indexing videos, SEO has been replaced to some extent by SMO, or social media optimization (I’ve called this SNO, or social networks optimization, in the past). This has been accentuated by the “deportalization of the Web”.
He touched on Bebo, which he suggests is being repositioned on what it did best: sharing media and entertainment amongst friends.
Display and Video to Outperform Search?
The next $50 billion that shift online probably won’t respect the same ratio between search and display. He’s right, here’s a graph to demonstrate that:
Related: can online video advertising can surpass online search advertising; can online advertising outright surpass television advertising?
It’s no secret that Armstrong is repositioning AOL’s ad network business, suggesting that AOL’s extreme focus on Platform A might have been misguided.
To become the #1 in display banner ads, he added: “Display cannot be about ad networks and reach alone, brand advertising could be done differently, it’s about the ‘brand story’”.
Multi Brand Strategy
AOL has 70 properties, ranging from men’s blog Asylum to Spinner, but AOL sells mainly by audience. As Asylum’s quick ascent has shown, AOL doesn’t merely have the traffic and eyeballs to build large properties, but it has data.
As a VP for men’s lifestyle site AskMen, I worked with both MSN.com and AOL.com in the early 2000s, and one thing that AOL had was a lot of information on user’s interests, click through data and what not. As a result, if it decides to focus on an audience, it can move fast… and efficiently.
Of course, that is theory; in practice, it boils down to execution and having the right content.
“More and more advertisers see themselves as content producers,” continues Armstrong. I agree, but we’re also seeing a more sober stance occasionally when marketers decide to stick to what they do best.
He touched on local and video, too.
Local
“All about living lives better locally”, he stressed. He invested in Patch due to a personal frustration over a lack of information at the local level. AOL acquired Patch, who has since expanded into 30 cities and tends to partner with local media, as is the case in New Jersey.
Video
AOL is producing six times more videos than it was a mere 4-5 months ago. The content can be broken down into two main genres:
- very high quality (Beyonce comes in the studio)
- original videos based on their media properties.
I personally break professional videos into two: super premium and premium. Here is my not-so-complicated view of content online:
- At the top, you have ”super premium” representing Hollywood, studios etc. You can command extremely high CPMs but the inventory is usually low etc.
- In the middle, you have “premium” content, basically being where WatchMojo now has built a nice position. If you’re keeping track, CPMs are healthy and inventory is decent, so the overall revenue is highest here.
- At the bottom, you have UGC, which totally changes the rules of engagement of media, news and publishing, but which will fail in ad-supported model.
Echoing by bearishness on scripted entertainment, Armstrong believes that there is an “opportunity” in scripted entertainment, but can’t take a Hollywood approach online. This is why many companies have failed, in fact, in the video content business.
AOL’s Future
The Verdict is obviously still out. Yesterday’s chat is largely about getting the story right and out, as institutional investors will have to buy into the story and the stock once Time Warner completes the divorce less than a decade after the marriage.
Will the Street buy in? Who knows. After all, the Street applauded the TWX/AOL merger when it happened, and then evaporated 90% of the value of the combined entity.
But I do know that Armstrong is saying all of the right things to position AOL as the home of great content and as a home for content producers. And, if content is king and in the end content prevails, then AOL might prove to be a nice long term bet amongst media stocks.
You can read more about Armstrong’s chat yesterday at the Media & Money conference on Business Insider. You can also read my previous posts on AOL and their content initiatives here:
- Mediaglow: Silver Lining in AOL Empire?
- Did Armstrong Leave Google Because Content is King?
The Web makes the world far more connected, but this doesn’t make it simpler for media firms:
Those that do tend to transcend corporate, political and local agendas; cover locally but market regionally; stick with marketing their media brand for the long term and devote enough financial resource to fund a strong sales force and newsgathering team.
One important factor is to have enough flexibility to be interpreted appropriately in each market, said Charlene Solomon and Michael Schell, authors of “Managing Across Cultures: The Seven Keys to Doing Business With a Global Mind-Set.”
“One of the reasons there are so few global media outlets is because typically media is developed for local tastes,” the co-authors wrote in a joint e-mail.
Read more.
According to AdAge, via Paid Content, Spot Runner is being sued by WPP. Spotrunner is a self-serve TV ad platform.
The company’s investors include:
Since launching three years ago, Spot Runner has raised $111 million from number of investors, including UK media group Daily Mail (LSE: DMGT) and General Trust, Spanish-speaking media giant Grupo Televisa, hedge fund Legg Mason Capital Management, French luxury group Groupe Arnault/LVMH, who were the most recent. Original backers include Allen & Company, Battery Ventures, Capital Research and Management, CBS, Index Ventures, The Interpublic Group, Tudor Investment Corporation as well as WPP.
Adding insult to injury, Spot Runner has had 3 rounds of layoffs.
How does that $111M in funding break down? According to Crunch Base:
- Series A = $10M invested in January 2006
Battery Ventures
Comerica Bank
Index Ventures
- Series B = $40M invested in October 2006
Allen & Company
Battery Ventures
Capital Research and Management
CBS
Index Ventures
Tudor Investments
WPP
Lachlan Murdoch
Vivi Nevo
Interpublic Group
- Series C = $51M in May 2008
Daily Mail and General Trust
Grupo Televisa
Groupe Arnault/LVMH
Legg Mason
That list of investors is almost Madoff-esque, no?
I finished reading Kenneth Whyte’s The Uncrowned King on William Randolph Hearst, and I learned a lot about how to be a better businessman and entrepreneur, no doubt. Hearst was the man, for sure.
But I also walk away now realizing that newspapers as (we know them) will die, no matter how much of a fight they put up.
From the last pages of the book:
“The 20th century brought an extended (and ongoing) era of profit-taking and consolidation. Advertising came to dwarf circulation as a source of newspaper revenue, and advertisers found it more cost-effective to reach a whole reading public with one or two ad placements than with many.
The big papers got richer, the smaller ones disappeared, to the point where many metropolitan dailies enjoyed local monopolies. With reduced competition, newspapers lowered their voices and brought in their elbows.
The aggressive, crusading, politically charged, self-promoting, polarizing, audience building antics of the old warrior owner-editors gave way to to the relatively bland consensual habits of the business manager who wanted only as many readers as would keep his advertisers happy.”
What is the problem? There are two.
- The Web has cut into their audiences, and
- advertising is more effective online…
The Web will keep eating away at newspaper audiences and revenues, and if/when newspapers get serious about moving to the Web, then they accelerate their inevitable demise.
In the 1950s, television ushered in even greater reach, so the appeal of placing ads in most newspapers vanished. I think the papers who did not die when the penny presses merged and subsequently closed in the 1950s will probably go out of business by first merging and then selling this time around.
In the 2000s, the Web offered more by way of local tastes. The myth that newspapers “master” local content is a myth. They’re not bad at it, but they took advantage of an inefficiency. The Web leveled the playing field and made marketing more efficient. This fundamentally pierces through any vestige newspapers had.
Newspapers will die, news will go on… News companies have a choice to make.
Times have changed, haven’t they?
Now:
Local ad spending will fall from $155 billion last year to $137 billion in 2011, predicted the Kelsey Group and BIA Advisory Services. Yet local online ad spending will increase from $14 billion to $23 billion during that time.
Then:
Advertising in newspapers (in the US, I presume) grew from $39M in 1880 to $150M in 1900.
From Kenneth Whyte’s book on William Randolph Hearst called The Uncrowned King: The Sensational Rise of William Randolph Hearst.
Over the next two years, online local ads will grow by 64%, but local ads altogether (or offline only, it’s unclear based on the quote below) will slip 12%. But I think this shows the big concern for traditional, offline media: even though the relative (percentage) growth rates are impressive, in absolute terms (dollars), the loss from offline is not being covered by online’s gains.
Local ad spending will fall from $155 billion last year to $137 billion in 2011, predicted the Kelsey Group and BIA Advisory Services. Yet local online ad spending will increase from $14 billion to $23 billion during that time.
Could this be the straw that breaks social media’s back? Maybe.
A chiropractor is suing Yelp and a poster for disparaging comments. You’d think that the First Amendment would provide cover for such free speech, right? Well, it all depends where opinion ends and facts begin. This is at the heart of a dispute affecting local review site Yelp.
2008 was not a kind year for social networking:
- Facebook reduced its revenue projections,
- eMarketer slashed its forecasts for the segment,
- even MySpace experienced a slowdown in the second half of the year,
- By year’s end, the economic meltdown affected advertising and all of a sudden, hopes for ad-supported business models evaporated.
Regardless of how this lawsuit fares, I think this is one of those “ah ha moment” for social media where any doubt fades away: social media won’t - and can’t - be ad-supported, period.
Sure, you would think that selling paid listings and generating e-commerce will be easier, but even then, when you consider the following:
“Biegel, who was a “sponsored” advertiser on Yelp and encouraged customers to write reviews on the site, received about as many referrals per month from Yelp while the review was up as before, but fewer after the lawsuit was filed, Blacksburg said, citing Yelp documents.”
You realize once again that while social media is powerful… so what? Ultimately, you’d think that the chiropractor in question would want to advertise next to this user-generated content… but instead, all Yelp got was a lawyer’s letter.
This one will be interesting to watch.
In 2008, one of my resolutions will be to spend more time on developing our local strategy.
Borrell Associates has released their 2008 Outlook: Local Online Advertising report. They estimated next year’s total local ad market will reach a whopping $12.6 billion in spending.
Of that figure, Borrell said $5 billion will come from local search advertising. Another $1.3 billion should arrive as the local online video market triples from 2007.
read more.
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