In chaotic markets hurtling through speed-of-light evolution, every player knows some of the decisions they make in the heat of the moment will prove fateful. They also know that which decisions end up being fateful, and why, will only become clear with the luxury of hindsight. So here’s a contrarian punt: the AOL/Time Warner merger is one of these fateful decisions, and it will prove disastrous to them both.
First, let’s quickly rehearse why the deal seems such a good idea. The logic is clear enough. AOL is a “walled garden”, offering a wide range of services to users who stay within its confines, plus an important and valuable exit to the Internet. The AOL business model depends on making its garden pretty enough for people to want to visit it, and on keeping them within its walls for as long as possible, because that’s how it makes most of its money.
To achieve that, it needs content – and that’s one thing Time Warner has got mountains of. Time Warner is also the second-biggest broadband cable operator in the US, and broadband is something AOL needs to master if it is to develop next-generation services.
Time Warner’s problem is the exact opposite. Compared with AOL, its Internet presence is minuscule and this is untenable. The Web is not just another media channel. It is evolving swiftly to become all media channels bound up in one. In future, it will encompass Web-TV and video, Web-radio, Web-telephony, Web-music, Web-magazines and even Web-books. As a media company, therefore, if you are not on the Web, you are nowhere. And a deal with AOL provides mass Web presence overnight.
So it looks like a marriage made in heaven. But is it? A salutary story from the heart of marketing mythology – the great cola wars – suggests otherwise.
Coca-Cola’s core strategy was universal availability: it wanted Coke within an arm’s reach of desire. But in certain key markets, PepsiCo followed a different route. As well as owning a highly successful snack company (Frito-Lay), it was also a major fast-food operator with chains including KFC, Pizza Hut and Taco Bell.
The marriage between fast-food and beverages seemed perfect. The offers were complementary: cola goes with fast-food like bees with honey. Fast-food was booming, providing guaranteed distribution growth for Pepsi. And by owning Pepsi, PepsiCo made sure that the fat margins earned on fountain cola sales in fast-food outlets were held inside the corporation rather than lost to an outsider such as Coca-Cola. There were also endless opportunities for joint marketing initiatives.
But it didn’t work. The fact that Pepsi was in bed with the likes of KFC meant that it never got a look in with rival fast food outlets such as McDonald’s. So what looked like a distribution opportunity became a prison, barring Pepsi’s further expansion and giving arch-rival Coke free rein.
The Pepsi link also cramped the style of the fast-food outlets, especially in those markets outside the US where rather than being neck-and-neck with Coke, Pepsi is sometimes a pathetic also-ran. In these markets, it was natural for the fast-food outlets to want to offer the content their customers wanted, rather than content dictated by ownership arrangements. The result was conflict, not synergy.
The parallel with AOL/Time Warner is uncanny. Content creators such as Time Warner are like Coke – they live and breathe universal availability. With brands such as Warner Bros, CNN, Time and Fortune, Time Warner’s success lies in maximising distribution opportunities, making its product available anywhere and everywhere. But by merging with AOL, it has joined up with many key content distributors’ sworn enemy. Its distribution opportunities will start evaporating.
Ditto with AOL. Service providers such as AOL are like fast-food restaurants – they live or die to the degree that they become destinations for their customers. By getting into bed with one of many content providers, AOL is transforming its role, from being a basically neutral content distributor to ally with Time Warner against its enemies. Rival content providers such as Disney will treat it suspiciously from now on, and in the long term AOL’s content will be impoverished, not enriched. Note the contrast with Yahoo!, which is continuing with its strategy of partnering with as many content providers as possible.
The cola war analogy also applies to AOL and Time Warner’s status inside and outside the US markets. Like Coke, Time Warner is big outside the US, while (like Pepsi) AOL is often a number two, three or worse. In the UK, Germany, France, Italy and Spain, for example, Yahoo! is ahead of AOL. In an ideal world, wouldn’t Time Warner prefer to link with Yahoo! in these markets? The AOL link risks closing far more international doors for Time Warner than it opens.
The merger between the two, therefore, is a case of short-term opportunism and hubris taking precedence over strategic marketing. Of course, the blurring of boundaries between Internet access provision, broadband cable, telephony, traditional media, computing and software does make it difficult to know exactly what sort of beast you are. But that only underlines the central point, which applies to every marketer – “know thyself”, understand the inner marketing logic that drives your business, and be faithful to it.
In this case, the marketing logics don’t mix. Content creators such as Time Warner need presence-marketing strategies which are fundamentally at odds with the destination-marketing strategies needed by distributors such as AOL.
Eventually, after many years of struggling with the mess they had created, senior PepsiCo managers accepted the inevitable and let their different businesses go their separate ways. Likewise, the lure of “synergies” may keep AOL and Time Warner together for a while, but these synergies will prove illusory. The union between AOL and Time Warner is an attempt to marry fish with fowl. They will find it impossible to consummate their marriage. And when the union proves barren, the divorce promises to be extremely messy. By which time, both sides could find themselves left on the shelf.
Alan Mitchell can be contacted at firstname.lastname@example.org