Media Curmudgeon

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September 22, 2007

The Future of AOL

This past week CEO Randy Falco announced another reorganization of AOL, which sparked a lot of speculation about its future. On September 17, The Wall Street Journal ran a story titled “Overhaul at Time Warner?” that included speculation by a Wall Street analyst who wondered, "Would shareholders be better off if AOL were spun off?” On the same day MediaPost’s Wayne Friedman wrote in an article titled “Analysts To Time Warner: Sell AOL,” that “Time Warner's honeymoon with AOL seems to be over, as some analysts are strongly suggesting that the media company should make major moves concerning the online service.”

The reorg that fueled this speculation about the future of AOL was actually fairly well received in the media buying community. MediaPost writer Gavin O’Malley wrote in an article titled “Media Buyers Give Thumbs Up To New AOL Ad Network,” that “Media buyers were positive on the news, adding that AOL's recent spate of ad network acquisitions would have been pointless without their eventual integration.”

So, the reorganization of AOL’s sales effort was well received by its customers (media buyers) and not well received by its investors (Wall Street). Time Warner’s stock price didn’t move to any significant degree after the announcement; so, what was the reorg about and what does it mean for the future of AOL?

The new unit will be called Platform A and is the result of a carefully crafted strategy to leverage AOL’s assets, such as the AOL portal, Advertising.com (the country’s biggest ad network), Tacoda (behavioral targeting), Lightningcast (a video ad network), ThirdScreenMedia (a mobile ad network), and AdTech (an international ad-serving company) to address the current trends in online advertising—trends that don’t bode well for portals such as AOL, Yahoo, and MSN. Falco had to do something to demonstrate why Dick Parsons and Jeff Bewkes of Time Warner hired him to run the faltering AOL that didn’t meet its expected advertising revenue numbers for the second quarter of this year.

About the reorg, Falco said, "With the launch of Platform A, we are unleashing this powerful network to deliver unrivaled transparency and return on investment for our marketing partners.”

He could have said, but obviously didn’t, “I had to do something. Morale at AOL was lower than whale shit, we weren’t making our numbers, and portals are as a dead as Kelsey’s nuts.” But I give Falco credit for what seems to be the right moves and for waiting to make them until he had all the pieces together. If AOL is to grow, it has to aggregate inventory on many smaller sites out in the long tail (niche-market sites), serve relevant ads, preferably in a video environment, and grow internationally. So Falco and his COO Ron Grant, get an A for this move that will please advertisers. To hell with Wall Street—the PE bozos have a hard enough time managing their own firms, let alone telling other companies how to manage theirs. Wall Street only knows one strategy—buy low, sell high, and collect outrageous fees from both sides for lousy advice. As a good friend of mine said, “They couldn’t organize a two-car funeral parade.”

What is the future of AOL? First, Time Warner will not sell AOL because it’s seen as a no-grow or slow-grow business, and who is going to pay $20 billion (what it was valued at when Google paid $1 billion for five percent) or even $13 billion (what some analysts think it is worth today). Second, Jeff Bewkes, who will take over from Dick Parsons as Time Warner CEO, probably by the end of the year, didn’t fight and claw to get to be the top gun at the world’s biggest media conglomerate to dismantle it and reduce its (and his) clout and power. In the media, profits are important, but power is the most valuable currency—no mogul wants to lose even a scintilla of it.

Third, we on the outside don’t know what Parsons and Bewkes promised Falco when Time Warner hired him to run AOL. Don’t you think Falco asked if they were going to sell AOL? Don’t you think he wanted assurances that they wouldn’t sell it from under him and that to make sure they didn’t he got a huge, huge golden parachute from them. I’ll bet a venti latte that Falco got an enormous golden parachute—so big that if Bewkes sells AOL and Wall Street learnes what Falco's payoff is, that Wall Street and TW investors would be after Bewkes’ scalp. So, Bewkes won’t take that chance.

Fourth, Bewkes is currently the media Golden Boy—the savior under whose watch HBO developed “The Sopranos” and “Sex and the City.” He is supposed to have pushed AOL into its current (and correct) portal strategy, fired AOL’s CEO Jon Miller, and hired Randy Falco, all of which look now like good moves. However, I’ve heard that Bewkes is a suit—a glib, suck-up Yalie who is a cost cutter but not a brilliant strategic thinker.

Dick Parsons is a compromiser, a politician, a consensus builder, and a negotiator. He’s a very bright, charming, and, at least externally, calm guy who was right for Time Warner after the disastrous merger with AOL. But he’s an ex-banker, so he’s not a risk taker and he’s not a great media strategist. He’ll be throwing Bewkes to a wolf pack of brilliant strategic thinkers. Rupert Murdoch will have him as an appetizer, Summer Redstone will eat his lunch, and Bob Iger will have him for desert.

So, Bewkes won’t sell AOL, and during the first year of his reign he’ll look like a deer in the headlights, will be paralyzed with fear, and will make no major moves. If I had any Time Warner stock, I’d sell it immediately before it goes down further. When it goes down to under ten in a year-and-a-half, the TW board will fire Bewkes and hire Randy Falco. We’ll see then if Falco is tough enough to swim with the sharks.

Posted by Charles Warner at September 22, 2007 09:59 PM

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