Net visionaries: Bad execs or victims of bad timing?
By David Lieberman, USA TODAY
URL:http://www.usatoday.com/money/media/2003-01-13-aol-cover_x.htm
NEW YORK — One fact is indisputable after Steve Case acknowledged the anger of shareholders by announcing Sunday his decision to resign in May as chairman of AOL Time Warner:
Some believe Case, left, and AOL CEO Gerald Levin will be vindicated in the end.
By Stan Honda, Agence France-Presse
The Internet media visionaries of the late 1990s just didn't get it.
Case and other fallen digital dreamers — including former AOL Time Warner CEO Gerald Levin, former Vivendi Universal CEO Jean-Marie Messier and former Bertelsmann CEO Thomas Middelhoff — clearly misjudged how fast Internet media would catch on and how much revenue it would generate.
But the downfall of the Web's most prominent evangelist raises another, more intriguing, question: Are he and his colleagues simply the victims of bad timing and market karma? Or were they lousy executives who, at the height of the Internet frenzy, lost sight of fundamental characteristics of business and human nature?
Case clearly believes that short-term circumstances beyond his control account for the 80% decline in the value of AOL stock in the three years since he announced its acquisition of media giant Time Warner.
He didn't foresee how much ad sales would fall at America Online, how much subscription growth would slow and how interested federal investigators would become in its accounting practices. That made him an albatross at AOL, according to the company's mightiest investors, including Vice Chairman Ted Turner, Capital Research & Management's Gordon Crawford and Liberty Media's John Malone.
They and others are so angry that it appears to be just a matter of time before CEO Richard Parsons and the board decide to strip "AOL" from the company name.
Yet Case says time is on his side.
"Despite the current cynical view on Wall Street, there is growing evidence on Main Street that consumers increasingly desire and demand more choice, convenience and control from the media they consume," Case said Sunday. "I will continue to advocate a forward-looking view, so that when the environment and our performance improve, our company will be well positioned to benefit from these trends."
In a TV appearance Monday, he added, "If you look out 10 to 15 years, I think people will look back and have a different view on this merger."
He's not the only one who clings to the dream. Case and Levin "were extremely visionary and in the end will be vindicated for being correct," says Tim Bajarin, president of consulting company Creative Strategies.
But others say that the Internet bubble was inflated more by hot egos than by cool logic.
AOL stock the past two years.
"In light of the huge valuations of their companies two or three years ago, these men cast huge shadows, and they believed their legends," says Brian Arthur, an economist at the Santa Fe Institute, a non-profit research and education center. "After the Internet collapse, they've been revealed as just normal executives — some bright, some not. And many have been forced to slink away from the huge challenges they set themselves."
Sony Corp. of America CEO Howard Stringer says, "The frenzy was quite blinding, and if you weren't in it, you were treated quite patronizingly. The pressure on a lot of business executives was, 'You're missing the boat.' Society favored those who couldn't wait to do deals. And when one (Internet) person can say, 'I'm worth $100 million,' that was irrefutable for a while. That enhanced the gold rush. It was greed run rampant."
That skewed the way many approached basic business considerations. For example:
Executives failed to realize how few synergies they'd find between online and traditional media.
That was one of the most dazzling rationales AOL and Time Warner gave for their union. Case and Levin said that they could boost revenue by persuading advertisers to pay up for package deals. The assumption was that they'd relish the opportunity to see their spots run across AOL Time Warner's broadcast and cable channels (including WB, CNN, TNT and TBS), in magazines (including Time, People and Sports Illustrated) and in AOL banner ads.
But that's not the way ad buyers saw things. They liked having the latitude to pick the venues that appeal to their target audiences, says David Simons, managing director at Digital Video Investments.
To make matters worse, AOL executives never could figure out how different divisions would benefit by working together. For instance, Time Warner Cable honchos knew that their successful high-speed Internet access service, Road Runner, might suffer if they also pushed AOL Broadband — where they'd have to share the proceeds.
"You can smooth these things over but never eliminate them," Simons says. As a result, companies "hoped for synergies that did not happen."
Executives panicked into moving too quickly.
Many companies decided they had to do something, anything, to catch the seemingly speeding Internet train. They "saw a few early successes, like Amazon.com, and thought they needed to rush in," says Christopher Ely, vice president and portfolio manager at investment management firm Loomis Sayles.
It wasn't just that they'd miss out on a good thing. "There was this fear (among large media firms) that if you don't have a substantial presence in new media, you'd be left out in the game of musical chairs," says Joseph Turow, a professor at the University of Pennsylvania's Annenberg School for Communication.
Many companies acted first and asked questions later.
Where were the voices of reason on Wall Street?
"These business were being put together so quickly, it was very hard for analysts to get their arms around the numbers," says UBS Warburg's Christopher Dixon. "Where we stand today, we are digesting the excesses of the past several years."
Media giants overestimated how fast cable and phone companies would roll out broadband.
Moguls couldn't do much without the broadband speed needed for high-fidelity music and video.
"Broadband was the missing link," Ely says. "To capture people's attention, you have to provide an experience that will hold their attention," he says. "If you want to surf Time Warner's library, you can't do it with dial-up. Life's too short."
But broadband providers consistently promised more than they could deliver.
Stringer saw that in the mid-1990s when he ran Tele-TV, a failed phone company alliance with Hollywood that was supposed to deliver video.
"At Tele-TV, I thought DSL (digital subscriber lines) would be ubiquitous," he says. "But seven years later, it isn't, and cable has the most capacity to deliver broadband."
They overestimated how much consumers would pay for new services.
The theory was that people who used free Internet services would become hooked — and then gladly buy subscriptions to keep getting the content.
That's not how things turned out. Media companies discovered that the cost for making content was much higher than they expected. With just a few exceptions, "Being able to charge for online content has been difficult," says Paul Cook, portfolio manager at Munder Capital Management.
Consumers stubbornly continued to buy music and rent movies from local retailers rather than pay $50 a month or more for broadband to download the entertainment.
In the meantime, many grew accustomed to getting material for free. Deep changes in the industry are needed to overcome that mindset.
Small upstarts that still give away free content need to burn through their venture-capital funds, Cook says. Then large media companies will be able to charge for their content.
In addition, large media need to bundle their content into packages that Internet service providers can offer for an extra fee — similar to premium cable channels such as HBO, Showtime and Starz.
Executives misjudged investors' willingness to support unprofitable companies.
"There was an assumption you could sell stock to the public and fund your way through anything," says Marta Wohrle, vice president of the media consultancy at Mercer Management Consulting. Moguls thought "they could invest their way to being the last man standing."
It didn't take long before most media firms launched Internet tracking stocks, such as Disney's Disney Internet Group and General Electric's NBC Internet. Even they were shut out of the equity market after the Internet bubble burst.
Shares of NBC Internet and Disney Internet Group plunged before their parents finally called them back in. Viacom couldn't even get its initial public offering of MTVi done. "The marketplace let the valuations get out of hand," says Bob Davis, former CEO of Internet portal Lycos who is now a venture partner. "They were astronomical."
Executives contributed to that by forecasting extraordinarily high earnings. AOL Time Warner shareholders felt especially betrayed by the company's refusal in 2001 to acknowledge that it had gotten carried away. Investors finally concluded that AOL and Time Warner had paid "too high a price for something that was too uncertain," says Sanford C. Bernstein's Tom Wolzien.
It will probably take another year or two before the market can determine whether the Internet champions were visionaries or delusional. But that's cold comfort for those left with devastating losses.
"In the long run, they'll be proven more right than wrong," says investor Frank Biondi, former CEO of Viacom and Universal. "But in the long run, we're all dead."
Contributing: Paul Davidson, Matt Krantz, Jon Swartz |
