AOL, of course, has long recognized this, since their AOL 4.0 client software takes advantage of their
content on the AOL service. Now that AOLís fortuneís are more tied to the ìopenî Internet (i.e. now that
an increasing portion of AOLís traffic inventory is coming from the Internet click-stream), the additional
development burden of making sure AOL.com and ICQ worked with (was tightly integrated with) both
IE and Navigator could have been a daunting task. Owning Netscape gives AOL the same theoretical
level of control over consumersí Internet ìexperienceî as they have over consumersí AOL ìexperienceî.
And since AOL is deriving greater and greater revenue from their ability to promote and transact, having
a fine level of influence over the consumer experience, whether they are on AOL or off cruising the
Internet, is key. As well, as consumers grow more accustomed to the features and functionality imbedded
in the software and ìactivatedî by the Netcenter or MSN portal, they will be more difficult to dislodge
from the portal site itself.
The AOL Anywhere strategy, the concept that consumers should be able to get to AOL from any device
and via any communication method, could also gain nicely from this deal, since Sun has committed to
developing the software and networking technologies (Java) that would enable the proliferation of such
devices. Since PC unit growth (10-15%/yr) will not make the Web into a truly mass market phenomenon
(with the penetration of TV, at 98% of households) soon, other devices must be employed to reach these
levels (and to ensure continued nice subscriber growth when we start to approach saturation at the PC
level). Having access to Sunís Java technology and working with Sunís engineering team to promote the
development and use of alternative access devices is a smart long term investment on AOLís part. We
certainly arenít drinking the Kool-aid enough to believe that real progress is likely very soon, but the
strategy is right and the timing makes sense, since both AOL and Sun will have to learn many hard
lessons to determine what will work and what wonít with consumers.
Our central worry, beyond the very real risks of actually integrating the two companies and managing the
triumvirate of AOL/Netscape/SUN, was that AOLís persistent claim that the addition of Netscapeís
enterprise software assets fundamentally changed AOLís strategy. As Bob Pittman was quoted on the
conference call:
"Up until now, AOL's business was in driving consumers to our commerce partners. Now we want to
provide end-to-end electronic commerce solutions. We are giving companies solutions to build virtual
stores. We will manage both ends of the business.î
This worried usÖa lot. Part of AOLís DNA, one of the strings on their double helix, if you will, was
their determination to proceed quickly toward becoming a content destination just like Yahoo! and that
they would shed the vestiges of infrastructure in order to achieve new media nirvana. That is, they, just
like traditional media companies, would not have much vertical integration with ownership of, say the
telecommunications network subscribers used to get online. Among other things, this strategy muddies
the business models, makes strategy difficult, and diffuses concentration. We remember fondly AOLís
decision to get rid of AOLnet via the WorldCom/Compuserve transaction as one of the first real data
points toward this thesis.
The public positioning of the Netscape transaction, however, was plainly different; though AOL has
professed a desire to disburse their investment in the telecommunications layer of the online
infrastructure, their new strategy, of taking ownership of and responsibility for the software layer (client
and server side), went against this grain. What is it, we asked, about this medium that demands that an
Internet media company take a stake in infrastructure when traditional media companies, by and large, do
not produce, market, and sell the satellites, camera equipment, or plant associated with radio, TV, or
cable enterprises? We were confused and our reading of AOLís intentions did not completely clear this
issue up.
We were somewhat righted in a long conversation with the company right before the Capitalist went to
press that the ìpure mediaî strategy remains wholeheartedly in place. AOLís strategy now is to take a
stake in the software infrastructure layer of the online business (by owning the client and server Internet
software) in an effort toward building a larger subscriber base rather than selling software to corporations
that want to get online. Like AOL bought ANS because no telecommunication vendor was able to
provide AOL with the needed capacity for dial-up IP access to their service, AOL is utilizing Netscapeís
enterprise software assets to bring corporations onlineÖbecause there isnít a vendor AOL feels it can rely
on to provide them this functionality. Whereas AOLís early investment in the telecom layer (ANS) was
to generate subscribers, this investment in the software layer (Netscape) is to generate online retailers,
which in turn directly attracts more subscribers.
Of course, weíd still have thought that, on balance, the transaction makes sense, since the costs of this
potential strategy shift were outweighed by the benefits of acquiring Netscapeís portal assets. But from
where we sit, weíd have been much happier if AOL simply stated that they didnít give a hoot about the
enterprise software business and that if everything goes wrong theyíll sell it off and keep the reach points
from NetCenter, since that would have more clearly reinforced (at least from our perspective) that AOLís
strategy continues to be toward becoming a very large media company.
Thomas Jefferson once said that ìthe only exact testimony of a man is his actionsî so we will wait
anxiously for more evidence from AOL that its strategy is still pure, that they still only care about
building the largest subscriber base out there and view the Netscape software assets as merely means to
an end rather than an end unto itself. Weíll keep you informed. |
