There’s a free-to-fee lesson at the center of AOL Time Warner’s collapsed equity price: Know why consumers go online rather than using other media.
The marketing concept behind the AOL and Time Warner merger in January 2001 was something called “synergy.” Chief pitchman was AOL Time Warner COO Robert Pittman, a legendary marketer. His concept was the combination of new and old media amplifies the sales of both. As recently as last December, he was saying AOL could increase its average subscriber revenues from $20 to $150 a month by selling Time Warner’s magazines, CNN’s clips, and HBO’s and Warner Brothers’s movies and music to AOL subscribers.
Instead of AOL’s monthly revenues increasing over sevenfold, its stock price dropped more than that amount since the merger with Time Warner was announced.
Part of that drop can certainly be attributed to the ad recession, but surely not a sevenfold plunge. No, what caused this new “Fanciest Dive” (a 1987 book about a previous instance Time Warner “Leaped Without Looking into the Age of High-Tech”) was a severe misunderstanding of why consumers go online and why traditional media companies “synergy” and other “convergence” strategies don’t make much sense.
Why did over 200 million consumers gravitate onto the Web between 1993 and 1998? At the time, no mass media company had marketed the Internet. No telco created the Internet as a consumer medium. No marketing company created that mass demand for the Internet. Not even Microsoft or AOL (which originally fought giving subscribers Web access) had foreseen the Internet as a consumer medium.
After 1998, when major companies finally did begin marketing Internet access and another 300 million consumers went online, why did all those people so readily convert? Those consumers already had telephones, TVs, AM and FM radios, newspapers, magazines, and other traditional media.
Simple. Half a billion consumers gravitated onto the Internet because it let them communicate with other people, express their opinions, and find others like themselves. Because it let them find content they couldn’t get from traditional media, content matching each individual’s specific interests.
Both reasons — finding others like themselves and more precisely matching content to their interests — distill to the same essence. Most consumers use the Internet to communicate with each other and to find content that more specifically matches their interests in ways traditional can’t.
We all possess generic interests (for instance, we’ll all want to know about the next September 11 when and if it happens). Yet each of us possesses very specific interests (I like international soccer, bellows-equipped view cameras, and actor Patrick McGoohan. Perhaps you like NFL football, the B-52s’s music, and poker). Though some people might share some specific interests (there are lots of NFL fans), no two individuals share exactly the same mix of specific interests. Each one of us is a unique mix of generic and specific interests.
Traditional media has a fundamental limitation. The same show, program, or edition is distributed to everyone. This reflects limitations of the analog printing press and analog broadcast transmitters, technologies dating back to the industrial era. The same generic edition is produced and distributed for everyone. No individualization. No custom-tailoring each edition to your specific mix of interests. Traditional media is great for satisfying generic interests but lousy for satisfying each of our individual interests.
That limitation doesn’t exist online. A consumer can use the Internet to find content much more precisely matching his unique mix of interests. The U.S. has over 7,000 magazines and 1,500 daily newspapers, but there are now more than 12 million American Web sites. Almost all publish much more specific, or niche, content than do traditional media. Consumers use these sites to more precisely find content and communications matching each individual interest mix. They use it to get what they can’t from traditional, generic media.
Likewise, consumers download music and burn their own CDs to more precisely match their individual interests. Sure, they like that downloading means not having to pay for mass-produced CDs. But most (99 percent) don’t download entire albums. Instead, they download only the individual songs they want, then burn CDs that contain their selections. They match content to fit their own tastes more precisely than traditional media can.
For a story last week about AOL Time Warner’s woes, I told The New York Times, “This is an emblematic case because digital media was thought to be the successor to traditional media… The media that Time Warner does is very good at satisfying generic interests but isn’t good at satisfying each individual’s very unique, specific interests.”
Traditional media executives mistake new media as just another traditional media channel — as if new media is online presses or an online broadcast antenna through which the same editions still apply to everyone. Like Pittman, they can’t understand why consumers who go online to get what they can’t from traditional media won’t buy more traditional media online.
Take a look at NYTimes.com’s online media kit. It currently touts the site’s average user visits 4.0 times per month and notes that’s better than CNN.com’s 3.4 or ABCNews.com’s 2.1. Those lousy frequencies are for brand name, traditional media content that changes daily (if not more often). How will those premier brands charge for access when consumers won’t regularly visit for free? The answer? They won’t. Consumers don’t go online for traditional media content.
I, too, was a media executive who thought online was just another distribution channel for traditional media. I joined Rupert Murdoch’s News Corp. in 1993, on the day he bought Delphi Internet Services Corp., the world’s first consumer ISP. (Talk about blown opportunities! Imagine if you owned the world’s only ISP in 1993 and knew how to market it.) Delphi comprised email, bulletin boards, and chat rooms. We at News Corp. tried to transplant the traditional media model of “we the publishers write it, you the consumers read it,” and we tried to make Delphi a synergistic platform to market our traditional News Corp. and Fox brands and products. Despite premier brands, traditional media expertise, and all the marketing and money in the world, we failed miserably. We didn’t understand. Consumers go online for different purposes than to use or buy traditional media.
Nine years later, the Time Warner folks are realizing they made the same mistake.
Synergies between traditional media and new media don’t exist. Consumers use them for different purposes and to obtain entirely different things. That’s why AOL Time Warner’s stock at press time was $11.20, compared to AOL’s $75 and Time Warner’s $48 per-share price when the merger was announced in 2000.
If you want to charge consumers for online content, don’t use traditional media business models. Don’t imitate newspapers, magazines, broadcasters, or movie studios.
Instead, operate a site or service that allows consumers to obtain the most specific content possible in your niche; that lets them responsibly contribute such content; that lets them communicate with others like themselves; and ideally that lets them individualize the content, communications, and experience (personalization technologies are expensive, so mom-and-pop sites should stick to offering the most specific content possible).
Don’t be AOL Time Warner and think the Internet is just another distribution channel for the same old thing. It’s a new media, baby.
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