Consume This: On AOL Time Warner and Real Market Value
Watching whales mate might be interesting, but it isn't pretty.Not many people are going to rent the video.Craig Burton
AOL is now a much more interesting company and a much less interesting stock.Roger McNamee
Who is the fool that would piss on a rose and call it to grow?Stanfield Gray
Every company has two markets: one for its goods and one for itself. Over the past several years, the market for Internet-related companies has gone nuts. The first sign of insanity was Netscape's IPO in August 1995: a new company, known mostly for a free product, was suddenly worth billions. Amazingly, this was no aberration. Yahoo, eBay, Amazon.com and others rolled up multi-billion-dollar stock valuations while sales of their own goods numbered in the low millions. It still doesn't seem to matter that Amazon.com has never shown a profit.
AOL, on the other hand, has shown profits. It used its own free product--countless floppies and CD-ROMs--to hook millions of customers into spending 20 bucks a month to get on-line and stay there. Today, AOL has an astonishing 54% of the Internet access business in the U.S. For this, the stock market valued AOL so highly that the company was able to buy Time Warner for $156 billion, even though AOL's sales are just $4.8 billion and Time Warner's are over $20 billion.
It is tempting to say these high stock valuations are not "real" because they don't derive from bottom-line performance, that stock itself is just "paper money", and that the market can devalue these companies to nothing in a heartbeat.
But stock sells for real money. In the first three quarters of 1999, venture-capital firms poured over $10 billion into Silicon Valley startups--nearly all of it cash money made on sales of prior investments. There is nothing "paper" about any of it. As for risk, the stock market hasn't had a real crash since 1929. The '87 drop was a doozy, but the losses were erased in a matter of months.
What's behind this boundless buoyancy? Is it the genius of guys like Jeff Bezos and Steve Case? Is it the low-friction efficiencies of e-commerce? Is it the intoxicating sense that the Net plainly changes everything? No, it's the people who gave us the Net, Linux and every other technology that is good because it's free.
It's the hackers.
AOL didn't invent the Net. Hackers did. And they didn't invent it as yet another way to pump out "content" and suck back credit card purchases. They invented it so nobody could own it, anybody could use it, and nothing could threaten it. And no mating of whales on the supply side of any market--including the markets the Net transforms--will do anything to change that fact.
"All the significant trends start with technologists," Marc Andreessen told us back in 1998, when we interviewed him about the open sourcing of Netscape's Mozilla code (Betting on Darwin, Linux Journal #52). In the same interview, he added, "Technologists are driving progress, and it's easier to drive with Linux than with anything else."
So let's savor this irony: while Netscape now belongs to AOL, and Mozilla (still funded by what's left of Netscape) famously lags behind Microsoft's Internet Explorer in the consumer market, Intel is quietly building its new home Internet appliances--TV set-top boxes and thin network clients--with Mozilla code running on Linux. If these babies catch on, they'll bypass AOL and every other mass-market megalith that continues to regard the Net as yet another one-way shipping system between a few suppliers and a zillion consumers. These appliances will prove yet again that the connections that matter most are the ones between human beings. And that includes the human beings who do e-business with each other.
From the day the first packet moved across a TCP/IP network, economic power has been shifting steadily from supply to demand. Wars and marriages between giant suppliers still make great stories, but those stories have little or nothing to do with what's really going on. Hackers--the programmers, inventors, developers and architects who are building out this new world--have been trying to make sure the stuff that matters most is what works for everybody because it belongs to nobody. They do it by making markets what they were for thousands of years before industry turned "market" into a verb: places where people gather, talk about what matters to them and do business together.
Demand will win, because it is equipped to win. Mouse-to-mouse, link-to-link, page-to-page, email-to-email, voice-to-voice, customers are going to come out on top, along with the companies who make it easy to do business with them. Those companies will know that the best way to relate to customers is as human beings, not as abstract populations to attack, control, capture and herd like dumb beasts.
The real war is between markets and marketing. For decades, marketing has been the military wing of business, working "strategically" to "attack", "capture" and "deliver impact" to populations it calls "eyeballs", "seats", "end users", "demographics" and "consumers" (which Jerry Michalski calls "gullets that live only to gulp products and crap cash"). The problem with marketing is that there is no demand--no market--for its insults. That's why markets will win.
Is the AOL/Time Warner deal a bet on markets or on marketing? Credit where due: AOL has done a terrific job of equipping demand to deliver clues (as well as money) to supply. But the "consumers" AOL wants to "aggregate" and "deliver content" to will only become better equipped to screen out unwanted content, and more significantly, to converse with its sources.
What happens when the mute buttons on remote controls send "we hate this" messages directly back to the advertisers who pay for the media? What happens when consumers turn into real customers with real names who express no desire for "messages" mostly intended for somebody else? The business model for mass media advertising falls like a bad tent, that's what.
There's an old advertising adage that says, "I know half my money is wasted. I just don't know which half." In the advertising tradition, even that's a lie. Direct mail, one of the most efficient forms of advertising, counts a 3% response rate a success. The dirty truth about most advertising is that it has always been woefully inefficient, especially in mass markets. But a lot of it has been successful, which is why it's still around.
That success, of course, came in the absence of alternatives. Worse, it came in the absence of demand from consumers. But consumers were never advertising's real market. They paid nothing for advertising's goods, and exerted no direct influence over it. As a result, countless marketers and "creatives" in advertising agencies (including the hip new "interactive" agencies) still labor over screens and keyboards to come up with "messages" to "deliver" to people who have little or no interest in it.
The notable exceptions, of course, are classifieds, yellow pages and trade publications like Linux Journal, which are not only sources of useful editorial content, but of relevant additional information, paid for by companies, that is interesting to readers.
So here's a clue for mass marketers who think AOL's customers are going to sit still for the kind of heavy abuse that television has been delivering to its addict for decades: there is no demand for messages. There never was. When that clue finally arrives, it will be like a fist through the screen.
Provided, of course, that hackers keep doing their good work.
The fight is far from over. The good guys will win the OS war and the browser war. But there are other enabling technologies that still belong to suppliers with controlling intentions. Streaming media is one. Instant messaging is another. Both could be far more useful than the bait-for-advertising vehicles we see today. Look at the differences between AOL's Instant Messenger and what's starting to come from the Jabber people. Better yet, join the movement.
Let's start to show these guys what's really valuable.