Friday, February 24, 2006

The Necessary Reinventing of AOL

There was a time when AOL dominated the Internet portal and ISP markets. AOL was considered the gateway to the Internet by many. Today that legacy seems to be a distant memory replaced by the association of AOL with throw-away CD mailers. The merger between AOL and Time Warner was heralded as a sign of the dominance of the new economy. As time has shown and the reversion of the AOL-Time Warner name back to only Time Warner suggests, the merger and AOL has not lived up to the hype. To survive AOL needs to reinvent itself: 1) lose the big-company bureaucracies; 2) embrace change rather than be afraid of it; 3) use its size, customer base and knowledge of its customers to build a business based broadband content (paid and ad supported) tailored by its users; and 4) deliver regional, personalized content to users across the world.

To be fair to AOL, AOL was a major force in evangelizing the Internet to the mass market. AOL’s easy-to-use interfaces, community centric portal offerings made it possible for non-techies to use the Internet without their being an “IT pro.” AOL’s creative and persistent marketing tactics helped it build a large customer base. However as broadband emerged and began to replace dial-up and as Internet users themselves became more Internet savvy, AOL’s core business areas became vulnerable to competition.

As one of the world’s leading media Internet Service Providers (ISP) and online content providers, AOL faces significant challenges and opportunities associated with a sector shaped by a decade of fierce competition, rapidly evolving technologies and increasingly demanding customers. How a service provider responds to these challenges will largely determine its position in the market and whether it will ultimately thrive.
AOL continually needs to reinvent its business, competing with formidable rivals such as Yahoo!, Google and MSN and a growing number of specialty content providers. Furthermore, AOL also needs to compete against telecom and cable companies poised to assault its market share, by creating service bundles and undertaking marketing campaigns that continue increasing their user base and attracting advertisers.
There are several factors that affecting AOL’s ability to compete. To explore just a few on the many, let’s consider 1) online advertising industry; 2) content delivery; 3) consumer demographics; and 4) the media business model.
Online Advertising
• Double digit growth in online advertising, especially paid search
• Cost of online advertising rising for premium content, Cost-per-Click and Cost-per-Keyword
• Increased competition between AOL, Google, MSN, Yahoo! and an increasing number of specialty search engines and content portals
• Sophistication of Ad Agencies and Advertisers is increasing, demanding better ROI results on their advertising dollars

Content Delivery
• Growth of premium/paid content services through subscription and a-la carte models, especially for video, music, VOIP and other broadband services
• Growth of mobile and wireless as a content consumption device
• Increased piracy of copyrighted content
• Instant Messaging as a channel for content and service delivery continues to expand

Consumer Demographics
• Increased localization and personalization of content
• Emergence of online advertising markets outside of US and Europe
• Proliferation of broadband and a decline in dial-up Internet access
• New, sophisticated data mining techniques

The Media Business Model
• Continued convergence of telecom and media
• The link between the ISP as the content provider is weakening
• Maintaining high ad revenue margin as a competitive advantage is key
• Increased regulatory requirements
• Partnerships and industry consolidation increasing

To compete effectively, AOL recognizes the need for constant change and to protect its customer base, maintain a prominent position and continue enjoying strong growth in its advertising business. For example, the conversion of existing customers to broadband from dial-up has resulted in improved customer retention rates and page views, which are critical to increasing online advertising inventory. The introduction of broadband services like VOIP and content like video is helping AOL cater to changing user demographics and new competition from telecoms and cable operators. AOL has also moved to make its content available to all users regardless of AOL membership and has recently reached an important agreement with Google, whereby AOL’s search is now powered by Google. This makes complete sense as AOL’s core competencies are not in search (unlike Google), but rather in community development, user-friendly interfaces and content management.

AOL can be competitive. Already the growing advertising revenues suggest that its leaders understand the fundamental need for change. However stopping here is not enough. The launching of TV-over-the-Internet and other rich media channels require new underlying technologies, and AOL should continue to look at tactical and strategic acquisitions that could help it compete in these areas.

Other challenges require a focus on customer needs. It should leverage new broadband offerings (especially considering its tie with Time Warner) with its ability to develop top-notch user interfaces. This will help increase exposure of and revenues from higher margin broadband content to the masses just as it had introduced the Internet to so many people.

AOL should also consider totally dropping its dial-up business entirely. The dial-up business is highly competitive, primarily based on price wars, capital intensive and has low operating margins compared to its content based businesses.

The move by AOL to use Google to power its search engines was a smart choice. AOL should use its cash and assets to focus on its core strengths rather than trying to do everything. With the ad-based revenue growing and the need to not focus on developing search technologies itself, AOL can try to build its customer base in videos, music and other areas where (other than Apple) there is still no clear market leader. Here AOL’s smart marketing tactics and brand will help it build businesses that actually tie in to its Time Warner family.

Lastly and most importantly, AOL needs to develop a culture that is creative and entrepreneurial. Rewarding employees for taking smart risks and coming up with new ideas that help AOL move away from the status quo is fundamental. This should start from the top – AOL needs to have inspired leaders that are not afraid of change and taking risks. Reinventing itself from an ISP-centric company to a globally recognized content leader takes real culture change that has to be supported by the leaders. Then by tying employee compensation and non-compensation incentives (e.g. recognition awards) to its new goals, AOL can develop a culture that thrives on change and constant reinvention in order to stay competitive, deliver strong return to its shareholders and offer its customers something more than just a gateway to the Internet.

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