Home » Internet Business » Time Warner Says Synergy Is BS. So Sell AOL.

Time Warner Says Synergy Is BS. So Sell AOL.

According to the WSJ, Time Warner has abandoned all pretense of “synergy” between its various media divisions, the failed concept that was the sole justification for its merger with AOL.  Without synergy–cooperation between divisions to develop next-generation services in music, VOIP, VOD, DVRs, interactive TV, and a host of other applications that have since been launched elsewhere–the merger had no reason for being.  Worse, as the article makes clear, the lack of synergy actually gives the merger significant reason NOT to be: Instead of helping the combined company, the divisions just waste each other’s time and piss each other off.

Jeff Bewkes (TW’s president who, to his credit, was never a fan of the merger and now feels comfortable enough to call the synergy concept “bullshit” in the WSJ) is no fool, so it would probably be shortsighted to view yet another Time Warner strategy shift as an excuse to bash the company for the sins of the past.  Perhaps synergy is, in fact, bullshit–perhaps the merger was doomed from the moment it popped into Steve Case and Jerry Levin’s bubble-addled heads.  If so, however, then why on earth won’t Time Warner just throw in the towel and sell AOL?

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11 thoughts on “Time Warner Says Synergy Is BS. So Sell AOL.”

  1. AOL FANZ,

    That’s right, a BLOCKBUSTER LAYOFF for the ages!!! Finally the show is almost over and the curtains are about to be drawn…. sources suggest that AOL is going to have a “75% layoff” of the Access business which is home to the AOL Broadband and AOL Narrowband departments.

    This hatchet is expected to drop sometime between August and early October-06 timeframe however a “reorganization” is expected to be announced on or around the early Aug earnings call. The new AOL strategy will amount to shutting down AOL broadband because the economics do not work for the bundle — $6-7 in cost and $3-4 in bundled revenue per subscriber.

    AOL losses cash on each subscriber that they migrate over to Telco broadband. Host costs are to blame…but wait…there are over 25,000 servers…..Cable companies hosts costs are a few dimes a month per user not $5.00/sub/mo. And you might have though there were economies of scale….you thought wrong….

    The entire Narrowband marketing engine is expected to also be shut down — no direct marketing, perhaps only the online channel will survive which is perhaps 10% of all sales. Over the last 12 months over 600 million CD-Roms were sent out with a ~0.5% response rate at $200 mm in cost.

    AOL has about 2 remaining choices which are currently being considered….

    1) Make AOL Free so that there may be some potential long term AOL.com strategy before all 18 million remaining subs leave….hmmmm this smells like 1999 when NetZero came on the scene….AOL for free with advertising to the max to kill Netzero. Geez, I still can’t believe some marketing genius put ZERO in their name. LOL.

    2) Reduce the unlimited narrowband cost from $25.90 (see below) to under $10 and compete head to head with NetZero, Juno, etc….the bottom of the barrell. Well we know for sure that AOL will kill Netscape (low cost flanker) in either scenario….and Compuserve….that died a long time ago….what has not died that has been touched by AOL?

    3) Let me see, what else could they do…split up the dial-up, broadband group, digital services, and AOL.com….DUH. Thats like splitting a terd into 4 pieces…its still a terd and smeels no matter how you dress it up.

    GMAT question…..

    $1.0 Billion (13-24 months ago) ——–> $250 MM (Last 12 months)—————-> $$ XX (next 12 months) ….

    Did you get that right? Slap yourself on the back if you came up with $62.5 MM and high five your neighbor. That is what one could expect AOL to spend in the following 12 months on marketing spend in this death spiral. This is the “lights out” scenario that was considered 2 years ago but somehow some excellent BSer convinced someone at TWX to hold onto AOL.

    If you were caught in the AOL hallways in 1997-2000 you would expect to give slap happy high fives as the stock went up…but little by little director by director, VP by VP, pure incompetence was being built…each dummer than the next….. TWX milked them dry – no new ideas or products….or if they were they were late, very late.

    Remember the slogan…”AOL, so easy to use, it’s no wonder we’re number one”…well its no wonder they have not gone extinct yet without a product. They had a thick cushion but the air has leaked out. The lights are on and last call has sounded…and DAMN DOES SHE LOOK UGLY…..back to what is pertinent….

    The only thing which will likely survive for some period of time will be the US AOL.com and the digital services unit as well as the international development of the India and Chinese portals….wait…aren’t they like 20 years late on this? Ok, Ok…10 years but you get the point. Wasn’t a ex-Sony exec fired in AOL Int’l for suggesting a portal strategy that went against the scared cow for the China JV deal in 2000? Hmmm,….

    Didn’t Pitmann say “focus on Dial-up” in Summer 2002 just when the subscriber base peaked….hmmm….vision….

    One thing to note is that the US portal is likely not really profitable on a standalone basis because 80% of the page views are generated by AOL subs which is falling fast if you have not noticed….even the portal as a stand alone does not look to have legs.

    Also you probably did not catch it but AOL quietly raised the price of AOL dial from $23.90 to $25.90. What? Why not sock it to your customers with the slimmest choice…. the old folks who can’t see their bills on their credit card statments without bifocals…. and those that cannot even get a broadband connection…

    And if that is not enough how about this video:


    This is the big one you have been waiting for.

    Expect AOL CC3, 4, 5, and 6 to be closed down and sold off. Perhaps only CC1 and 2 will remain. This should not be a suprise to anyone…the suprise should be….why didn’t they do this about 2 years sooner.


  2. Ok boys and girls, here’s a perspective from someone who works for TW.

    Beyond the obvious reasons why the merger and the synergy hasn’t worked is because the leaders of TW have been half-ass about making the divisions work together. It’s almost as if Dick and team have been afraid to tell the division heads how they need to get on the same page. Thus, it’s not clear from anyone’s perspective of what the stratgy is and whether collaboration is truly valued and more importantly, whether people will be rewarded for doing the right thing for the company as a whole.

    Frankly speaking, I’m pretty skeptical about the future of the company. I agree, we need to sell AOL…just as they catch up with Yahoo, etc, they will be chasing the next trend and will be atleast 10 steps behind.

    We need to also sell the publishing side of our business. It’s a dead-end business with no future.

    Content is king man. Pump the resources into HBO, New Line, Turner and have them create more great content for the old media as well as new media platforms.

    Oh yeah, shrink corporate even more. There should be very feel people working for TW corporate given the de-centralization approach we have taken with the company. Corporate is getting in the way 99% of the time versus adding value.

    BTW, I’m one of those guys who work at corporate…

  3. I think there is a problem with synergy in media in that consumers are suspect of one divisions within the same media company “working together”. For instance, if AOL runs information or reviews on HBO properties, these could be seen as biased. That doesn’t mean content from HBO can’t come online, but I think media people in general don’t like to feel there is a “company-line” that must be adhered to. To difficult of a subject to fully express here, but in essence I believe from looking at TW’s properties that little effort has been made at synergy, perhaps for the aforementioned reason, so how they can call it BS is hard to determine.

  4. Since time has proven wrong so many incarnations of the “synergy” idea, it’s high time we anticipated a flow of books on why these things did/could not happen as expected, etc. As well, it’s worth recalling one of its most vocal and effective advocates: McKinsey itself…

  5. TW could do great stuff with the captive, generally non-tech saavy audience of AOL if they had a clue about the future of media distribution. People want to pay for digital downloads as long as the price is right and you don’t DRM them to death. It can also promote your other properties if done right. But I get the sense (just like Sony) that you have one division producing the content and being scared of getting ripped off so the other is left in the digital dark age. Meanwhile the customer doesn’t get what they want and the company loses their money.

  6. I meant, as a sinking ship it is basically worthless for any prospective buyer. I don’t think the premium that TW would want for AOL cannot be justified by any buyer. I think AOL will bleed to its demise if nothing happens in the short term.

  7. AOL is not worthless. The company still generates over $1 billion of cash a year, and even if management did absolutely nothing to stem the subscriber bleed, it would continue to generate significant cash flow for many years.

    The company needs to continue to migrate its business from dial-up subscriptions to the web, and to save itself for the long term, it needs to do this aggressively and without regard for near-term cash-flow consequences. At the right price, the company would be an ideal LBO. Once private, the business model could be retooled and the company refocused. Then it could be taken public or sold to any number of potential buyers (Diller, Rupert, Microsoft, Google, and others come to mind).

    Unfortunately, none of the above can happen within a public conglomerate that is hyper-focused on near-term cash flow performance in order to get its own stock moving again.

  8. Henry,

    To come back to your last question. Let me reply with a question.

    What self-respecting company would want to buy AOL, and for what reason?

    TW still thinks AOL still has some value, and Google thought so too. But Google made an opportunistic investment rather than to go for the all out effort. AOL is a sinking ship. It is basically worthless. The historical charge some time back that TW took on AOL (I believe somewhere in the $40B range) was just one big warning that most of the investment industry still doesn’t understand

  9. The merger failed because of the vast differences between old and new economy, internet versus brick and mortar.

    The corporate identity of AOL was not one that the TW people wanted to make their own, while the AOL people in effect became the buyers, thus breathed a more hautain air.

    Last but not least, AOL’s business model was a great one at it’s heydays. But everybody knew that the dial-up empire would crumble one day. Well, everybody except Gerald Levin (then TW’s CEO). The value proposition that came with the merger (synergies, alliances, harmonies, whatever) proved to be build on quicksand.

    Even if the internet and telecom bubble wouldn’t have bust, AOL/TW was bound to fail.

  10. I think there are three main explanations why the merger failed:

    1) AOL was and still is a closed garden based on dial-up access. Back in those times, AOL was very optimistic they would be able to expand to broadband, but neither cable nor telcos gave a damn about AOL. Thus, AOL started losing dial-up customers to broadband and is bleeding close to 0.8 million customers a quarter.

    2) TW was not a company with idealistic views. The top-rank people at TW were very smart, but full of vanity and personal ambitions. These weaknesses of human nature resulted in jealousy and highlighted power struggle to satisfy those ambitions and no one really cared to do what made sense.

    3) When is it right to merge assets of two businesses? The benefits of merger can be seen (apart from cost cutting) in cross-promotion and/or cross-integration. AOL-TW had plenty of cross-promotion, but it’s nothing and (is much easier to accomplish through partnership) as compared to deep cross-integration. The latter never really happened. People there struggled for power and hardly worked together to come up and execute on good ideas.

  11. Like the article said, not only was AOL a bogus deal, but it was also wrong of Time to buy Warner. Movie companies do not make money. This is what has me worried about GE and Immelts dumb move to buy Universal. CBS should have never bought Parcom and Columbia has got bounced around between Coke and Sony.

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