2 Losers Don’t make a Winner – Ignore Yahoo and AOL


Summary:

  • Creating value requires growth, not cost reductions
  • Yahoo and AOL have no growth, and no new market development plans
  • Yahoo and AOL lack the resources to battle existing competitors Google and Apple
  • Don’t invest in Yahoo or AOL individually, or if they merge
  • Companies that generate high valuation, like Apple, do so by pioneering new markets with new products where they generate growth in revenue, profits and cash flow

Rumors have been swirling about Yahoo! and AOL merging – and Monday’s refresh led to about a 2% gain in the former, and 4% gain in the latter. But unless you’re a day trader, why would you care? Merging two failing companies does not create a more successful progeny.

AOL had a great past.  But since the days of dial-up, the value proposition has been hard to discern.  What innovations has AOL brought to market the last 2 years?  What new technologies is AOL championing?  What White Space projects are being trumpeted that will lead to new capabilities for web users if they purchase AOL products? 

And the same is true for Yahoo!  Although an early pioneer in on-line advertising, and to this day the location of many computer user’s browser home page, what has Yahoo! brought to market the last 2 years?  In the search market, on-line content management, browser technology and internet ad placement the game has fully gone to competitor Google.  Although the new CEO, Ms. Bartz, was brought in to much fanfare, there’s been nothing really new brought forward.  And we don’t hear about any new projects in the company designed to pioneer some new market.

And from this merger, where would the cash be created to fight against the likes of Google and Apple?  Unless one of these companies has a silver bullet, the competitors’ war chests assures “game over” for these two.

Sure, merging the two would likely lead to some capability to cut administrative costs.  But is that how you create value for an internet company?  What creates value is developing new markets – like AOL did when it brought millions of people to the internet for the first time.  And like Yahoo! did with its pioneering products delivering news, and placing ads for companies.  But since both companies have lost the willingness, capability and resources to develop new markets and products they’ve been unable to grow revenues and cash flow.  The road to prosperity most assuredly does not lie in “synergistic cost reductions” across administration, selling and product development for these two market laggards.

The reason Apple is skyrocketing in value is because it has pioneered new markets.  And produced enough cash to buy both these companies – if there was any value in them.  SeekingAlpha.com lays out the case for almost 100million iPad sales, and a lot more iPhones, in “What Could Justify a $500 Apple Stock Price.”  But beyond selling more of what it’s pioneered, Apple has not stopped pioneering new markets.  Another SeekingAlpha article points out the likelihood of Apple making video chat something people will really want to use, now that it can be done on mobile devices like iPads and iPhones, in “Apple’s Future Revenue Driver: FaceTime.”  It’s because Apple has the one-two punch of growing the markets it has pioneered while simultaneously developing new markets that makes it worth so much.

If you’ve been thinking a merged Yahoo/AOL is a value play – well think again.  Both companies are well into the swamp of declining returns.  So focused on fighting off the alligators and mosquitos trying to eat them that they long ago forgot their mission was to create new markets with new products that could carry them out of the low-growth swamp.  Sell both, if you haven’t already, and don’t look back.  Whether you take a loss or gain, at least you’ll leave with some money.  The longer you stay with these companies the less they’ll be worth, because neither has a sail of any kind to catch any growth wind.

Apple at $500 might sound crazy – but it’s a better bet than hoping to make any money in the individual, or merged, old-guard companies.  They don’t have the cash, nor the cash flow, to drive new solutions.  And that’s how value is created. 

 

Strategy First: not Execution – Instant Messaging and AOL’s demise


Summary:

  • Not even dominant industry leaders are immune to decline from market shifts
  • It’s easy to focus on what made you great, and miss a market shift
  • Competitors drive market shifts, not customers – so pay attention to competitors!
  • AOL lost industry domination to competitors with new solutions, and now new technologies, even though it executed its Success Formula really well
  • You can become obsolete really quickly when fringe competitors introduce new solutions
  • Do more competitor analysis
  • Keep White Space teams experimenting with emerging solutions and competing in shifting markets

Do you remember when AOL (an acronym, and updated name, for America On-Line) dominated our perception of the internet?  Fifteen years ago AOL was one of the leading companies introducing Americans to the wonders of the web.  Providing dial-up access (remember that?) AOL offered users its own interface, and a series of apps that helped its customers discover how the world wide web could make their lives easier – and better.  At its peak, AOL had over 30 million subscribers!  AOL was so commercially strong, and investors were so optimistic, that a merger with powerhouse publisher Time/Warner, which already owned CNN and HBO, was organized so AOL’s young leader, Steve Case, could take the helm and push the company forward into the digital frontier.

Along the way, something went very wrong. In an example of what happened to AOL and its products, as seen below, after pioneering Instant Messaging as an internet application AOL’s AIM user base has declined precipitously – by more than 50% – in the last 3 years:

AOL instant messager decline 8.10
Source:  BusinessInsider.com

Of course, the same thing that once drove AOL growth is now apparent somewhere else.  New markets are emerging.  Instead of using PCs with instant messaging, most people today text via their mobile device!  Texting isn’t just a youthful activity.  According to Pew Research, on PewInternet.org in “Cell Phones and American Adults” 72% of American adults now text – up from 65% a year ago.  87% of teens text. And I’m willing to bet a lot of those teens don’t even have an instant messaging account – on any platform.  The amount of “instant messaging” has grown dramatically – just not using “instant messaging” software.  It’s now happening via mobile device texting.

Where AOL once dominated the landscape for digital communication, it is now becoming almost insignificant.  But it wasn’t because AOL didn’t know how to execute its strategy.  AOL was an industry leader, with savvy management, and a blue-ribbon Board of Directors.  AOL even bought Netscape in its effort to remain the best server and client technology for a proprietary internet platform. 

AOL became obsolete because the market shifted – while AOL tried holding on to its initial Success Formula.  AOL did not shift as the market shifted, it has remained Locke-in to its early Identity, original Strategy and all those product Tactics that once made it great!  AOL didn’t do anything wrong.  It just kept doing what it knew how to do, rather than recognizing the impact of competitors and changing markets. 

Shortly after AOL emerged as the market leader, competitors sprang up.  First they offered dial-up access, often more cheaply.  Eventually dial-up was replaced with high-speed internet access from multiple providers.  Instead of using a proprietary interface, competitors Netscape and Microsoft brought out their own internet browsers, making it possible for users to surf the web directly and easily.  Instead of using an AOL directory to find things, search engines such as Ask Jeeves, Alta Vista and Yahoo! Search came along that would find things across the web for users based upon their query.  Email alternatives emerged, such as Hotmail and Yahoo! Mail.  Eventually, one piece at a time, all the proprietary packaged products that AOL provided – including instant messaging – was offered by a competitor. And the value of the AOL packaging declined.  As competitor products improved, for most users being an AOL subscriber simply had little advantage.

And now entirely new apps are coming along.  As the market quickly shifts to mobile data and applications, devices like smartphones and tablets are replacing PCs.  And the apps that made internet companies rich and famous are poised for decline – as users shift to the new way of doing things. 

Whether the currently popular internet companies will make the next step, or end up like AOL, will be determined by whether they remain stuck on defending & extending their “core” business, or if they can shift with the market.  There is no doubt that the amount of “instant messaging” is skyrocketing.  It’s just not happening on the PC.  Like many tasks, the demand is growing very fast.  But it is via a new, and different solution.  If the company sees itself as providing a PC type of internet solution, then the company will likely decline.  But, alternatively, the leadership could see that demand is exploding and they need to shift – with the market – to the new solution environment to maintain growth.

Whether you are the market leader or not, you know you don’t want to end up like AOL. Once rich with resources, and a commanding market lead, AOL is now irrelevant to the latest market trends – and growth.  AOL stuck to what it knew how to do.  It has not shifted with changing market requirements – including changes in technology.  For your company to succeed it must be (1) aware of competitors and how they are constantly changing the market – especially fringe competitors, and (2) enlisting White Space teams that are participating in the new markets, learning what works and how to migrate to capture the ongoing growth.

Postscript:  I want to thank a pair of colleagues for some great mentions over the weekend.  Firstly, to FMI Daily for posting to its readership about my blog on The Power of Myth.  Secondly, a big thank you to Management Consulting News for referring its newsletter readers to this blog as notable, and my recent posting on the failure of Fast Follower strategy.  I encourage readers to follow the links here to these sites and sign up for future information from both!!