Monday, December 12, 2005
My own research is about how companies need to rely less on vertical integration and explore more of virtual integration. In other words: instead of ownership of assets, corporations should rely on accessing complementary capabilities through relationships. This is particularly true in the context of fast-changing conditions.
So, what does it mean for AOL and Time Warner. In early 2000, Steve Case used inflated stock market valuation of his dotcom company to acquire tangible assets hoping to create cross-business synergies between content and channel. That never materialized.
Now, as we end 2005, we are at a point where dynamic web companies like Google, Yahoo, eBay, Amazon and MSN (part of Microsoft) are jockeying to win in what is now loosely called as Web 2.0. Interestingly, AOL could be a significant player if they can reposition to offer some of the services that we have seen come from Google, Yahoo and MSN recently. Indeed, the famous leaked memos from Microsoft show the importance of services on the web. AOL has critical assets that may be stymied by being part of Time Warner. So, Steve Case wants to unleash the full value potential.
Why has Steve Case changed his tune? The business characteristics have changed from 2000. It's no longer about bundling content and channel and locking-in customers. It's more about tailoring content and services to consumers based on knowing more and more (and much more than ever before) about consumers based on massive amount of individual data and search behavior on the web.
Web 1.0 was about vertical integration; Web 2.0 is about virtual integration.
Strategy 1.0 was about ownership of assets; Strategy 2.0 is about relationships in networks.
Leaving aside the Carl Icahn angle to the news, the real story from a business innovation point of view is as follows:
1. if AOL is carved out and sold to either Google or Microsoft, AOL as a brand may disappear and subsumed under Google or Microsoft over time (remember Hotmail? it will be Microsoft Live Mail in the near future!).
2. Whoever gets AOL will win in the short-term; so the winning bid may overpay to get it because each does not want the other to get it; so, AOL may fetch a premium in the short term.
3. If AOL is not for sale, then AOL needs to structure a very good business partnership agreement with either Google (with whom they have a current relationship) or MSN (who has been their competitor for sometime).
Choosing Google means continuing and evolving the historical relationship but with a more fierce and aggressive company; it may mean losing AOL's brand identity perhaps. Selecting Microsoft means working with an erstwhile competitor (MSN). But, Bill Gates has made friends with his erstwhile enemies before (look at Real Networks, Apple, Sun and others!). and the new management team at AOL can do as well. Both Microsoft MSN and Google have the technology to serve up personalized ads and content to AOL customers.
The stakes are high. The upside potential is clear. The downside is inaction. AOL managers would have failed if they do not to capitalize on their strong customer base now and simply let the customerbase defect elsewhere.
Meanwhile, Yahoo is waiting on the sidelines (It is officially out of the race)....wondering its strategic options and examining its competitive moves against both Google and Microsoft--knowing whoever the winner is will be stronger after forging new links.
See also John Hagel's edge perspectives blog on this--as usual quite insightful.