The Media magazine has just celebrated a decade of publishing. Tim Spira looks back on the last 10 years of media and how it has been altered forever by the onset of online.
For the final years of the last century, and around six months into this one, some of the smartest people on the planet were loudly proclaiming the beginnings of a ‘new economy’ that would redefine the way the world worked. For those riding the wave, cheered on by a chorus of venture capitalists, research firms, sponsoring brokers and the like, it was a time of paper fortunes and exponential curves on PowerPoint slides. And for the old ‘bricks and mortar’ enterprises destined to be swept away by the incoming tide, it was an age of terror.
Nowhere was this heady mix of euphoria and fear more apparent than in the media industry. This was, above all, a media revolution. Certainly, the internet would affect sectors like mining and manufacturing – streamlining supply chains, optimising trading processes – but for the news and entertainment business, the internet would change everything. If the industry incumbents were to survive, their leaders would need to act with foresight and courage. Few understood this more keenly than Gerald Levin, then CEO of Time Warner. His bold decision, in early 2000, to merge his empire with AOL – then the world’s largest internet company – was hailed as a master stroke heralding new media’s coming of age.
But the optimism was short-lived. By the middle of the year, amid doubts about the true earnings potential of internet companies, it emerged that AOL’s hefty share price, which effectively enabled it to buy a company with more than twice its own cash flow, was based on shaky assumptions. AOL’s online advertising forecasts proved wildly unrealistic, and the emergence of broadband rendered the company’s dominance in the dial-up market irrelevant. The notion that Time Warner’s brands and content could somehow be reinvented as new media businesses proved equally fanciful. When the bubble burst, around 80% of the merged entity’s value was wiped out at a stroke.
Ten years later, soon after the deal was finally unbundled, the current chief of Time Warner, Jeff Bewkes, declared the merger “the biggest mistake in corporate history”. For Bewkes, the deal betrayed a failure on Time Warner’s part to understand its true reason for being. He vowed that the company would never again lose sight of its core strengths.
But there’s a broader cautionary tale here too, about the pace and scale at which new technologies take hold, and the unforeseen, often unforeseeable ways in which consumers adopt new media and integrate them into their lives. In this respect, the hopes upon which the AOL-Time Warner deal was based, and the vastly different realities that ultimately undermined them, shed light on how the internet has transformed the media landscape in the past decade.
On the face of it, AOL’s expectations of exponential revenue growth were perfectly reasonable. As America’s most popular entry point on to the internet, the company controlled a vast ‘walled garden’ of content into which its massive customer base could be corralled and sold off to advertisers. But unlike broadcasting, where the platform provider can determine the user’s content choices, the web is defined by the ubiquitous hyperlink, which allows users to access whatever content they like, whenever they like. So the notion of the walled garden, or conditional access, was inherently antithetical to the nature of the internet. (While this may seem obvious in retrospect, it’s a lesson that mobile network operators are only now beginning to understand).
Furthermore, unlike the old media model in which control of distribution was secured by regulatory protection or massive investment in presses or broadcast infrastructure, legions of internet start-ups could distribute content and services from the comfort of their suburban garages or college dorm rooms, with none of the fears of cannibalising legacy revenue streams that held back their traditional media counterparts.
Rather than a concentrated walled garden, the result was a long tail of niche publications and services, each competing for the attention of an increasingly fragmented audience base. The company that would establish itself as the gateway to this vast but chaotic universe would have to deliver a value proposition that went well beyond simple connectivity.
That company turned out to be a young duo from Stanford University who set out to “organise the world’s information and make it universally accessible and useful”. They built a service called BackRub that used the wisdom of the crowd to order search results, prioritising pages that other sites deemed important enough to link to. The idea was brilliant, even if the name needed a little work. By June 2000, a couple of months after the AOL-Time Warner deal, they had renamed the service Google and quietly indexed a billion web pages.
Beyond its novel approach to search, Google’s business model turned the traditional media industry on its head. Because the company knew what consumers were searching for, it was able to target advertising so accurately that it could charge only for the ads users clicked on – all without investing a cent in the stuff that companies like Time Warner called “content”. Suddenly, traditional media content was no longer king, and the old maxim that ‘half of all advertising spend is wasted’ no longer held true. Suddenly, firms like AOL-Time Warner found their new media business models undone by old media thinking.
Quoted in a New York Times interview published on the 10th anniversary of the doomed merger, Time Warner’s Levin struck a poignant note: “I used to think at the time it was a clash of cultures and a misreading of the dotcom bubble. But I now upon reflection believe that the transaction was undone by the internet itself. I think it’s something that no one could have foreseen, and to this day, whether Apple is going to dominate entertainment or whether Amazon is going to dominate publishing, all the old business plans are out the window… so what I call the rolling thunder of the internet started actually to eat its own.”
In retrospect, it’s easy to criticise Levin for staking his company’s future on assumptions that belonged to the past. But as we hurtle through this digital age, it’s a story that has and will be repeated time and time again. Apple’s extraordinary re-emergence in the past decade has spawned a new kind of walled garden – the app store – that bypasses the web, and Google, almost entirely. And while Google was focusing on links between data, another dorm-room start-up was exploiting the power of links between people. But, according to some, Facebook’s star is already on the wane as it fumbles to respond to the impact of mobility on the social web. The internet continues to eat its own.
A month after the AOL-Time Warner merger, just before the great dotcom crash of 2001, the futurist Ray Kurzweil wrote a seminal article in Wired entitled ‘The Law of Accelerating Returns’, in which he reflected that the impact of technological change tends to be overestimated in the short term and radically underestimated in the longer term. This is because technology grows in the exponential domain, but we humans live in a linear world.
Technological trends are not noticed at first because their impact is incremental. “And then, seemingly out of nowhere, a technology explodes into view.” What the last 10 years have proven is that the original dotcom pundits were guilty not of hyperbole but of understatement. The internet has altered the media world in more ways than we can imagine. All we can say for certain about the next 10 years is that when they’re over, everything will have changed again.
This story was first published in the October 2012 issue of The Media, that celebrated 10 years of publishing.