The trouble with behemoths such as AOL Time Warner is that the
larger they get, the hungrier they become. You could make analogies with
a shark that has to keep moving forward or die but this beast makes a
shark look like a stickleback. Steve Case, the chairman of this
corporate giant, has to keep delivering growth or he'll be removed by
his shareholders - and in a mature market such as media and advertising
the only opportunities for growth are by acquisition.
This would be fairly straightforward if the company wasn't already so
large in its home market that each time it makes a move, the competition
authorities start running round having panic attacks.
AOL Time Warner has to look abroad. That's why Case stated in a recent
interview that, ten years from now, 50 per cent of the group's revenues
would come from outside the US. At the moment that figure is around the
20 per cent mark.
At first sight this seems like a wildly aggressive empire-building
strategy, but in the bigger picture it's probably more to do with the
remorseless logic of his position. Case really has no choice. He has to
look at just about every opportunity that comes his way. Especially big
consumer magazine companies owned by venture capital outfits desperate
to get out of a market that is heading toward the low point in its
economic cycle. Companies, in fact, such as IPC - which AOL Time Warner
bought for £1.15 billion last week.
So the monster lumbers on, but can we safely ignore most of the
background noise - all the talk about content and synergies and
convergence? Or are there real lessons here about how the media world
will work in the future?
Michael Pepe, the president and chief executive officer of Time Inc,
will now be managing the IPC division. He says: "IPC can help Time Inc
in the UK given its size. Consider launching In Style within our smaller
local publishing operation versus doing it with the talent, resources
and infrastructure of IPC. The same resources can be made available to
Time, Fortune or Wallpaper."
He adds: "Time Inc, an experienced direct marketer of magazines, can
help IPC generate more subscriptions. IPC can teach us about the
newsstand business. AOL can help IPC strengthen its websites, providing
tech support like hosting and generating traffic more efficiently. IPC
and AOL can also cross promote each other's brands, generating higher
sales for each."
Do we buy that? Simon Wallis, a media analyst at WestLB Panmure, is more
than willing to keep an open mind: "The whole AOL Time Warner merger was
done on the basis of synergies between AOL and the traditional media
One of the first areas they tried to drive that in was magazines -
offering subscriptions for magazines within AOL. Time has apparently
taken hundreds of thousands of subscriptions that way."
Whether they'd have got those subscriptions anyway if Time wasn't linked
to AOL is a moot point. But the numbers seem impressive. You can always
argue that cross-promotional momentum inevitably builds when you have a
whole portfolio of properties. For instance, although AOL's core
internet service has been growing steadily (it has more than one million
customers in the UK and more than 4.5 million across continental
Europe), just think how many more customers it can hope to tempt through
the astute use of its new IPC properties.
Wallis also points out that there are potential synergies on the cost
side. He says: "For publishers to learn about this independently takes a
lot of upfront costs and this is an area where AOL's expertise could
prove valuable. If you look at the websites of the US magazines these
days, for instance, they're very good. The US market is sceptical about
the degree of revenue synergy you can derive from this but you can see
why AOL Time Warner wants to roll out the strategy across Europe."
Another theory put forward is that Time Inc needs a bigger stepping
stone close to continental Europe - though it's hard to believe that
King's Reach Tower is positively seething with expertise on such
matters. Nicholas Coleridge, the managing director at Conde Nast, would
certainly number himself among the sceptics. The general view, he
maintains, is that convergence has not really worked at AOL Time
He says: "If the present IPC management stays in place there will be
little difference except the ownership. And if they are wise they will
certainly keep Sly Bailey. But if they bring in US executives it will
take them a long time to figure out a company as large and diverse as
Coleridge adds: "I think that IPC in its Cinven phase made pretty
energetic attempts to diversify into other markets, with titles such as
Later and Nova, but the reality is that sometimes they work and
sometimes they don't. The general view is that AOL Time Warner is a
sprawling media conglomerate where some executives find it difficult to
concentrate on anything for more than ten seconds."
Dan Reaume, the international media director of OMD, doesn't agree with
that view. He comments: "Internally, from a business cost point of view,
it can make savings in producing advertising across the portfolio -
advertising and promotional costs can be halved. The cross-promotional
opportunities are there and I do buy the argument about synergies in
terms of content across various media."
Reaume concludes that there don't appear to be any downsides for the IPC
sales department. He states: "There could be a real positive from an
advertising sales point of view in that it could sell packages."
Steve King, Zenith Media's chief executive of Europe, the Middle East
and Africa, tends to agree. He argues that AOL Time Warner is an
extremely smart company and led by some of the most inspired management
He states: "I'd agree that, like a lot of international media owners, it
has struggled to deliver the concrete benefits but I think the AOL
merger was visionary."
The US giant is different from most media companies, he adds: "Only a
quarter of revenue comes from advertising, which makes it a very robust
operation. I don't know much about the relative heath of IPC but it is a
well-established UK media company and AOL Time Warner's claims of being
able to leverage scale and efficiencies are more believable. The only
slight doubt is that it is a very US-focused company and that makes this
a big challenge because IPC is geographically more remote."