What is the future of technology as far as corporate America is concerned?
The five year strategy of AOL Time Warner, the world's largest media company
sheds a lot of light on the subject.  All of us will be on the meter paying
by the minute, day, or month.  We will work to pay AOL Time Warner a piece of
our paycheck.  All communications will be integrated and access and services
will be sold, not technology per se.

Kelly



The New York Times

AOL Plans the Digital Smorgasbord

June 11, 2001

AOL Plans the Digital Smorgasbord

By SETH SCHIESEL

Gerald M. Levin, the chief executive of AOL Time Warner, is not an effusive
man. To begin a recent interview at the company's Manhattan headquarters, he
was asked about his company's vision.

"Subscriptions," he said. Full stop.

Asked, gingerly, about the sorts of subscriptions he had in mind, he
responded simply.

"Everything," he said, still sounding a bit bored. "Anything you want to
name."

A few minutes later, though, his ennui faded as he began describing a new
project, one meant to be a harbinger of his company's future. It is a future
in
which the union of America Online, which helped pioneer "all you can eat"
Internet access, and Time Warner, which lives on magazine renewals and cable
subscribers, delivers a media smorgasbord to every home in the nation.

It is a future in which everything is for sale, preferably by the month.

"We're about to do HBO subscription on demand, which sounds like, `Hah, just
another concept,' " Mr. Levin said, but "may be the most profound thing that
we're going to do."

Animation creeping into his voice, he amplified the subscription on demand
concept: "Why don't we ride the thing that's riding the society right now:
it's
called `The Sopranos' and `Sex and the City.' And there are 10 channels of
HBO. Now forget about channels. You can get anything that's on HBO that day,
that week, that month. And, oh, by the way, you can go back and get the first
year of `Sopranos,' all on demand. Pay me an extra 10 bucks a month."

By now, Mr. Levin was actually excited.

"That's not just the business idea because what it tells you is the way the
consumer works and the human mind works," he said. "That's one of the keys to
the future of interactive services. And as a matter of fact, everything ?
every movie, every written piece of paper ? will ultimately be delivered on
demand."

"So I'm enthralled by it," he concluded.

Clearly. And if Mr. Levin and the rest of the company's executives have their
way, this subscription-based, on-demand approach to media will someday
enthrall
consumers around the nation.

AOL Time Warner is hardly alone among the media giants in trying to position
itself for a digital tomorrow. But AOL Time Warner stands out, and not simply
because of its sheer size. It stands alone mostly because it controls two
sorts of assets about which none of its rivals can boast: a major Internet
service
and ? at least as important ? a major cable television operation.

The company faces a lot of challenges. And it needs help, or at least
cooperation, from many other companies. But it is those two assets ? the AOL
online
service and Time Warner Cable ? that will give the company at least a shot at
making that digital tomorrow, that monthly smorgasbord, an interactive today.

In January 2000, America Online, the No. 1 company in cyberspace, announced
that it had agreed to acquire Time Warner, the No. 1 company in traditional
media. Ever since, Stephen M. Case, then America Online's chairman and now
chairman of AOL Time Warner, has told the same story.

"The basic bet is that convergence is going to happen, and it's not just
about the TV," he said in a recent telephone interview. "It's about knitting
together
the PC, the TV, the telephone and the stereo to allow people to be
entertained in better ways, to be educated in better ways, to communicate in
better
ways, to change people's lives."

That means interactive and on-demand television. That means music on
computers. That means e-mail on mobile telephones. It means telephone service
over
cable wires.

"This merger is not about selling magazine subscriptions on AOL," said
Richard D. Parsons, the company's co-chief operating officer. "This merger is
not
about using Madonna tickets to generate AOL subscriptions. This merger is not
about advertising deals. Don't get me wrong, those things are great, and
they are important. But this is about creating new industries, about taking
the interactive aspect of the telephone and applying it to other sorts of
media."

But making a plan a reality requires not only a goal, but also an overarching
strategy and effective tactical execution.

The strategy, as spelled out by Mr. Levin, is to package various services
into all-you- can-eat bundles sold by subscription. As more services are
added
to a bundle, the price of the bundle goes up, just as the monthly price of
cable service rises as channels are added to the basic package.

And at least as important, as more services are added to the bundle, the idea
is that the customer becomes more loyal to the company that provides it and
becomes less likely to end the subscription. Moreover, adding services to
bundles is financially attractive because it is less expensive to sell an
additional
service to an existing customer than it is to attract a new customer.

That is a fundamental truth of information industries. It is why local phone
companies have signed up hundreds of thousands of customers for long-distance
service within months of being allowed into the long- distance market in
certain states; it was simply a matter of selling a new service to an
existing
customer. It is also why Microsoft is trying to move its business toward
subscriptions and away from a model in which a customer buys a box with a CD-
ROM in it and then disappears from the company's radar screen (and income
statement) for months or years.

Of course, some of AOL Time Warner's businesses are not based on
subscriptions, particularly television, books, films and music (though the
status of music
may soon change with the advent of digital distribution services).

The idea driving the entire company, though, is that eventually all the
company's content will find its way back into subscription products.
Subscriptions
are at the center of the AOL service, at the core of the Time Inc. magazine
empire and certainly at the heart of Time Warner Cable. It is the cable
dimension
that is perhaps the most important to the company's future, and is also where
the company faces perhaps its biggest strategic challenge.

Picture the year 2005 in the company's digital future. Perhaps the ideal AOL
Time Warner customer downloads some songs from Warner Music to her computer,
orders some old episodes of "Sex and the City" and receives a notice on her
television when a video e-mail arrives from a friend. Then, because her
husband
is using the household's main telephone line, she calls the friend back on
the secondary line ? using a phone that she routinely leaves plugged into her
cable modem.

The attraction to the customer is that she pays a fixed monthly fee for the
unlimited use of all of these services, a package that can be delivered in
only
one manner: cable.

A telephone company's copper wires simply cannot compete with the sheer
capacity of a cable system. And for all of the buzz around mobile wireless
services,
at the end of the day the battle to control the digital future will be won or
lost at home.

So for AOL Time Warner, the advantage is that it owns the nation's No. 2
cable operation (behind AT&T's), with about 12.8 million subscribers. The
drawback
is that the 21.1 million homes to which the company's cable service is
potentially available are only about one-fifth the nation's total.

So even if the company makes all the technical upgrades it wants and deploys
all the fancy new services it desires, those products still will not be
available
to 80 percent of the nation's homes.

Not, that is, unless AOL Time Warner can cut deals with other cable
providers. And in the end, the company's ability or failure to make those
deals may
well determine the success or failure of the company's digital smorgasbord
business.

The company's entire subscription-based strategy is based on the concept of
"owning the customer." That is, of developing a continuing, direct
relationship
with consumers. That means branding is very important and that enforcing the
relationship through monthly bills is just as important.

The problem is that the other cable companies generally want to own their
customers as well. AT&T, for instance, certainly has a strong brand itself,
and
may not be eager to become simply a distribution agent for AOL Time Warner.

This issue goes far beyond so-called "open access" to cable systems. Under
regulatory pressure, the big cable companies are beginning to agree to allow
multiple Internet providers on their systems. But for AOL Time Warner to
deliver its broad packages of broadband video, data and messaging products,
more
extensive cooperation from other cable providers will be required.

In one sense, the company can take comfort from the lessons of its cable
channel HBO. Consumers pay a premium each month for HBO and are billed for
that
service by their local cable company or satellite provider. Yet consumers
still identify "The Sopranos" with HBO, rather than with, say, Cox Cable.

But as media become more interactive, the lines between content providers (*
la HBO), and distributors (* la Cox Cable) will blur. That will make AOL Time
Warner's balancing act even more difficult; the company will need to preserve
its customer relationships while also eliciting cooperation from other cable
companies.

Outside the company's own cable regions, Mr. Levin sees the future in terms
of separate billing, in which the consumer receives one bill from the local
cable provider for basic network connections and receives another from AOL
Time Warner for advanced services that ride on top of that network.

But it seems unlikely that other cable companies will readily agree to such a
system, which could reduce them to playing the role of common carrier while
AOL Time Warner continues to "own the customer" as far as selling the
advanced services that consumers actually use.

"The No. 1 issue is that they have the brand and the cable operators have the
pipe," said Richard A. Bilotti, a media analyst for Morgan Stanley. "How they
conclude those negotiations for access, whether they are with AT&T or any
other cable operator, is absolutely critical."

Handling these critical negotiations and managing AOL Time Warner's future,
is perhaps the most intriguing management team in the nation.

Mr. Case, Mr. Levin and Mr. Parsons have each been chairmen of companies in
their own right. (Mr. Parsons was chairman of Dime Savings Bank before
joining
Time Warner in 1995.)

Nonetheless, much of the media attention directed at the company since the
merger was announced has gone to Robert W. Pittman, who along with Mr.
Parsons
is also co- chief operating officer.

"Look, I am very vocal about what I think the company is, and so I'm on a
jihad," Mr. Pittman said. "So you do attract some attention."

More substantively, if the future of AOL Time Warner is in subscriptions, it
is tough to ignore the fact that the company's main subscription businesses
?the AOL online service, the Time Inc. magazines and the cable operation ?
report to Mr. Pittman. Mr. Parsons oversees the content operations ?
including
films, music and television ? and is the primary "people person" within the
company, whose job it is to keep egos both stroked and in check.

Mr. Pittman, who before the merger was president of America Online, has been
here before. He was chief executive of Time Warner Enterprises, which
included
the company's theme park business, for five years in the early 1990's. It is
no secret in the media industry that he and Mr. Levin were by no means close
friends.

But for now, it appears that each of the four top executives is working
smoothly with the others.

"I think the actual management is underappreciated," said Frank J. Biondi
Jr., a former chief executive of HBO and Viacom. "I don't think they get the
notoriety
that Sumner or Barry or Rupert or Mel get," he said, referring the media
moguls Sumner M. Redstone, Barry Diller, Rupert Murdoch and Mel Karmazin,
"especially
since Jerry Levin is so low key. Besides Bob Pittman and Steve Case, there
are really no media names there."

Besides negotiating deals and keeping tabs on the company's roughly 90,000
employees, the management team is trying to meet the company's main financial
target of generating cash flow of $11 billion this year, up from $8.4 billion
last year.

And despite the company's subscription focus, the flagging advertising market
? which affects magazine and television operations, especially ? has made
meeting that goal more difficult. The company has cut costs aggressively with
measures ranging from layoffs at CNN to the planned closing of the Warner
Brothers retail operation.

To raise revenue, next month the company intends to increase the price of the
AOL online service by 9 percent, to $23.90 a month. That move could generate
an additional $400 million a year in revenue.

As investors have become more confident that the company will meet its
financial targets, the company's shares have risen from below $35 in early
April
to a close of $51.05 on Friday.

The conventional wisdom in the media industry is that Mr. Pittman, 47, is set
to become chief executive if and when Mr. Levin, who is 62, retires. There
is no reason to believe that Mr. Pittman would not get the job. But if there
is any lesson from the last few years in the business world, it is that
conventional
wisdom ? the seductive momentum of the familiar ? should exist only to be
challenged.

It is a lesson that Mr. Pittman knows well. He recognizes some of the
potential perils as his company feels its way toward fulfilling its vision of
the
digital subscription smorgasbord.

"One of the hardest things you have to do in running a company is not to lie
to yourself," he said. "It's sort of like your aspirations for your children
sometimes. Sometimes your aspiration colors your perception of what's really
going on."

"And the way we lie to ourselves is that I start, let's say hypothetically,
10 new ideas," Mr. Pittman said. "Two are clear winners, two are clear
losers.
I've got six things in between. I always kill the clear losers. The problem
is most of us ? and if I'm not careful I do it, too, even though I'm
articulating
this ? we let the six in the gray zone live because we rationalize that
they're not failures. `Ah, it's going to work,' `Ah, it's coming along,' `Ah,
just
a little more.'

"The reality," he said "is we should think of everything except the clear
winners as losers."


VICUG-L is the Visually Impaired Computer User Group List.
To join or leave the list, send a message to
[log in to unmask]  In the body of the message, simply type
"subscribe vicug-l" or "unsubscribe vicug-l" without the quotations.
 VICUG-L is archived on the World Wide Web at
http://maelstrom.stjohns.edu/archives/vicug-l.html