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Aol term paper

  1. 1. 1 Monique Singh AOL Case Study WCU ID: 653265 MKT-425-01Spring 2012 AOL, Making their Existence Known Executive Summary The following report will analyze the after effects of the merger between AOL and Time Warner, and the problems associated with both the merger. It will also explore AOL’s need to transform from being viewed as an “ice-age” Internet service provider (ISP) to broadening their product line and target market. In an effort to investigate AOL’s issues from a strategic standpoint, I have evaluated AOL’s utilization of their resources and how their business plans have either benefitted or deteriorated the company as a whole. The first issue to discuss with AOL is the merger with Time Warner in 2000. According to an article by Forbes, 66% of mergers are unsuccessful (Forbes). 1 AOL had a chance to rise above the statistic, because no Internet company of the time had as much subscriptions, exposure, and definitely did not have a media company to stream content from. The idea was innovative, however, AOL may have chosen the wrong media company to merge with because Time Warner’s culture and strategy alone were extremely different from AOL’s. The next issue pertains to AOL’s current state, after the merger with Time Warner has ended, and the public’s perception of the company as a whole. Many people are unaware of what products and services AOL offers, and they are on a mission to become a provider of content, advertising, and Internet service and security. Their marketing strategy has transformed from “creating a sustainable model for the ISP business” into a company that seeks “to inform, entertain and connect the world.” (AOL.com)2 They are now in the growth stage of their business, as they are creating new avenues to obtain revenue, rather than sticking to the old-fashioned ISP plan of providing only internet service, and now bringing more to the table such as content, blogs, games, and much more. (Ref 1.1) 1 Forbes, Mergers and Acquisitions 2 AOL.com Our Values
  2. 2. 2 The Environment The ISP environment is a fairly tough one to judge (Ref 2.1 for a simpler PEST analysis). Consumers of the industry are drawn to either faster speeds or lower prices. Innovation is important because some customers will be willing to pay more for a service that guarantees they are getting quality service and staying ahead of the pack of technology. The economy’s stability may cause some consumers want a service with lower prices, because they can get internet service in public libraries or schools, while other customers may pay the extra to use the internet in the comfort of their homes. Regulators only generally step in when large companies use their networks to charge people certain prices that can oust smaller companies from the market and create monopolies. A lack of small businesses also limits rural users from using anything but a long distant network, which is too expensive and would be unfair to people in certain areas. Also, since ISPs are allowed to have their services available in public schools and libraries, they should allow some restrictions. From a sociological standpoint, ISPs are in a market that makes foreign infiltration difficult. Countries, such as Japan and France, tend to avoid inventions that are not their own as a whole, let alone a provider who can let certain content into their nation’s homes. Some economies also just appreciate their own inventions more than other countries’ because it helps their economy when they support their own services. Another sociological outlook on the economy deals with the fact that only scientists and scholars used to use the internet, and now virtually anyone anywhere can. Therefore, demographics and geography do not play as big a role as they did in the past, and ISPs must try to be available and useable by everyone. It is evident that technology plays a large role in the ISP industry, as it is its backbone. ISPs must be innovative and advanced in order to stay ahead of the curve due to society’s reliance on technologies for day-to-day activities. This leads to why AOL’s initial merger with Time Warner was a wise idea, because people being able to access the internet and then movies, chat rooms, games, music, and more in one place was not being done by any other company at the time. The Industry: Internet Service Providers
  3. 3. 3 A SWOT analysis of the ISP illustrates the strengths, weaknesses, opportunities, and threats that affect the companies in the industry (Ref 3.1) Strengths of the industry lie in the fact that most companies in the industry know all about the schematics that go behind developing a company and know what it takes to make customers receive the support they need to be satisfied. Having a name that sticks out to customers as a trustworthy brand is more likely to gain new customers who do not want to go on the search for a deal with a company without a good reputation (HP).3 The weaknesses of the ISP market fall in the issues with customer service issues. Though many companies know the recipe to making customers happy, they are not putting enough resources in finding a properly trained staff to help customers with their issues. Technology is constantly changing and different types of people young and old are using the Internet, and “as computer literacy among customers decreases, their need for quality customer service increases” (HP).3 Opportunities in the industry are abundant, as a company partnering with other media outlets can boost and ISPs recognition and allow a company to expand among other markets. There are usually opportunities for large companies to branch out into other industries. Large ISPs may wish to consider related industries in the general idea of computing. When moving into a related area, brand name and customer base can be [priceless] (HP).3 Digital cable services are extremely threatening to the ISP market. Even though they charge more for their services, they are providing faster Internet speeds and package deals with their existing products. The market can become saturated with new companies who become aware of the benefits of having an ISP with fast speeds and different forms of content. The competitors of the industry play a large role in the outcome of an ISP’s strategy. When looking at Porter’s Five Force Model for this specific industry, one can see that the power of substitutes are high in the ISP market because switching costs are low and customers are price sensitive and competitors with broadband and faster technologies can threaten other services. This also means that the buyer power is high, because they have many different companies to choose from. The supplier power is also high, since ISPs must use existing networks because it is 3 HP, The Structure and Trends of the ISP Market
  4. 4. 4 difficult for every ISP to build their own entire network. Suppliers are the backbone of the Internet and control routing and switching traffic (Star Tribune).4 Suppliers in the industry face little to no competition in certain regions, and by 2005, it became evident that smaller ISPs were being bought by larger ones, and high speed internet was more appealing than dial-up internet (Ref 3.2). Soon enough, suppliers were limited on how fast the internet speeds could go and “In order to offer faster DSL speeds, up to 40 megabits, independents [had to] agree to let suppliers manage the service, which lower[ed] the independent's profit margin and, in the eyes of several independents, [made] offering the faster DSL service unfeasible.”(Star Tribune)4 As a result, many ISPs found it necessary to create a new business model that allowed them to infiltrate other markets to generate revenue to close the gaps in profit margin. In order for an ISP to gain profitability, they must crate value in a way that attracts customers, such as a low cost or high quality approach (Ref 3.3). Approaches finding a distinctive competency include mixing a firm’s capabilities and resources to create a functional strategy and then creating a strategy around a value creation approach that includes low cost of differentiation (Hill).5 The Organization: AOL When AOL began providing Internet services, they sought to create a sustainable model for the ISP business and were mainly focused on generating revenue purely from subscribers to their provisions of Internet service. They were able to stay on top as the phrase “You’ve got mail” resounded in the ears of many after they dialed up to the Internet everyday. Their strengths were solely in brand awareness and they were a sales oriented company that had 70% of their revenue coming only from the monthly fee they charged customers for using their Internet service (Kirkpatrick).6 AOL also seemed to be less concerned with their environment, and more concerned with the employees, with the motto “You first. We insist.”, with no emphasis on Corporate Social Responsibility. Overall, AOLs weakness and constraints lacked on customer 4 Star Tribune, Internet Providers Fading 5 Charles W. L. Hill, Strategic Management Theory 6 David Kirkpatrick, AOL and Time Warner part ways
  5. 5. 5 focus and a complete lack of innovation to obtain new sources of revenue and compete with the cable companies coming into the industry. Problem Number One and Its After Effects: Time Warner Merger In order to compete against the cable companies, AOL merged with Time Warner in order to offer customers no other ISP was, streaming content from a legitimate source. The merger in the year 2001 had many people excited about the possibilities that could arise. The new company [was] called AOL Time Warner and [combined] AOL's online services with Time Warner's vast media and cable assets. In a world where online services, media and entertainment are rapidly converging, the new company could have almost unparalleled resources (CNET News).7 The company was thought to have a prosperous outcome, because the new company was projected to have more than 100 million paying subscribers7 , which would include AOL's dial-up customers and Time Warner's cable and magazine subscribers. However, as the company began to come together, there was no synergy in regards to things from clashing company cultures, business strategies, and company focus. It became abundantly clear that most of AOL’s corporate heads were staying on top, as 2/3 of the top positions were filled by the new company (Benz). 8 The new company was also not even in the distribution of ownership, as it was “55 percent owned by AOL and 45 percent owned by Time Warner” (Kramer). 9 To add to the issue, those in management positions were not pushing the employees in their own brand to work with the other company in generating new ideas, and the environment became a sort of “us versus them”. Since most of AOL’s executives stayed at the top, the company was working without strong editors to deliver the content, and AOL found themselves ill-prepared to step into such a business. A SWOT analysis of the AOL Time Warner Merger (Ref 4.1) shows that the company could have been a powerhouse with AOL’s brand recognition and customer base paired with Time Warner’s experience and content. They missed opportunities to allow Time Warner to stream their content over AOL’s servers because Time Warner was reluctant to give AOL such a power with their 7 CNET News, 2000 8 Matthew Benz, Culture Shifts At AOL Time Warner 9 Larry Kramer, Why the AOL-Time Warner Merger Was a Good Idea
  6. 6. 6 products when they hardly had a say in the company. The weaknesses of the merger were the culture class that caused a lack of synergy and a loss of both companies following through with what the merger initially started. Because AOL and Timer Warner lost sight of their visions, cable and phone companies were creeping into the ISP industry with high speed Internet and content that could threaten AOL as a whole on the innovation front. Problem Number 2 AOL and Time Warner eventually parted ways in 2009, but at this point, AOL was not even seen as a competitor against other ISPs, because they were all offering high speed internet as opposed to dial-up. After the split up, AOL was seen as an old-fashioned service provider. Companies such as Verizon, Comcast, and MSN were offering high-speed satellite access for customers, which allowed them to utilize their phone lines while still connected to the Internet. Though this problem arose about three years ago when AOL came out of their merger, it is still an issue for them today. AOL needed a new brand identity and left the world of being purely an ISP and ventured into the world of content and advertising while offering Internet provision and security on the side. After companies such as Comcast arose in the ISP industry, AOL had to reinvent themselves and have done so by buying the Huffington Post just one year ago. As apart of the transaction, they obtained the Huffington Post’s co-founder and editor-in-chief. The new mission statement of AOL is to “inform, entertain, and connect the world”, which is a foreseeable goal with the new acquisition of Huffington Post. They have not only obtained the name, but Pulitzer Prize writers whose content is plastered all over their website. AOL Now The company has also broadened what one would call their product line as they now provide the following: • Global and local content including sources such as the Huffington Post, Moviefone, Engadget, TechCrunch, Patch, Stylelist, and Mapquest. • Paid subscriptions that boast a VIP experience and high quality member support. • Advertisements that are bought by advertisers with the aim to have with premium content to reach the targeted consumer
  7. 7. 7 • Consumer applications, such as blogging • AOL Ventures, a branch that invests capitol in early stage businesses and can give them checks ranging from $50,000 to $3 million. Also, since the company has drifted from being merely and ISP to now providing content and other services, they are able to expand globally with a development team in Dublin that has rolled out new AOL homepages for the worldwide audience. These homepages are all aimed at content that the country it is made for would want to see, with tabloids pertaining to that specific country, even with the language and dialect they use. Many people are not aware of the new things that AOL is doing with their company, and some do not even know they exist. Once known as America Online, AOL has transitioned to providing content, advertisements, money for ventures, and much more to societies worldwide. They are using a cost leadership strategy as they still only charge $14.95 for their ISP that comes with security too. In order for AOL to no longer be seen as and old-fashioned ISP, they must make the public aware of their existence. Americans were once bombarded with the free trial disks and hearing the phrase “You’ve got mail” wherever there was a computer. AOL must create a brand around their new name and make the public aware that they are competitors against sites such as Google and Yahoo! for advertisements and content. Commercials would be a wise option for AOL to seek, or even acquiring another company that focuses on small and big screen media. It is important for AOL to stay away from merging with another company that is not in their business, because businesses that are in different industries are difficult to unite into one without issues. They must build enough revenue to acquire a company that can get their advertisements out there, such as Hulu. This would force consumers to watch commercials about AOL, while still obtaining the content they want. Such a strategy has worked well with Google’s purchase of YouTube, as both accounts are even fused together, and you can’t log onto one without the reminder that the other company exists.
  8. 8. 8 The task may be difficult because a few media and entertainment companies jointly own the site, but AOL partner with those companies for ownership without merging directly with them. AOL can be in charge of the advertising aspects of the site, while allowing NBC, ABC, and FOX to stream their content on the site and still reap in the revenue from advertisements. This would allow all companies to stay the same internally, and reap in revenues from agencies that need advertising that AOL has acquired along the way, while also being able to get their own name out there. Measuring the success rate of such a plan can be done by seeing how many more subscribers AOL gets after one year of synchronizing Hulu accounts to AOL. Subscribers for their Internet services, free email addresses, blogs, advertising, etc. A probable outcome of the partnership would most likely not hurt either company, but allow them to reach customers that would generally not access the media streaming that is available on Hulu with the content on AOL at the same time. Conclusion Overall, I believe that AOL is on the right track to bringing their company out of the ice age of ISPs. However, people are unaware of the strides they are making in the industry, and a partnership or acquisition with an outlet that is frequently used would be a good way to get their name out. The company has made a great start in re-establishing themselves as a “current” company in today’s constantly changing technological business environment, but they always need to be sure to stay one step ahead and enforce a plan that ultimately causes consumers to know about the strengths they have as a company. Appendix: AOL’s Current Product Life Cycle 1.1
  9. 9. 9 PEST of ISP Industry 2.1 SWOT Analysis of ISP Industry Table 3.1 Five Forces 3.2 Suppliers: High  Substitutes: HighRivalry Among Existing Internet Service Providers: High
  10. 10. 10 Key Success Factors 3.3 SWOT Analysis AOL Time Warner 4.1 Sources: Alexander, S. (April 30, 2012). Star Tribune: Internet Providers Fading. Retrived from http://www.lexisnexis.com.navigator-wcupa.passhe.edu/hottopics/lnacademic/ AOL.com. (2012). Our Values: Our Mission. Retrieved from http://corp.aol.com/our-values/our- mission Benz, M. (2001). BPI Communications: Culture Shifts At AOL Time Warner. Retrieved from http://www.lexisnexis.com.navigator-wcupa.passhe.edu/lnacui2api/results/docview/docview.do? docLinkInd=true&risb=21_T14612427989&format=GNBFI&sort=BOOLEAN&startDocNo=26 Threat of Entry: Low  Buyers: High
  11. 11. 11 &resultsUrlKey=29_T14612427993&cisb=22_T14612427992&treeMax=true&treeWidth=0&cs i=5545&docNo=30 Forbes. (2000). Mergers and Acquisitions. Retrieved from http://www.forbes.com/global/ 2000/1030/0321112a_print.html Hewlett Packard (1999). The Structure and Trends of the ISP Market. Retrieved from http://www.hpl.hp.com/techreports/1999/HPL-IRI-1999-002.pdf Hill, C. Strategic Management Theory: An Integrated Approach. Publication date: February 2006. Junnarkar, J. and Hu J. (2000). CNET News: AOL and Time Warner Merge. Retrieved from http://www.lexisnexis.com.navigator-wcupa.passhe.edu/lnacui2api/results/docview/docview.do? docLinkInd=true&risb=21_T14612427989&format=GNBFI&sort=BOOLEAN&startDocNo=1 &resultsUrlKey=29_T14612427993&cisb=22_T14612427992&treeMax=true&treeWidth=0&cs i=299488&docNo=1 Kirkpatrick, D. (2009). Newstex: AOL and Time Warner part ways. Retrieved by http://www.lexisnexis.com.navigator-wcupa.passhe.edu/lnacui2api/results/docview/docview.do? docLinkInd=true&risb=21_T14612427989&format=GNBFI&sort=BOOLEAN&startDocNo=26 &resultsUrlKey=29_T14612427993&cisb=22_T14612427992&treeMax=true&treeWidth=0&cs i=299488&docNo=48 Kramer, L. (May 4, 2009) The Daily Beast: Why the AOL-Time Warner Merger Was a Good Idea. Retrieved from: http://www.thedailybeast.com/articles/2009/05/04/how-time-warner-blew- it.html

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