Transformational Power of Internet: Business development strategies

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Transformational Power of InternetBusiness
development strategies

• NCHELP Leadership Conference
• January 2006
• George T. Geis
• geis_at_ucla.edu

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Session outline

• Background alliances/corporate investments for
  business development
• AOL/Time Warner a digital strategy that
  plummeted
• The music market dynamic industry structure
  business development
• Apple iTunes/iPod a digital strategy that soared
• Implications and takeaways

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Range of alliances/investments for business
development

• Pooling technology and building new businesses
• Philips and Sony used a nonequity alliance to
  pool patents and develop the compact disk. They
  later licensed the product as an open standard
  with Sony marketing it in Asia and Philips
  pushing it in Europe and the U.S.
• Using the global sliver effect pursuing a
  product or value-chain sliver on a world-wide
  basis
• Starbucks leveraging a product/concept through a
  galaxy of alliances

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Starbucks global sliver

• Product line extensions/co-branding
• Pepsi (bottled coffee beverages)
• Dreyers (premium coffee ice cream)

• Geographical expansion
• Joint venture with Sazaby (Japan)
• Chapters in-store stores (Canada)
• SC de Mexico (Latin America)

• Channels
• ITT Sheraton (coffee served throughout hotel)
• United Airlines (in-flight coffee)
• UCLA (coffee served in executive program)

• Formats and forums
• Barnes Noble (in-store stores)
• Host Marriott Services (airport kiosk)

Adapted from David Ernst, Strategic Alliances
Conference, London, 1998.
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Range of alliances/investments for business
development (cont)

• Accessing skills
• 25 years ago Samsung was off the map. Today, the
  company is a leading player in TV monitors, VCRs,
  and a wide range of consumer electronics. Of 100
  businesses theyve started, at least ¼ have been
  started via a JV. In many other cases, licensing
  deals enabled them to access critical skill
  capability

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Internet Transformation

• Products services in all markets are combining
  with digital technology and communications to
  create new offerings
• Digital technologies are disrupting markets and
  organizations
• Disruption will flow and ebb -- driven by the
  ongoing march of broadband/wireless/digital media
  tempered by swinging moods of reward and loss

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Business development triangle
Product/ Service
Impacts

• Competitive positioning
• Business development partnering

Technology
Platform
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Analyzing the AOL/Time Warner Merger

• Worst business combination of all time?

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Entertainment industry challenging MA
environment
1. Industry/company characteristics

• Entertainment industry acquisitions problematic
  in 1980s and 1990s
• Universal shuffled from Matsushita ? Seagrams ?
  Vivendi
• Uncertain returns
• Advertising fluctuation during economic cycle
• High risk in creative/movie projects

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Pre-merger context of AOL (1999)
1. Industry/company characteristics

• AOL reaches record market capitalization (over
  200 billion)
• Large subscriber base (largely dial-up)
• Vigorous ad/commerce deals
• First USA credit card partnership
• Many deals with dot-com firms flush with venture
  capital money (see Bear Stearns backlog table)
• Stock market places premium on Internet firms

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AOLs virtuous cycle for commerce deals in 90s
1. Industry/company characteristics
Build subscriber base

• Gain subscribers by attracting partners
  customers
• Add subscribers through brick mortar deals

• Mobile access
• Interactive TV
• International expansion

• Content deals
• Local services (such as MovieFone)

AOL
Monetize subscriber base
Enhance services content

• Advertising and commerce deals

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Trouble brewing on AOLs horizon
1. Industry/company characteristics

• New ISPs providing service with low or no monthly
  fees
• Increasing popularity of broadband
• Cable and phone companies offering their own ISP
  systems
• Would customers pay a premium for AOL on top of
  an already expensive broadband connection?

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AOLs strategic challenges
II. Merger motivations

• Users becoming more Internet savvy, so appeal of
  AOLs gated community diminishing
• Rapid growth of broadband
• Loss of dial-up subscribers
• Subscription revenue as well as adcom revenue
  threatened
• Need for compelling content

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Appeal of Time Warner as a target
II. Merger motivations

• Time Warner one of the largest media firms
• Publishing properties
• included Time, People magazines
• 25 of ad revenue among U.S. magazines
• Warner Music group
• Warner Bros studios
• WB network, HBO

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Reasons for merger AOL
II. Merger motivations

• AOL/Time Warner would be first integrated
  Internet-powered media/communications company
• Complementary assets would stimulate growth of
  subscription and ad/commerce revenue
• AOL would drive digital transformation of TWXs
  divisions
• AOL estimated 1 billion of EDITDA synergies in
  first year of operation

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Reasons for merger TWX
II. Merger motivations

• TWX traditional properties would be brought into
  the new media age
• AOLs Internet infrastructure would provide new
  distribution outlet
• TWXs broadband systems would provide platform
  for AOLs interactive services

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Epilog From riches to rags
III. Merger performance

• AOLs model of monetizing adcom partnerships
  worked amazingly well in the 1990s
• AOLs structuring of adcom deals (such as First
  USA) included 1) upfront cash 2) success fee on
  initial deliverable 3) percentage fee for
  ongoing usage.
• In April 2002, AOL Time Warner reported a loss of
  54.2 billion after taking the largest charge in
  corporate history (related to the Time Warner
  acquisition).
• What had been a very successful business
  development strategy in the 1990s needed a
  makeover.
• AOL Time Warner struggled as a merged company to
  manage conflicts with broadband and content
  partner companies.
• In October 2003, the AOL became silent in AOL
  Time Warner as the companys name became Time
  Warner
• In 2005, investors were pressuring Time Warner to
  spin off its cable unit and repurchase 20B TWX
  shares as a value play.

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AOL/TWX deal notoriety
III. Merger performance

• In months following acquisition, almost 200B in
  market value evaporated
• CEOs and other senior executives from both
  companies resigned or were fired
• Government investigations were triggered by
  alleged accounting violations

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YHOO performance better than TWX
III. Merger performance
Note that for the first year after the merger,
AOL Time Warner roughly tracked the SP 500
index thereafter the shares slumped sharply and
aligned more closely to the Internet index.
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Analyzing Apple iTunes/iPod

• "Hello iPod, Goodbye Walkman"

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Recorded music business

• In recent years, worldwide sales of recorded
  music has ranged between 30 and 40 billion.
• Some 35 of sales (12 billion) in the US

8 decrease in 2002
4 decrease in 2001
6 decrease in 2003
2 increase in 2004
Source RIAA
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Big 5(4) have accounted for 80 of record
company market share in U.S.
Source Billboard, SoundScan
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Traditional music recording value chain
Content Generation (AR)
Production
Manu- facturing
Distribution
Retail
Marketing
Major record companies vertically integrated
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Linear value chain is being upset and replaced
New media distributor
Internet retailer
Hybrid music activities
Traditional music activities
Management Company
Record Label
Manufacturing
Marketing
Distribution
Retailer
Consumer

• Britney

Digital Delivery
Digital music activities
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What a difference an iPod makes
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Key market modeling questions

• Which value activities are market choke points?
• With whom should I partner in building a superior
  business model?

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Visualizing Apples business development strategy
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Lessons from the digital music market

• Digital technology impacts market from multiple
  perspectives
• industry structure and power shifting (artists,
  new players, large incumbents, consumers)
• technology standards battle
• changes in product form
• business model morphing

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Takeaways

• You must consider a large number of options in
  constructing a company's business development DNA
• The success of Apple's business development model
  involved selecting which value activities to
  control or influence

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Value created and divided in new ways
Think of an industry as a picture puzzle with
each piece representing a part of the chain of
suppliers, manufacturers, and service providers
that currently make up its structure. On the back
of each piece is a number representing its
value. Now take the puzzle apart and change the
shape of the piecescut them in half, attach them
to others, discard a few, and create new ones.
Then assign new values to each piece, but use a
much broader and higher range of
numbers. Winning will be about shaping or owning
the right pieces at the right time and putting
them together in new ways.
Lowell Bryan, Jane Fraser, Jeremy Oppenheim, and
Wilhelm Rall, Race for the World