News flash: AOL, desperate for a new strategy as its base of dial-up Internet service customers erodes and determined to built a "platform" that marries "community" with "content," overpays to purchase a well-known media company.
Haven't we seen this flick before? If memory services, the merger of AOL and Time Warner turned out to be more horror movie than action-hero adventure. Corporate memories, however, tend to be short, and no sooner was the ink dry on AOL's $315 million purchase of the Huffington Post than the Wall Street dream machine kicked into high gear, floating rumors and sky-high valuations for Gawker and Politico.
(Bloomberg News) - AOL has acquired the Huffington Post for $315 million, a partnership that could help AOL deliver news content to a potentially lucrative audience.
The hype notwithstanding, this time they may be right. Enough has happened since AOL announced its ill-fated merger with Time Warner that the original strategy based on business "synergies" and technological "convergence" may be more valid today than it was a decade ago. If so, we could be at the start of radical consolidation in the media industry.
I'm not just talking about mergers between Web portals and popular Web sites. Think newspapers and TV networks, magazines and cable networks, wire services and social networks, movie studios and telephone networks. The process will take at least another decade and will involve lots of trial and error and squandered fortunes. By the time it's over, the landscape is likely to be dominated by a handful of global "brands" selling news, entertainment and community engagement, using video, audio and text, delivered through whatever devices customers desire.
Several factors drive this consolidation, including the AOL-HuffPost deal.
The most obvious is that there are tremendous economies of scale in the media business. News, information and entertainment are classic examples of products that involve lots of one-time, upfront costs required to serve the first customer, but little cost to serve additional customers. In such industries, firms that jump out in the lead with the highest sales volume gain a huge cost advantage that they can use to lower prices and gain an even greater market share. In time, only a few giants survive.
Consuming news and entertainment, it turns out, is also something of a community activity. People mostly read and view by themselves, but they like to talk with other people about what they have read or viewed. For that to happen, however, it's best if many of us get our news and entertainment from the same sources. That also pushes the market in the direction of consolidation.
There was a time when many people believed that everything on the Internet should be free, or at worst financed by advertising revenue. That was always something of a West Coast fantasy, or a throwback to the days when newspapers and TV networks could command hefty ad rates. But while Internet advertising sales grow every year, it's becoming clear they will rarely be sufficient to pay the full cost of producing the kind of quality news and entertainment that can attract large numbers of readers and viewers.