Wednesday, December 12, 2012

The Lessons of AOL

There are many people alive today who were not around when AOL was born.  They likely don't remember the meteoric rise - and fall - of this once-powerful media and social networking company.

I think it is worthwhile to study the history of America Online or AOL as it is now called.  A lot of people alive today were not even born when AOL was founded, and were mere children during its heyday.   For them, AOL is not something they remember or even know about.  But its spectactular rise to the top - and sudden downfall - are a valuable lesson to anyone who might think that investing in popular trends is a swell idea.

A brief history of the company can be found here.  What is startling about this history is that the company was founded as a means of sharing games online by downloading them via modem.  Today we do this and consider ourselves clever and modern.   Everything old is new again.

The company even proposed licensing and streaming music over modems, back in the 1980's, but was shot down by Warner and since they couldn't get licensed content, the idea died.

Actually, much of what we consider to be the modern technology really was tried before, back in the 1980's and even the 1970s.  Cable companies offered video on demand, telephone service, and alarm monitoring, back in the 1980's, as part of their efforts to get lucrative cable franchises during the "wired cities" era (in the late 1970's, cable morphed from a rural to urban phenomenon, believe it or not).

It is only today that we have the bandwidth, the licensing agreements, and a common formatting that allows a lot of these ideas from "back then" to actually work.  And actually a whole lot more of them would work - or work better - if we have more open source code and less "Gimme! Gimme!" proprietary hardware, apps, and formats out there.  And yea, I'm talking about Apple.

But getting back to AOL, it started out as a dial-up service, one of a few around, such as Prodigy (which was sold by Sears) and Compuserve.   You could dial up to AOL and then go onto their primitive version of the Internet and search discussion groups and proto-websites, using proprietary AOL "Keywords".  You could go on these sites and join "groups" and have discussions online (and send e-mail) much as we do today with the Internet.

At the time, it seemed like "everyone" was on AOL, as the media hyped it relentlessly.   Every ad on television had the phrase "AOL keyword...." at the end - or they appeared in print ads, much as these obnoxious 2-D bar codes appear today.

It was just assumed that AOL would take over the world, and that everyone would end up on AOL, as it had the largest market share of any online service.   And many folks, including myself, resented it, as it seemed like we were being forced into something - a monopoly service - that we didn't want.

The company became so popular that when it went public, the stock soared and the whole "dot com" boom took off.  Companies like Motley Fool were saying the stock was the greatest thing since sliced bread.  From a 1994 report:

"BUY AND HOLD, HOLD, HOLD. We are buying [AOL], and we are holding. And holding. And holding. Because when we come to like a company and its situation this much, we're very unlikely to let go inside of a decade."

And it didn't stop there.  The stock went up 500% by 1998, and some folks still thought it was undervalued at that point!
"My valuation model clearly indicated that AOL was undervalued. I also believed that AOL would begin to generate additional revenue from advertising and online commerce in the future, which would only add further to the "fair" stock price that I had calculated. This quantitative data, combined with my knowledge and experience with AOL, gave me the confidence I needed to buy and hold AOL stock for the long-term."
Ha-ha!  I can only guess that the author also bought a mini-mansion and is now heavily invested in gold.

But he wasn't the only one drinking the Kool-Aide.   Time Warner, the media company, "merged" with AOL and at the time, AOL was considered the larger of the two companies with a huge "Market Cap" in the billions.

But things started unwinding, slowly at first, and then more and more quickly.

The Internet, which had been around since the early 1980's, became more of a mainstream product for average citizens.   Small Internet Service Providers (ISPs) started up, offering dial-up internet access for as little as $10 a month.   It was the wild west back then, with small ISPs on every streetcorner (often literally) and everyone getting "online" to the 'net through 56K modems.

Of course, the Internet back then was harder to use.  Most of the stuff you saw was in ASCII text format, and "web pages" were just starting to appear.  We had to run something called "Netscape Navigator" to view a web page.   The "user friendly" interface of AOL was much easier to use for the average citizen, and most prognosticators put their money on AOL.

Please stop me if any of this sounds familiar at all - in today's context.

AOL made a mistake at this point - a costly mistake.  They assumed that their proprietary databse of "AOL KEYWORD" topics would be more popular than the real Internet, in the long run.  And in fact, they made it hard for AOL users to access the Internet or even send e-mails outside of AOL or receive them from outsiders.

The Internet was clunky and difficult to use, but it was also cheaper and also open format.   There was no "Keyword" needed, only a URL, and anyone could get one of those.   And once Google came along, and made searching the Internet easy, well, the writing was on the wall for AOL.

The stock price plummeted.  Subscribers fled.  Time-Warner extricated itself from the merger.  The company soldiers on, of course, trying to re-make itself as a content company.  Maybe it will succeed at that.  But like IBM, it won't be the same company it was before.

And the predictions that AOL was "the next big thing!!!" proved to be completely without merit.   And with the perspective of time (I have a time machine, but it travels in one direction only, forward) I can look back on the views of people at the time and laugh.  And it is a satisfying laugh, as these are the same people who called me a fool for not investing in AOL.   I may be a fool, but at least I am not Motley.

So what does this mean for today?   Well, as recently as two years ago, people were hyping the stock of ZipCar (the next big thing in cars!!!) and that tanked.  Then came Groupon (the next big thing in couponing!!!) and that tanked.   Facebook came along and tanked as well, but no one wants to admit it just yet.   The media is still blaming the "botched IPO" for the stock price not doing well.  But I think the market is talking here - and saying that the company isn't worth as much as people initially thought.

If you think Facebook stock is undervalued, you have to hope its profits soar by a factor of 10 to 20, in order to have any rational return on investment, over time.

Facebook even made the NASDAQ 100 recently - which some are heralding as an indication that the company has a bright future.  But Yahoo!, Vodaphone, and First Solar are on the NASDAQ 100, and I am not about to plow money into those anytime soon.  Certainly not Facebook with its P/E ratio of 280.  I don't think Facebook can grow its way out of a hole like that.  Although I am sure others (like our friend quoted above, who had an MBA) think it is undervalued.

Yes, just like AOL, it seems that Facebook is everywhere all at once, and that "everyone" is on it - and a lot of people are.  And every ad now says "follow us on Facebook!" or some such nonsense.   But just as suddenly, users or subscribers can vanish, as they morph over to the next big thing - and if management makes boneheaded mistakes like AOL.  And I think in five years, "follow us on Facebook!" will be as quaint and archaic as "AOL Keyword....."

Have you every "followed" your favorite restaurant on Facebook?   Really?  Most of the pages I have seen are pretty lame, rarely updated, and, well, stale.   How is a company making money by having a Facebook page - in addition to its own home webpage?   How can a company sell product on Facebook - as opposed to eBay and Amazon?  In other words, where is the money in this?

I was on the website of a small organization the other day.  They have a traditional HTML-coded website, a blogger page (with updates on what they are doing), AND a Facebook page.   And what was interesting to me was that (a) all three pages had the same information, (b) some poor sap has to update three different web pages in three different formats, at least once a week, and (c) that is a lot of extra make-work for a small organization to undertake - when there is no payout in terms of customers or traffic.   Is this an effective use of time for a small company or organization?  I didn't check to to see if they also had Twitter, Pinterest, or MySpace accounts (or whatever else is new this week).

Another company following in the footsteps of AOL is APPLE.  Again, it seems that the iPhone and iPad are everywhere - according to the media.  But in reality, the open-architecture Droid platform outsells the iPhone by 2:1 - it just doesn't get a lot of press.  And yes, maybe Apple products are "easy to use" for first-timers, but the cost delta doesn't justify that advantage - not in an era where everyone is pretty much computer literate - or at least all your potential customers are.

Markets abhor monopolies and proprietary formats.  Over time, people propagate to the public domain.  It may take a year, five years, a decade, or even a lifetime.  But it is a market force that cannot be denied.

We drive cars today, not because they are safer or more efficient that trollies, trains, buses, or subways.  We drive them because we like freedom of choice and freedom from arbitrary pricing and dependency.  Talk to anyone over the age of 70 about the trollies, and once they wipe away the romantic cobwebs of memory, they will tell you that they were keen to buy that Model A Ford, back in the day, and not have to ride that rickety old trolley anymore!  (Today we love trollies and trains - as an act of nostalgia.  But back in the day, no one mourned their passing.  And frankly, if you ride AMTRAK, your nostalgia will be wiped away pretty quickly.)

Beta gave way to VHS.   AppleDos was trounced by MS-DOS.  Polaroid was never as popular as 35 mm.  The market abhors proprietary formats, hardware, single-sourcing, and one-stop shopping.  It is a pretty inflexible rule.  Like Adam Smith's invisible hand, it can be twisted, distorted and manipulated - for a time.  But like the running tide, it cannot be denied in the long haul.

And fads wear out.   Popularity of a site or product can vanish overnight, as people simply get tired of dicking around with things.   The music business was big business in the 1970's, when none of us had cable TV or home computers.   We all had monster stereos and record collections.   Today, no one gives a damn, and they stream music from their computer - when they listen at all.  Music listening is down, TeeVee watching (and screwing around with smart phones) is up.  Rock and Roll was just a fad it seems.  Hopefully, so is rap music.

The lesson of AOL is a lesson that has been applied time and time again in our history.  The "next big thing!" arrives with a lot of fanfare and hoopla, and falls apart in short order.   From a personal perspective, investing in these sorts of things is a really bad idea.

Turn away from the noise and spectacle of the media.  What they think is important, often really isn't.  They have a stellar track record of getting everything all wrong - most all of the time.