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| Convergence’s long-term play |
July 9, 2002 |
By Mark Evans
When america online (aol) acquired time-warner two years ago, it was widely hailed as the ultimate convergence story—a deal that would blend AOL’s Internet access business with Time-Warner’s content to create a media conglomerate with an unparalleled consumer reach.
It also made convergence a buzzword in the high-tech, media and content industries. Suddenly it became important to own both the content and the means to distribute it. Convergence, in theory, would let companies leverage their assets by re-packaging content and distributing it through a variety of media channels. It would also offer advertisers new ways of reaching specific audiences.
Not surprisingly, convergence has become a mega-billion dollar corporate strategy with no lack of willing participants.
In Canada, BCE has used the billions it collected from spinning off Nortel Networks and selling 20 per cent of Bell Canada to buy The Globe and Mail and broadcaster CTV. Rogers Communications has created a sports convergence empire by purchasing the Toronto Blue Jays, specialty station SportsNet and all-sports radio station The Fan 590.
Despite the hype surrounding convergence, a growing number of analysts believe the benefits are, at best, years away. Much to the surprise of senior executives who expected convergence to generate large profits quickly, gluing content to distribution has been a
convoluted exercise. BCE, for example, is still working on ways The Globe and Mail and CTV can best fit into its Sympatico Internet access business.
To many people, the only obvious sign of convergence at work within BCE is the cross-marketing activities that place advertisements
for Bell Canada in The Globe and Mail and ads for the paper on CTV.
David Ellis, president of Omnia Communications Inc., said convergence is really about driving deals more than a real and tangible marriage of technologies and services.
“It’s a concept about mergers and acquisitions, and it’s used by advertising people to talk about cross-advertising and promotion.”
Old wine, new bottles
But for all the interest in convergence it is not a new concept. Ian Angus, president of Angus Telemanagement Group in Ajax, Ont., said it is an old idea dusted off by senior executives anxious to justify aggressive strategic moves.
Angus said one of the best and most successful examples of convergence took place 36 years ago when NBC introduced a comedy show called The Monkees. As most people born before 1970 know, The Monkees was a top-rated television show that spawned a pop band with hit records, movies, merchandise and magazines.
It was, Angus said, a good example of content that was effectively repackaged and sold through multiple sales channels.
Today’s convergence strategies have the same goal: to sell content and/or products to the maximum number of consumers using multiple sales channels. At AOL-Time Warner, the potential to market content such as movies, books, music and magazines to AOL’s 36 million subscribers and Time-Warner’s 10 million cable subscribers makes senior executives salivate.
The same goes for Rogers, which wants to leverage its ownership of the Toronto Blue Jays by broadcasting the baseball team’s games to consumers through SportsNet and The Fan 590.
Regardless of how AOL chairman Steve Case or other proponents try to paint a pretty picture about convergence, it is still early days and no one knows how it will evolve. Angus said there is a lot of trial and error happening, and companies should be more forthcoming about their efforts.
“I don’t object to people trying stuff,” he said. “What I object to is people basically not describing [convergence initiatives] as experiments. If you listened to someone from BCE or AOL-Time Warner, [you might think] this is a guaranteed way to do well. It isn’t.
These are very expensive experiments, so they should be labelled that way.”
Some benefits
AOL-Time Warner is a good example of how these “experiments” are taking time to develop. The synergies Steve Case talked up in making the US$181 billion mega-deal have yet to materialize. A big part of the problem has been the advertising market slump, which has made it
hard for AOL to generate the double-digit growth promised by Case.
The investment community’s unhappiness is reflected in AOL’s stock price, which has tumbled by more than 60 per cent in the past year.
Meanwhile, the company’s market value has dropped to about US$80 billion from US$250 billion when the convergence deal was announced.
When AOL-Time Warner reported its first-quarter results, it had a US$54 billion loss, mostly due to accounting charges.
The company also said it was falling short of its cash flow and earnings because synergies between AOL and Time-Warner had not been tapped. For example, only 200,000 of AOL’s 33 million Internet subscribers are using a highspeed connection from Time-Warner, but
this component was hailed as a slamdunk when AOL bought the company.
So far, the biggest dividends appear to be that promotions on AOL generate 100,000 magazine subscriptions a month, while the company has been saving millions of dollars by advertising within its own properties.
Saul Berman, global leader of strategic consulting with PricewaterhouseCoopers in Los Angeles, Calif., said that convergence has gotten off to a slow start because the marriage of content and distribution companies will take time to consummate. The biggest issue, he said,
is that these companies have historically worked with a variety of partners.
“You’re dealing with different relationships and silos that haven’t worked together,” he said. “In the long term,many of these things will be successful, depending on the application.”
Peter Pleckaitis, strategy practice leader with PwC Consulting’s infocom, communications and entertainment group, said convergence may not be dead, but it has stalled. Many companies have gone back to the drawing board using traditional business fundamentals (sales and profits) rather than spending money on ideas and services that consumers are not ready to buy.
“I think there is a lot less exploration going on, and now it’s a case of ‘What has worked, what can we salvage and keep?
Let’s get our businesses in order and we will move on from there,’” Pleckaitis said.
“We are really at a crossroads.
Consumers are fatigued by the number of bundled offerings that come to them and the hype and exaggeration of convergence, and I don’t think [any benefit] is being delivered to them.”
Web convergence
Angus Telemanagement http://www.angustel.ca
AOL http://www.aol.com
BCE http://www.bce.ca
BCE Emergis http://www.bceemergis.com
Bell ExpressVu http://www.expressvu.com
The Globe and Mail http://www.globeandmail.ca
Omnia Communications http://www.omnia.com
PwC Consulting http://www.pwcconsulting.com
Sympatico http://www.sympatico.ca
Teleglobe http://www.teleglobe.com
TSN http://www.tsn.ca
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