America Online is Worth Less than These Two Swans

I would tend to resist the urge to criticize CEOs, except that, in most cases, the criticism is spot on:

Time Warner announced in May that it plans to spin off its AOL division by year end. The new AOL’s value will likely be barely 1 percent of the market price of the inflated stock that Time Warner accepted in the original $175 billion merger almost a decade ago—despite the inclusion of numerous subsequent expensive add-on acquisitions. While extreme, the Time Warner–AOL combination was no aberration. The deal represents less than half the financial damage done during an unprecedented era of excess in the media business. Since 2000, the largest media conglomerates have collectively written down more than $200 billion in assets, a record that would make even Citigroup blush. These write-downs reflect a broad-based legacy of value destruction from relentlessly overpriced acquisitions, “strategic” investments, and contracts for content and talent.

One might be tempted to give media executives a pass because of the impact of the Internet. If we take Netscape’s public offering in 1995 as the birth of the Internet era, on average over the next 10 years the biggest media conglomerates achieved less than a third of the returns available from the S&P as a whole. But even more telling is that these companies, as a group, had also underperformed the S&P for much of the previous decade, before the Internet upended their industry. Indeed, one aspect of the media business has remained largely unchanged for a generation: the lousy performance of its leading companies.

Although individual media moguls have come in for skepticism and scrutiny, the industry’s underlying strategies have mostly escaped question. Executives, investors, analysts, and the press seem to agree that the primary imperatives are to accelerate growth, diversify internationally, invest in content, and exploit digital convergence. Unfortunately, these are precisely the strategies that media companies pursued aggressively during the past lackluster decade.

That AOL is worthless is hardly the fault of the CEO--there are quite a few shareholders and customers who are shell-shocked as well. I can't help but feel relief, to some degree, that I wasn't an active trader or investory from 1995 until 2005. I had to sit out of the market because of an insider trading conviction and an arrangement that I made to take a ten year break. (They could have given me a lifetime ban, but Father still had some juice, so ten years was what we agreed upon).

That enforced sidelining of my financial activities saved me most of my net worth, likely, because I completely missed the dot-com bubble and the aftermath it created. I might have bought in heavily to Netscape. Remember Netscape? What a wonderful "browser" it was. The cool green colors and the graphics of it were fantastic, for the time. It was a well-designed piece of software, and, again, you have to remember the times. Internet Explorer is a far more flawed piece of code than Netscape ever was, but who's to say that, as time went on, Netscape wouldn't have had the same issues? It's hard to speculate. I do know this--Netscape worked like a charm on the best Macintosh computers of that era.

Think of where that value went--a hundred and seventy-five billion dollars in value has disappeared, never to return, and America Online is a clunker, full of features no one wants to bother with anymore. It reminds me of music business.

X - posted at my fabulous blog, An American Lion

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