Porter, Google, and AOL

 

Unfortunately, technology is one of the most insular industries in the world. While “old world” executives jumps from one industry to another...CPG, to media to industrial products (GE-trained managers are the perfect examples), very few technology executives ever leaves the industry once they enter. Even old-world executives who got recruited to the tech world (such as Terry Semel, Meg Whitman) rarely go back. (the money is too good, and the work too exciting ?! ) Even worse, many of us have spent most of our business careers in the industry without ever tasting what it is like to work at a “build-to-last” company like P&G.

These so called geeks turned entrepreneurs/executives (I’m one) tend to truly lack context for making complex business decisions. We tend to think that we are breaking new grounds but in truth, we are really just re-inventing the wheel. This is one of the main reasons I decided to leave the comfy confines of the valley and head eastward for business school...to get a little perspective, context, and some history lessons.

Nothing is more clear these days as I read blog after blog arguing about some new business model or partnership using some new fanagled meme to explain away one business decision against another. Sure there are many nuances that only someone knee deep in the industry will understand...but fundamentally, the industry is not so different from what existed before that we deserve to re-write the rules of business. (remember what happened last time when we did so? where did the new economy go? Dot-Bomb?).

So there has been incredible amount of noise lately about profit motives, margins, and market powers of content creators versus content publisher. Specifically Google & AOL ’s blockbuster deal as well as lots of startups & bloggers arguing over revenue share model to content creators from content publishers (is it fair? is it communism? is it necessary?). The value chain for content in the internet world is really not so different than media...the line is not so clear who is really the content creator and who is the content publisher...AND there are so many value added layer in the middle (producer, executive producer, talent agents, distriubtors, theators etc) that mashups are really not a cool new invention born out of the colletive genius minds of the web 2.0 crowd. So yes, other people do get the complexity of the two-dot-oh world.

For better or for worse, search engines has become the defacto channel for distributing internet content. Even more so than cable/satellite TV providers in the broadcasting world. Google is by far the largest and most powerful search engine, and Comcast is the same in the broadcasting world (ever wondered why Comcast wanted a piece of Google?). As Michael Porter will tell you, the power interactions (and direction of revenue flow!) between two partners within a value chain is highly dependent on industry concentration and the market share of the particular players. Because Comcast owns such a powerful position in the TV industry it can extract “tolls” from commodity content creators to have access to its subscriber base. ESPN on the other hand, because it owns highly desirable content, can negotiate with Comcast significantly more aggressive. We tend to forget that when AOL first started, it was PAYING for content to be made avaiable to its subscribers, BUT as AOL grew larger and larger the table turned, and AOL ended up getting PAID to make content available to its user base. (BTW AOL lost most of its gateway strangling hold to google...but its still important enough for Google to want to work with)

The same powerplay has been in play for almost a hundred years... I dont see why we are arguing over AOL/Google OR over whether content creators (in the peer economy) deserve to be paid or not. There is no right answer it all depends on who you are.

AOL needs Google to act as a distribution channel for its content/services. Google OneBox seems to be the most effective/premium placement for search inclusion. Google, on the other hand, needs AOL to distribute its advertising content/network. The powerplay and eventual “deal” comes down to what other alternatives each other have and what they are willing to offer.

The same case for startups... if you are a new cable TV provider, you dont have the bargaining power of Comcast so you need to pay up the wazoo to get ESPN... (plus other larger problems)...if you are a new distribution channel for internet content (such as a new search engine or a new content aggregator) the only way you are going to get proprietary/differentiated content (like AOL in the early days) is to provide some sort of value to content creators (and cash is one way to add value)...Google can give away eyeballs/traffic/subscriber as a “value proposition”, startups can’t so they end up have to use cash instead...sometimes its just that simple...good ole Porter’s Five Forces.