Why AOL should harvest Apple
Before you click on your online broker to snatch up Apple shares, hold on. There is no reason to believe this deal is in the works. I have no special information that the companies are talking or in any way considering this. It's not even on the level of wild rumor (For you speculators, the current buzz is that Sony is eyeing Apple.)
No, this is just the proverbial view from 30,000 feet from someone who spends far too much time thinking about AOL Time Warner and the Internet in general. But regardless of whether such a deal ever comes to fruition--or is ever even seriously considered by either company--looking at why it would be smart to buy Apple goes a long way toward helping understand how AOL hopes to harness the massive potential of its myriad media and technology properties.
All right, time to think on your feet: What is the one thing Apple has that AOL needs?
The biggest thing AOL needs that it doesn't have is a media player to call its own. And Apple has perhaps the best one out there in QuickTime.
The media player is the linchpin to AOL's strategy. You have AOL's huge membership--27 million and growing so fast by the time you read this it may be at 28 million--and all those musicians and movies that are part of Warner Music and Warner Bros. The whole point of the merger is to drive dollars from one to the other: promote upcoming albums, movies and television shows to AOL subscribers to get them to go buy the CDs, see the movies and watch the shows; at the same time, offer things like tracks from new albums, live concerts and video content exclusively to members (or possibly to others for a fee) in order to make AOL membership more valuable.
AOL is also well aware that much of the future of music will be on the Internet. The company worries about the dynamic duo of Napster and Bertelsmann--the roaring success of the original software, the potential profit when it starts charging (Bertelsmann says this summer) and the speculation about a Napster device--and AOL desperately wants to compete before it's too late. And it doesn't just want to compete; it wants to take it further.
That's why AOL Music and AOL TV are the biggest focuses of America Online CEO Barry Schuler.
The company already credits a cross-promotion with AOL, Spinner.com and WinAmp.com (both AOL-owned companies) with driving Matchbox 20's latest album to the No. 1 spot on Billboard's Internet Sales charts in its first week. (A note for full disclosure: In the '80s, I was in a band called "Purple Swine" with Matchbox 20 bass player Brian Yale.) But in order to move forward on this front, AOL needs the software to play the music and show the videos.
Co-branding with RealNetworks
So why doesn't the company just partner with one of
the three biggest companies offering competing media
players: Apple's QuickTime, RealNetworks's RealPlayer
or Microsoft's Windows Media Player? (MSNBC is a
Microsoft-NBC joint venture.)
Well it is--for now. Sources close to the company say AOL is about to sign a deal with RealNetworks to produce a co-branded version of the RealPlayer that would be integrated into AOL.
But that's probably not a long-term solution. Think back to 1996, when AOL signed with Microsoft to make a co-branded version of the Internet Explorer browser integrated into AOL. At the time of the deal, AOL had the power position: Microsoft needed AOL to win the browser war against Netscape more than AOL needed the IE browser. But little over a year later, Microsoft had crushed Netscape. AOL realized that it would soon be at Microsoft's mercy if Netscape died completely, so that was one of the reasons it bought Netscape.
The same sort of standards war is going on now between RealPlayer, QuickTime and Windows Media Player. If AOL helps RealPlayer win that battle and beat its competition, RealNetworks will be calling the shots in the future.
And there's nothing AOL Time Warner honchos Bob Pittman and Steve Case hate more than having someone else call the shots.
So sources close to the company say that AOL is looking at either building its own media player or buying one. Ask yourself when was the last time AOL built a new technology in-house rather than getting it through acquisition, and you'll see why it makes sense that AOL will buy one.
QuickTime vs. RealPlayer
You may ask: Why would AOL want QuickTime and
not RealPlayer?
The answer is that with Apple comes so much more. QuickTime would be the main reason to buy, but not the only one. Not even close.
First of all, Apple is cheap. With a market cap of $6.7 billion, Apple would be an easy pill to swallow for AOL Time Warner and its $113.4 billion market cap--even if Apple demanded to be bought at a premium and drove up the price to $10 billion. Apple made about $400 million in revenues over the last 12 months, so it would take a while to make up the cost. But the revenues would surely increase with the synergies between the two companies:
Take a look at the iMac. All sorts of words are thrown around for the cute and colorful computers--personal desktop computer and Internet appliance--but the iMac is really a new media device. Along with the iMovie and iTunes software, and soon the SuperDrive that reads and writes to both CDs and DVDs, the iMac is made for music and video downloads and viewing.
It would be the perfect device for AOL to feature its music and videos. It's also a family-oriented computer with its easy setup and colorful decor, which would fit AOL's image like a glove. It's even triangle-shaped (from a side view), a lot like the AOL logo. The iMac could easily become the AOL TV set and jukebox.
And under AOL, the iMac could be sold as a loss leader--that is, sold for an initial loss, knowing the company will make up the revenue in spades with future services. Knock $400 off the price of an iMac and you have a $300 media center. Suddenly, Apple's market share would skyrocket.
That, of course, would hurt Microsoft and put a big kink in the Windows dominance. And in case you haven't noticed, AOL hates Microsoft with the power of a thousand suns. Many AOL workers commonly refer to Microsoft as "The Evil Empire," and when he was first hired at the company a few years back, AOL vice chairman Ted Leonsis unveiled a 15-foot dinosaur that he said symbolized Microsoft--an old and dying giant.