Thursday, March 13, 2003

Fairy Gold

Let's say you're sitting around one day, doing nothing in particular, and a leprechaun appears and gives you a pot of gold. Great! You're rich! Except that it isn't real gold, it's fairy gold. It will disappear at midnight.

What do you do? Well, the obvious answer is to trade your fairy gold (which looks exactly like real gold) for something that won't disappear at midnight. You can even tell people exactly what it is -- "This is fairy gold. At some point, it will disappear." It's a game of musical chairs -- everybody wins except the poor sucker who's holding it at midnight. Since you've told people this will happen, you can't really be blamed.

Virginia Postrel, in a piece called "Not Devious, Stupid", discusses the AOL/Time Warner merger, and points out that it doesn’t really make sense from a business standpoint. True. [Editorial comment -- duh!]

However, look at the "internet bubble". Everybody knew it couldn't last forever. Stock prices rose to levels that were, literally, insane. Many of the dotcoms had business plans that could never possibly make money. So here you are. You have a big block of wildly overvalued stock. You can't just sell it -- the SEC doesn't like it if the company dumps all of its stock. Anyway, selling it would, at best, depress the market and, at worst, break the magic spell. What do you do? Well, the obvious answer is to use it to buy "real" companies.

Time Warner was an obvious target for AOL. In particular, its entertainment division provided a "cash cow" that would be unaffected by any future Internet collapse. It was also considered to be undervalued. So AOL traded its "fairy gold" stock for Time Warner's "real" stock. Keep in mind that the "name of the game" in business isn't "profit". Any accountant can make any amount of "profit" appear and disappear almost at will. The thing that you really have to look at in a business is cash flow -- and Time Warner certainly has plenty of that.

The biggest problems with the AOL/Time Warner merger were size and corporate culture. Time Warner was a much older and more experienced company, as well as having many more employees than AOL. It was obvious that the "young guns" of AOL didn't stand a bureaucratic chance against the old hands at Time Warner. While AOL officially "owns" Time Warner, AOL/Time Warner is starting to look a whole bunch more like Time Warner than AOL.

I started working in this crazy field shortly before the first microprocessors came out. It's been a time of really exciting innovations. Through that entire time, the New Guys have been claiming that their new stuff made everything that came before totally obsolete. What they do, however, is simply demonstrate their ignorance. Our basic business models date from the Fourteenth Century, and they've gotten pretty sophisticated since then.

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