Will the write-offs never end?

Citation

Curwen, P. (2002), "Will the write-offs never end?", info, Vol. 4 No. 3. https://doi.org/10.1108/info.2002.27204cab.003

Will the write-offs never end?

A regular column on the information industries

Will the write-offs never end?

Peter Curwen

The rationales underpinning the construction of vast conglomerates created during the late 1990s to bring together previously distinct segments of the communications industry are, in retrospect, looking increasingly divorced from reality. The consequent write-offs are rising by the day, although none may ever match that of AOL Time Warner. However, where broadband is concerned, it is not just the AOLTW model that has proved to be flawed.

The shooting stars of the telecommunications industry, such as AOL Time Warner (AOLTW), Deutsche Telekom and Vodafone, are falling to earth in increasing numbers; so-called empires, for example that of Kirch in Germany, are crumbling into dust; and a stream of companies such as NTL are resorting to Chapter 11 bankruptcy to be purged of their debts. The associated losses, write-offs and reductions in market capitalisation are truly staggering – it is difficult to take in that Vodafone has fallen in value by $200 billion. Clearly, the visionary models for the future development of the industry that so excited everyone from analysts to the general public a mere two years ago have failed to deliver. Among these models, the vision underpinning the takeover of Time Warner by AOL was arguably the most enticing, and hence its apparent failure is especially worthy of comment.

The creation of AOLTW was analysed in detail by this author in a previous edition of info (Curwen, 2000a). This was a marriage – never to be repeated on any comparable scale – of old economy with new economy assets and, crucially, it was the latter that acquired the former, thereby indicating only too clearly the expectations of industry participants at the time. However, when in April of this year AOLTW announced a first-quarter loss of $54.2 billion, after declaring the biggest write-off in corporate history, the respectable performance of Time Warner's traditional media businesses was overshadowed by the devastating effects on the AOL division of the collapse in its sources of income.

It may reasonably be argued that writing off the goodwill involved in takeovers has no direct impact on cash flow, and reflects the exuberance of the past rather than the realities of the future. But everyone agrees that the future lies with broadband, and in that respect AOLTW has so far been found wanting. In acquiring Time Warner, AOL was particularly interested in the former's cable network. Previously, as the originator and dominant force in dial-up access to the Internet, AOL could compete happily with other ISPs, even those owned by telcos. However, dial-up access is no longer a growth area in developed countries, and broadband access is for now largely confined to telcos controlling the local loop (using ADSL) and cable companies. Naturally, both provide their own Internet portals and both prefer to discourage competitors.

Controlling access to both content and network is not necessarily easy to achieve. In the UK, for example, BT has been forced to introduce a cut-price broadband service because the great majority of its customers are unwilling to pay for its own portal. It may be argued, however, that this is more a reflection of how customers view BT than of how they view own-brand portals, and for their part cable companies in the USA have so far been willing and able to resist the need to open up their networks to either AOL or Microsoft's MSN. Hence, although AOL was able to gain control of Time Warner's cable network covering roughly one-tenth of the US population, this could not remotely compensate for the effects of declining online advertising and e-commerce on its dial-up business. In effect, AOL has been reduced in the short term to acting as a marketing device for Time Warner's films, music and magazines, and AOLTW has admitted that most of the short-term benefit from the takeover has come from better co-operation between the former divisions of Time Warner – a case of the coach driving the horses.

It may reasonably be asked whether AOLTW's vision of the future is the only one to have revealed its flaws. In fact, its experience is by no means untypical, although the other visionaries have mostly approached the problem of combining network with content from the opposite end. Vizzavi is a good case in point. As noted elsewhere (Curwen, 2000b, 2002), Vodafone built up the world's largest mobile network but lacked content to sell to its customers. It accordingly set up a 50/50 joint venture with Vivendi Universal – which hoped to become the European-based rival to AOLTW and had acquired lots of content – named Vizzavi, with a view to creating a new portal providing e-mail, e-commerce and entertainment accessible via mobile phones, PDAs and computers. The share prices of both partners have recently been hammered for reasons only partly related to Vizzavi, but the fact remains that while the latter has over six million users it operates at a loss and does not expect to reach break-even for at least another year.

In essence, the underlying assumption that where new high-speed services are concerned it is enough to create supply and demand will automatically follow only appears to work if the customers are not expected to pay a great deal for what are widely regarded as non-essential services. It is illustrative that whereas GPRS-enabled handsets are selling well in the UK, few buyers use them to do anything that actually requires GPRS. In any event, even where customers are prepared to pay for broadband services, that does not appear to provide the opportunity for their suppliers to make a lot of money. By the time, for example, that an ISP has paid for access as well as marketing, billing, customer support and other expenses there is precious little, if anything, left over, at least for now. The solution for ISPs is for networks to cut access fees, but this solution does not go down too well with network operators.

AOL badly needs access to broadband networks other than those provided by Time Warner. Cox Communications, for one, is seemingly now prepared to provide it, but the two sides cannot agree on how to divide up any revenues and who is ultimately to be in control of the customer relationship. There is a clear mutual self-interest that may eventually produce a compromise, but at the end of the day a cable network already provides access to a home page in its monthly charges so customers may not be keen on an additional fee to cover access to AOL.

The fact that broadband access has been, and remains, very costly to provide has important implications for the future of the TMT sector. For example, the reluctance of Liberty Media to pay to upgrade the cable networks that Deutsche Telekom needs to sell in order to pay off some of its huge debts, combined with the refusal by the German cartel office to countenance Liberty's proposed delays, effectively prevented the deal from proceeding. Furthermore, if where broadband has been installed it continues to stack up losses at current rates, then there will need to be further write-offs and even the possibility of withdrawal of the service.

ReferencesCurwen, P. (2000a), "Hey presto!: how to turn Monopoly money into real money with a wave of the magic merger wand", info, Vol. 2 No. 4.Curwen, P. (2000b), "Mobility rules?: impacts of the Vodafone AirTouch-Mannesmann takeover", info, Vol. 2 No. 1.Curwen, P. (2002), The Future of Mobile Communications: Awaiting the Third Generation, Macmillan, (forthcoming) Chapter 6.