What Business Are You Really In? Martha Stewart vs. AOL

Viewpoint: June 1, 2002  

Like most things in life, the most difficult part of a blog is the beginning. Where to start? How about Martha Stewart and AOL Time Warner (AOL)? Why there? Well, they’re in the news right now (ever notice how media companies have become the favorite subject of other media companies?) and I know a little bit about both (just enough to be dangerous).

A long time ago, I used to work for one of the early parents of AOL – Warner Communications (back when they used to own the wild and crazy videogame pioneer, Atari). I don’t know Martha, but I have watched her from afar with growing admiration. The real reason to write about them is because they are both in the media business and yet they illustrate fundamentally different approaches. There may be some broader business lessons to learn.

Martha just had a book written about her (Martha, Inc.: The Incredible Story of Martha Stewart Living Omnimedia by Christopher Byron) – one that I expect she was not too happy to see published. The book acknowledges her business accomplishments, but focuses on her personal life. It does not paint a pretty picture. Whatever flaws she may have in her personal life, Martha Stewart represents a very different – and very promising – model for the media business of the future.

What are the elements?

– First, she has targeted a very clear audience – the homemaker seeking advice on how to make a better home.
– Second, she has taken a core set of content and systematically leveraged it across a broad range of media – books, magazines, television, and the Internet – to reach that audience. She has been very effective in expanding share of attention of the target audience.
– Third, she has smoothly expanded from content to merchandise and is steadily expanding her share of wallet of the target audience. Relying heavily on direct marketing catalogs and her web site, Martha has begun to develop detailed profiles of individual members of her audience and of their preferences and purchase histories.
– Fourth, she has used this clear audience focus and broad media and merchandise reach to develop a very strong brand. The brand is about the audience – Martha Stewart knows what you as homemakers (and, increasingly, you as individual homemakers) would find most useful and you can trust her to deliver the right mix of advice and products to make your efforts more successful.
Sounds a lot like what Disney did in its heyday before it lost its way. Even more than Disney, Martha Stewart Living Omnimedia, Inc. (MSO) has taken seriously the need to develop detailed profiles of individual audience members and to use that information to introduce audience members to helpful products and services.

Let’s look at AOL Time Warner in contrast. AOL represents a more conventional media model. Even Disney has fallen under its spell.

Size matters. Expand across as many media forms as possible, but don’t worry about maintaining audience focus – that just limits efforts to get bigger.
Content needs to own distribution channels and vice versa. This after all was the logic behind the original Time Inc. and Warner Communications merger. The same logic drove Time Warner into the arms of AOL.
– As the reach of the media company expands, focus on building the brands of individual media properties, rather than an overarching brand that will have a powerful hold on the audience.

Here’s the problem. AOL lacks a distinctive identity. It is spread too thin. It has more difficulty building upon the success of one media property. It wrestles with conflicts: should it try to make its distribution channels (e.g., cable systems and online AOL service) more distinctive by providing exclusive access to its content or should it try to broaden the reach of its content to other channels?

Both MSO and AOL have suffered in the recent stock market. But here are some differences:

– AOL is making massive write-offs leading to large losses, while MSO remains profitable, even in the midst of a severe advertising downturn
– Investors have more faith in MSO – it trades at a price/sales (ttm) ratio of 3.2, almost 50% better than AOL’s 2.2 price/sales ratio

The lesson: size matters, but focus matters even more. Here are some specific steps AOL might take to create more focus:

– Divest the distribution business and retain the content business.
– Create audience segment business units to address specific audiences that are economically attractive and fit with some of AOL’s existing properties – some natural examples: business executives, sports enthusiasts and teen-agers.
– Assign content businesses to report to specific audience segment business units (e.g., Sports Illustrated reporting the sports enthusiast business unit) or establish content businesses as shared services units (e.g., Warner Brothers movie studio) to support all the audience segments
– Build distinctive overarching audience brands aggressively
– Invest in businesses and skill sets to deepen database marketing capabilities
– Acquire businesses selectively to broaden share of attention and share of wallet within priority audience segments

MSO is doing well but it can build even further on its current foundation:

– Build secondary personalities and branded media properties to reduce the dependence on one person for the brand
– Add more value as a trusted advisor by helping to connect homemakers with an even broader range of products and services – even if they don’t carry the Martha Stewart brand (see Net Worth for more information on the “infomediary” concept)

The lesson for everyone: decide what business you really are in (hint: it is probably not obvious – see “Unbundling the Corporation”) and then design a growth strategy to reinforce, rather than dilute, that business focus.


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