Chapter and Lesson #10

Chapter 10 

 

“The four most dangerous words in investing are: ‘this time it’s different.’” 

 Sir John Templeton 

 

I landed a role in Microsoft’s buildup of a team that was going to go after the dial-up and internet king of the day – AOL or America Online , it was a new war for Microsoft, with many veterans of the browser wars taking on new leadership positions in the fight against the newly merged AOL Time Warner.

My first role was in PR, but this PR job would be very different than the role I had in Windows Marketing, and this would be where I received my first promotion to being a Group Product Manager, my first time managing other fulltime employees at Microsoft.   I honestly can’t remember if I was ready to manage people, and thankfully I only had a handful of employees at the time, with well-defined roles.

I am almost certain I was a terrible manager.  First-time managers usually are, and I see no reason why I would have been any better than average.  Most of the skills developed as an individual contributor don’t translate to being a good manager.   I had previously done most of the tasks that each of the people on the team had assigned to them, so I was comfortable enough taking on the role of managing these things.  The problem with first-time managers who previously did many of the jobs he or she is now managing is that they think they know how to do the job better than anyone else.   It takes time and a lot of experience to appreciate how to get things done through and with others.  That is a different book altogether, but a topic that tech companies need to figure out better and fully embrace.

My job was to orchestrate a narrative that Microsoft was serious about competing with AOL.  And, In fact, we were serious.   The company was spending literally BILLIONS of dollars, and taking huge losses that impacted Microsoft’s bottom line to try and slow down the AOL juggernaut. When the effort first began, nobody was really taking Microsoft’s competitive threat serious, so we set out to prove to the press and to Wall Street that we were indeed very serious, and we were going to spend like crazy to compete and catch up to AOL.   They had a big lead, and all the momentum in the marketplace, so proving our ambition was not going to be easy.

The spending to fight AOL was ferocious and the tactics involved in doing so were at times absurd.   I remember at one desperate point in the battle, we hatched a plan to give customers at “Radio Shack” $400.00 to spend immediately in store if a user would sign up for 2 years of MSN Internet access on the spot.   Just as soon as we implemented the plan there were reports of people coming into the retail stores multiple times under fake names, bogus credit cards who were walking out with brand new TV’s and DVD players from their 400 free dollars, courtesy of Microsoft’.  Radio Shack, of course, loved the deal as it drove a ton of traffic and purchases at the store, in hindsight, it was an idiotic and desperate move.   Making things even worse for Microsoft’s financials, we agreed to pay a bounty to RadioShack for every customer who signed up!  There were similar deals offered at Best Buy, Office Depot and other retailers.    It was was a crazy tactic with insane spending to try and steal share away from AOL.   

At the height of it all CNet had reported on a story that covering Microsoft’s earnings “Retailers relied heavily on $400 MSN rebates to sell PCs during the holidays. Customers agreeing to make a three-year MSN commitment with their PC purchase received an instant $400 rebate subsidized by Microsoft. 

But Microsoft also extended the rebate to other non-PC products. Retailing giant Best Buy, for example, sold 200,000 MSN subscriptions worth about $80 million in instant rebates on anything in the store. 

“Obviously stores used the rebates to drive sales across other categories,” said PC Data analyst Stephen Baker. “It means maybe people aren’t as tied to the Internet as a PC thing, so people used that $400 to get a big-screen TV.” 

It was crazy and some would say it was totally out of control spending, all to try and eliminate the fear, and kill off the AOL Time Warner monster.  

To give you an idea of how crazy and frankly unethical things had got inside of Microsoft at that time, they set up a top-secret competitive intelligence group to try and track every move of AOL.  Microsoft even hired private investigators who dug through AOL’s garbage.  At one point there was even an employee who started dating a girl from AOL just so he could collect intelligence.   The Microsoft employee had convinced her somehow give him access to a private internal phone conference call bridge number where the team would sit and listen to many of AOL’s internal conversations.    Later these employees would receive a slap on the wrist for going too far on gathering intelligence.  But it was widely known that this group was pushing the boundaries of corporate “intel” gathering, though most were rewarded and or later promoted for their efforts.   In a very strange twist of faith, one of the employees involved was later arrested for embezzling millions of dollars from Microsoft.     I guess you reap what you sow.

The name of the game was to take away the momentum from AOL, make them look vulnerable, show the marketplace that MSN had a serious competitive offering, and start to erode the finances of AOL to take the wind out of their sails – and their sales I guess too…    Indeed the narrative started to work.   Each Quarter both AOL and MSN would announce how many net new subscribers they had gained.   It had become a brutal game of churning and battling for customers.  The customer acquisition costs for both companies were going through the roof.  It was an arms race.  And MSN with a smaller base of customers, and ridiculous offers in the marketplace was able to show accelerating growth that was outpacing AOL’s customer numbers.   The market started to take the threat from Microsoft very seriously.    Momentum had shifted.    Microsoft had a competitive offering.  And at the same time, AOL was hitting the wall with 3 other nasty problems.    

1) The .com bubble was bursting – revenues from companies who were paying huge sums to advertise on AOL’s network were evaporating as fast as companies like pets.com were going bankrupt.  The outlandish advertising revenue projections AOL had made to justify their merger with Time Warner were looking obviously inflated.    

2) The merger of AOL and Time Warner was breaking down into a mess of two cultures who hated each other – it was a disaster.  Wall Street coined it the worst merger ever in history.  

3) Broadband was starting to take off and customers were ditching the slow dial-up access provided by AOL to move to the new fast and always on connections provided by their phone or cable companies.   AOL never “owned the pipe” or really any of the actual infrastructures that was carrying the bits and bytes through to the telephone modems to a consumers PC.   They were an easy way to get onto Narrow Band access, and the original “training wheels” for the Internet for the first time, but as people switched to faster DSL and Cable Internet access, they had little use for AOL’s proprietary network.

AOL had missed the strategic inflection point of Broadband mass adoption.  Broadband was always connected, versus AOL’s Narrow Band which used special software which connected the PC to a modem on an old fashioned phone land line.  This software called a “dial-up stack” was one of the differentiated things that AOL had made easy for customers, and it was their bread and butter product that was now no longer relevant.   AOL had thought that their content and services would be the differentiator, and they made a bet that combined with Time Warner they would be able to hold their lock on the consumer market by packaging all the content and services together, even if users did not need AOL as their everyday onramp to get online.    

Over time this proved to be a foolish bet, the World Wide Web, and democratization of inexpensive publishing onto the Internet was a much more powerful force than almost anybody had anticipated.    AOL Time Warner fell into a total meltdown.   It missed the next big thing that was coming, the idea that any individual could publish content for negligible cost.  Content was exploding all over the Internet in the form of blogs and new digital-only publications were more popular than the old analog content that Time Warner was slowly moving toward the digital age.  The great hope of combining Time Warner’s content with AOL’s technical know-how was now looking like a dubious value proposition.  Stockholders in this deal were about to lose their shirts. 

The value of the combined AOL Time Warner sank from $260 Billion to just $20 Billion in a few short years.  The company was forced to write down $99 Billion of “goodwill” assets less than 2 years after the acquisition was complete.

This story is really not all that unusual in the tech sector, but it does illustrate on grand terms why tech leaders are so paranoid, and how fast fortunes can change as technology platforms shift and consumer behavior changes.  The tech sector is littered with these irrational buildups, buyouts and mergers, there are many of them out there today that will end up the next great business flop.  Be careful not to indulge in the irrational valuation of these seemingly “brilliant” next big things.   It is a good way to lose a lot of money.

Learning Lesson #10- The Tech Industry is full of incredible hype and has a massive herd mentality, picking the Winners and Losers is EXTREMELY difficult and can be dangerous for investors.  If you are an investor or somebody who works in the Tech industry.  It is useful to look at the history of the wild swings and the herd mentality thinking that repeats itself again and again in the industry.  Tech is really a series of micro booms and busts of different micro cycles.   It is very difficult to predict both the timing and who will be the winners and losers of the next big wave in tech.   There have been lots of booms and busts in tech.  The .com boom and bust is probably most widely known and understood because of its incredible meltdown of the NASDAQ in 2000.  But there have been many other tech sector buildups and meltdowns.  3D Printing, PC OEMs, Console Gaming, Instant Messaging, Search, Mobile Phones, Social, and many other sub sectors of tech have seen huge crazy run-ups of investment followed by harsh periods of consolidation and price correction.   The same types of buildups will repeat with Wearables, Internet of Things, Electric and Self Driving Cars, Virtual Reality and more.   Globalization, Cloud Computing, and super-fast transcontinental fiber optic communications are hastening the pace of these buildups and meltdowns.  Wall Street is always trying to predict who and when the next big winner will be in one of these hyped-up areas.  Unfortunately, they are almost always wrong, and when they are right, they almost always way overvalue the opportunity to the point where when the damage comes, it cripples the company involved and the reckoning day is very painful for those who have to do deal with it.  If you are an investor, an employee or a partner company of a newly unloved sector or company it can be extremely painful.  But this is what tech is all about, and like it or not, much of the economy is now becoming part of this rapid boom-bust cycle of innovation.