If you follow tech business news, you probably noticed that AOL has been on a buying spree recently, snatching up huge sites like TechCrunch and The Huffington Post, in an effort to transform itself from an Internet service provider to a content hub. That raises two questions: Why is AOL changing its business strategy, and where the hell did they get all that money to make so many pricey acquisitions? As The New Yorker explains in a recent article (subs. req.):
[AOL] still gets eighty per cent of its profits from subscribers, many of whom are older people who have cable or DSL service but don't realize that they need not pay an additional twenty-five dollars a month to get online and check their e-mail. "The dirty little secret," a former AOL executive says, "is that seventy-five per cent of the people who subscribe to AOL's dial-up service don't need it."[emph. mine]
With that in mind, it's easy to see why AOL is spending lots of money to become a content portal: The profits the company is earning from subscriptions will not last, and cannot be replenished. There's no untapped market for ISP subscriptions, because in an era of wireless broadband, the value proposition of a dial-up service is entirely outdated. Instead, this revenue is destined to continue waning, as these existing subscribers realize they no longer need it, or in the next few years, quite literally begin passing away. And while the analogy is not exact, this is very much like the position Linden Lab finds itself now:
The vast majority of its profit comes from virtual land fees, but that market is not being replenished by new customers. In an era of declining server costs where most user-generated content platforms, virtual worlds, and chat networks are free or near-free, it is difficult for Linden Lab to find a new market of customers who are willing to pay hundreds of dollars a month on their main offering. And whereas AOL still has millions of subscribers, Linden has something like a hundred thousand landowners, a much more brittle revenue base, which makes the need for a dramatic strategic shift in search of new markets and revenue streams even more pressing. (Do you think I'm an advocate of Facebook integration merely because it's trendy?) But whatever moves Linden Lab decides to make, keep this underlying reality in mind -- as with AOL, time is running out to make Second Life sustainable into the next decade.
Image credit: newyorker.com.