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How Harry Potter Predicts Success For AOL

04 July, 2011

Evolution doesn’t happen like we think. It’s not slow and gradual (like line A, below). Things don’t go from one level of performance slowly to the next level in a nice, continuous way. Rather, evolutionary change happens brutally fast. Usually, the potential for change is building for a long time. But then, there is some event some environmental shift (visually depicted as B, below) and the old is made obsolete while the new grows aggressively. Economists call this ‘punctuated equilibrium.’ Everyone was on an old equilibrium; then they quickly shift to something new, establishing a new equilibrium.

Momentum has been building for change in the publishing space for several years. Books are heavy, a pain to carry and often a pain to buy. Now e-readers, Tablets and Web downloads have changed the environment. And in June this year, J.K. Rowling, author of those famous Harry Potter books, has opened her new website as the location to sell exclusively all the Harry Potter e-books (see TheWeek.com How Pottermore Will Revolutionize Publishing).

Rowling has realised that the market has shifted, the old equilibrium is gone and she can be part of the new one. She will let the dinosaurish publisher handle the physical books, especially since Amazon has already shown us that physical books have a smaller market than e-books. Going forward, she doesn’t need the publisher or the bookstore (not even Amazon) to capture the value of her series. She is jumping to the new equilibrium.

And that’s why I am encouraged about AOL these days. Since acquiring The Huffington Post, things are changing at AOL. According to Forbes writer Jeff Bercovici, in ‘AOL After the Honeymoon,’ AOL’s big slide down in users has begun to reverse direction. Many were surprised to learn, as the FinancialPost.com has recently headlined, that ‘Huffington Post Outstrips NYT Web Traffic in May.’

The old equilibrium in news publishing is obsolete. Those trying to maintain it keep failing, as recently headlined on PaidContent.org Citing Weak Economy, Gannett Turns to Job Cuts, Furloughs. Nobody should own a traditional publisher; that business is not viable.

But Forbes reports that Arianna Huffington has been given real White Space at AOL. She has permission to do what she needs to do to succeed, unbridled by previous AOL business practices. That has included hiring a stable of the best talents in editing, at high pay packages, during this time when everyone else is cutting jobs and pay for journalists. This sort of behaviour is anathema to the historically metric-driven ‘AOL Way,’ which was focused on industrial management. That sort of permission is rarely given to an acquisition, but it’s key to making it an engine for turnaround.

And HuffPo is being given the resources to implement a new model. While HuffPo had something like 70 journalists, AOL is now cranking out content from some 2,000 journalists and editors! And that’s more than The Washington Post or The Wall Street Journal. Arianna Huffington, as the new leader, is less about ‘managing for results,’ looking at history, and more about identifying market needs and then filling them. By giving people what they want, Huffington Post is accumulating readers thus leading to display ad revenues. Which, as my last blog stated, is the fastest growing area in online advertising.

Where the people are, you can find advertising. As people are shifting away from newspapers, towards the Web, advertising dollars are following. The Internet now trails only the television for ad dollars and is likely to be No. 1 soon.

So now we can see a route for AOL to succeed. As traditional AOL subscribers disappear which is likely to accelerate AOL is building an online publishing environment which can generate ad revenue. And that’s how AOL can survive the market shift. To use an old marketing term, AOL can ‘jump the curve’ from its declining business to a growing one.

This is, by no means, a given to succeed. AOL has to move very quickly to create the new revenues. Subscribers and traditional AOL ad revenues are falling precipitously.

But HuffPo is the engine that can take AOL from its dying business to a new one. Just like we want Harry Potter digitally, and are happy to obtain it directly from Rowling, we want information digitally and free and from someone who can get it to us. HuffPo is now winning the battle for online readers against the traditional media companies. And it is expanding, announced just this week on MediaPost.com ‘HuffPo Debuts in the UK.’ Just as the News Corp UK tabloid, News of the World, dies (The Guardian James Murdoch’s News of the World Closure is the Shrewdest of Surrenders).

News Corp. once had a shot at jumping the curve with its big investment in MySpace. But the leadership wouldn’t give MySpace the permission and the resources to do whatever it needed to do to grow. Instead, by applying ‘professional management,’ it limited the future of MySpace and allowed Facebook to end-run it. Too much energy was spent on maintaining old practices which led to disaster. And that’s the risk at AOL. Will it really keep giving HuffPo the permission to do what it needs to do and the resources to make it happen? Will it stick to letting Arianna Huffington build her empire, and focus on the product and its market fit, rather than short-term revenues? If so, this really can be a great story for investors.

So far, it’s looking very good indeed.


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How Harry Potter Predicts Success For AOL

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