Richard Parsons (businessman)

Transcription

- Ladies and gentlemen, welcome to the 2008 Portman Lecture in the Spirit of Entrepreneurship. My name is Andrew Samwick, and I am the director of the Nelson A. Rockefeller Center here at Dartmouth. This afternoon, in collaboration with the Tuck Center for Private Equity and Entrepreneurship, and the Dartmouth Entrepreneurial Network, we present Entrepreneurship in the Digital Age, by Richard Parsons, the current chairman and former CEO of Time Warner. Before introducing today's speaker, I'd like to take a moment to acknowledge the Portman family, whose generous gift makes it possible for us to host this lecture. The gift was made by Mr. William C. Portman, a member of both the Dartmouth class of 1945, and the Tuck School class of 1947, and his three children: Rob, Dartmouth class of 1978, William, Tuck School class of 1981, and their sister, Virginia Portman Amos. The Portman family's relationship with Dartmouth began over 90 years ago, when Arthur Portman, Bill's father, arrived in Hanover as part of the class of 1915 at the Amos Tuck School of Business. The purpose of the Portman fund is to foster an understanding and appreciation of small business development, entrepreneurial activity, and risk-taking, and the role that public policy takes in shaping its course. In addition to the Portman Lecture in the Spirit of Entrepreneurship that has become a mainstay of our spring programming, the Portman Fund helps to support a number of initiatives on campus over the whole year. Including the Founders Forum, Greener Ventures, and our Women in Business Program. The internet revolution that began in the mid-1990s ushered in a tumultuous period in national and global economic development. Tumultuous here does not necessarily mean bad. All technological advances, but particularly technology that goes directly to the ability to connect people together to exchange and improve ideas, serves to lower the barriers to entry in all sorts of activities. The value of existing physical, human, and organizational capital changes. Some capital is relegated to the old economy, some is extolled as being part of the new economy, and some is not easily classified as one or the other. New opportunities are created to produce the same goods and services more efficiently, or to produce entirely new products. Technological progress fosters all manner of opportunities for those who have access to it. But even low barriers to entry are still barriers for some. The advent of new technology also has the potential to radically widen the disparities in economic, social, and political outcomes, between those who have access to it, and those who do not. In the case of the internet and related technologies, this is the digital divide, and it is so wide today that it is causing us to reexamine our notions of what becomes a basic right of national or global citizenship. Against this backdrop of societal developments, we are very fortunate today, to be visited by Mr. Richard Parsons. From May 2002 to December 2007, Mr. Parsons served as Time Warner's Chief Executive Officer. He became Chairman of the Board in May 2003, and retains that position currently. Time Warner has been an industry leader in the fields of filmed entertainment, interactive services, television networks, cable systems, and publishing. In its January 2005 report, on America's best CEOs, Institutional Investor Magazine named Mr. Parsons the top CEO in the entertainment industry. As CEO, Mr. Parsons put in place the industry's most experienced and successful management team, strengthened the company's balance sheet, and simplified its corporate structure, and carried out a disciplined approach to realigning the company's portfolio of assets to improve returns. Mr. Parsons' tenure with Time Warner extends back to 1991, when he joined the company's Board of Directors, and 1995, when he became the company's president. His responsibilities included all corporate staff functions, whether in finance, legal affairs, or public affairs and administration. There is literally no one who has seen and experienced the wonder and challenges of the internet revolution and the digital age from a better vantage point than Mr. Parsons. He has been at the interface of the old and new economy for over 15 years, and we are delighted that he brings the experiences and insights that he has gained to campus today. We are particularly excited to welcome him to the Rockefeller Center in 2008, as we celebrate the 25th anniversary of the center, and the centennial of Nelson Rockefeller's birth. After completing his undergraduate education at the University of Hawaii, and earning his law degree from the Albany Law School, Mr. Parsons held various positions in state and federal government, including as counsel for Governor Rockefeller, and as a senior White House aide, under President Gerald Ford. Nelson Rockefeller had a reputation for hiring and mentoring the brightest young people he could find. I think Governor Rockefeller would be proud of his protege, not just for his success in the boardroom, buf for his civic engagement. Mr. Parsons has served as co-chairman of the Mayor's Commission on Economic Opportunity in New York, Chairman Emeritus of the Partnership for New York City, and Chairman of the Apollo Theater Foundation. He has served on the boards of Howard University, the Museum of Modern Art, and the American Museum of Natural History. It is a great honor for us to have Mr. Parsons with us today, his presentation will be followed by a brief period for questions and answers. During the Q&A we will have helpers in the audience who have microphones, please wait for one of them to arrive with a microphone before asking your question. Please also take this opportunity to turn off your cell phones. Without further delay, please join me in welcoming the 2008 Portman Lecture in the Spirit of Entrepreneurship, Mr. Richard Parsons. (applause) - Thank you Andrew, appreciate that over-generous introduction, and good afternoon. Ladies and gentlemen, when I was asked to do this, I was told that it was gonna be, not so much a speech, but an informal discussion with a group of interested students. So what I've done is I've made some notes, and I will share some reflections with you on the subject of entrepreneurship in the digital age. And then as you just heard, we'll move to Q&A, which I'll try and get to as quickly as I can, because my limited experience in these matters, is that people are always more interested in what's on their mind than in what's on my mind. So, I think I can get through this in about 20 minutes, 25 minutes, but I guess the place to start, as you just heard from Andrew that I worked for Nelson Rockefeller, basically for the decade of the 70s. I worked for him when he was Governor of the State of New York, and when he was Vice President, and then in his years prior to his death when he was back as a private citizen and it's always an honor and a privilege for me to be able to do anything that helps perpetuate the legacy and memory of a man who I thought was a giant in American politics and American life. And who was an example of what a public servant should be. Because he was all of that. Now I'll take you back to, in starting this discussion about entrepreneurship in the digital age, to 1970, because everything, in order to understand anything, everything has a context, right? Including that broad subject matter, what does entrepreneurship look like in this digital age? And as a point of reference for the context, I will tell you about a speech. Well, not a speech, many speeches, that Nelson used to give back when he was Governor of New York. He would start almost every speech by saying, or reciting the fact that we live in a world of fantastic and accelerating change. So much, he would repeat that so often, we'd call that a WOFAC. You know, BOMFOG is actually a term that you hear nowadays, nobody knows its origin, it was from speeches I think Hoover gave or something, brotherhood of man, fatherhood of God. But we called Nelson's a WOFAC, because he would start every speech by saying, "We live in a world "of fantastic and accelerating change". The fact of the matter is, he was right. But if he were around today, he'd be more right today. The pace of change in the world accelerates over time. So that, you know, for my grandmother, right, to live in a time where they invented airplanes, for goodness sake, and telephones, was remarkable. Well, you know, we'll have four equivalents, four generational equivalents of those in our lifetime, because the pace of change just accelerates over time. And one of the things that has been driving that acceleration in the last 20 years, has been this so-called digital technology. And to give you some sense of how dramatic and rapid change is today, and it's only gonna get faster. I will recite my own history with sort of digital technologies and companies built on digital technologies. If I were to ask you, what company, what American company had the greatest return to shareholders in the decade of the 90s, that is to say, the highest stock price appreciation over the course of the decade, anybody know? It was AOL. AOL's stock price grew more, and more rapidly, than any other company, 14,000 public companies, or any other company, during the decade of the 90s. Here we are eight years later, AOL is just a footnote whenever you read articles about internet companies today. And who replaced AOL as the hot shooter? By the way, when we did, as Time Warner, when we did the merger with AOL, Time Warner, a company that had been around for 75-80 years, which had household name brands, I mean gold standard brands, in their magazine group, Time Magazine, Fortune, People, Sports Illustrated. And their cinema group, Warner Brothers. And the cable business and the music business we had, you know, Warner Music Group, which was the number one record label in the country back in the 70s, and we had just company after company after company that were just household names, in terms of who we represented and who we were. Time Warner had a market cap of about $100 billion back in the turn of the century, back in 2000. AOL had a market cap, which AOL the company is around less than 15 years, and had hit its growth stride less than 10 years ago, had a market cap of $200 billion at that time. Today you almost couldn't give AOL away. They were replaced by Yahoo, Yahoo was going to be the next company that was going to sort of take over the world but on the back of this digital technology, and that lasted for just about a couple of years. Yahoo pioneered in the you know, free-to-web portal. And then somebody came along and obsoleted them, they were called Google, and Google, you know if you read the papers today, or certainly if you read the papers six to eight months ago, you would think that Google was about to take over the world and then along come these things called social networks. Myspace, you know, Facebook, which just had a valuation of $15 billion put out by Microsoft. Every sort of fourth year there's some new company that comes along and seems to shoot to the moon, and it's going to represent the future. Things are changing so rapidly in this space, that it's hard to keep up, and the scary part is it's only gonna accelerate, because we do live in a world of fantastic and accelerating change. So what does all that, that's the context for the discussion of what does entrepreneurship look like in the digital age? And of course, digital technology is changing the way we live, to some extent, and the way we conduct business, but it's not changing everything. For example, it's not changing the nature of the beast, people are still people, so a lot about entrepreneurship in the digital age is the same as prior to the digital age in the pre-digital age. And those are aspects of character. So let's talk first about what's not changed, or what's not different, and then we'll get to what's different. What's not different is that, A, all of us are not entrepreneurs. Entrepreneurs are a, if not special, I would resist that characterization, but, a unique brand of person. Since I always like to argue by analogy, think about the difference between explorers and settlers, you know, in the old days. Explorers were the ones who went out into the wilderness, and to see what was there, and to find new things, and try new ways of life. And then once they went out and kind of established a beach head, then the settlers followed, then the lawyers and the doctors, and the accountants and the dentists, and the schoolteachers, and the moms and the pops all followed them to sort of form settlements. But the explorers were the risk-takers. And that's the way I think about entrepreneurs. Entrepreneurs first and foremost, they're risk-takers. They're people who are comfortable taking risk. But risk in a business sense. Well, what else distinguishes an entrepreneur from the rest of us? I will give it to you from the perspective of an investor, what to investors look for when they see someone who purports to be entrepreneurial? Other than someone who's prepared to take risk? Well they look for the normal things that we look for in any kind of human interaction, you know, intelligence and integrity, but they look beyond that. I'd say first and foremost they look for passion. Most entrepreneurs are true believers, they believe passionately in whatever it is that they're about to undertake. And that's why they're prepared to take the risk, by the way, because their belief is so strong, they sort of look past the risk. And they sort of have such fervent belief in what they're trying to do, that that drives them to sort of disregard the risk and go out into the wilderness anyway. Secondly, and this is the part that, particularly for those of you who are on the younger end of the age curve and think that you may wanna be an entrepreneur one day, investors look for a balance between idealism on the one part, but pragmatism on the other. Most entrepreneurs really do believe, almost in an idealistic sense that you know, they're going to change the world. I'm going to do something that's going to change the world, that's going to make the world a different and better place. But that idealism has to be tempered, for a successful entrepreneur, with pragmatism. I was talking to some students earlier today, and one of 'em asked me, "Well I got this great idea. "And can I bring it to funders and investors "to fund, you know, to build out on my idea?" You can't do that in today's world, you have to show investors that you've taken a concept, about which you believe passionately, and which you think has an ideal driving it, but you've surrounded it with business discipline, that you have developed more than an idea, you've developed a product, maybe. That you've developed a business plan that shows how this idea is going to be productive of revenue, and ultimately productive of profit. That there's enough, that you have enough of a, at least one foot on the ground, that you're just not another idealist who is you know, sort of dreaming great dreams, but who has the practicality to make those dreams come true. Third thing investors look for is, I'll put it this way you know, somebody once told me that the beginning of wisdom is knowing what you don't know. All of us don't know something, most of us don't know a lot. The wise ones among us have a sense of what we don't know, and therefore, have a sense of who we need to bring along on a journey with us, who fills in our flat spots. Who has knowledge, expertise, skills, that we're going to need to become successful, because in a complicated world, almost nobody has the whole package. So when we look at, and we do a fair amount of investing in entrepreneurs in this digital age, when we look at someone who's coming to us with an investment proposition we not only sort of evaluate the qualities of the individual in terms of their character, their idealism, their pragmatism, but do they have people in their professional world who can help them navigate all of the various roads they're gonna have to navigate? Now that sometimes shows up in the team they put together, sometimes is shows up in advisory boards that they put around them, or full boards that they put around them. But is this a person who knows that he or she is not the whole show? That he or she is going to need other talented people who have other skill sets and other knowledge to help them launch and implement a business? That's the key thing that investors look at. And then the last thing I would say in terms of the human qualities, and this is almost more important from the point of view of the entrepreneur himself or herself, than even an investor. You know, are you, each of you who thinks, "Maybe one day I'll be an entrepreneur", are you a half-full or half-empty person? You know, the glass is half-full or the glass is half-empty. Because the one thing that's certain, for everyone who sort of starts down the road towards launching a new business or a new enterprise, is they're going to encounter some fair modicum of failure. Things never work out the way you drafted it up in your initial business plan or the way you've thought it up in your initial thinking about business. And if you're not a person who has resilience and optimism, and who can see the glass as half-full all the time, you shouldn't start down that road because at some point in time, the disappointments and the failure will just become overwhelming. But for those who have optimism and ebullience, and who basically look at life like, you know it didn't happen this time, but I'm gonna get it the next time, and I'm gonna keep putting one foot in front of the other, and persist, that's an important quality for most successful entrepreneurs, and I'll come back to that in a minute when I talk about a specific example, because that always helps illustrate things. So those things, whether you were an entrepreneur 50 years ago, today, or 50 years from now, I think those human characteristics and qualities are gonna remain a constant. That said, the landscape is still much-changed for entrepreneurship in this digital age. And so now I'm going to talk a little bit about in what ways has it shifted? Let me start with an old business axiom. Which is that you need two things to launch and sustain a successful business. You need management, and you need capital. Management's all the stuff we were just talking about, you know, the ability to conceive of a vision, to be practical about how you approach that vision, to put people around you who can help you manage your way through to the vision, to have that persistence and perseverance to stay on track. That's all in the realm of management. Capital on the other hand, is the money, the resources you need, to launch and sustain a business. It costs money to start almost anything, and particularly to start a new business. The difference between the digital age, however, and the pre-digital age, let's call it post-industrial but pre-digital age, is that in the pre-digital age, it costs a heck of a lot of money. Capital was usually the principal barrier to entry for people who had great ideas. I have a great idea, you know, I think I've figured out a better way to build a mousetrap, or a better way, you know, to have an internal combustion engine, or whatever it is I've figured out. But now I need the resources to put my ideas to the test. And you know, finding those resources and finding someone who would back you, was a much much more formidable process in the pre-digital age than it is today. And there are a couple of reasons for that. The first is, and both of them relate to the onset of so-called digital technology, which, I probably should have started here, you know, what's different about digital technology than previous technologies? It's really the ability to reduce anything that can be carried by voice, by video, or any form of data, to sort of electronic impulses that can be sent and then reassembled at the speed of light, anywhere in the world, instantaneously, right? So that you know, in the old days where... You, as you heard, I went to undergraduate school in Hawaii. And I remember distinctly, back in the days, this was in the 60s, they had tape delay for the football games and big, you know, the race that was just run on Saturday, the Kentucky Derby, so you would have to lock yourself in your dorm room, and have no contact with any living person for 24 hours, if you wanted to sort of see an event that was broadcast live here in the United States, in real time in Hawaii, because otherwise somebody would tell you who won the Derby or something like that, then it would all be ruined. And that was because we didn't have the technology that could move video around the world, it went by antennas, right? And the same was true for voice, and the same was true for data and so we've had years and years of putting in very expensive infrastructure to move these things around, and then along comes digital technology where images, where voices, where sounds, where text, can all be reduced to electronic impulses, packaged, and sent anywhere in the world like that. So that technology has had two profound effects on the availability of capital to entrepreneurs. The first is it gave rise to what I'll call the venture capital industry. As people began to understand that there was a whole new wave of technology coming along that that would enable clever entrepreneurs to create new business forms or new business models, from scratch, a group of investors said, "You know what we need to do? "We have to start making capital more available "at the very early end of these business enterprises "creating these business enterprises "so that we can nurture them and grow them "into full-fledged businesses." So you don't have to deal with the bank anymore, or classic traditional source of capital, you had a whole new group of people, one of whom was Laurance Rockefeller. Nelson Rockefeller's brother, who founded something called Venrock, which was one of the first venture capital firms focused on nascent businesses built around, building around new technology. And so that was the source of funding for companies that are household names today. Intel, which was one. Apple was one of their early investments. So that industry, which got its start in the 70s, is now in full flight. It's a mature industry, there is, you know there are established venture firms around, that look to put capital in ideas at early stages. Whereas there was not the case prior to to these venture capitalists coming along. But the second phenomenon, and one that is, I think even more powerful, is that the technology itself has obviated the need for a lot of capital. And by that I mean, I'll give you some historic examples, then I'll give you one that's very current, and that really makes the point. For a good while after our merger with AOL, Steve Case and I would sort of, you know, we were partners, he was the Chairman, I was CEO. And he would talk about the difference between how he built AOL, and how Time Warner built all of its other, I'll call them analogue businesses. You know, the rule for example in the magazine business has always been it takes the magazine about five years to get to profitability. Because you have a lot of up-front expense, you have to have writers, the printing and manufacturing process for the magazines themselves is expensive, you have to get distribution in, you have to build a subscribership over time and get some advertisers. And if you're breaking even, or turning into the black after five years, you're about on the industry average for a successful magazine. Because it costs so much to get started. Well, the way AOL got started was they rode over the existing telephone lines, right? They didn't have to spend a penny to put in the infrastructure that they needed to build their business. Now, they did have to buy servers, and routers and things like that, so there was some capital involved, but the big money, the big money had already been spent over the last 70-80 years by the phone companies. Who spent billions of dollars putting in a network of wires and fiber optics throughout the United States, on which this new, digitally-augmented business could ride. So that it didn't cost Steve billions of dollars to get into business with AOL, in fact, it cost him tens of millions, but that's a way big difference from billions. And nowadays it's even simpler because nowadays, that the internet has really sort of grown out and is robust and has what they call open-source infrastructure, I won't, software, I won't get into too much detail. But basically, you don't have to even have servers and routers and other forms of infrastructure, you can sit at your computer, and if you have software development skills, you can essentially, use someone else's infrastructure to create a business. So to put that in context. To give you a real-world example. And it's the example it's called Bebo. I talked about it to a group of students earlier today. Bebo is a social networking site. It's a place you can go on the internet where you can engage with other people, you can share information, you can share music and photographs, and something about your life, and just network in a social way. It was created by a guy who was a 1991 graduate of something called Imperial College in London. He was a physicist, but just undergraduate level. Got out of school in '91, his name's Michael Birch. And went to work for an insurance company. Worked for an insurance company for about seven or eight years in their IT department. And decided that he not only liked working with computers, but that he was good at it, and that he wanted to be his own boss, so he quit. And in the classic fashion, as I was suggesting before, he launched a couple of businesses out of his kitchen, which failed. So from 1999 when he started on his own, to about 2001, he launched a couple of businesses, they went nowhere, failed. He actually ended up moving in with his in-laws. In 2001 he launched another business, which was one of these sort of e-card businesses, which actually succeeded, that was his first success. Which he sold, for a small amount of money, so that he could move out from under his in-laws, and then in '03, he had his first sort of real big success, he launched something called ringo.com, which was a music site. Which he ended up selling to somebody for like a million and a half bucks. So now he was on his way. in 2005 okay, three years ago, he launched this Bebo, this social networking site, by essentially, he was the only programmer. His wife was the rest of his staff, his wife did everything else. He programmed it, she managed you know, the revenue part of it, trying to sell ads, trying to get content for it. And he didn't have to put up any real money, because he was able to ride his service, his programming, on the existing infrastructure of the internet. So it was just a question of, you know, did people like the site? Would people come to the site? Could he build an audience? He listened to his, you know, he had a group of friends who started using it, listened, made modifications, improved the site, got more content, got more people to come and bring their content to the site, this is starting in 2005. In March of this year, less than three years after he launched Bebo, he sold it to us for $850 million. We're about to, we'll close that deal in about a week. And he'll get $850 million, and we'll get this Bebo site that this guy created out of his head, using the advice and expertise and talent of a lot of his friends. And he's got, he did his first capital-raising. He raised his first capital for the business in 2006, a year after he launched it 'cause he know he had something going, he had to hire some people, so he raised $15 million from a venture capital fund, he's got about 100 employees, and he just sold, he just did a deal at $850 million. That's $8.5 million per employee. It's ridiculous, I mean, you would never have heard of something like that 15 or even 10 years ago. But today, you know, this Mark Zuckerberg, who has Facebook, created it as a network for college kids to stay in touch with their college peers. I'm sure most of you here have Facebook pages and whatnot. He just got a valuation on his company, by Microsoft, they didn't buy it but they bought a small piece of it, that values the company at $15 billion, the guy's 23 years old. And he put what he could come up with, and what his father would lend him, into the business. I mean there was no real capital required to get into that business. And that's going to be more the model in the digital age, because what digital technology enables you to do is to create these applications that ride on pre-existing infrastructure, infrastructure that somebody else has paid for, and is now open to you. And so it really is going to be an age of remarkable opportunities for men and women, I won't say young men and women because I know you know we've got a friend of mine who was a housewife who uh... Created a site for mothers, because she hadn't been able to find information that she needed that, a friend of mine just bought for $25 million. People who have fluency in this technology, excuse me, I'm recovering from what Andrew told me was a "sissy virus" that we get down in New York, because you get robust viruses up here. (audience laughs) But sissy or not, you know, it's taken me a while to get over this thing. People who have vision and sort of a concept and who are prepared to take a risk, and who are prepared to, and mostly now it's the risk of your own time and talent and treasure. But the doors are wide open for entrepreneurs, and the barriers to becoming one, the requirements that used to apply, and that still do apply in the non-digital world of having the capital to fund your business enterprise, are being alleviated at an incredible rate, so, I think it's a very exciting time for people who have the entrepreneurial instinct, and who have skills in this digital arena. And uh... With that I think I'll stop and take questions. Yes sir? - [Voiceover] Life cycle for products and businesses, are becoming shorter and shorter (background noise) varies tremendously-- - [Richard] Wait a minute. You have to, you have to-- - [Voiceover] I'm sorry. The life cycle of products, the life cycle of businesses becoming shorter and shorter, easier to get in, now you bought Bebo, but, isn't it true that somebody could come down the road next week and that's something (mumbling) make Bebo outdated and your company's invested a fortune in it, and suddenly it's redundant? Or out of date? For those of you making purchases (mumbling). - The lifecycle of businesses in this age, just like you can get 'em up like that, they can also be obsoleted like that. That's a fair observation, and we've actually been to that movie, we were in that movie. When AOL was created, it was created on the back of making emailing accessible to everybody, right? It was no longer just a tool for professors or for the Defense Department guys. Anybody, your grandmother could email you know her grandkids at school and send. And AOL made it easy and fun. And so their business model was to charge for that. What happened to AOL was, it became so simple to manage that, along came the Yahoos of the world and said, "Well give it to you for free". And so AOL's entire business model, and that's why AOL has now been reduced to being just a footnote in the stories, is because they've been obsoleted. By the next generation, by internet 2.0. And... The reality about these social networks, we, you know we looked at Myspace. Which Rupert Murdoch bought for $560 million I think, a couple three years ago. And we concluded not to play because, you know, who's to say you know, there was something called Friendster before Myspace, Myspace came along and knocked them out of the box. Who knows when the next one is gonna come along? But Murdoch bought it, took the gamble, and is gonna make a fortune with it, I mean he's been trying to sell it for $10 billion, having spent $560 million, you know about a half a million dollars two and a half years ago. Nobody's gonna give him that, but somebody will give him $4-5 billion for it today. And the issue for companies like ours, is that if you're gonna be in this space, you gotta play. You can't value companies by traditional means anymore. And you have to take the chance that you, if you have a first mover advantage, that you can hold it. But you take the risk. That something comes along, like Yahoo and the free portals came along and they obsolete your whole business. So it's a different business dynamic now, a different set of risks. Buf if you're going to be in the game of media and communications you gotta play. - [Voiceover] I'm wondering if you could just comment one of the things that happens that you see now is that young people in this digital age are increasingly interested in pursuing careers in that space as you suggested, Mark Zuckerberg and others. And just compare that with your own career, going really in public service initially, and then getting involved in business and (mumbles). What did you learn that you might not learn if you jump into technology at an early age, about things that (mumbles) technology, (mumbles) managing in business. - It's actually a very perceptive and good question. First to the premise of it, which is that lots of young people wanna go into these new digital enterprises, and it's because you know... You know, who among the young nowadays, and particularly the young and the privileged going to top-flight colleges, and with the best educations, doesn't fundamentally wanna work for themselves, right? They don't wanna work for anybody else because they don't wanna be shackled by some chucklehead, like me, when they know everything. And it's just a matter of them having an opportunity to sort of show the world they know everything. So they wanna go into a place of employment where they are as free as they can be to sort of bring whatever level of talent they have, and enthusiasm and idealism, and then get rewarded for it also on the other end. So yeah we're seeing a lot of that. And you know, it's good, but it has its limitations. One of the things that we saw, for example, when we tried to merge AOL, this is going back to 2000-2001, with the old Time Warner culture is, they were riding a hot hand, and they were full of themselves. They had a lot of success, as I said, it was the fastest-growing stock in the 90s. A lot of wealth, and a lot of, of enthusiasm about changing the world. But they really weren't business people. They really weren't business people. And you see that a lot in a lot of the new technology startups. Their orientation is to, "Let's build something that's cool. "Let's build something that is fun. "Let's build something that's going to change the world." But not necessarily, "Let's build something that will generate a level of revenues "that will offset the expense "that we have incurred to build it, "and that will give us a bottom line." And so a lot of these companies I just mentioned, you know, the Myspaces, even the Bebos, they have no revenue model. They've built something that is cool, and that people use, but that people don't pay 'em for. And therefore, you know, you can have, as Bebo does, 80 million unique visitors, something like that, and generate no revenue, and therefore no income, because they haven't figured out that part of the equation yet. And so the challenge that the overall business environment is going to have over the next, let's call it half a dozen years, is taking the, "Let's build something that's cool "and has the potential to change "the way people live their lives", cohort, and blending them with the old cohort that says, "Okay, let's figure out how to make money", I don't wanna sound too crass with this, but at the end of the day, you can't sustain the former model. At the end of the day, you can't sustain a model that is a free model, because people will sort of say, "Well it was cool, but now I gotta go feed my family." And the people over here who were in the sort of old-media world, have the business acumen, and understanding of how you build and and create a sustainable business, but not the knowledge, and the sort of almost organic understanding of the new technologies to do this piece so blending those two cultures so that you have cool, useful stuff that changes the world for the better, in a sustainable business model, is the challenge going forward. And while it sounds, it's easy to say, that's not so easy to do because they're very different types of folk, very different. Right back there. - [Voiceover] Hi, my question I guess has to do with sort of revenue models and (mumbles) new digital companies. I think it's interesting that AOL, which was once on the subscription model, is now essentially an internet potentializing firm that (mumbles). The revenue model for these digital companies, do think there's a revenue model that's not all about advertising, online advertising? - The answer, well I think everybody heard the question, the answer is, probably. And I think it's probably going to end up being some mixture of the two that this new technology enables. Just to give context to the question, when AOL was launched, as I said, in order to get access to it, and to have access to this sort of spiffy new communication device called the internet, and all these chat rooms and whatnot, you had to pay a subscription fee. And so their revenue model was a subscription-based one. We put all this up, we create this world for you to come and live in and communicate in, and you pay us a monthly fee to do it. What happened to AOL was, within 10 years, virtually everything that you could do inside the AOL cloud, was replicated outside the AOL cloud for free. So that undercuts the subscription model. So what's replaced it is the advertising model. Like think broadcast television. You know you just, you buy a TV set, you hook up your antenna, you turn it on, you get ABC, CBS, NBC, Fox, for free! How do they pay for that? They pay for that by having advertising ride along with what you see on the television, and the advertisers essentially pay the load. So that's the model that Google has, and that's the model that is now the kind of... Model of the day if you will, or answer of the day on the internet. And the question is, is there gonna be yet another revenue-generating model that takes its place? I think it's gonna end up being a blend of a little bit of subscription at a much lower place, you know, AOL got to $25-26 a month, but you can get the music services and other things that are unbundled, for $2.95, right, or $3.00. There's gonna be some of that, it's gonna be some advertising, and then it's gonna be some pay-per download, pay-per service, whether it's a pay-per-view, pay-per-listen, pay-per-opportunity to hear, it'll be a combination of discreet pay-per-episode, subscription, and advertising. My guess is that eventually, it's over the next half a dozen years. We have, oh, excuse me. - [Voiceover] Sorry. - [Richard] There you are. - [Voiceover] In the back. I was just wondering, you touched on the magazine business a little bit, and I was wondering how, (mumbles) the time in business, how are they leveraging (mumbles) technologies now going forward (mumbles)? - Magazine business. Yeah, well, the challenge for us with Time Inc., was to convince them that they're no longer in the magazine business. Magazine business by the way, it's, it's a great business. It's... Stable, it's productive of a high degree of cash flow, because the brands are, you don't have to keep marketing behind them. But its growth has been stunted, sorta like newspapers only not as bad. A big part of the revenue stream for magazines, that's a two-revenue-stream business. You get revenues from subscriptions. And you get revenues from advertising. And a big part of the advertising base of magazines is being siphoned away by the internet. And some small part of the subscription base, though not much. Because as one of my colleagues, who once called the internet a black hole, used to, liked to say, said, you know, "You have the three Bs "that protect the magazine business. "The bedroom, the bathroom, and the beach." You know people, people don't take their computers to those three locations, although today they do. But what we've said to our magazine colleagues is look, stop thinking that you're in the ink-on-paper business. You are in the content-creation and editorial business. You go, you have reporters and writers who go and investigate things, and report on them, and give a slant on them, and have insights into them, whether it's sports, news, entertainment, lifestyle, information, and that can live in a magazine, in ink on paper, but it can also live on the internet, in a different form of distribution. And so we've been, we're now thinking of ourselves as in the publishing business, and we publish information in ink-on-paper form, into magazines, and on the web. So if you were to ask me, "What's the biggest celebrity site", these are called verticles, "on the web right now?" It's people.com, because we took the People brand, which is, People Magazine, by the way, is the most profitable magazine in the world, by orders of magnitude, it's just unbelievable how profitable that magazine is. And it's because the content is, you don't, like for Time Magazine I have to have news bureaus all over the world and serious reporters and stuff like that. For People, you just snap a bunch of pictures of a bunch of Hollywood people running around doing silly things and, boom, you have a magazine! That makes a lot of money, and so now we've taken that same content, and we've put it on the web. And it draws, and it's free on the web, it draws, you know, millions of viewers, and then you sell advertising against that. Now the difference between the print version and the web version is... Advertising is far more lucrative in the magazine space right now, than impressions on the web. People just don't, they still don't know how to value that and how to pay for it. So an ad that runs in my magazine that may generate a dollar in revenue, that same ad on the web may generate five cents in revenue, so you have to get, you have to get that much more reach, to have it be a one-for-one tradeoff. But you know, like everything else, it's evolving, and I think our magazine, our former magazine company is going to be fine, so long as they can make the transition to a digital world, and not just have the printed version, but the online version that's formatted and presented in a way that people who access information online, want it. You know, nobody wants to go online to read a magazine like you would read a magazine in the bathroom. They wanna use it differently, they wanna interact with it, they wanna have feedback with it, they wanna be able to take pieces and send them to their friends. So it has to have all of that, those bells and whistles, but so far so good. I'm encouraged that our publishing business is going to be a survivor in the digital age. Whereas I think, like the newspaper's gonna have a tougher go. - [Voiceover] Um, this question pertains to the original thoughts (mumbles). Not that it's not, assume that undermining the content businesses like Time Warner and (mumbles) with all these new properties with the distribution businesses will get along and would be very profitable, and (mumbles) And now that the business community rewards (mumbles) Time Warner's (mumbles) sellings (capable) But people (mumbles). Where do you think the road (mumbles) with content business? And how do you separate these two, and when do you know to combine content distribution like Google is trying to do? And when do you know like that, one has no bearing upon the other? How do you make that decision? (microphone muted) - Are a lot of questions, in that one question, so. (audience laughs) So I'll try and unpack them. The first question was, the original concept with AOL was you're going to have essentially Time Warner content, flowing through the AOL distribution system, and that was gonna sort of add value. And it didn't work. It didn't work for a number of reasons. Number one, it turns out that, particularly back then, and it seems like something that happened, this is 2008, something that happened seven years ago, right, 2001, wouldn't be back then, but to me it's like ancient history, I mean, we've gone through several generational turns. People didn't go on AOL, and in those days, they didn't go on the web, to get content. They still watched TV, they still went to the movies, they still bought magazines. They went on the web and they used AOL for communication purposes. To email, to chat, to instant message. Not to read People Magazine. And so trying to feed them a steady diet of content on the web, we weren't getting any bang for the buck. And so, and even now, people still, you know, young people tend to go more to the web 'cause we now have YouTube and you can have, you have multimedia presentations on the web, which you didn't even seven years ago. So you can see full-motion video, and you can watch a movie and stuff like that. But even still, it's pretty sub-optimal. It's not the best way to watch a movie, it's not the best way to listen to music. You know, if you can download it that's one thing, but streaming music is not the best way to listen, it's not the best way to access content. It's still primarily a communications medium. So the premise, to the extent that that was one of the premises that supported the merger, the premise was premature, is the way I'd put it. I mean, the, this gentleman asked me before about what did we, what was the difference between the cultures and what did the old guys know that the new guys didn't, and vice versa. All of my AOL colleagues believed, they were true believers, remember I mentioned that before. They honestly, truly believed, that this technology was going to change the world in a couple of years. I remember the Chief Technology Officer at AOL stood up at our first joint board meeting when we put the companies together, and he held up a CD in one hand and a DVD in another and he said to the board he said, "In two years, "18 months, two years max, these are gonna be obsolete". And he sorta threw them over his shoulder and said, "Everything is gonna come into your house via the web" and streaming and so on and so forth. Eventually he's gonna be right. He just wasn't right in 2001. And so they thought that there was gonna be a lot more bang for the buck, in terms of putting content on. And that's not why people were using that medium. Now, when do you know that it's time to decouple content from distribution? In our case, we're not gonna sell the cable companies, we're just gonna spin it off. We're gonna separate Time Warner Cable from the rest of Time Warner. In the past, over the past 20 years, because we've had content and distribution together, we've been able to do some things that really have led the industry, I mean, almost everything that HBO, first of all, the creation of HBO was because we had, we had some content creation ability, and we had this distribution mechanism that we controlled. So essentially you introduce it into the marketplace on your own bottom. Video on demand, all that sort of stuff, was done because our content guys and our distribution guys could work together. The reality is today, however, that the cable company, for most of its 50-60 years of existence, cable has meant delivery of video signals into the home, video programming. Cable was an equivalent of television distribution, right? That's what cable was. In the last 10-15 years, cable has become the equivalent of a phone company. Right now, I've got almost as many phone customers on my cable system as I have TV customers. And almost as many high-speed data customers, and the phone is catching up. So cable is looking more and more and more like Verizon, and Verizon is looking more and more like cable, because they put fiber in so they could, they could always do voice, and data, now they can do video. We could always do voice, we could always do video, now we can do voice and data. So there's going to be a shakeout down the road between the distribution companies, and the cable companies are gonna look more like phone companies, and the financial dynamics of that capital-intensive utility-like company, are just totally different from the financial dynamics of a content company, and that's the primary reason for separating them. Now, which is a better business? I like 'em both. I really like, I like the cable business. Because... You know, sort of human being's appetite for ability to connect and communicate with each other seems insatiable. You come up, any new communication device you come up with, instantly people jump on it, and the next thing you know, we were talking earlier about cell phones. Somebody said when I started here, she was a senior. You know, if you had a cell phone it was unusual. Now, if you don't have a cell phone, you're from another planet. And no matter where you go, people are on their phones. And they're communicating with each other, and the cable business is basically right in the middle of that trend and loop. And I like the content businesses because you know these are, it's not commoditizable. Each creation is unique, right? Each movie is different from all the other movies. Each song is different from all the other songs. And if you can protect your creations in a digital world, you have something that lives for, if not ever, for many business cycles, that is unique and not replicable. So I think both businesses, I know that both businesses will be around for the duration, and I think they'll both be good businesses. To be investors in. Whoops okay. - [Voiceover] Thank you. Time Warner seems to be in a very good position to spot kind of emerging trends in media and technology. How much intrapreneurship goes on within the company? - That's a really good question, and the seeds of the answer, at least the seeds of my answer, were in where I started off this talk by saying, that you know, first it was AOL, as the hot shooter in the space. And then its place was taken by Yahoo, and then Yahoo's place was taken by Google, and now Google's place is being sort of snuck up on by the social networking companies. And it's because you know, big companies have a hard time innovating and being entrepreneurial. What happens in a big company, is that people are, people do, this is a rule of management. People do what they're paid to do. Most people can figure out, how do I maximize my earnings in this environment, and so that's where I'm gonna put my time and attention. And the bigger a company gets, the more, and the more robust and powerful the revenue streams, the more the need to sort of control, have budgets, have targets, have business plans, and then to meet your plan, because that's how you get paid, that's how you maximize your pay. You meet and then just barely exceed your business plan. So most capable business leaders sort of look at their business, make some projections going out, you know, sort of on a steady course, I can just take this, build on it a little, you know, squeeze the guys here, take out a little expense there, and then they build a plan and then they wanna stay on that plan, and that's how they, that's how they perceive themselves to get paid, and that's how they pay their people who work for them. So in comes a guy or gal who says, "I have a great idea, if we, you know, "how about we go left over here instead of going right, "and it's only gonna cost us so much". And when they say, "Well, have you, "have you pre-sold this to our advertisers?" "No." "Do we have any subscribers?" "No because we don't have a product yet." "Well let's not do that then because "you know, that could throw me off my plan." That happens, and organizations become risk-averse the larger they get. And they know what they know. And the last thing is, most frequently, new ideas are inimical to the existing business paradigm. So an example. When we merged with AOL, Steve Case wanted to take all of the music that Warner Music Group produced, and put it on AOL for free. Well, the music guys went ballistic. You know they had a $5 billion revenue business, billion dollars in earnings, and this guy wanted to give it away! Now, Steve's theory was that, if we had all that music for free on AOL, the subscribers would stay. And we'd get even more subscribers, and you'd make your money that way. Whereas for the music guys, he was hollowing out their business completely, so they resisted, you know, this was the Battle of Dunkirk. They were sort of laying down in, in the tide, saying, "We're not gonna be moved". Because nobody wants to jeapordize an existing successful business model. So these disruptive technologies are, it's like tissue rejection in a big organization, they're just going (grunts). So that's why all the young people who are coming out of colleges, who think they have some swat in this digital world, don't wanna work for big companies. They wanna go with these little internet startups because they're gonna change the world, they're gonna disrupt the existing business plan, and they're gonna be creative. And that's why it's so hard for the big companies. What ends up happening is exactly what happened in our Bebo example. Now if you think about it, AOL actually had, it was the first social networking company. They were called chat rooms. And literally millions of people would occupy these chat rooms, and they'd do what college kids now do on Facebook. They'd talk about each other, they'd share information about each other, blah blah blah blah blah. When we moved away from the subscription model, AOL was incapable of creating Myspace, Facebook, Bebo, as by the way, was Disney, was Fox, was, was Google, was Yahoo. So what happens, the way the cycle works is, young people come out, they create these things, and they get 'em to a point where, as I say where, it's cool to be cool, but now you gotta make some money. Then they sell them to the bigger companies, who try not to kill them in the crib. I mean that's, that's the reality. Every company you go and talk to, by the way, will tell you, "Oh no no, we have a culture of innovation, "and risk taking, and blah blah blah." But just look at the results. The results are all of these new technology-enhanced companies are being created in somebody's garage. And then being acquired after they're, after a business has been created. They're not being created inside the big companies. - [Voiceover] You mentioned disruptive technologies. I'm wondering how a company like Time Warner basically works with or against companies like Napster that might come out and promote piracy of Warner Music Group songs, of if there were to be a website that promoted, I guess piracy of Warner Brothers films right after they were released, how do you guys react to something like that? - We try and put 'em out of business. And in fact, we did put Napster out of business. That's another, a fault-line on which the battles are being fought right now. I said earlier, the reason I like the content companies is because every product is to some extent unique. And the question is whether you can protect it in a digital world because digital technology allows you to make perfect copies of anything that can be digitized, which is, anything in the entertainment space. And send it to a gazillion people with the push of a button. So for companies like ours, Time Warner was when we owned the music company, I know we were the largest copyright owner in the world. I still think we are, still think we are. So for a company that is so heavily invested in copyright, you can't tolerate people stealing your stuff, that's the way I think about it. You know, not respecting the fact that somebody owns this intellectual property just like, you know, you couldn't have somebody come in here and sort of un-bolt half of these chairs, and take them in the dark of night, and just let 'em get away with it! So what we try and do is first we try and hammer them, to be candid, and then we try and negotiate with them, to sort of say there's gotta be, you know because in some respects, all the content companies want their content to get the widest possible distribution it can get. They just wanna be paid for it on some rational basis. So but, you know, the generation that sort of grew up with the internet has a kind of in-built notion that hey, music should be free, or content should be free. And so you gotta, as I say, there's a clash of wills right now, you have to first shake 'em out of that perspective, and then negotiate a way that both sides can win, where people can get what they want, where they want it and how they want it, and at a reasonable price, and with the assurance of convenience. But not let somebody just sort of take your stuff and run away with it. - [Voiceover] The music business has changed radically in the last five years, especially since Apple got into the arena with iTunes and the iPod. What do you think is gonna happen now, in the next big battle which seems to be the video and the movie business? - Good question, the music business has changed radically. I had pointed out to a group of students I met with earlier, we sold our music business just about five years ago. Because we saw this coming. And it's not that there won't be a music business going forward, I just don't know what it looks like. And I don't think anybody does. I think Steve Jobs has a vision, maybe his vision comes true. I think the music companies are sort of challenging that now 'cause they're not making enough out of his vision, he's making all the money. But it's changing and it's changed for good, it's not gonna go back to the way it was. Now the question is whether that same paradigm or model applies in the video space. And I don't think so, I think for a number of reasons. One is the quality of the product. You put on those little button speakers that you put in your ears, with the iPod, it's not like having you know, a... 40-amp Bose speakers in your living room, but it's pretty darn good, it's pretty darn good. So the quality of what you get on the music side, is comparable to the quality of what you would get in a non-digital arena, and it's also portable, so that's an added advantage. On the video side, that's not the case. Looking at a movie on a two and a quarter by two and a quarter screen, it just isn't as satisfying, as looking at a movie on a 51" plasma TV set in your living room. So the quality of the delivery of the product is not as compelling. Secondly, the whole business model around movies and videos is different than music. One of the complaints we heard over and over again when we were still in the music business was from you know, teenagers who are saying you know, "Why should I have to buy a CD "that had 12 songs on it when I only wanted one? "You know, and that's why I go to Napster or "some of the other sites, because I just want this one, "and you guys are trying to rip me off by making me buy "11 songs I don't want just to get the one I do." So Steve solved that problem for them, digital technology solves that problem, 'cause you can get exactly what you want, you can get the song you want. That's not the way video is marketed. We don't sell movies 12 at a time. Where you have to buy 12 movies in order to get Iron Man. If you wanna get Iron Man, you go and see Iron Man. And that's actually a very significant difference that I'm not sure Steve and his Apple engineers have fully taken into consideration. So they got a couple of things different in the video side of the equation, one, an inferior product delivery mechanism. And two, they're fighting against a different business model, so I don't see, I don't see the world moving from going to the movies, as we know it today, or buying, you know these big flat screen plasmas, we sold more of those in the United States last year than in the history of those sets, moving to a two or three-inch mobile screen. I just... That's not to say that digital technology isn't going to have an effect, I don't see it as being as disruptive as it is in the music space. We'll see. In the back. - [Voiceover] Just a quick question about valuation, valuation in terms of what was done in the early 90s, and how valuation is being applied now, can you give us a sense on what the issues were with the assumptions that were being made then and now how they've changed and how you mitigate those risks today? - Yeah um, must be a business-school student. You know, the art of valuation is it's very hard for those who were raised in my era. And in fact... I'll make a confession before this group that I made only to my board of directors. I'm not, I don't know that we would have done Bebo, if I was still CEO of the company. I used to say, that's why we didn't do Myspace, 'cause I was CEO of the company. We didn't do a lot of things. Because using traditional valuation methodologies, of looking at the revenues and looking at earnings, right? And applying some multiple to those based on a cash flow analysis, you can't do that in the internet world. We looked at YouTube. And how in God's name the Google guys got to $1.6 billion for YouTube, I have no idea, I have no idea. Because YouTube had, I think $10 million of revenue. They had no earnings, $10 million in revenue. If I could get that multiple for Time Warner, I could sell Time Warner for seven trillion dollars. I'd be the second-largest economy in the world next to the United States. But so... Valuation has moved in this digital space, to what I call kind of a hope and a promise. That if you get the eyeballs, which is what YouTube did have, which is what Bebo has, which is what Facebook has, they have tremendous user engagement, that somehow, someway, and at some time, you're gonna be able to figure out how to monetize those in a way that will give you a return. And since, you know, I'm not of your generation, I'm not even of the generation between you and me. You know I couldn't figure it out, I couldn't get there but, that was a sure sign it was time for me to sort of step down, stand aside, and bring somebody else in, to sort of start choppin' at this log, because valuations now are based on entirely different metrics than they were in the 90s. They're based on user engagement and other projections as opposed to revenues and earnings. 'Cause most of these companies have no earnings. Some of 'em have no revenues! But they have people who are devoted to them and a growing belief on the part of traditional business that this is the way the world is moving, and our job will be to figure out how to monetize that traffic. Pleasure, it's been fun. (applause)