Monday, October 24, 2005

Cendant: Object Lessons In Scale and Creativity

I am truly amazed that Henry Silverman now proposes to spin off the parts of Cendant which he integrated several years ago, and remain the CEO of one of its parts as a reward for this failure.

Where is Carl Icahn when you need him? Too busy over at Blockbuster, I guess.

I recall Silverman articulating the wonderful opportunities for cross-selling among the various travel, subscription, buying club and other businesses he assembled through acquisitions and mergers. So much for that puffery.

Perhaps the object lessons to learn here involve leadership, creativity and scale.

First, it’s really difficult to lead a diverse group of businesses into some sort of group-think that spontaneously generates successful cross-selling the way a producer wants to market it. All too often, as with Time Warner and AOL, or diversified financial services, the cross-selling is in the mind of the producer, not the consumer.

Neither Sandy Weill at Citicorp, nor Henry Silverman at Cendant, could force consumers to behave in ways which provided the predicted integrated revenue and profit growth from their respective acquisition empires.

Second, creative marketing management doesn’t seem to lend itself to scale. Innovative product development and marketing positioning seem to be fleeting instances of genius. It’s not clear you can “best practice” it across a business, let alone across businesses. Empirical evidence on the lethargic total return behavior of most conglomerates seems to bear this out.

If anything, the recent decades of technological advances in computing and communications have lowered the effective size for successful creative management, not raised it.

Finally, this leads to scale. Grandiose visions of imagined consumer buying behaviors changed by conglomerating products and services usually fail to account for the sheer difficulty of managing scale.

One of the oft-missed effects of conglomeration is probably the loss of many of the most talented employees. From my own experiences at AT&T, then the largest private employer on the planet, Chase Manhattan Bank, and Andersen Consulting (NOT Arthur Andersen, thank you very much!), I can vouch for this. Large scale organizations inevitably have to be run by a middle class of talent at most, if not all levels. Innovation is hard to tolerate in a firm of large size. Management is typically routinized into a definable culture, so that the firm is more efficiently run.

When you put all these effects together, you get disasters like Cendant.

I’ll leave you with this little gem. Today, in an interview on CNBC, Silverman solemnly intoned something to the effect that his conglomeration was, ‘an artistic success, but a commercial failure.’ How nice of him to tell his shareholders now that all this time, he was dabbling in art, not commerce.

The Scramble to Cannibalize AOL

The recent interest by Google, Yahoo and Microsoft in Time Warner’s AOL unit seems to be confusing quite a few analysts and other observers. I do not agree that AOL is suddenly “valuable” again, as it was when it merged with Time Warner in the ‘90s.

Rather, these other companies see a possible opportunity to scavenge some of AOL’s parts on the way to changing the terms of competition in the larger arena in which AOL once played a dominant role. None of the three suitors would likely care about the dial-up access business, nor, for its own sake, the content portion of AOL. What they all want is AOL’s customer base to which to market their own collection of internet-oriented services.

Their very interests in the remains of AOL’s customer base signal that their strategies have devalued this older business model. AOL is a faded brand in a growth industry. Further, the industry has changed so much that companies with concepts still in their infancy in AOL’s heyday are now dominating it.

Google creates its value in other ways, and is perhaps looking to deny a piece of AOL to a competitor. The same is true of Yahoo. The combination of Yahoo’s and MSN’s messaging services further devalues AOL AIM system, because all of these are free.

The current competitive situation in this arena finds AOL still in possession of a customer base which sizable and somewhat unique. Before that is no longer true, these newer entrants, and one old one, Microsoft, are hoping to capitalize on the value of that base. The incidental businesses which originally attracted the customer base are probably not all that valuable to anyone now. If they were, AOL wouldn’t be in the trouble it’s in today.