Monthly Archives: April 2015

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AOL’s problem was not that it was a walled garden

As I think about my last post on walled gardens and dumb pipes, a simple thought occurs to me: AOL didn’t fail because it was walled garden.  AOL failed because it was a dumb pipe.

The value proposition of AOL back in the day was, “We’ll pre-digest the Internet for you, and put it in a safe, packaged form that’s good for beginners, children, and digital immigrants”.

Actually, the value proposition back when I signed up in the early ’90’s was, “We’ll give you an Internet ID that’s a name, not a number”.  Recall that their big competitor walled garden at the time, Compuserve, had User IDs that were a pair of numbers.  <300129, 1235> or the like.

But by the time we got to the beginning of the end for AOL, they had a walled garden: they figured that their inmates would be too terrified to leave.

I suspect what happened, however, was that the “inmates” began to receive offers from other service providers that were 1) competitive in price and 2) better in terms of bandwidth and latency.  So it’s not that people became tired of the walled garden, it’s that another service provider — in what became essentially a commodity market — had better service for a lower price.

Classic Dumb Pipe stuff.

Now, to be fair to the argument, the “features” of AOL — especially AOL IM, which was hegemonic for a while — should have kept AOL as a “smart pipe” and didn’t.  But it’s amazing how quickly people found those features irrelevant when the price was right.

advertising, digital media

Dumb Pipes and Walled Gardens

If the online world has one potent effect, it’s turning proprietary value chains into dumb pipes

Over just a decade-and-a-half we’ve watched this happen to:

  • Software sales.  Who now goes to an Egghead software store to interact with a salesperson with expert advice about what software to buy?  Software is downloaded directly from vendor websites if it’s downloaded at all.  Most of the time you give in your credit card and start subscribing.
  • Music.  Who today goes to a CD store (or indeed even to an iTunes Store) to buy music.  Music is purchased in bulk on streaming services.
  • Phone companies.  Who now buys a land line from a phone company?  Voice is one service among many over the Internet.  (We will speak about wireless service in a bit).
  • Newspapers.  Who now consumes news, local events, and classified ads in a printed package?  Not so many.

Pay TV is tipping as we speak.  Why pay for someone’s packaging of programs (whether as a “channel” or as a bundle of channels) when you can fetch high-quality video content directly over the Internet, “over the top” as it is called?

Although those-who-are-about-to-die can see their doom coming, they can’t necessarily evade it.  Pay TV is a great example.  The MSOs have gone from bravado (“premium content will always be worth paying for”) to playing catch-up.  No one wants to become a dumb pipe.

What’s the opposite of a dumb pipe?  In some ways, a walled garden.

A “walled garden” is an online venue who keeps a captive audience and gets value out of them, either by subscription, or by advertising to them, or both.  As long as the audience is truly captive, it’s an annuity.

I saw a clip when I was a boy about a scientist drawing a chalk line on the ground and putting a chicken’s head down on it.  The chicken, the voice-over said, believed the chalk line was a rope and stayed put.

Audiences aren’t like that.  They won’t stay put forever, as AOL, MySpace, SMS text messaging services, and others have found out.  Walled Gardens have a way of turning into Dumb Pipes.