Global Debt Crisis: Europe’s 50% Solution

Posted on October 31, 2011 by

Do you believe that last week’s agreement by European Union (EU) leaders will finally solve the Greek government’s debt crisis? It’s awkward to express exuberance about it; after all, the Greeks will continue to experience many years of fiscal austerity before their government’s debt is reduced to manageable levels. And if the bitter pill of austerity prevents economic prosperity, the Greek nation may not experience sustained growth for a generation.

At the moment, though, our global markets appear to believe that the agreement represents a huge step in the right direction. At the end of last week, the Dow Jones Industrial Average was on track to complete its strongest October in history. And many analysts hailed the agreement as an historic success, though some cautioned that investors should wait and see how the terms are implemented before celebrating its consummation.

Lost in much of the hoopla, though, was an important clause that had not previously appeared in similar government debt agreements. Interestingly, the clause illustrates how the European approach differs from the American approach on a fundamental level.

Let’s Make A Deal!

The challenges facing Greece and its EU partners are quite imposing. Each nation member is legally required to limit its federal government debt to 60% of its national GDP, but because of the ongoing economic malaise, the overall EU debt level has soared to 80% of GDP. And Greece’s debt level is the highest of all nations; it soared to 142% in 2010 and is forecast to remain above 130% of its GDP next year.

Because a Greek default on its debt would deliver a huge blow to its creditors, and because many of its creditors are European banks that are considered “too big to fail” by their governments, a Greek default is now considered an existential economic threat to the EU itself. European leaders have been struggling for months to devise a way to support the Greek government without taking the politically unpopular step of bailing out its profligate (and, arguably, fiscally irresponsible) member state.

Last week’s solution encompassed a commitment by the EU leadership to guarantee up to $1.4 trillion of the government bonds of fiscally weak European states. In exchange for this support, the Greek government agreed to new austerity measures that would reduce its debt load to 120% of GDP by the year 2020; furthermore, all European banks would be required to increase their capital reserves by $147 billion.

Perhaps most surprisingly, EU leaders convinced global private banks that have invested in Greek government debt to “voluntarily” forgive 50% of the outstanding principal on their loans. This clause was indeed a unique one; in contrast, the United States government failed to convince any of the holders of the debt of bailed-out American financial institutions to agree to any reductions in principal balances.

Merkel vs. Paulson

What are the accounting implications of a “voluntary” 50% reduction in principal by the private banks? Well, the firms will write off significant asset balances, which will reduce their equity book values accordingly. And because their capital reserve requirements are increasing in compliance with last week’s agreement, a larger share of their dwindling asset balances will necessarily be diverted to satisfy those requirements, thereby leaving fewer funds available for lending and investing activities.

On the one hand, some may predict that this will inevitably lead to less business activity and slower economic growth. On the other hand, skeptics may scoff that global banks have not been aggressively seeking out new growth opportunities any way, and thus the new regulations will not significantly impact growth.

German Chancellor Angela Merkel has been widely praised for demanding the 50% write-down from private sector banks. Her negotiating position, in fact, provides a dramatic contrast to that of former U.S. Treasury Secretary Hank Paulsen, who didn’t demand any such write-downs and reportedly sunk (literally) to his knees to beg Democratic legislators to fully bail out all “too big to fail” banks during the market collapse of 2008.

President Merkel?

It’s tempting to conclude that Chancellor Merkel did a better job of protecting taxpayer interests than Secretary Paulson. However, it will take a while for the long term results to become evident.

On the one hand, if the EU’s massive asset write-down cripples European banks (and thus the EU economy) for years, then Merkel’s victory may be viewed ultimately as a pyrrhic one. Conversely, if the U.S. government ever defaults on its debts, then Paulson’s decision to bail out 100% of the debt of the “too big to fail” institutions may be perceived eventually as a foolhardy choice.

At the moment, though, Merkel’s approach is undoubtedly the more popular one with voters in both the EU and the U.S. In fact, with such unproven candidates as Herman Cain riding high in the opinion polls at the moment, Merkel herself might have been able to win the American Presidential election if she had been eligible to run for that office.

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Which Agency Survives: Amtrak or the Postal Service?

Posted on October 24, 2011 by

One traces its lineage to a golden spike, driven into a rail in 1869, that linked the eastern and western coastlines of the United States. The other was formed in 1775 and was explicitly institutionalized by the United States Constitution.

To which organizations are we referring? To the Amtrak railroad service and the United States Postal Service, government agencies that have existed for decades and even centuries. Each is deeply ingrained in the American way of life, and each now faces a similar existential threat.

A more detailed analysis, though, reveals a significant difference between the competitive positions of the two entities. And because of this difference, it is indeed possible that one of the organizations may long outlive the other.

Antique Technologies

Amtrak is America’s public railroad transportation service, operating from northern New England to southern California. Although the service was officially formed during the Nixon Administration in the early 1970s, the network considers itself the heir to the nation’s earliest transcontinental railroad service, an entity that was born with the driving of a ceremonial golden spike in Utah that linked the Central and Union Pacific rail lines together.

A century earlier, the Postal Service was formed shortly before the thirteen colonies declared their independence from Great Britain in 1776. Its first Postmaster General, in fact, was Benjamin Franklin, who had previously halved service delivery times between Philadelphia and Boston by modernizing and standardizing mail shipment procedures.

Each of these services, though, was eventually threatened by more efficient emerging technologies. The rail system lost large numbers of passengers to automobiles, buses, trucks, and airplanes after the Second World War. And the postal system continues to lose significant business volume to internet-based email, merchandise purchasing, bill payment, and coupon distribution services.

In other words, industrial advances have forced each service into a position of technological obsolescence. But does this mean that each service is equally likely to fade away after generations of public service?

Competitive Positions

Although the services are each facing similar threats, they differ markedly in terms of their strategic market positions. Specifically, each service confronts a different mix of competitors, with differing abilities to attract customers with more efficient levels of service.

Amtrak, for instance, benefits from the competitive reality that the nation’s highway grid and air space are saturated with traffic. Such congestion has helped make Amtrak’s northeastern Acela service competitive (in terms of both time and cost) with air and land vehicle alternatives.

On the other hand, as the Post Office’s first class mail business continues to gravitate to the internet, and as its package delivery business continues to migrate to for-profit firms like Federal Express and UPS, the federal agency has been forced to face the prospect that its entire line of business may be vulnerable to poaching by rivals. Of course, no other firm would be interested in poaching its grossly unprofitable rural delivery system, which it plans to streamline in the near future.

Thus, based on its competitive strengths, Amtrak appears to be much better positioned to survive than its sister agency the Postal Service. But do their respective financial positions support this assertion as well?

Government Subsidies

Regrettably for Amtrak, the financial positions of the two government agencies are mirror opposites of their strategic positions. In other words, although Amtrak is the stronger entity from a competitive perspective, the Post Office is the stronger one from a financial perspective.

How can that be true when the Post Office has relentlessly increased the price of a first class stamp from 37 cents as recently as January 2006 to 45 cents in January 2012? In essence, its ability to raise its prices has actually helped bring it the necessary revenue to phase out government subsidiaries. And because Congress is now proposing to allow it to implement various cost efficiencies, the Post Office has been able to manage (and subsidize) its costs effectively.

On the other hand, United States Congressmen who fear watching their home districts lose access to the national rail transportation system are loathe to permit Amtrak to reduce, eliminate, or spin off rail lines. As a result, Amtrak is unable to engage in the types of restructuring activities that can improve its financial position, and thus it has needed over $40 billion in public subsidies in order to remain solvent. Since it initiated service under the Amtrak moniker, the agency has never broken even or earned an annual profit.

Nevertheless, the growing public need for a national rail service recently led Amtrak to announce an all-time record 30 million tickets sold last year, at the same time as the Postal Service declared that it is hiring a former Obama Administration automobile “czar” to study its restructuring options. As long as the railroad is strategically positioned to serve a growing public need, it may thus survive long after Ben Franklin’s postal system closes down, despite its financial shortcomings.

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AIG: Your New Public Relations Firm!

Posted on October 17, 2011 by

Imagine, for a moment, that your organization is suddenly confronted with an embarrassing crisis of monumental proportions. A crisis so severe, in fact, that you believe you need to hire Public Relations (P.R.) professionals to help you cope with the demands of an outraged public.

A few years ago, as you may recall, this was the type of crisis that confronted AIG, the global insurer that churned out billions of dollars of financial weapons of mass destruction. When AIG’s senior officers decided to pay themselves substantial performance bonuses after receiving taxpayer-financed government bailout funds, angry American citizens pressured those officers to voluntarily return their compensation.

AIG undoubtedly could have used some P.R. advice at that time. Surprisingly, the insurer is now helping to provide such advice to firms in crisis today.

Reputation Guard: Is It Insurance?

AIG’s service, provided through its Chartis subsidiary,  is called Reputation Guard. It is designed to help small and mid-size organizations that cannot afford to hire permanent P.R. staffs, but that may nevertheless require P.R. expertise in times of crisis. For an annual fee, AIG arranges for such organizations to receive advice from Madison Avenue P.R. firms; it also reimburses these organizations for various out-of-pocket expenditures related to crisis management activities.

But instead of structuring Reputation Guard as a simple prepaid contract, AIG has decided to design it as a complex insurance policy. According to the policy, a public relations crisis is defined as a rare but costly insurable event. A policy holder pays an annual premium to protect himself against the risk that he will suffer a loss from reputation damage as a result of a crisis.

The insurance policy does not reimburse a policy holder for the direct costs of “fixing” the problem that caused the crisis; nor does it cover the legal costs of fighting or settling litigation. Furthermore, the primary benefit of the policy does not involve any loss reimbursement at all, but rather arranges for the delivery of a limited array of P.R. advisory services.

This unusual contractual arrangement raises the following simple question: can this truly be labeled an insurance policy? Indeed, how can we differentiate between an insurance policy and a prepaid service contract? And why should we care?

Insurable Interest

As far back as the 1700s, the global insurance industry agreed to require that a policy holder maintain a quantifiable insurable interest in any object of insurance. A property owner, for instance, could only purchase an insurance policy if he could demonstrate and quantify the extent to which he would incur losses if his property were to be destroyed. Likewise, a family relative could only purchase a life insurance policy if he could demonstrate a personal relationship with the insured party, one that would likewise lead to losses if his relative were to lose his life.

Furthermore, the level of the benefit was historically defined by (and limited to) the level of the projected financial loss, a value that could be estimated through standard actuarial processes. Thus, by requiring that any policy holder possess a bona fide insurable interest in an insured asset or person, and by defining the payment benefit in terms of the projected loss, regulators could prevent speculators from developing gambling contracts that masquerade as insurance policies.

Otherwise, gamblers who wish to pace wagers on the deaths of total strangers could simply purchase insurance policies on those persons’ lives. In fact, morbidly speaking, they might even be tempted to cause the death events that would trigger the insurance payments!

Concerns about insurable interests have reverberated throughout various contemporary debates as well. Industry critics have complained, for instance, that credit default swaps allow financial speculators to bet on the “death” (i.e. the bankruptcy) of corporations without requiring them to own stock in those firms. And the United States Securities and Exchange Commission continues to receive appeals to strengthen regulations of firms that purchase life insurance policies from total strangers in the pursuit of profits.

Buying A Sales Pitch?

Measured against these standards, one cannot help but wonder whether AIG’s Reputation Guard should be classified as an insurance policy at all. Although companies do indeed incur losses when their corporate reputations are damaged in times of crisis, AIG’s actuaries have not estimated those projected financial losses and established premium and benefit levels that purport to cover them. Instead, the firm has simply developed a prepaid referral service that can be accessed in time of need, something akin to an Employee Assistance Program in the Human Resources field.

And what does a policy holder actually receive when, in a time of crisis, he accesses the service of the P.R. firm? At best, he may indeed receive the valuable advice of a highly qualified P.R. professional. At worst, though, he may instead receive an unwanted sales pitch to purchase additional services that fall outside of the scope of the Reputation Guard benefit package.

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Steve Jobs: Contrarian

Posted on October 10, 2011 by

Much praise has been lavished — and deservedly so — on the life and legacy of Steve Jobs in the days following his untimely demise at the age of 56. Although comparisons to historic figures like Thomas Edison and Henry Ford may be a bit strained, we can all certainly agree that Jobs’ emphasis on product design and quality helped transform the consumer technology industry.

Absent from the initial wave of obituaries, though, was a focus on the contrarian approach that Jobs repeatedly employed throughout his storied career. Time and again, Job made decisions that left the pundits scratching their heads in confusion, decisions that nevertheless led to eventual success.

Some of those decisions represented conscious choices to repudiate fundamental principles of modern business theory. Others represented the implementation of highly risky tactics that are seldom successful in the contemporary economy, but that Jobs nevertheless managed to implement effectively.

Repudiating The Academics

Several years ago, Apple hired Dean Joel Podolny away from the Yale School of Management to manage Apple University, the firm’s internal training function. Dean Podolny was also assigned the task of creating a series of written case studies, for use in Apple’s training programs, that captured the essential principles and theories that Jobs employed during his tenure.

The cases themselves might be difficult to integrate into a traditional university curriculum, given Apple’s propensity to repudiate various fundamental tenets of traditional MBA lesson plans. Consider the principle of product obsolescence, for instance; firms are generally advised to extend the life cycles of their products, and not to consciously speed their obsolescence.

But Jobs continually developed new products that cannibalized existing Apple lines. Sales of iPod music players, for example, plummeted once Apple incorporated their core functions into the iPhone. And the iPad didn’t simply take business away from other laptop and netbook computer manufacturers; it apparently drained sales from the MacBook line as well.

Some professors might protest that Apple was simply combining complementary functions in new packages, in the manner that consumer product manufacturers sell soap and shampoo in toiletry travel packages, or spoons and forks in cutlery sets. But at the time that Apple combined its mobile music player with its new telephone, for instance, the pair of functions resided in entirely different industries.

Sony had not originally contemplated the placement of a telephone in its Walkman; likewise, Motorola had never attempted to play music through its Razr. The integration of music by the iPhone, and its resulting cannibalization of the iPod line, was thus a truly groundbreaking decision.

Rolling The Dice

Other decisions authorized by Jobs were not necessarily repudiations of classic business theories per se, and yet they represented highly uncertain “rolls of the dice” that paid off for Apple. Indeed, they were reflections of a corporate culture that embraced entrepreneurial risk-taking at the highest level.

Apple’s decision to rehire Jobs in 1996 after firing him in 1985, for example, represented an astonishing about-face by the firm’s Board of Directors. Although it is not unprecedented for corporate founders to return to the helms of their organizations after having retired or resigned to pursue other endeavors, the rehiring of a fired CEO was undoubtedly a risky choice for the firm.

Then, shortly after his return to the CEO position, Jobs reached out to Microsoft and secured a direct $150 million capital infusion. Such equity investments are likewise not unprecedented in nature, but the manner in which Jobs introduced and then defended the transaction startled the public. At the 1997 Macworld Expo, Bill Gates himself unexpectedly appeared “live” on an immense view screen, looming over the audience in a manner that reminded some viewers of Big Brother’s presence in Apple’s seminal 1984 Super Bowl ad.

Furthermore, throughout his tenure at Apple, Jobs repeatedly took the risk of striving for product simplicity in an industry that continued (and still continues) to grow increasingly complex over time. Although some simple designs, such as the minimalist Mac Cube, failed in the market place, others — such as the single button iPod, iPhone, and iPad — succeeded wildly. That’s why, for instance, many psychologists now recommend giving iPads to individuals with autism because of their ability to master its simple commands.

The Test Of Time

Ultimately, though, the most impressive accomplishment of Steve Jobs’ career may be his success in maintaining Apple’s position at the forefront of technological innovation for an astounding 35 years. During that time, numerous competitors have risen and fallen, including Xerox, Wang, Compaq, and Yahoo. None was able to maintain a tradition of creative leadership that stretched from the mainframe focused year of 1976 to the cloud computing era of 2011.

Indeed, the sheer longevity of Apple’s reign may represent the greatest legacy of a man in an industry where life cycles are measured in months and years, not decades. And now the attention of the technology community will turn to Tim Cook, Jobs’ successor, to observe whether he will be able to maintain Apple’s track record of accomplishment.

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Throw Back Champs: A Lion King and Devil Rays!

Posted on October 3, 2011 by

Do you remember when Frank Sinatra, in his senior years, returned to the pop music charts in May 1980 with the Big Apple anthem New York, New York? Or when tennis legend Jimmy Connors, one year away from retirement at the 1991 United States Open, blasted his way into the semi finals against an entire younger generation of opponents?

They were both “throw back” champions of an earlier age, sporting strategies and styles that had not been utilized in years. Sinatra exemplified a bar room style of singing that had long ago yielded to the bouncier formats of rock, disco, and rap music. And Connors embraced a “charge the net” finesse-based approach that had similarly given way to a world of power serves and metallic racquets.

It’s rare to watch a single throw back champion emerge from the pack at any given moment in time; of course, it’s even rarer for two such champions to seize the public’s imagination at the same time. And yet, last week, that’s exactly what occurred across the nation.

Introducing … The Lion King!

Sixteen years have passed since Pixar began to nudge the animated film industry from hand drawn cells to computer generated scenes with the release of Toy Story, its first full length movie. And five years have passed since Disney itself, the venerable pioneer that launched the world’s original full length hand drawn movie in 1938 with Snow White and the Seven Dwarfs, purchased Pixar for $7.4 billion.

But Disney has always been willing to pursue “throw back” strategies in order to grab the attention of the American consumer. In the 1990s, for instance, it purchased and renovated New York City’s New Amsterdam, a 1903 theatre in what was then a seedy Times Square district; its successful reintroduction helped launch the revitalization of the Big Apple’s theater center. And just two years ago, it released The Princess and the Frog, an old fashioned, full length film set in Jazz Age New Orleans.

Last month, it dusted off its 1994 animated classic The Lion King and re-released it in movie theaters across the nation. To the surprise of industry veterans around the country, it soared past the new Brad Pitt film Moneyball and became the most popular film in mass release in the United States.

The Miracle at Tropicana Field

Meanwhile, last week, baseball fans were marveling at the manner in which a throwback team in a throwback sport completed a historic comeback in a throwback stadium.

The team was the Tampa Bay Rays, named after the devil rays that swim along the western Florida coastline. The Rays are a low budget baseball team in a relatively small American city, playing in a decrepit ballpark that is named after an orange juice company. And the sport of baseball itself, of course, is a Civil War era game that (by certain measures) has fallen behind football in mass popularity.

But last week, the Rays astonished the sports world by rallying from a seven run deficit on its home field to defeat the heavily favored New York Yankees during the final game of the regular season, which propelled it past the wealthy Boston Red Sox in the standings and into the playoffs. Some sports reporters referred to it as the most exciting night in the history of the National Pastime, an event that reminded fans of the ancient charm of a team game that does not embrace electronic clocks or sophisticated equipment.

There Is A Market …

Why have these throw-back events grabbed the attention of American industry? Clearly, they demonstrate that there a market for entertainment pastimes that, at first glance, might be dismissed as relics of earlier eras. Like Charlie Chaplin movies that are featured at contemporary film festivals, and vintage baseball games that are played under nineteenth century rules and regulations, the enduring popularity of these events reminds us of the significant revenue that can be earned from such endeavors.

And when considered in tandem with the low costs of such productions, the net profits generated from such events can be immensely lucrative. After all, the cost of constructing Tampa Bay’s Tropicana Field in the late 1980s was $130 million, a tiny fraction of the $1.5 billion price tag of the New Yankee Stadium. And the additional cost of producing The Lion King for distribution last month was literally zero, the film having earned back its production costs during its initial run in the 1990s.

Simba the Lion and Evan Longoria (the third baseman who slammed two critical home runs to propel the Rays to victory), of course, are incredibly talented performers with qualities that cannot be easily discovered or duplicated within other characters or players. Nevertheless, as long as throw back champions continue to attract the attention — and the purchasing power — of American consumers, organizations will doubtlessly continue to try to replicate their magic.

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College Football: A 19th Century Business Model

Posted on September 26, 2011 by

Does this scenario sound familiar to you? What sport does it involve?

Dozens — perhaps even hundreds — of teams across the nation, filled with unpaid amateur players, seek a plausible method for recognizing an annual champion. They experiment with one unsatisfying process after another, and finally begin to gravitate towards a relatively formal system of direct competition.

But the prospect of financial profits begin to impinge on their amateur credo, and the larger teams in wealthier markets begin to dominate their weaker foes. Finally, those larger teams decide to join each other in new “super conferences,” declaring their own victors to be national champions, and leaving hundreds of smaller teams excluded from consideration.

It sounds like contemporary college football, doesn’t it? But the entire process previously played out over a century ago in America’s original National Pastime, the game of baseball, as well. And the lesson learned from nineteenth century baseball may not please gridiron fans who admire the amateur ideal.

A Gentleman’s Game

Although obscure versions of baseball were played in America as far back as colonial times, the modern game first took shape as a part-time pastime of gentlemen who created clubs and played on grassy fields and rural pastures. Sportsmanship was emphasized by these pioneers; the very first policy of the inaugural 1845 codification of the “Rules and Regulations of the Knickerbocker Base Ball Club,” for instance, noted that “members must strictly observe the time agreed upon for exercise, and be punctual in their attendance.”

A National Association of Base Ball Players convened several times from 1857 to 1871 to organize play, protect the amateur ideal, and recognize a championship pennant. But as in today’s sport of professional boxing, teams had no obligation to square off against their strongest rivals, and games were often scheduled on an ad hoc basis. Near the end of this period, “under the table” payments began to be paid to the game’s most talented players, and the first openly professional team (i.e. the Cincinnati Red Stockings) finally emerged in 1869.

During the early 1870s, the first association of professional ball players emerged from the amateur system, and it was open to any team — large or small, from any major or minor regional market — that chose to enter the competition. But wealthy and powerful teams from the major metropolises of Philadelphia and Boston then trounced tiny rivals like the Fort Wayne Kekiongas and New Haven Elm Citys five years in a row. Finally, in 1876, eight of the largest teams formed their own professional league and excluded the others, thus banishing the ideals of open competition and amateur sportsmanship from major league baseball forever.

College Football Today

The parallels between college football today and the amateur (though rapidly professionalizing) sport of baseball in the mid 1800s is quite striking. Today’s gridiron game remains one that is played with amateur players, though the most talented ones are occasionally tempted with “under the table” compensation for their services.

And like the National Pastime of yore, college football’s large and unwieldy assortment of teams has made it difficult to crown a national champion. Prior to 1992, in fact, various sports experts were simply polled throughout the year to identify the sport’s finest team. Then, for several years, a coalition of football Bowls attempted to arrange an annual game between the two poll leaders to crown a champion.

The current Bowl Championship Series was first established in 1998, but it has been roundly criticized for failing to provide a level playing field for all college teams. As was the case with professional baseball over a century ago, this level of dissatisfaction — along with financial interests to anoint a champion — has compelled the largest and wealthiest college teams to coalesce into a “super conference” configuration.

A Conference Quartet

For quite some time, sports pundits have been predicting the eventual transformation of the college football landscape into a quartet of 16 team conferences, each with two 8 team divisions. The alignment would allow the 64 largest collegiate football programs in the United States to produce a quartet of annual conference championships, to be followed by a pair of semi-final games and a subsequent national championship match.

Last week’s shift of the University of Pittsburgh and Syracuse University to the emerging super-sized Atlantic Coast Conference (ACC) increases the size of its roster of teams from 12 to 14. Rumors of the ACC’s recruitment of the University of Connecticut and Rutgers would, if brought to fruition, complete a full 16 team conference.

What would happen to the dozens of collegiate football programs across the nation that would be omitted from a quartet of 16 team super conferences? Like the teams in former major league baseball cities like Fort Wayne and New Haven, they may learn to be content with minor league status, giving up the dream of ever playing for a national championship. Considering the success that Major League Baseball has enjoyed with such an approach, it may be inevitable that the National Collegiate Athletic Association (NCAA) will follow the same business development plan.

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Online Advertising: Allied Against Google!

Posted on September 19, 2011 by

How many global internet firms does it take to challenge Google in the online advertising industry nowadays?

The answer, apparently, is three: Microsoft, AOL, and Yahoo. Although no formal agreement has yet been announced by the three firms, credible news organizations reported last week that the trio had agreed to coordinate their efforts to sell advertising space on their web pages.

Google, meanwhile, has chosen not to respond to the reports, preferring to maintain its focus on challenges like the positioning of its Android mobile telephone franchise against Apple’s iPhone. That says something about how the once-dominant market positions of the three partners have waned, doesn’t it?

They Once Were Giants

Microsoft, AOL, and Yahoo, of course, exemplified the growth of the contemporary knowledge economy during each of the final three decades of the twentieth century. Each firm revolutionized an existing technology and then found a way to profit from it, eventually yielding to the next firm in line, which then accomplished a progressively similar feat.

Microsoft was the first in line in this series, incorporated in 1975 by the now-legendary development team of Bill Gates and Paul Allen. The men modified the operating system DOS, which had previously been created by a firm named Digital Research, to operate IBM’s emerging line of Personal Computers (PCs). Later, they introduced the groundbreaking Windows line of operating systems to the world.

But despite its dominance of the desktop computer operating systems sector, Microsoft was never able to dominate the internet age that emerged during the 1980s. That accomplishment was achieved by Steve Case of America Online (now AOL), originally incorporated in 1983 under the name Control Video Corporation. The firm dominated the Internet Service Provider (ISP) business at a time when the vast majority of all Americans accessed the web through dial-up telephone lines that were connected to their PCs, at the dawn of the internet age.

Later, in 1994, Stanford University engineering students Jerry Yang and David Filo launched the Yahoo site as a reference tool, one that was designed to help web surfers find information once they were connected to the internet. Their portfolio of virtual services soon diversified into search engine, email, and other functions, which eventually grew into the most highly trafficked collection of web sites in the world. Even today, Yahoo holds the #2 position (behind Google, of course) in web traffic in the United States.

Each of these three firms thus arose to enhance and then supplant the innovations of the previous firm. None, though, possess a successful track record for establishing mutually profitable joint ventures with other organizations, which is why some analysts are dubious about their prospects for success in their newly announced three way partnership.

Failed Relationships

Those skeptical analysts, in fact, can point to any number of instances in which the three firms have fallen out of joint business relationships with other prominent organizations. Microsoft’s original business relationship with IBM, for instance, ended with angry recriminations and subsequent retaliatory attempts by IBM to establish its own operating system and productivity suite to rival Windows and Office. And the NBC television network’s MSNBC cable channel still carries an acronym within its name that memorializes its original failed plan to jointly operate the news service with Microsoft.

Meanwhile, AOL’s merger with Time Warner continues to be universally regarded as one of the greatest fiascos in the history of corporate mergers. Consummated at the very height of the internet bubble economy in the millennial year 2000, the AOL half of the merged entity later collapsed in value and was fully jettisoned (i.e. spun off) by the firm in 2009. More recently, AOL’s recent acquisition of the highly successful Huffington Post is reportedly confronting similar challenges.

Finally, Yahoo was recently embroiled in a complex ownership dispute with Alibaba of China, an organization in which it owns a 40% interest. Some believe that the stake represents Yahoo’s most valuable strategic asset, but earlier this year Yahoo charged that Alibaba’s Board spun off its Alipay subsidiary without seeking its advance approval. Although the disagreement has since been settled, the public argument was described by some as having reached “soap opera proportions.”

Why would these three firms, with so many resources at their (individual) disposal and so little successful experience in collaborative joint ventures, try to pull off a three way venture against a far more accomplished rival? It is, indeed, difficult to avoid the conclusion that the three firms have reached a level of desperation where no alternative options are feasible.

In the meantime, the historical cycle of innovation and evolution continues, with Facebook having launched in 2004 as a pioneer of the social networking revolution, and with fledgling location based services such as foursquare now hoping to become the success stories of the upcoming decade. It is indeed difficult to image how AOL, Microsoft, and Yahoo, working together or independently, will be able to succeed against the inexorable tide of history.

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