Steve and Peter sat in an antiseptic conference room with the latest hit squad from AOL. First they had endured the fake marketing hit squad, then they had faced the false engineering hit squad and now they faced the only hit squad that mattered. The deal squad.
Steve looked across and realized that they were playing poker without any cards. Peter and he had talked the entire night before trying to find a way out. The question was how to you threaten to walk away from the table when they knew you couldn’t? Peter didn’t care. He just wanted to save the company and himself so they could live to fight another day.
The leader of the pack harrumphed loudly to bring everyone to attention. He smiled over the table like a cat looking through an aquarium wall. Snack time. “We wanted to see if we could come back to the table with you and hammer out a new agreement. I know our engineering team passed on you, but I think there is still a deal that can be made that would be mutually acceptable.”
OK, thought Steve. So you are the good cop. You are going to pitch yourself as the sole executive at AOL who is willing to go to bat for us. He is our friend. We should be thankful that he is doing this for us. The only question is which of the other smiling heads across the table represented the bad cop.
The good cop continued. “Now, obviously the previous deal is off the table, but I think we can construct a new deal based on what we think you can provide, and what we are going to have to expend in terms of time and money to make it go live. Let’s talk first about the engineering, and how far you think you are from solving the problems with your software.”
Peter not surprisingly decided to go on the attack right out of the gate. “First off, I would like to point out that what you call problems with our software most people call compatibility problems. That means the mistake could very well be with your software. Let’s try and figure out how to work together without assigning blame here, eh?”
The good cop held up his hands. “Fine, I accept that. Let me rephrase the question. How long do you think it will take for your software and ours to become compatible?”
Peter looked pleased with this little victory. “Well, given the feedback from your engineering team, we are assuming about sixty days. Add another couple of weeks for QA, and we should be good to go.”
A hand went up from down the table. Steve suspected that the bad cop was about to make an appearance. “OK, based on the feedback from us, that is what you are telling us. I’m assuming your engineering team does not sanction these assumptions. And this only takes into account the one problem we already brought to your attention. You are telling us that there are no other bugs in your software, right?”
Peter was now on the defensive. “Well, the software has been hammered on pretty good since we launched. People spend a ridiculous amount of time in our spaces, so that makes for some great stress-testing.”
The bad cop nodded for a moment while he digested this. “How about the other components?”
Peter looked baffled. “I’m not sure what you mean?”
“Well, what I mean is the whole point of this meeting is to set a value on your company. But there is no point in paying for software that we already have or are going to have. Otherwise we are just paying for duplication. You understand, yes?”
Peter nodded. The bad cop reviewed a piece of paper on the table in front of him and then plowed ahead. “Now, this is what I have come up with so far. You have a chat engine built into your interface. Obviously we already have chat. I mean, we are AOL after all. We need to integrate our client into your interface. Then there is the communications code. We are all about communications, and we pride ourselves on having the best connection stack in the business. Any client, any connection and we will find a way to get you onto AOL. That is more duplication. Then there is your server software.”
Peter snorted. “I have to stop you there. You aren’t about to tell me that you think your server software for supporting chat rooms is going to support real-time immersive environments, are you? That is ridiculous.”
“Not at all. But I do want to find out what percentage of your code is doing work unique to your client, and what percentage is just doing what we already do. Again, the whole point here is to ferret out any duplication. Are you telling me that every line of your code on your server is unique to your environments?”
The bad cop had deftly fired the ball right back into Peter’s lap. “Well, to be honest, we’ve never really thought about it that way. I’m not sure I could give you an answer.”
The bad cop twirled a pencil aimlessly and stared at the ceiling. “Well, would you say that the code specific to supporting your environments is ninety percent of the code? Seventy? Fifty? Just a ballpark is what we are looking for here mind you.”
Sure, thought Steve. He figured he better ride to the rescue here. “Look, I think this is a question we should take back to the engineering team. Are you asking Peter here to vet thousands of lines of code in his head? That seems a little unrealistic, don’t you think?”
The bad cop stared at Steve for a moment. He looked unsure how to take this interruption. CFO’s didn’t usually block and tackle on technical questions. However, Steve could feet the gun turrets now ratcheting around to face him. The bad cop dramatically turned over the paper in front of him and reached for another one “Fine, we will let that one drop for the moment. Let’s turn to your side of the house, Steve.”
Well, he did ask for it. The bad cop was off to the races again. “Let’s take a look at headcount. It seems many of these people are redundant in your organization, and they would certainly be redundant in ours. Right now the last thing we need is another web site designer.” The bad cop pulled his lips sidewise in what was supposed to pass for a smile. “All these web site people are out, plus the QA. We have a stupendous group of bug hunters here. I can see one or two finance people making it, one which of course would be you Steve.” More lip pulling. He stopped for a second to write something down in the margins of his paper.
“At least out of the gate I am assuming we are going to have to keep most of the engineers. Especially given the, um, compatibility issues.” More scribbling. “Marketing. Boy, you certainly grew that side of the house quickly, didn’t you?”
Steve just smiled blankly at him. There was really nothing he could do except to try to withstand the blizzard of bullets and impending pink slips. The bad cop was at cruising altitude at this point. “Well, we can assume that most of them go too, right? And that brings us to the executives. Steve, we are going to need you for the pooling issues, and then also to go over how your advertising assumptions are going to fold into ours. I can’t see how we need more engineering help, so your CTO is not going to make it either. I hear good things about your VP of Marketing, so we will see what we can do there.” A final rush of scribbling. “OK, that brings us to the main issue. Revenue assumptions.”
Steve girded himself for the final assault. Get through this and they could retreat for the hills. Again, the bad cop made a show of rearranging his papers. “Now, explain to me how the first year works here. What is subscription and what is advertising?”
Steve swallowed. “It is all advertising out of the gate.”
The bad cop looked stunned. “I’m sorry, did you say all of the revenues. Didn’t you have a subscription model built in? How else could you build in some recurring revenue?”
“We weren’t. The model was designed to take advantage of the beneficial dynamics of our retention to build a superior advertising model. We wanted to follow the lead of television, not on-line services. If we replicated your model exactly, there was no way we could challenge it. The only way we could compete would be to find a greater source of revenue.”
The bad cop sneered. “Ah yes, the pursuit of eyeballs. Get people using your service first, and figure out how to make money off them later.”
Steve didn’t think it was necessary to be defensive about this. “We never made any excuses about building the car on advertising dollars. We had to play to our strength. And unlike you, we didn’t have ten years to get it right. We had ten months to prove it viable.”
“OK, I’ll buy that. So, what metrics were you planning to get from advertising? Did you figure out how much money per month per user?”
“We actually are talking to several media agencies right now. We were told we needed 90 days of performance before they could attach a number for placements.”
“Well, what was in your business plan?”
Steve knew this number was going to come up. And he also knew there was no way to defend it. In reality they had no supporting data, and the numbers in the business plan were a wild ass guess. “We have five dollars a month a head in the first year decreasing to three dollars in year five.”
Furious scribbling ensued. “And that is across what customer base?”
“We were starting with 100,000 the first year, growing to 3 million in year five.”
The bad cop stared at the table with a confused expression. “This may be a silly question, but how do you know how many subscribers you have if they don’t subscribe. If they aren’t paying a monthly fee, how do you know who is actively using your system and who has churned out?”
“We base it on unique IP addresses coming into the system. Every time they log into a virtual world we track it. And the numbers I gave you assume a 50% churn rate in the first year going down to 30% in the fifth year. Once we have them, we think the retention will accelerate the model.”
The bad cop was actually starting to look pleased. “Well the numbers will have to be revised down to reflect what percentage of our installed base of customers actually have enough processing firepower to run your software. And of course none of our Macintosh clients can run this. If we overlay our consumers’ computers across your estimates, I can see 40% of your revenue actually happening. That means $40 million in year five. We have to net out the headcount costs, engineering we are going to have to do and marketing. That will tell us what we are looking at for a return. And that will get us to the number for how much we can afford to pay for you. That should take until the end of this week. Sound good?”
Steve nodded. He wasn’t expecting it to be a very big number. He wasn’t even sure that he cared any more. “Sure, that sounds about right.”
“Also, we will need you out next week to talk about the merger and accounting issues pertaining to that. Write-offs, goodwill, software in progress. That sort of thing.”
“No problem. Just let me know what day you want me out there.”
Peter spoke up. “What do you need from me during the transition? I want to make sure I am ready to fight for you guys when this is all done. I think I should head down to the studios as soon as possible to keep them happy.”
The good cop and bad cop stared at each other down the length of the table. Strange facial expressions were being exchanged. Finally the good cop spoke. “I’m sorry Peter, I thought you understood our discussions about redundancies and duplication. We already have a CEO. You won’t be part of the new team.”
All the air went out of Peter in one pathetic wheeze. Steve suddenly saw that it wasn’t a good cop, bad cop routine. It was all bad cops. And they had just shot his CEO. Peter just stared into space.
The ex-good cop smiled sadly. “I’m sorry, Peter. I thought you had been told. The package does not include you. But you are going to walk away with a bundle of shares. You can relax on a beach and watch your investment in us go up. Not a bad way to go!” The AOL group all laughed together.
Steve couldn’t believe how antiseptic it was. And they didn’t understand Peter one bit. This was worse than Lazlo. At least when his baby was bought then, he got to keep playing with it. This time he had been unceremoniously kicked out of the nursery.
They had nothing else to talk about. The meeting ended and Steve and Peter staggered out of the room. Peter still hadn’t said anything. “Do you want to go outside for some air?” asked Steve. Peter nodded and they staggered out into a perfect day, when you could almost see from one end of the world to the other.
Peter didn’t notice any of it. Finally he spoke. “They took it away from me, Steve. They took it all away. I thought I got us through it. I thought I could keep it all together. What do I do now? What the hell do I do?”
Steve looked at him for the last time. “The only thing you can do, Peter.”
“Go home.”