In the heady days of the dotcom boom, convergence was all the rage. The new economy was about to overtake the old, and the future was all e-commerce, clicks and URLs. New business models based on online eyeballs made traditional bricks-and-mortar businesses look old fashioned and boring. And nothing summed up the spirit of the boom quite so well as the merger of AOL and Time Warner in the year 2000. It was a huge deal, the largest in history, and it saw upstart AOL purchase venerable Time Warner for some $160 billion in stock, creating a fully-integrated new-media powerhouse worth some $350 in market capitalisation. Time Warner CEO Jerry Levin made the case for the merger by highlighting the synergies that would be generated between the world’s leading Internet service provider (ISP) and a media giant that hadn’t yet cracked the nut of online content delivery: “This strategic combination with AOL accelerates the digital transformation of Time Warner by giving our creative and content businesses the widest possible canvas.”

The merger went downhill almost immediately, and a decade later, the now un-merged companies are worth just one-seventh of their pre-merger selves. How did it all go so wrong? Some argue that it was simply a matter of timing – that a good idea, the convergence of Internet service and Internet content, was undone by the incipient dotcom crash: the NASDAQ, the financial bell weather of the new economy, had peaked at 5,132 on March 10, 2000 and bottomed out at 1,114 in October 2002 – 80% off its high. Scores of Internet start-ups, from pets.com to eToys, bit the dust; perhaps AOL Time Warner was simply collateral damage in the meltdown of irrational exuberance.

Or perhaps the leaders of AOL and Time Warner fell victim to their own thinking, to a willingness to blithely mash together competing logics without even being aware of it. Unlike integrative thinkers, who explicitly use the tension of opposing ideas to generate new and better solutions, the thinkers who fall prey to this cognitive misstep don’t dig deep into the logic of the opposing choices, test assumptions or explicitly seek to understand the way in which conditions and consequences are linked. It is a common failing, a logical fallacy in which we tend to see what we want to see and not ask the harder questions.

Consider AOL Time Warner’s predicament. Time Warner had a problem – it couldn’t figure out how to get people to pay for its content online, and worried that in an all-digital future, a paid subscription model would fall apart. Along comes AOL, lifted by a surging dotcom boom. AOL has a vast audience of paying customers, all presumably thirsty for information. So, AOL and Time Warner posit the following: together, they can provide AOL’s customers with proprietary access to the Time Warner’s valuable content, providing a point of differentiation among ISPs, creating more AOL customers and simultaneously generating a revenue stream for the digital content. Plus, the deal would also give AOL access to Time Warner’s broadband cables, increasing its capacity to deliver the rich content. It seems like a lovely, tidy solution, but only if the thinking isn’t examined too closely.

Ultimately, there are two possible states of the world relative to AOL Time Warner’s new model. In one case, it turns out that AOL customers don’t care all that much about the proprietary content and so there is no advantage to AOL Time Warner to having it. In this case, offering proprietary content is a bad idea: your subscribers don’t care and you have invested more than a hundred billion dollars in something that turns out to have no strategic value.

In the other case, customers turn out to care very much about proprietary content and flock to AOL in droves. This starts to look attractive. Until we consider two things: One, the nature of the industry at the time, and two, the likely competitive response. On the nature of the industry, at the time AOL had some 25 million subscribers, which was about 30% market share – of a rapidly growing and constantly transforming market. At a minimum, that meant 70% of the share was in other hands, but it is important to remember that this market was also in serious flux. The increasingly frequent introduction of new technology and the rapid growth in the number of consumers online put AOL’s market share at almost constant risk. On the competitive front, it was unlikely that competitors would merely sit by and watch AOL steal their lunch thanks to its Time Warner content. No, they would launch their own proprietary online content and refuse to distribute anything that Time Warner produced, online or not. The result would be a serious bloodbath that would extend beyond the online world into the traditional media space. In other words, if the proprietary online content did provide a big competitive advantage, AOL Time Warner should expect an equally big retaliation from competitors. Time Warner, in order to have preferential access to AOL’s subscribers, would have cut themselves off from distribution to some 70% of the market. Given the high fixed costs inherent in Time Warner’s business model, this would be a devastating hit to profitability.

In essence, in choosing to create differentiation on proprietary content, AOL Time Warner failed to make sense of the logic behind its choices. In this case, there were two clear IF-THEN-BUT conditional constructs:

1) IF customers don’t care about proprietary content, THEN competitors won’t aggressively retaliate when we wall off our content BUT we won’t make any money from greater AOL success.

2) IF customers care very much about proprietary content, THEN we will be able to build share of AOL and charge a high premium for our content BUT this will lead to competitive retaliation and a bloodbath in our content business.

The folks in charge of the AOL Time Warner merger took one predicate (an ‘IF’), mashed it together with consequents (the ‘THENs’) of the two conflicting conditional statements and imagined-away the negative consequences (the ‘BUTs’). In doing so, they created a nonsensical structure that was unsupported by the facts at hand: IF customers care very much about proprietary content, THEN we will be able to build share of AOL and charge a high premium for our content AND competitors won’t aggressively retaliate when we wall off our content.

AOL Time Warner attempted to take the best of both models, but they did so without undertaking the hard work of finding a mechanism by which the new model could work. They envisioned a wonderful world in which they wanted to live, but didn’t take the time to figure out how to get there.

It isn’t just individual companies that fall victim to a failure to think through the causal logic of their choices carefully and explicitly. Consider the approach the entire business community takes to corporate governance. Agency Theory tells us that corporate executives are ‘agents’ who are hired by ‘principals’ (owners and shareholders) to work on their behalf. But this creates a problem, because these agents have an inherent incentive to optimise activities and resources for themselves rather than for their principals, driving a greater share of the company’s profits into their own pockets instead of back to the investors. To get around this inherent self-interest, we have constructed boards of directors, who are meant to be the representatives of shareholders, providing oversight of management activities and ensuring that executives make decisions that are in the best interests of shareholders.