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Broadcast
15th January 2000
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TIME
WARNER AND AOL IN MERGER OF GIANTS
The merger between Time Warner and America Online is the
first significant merger of an "old-media" company with
the high-tech Internet wizz-kids of the so-called "new
media".
The old media group, Time Warner, which also owns the
CNN TV news network, saw its share price leap in value
as it took on the glowing rating that Wall Street currently
hands out to anything linked with the Internet. By contrast,
the share price of America Online [AOL] slid back, now
that its tainted by the prospect of being part of a group
that includes something as mundane as traditional entertainment.
The value of the combined group stands at around $240
billion, which would make it the world's 8th largest company
- a huge achievement indeed for Steve Case, the boss of
AOL. Mr Case's marketing skills have given the company
22 million subscribers - buying the Compuserve and Netscape
brands has helped too of course. If Mr Case's marketing
prowess can be harnessed to sell Time Warner's content
of magazines, news and films, to Main Street, then the
new company will indeed prosper.
It all adds up to a dramatic start to what Mr Case believes
will be the "internet century":
"At
America Online we have worked out to fulfil our mission
of building a medium that's as central to people's lives
as the telephone or television, but even more valuable.
Time Warner shares that vision. This merger advances the
day when that vision becomes a reality.
"In
short, we're kicking off the Internet century with a unique
company with unparalleled assets and unprecedented ability
to accelerate the next Internet revolution, and an unsurpassed
opportunity to have a positive impact on society."
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The
true value of this union lies not in what it can
do today, but what it will achieve in the future.
Steve Case |
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Steve Case becomes chairman and therefore the strategic
top-man at the merged AOL Time Warner. America Online
also takes 55 per cent of the combined group. Time Warner's
boss, Gerald Lervin, was quick to joke that while he operates
in more traditional areas of entertainment, his company
hasn't been slow to re-invent itself in recent years.
"It's exactly ten years to the day - January 10th,
1990 when Time Warner was formed. So in fact Time Warner
is not old media - AOL is in fact older than Time Warner,
by several years. For me, this represents the digital
transformation of Time Warner."
The colourful boss of CNN, Ted Turner, agreed to have
his news and film channel bought by Time Warner a few
years ago. Now he's being bought again, but it doesn't
seem to worry him.
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"I
know there's going to be some speculation, with
all the strong management and personalities, that
there's the possibility for some friction. But I
don't think that's going to happen. I think we're
all committed to making this thing work and creating
the most exciting and socially-conscious company
that the world has ever seen." |
Wall Street's overall verdict wasn't exactly glowing
- the combined value of AOL and Time Warner after
news of the merger is well below the combined value
of the two companies at the start of the year. Our
editor Martin Webber turned to Denis McAlpine, media
analyst at Ryan Beck and Company, for his views
of what was behind the deal and what was so valuable
about Time Warner?
"Between the film entertainment and the television
entertainment, they're one of the largest suppliers
of network programming in the United States. Warner
Brothers Music, which is actually a bunch of different
labels - Electra, Asylum, Warner, and a variety
of others - is one of the five major record companies
in the United States and in the world. And of course
the heritage of Time Inc was the magazines, and
they represent over a third of the magazine industry."
Martin Webber wanted to know if AOL would actually
make any money signing up with Time Warner.
"AOL makes money in two fashions. They're much
like a cable TV system, which of course Time Warner
has in abundance. What AOL does is: they make money
from a monthly charge - typically $21.95 for an
AOL service that the subscriber pays for access
to the Internet.
"The other source of revenue for AOL is selling
advertising on its various services. By advertising,
we're talking about banner advertising or, in some
cases, just selling the rights for a particular
company to appear on the front page of AOL when
that Internet page comes up."
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AOL
are one of the few Internet companies that
actually makes a profit. Not very much of
a profit, but at least it's profitable. Denis
McAlpine |
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Martin Webber pointed out that old media companies
had got together with distributors in the past,
but not with new media - the Internet companies.
He asked Denis McAlpine if this really was a ground-breaking
deal?
"I think it's probably something like a sheep
in wolf's clothing. It's been described as a merger
of content companies. The reality here, I think,
is that what we're doing is cleaning up a dispute
between distributor companies: AOL, who is a distributor
of narrow-band Internet services, and Time Warner
who, through it's cable TV system, is a distributor
of broad-band Internet services."
Were
they frightened of each other, Martin Webber wanted
to know, because cable TV operators were worried
that people were going to watch their televisions
via the Internet; and the Internet people like
AOL were worried that people wouldn’t be paying
a monthly fee and they'd be able to get all the
information on the Internet via their TV.
"I think that the real concern is that there's
such a massive difference between being distributed
on cable, at 300 kilobits per second speed, versus
having to dial up on the dial-up telephone system
in the States, at maybe 33 kilobits per second.
As you can see, there's a factor of ten in the
area, in terms of speed and that's an enormous
difference in how long you have to wait.
"The general sentiment is that, as the
cable TV companies - and Time Warner is one of
the two major cable TV companies in the States
- roll out distribution of cable modems around
the country to their various subscribers, which
is some 20 million households, they could very
easily brush aside AOL.
"It is like the old expression ‘You can't
keep them down on the farm.’ Once the Internet
user has found out that he can get 300 kilobits
and what that means to him via the cable, why
is he going to stay on board with a slow-speed
AOL service?
"I think, on the part of Time Warner, and
most cable companies, the fear would be that,
if the federal government stepped in and ruled
that the cable TV system was a common carrier
- which is basically what you would do with a
monopoly - that they would end up not receiving
very much in payment for providing what they felt
was going to be a very lucrative service: that
is, cable modems.
"So if this is a sort of compromise agreement,
they are going to go the federal regulators and
say we are big guys -.we hae solved this problem
for ourselves, we have come to an agreement. We
do n0t need you, Mr Federal Regulator, to step
in and make rules that one of us is going to be
extremely unhappy with."
But the monopoly issue is still there. In
fact, if AOL is giving up on trying to provide
a competitive service via old-fashioned phone
lines and is going in with the cable TV guys,
then people in one particular area are hooked
up via one cable company, is it not it even more
clearly a monopoly?
"Well, there are other avenues, and AOL is
trying that, with the direct-to-home satellite
broadcast system. And they're also trying that
with DSL, which is one of the telephone alternatives,
at a very high speed. But their real concern was
that the cable modem would really push them out
of the business."
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By
doing this deal, AOL have essentially said
to the outside world: "We've got our cable
modems. Now you can join us." Denis McAlpine
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| The
Markets: 18:23 GMT |
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FTSE |
6406.80 |
-11.00 |
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Dow Jones |
12525.7 |
-48.11 |
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Nasdaq |
2467.70 |
-9.91 |
| Data delayed at least 15 minutes. |
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