The AOL Time Warner deal
Patrick Barkham www.theguardian.com
<B>What is all the fuss about?</B>
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the Guardian
What is all the fuss about?

The merger of AOL and Time Warner is massive by any standards. It is the biggest US corporate merger ever, creating the fourth largest company in the world, worth $350bn (£220bn), more than the output of Russia or the Netherlands. The new company will have more than 100 million subscribing customers across the globe.

The deal is even more hyped because it will create the world's largest media company from the first significant merger of an internet company with a traditional firm.

Who is the dominant partner?

AOL made $4.8bn in revenue in the 12 months to June 1999; Time Warner made $26.8bn in 1998. AOL employs 12,100; Time Warner 70,000. Despite this, AOL earned four times the net profit of Time Warner in 1998/99 and the stock market values AOL 1.5 times higher than Time Warner. So, although it has been heralded as a "strategic merger of equals", AOL shareholders will be given 55% of the new company to Time Warner's 45%, giving them effective control of the new company.

What is in it for both of them?

Much has been made of traditional media companies failing to get the net. With a media empire embracing TV news (CNN) film (Warner Bros) and magazines (Time, People), Time Warner had set aside $500 million to invest in new online efforts. Now it has a ready-made internet strategy and a vast new media platform to distribute its content. Its films, for instance, could soon be downloaded from the internet by AOL subscribers.

AOL, America's leading internet service provider (ISP) which also owns web browser Netscape, wasn't short of content, although Time Warner will provide it with more: Warner Bros offers the potential to "broadcast" thousands of films over the internet.

More importantly, the merger will end AOL's bandwidth problems. The company has struggled to find ways to speeding up its dial-up internet service for American households. Now it can now provide a far quicker, broadband internet service, carried on Time Warner's Roadrunner cable modem service. Time Warner has 13m cable subscribers, who also present AOL, which already boasts 22m internet subscribers, with a vast new market.

How will they work together?

The buzzword is "convergence". At the start of the 1990s Time's publishing empire merged with TV, film and music giant Warner. Ten years on, this merging of a traditional content provider with an online operator appears to make a lot of sense.

AOL will give Time Warner much-needed internet savvy and an established internet platform for its content; Time Warner will grant AOL high-speed cable access to households. The integrated company will be able to provided integrated media services, so that customers can get films, music, magazines and the internet all through their digital TVs.

There will be difficulties which come with forcing together two giant companies of contrasting cultures, personalities and locations. Time Warner are based in New York; AOL in Virginia; the new company will be split between the offices. AOL chairman Steve Case admitted "there are a lot of cooks on stage", with his Time Warner counterpart Gerald Levin, as well as high-profile CNN chief Ted Turner at the apex of the company.

Lower down the food chain, Warner employees may resent working alongside AOL workers made rich by their internet stock options. In turn, the AOL net millionaires may resent the value of their shares being held down by its merger with Time Warner, a traditional media firm with slower growth.

Could there be any problems with the deal?

The deal has not gone through yet. It must be subject to regulatory scrutiny. Legal experts don't foresee any significant problems in America, although AOL's alliance 50-50 joint venture with German media giant Bertelsmann in Europe and Australia could be questioned. Previous proposed mergers between internet and traditional media have collapsed, such as last year's attempted merger of internet portal and search engine Lycos with USA Networks.

What are the implications here?

British consumers will be able to take advantage of a bigger range of Time Warner content services through AOL Europe, which is handed a competitive advantage in its battle with Freeserve, Britain's biggest free internet service provider. Its share value fell yesterday.

The stock market believes this deal is the first of many. That a traditional media company, Time Warner, accepted the higher value of an internet company, AOL, also suggests that the market's high valuation of many internet companies is no chimera. More than £8bn was added to the value of London-listed media shares yesterday.

"Temporarily, maybe it leaves them in the dust,'' said internet analyst Dan O'Brien of Time Warner's traditional competitors. These media giants, such as Rupert Murdoch's News Corporation, Sony or Disney, all with a significant presence in Britain, may consider striking similar deals with dedicated online companies such as Yahoo, Lycos, AT&T and Microsoft.

What about the future of the internet?

AOL has fiercely campaigned for high-speed cable operators to open their lines to a variety of providers, which would help ensure competitive pricing and consumer choice. It insists that its privileged access to Time Warner's cables will not change its position and both promised to promote open access on their cable network, forcing AT&T to do the same.

Critics argue AOL will surely reduce its campaign for open access. And even if they remain committed to open access that does not necessarily mean they will grant outside providers with equal access to their broadband services. AOL's services are likely to enjoy preferential services on Time Warner's cable system.

Internet idealists argue it is a massive step in the multinational corporate takeover of the internet and web content. Other internet-media mergers cannot be far behind.

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