The
merger of America Online and Time Warner
represents not only the triumph of the Internet as
the irresistible force in
business, but a vision of the
Web as a mass-marketed,
middle-of-the-road medium
for Main Street America.
Though top executives
of both companies
presented the deal as a
"merger of equals," it
was in fact a victory for
Stephen M. Case, the
41-year-old billionaire
who built America
Online from a fledgling
dial-up service in the
mid-1980's to an
Internet powerhouse
able to acquire the
world's largest media
company.
"America Online is
clearly dominant,"
David Readerman,
managing director of
Thomas Weisel
Partners, a San
Francisco investment
firm, said. "The nerds
have won. This deal
really validates the
Internet."
Even more so, it would
appear to validate AOL,
whose strategy was to
market the
freewheeling, global,
often chaotic Internet as
the suburbs of its online
service. Techies long
derided America Online
as a lowbrow medium.
They called it "training
wheels for the Internet,"
suggesting it was not the
real thing.
But Mr. Case, who once
developed new pizza offerings
for Pizza Hut, always
held his ground. He insisted
that the online business
was less about technology
than about consumer
marketing. His vision has
proved on target so far,
making America Online by
far the biggest online
service with 20 million
subscribers. Just where the
combined AOL Time Warner
is headed is hard to
predict, but the emphasis
is certain to be the same -- a
mass-market consumer service
that is easy to use and
hides the intimidating technology.
"It's not about technology,
it's about making this a mass
medium and becoming part
of the everyday habits of
ordinary consumers," Mr.
Case said yesterday.
The measure of America Online's
rapid rise and its
current stature was evident
on Wall Street yesterday. A
few years ago, it was thought
that America Online
might indeed merge with
a media company. Disney or
Time Warner, it was said,
might buy America Online,
which was then regarded
as a promising upstart. But
yesterday it was the shares
of Time Warner, with its
storied legacy reaching
back to Henry Luce, that leapt
in celebration, like some
neglected waif rescued by a
wealthy benefactor.
"I accept that something
profound is happening in
the
Internet space -- I believe
that,"
said Gerald M. Levin, the
chairman and chief executive
of
Time Warner. "The new media
stock-market valuations
are real
-- not in every case, of
course.
But what AOL has done is
get
first position in this new
world.
Its valuation is real, and
I am
attesting to that."
Yet the America Online-Time
Warner deal is more than
a
striking testimonial to
the
Internet as mainstream medium.
The proposed merger is also
a
big gamble for both companies,
as well as an admission
by each
that they need one other.
America Online's weakness
is
its lack of access to high-speed
Internet services over television
cables, which its online
rivals
AT&T and Microsoft have.
Once in place, these high-speed,
or broadband, networks --
provided over upgraded cable
or phone lines -- open the
way
to the digital distribution
of new
services for interactive
entertainment, information
and
e-commerce through everything
from desktop computers to
handheld devices to television
sets.
Time Warner, with its vast
cable networks serving more
than 13 million subscribers,
gives America Online assured
access to the high-speed
networks required for these
new
mass-market Internet services.
"The biggest threat to AOL
over
the next three years was
getting locked out of
broadband," said David B.
Yoffie, a professor at the
Harvard Business School.
"And this deal certainly
helps solve that problem."
But that solution, by joining
its fate with Time Warner,
could come at a high cost
for America Online. The
online leader has been a
favorite on Wall Street
because it is regarded as
a fast-growing Internet
company. Now, it is melding
its business with a
slower-growing, though far
larger, media company
whose properties range from
Time magazine to Warner
Brothers films to CNN.
"There's not a prayer that
the combined company can
grow at anything like AOL's
historical rates of growth,"
Mr. Yoffie said.
Reflecting that concern,
America Online's stock price
slipped a bit today, closing
down $1 1/8 to $72 5/8 a
share, while Time Warner's
shares jumped $25.25, to
$90.
Mr. Case said he expected
the far higher valuations
given to Internet companies
than to media companies to
decline. But he held that
view, he added, not so much
because he thought investors
had bid up Internet shares
to outlandish heights but
more because traditional
media companies would be
revived if they got their
Internet strategies right.
"Traditional media assets
have a vibrant future if they
can be catapulted into the
Internet age," Mr. Case said.
By linking with Time Warner,
Mr. Case is also betting
there are advantages to
owning those media brands, not
just distributing them through
the America Online
service. With Internet access
expanding beyond the
personal computer -- with
people increasingly tapping
onto the Net by phone, TV
and handheld devices -- Mr.
Case feels consumers will
want an easy-to-use service
that works on all those
machines.
America Online, in short,
wants to be a one-stop
service for the Internet
of the future. "We don't want
AOL to be a place people
go through to get someplace
else," Mr. Case said. "We
want to be able to create an
integrated consumer space.
That's why, ultimately, the
ownership of media brands
will be important."
At Time Warner, the deal
is seen as a fast track to the
Internet -- "the digital
transformation of Time Warner,"
in Mr. Levin's terms. In
trying to make that shift on its
own, Time Warner had struggled
badly. Its Internet site,
Pathfinder, which offered
online versions of most Time
Inc. magazines, for example,
was abandoned after four
years and millions of dollars
in losses. Each
publication, including Time,
Fortune, People, Sports
Illustrated and Entertainment
Weekly, has its own site
now.
And while Road Runner, the
company's high-speed
Internet service, has more
than 320,000 clients, it has
not grown as rapidly as
Time Warner had hoped. And it
is clearly not the online
brand America Online is.
"Time Warner sees all its
media properties going to the
Internet -- movies, television,
print and music, which is
already well on its way,"
said Harold Vogel, who
heads a New York media investment
firm. "And the
company has been frustrated
in not being able to exploit
its cable and media assets
more effectively in the
Internet arena."
The people behind the merger
-- perhaps even more
than the strategy -- will
determine whether the
combination works. At the
New York news conference
yesterday, there was no
shortage of smiles and
back-slapping and much warm
talk of the "shared
vision" of the top executives
of America Online and
Time Warner. Mr. Levin went
out of his way to appear
informal, wearing a sport
coat and no tie; Mr. Case,
renowned for his khakis
-- he once appeared in a Gap
ad -- and rarely donning
a coat, went out of his way to
look formal, wearing a suit.
But the blunt-spoken Ted
Turner, who is Time Warner's
largest shareholder with
100 million shares,
acknowledged a key issue
in all large mergers. Mr.
Turner said that the new
executive team would be filled
with "strong personalities,"
meaning there was
"potential for some friction,"
though he said he did not
expect clashes to slow the
new AOL Time Warner.
Outsiders were even more
skeptical. "Sorting out these
businesses is going to be
a task of monumental
proporations," said Mr.
Yoffie of Harvard.
That chore, apparently, will
fall mostly on the
shoulders of Mr. Levin,
who is to be the new
company's chief executive
and who is a more seasoned
manager than Mr. Case.
"I'll focus on the things
I'm best at -- strategy,
technology, policy and running
the board," Mr. Case
said. "Gerry will run the
company."