AOL Time Warner:

A Closer Look at the Largest Media Merger in History

America Online has been confounding its critics since its initial launch in 1989.

Silicon Valley programmers laughed at its cheerful user-friendliness, some even

nicknaming it, “America on training wheels” (Borrus). When free Internet service

providers entered the market, many industry analysts predicted it would be the end of

AOL, which charges a monthly subscription fee of $21.95, but they were wrong. AOL

survived the dot-com meltdown and has more subscribers then ever, while many of its

competitors were forced to close their doors or began charging subscription fees of their

own. The company is one of the hottest companies to emerge from the Internet, and with

its acquisition of Time Warner, Inc., AOL has become one of the world’s most powerful

media companies.

When the all-stock transaction was announced January 10, 2000 it was the biggest

merger in corporate history, a marriage of old-and new media-titans. A lot has changed

since the two companies announced the deal. From the wealth perspective, the merger

was worth $183 billion on the day of the announcement. Over the past year, the

combined companies have dropped in value to $112 billion, as stock prices of both

companies declined (Guardian Newspapers). Wall Street analysts blame the evaporation

of investor confidence in the Internet revolution and the rapid deceleration of the U.S.

economic growth for taking some of the “gloss” off the deal. Still, the merger

“represents a seminal event in corporate marriages” bringing together the world’s

dominant Internet service provider with about 29 million subscribers worldwide, and the

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venerable Time Warner brands, including Time magazine, CNN, HBO, Warner Brothers

films and the nation’s second-largest cable provider (Guardian Newspapers ).

After more than a year of battling with bureaucrats, competitors, and Internet

advocates on both sides of the Atlantic, AOL Time Warner cleared its last regulatory

January 11, 2001, when the FCC officially approved the merger. That may have been the

easy part – now they’ve got to make it work. The media giant faces the daunting task of

making good on its promise to dramatically transform the advertising and media

landscapes – in the words of AOL Time Warner’s chairman, Steve Case, “lead the

convergence of the media, entertainment, communications and Internet industries”

(CNNfn Staff Reporters).

Although most agree the mega-merger has tremendous potential, many obstacles

remain. When AOL agreed to take over Time Warner the dot-com world had not yet

melted down, advertisers had not started withdrawing from AOL’s Web sites, Turner

Broadcasting’s cable networks, and Time Inc.’s magazines, and spending on developing

businesses was still considered a good thing. “A year ago all you saw were the

opportunities,” said an executive at one Time Warner division. “Now you see all kinds

of downsides” (McConnell and Higgins).

AOL Time Warner is under tremendous pressure to show positive results almost

immediately. With a softening economy, aggressive goals for revenue and profit growth,

impending layoffs, and the watchful eyes of the media and business communities, AOL

Time Warner certainly has a tough task. But perhaps the biggest challenge for the new

company will be its ability to convince two companies with very different corporate

cultures to work together as a cohesive team. I will explore the merger in depth by

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examining the reasons behind the union, as well as some of the challenges the new

company faces – particularly in the area of successfully integrating two separate

corporate cultures. I will use one of the mega media mergers of the 1980’s, Sony’s

acquisition of Columbia Pictures, to illustrate just how difficult this type of integration

can be. Finally, I will discuss the results of the merger so far, and the potential

implications it has on the way business is conducted in the future.

Countless articles have been written about the merger – most discussing the deal’s

strategic benefits. These benefits are real – the merger took place because each company

had something the other wanted. Time Warner realized that the future of an infotainment

company was in digital technology, but its attempts establish a dominant presence on the

Internet were unsuccessful. AOL provided Time Warner with a Net presence to serve up

movies, music and information, as well as a connection with the world’s premier Internet

brand. For AOL, the opportunity to use Time Warner’s cable-TV wires to carry high-

speed “broadband” access to millions of subscribers was one they did not want to pass

up. “Time Warner’s unique combination of content, great brands and cable assets are a

perfect fit with AOL,” according to Mike Kelly, AOL Time Warner’s CFO (Sloan).

Together, the new company has unprecedented control over the flow of

information and entertainment. AOL Time Warner delivers magazines to more than 200

million readers a week, and will be able to target subscribers on the Internet with AOL’s

MovieFone, news from CNN, and music clips from Warner’s Music Group. But critics

say there is a real danger in one company trying to be all forms of content and delivery.

“That’s a shaky premise on economic grounds,” says Eli Noam, professor of finance and

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economics at Columbia Univeristy. “The old Time Warner was hard enough to manage.

Now you add AOL to the mix and I’m not sure that’s the way to go” (Walsh).

To prevent a management nightmare, “don’t seek a concensus,” says Linda

McCutcheon, former president of Time Inc.’s New Media. “It will be genetically

impossible” (Walsh). That warning addresses what some predict could be the undoing of

the merger – getting all of the companies divisions to work together. AOL Time Warner

officials groan each time the phrase “culture clash” comes up saying it’s an invention of

the media, but to many, the chemistry seems lethal. On one side are the hard-driving,

khaki-wearing “masters of the networking universe” who emerged in the 1990’s as the

“kings of the Internet domain” (Walsh). On the other side are the more conservative

media masters who’ve been around for almost 80 years, and deep down, may feel like

they’re behind the times. “This merger has created a really big company,” says Bill

Saporito, Time magazine’s business editor, “and the history of big mergers in other

industries is that they really don’t work well. So the success of this one is far from

guaranteed” (Karon).

Sony knows just how complicated integrating two very different companies.

Although the electronics giant established itself in the 1990’s as one of the world’s most

powerful media and entertainment companies, it has been a difficult and expensive

process. Sony waltzed into Hollywood in the 1980’s with dreams of synergy and a

fistful of dollars. It acquired a motion picture company, and hired two legendary

“hucksters” to run its studios. What followed was a slow-motion, $3.2 billion dollar

catastrophe.

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 The decision to become a major media player was made by Akio Morita, the

founding chairman of Sony. Morita was a historic figure in Japan’s postwar economic

recovery, and was responsible for introducing the transistor radio, Trinitron color

television, the Walkman, and the Watchman to the world. However, by the mid 1980’s,

the company whose motto had been “something new, something different,” was growing

bloated and bureaucratic (Klein, Hollywood). Along with the rest of the Japanese

electronics industry, Sony hadn’t come up with a big new hit in years.

Japan’s consumer-electronics industry had begun to saturate the world markets by

the mid 1980’s. As a result of slowing growth rates, Sony executives were concerned

future revenues would not be sufficient to pay for the mounting costs of research and

development and capital investments. What’s more, the electronics giant had suffered a

costly and humiliating defeat a few years earlier when its Betamax videocassette recorder

was trounced by the VHS format promoted by its arch-rival, Matsushita. Akio Morita

viewed the defeat of the Betamax videotape technology as a humiliating setback, and was

looking for ways to jump-start his company.

The Sony chairman believed the next electronics war would be fought on a vast

global scale over direct satellite broadcasting and high definition television. Expanding

TV markets in Asia and Europe desperately needed software, and Morita wanted to make

sure his company had the software that would make consumers buy Sony’s hardware. He

believed that Sony stood on “the threshold of a new wave of consumer electronics

products driven by digital video technology – direct satellite broadcasting, digital

videotapes, digital videodiscs” (Klein, Tycoon). Morita was convinced the best way to

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achieve an exponential hardware-software synergy was through the ownership of

entertainment companies.

Sony purchased CBS records in 1988, then set its sight on a motion picture

company. Other cash-rich Japanese companies had put up money to make some movies

in the past, but Morita wanted Sony to be the first Japanese company to own a

Hollywood studio lock, stock, and barrel.

Not all of Sony’s top executives were convinced purchasing a studio would be

beneficial for the company. To some, Morita’s argument for a “software-hardware

synergy” sounded less than totally convincing, especially after Sony’s chairman decided

to purchase the Columbia Picture group for $3.4 billion for the studio, which some people

in Hollywood estimated was $1 billion more than Columbia was worth. A struggling

studio like Columbia, which had less than a 10 percent share of the domestic market in

the 1980’s, hardly had the power to drive the sale of Sony’s hardware. Many people in

Japan speculated that at least in part, Morita’s acquisition of an American film studio was

motivated by his “bruised ego and an overwhelming desire to awe his opponents into

submission” (Klein, Hollywood).

Sony’s top executives were not the only ones with reservations about the

acquisition. Business associates also warned Akio Morita that the management styles in

Japan and America were not compatible calling the decision to purchase the troubled

studio a “mistake.” Keiji Shima, then the chairman of NHK, the Japanese public

broadcasting company reportedly told Morita, “’you don’t understand Hollywood. It

won’t work. You’re asking for trouble. You’re getting into a business that you won’t be

able to control. Don’t do it!’” (Klein, Hollywood). Despite the concerns, Sony’s board

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of directors approved Morita’s plan to purchase Columbia Pictures in 1989. Morita was

reportedly proud of the fact that this acquisition would rank as the most expensive foreign

takeover of an American company.

To head Sony’s new motion picture division, Akio Morita turned to veteran

producers Peter Guber and Jon Peters, a producing team riding high on the international

success of Batman and Rain Man, two of the biggest blockbusters of the 1980’s. Despite

the team’s limited high-level executive experience, the partners managed to dazzle the

Sony chairman, who decided to buy out Guber-Peters Entertainment Company for $200

million, and hired the two producers to run Sony Pictures Entertainment.

Many entertainment industry insiders believed Sony’s decision to hire the two

producers was a recipe for disaster, and guaranteed the failure of their venture into

Hollywood. Frank Price, former head of Columbia who worked briefly with Sony in the

late 1980’s said, “What the Japanese got with Guber and Peters was two hustlers” (Klein,

Tycoon). After Guber and Peters were brought onboard, Sony learned that the two

producers were legally bound by an exclusive production contract to Warner Brothers.

Warner Brothers refused to release Guber and Peters from their contract until Sony paid

the rival studios close to $500 million dollars (Masters, Vertigo).

The clash between the Japanese, and the “Hollywood” style of doing business was

immediate. Guber and Peters immediately embarked on a major face-lift of Sony’s new

California quarters, spending $100 million on landscaping and artificial storefronts to

build an artificial version of a classic studio back lot. “’When the Japanese guys come

visit,’ said one insider, ‘they get the feeling that they’re in an idealized version of a

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Hollywood studio’” (Masters, Headache). The back lot was not designed for filming, or

for tours – it was designed to project an image of success for Sony’s top executives.

The successful image projected by Sony’s Culver City offices did not mirror

reality. By 1995, Sony had spent more than a billion dollars in a futile effort to gain a

foothold in Hollywood. Of the 26 pictures released by Columbia and TriStar pictures in

1994, 17 lost money (Klein, Tycoon). Sony’s leaders were concerned that the highly

publicized problems within the Sony Pictures Entertainment division would disrupt

harmonious relations inside the larger Sony family, which in Japan is the key to business

success. “A couple of years ago, it looked like Sony was invincible,” said a movie

executive who has dealt extensively with the Japanese. “But then Sony began to take a

huge hit on Columbia; the negative cash flow was climbing into the stratosphere,

somewhere in the $200-to$300 million a year range.” (Klein, Tycoon).

It was not just the negative cash flows that concerned Sony’s Japanese leadership.

Even more important from their point of view was the spectacle of managers who were

diverting company resources to private uses. Peter Guber insisted on having expensive

fresh flower arrangements and fruit baskets delivered to top executives’ offices daily.

Jon Peters reportedly sent the Sony jet filled with flowers to London to pick up his

girlfriend at a cost of $30,000. Peters also put his girlfriend and ex-wife on the corporate

payroll for a quarter of a million dollars apiece. “’It was the little things that got the

Japanese,’ said one former Sony Pictures executive. ‘The thing that they kept talking

about over and over again was that Peters had come to one of these meetings in Japan not

wearing socks, and that drove [them] crazy. There were a lot more things to be angry

about than that’” (Klein, Tycoon).

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 Sony eventually fired Jon Peters in 1991, but Sony was reluctant to get rid of

Peter Guber. The Japanese carried on business affairs according to the code of giri, a

concept for which there is no exact Western equivalent, but which is sometimes

translated as a feeling of “moral obligation to one’s liege lord and comrade-in-arms”

(Klein, Tycoon). In a 1995 interview, Mickey Schulhof, former president of Sony’s

American Division, tried to explain the company’s philosophy of management by saying,

“ultimately, the management of a corporation has to accept responsibility for its actions.

But you have to understand that Sony’s culture has always been not to fire people but to

accept people for their strengths (Klein, Tycoon). But Sony seemed blind to the fact that

relationships in Hollywood were governed by an entirely different code of behavior –

ruthless self-interest.

Sony’s leaders deny they were “fleeced” by Guber and Peters. Although there

had been signs of overspending, management in Tokyo and New York did not believe the

amounts being spent were “wildly out of line” with the industry (Klein, Tycoon).

However, the Japanese recession and the dramatic appreciation of the yen forced the

electronics company to face reality. Profit margins were being squeezed in Sony’s

traditional “hardware” exports such as TVs and Walkmans, making it harder for the

company to carry the losses of its motion-picture “software.” Even during one of Sony

Pictures’ best years in1992, when it posted profits of $409 million, its income was

entirely erased by the more than $300 million owed in interest payments on its debt, and

$100 million in “goodwill charges” – an annual charge taken over 40 years, reflecting the

difference between what Sony paid for Columbia pictures and the company’s net worth at

the time of the purchase (Klein, Tycoon).

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 Sony tried to find a strategic partner to invest money into their Hollywood

companies. Sony put out feelers for a “strategic partner”, but no one would meet the

company’s asking price. Top management decided the only way to make the company

more attractive to investors would be to clear the balance sheet of the goodwill charges

by taking a huge onetime write-off – a step tantamount to admitting the company made a

mistake when it purchased the Columbia motion pictures group (Klein, Tycoon).

In 1994, Sony wrote off $2.7 billion of goodwill associated with its acquisition of

Columbia Pictures, as well as $510 million in additional charges for such items as

abandoned movie projects and contract settlements. The $3.2 billion write-off was the

biggest in Hollywood history, and the equivalent of a quarter of the Japanese company’s

stockholders’ equity. What’s more, the decision “raised serious questions about whether

the once seeming invincible Japanese were culturally suited to compete in the

entertainment and communications industries” (Klein, Tycoon).

The expensive fiasco in Hollywood prompted Sony’s Japanese leaders to make

some managerial-changes, starting at the top. Nobuyuki Idei, a board member who was

named Sony’s president in 1995 said, “it will take at lease three years for us to recover in

Hollywood. This kind of management problem cannot be rectified overnight.” (Klein,

Tycoon).

Since the write-off, the Sony Pictures Entertainment division has performed

respectably, with an equal share of box office hits and misses (Staff Reporters). It has

also built a modern studio, whose state-of-the-art equipment is second to none in

Hollywood. Sony ranks fifth on a recent ranking of the world’s top media companies,

with holdings that include: four motion picture studios; three television production

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companies; several recording labels, a movie-theater chain, and video and electronic

publishing divisions (Reed).

Sony survived the difficult and expensive expansion from electronics into

entertainment, but learned some painful lessons along the way. Most industry experts

agree that the clashing corporate cultures between Sony and Hollywood made the

expansion a difficult one. In the words of one studio insider, “The Japanese collective

spirit did not mix well with Hollywood megalomania” (Klein, Hollywood). Even former

Sony Pictures co-chairman, Jon Peters now agrees “the Japanese didn’t know what they

were getting into” (Klein, Tycoon).

AOL Time Warner hopes the integration of its companies will be less difficult

than Sony’s, but even executives who support the new corporate strategy say it won’t be

easy to get all of the company’s divisions marching in “lockstep” (Yang, Grover, and

Palmer). “AOL has bought a huge media company that has been through two large

mergers in the last decade,” says Elizabeth Sun, senior program director at the Meta

Group, “and it never really integrated its operations with either one,” (Radigan).

“Togetherness” has not historically been the Time Warner way. Each division

has operated like a city-state, with an unquestioned leader who did not always cooperate

with colleagues in other departments. Division heads are used to running their own

operations, with concern for their own bottom-line, and not necessarily the performance

of the company as a whole. Making matters worse, there’s a generational gap between

AOL’s “twenty-something’s” and Time Warner’s “graybeards”. When it comes to

making deals or launching new ventures, they move at two speeds. It’s “Let’s do lunch”

vs. “Let’s skip lunch,” according to Time CEO, Don Logan (Yang, Grover, and Palmer).

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Perhaps most telling, Time Warner employees learned they would lose their profit-

sharing benefits in favor of stock options – a clear nod to the Internet culture. Not

everyone on the old-economy side of the company was pleased. “Some people are

bummed out about this,” says one Time Inc. writer. “This is a huge cultural change. It’s

replaced our very dependable old-line compensation system with this new Internet

compensation. I just don’t think these options will be worth as much” (Orenstein, Li,

Rich, and Pressman).

An incident early in the negotiation process illustrated just how strained relations

between the two companies were. David Colburn, AOL’s president of business affairs

was in a meeting in which a Time Warner official didn’t think he was getting enough

respect. “You talk like you’re buying us,” said the Time Warner executive. “We are,

you putz,” replied Colburn (Walsh). Although Colburn has since denied making the

comment, the incident was considered a point of honor by his colleagues who had T-

shirts made repeating the answer.

In order for the merger to work, Time Warner will have to change it’s

decentralized approach to management. On its own, AOL never had much of a problem

centralizing its operations under one roof. But for most of its existence, it was a

relatively small company focused mostly on Internet access. Now the same management

that came out of nowhere and dominated one of the hottest sectors of the New Economy

is faced with integrating at least half a dozen diverse businesses. The last major change in

AOL’s operations was the shift to flat pricing, and the company fumbled it miserably

with widespread service outages as the company couldn’t keep up the increased demand

for its service. This time, the stakes are much higher.

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 The man responsible for bringing the two warring tribes together is Robert W.

Pittman, co-Chief Operating Operator of the combined company. Pittman has worked at

both Time Warner and AOL, and has already successfully revamped AOL’s corporate

culture. Pittman was brought on-board AOL in 1996, when the company was in crisis.

Investors were impatient with the company’s fixation on growth at any cost. At the time,

the stock had fallen to a low of $25, down from a high of $83 in February of 1994.

Pittman immediately began refocusing AOL on the bottom line – slashing costs, and

building advertising and e-commerce revenues. He encouraged senior executives to work

together by holding biweekly operating committee meetings, and forced them to use the

same in-house marketing, engineering, and deal-making teams (Yang, Grover, and

Palmer).

Pittman is using a similar approach at AOL Time Warner, holding meetings every

two or three weeks with all division chiefs. It is the first attempt ever to gather the Time

Warner bosses regularly. So far, the conflicts have been minor. Pittman persuaded Time

Warner executives to trade in their e-mail system for AOL’s. Then, he put all employee-

benefit processing online to cut costs in paperwork. Pittman says the Time Warner

people resisted change at first, but “gave in” after he explained the cost savings the

changes would produce. While serious infighting could still occur, the open discussions

are helping to quell “corporate intrigue”. “It’s all about creating a safe environment of

trust and an expected mode of behavior,” according to Turner President Steven J. Heyer

(Yang, Grover, and Palmer).

Some coordination is already apparent, particularly in AOL Time Warner’s cross-

promotional efforts. Bob Pittman claims the company’s magazines have gained some

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100,000 new subscribers a month through plugs on AOL. Last summer’s Warner

Brother’s hit, The Perfect Storm, got a heavy promotional boost on AOL. The service

also held a Madonna listening party and live chat to coincide with the release of her latest

album – brought to you by none other than Warner Brothers. Meanwhile, to sell

subscriptions, AOL software has been embedded in Warner music CDs (Orenstein, Li,

Rich, and Pressman).

However, the merger is about more than strategic synergies. The long-lasting

impact of this combination may center on a party that has largely been ignored in all the

hype – advertisers. The AOL Time Warner merger represents a different model,

something media analysts call a “media network.” “Media networks use the power and

flexibility of digital technology to create a more flowing, boundary-free media

experience” (Charron). This creates value for advertisers, because media networks

address key concerns – the struggle to find large audiences in an ever-fragmenting media

universe (Charron). “Even in a time of media splinterings, there is a dominant leader to

drive the market,” according to economist, Jack Myers. “The more dollars that come into

the medium, the faster the technology developments and research developments

accelerate.” (Kempner, Study). AOL Time Warner is counting on this value-adding

proposition created by its “media network” to weather the harshest U.S. advertising

market in a decade.

Merrill Lynch analysts predict that advertising will grow more slowing this year

than U.S. gross domestic product for the first time since 1992, and on-line companies are

expected to be hurt the most. “Advertising spending in this new medium will shrink by

25 per cent this year,” according to one analyst (Grimes and Waters). Early signs of the

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advertising slowdown have already led to disappointing earnings at the Time Warner

cable networks in the final months of last year, and AOL officials admit the pressure is

building. “Advertising ‘overall’ is a little weaker this year than expected”, concedes

Mike Kelly, AOL Time Warner’s chief financial officer (Grimes and Waters ). But Kelly

insists AOL is less likely to be affectd by an advertising drought than old media rivals

such as Disney or Yahoo.

AOL Time Warner expects advertising to account for 23% of total revenues, and

despite years of attempts, no media group has set the world on fire with successful large-

scale cross-media marketing programs like those planned by AOL Time Warner (Fine).

Holly Becker, an Internet analyst with Lehman Brothers, warns that AOL Time Warner is

unlikely to “remain completely unscathed by the current environment, especially given

the overall ad market” (Grimes and Waters). However, AOL Time Warner officials

remain confident the company will meet its forecasted advertising revenues. “In bad

times, advertisers will spend their money on the top ad venues, like AOL and Time

Warner properties,” said co-COO Robert Pittman (Yang, Grover, and Palmer).

Despite concerns about the slowing economy and a decline in advertising

revenues across the company’s media platforms, AOL Time Warner leaders believe their

ambitious financial objectives are achievable. Those objectives, unveiled shortly after

the merger was approved January 11th of this year, include boosting revenue 12 % to $40

billion, and EBITDA cash flow 30% to $11 billion (Mermigas). The “AOL Time

Warner’s biggest dilemma is that it has to show some progress right away, and most of its

best business initiatives are long-term” said CIBC World Markets analyst John Corcoran

(Mermigas). The key is how quickly management can achieve its financial objectives,

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while juggling the massive integration of companies, a rapidly changing competitive and

technological landscape, and a weakening economy. Bob Pittman concedes he is on the

hot seat. “The company must hit the numbers expected of it,” he says. “If not, I’ll be

responsible” (Yang, Grover, and Palmer).

Analysts predict AOL and Time Warner Cable, which generate most of their

revenue from subscriptions, will provide the bulk of that growth. This factor could be

important for investors in a weak advertising climate. The company is expected to shift

its emphasis more toward its subscription and content business. “AOL can still achieve

its financial goals this year,” says Merrill Lynch analyst Henry Blodget. “They are not

immune but they are in a better position than others” (Grimes and Waters). But AOL

Time Warner is not relying exclusively on subscriptions to meet its financial targets.

“When you have the number one position in so many different areas, there are a lot of

different levers you can pull from a revenue perspective. I am more confident today than

a year ago” (Mermigas).

The first “lever” the company pulled was the old fashioned one – labeled “job

cuts.” In January, the company announced it would lay off approximately 2,400

employees worldwide, approximately 3% of AOL Time Warner’s employees. The

numbers will climb even higher when the company sells or closes its 130 Warner

Brothers retails outlets. So far, AOL, Warner Music, and CNN have sustained the largest

cuts. The company insists the layoffs are aimed at reducing duplication in interactive

areas and corporate operations. “In no area are we cutting into the muscle of the

company,” according to company spokesman, Ed Adler (Kempner, Changes). On the

cost-cutting side, the company has already begun to use synergies among AOL, its cable

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properties and its print division to cut marketing costs, and has captured about $70

million in revenue it otherwise would not have by cross-selling advertising deals with

companies like Compaq, Cendant, Nortel and Kinko’s (Scanlon).

So far, the marriage of the old and new media companies appears to be working.

First quarter results released in March show the company posted strong gains in total

revenues, EBITDA, cash earnings per share, and Free Cash Flow over pro forma results

from last year’s comparable quarter. Total revenues rose 9% to $9.1 billion, while

EBITDA increased 20% to $2.1 billion. Company officials credit increases in

subscription, advertising, and content revenues for the growth (AOL Time Warner Press

Release).

AOL Time Warner continues to stand by its ambitious financial targets. In fact,

AOL Time Warner chairman, Steve Case, says the company will be able to meet its

objectives without raising its online subscription fee – a price hike many analysts have

anticipated (Mannes). Still on the horizon are plans to extend AOL Time Warner’s reach

beyond the PC, initially through interactive television and wireless devices. AOLTV was

launched earlier this year, but has not captured many fans to date. The media giant is

also considering taking on rival Viacom Inc.’s dominant MTV franchise with the launch

of a cable TV music channel during the next 12 months. The company reaches 12.7

million homes through its cable unit, giving it a solid base for a network launch (Doman).

It will likely take years to assess whether the AOL – Time Warner merger creates

something groundbreaking, to know which divisions have won the battles for control, and

which players have staked out their turf. If the two sides can work out their cultural and

philosophical differences, the possibilities for the future are enormous.

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 The AOL Time Warner merger clearly has immense implications for media and

communications companies – and for their audiences. But it may also mark the moment

when the distinction between pure Internet companies and their brick-and-mortar

equivalents began to blur. A year ago, the announcement that AOL would buy Time

Warner signaled a seismic shift: An overgrown ISP barely a decade old was swallowing

one of the world’s most venerable media conglomerates. The old economy was giving

way to the new. Now that view is changing. With Internet stocks gasping for life, e-

businesses seems to need the traditional media – badly.

What the marriage of Time Warner and AOL symbolizes is the beginning of a

trend towards convergence between online and offline companies, each recognizing the

strengths that the other brings to the table. In coming to their agreement, both Time

Warner and AOL realized that each needs the resources and skills of the other to compete

successfully in the future. The fact that Time Warner, with its brands, content and

distribution channels, embraced the deal so enthusiastically is an extraordinary admission

of the difficulty that many traditionally companies face when trying to adapt their

businesses to the Internet.

As for AOL, it recognized that despite its pre-eminence on the Internet and a

market capitalization that made it by far the world’s most valuable media company, it

was still a vulnerable company. Particularly, in the area of gaining access to cable

systems, which are increasingly seen as the best way to bring broadband services to the

consumer. Under the terms of the deal, its shares are valued in effect at 75 cents on the

dollar, a kind of discount for Internet volatility.

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 In the future, nearly all companies will be Internet companies in the sense that all

companies today are telephone companies, with the Internet so deeply ingrained in their

cultures that they will no longer think about it. If the merger between TW and AOL

works as intended, they will simply have gotten there a little earlier than most.

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