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RSS feedsWelcome to convergence. It is enormous. Yesterday the world's largest Internet service provider, AOL (revenue, $4.7 billion; market value, $163 billion), bought film studios to cable TV media giant Time Warner (revenue, $26.8 billion but market value only $97 billion).
The agreed deal, the world's largest ever takeover worth $160bn in shares, brought waves of analyst euphoria and predictable hype.
Steve Case, chief executive officer of AOL and the deal initiator, described the deal as defining. It created, he said, "The first global Internet and communications company of the Internet century." Perhaps it's the deal of the millennium.
However, while the scale of the deal itself is enormous, it's worth striking a cautionary note. Despite all the talk of impressive synergies between AOL's Internet distribution network down to the Netscape browser in the desktop and Time Warner's movies, television, magazines and American cable networks, the reality is a little less magnificent.
Powerful combination
The merged company, AOL Time Warner, which retains senior executives from both sides, has staked out the lead ground in bringing together a software, network and content conglomerate.
The combination reflects the emerging maturity of the Internet as a mass medium and its constant crossover with traditional media - what was described in the mid-90s as convergence. To prove the point, both companies drew up a list of already agreed areas of co-operation, helping online brands with the strength to see off the slew of new entrants.
These include:
- Time Warner websites CNN.com and Entertaindom.com programming will be featured prominently on various America Online services.
- Time Warner will offer a number of special offers exclusively to AOL members.
- The popular Warner Bros. retail stores will promote the AOL service, including through the in-store distribution of AOL disks.
Yet it is wise not to get too excited about a list of marketing deals that didn't need a $160 billion merger. Cross-selling media products is harder to achieve in practice than in theory, even if it saves on marketing bills.
AOL surfers aren't just going to want to watch Warner movies (which include You've Got Mail). Equally, online magazines are not just going to want to be tied to AOL.
Regulators are likely to be concerned about open access if the content behemoth attempts to lock out interactive distribution channels.
High hopes
In the States Time Warner owns the second biggest cable network - which has broadband potential - but it has no media distribution interests in the UK or Europe. AOL gives the company new media skills, saving it from its failure to build up a significant online presence (remember Pathfinder?). But whether it will lead to creating new Internet on TV networks or content is a hope, not a certainty.
The long term prospects for Netscape also remain less than clear. Netscape, owned by AOL following a 1998 merger, was simply not mentioned in the deal's announcement. Its onetime top executives have all moved on. More detail is needed.
Will product investment in Netscape continue if Warner releases box office turkeys? Will the new company's stock be able to reward quality development staff? And will content companies want to buy Netscape servers if, elsewhere, the profits from the software help support a competitor?
Such problems have surfaced in other sectors, leading AT&T to demerge its telecoms equipment manufacturer Lucent in 1996.
However, Netscape has the backing of a big parent, who on the one hand could take on Microsoft, and on the other doesn't have to waste time backing struggling products that Netscape felt it had to develop to grow.
How Microsoft might benefit from the deal
Microsoft could be an obvious beneficiary of this merger in its battles with the Department of Justice. In its battle to avoid breakup it has already used the example of the AOL-Netscape merger as evidence that the market is competitive enough, although this didn't help it.
The new corporate colossus brings together the software, distribution and content entity that many Microsoft watchers feared Bill Gates would create. One wonders whether Justice or trial Judge Jackson will be able to enforce damaging penalties now.
Gates has also reportedly considered selling his company's cluster of content assets, such as travel site Expedia -- as much technology demonstrators as serious forays into the market. The AOL/Time Warner deal may change the company's mind, fuelling a renewed push into media and bringing it into direct competition with other content providers.
Microsoft apart, the rest of the media industry clearly has to think again. Can portals and Internet service providers remain independent from content firms? Should Freeserve or Thus, owners of Demon, link with a publisher?
Financial fervour
But it's hard to be convinced whether such a merged entity would produce any more innovative thinking in Internet/television crossover than a skunk-works or a startup. And the idea of most software companies, who focus on the business to business market, merging with content providers is implausible: SAP and Granada, News International and Oracle.
Yet the plaudits from the financial analysts would suggest otherwise. Perhaps its the prospect of all the advisory fees - the AOL/Time Warner link will earn an estimated $400 million for both sides' respective investment banks. No wonder they're all so excited.
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