The Medium & the Message: AOL-Time Warner Merger

EVEN those inured to the megamergers of recent times, such as those of aircraft manufacturers, automobiles, pharmaceuticals or the various banking sector mergers each larger than the other, must have at least blinked at the sheer size of the latest one bringing together the worlds largest internet-based company, America Online, better known by its dimunitive AOL, and Time-Warner, the worlds largest media conglomerate. After announcement last week of the successful takeover by AOL of Time Warner for a record US$ 190 billion in stock, the market capitalisation of the two companies together stood at US$ 360 billion (about Rs.15,48,000 crore), roughly the same size as India’s GNP! Unlike many of the other mega-mergers whose corporate, commercial or societal significance did not extend much beyond the size of the deal or of the merged entity, the AOL-Time Warner merger is widely expected, as also put in words by AOL CEO Steve Case who will also be Chairman of the merged company, to fundamentally change the way people get information, communicate with others, buy products and are entertained… Some of this is just hype, a wish-fulfilling prophecy regarding a future scenario which, truth be told, is quite unknowable at this point of time. But the far-reaching consequences of the deal are undeniable and need to be understood.

The merger AOL, with a market capitalisation of US$ 163 billion and annual turnover of US$ 5.2 billion (about Rs.22,360 crore), is the US and the worlds largest internet service provider offering a range of services from electronic or e-mail, on-line services such as shopping, travel bookings and banking all of which can be done from the personal computer (PC) in ones home, on-line chat rooms for interpersonal or group communications in areas of mutual interest, computer-based games and so on. Quite uniquely, when so many of its rivals offer these facilities free and depend on advertising revenues alone, AOL has over 22 million paying subscribers, with about 75 percent of its members’ internet time, and 40 percent of all Americans’ internet time, being spent within the AOL portal or doorway or within AOL’s
content itself.

AOL’s success has been attributed to its shrewd anticipation of individual consumers’ needs and desires, its periodic re-invention of itself tailored to these expectations, and the package of services and content it offers.

AOLs subscriber network gives it extraordinary reach directly into peoples homes in the worlds largest market, the USA, where it already plays a significant role in their daily lives and, importantly, in the ways they spend their money and their time in being entertained or obtaining information while being exposed to a variety of advertising messages.

Time Warner, for its part, is the world’s largest media conglomerate bringing together the print media (Time, Fortune and People magazines), films from the Warner stable, music, cartoons and other cable channels from TNT and the all-pervasive CNN news channel. Its market capitalisation is US$ 83.5 billion, roughly half of AOL’s, but with an annual turnover of around US$ 27 billion, over five times that of AOL’s. It brings with it 13 million cable subscribers in the US alone and 120 million readers of its magazines.

Shareholders appear to be somewhat sceptical going by the slump in the share values of both companies on announcement of the merger, with Time Warner’s shares dropping from $90 to $80 and AOL’s from $70 to $60. In fact, AOL’s shares have been on a down-slide for over a month, slipping down from a high of $80, evidence perhaps that AOL’s and other internet-related stocks have peaked and that the market is gradually beginning to realise
that it had unduly inflated the valuation of these companies and had allowed hope to run ahead of reality.

Indeed, much of AOL’s share value, as is the case with most internet service providers, is itself speculative in the sense that the valuation is based more on returns anticipated in the future than on actual returns today. The company’s turnover is a small fraction of the market capitalisation and there are few if any assets which can be turned into cash if need arises. The fact that AOL offered its stock in the merger deal to Time Warner at 75 percent of their value, is admission enough that the stock and the company are considerably overvalued. Some commentators therefore believe that, quite apart from the synergies to be achieved through the merger with Time Warner, the deal was prompted also by the
sliding value of AOL’s stock and its perception that the terms it could get would only get worse further down the road.

In the immediate future, consumers would see active promotional campaigns for AOL on CNN and other Time Warner cable networks and magazines. Selections from Time Warner’s music and films would be offered free on the internet to promote CD and VD sales. Gradually, one would begin viewing news, sports, films and so on the internet. And both companies would then begin the serious business of actually putting together a new media company which does more than merely combine their respective assets of internet delivery and media content and moves towards reshaping information and entertainment in a fundamental manner. And impact on society, too, in many important and yet unknown ways.

The sum and the parts

All commercial entities now view the internet as a new way and increasingly powerful way of doing business both with other companies and directly with consumers. For instance, Americas largest internet-based shopping service Amazon, whose success has startled all
observers, did consumer-based business worth US$ 1.5 billion (about Rs.6,450 crore) last year. Just a week before this merger, AOL signed a deal with the world’s largest automobile manufacturer, General Motors, to market their products through the internet and also to provide mobile internet connectivity in GM cars. Ford Motors and Yahoo!, the world’s second largest auto major and internet service provider respectively, quickly followed suit with a deal of their own.

To an extent, almost all major companies do a certain amount of business these days through the internet which has thus become an integral part of the process of commercial transactions much as the telephone was earlier. Many companies therefore have set up their own internet sites or even service providers offering a wider range of products apart from their own.

Some other companies have wanted to get into internet-based services even more directly, especially where their products synergise with the vehicle itself through which they reach the consumer itself, as has been particularly true of media and communications corporates.

Media companies have known for some time that the internet is both a future rival and a potential asset depending on how companies with content to sell view the new vehicle. Disney Corporation’s feisty chairman and CEO, Michael Eisner, recently predicted that his biggest rival was likely to be Bill Gates’ Microsoft which had tied up with the NBC television network which in turn had metamorphosed into a cable company. Disney had tied up with the internet search engine, Infoseek, and created its own internet portal,, which has not being doing very well with a valuation of around 15 times its revenues compared to around 70 for most of its main rivals. Time Warner itself, like many other “old media” companies, had also tried very hard to get into the “new media” or internet business. While some similar companies entered into joint ventures or alliances, Time Warner even launched its own internet service provider, Pathfinder, which was finally put to sleep last year after five miserable years and many millions of dollars worth of investment. The obverse was seen to be equally true. Many internet service providers tried to acquire or develop their own content but to little or no avail. Even the great Bill Gates of Microsoft tried to create independent content for its MSN site, but found that developing creative content is quite a different cup of tea from creatively developing software. All this experience showed that marrying content and the new vehicle or medium, the internet, was not so much about doing the same thing
differently but about doing a different thing altogether.

The importance of broadband and cable

The reasons for Time Warner’s keenness to merge with AOL are thus quite clear, especially when one considers the earlier trajectory of this media conglomerate and the future direction of the media business. Time Warner spent millions in the early nineties upgrading its cable networks to prepare them for going digital, a move scarcely credited by commentators then but hailed as visionary now, knowing that future transmission of content would be done digitally, thus bridging the gap between different forms of content such as pictures or music on the one hand and data or other information on the other. When Time Warner took over CNN in 1996, the acquisition was motivated as much by the huge expansion in cable connectivity this would bring as by the addition of another well-known media brand. The deal thus marked the recognition by “old media” companies that the future lay in the delivery of infotainment via broadband systems. And therein lies, too, one of the important reasons for AOL’s keenness for the merger and an essential element of its significance.

As any internet user knows, the delivery of sophisticated content through telephone lines leaves much to be desired in terms of both quality and speed of access. The existing telephone lines can carry simple text, static images and digitalised music, but video is notoriously poor with images moving at an abominably slow few frames per second, nowhere near TV quality. And if large quantities of data are being transferred, waiting times can be
agonising. Thus, while AOL or other internet companies have access to people, they cannot deliver content such as films, sports telecasts, news etc like TV or even cinema theatres can and are limited in their ability to deliver large quantities of data. In a critical way, therefore, the new media of the internet faced distribution problems even while it was being looked to for maximising consumer access.

To overcome these problems, telephone companies are evolving digital subscriber line or DSL technology which would enable telephone lines to act as broadband carriers. Simultaneously, satellite and cellular telephony companies are working to transform their delivery systems to effective broadband two-way systems. But cable TV already offers such capabilities and, importantly, is already connected into peoples’ homes. The importance
of cable networks for both old and new media thus becomes apparent.

In the AOL-Time Warner merger, few commentators have noted the fact the biggest asset brought by either partner to the merged entity is the vast cable network owned by Time Warner especially after its acquisition of CNN whose name being missing from the company name probably diverting attention away from it. Time Warner is the second largest cable system owner in the USA after AT&T which itself became number one by an aggressive and rapid acquisition spree. Some business commentators and media pundits have opined
that AOL’s take-over of Time Warner is a victory of the new media over the old. Why else, they say, would Time Warner sell out to a company with a fifth of its turnover, except for the fact that it needs AOL more than the latter needs it? After all, they argue, there are many other media companies with content to offer whereas AOL is in a class of its own. But the stark fact being missed is that Time Warner is one of the very few media giants with such a large cable network, providing that missing link required for the effective emergence of the new media combining content, delivery vehicle and reach.

Other important issues

Cable has also been central to another radical transformation of the media, another important aspect to be understood regarding the evolving new media. Till the advent of cable television, media companies were putting out content such as films, TV programmes, magazines or newspapers, all aimed through different delivery vehicles at a mass audience all imbibing the same content, thus inspiring the term “mass media”. Satellite television and cable TV changed this dramatically.

Consumers could now be segmented in terms of their interests, for example sports, news, films, entertainment, wildlife and so on, separate media packages designed to cater to these and the consumer enabled through multiple channels to exercise choice. Quite apart from the obvious benefits to consumers, both media producers and their commercial sponsors or
advertisers were delighted: instead of making one amorphous product, they could make several audience-specific products and make their message count.

Some media commentators have termed this “narrowcasting” as opposed to the broadcasting carried out by the older television networks, whose audience share is shrinking quite rapidly wherever access to cable television is possible and economical. The marriage of media content with internet access is expected to further sharpen this audience segmentation and enable catering to more specific audience tastes and incorporating their feedback or even interactive commands.

All this portends significant societal impact in the advanced capitalist countries with deep penetration of internet and its use by people from their home. In the West, for instance, where there is already concern about the fragmentation of society and the decline of traditional bonds of family and community, the highly introverted and isolated world of the internet had already appeared to many to have frightening consequences, these fears only
heightened further by the imminent demise of those great modern bonds, the mass media and the shopping mall. Needless to say, little of the above has any immediate or even short-term importance for India where internet use is infinitesimal and even cable access is relatively small. And yet, cable TV is already changing the face of the Indian media scene in many and important ways, impacting on the great Indian middle-class to an extent few would have anticipated a decade ago. New technologies and new products can move extremely fast in the contemporary globalised economy and cable systems networks are already setting up themselves in monopolistic ways, readying themselves for the day when many services including telephony, TV and the internet would come to each door via the same cable. In the Indian scenario, the internet may enter the home via the TV and cable rather than through the personal computer.

A last, but not insignificant point, needs to be made. Readers may have noticed how many times the phrase “world’s largest” or “second largest” occurred in the opening sections of this article. The AOL-Time Warner merger bringing the internet into centre stage in the infotainment business also signifies that, contrary to some romantic notions, size does matter. When the internet first emerged as a strong force, there were some who felt that
it would “democratise” commerce, make it easier for the “small guy” to engage in business and compete with the big boys on apparently equal ground where it was easy for anyone to reach the consumer with information about his product. AOL and Time Warner have proved that while many other things have changed, capitalism is alive and well, and in much the same old way. Setting up an internet site may be cheap, but accessing extensive cable
networks is not, making films or other media content is not. It is still the big boys who can and will do these, with the help of other big boys with big and deep pockets. With the marriage of the internet with the media, the important of size has been underlined. In days to come, smaller internet service providers and media companies will feel the pinch… and get
swallowed up or get knocked out.