AOL – Time Warner Merger Essay

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AOL – Time Warner MergerIn the recent past, there has been a wave of merger-mania, both in the United States and in europe. The merger of the Millennium is between America on Line and Time Warner. The AOL Time Warner deal represents the joining of the Old Media with the New Media.

Not only is it a marriage of different approaches, the two CeO’s are very diverse individuals. The two companies are quite different, in nearly every aspect. Some of the divisions of Time Warner have been around since the 1920’s, while the youngster, AOL is a mere fifteen years old. The quick paced, new up starting Internet companies never thought in a million years they would ever need the old stand-by media organizations. “The Internet will revolutionize everything”, that is what their beliefs were.

They were fearless and believed themselves to be invincible, but things have changed. The Internet has put the world only a mouse click away and it has changed the world. The fact of the matter is the world of the Internet is extremely competitive and in order to survive, you must invest huge sums into your marketing campaign, in some cases up to seventy percent of a budget. The one thing that you can always could on in this word is change, and there are going to be some major changes in the realm of the high tech companies. The ‘techies’ are going to have to realize their need for and have to learn how to form lasting relationships with the ‘old stand bys’ in order to keep up with today’s world.

Time Warner is, for the most part, a stable reliable organization. Time Warner’s holdings include many magazines, Time, Sports Illustrated, Money and Fortune just to name a few. Time Warner also possesses Warner Brothers Studio, Warner Music (which recently acquired eMI Music), Turner Classic Movies and an array of television stations. A partial list of the broadcast networks includes CNN, TNT and HBO. Time Warner is also the second largest cable television provider in the country.

They have also recently invested huge sums of money into their cable system to prepare it for Roadrunner technologies. Roadrunner is an alternative to a standard Internet service provider account (ISP). Roadrunner allows a user to send and receive as much information as they desire and unprecedented speeds. Time Warner has played around with their own Internet company, Pathfinder, with little success.

The world of the Internet is so cutting edge that unless a company pays very close attention to it, chances for success are very low. This fact brings the importance of a joining with an organization such as AOL into the light for Time Warner. America on Line realizes the value of a company as established as Time Warner.AOL is a New School organization. Steve Case and Bob Pittman also had the foresight to see the impact of a joining of their company with Time Warner. They could create the largest, most powerful service provider in history.

America on Line comes into the deal offering it’s cutting-edge technologies and the love of the American people. AOL has continually updated its system to make using the Internet easy for anyone. They have removed the phobias that many Americans have experienced. AOL has developed its very own vast world where you can find nearly anything you could possibly want to. AOL’s domain is perfectly safe and so simple to navigate.

At present, AOL has over 22 million subscribers. Americans love AOL and all the features it has to offer. AOL has something called Instant Messenger, which allows you to communicate instantaneously via your computer with anyone, anywhere. They offer multiple e-mail accounts with each dial up account.

What this means is in a household, each member can have their own e-mail address at no additional charge. AOL makes the Internet so easy to navigate and unlimited access is offered for about $20.00 per month.Prior to the merger talks, AOL’s online customer base had been growing rapidly, but revenue from subscriptions was partially offset by a decline in the average revenue per subscriber.

AOL had been under pressure from free Internet service providers and lacked guaranteed access to broadband cable, satellite, or DSL phone lines.Before the merger talks, Time Warner’s stock price was dropping, it was difficult to attract a new talent, and it was almost operating like a holding company. Time Warner was afraid to be bypassed by the Internet’s future media growth.Therefore, Time Warner’s CEO Gerald Levin was interested to meet with Steve Case, CEO of AOL, to discuss the proposed merger, which would create a fully integrated, Internet-powered media and communication company. As of January 2000, the merger was valued at $180 billion, 70% premium over TW’s price.

In addition, Levin was offered to be CEO of the combined AOL TW. The merger was offering AOL broadband Internet connectivity from cable and Internet lines. AOL would gain the competitive advantage by owning the second-largest cable system in US through Time Warner. With the merger, Time Warner would enter the Internet business.

The combined company would control two important distribution channels: AOL online service and TW cable, which would make selling different services to the wide range of subscribers. Offering discounted subscriptions to TW magazine or TW sponsored concerts could increase the use of the AOL services…

In addition, as a combined firm, AOL TW would be in better position to compete with Microsoft, which was entering many of AOL Time Warner’s key businesses.On January 2001, the time when the transaction was closed, Internet stock prices, including AOL’s, had plunged and the acquisition value was estimated to be $97 billion. One of the initiatives after the merger was to create more integrated work force. After the merger, as a part of the restructuring plans, TWE recorded a restructuring liability of approximately $210 million during the first quarter of 2001.

Out of the restructuring cost, $55 million related to work force reductions and represented employee termination benefits. But due to the economic downturn, the initiative was put on hold.The great goal of synergy turned out to be a “myth.” As one analyst put it “synergies can’t be manufactured…and are more a myth than reality. To the extent they exist, it is serendipity.

” Partly because of the Internet meltdown, recession and slow recovery, by most analyst accounts the merger has not been successful thus far. Since the merger AOL’s advertising revenue has declined sharply, and the number of subscribers declined, for the first time, in the first Quarter of 2002. AOL was also under investigation from the SEC and DOJ for accounting irregularities . The most telling evidence of the failure is that AOL Time Warner has recently decided to drop the AOL from its name, so the company is now just “Time Warner”.One thing that a company must consider when facing another in multi-market competition is how that competition is going to affect the intensity of the rivalry between the two companies. One theory suggests that because of “mutual forbearance” the intensity of the rivalry will subside .

This seems to have occurred between TW and Microsoft. After a recent agreement to settle the Netscape lawsuit and cooperate on many other matters, the two companies have seemingly retreated to their core strategies: Microsoft in technology and AOL TW in content.Of course they are still battling for control of Internet user’s online presence. Both are, as one analyst put it, “determined to be the trusted party that Internet users rely on to store all kinds of information – such as addresses, bookmarks, passwords, and credit card numbers. Who ever can control this has a huge advantage. ”Another issues that a company must face when battling a single company is multi-markets is how to allocate resources .

I would suggest the following: All of the battles between AOL TW and Microsoft can be traced down to the competition of winning the customers of Internet access. So the physical connections that join to the customers must be secured first and foremost. AOL TW has established technically mature networks for dial-up. As to broadband connections, such as cable, DSL and satellite, the bandwidth from Time Warner cable network is not sufficient. AOL TW therefore has to cooperate with a variety of data transmission companies, including phone companies, cable companies and satellite service providers. AOL does have somewhere around 650,000 broadband customers, but they represent just over two percent of the company’s total U.

  1. subscriber base, by far the lowest percentage in the industry . The best approach may be to forge alliances with cable/broadband companies. But this is not easy, because those companies may not like outsiders sharing a piece of their own pie. Moreover, Microsoft is backing those companies financially to play tough with AOL TW.

AOL TW also seems to be pursuing acquisitions of various cable companies, which according to some analysts should receive serious consideration . AOL TW CEO Andrew Parsons views cable as “a prized industry that will soon be ‘hitting its sweet spot’” and “will eventually…dominate the distribution of nearly all digital media to homes. ” On this front AOL TW is also in competition with huge companies such as Comcast who is now “firmly atop the broadband and cable industries” and described by some as the “new AOL.”For AOL TW, one alternative to get around the hurdles of acquisition is the “Bring Your Own Access” program. Customers who use other companies for data transmission can still subscribe to AOL for plenty of services. Yet the profit margin is much lower in this way.

AOL TW should still try to directly reach out to as many customers as possible, especially in light of the recent ruling that cable companies must open up their lines to more ISP’s .One major marketing problem that results from having customers switch from dial-up to broadband connections is the lack of motivation in terms of applications. To get competitive advantage over Microsoft in broadband, AOL TW must first triumph in broadband applications. Being a media company, AOL TW should take full advantage of its music and video business and enhance the services of online music and movie-on-demand. Furthermore, AOL TW can start joint ventures with other music and movie distributors to enrich the choices for the customers.

Another promising application for broadband is home entertainment. The combination of video games, web surfing and online games are attracting more and more people and taking higher and higher bandwidth. Unfortunately, AOL TW is way behind Microsoft in the capabilities of developing home entertainment applications. The alliance with Sony is the first step toward this direction, yet it is not enough. AOL TW must allocate more resource to make its on-line entertainment services really attractive, or even addictive. Merger may be a good option here.

With so many smaller companies developing games, and the market values of technical companies quite depressed, AOL TW can easily purchase some good home entertainment development firms.The content for the dial-up customers is also important. Since AOL TW has price disadvantage in all of the categories of dial-up services, superior content is the last defense against MSN.Time Warner needs AOL to move forward in today’s world and AOL needs Time Warner’s vast customer base and diverse advertising options. AOL can slice their advertising budget considerably by utilizing all of Time Warner’s diverse outlets. Just imagine, on every network, in every magazine and even at the beginning of every film produced within the Time Warner family AOL is mentioned.

The exposure would be phenomenal! If you examine the other side, on every AOL web page there is a mention of a Time Warner media division or a promo for a newly released Warner Brothers film, just imagine the number of people who would be exposed to it. The numbers are staggering. AOL is also very interested in Time Warner’s cable company holdings. The quality of what you see on your computer is dictated by something called bandwidth. A bandwidth is the amount of information that can be sent and received by your computer.

A large bandwidth would allow you to watch a television show or a movie on your computer. Most connections to the Internet are established via a standard telephone line. This type of connection does not provide a large bandwidth. AOL has plans to develop AOL TV in the future and in order to make that vision a reality; they need to be able to offer a larger bandwidth to their existing customers at a reasonable price.The merger with Time Warner is certainly a step in the right direction to achieving this goal.

At present, AOL’s ‘walled garden’ for all their subscribers is very small bandwidth friendly, but as the company has always done in the past, it will continue for bigger and better for its customers. Steven Case of AOL, the boyish entrepreneur has consistently beaten the odds with his ability for seeing a world-altering vision and not letting go until he has made it happen. His forward thinking concerning the merger with Time Warner has been compared to the gutsy moves of Alfred Sloan at General Motors back in the 20’s. Sloan outdistanced himself from the competition by constructing an automobile “for every purpose and every purse.” He left the competitors in the dust by gaining control of more of the automobile market than anyone else.

Case is a forward thinker and has the drive and ambition to make practically anything work if he wants it bad enough, and he wants the merger with Time Warner to be a success.I believe that the mergers and super mergers are going to continue in the future. I also believe that these transactions are going to become necessary for businesses to remain competitive and to not fall to the wayside. The joining of mega media giants AOL and Time Warner is going to start a trend and I believe we will see many more combinations of similar companies in the future. Companies will be forced to play this merger game if they want to stay alive and remain successful.

This, I believe, is the trend for the new millennium and it is a trend that will become a new way of doing business.Bibliography:Knox, Noelle. “Internet Marketplace Takes Shape at a Dizzying Pace.” St. Louis Post 17 July 1999: 26.Fairlamb, David.

“A New Giant Will Reshape World Finance.” Business Week 20 March 2000: 20-23. ““Mergers Success.” Pacific Management Institute.

11 March 2000. (www.mergersuccess.com) 4. “Virtual Organization.” Seanet.

Revised 3 Jan. 2000. 13 March 2000. (www.seanet.com)Businessweek Jan 24, 2000: “Welcome to the 21st Century” “The Big Grab” “The Great Irony of AOL Time Warner” Jan 31, 2000Alsop, Stewart.

“A Few Kind Words For America Online.” Fortune 17 Mar. 1997:1+. 30 Apr. 2003Hiatt, Brian. “You’ve Got Madonna.

” VH1 4 May. 2003: 1+. 7 May. 2001Hunter-Gault, Charlayne. “America Off-Line.” Online NewsHour 19 Feb.

  1. 30 Apr. 2003Mannes, George. “Casting a Wary Eye on AOL’s Promises.” The Street 11 Mar.

2003: 1+.3 May. 2003Millard, Elizabeth. “Time Warner’s AOL Problem.” E-Commerce Times 4 June. 2002: 1+.

10 May. 2003Modigan, Sean. “AOL Set To Lay Off Hundreds From Online Arm.” Washington Business Jurnal 14 Aug. 2001: 1+.

3 May. 2003Santos, Roy. “AOL Time Warner: The New Conglomerate With a New-media Purpose

 

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