Special Impact Report: The AOL-Time
Warner Alliance
another IMS Vision becomes a Reality.
On Monday Jan 10th 2000, 10 years to the day after
the historic merger of Time Inc. and Warner Communications, an even more historic - and
even bigger -merger was announced. America Online and Time Warner will combine,
and in so doing will exert a seemingly impenetrable dominance over Internet media. As CEO
Steve Case put it in his press conference, the deal puts AOL squarely in "every part
of the media value chain."
That undoubtedly makes AOL's many critics uncomfortable. But stock analysts aren't
worried. After all, from an investment standpoint, what's not to like about a deal that
puts the world's biggest Internet company together with the world's biggest media company?
Now we all can look for a faster deployment of broadband access.
Amazing vision: IMS suggested to Time Warner in 1998 that they create a virtual Alliance
with AT&T to leverage the TCI deal. Transitioning ALL Communication Media, via
broadband distribution, to homes would be feasable by 2001. AOL was advised to create a
affiliate revenue sharing relationship with it's client base and put in motion the easy
transformation of it's dialup base into the "always on highspeed access of XDSL or
cable modems". They too needed a partner with the technology to services their
customers demand for faster access. Our viewpoints on this deal follow:
***  "IMS believes that the merger is complementary to
the assets of both
companies, and that the combination truly merges two staggeringly powerful forces
across media, telecommunications, Internet, advertising and commerce. For AOL, Time
Warner's ownership of cable systems, as well as a 40 percent stake in high-speed Internet
service Road Runner, will significantly improve AOL's broadband prospects and should
enable the combined entity to secure access on all major cable systems in due time. For
Time Warner, AOL is the perfect partner to transform it's Internet operations into a
powerful leader by showcasing the new media that will evolve by enabling AOLTV and
broadband streaming applications reach 22 million captive members.. With a combined user
reach of 100 million, the new company should be able to cross-promote a very enticing
bundle of video services, high-speed data and communications. We estimate that the
additional services could increase cable services revenues from the current $40 per month
per subscriber to $100 per month or more via merchant advertising." ***
And the benefits for AOL/Time Warner don't stop there:
*** "We also believe that this unique merger will create the ideal advertising and
e-commerce platform. We estimate that the combined company will have advertising revenues
of $7 billion to $8 billion by next year, making it the largest provider of advertising in
the world. The combination also will significantly lower the customer acquisition cost for
the subscription businesses such as cable, DSL high-speed data and narrowband ADSL online
access. AOL Time Warner's businesses will benefit from extensive cross-marketing and
promotional opportunities. The bundled services will create a compelling experience for
customers, such an integrated billing for all entertainment and communications related
services." ***
Now my insider friends get to see why I picked AOL, Time Warner, Nortel, Cisco and
AT&T as long term blue chip stock investments. This is only the beginning or what
could become a spate of deals and mergers in 2000:
*** "[The merger] sets in place a new paradigm in media, Internet, valuation and
investor expectations. Clearly this merger is a catalyst to other potential combinations
between online and offline media companies. Noting this, we warn investors to be cautious
about the rate and value of such combinations. AOL and Time Warner are exceptionally
well-positioned to capture unique and powerful benefits including cross-promotion of
brands, services and commerce agreements.
Further, IMS notes that AOL's OEM strategy could be easily
deployed to Time Warner properties, perhaps in advance of the closure of this merger -
allowing Time Warner brands to extend their reach deeper into their 70 million-plus
subscribers." Also watch for companies like Prodigy and SBC who have taken our idea
of the "FREE-Pc" ( large rebate for a cheap Pc when combined with a 3 year ISP
dial-up contract then migrate them to broadband.) and start to offer a simple upgrade from
56K dial-up to DSL or cable modem without having to refund the 400.00 rebate.***
The deal adds new urgency to questions about the
future of such companies as Yahoo and Excite -@Home, whose strategies have so far
been unclear in regard to the content/access business. What will they do now? In addition,
what will the other big media companies do? They have to play catch up as merger/alliance
mania will reshape corporate structures during the first part of year 2000.
*** "IMS believes investors should keep their eyes open to potential combinations
between other online and offline media combinations and/or partnerships. Of particular
interest, we note the likely interest in broadband distribution assets held by
ExciteAtHome and the media presence of Yahoo. ... Companies including Viacom/CBS, Fox,
Disney and others would be likely partners in the new "ME TOO" new-and-old media
combinations coupled with faster home access." ***
Still, given the immense market capitalizations of companies like Yahoo, it's hard to tell
what could happen here. Such companies are priced too high for even the big media
conglomerates to buy outright, which means any such combination would have to involve a
pooling of interests - and control through strategic alliances. Would mogul-run media
companies like Rupert Murdoch's News Corp. (the owner of Fox) be willing to cede any
control to the likes of Yahoo?
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*** "America Online is expected to bring an urgency to
technology upgrades of the cable infrastructure that has not been seen before. We believe
AOL views the broadband future with more zeal than the network operators (whether cable or
telephone) and understands the concept of first-mover advantage. (Is there a better
example of that than AOL?) As such, we believe AOL could ignite a fire under Time Warner,
as they did with SBC for DSL service, to more rapidly upgrade its cable platform to
two-way, high-speed data capabilities. Arguably, a more rapid upgrade will accelerate the
need for a telephony partner, with AT&T the best fit, given its 60 percent share of
the consumer long-distance market, its strong brand franchise and its reputation for
quality service. The cross-marketing potential between the best brand in the telephone
industry and the best brand in the Internet industry coupled with the broad array of
content that resides with Time Warner could create a juggernaut, with the potential to
expand throughout AT&T's cable properties as well."
*** "AT&T still wants to craft agreements with cable companies to provide
AT&T-branded telephony service over the cable infrastructure. Once the AOL-Time Warner
deal closes, potentially more favorable terms could be forthcoming. Not only does AOL have
access to capital that could reduce the need for AT&T to supply capital to the cable
companies, but AOL has reason to want a quid pro quo. In other words, 'I'll let you sell
your telephone service over my cable plant if you let me sell my Internet service over
your cable plant.' AOL also gets to cement in it's 20 million + customers to a new
highspeed portal with more choices for advertising and merchandizing. Now there's the
potential for payment in kind, if you will, which could reduce AT&T's need to fund
other cable companies' upgrades as well." Look for AT&T to enter the mix and
watch for Nortel, Lucent and Cisco to capitalize on the big push to broadband.***
So far, of course, speculation is about all anyone has to
go on in considering the impact of the January 2000. But one thing is clear: Just about
anyone wanting to reach consumers on the Net will have to take AOL-Time Warner into
account....and on their terms. AOL after all is a customer oriented portal that wants the
best prices for their community. A real force when the 20 million act in concert
with the AOL plan and resulting benefits.
You cannot motivate the best
people with money. Money is just away to keep score. The best people in any field are
motivated by passion.
The editor for IMS and EcomCity
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