AOL/Time Warner Merger Paper
The merger of AOL and Time Warner was announced in January 2000 against the backdrop of a seeming technology revolution but prior to the bursting of the stock market bubble. Prior to Mid-March 2000, some of the bluest of blue chip companies feared marginalization by an upstart dot.com army. Today, however, every decision made in that era has been subject to the punitive scrutiny of hindsight. The AOL-Time Warner merger made a great deal of sense in the context of emerging competitive realities at the time and may prove to be a compelling combination as the Company moves forward and competes head-on with the likes of Microsoft. Both companies addressed perceived threats from externalities and bargaining problems. Nonetheless, it is clear that AOL gleaned the greatest lasting advantage from its choice of corporate strategies.
The Time Warner Imperative
At the time of the merger, Time Warner was the largest media firm in the world, having assembled an unparalleled portfolio of related assets, spanning both content and distribution. This was driven largely by two fundamental factors; first, the economics of the media industry dictate “extracting multiple sources of rents” from any given production, and second, media industry consolidation throughout the 1990s which saw large media firms largely internalize their distribution. However, with the rise of the Internet revolution, Time Warner was feeling pressure on a number of fronts:
* A stagnating stock price as markets rewarded nimble, net-centric businesses, no matter how unproven;
* Fragmentation of its audience, particularly to Internet media outlets, which it feared would sap it of the scale that provided leverage with advertisers;
* Failure in a number of its own Internet ventures, feeding the fear that “old economy” companies truly were ill-equipped to succeed in the emerging
* Rising costs of talent fueled by the exodus of executives seeking Internet riches.
Against this backdrop, Time Warner’s agreement to link up with AOL seemed like a solid defensive move, guarding against the potential obsolescence of its resources by giving itself a stake in the Internet Revolution. It also held out tremendous offensive potential by giving the Company a new avenue to leverage its portfolio of competencies, namely the effective creation and distribution of content across multiple distribution channels; in this case AOL’s 33 million subscribers. In the words of one analyst, Time Warner managed to “acquire” the Internet brand it had yet to build, thus enabling it to successfully overcome a major externality that was threatening its continued success.
The AOL Imperative
Throughout its history, AOL had leveraged joint ventures and partnerships as a means to grow and thrive. But competitive pressures were growing, and AOL, through its acquisition of Netscape and Compuserve, had begun to come more directly into competition with Microsoft, without the proprietary resources to win a fair fight. Additionally, and perhaps more importantly, despite AOL’s dominant position as the number one Internet service provider, it only provided “dial-up” service, the growth of which was coming to a halt. Future subscriber growth required being able to provide “broadband” access, which provided much greater speed of connection and data transfer, enabling significantly richer functionality and significantly more profitable subscribers. AOL had succeeded on the basis of providing easy access to the Internet and simple, convenient, features such as email and instant messaging, that won early loyalty.
However, the Internet was moving beyond its early beginnings, broadband was the key to the Internet’s future and AOL didn’t possess sufficient unique content to compete as a “dial-up” provider. AOL also feared that it would be vulnerable to “hold-up,” or frozen out altogether, by those companies that had broadband capabilities. The merger with Time Warner allowed AOL to address its potential bargaining problems in two ways. First, it acquired a wealth of unique content that should give it significantly greater leverage vis-ï¿½-vis firms like Microsoft that was extracting a heavy toll for access to the desktop. Second, by acquiring the number two cable provider, it instantly guaranteed itself a future in broadband and immediate access to millions of potential subscribers, mitigating the hold-up problem.
Hailed as one of “the two world powers of interconnectivity,” a major rationale behind the merger was to win control over the “home network” which Gerald Levin described as the “final battlefield.” The vision was to create a seamless platform that would give AOL TW “scale and scope beyond any other media company in the world” and allow it to “promote [their] products and brands across all of its media properties.” This would require the successful transfer of skills between the two companies. The companies would have to effectively share their combined knowledge of cross-selling, Time Warner’s skill in media creation, their respective distribution competencies (AOL online and Time Warner in broader media outlets), and finally lever AOL’s success in establishing meaningful joint venture relations.
From the first time that AOL had to negotiate with Microsoft for access to the desktop, it was inevitable that the two would eventually come to compete. What was probably much more difficult to envision was the breadth of different businesses in which Microsoft would become a competitor. Microsoft has an entrenched presence on what, until recently, was the only vehicle for accessing the Internet; the computer. But recognizing, as AOL does, the convergence of technologies in media and communication and the likely zero sum game for the “home network,” Microsoft’s key corporate strategy has been its ability to achieve coordination by creating or venturing with firms that provide complementary products or services.
Despite being “late” to the Internet game, Microsoft has effectively leveraged its ubiquity in computing and its vast financial resources to build or invest in businesses that go head to head with AOL in almost every facet of its operations. Microsoft has established links with complementary companies that will enable it to remain the de facto operating standard even when computing and Internet functionality leave the desktop and migrate to such vehicles as the television or the phone. It has also increased its content and functionality in areas such as messaging, gaming, transaction facilitation, online music and video, ensuring that there is no substantial area of interest in which consumers can not find a Microsoft or Microsoft-enabled solution. The result of these activities is that Microsoft and AOL will continue to go toe-to-toe for control of the digital consumer until a winner emerges.
AOL/Time Warner: Who won?
Determining who “won” and who “lost” in the AOL-Time Warner merger is complicated by the choice of criteria used to determine victory. If a more formidable and sustainable competitor was created, did both Companies win? But ask any Time Warner shareholder who won and you’ll get an unambiguous answer; AOL. By most standards, its acquisition was a coup. It’s true that the merger makes great strategic sense for the businesses in which both companies compete. But the fact that AOL acquired Time Warner with vastly inflated stock means that AOL shareholders partook in one of the great robberies of the Internet bubble. While the value of most Internet companies plummeted over the past three years, AOL shareholders had managed to acquire some of the most valuable “old economy” assets.
Time Warner, on the other hand, has seen the value of its consideration decline substantially, at a time when its stable mix of businesses should have held up much better. Had Time Warner acquired AOL for 20-30% of AOL’s market value in January 2000, it might have been viewed as one of the shrewdest mergers in recent memory. The circumstances of the two companies coming together, however, will leave a cloud over the Company until it begins to realize its great potential that was envisioned at the outset.