Making One Plus One Equal Three

In with the old and out with the new.

At least that's what America Online and Time Warner are suggesting, after announcing the $166 billion blockbuster all-stock merger this morning, the most ambitious consolidation of the Internet and traditional media to date.

By most measures, the benefits are clear: The two companies will mingle and merge their complementary media and technology assets, with unprecedented marketing powers and audience reach. At first glance, it would appear that Time Warner has rid itself of the niggling problem of how to successfully bring its content online.

"This strategic combination with AOL accelerates the digital transformation of Time Warner by giving our creative and content businesses the widest possible canvas," Time Warner CEO Gerald Levin told reporters, painting a picture of a company with reach, breadth and depth all at once. "This is a clean break with the past and represents something totally new."

For an immediate glimpse at what today's news portends, look no further than the range of mini-deals which were announced as well. Time Warner's InStyle magazine will be featured on AOL, joining other Time Warner properties including Entertainment Weekly, Teen, and Teen People. CNN.com and Entertaindom.com programming will be featured on AOL's services. CNN News content has finally found a broadband provider through the upcoming AOL Plus broadband service. AOL members will get access to Time Warner's promotional music clips from their roster of artists. Time Warner will also heavily promote AOL across its stable of offline content offerings, from cable to magazines.

But the titanic merger of Internet and old media, as earth-shattering and breathtaking as it seems, raises as many questions as it answers. Struggling to find a viable Internet strategy in the wake of Pathfinder's demise earlier this year, Time Warner has revised its approach on a number of occasions, most recently scrapping its original hub strategy. It also borrowed a page from everyone else's media playbook by launching a $500 million venture capital investment fund in December to fuel its Internet growth.

But there's one obvious question: Are there too many cooks in the kitchen? With Levin, Ted Turner, Norman Pearlstine, Richard Parsons and other marquee execs on the Time Warner side, and Steve Case and Bob Pittman at AOL, the ego power in the assembled company is staggering, to say the least. "There are a lot of cooks onstage here," says AOL CEO Case, in response to a reporter's question.

"But there's a big meal to be served."

Case said much of the time spent between the time the deal was first suggested in October until this weekend was spent on corporate cultural integration issues. And, at least for the cameras - Levin showed up in khakis, while Case and co. wore sharp blue suits - they seemed well on their way to a happy marriage. "We believe we can mesh them effectively," says Case. "[Levin] and Time Warner have a lot of experience with big mergers."

To date, Time Warner has only managed to launch one part of its post-Pathfinder Internet strategy, Entertaindom, through Warner Bros. Online, bringing together the company's movies and short films.

Oddly enough, Levin brushed aside questions regarding the integration of Entertaindom with AOL and played down its role at the press conference. "There are lots of other properties that we have in a lot of places," he told reporters. "Entertainment is on AOL, but Entertaindom will be doing other things."

Moreover, while delivery of digital music was clearly a driving force in the deal, the star-studded team of executives shed little light on how the company would accomplish the feat. It's an important point, considering Time Warner's sketchy track record to date.

To be sure, Time Warner hasn't been standing still on digital music. Warner Bros. recently joined three of the big five music labels in a $97 million round of investment in ArtistDirect, a music site which creates artist channels and offers music downloads, along with Universal Music Group, BMG Entertainment, Sony Music, Yahoo and Cisneros Television Group.

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