Broadband Isn't the Linchpin for AOL/Time Warner

Let's start with the easy part. Contrary to much of what you've probably heard, the proposed merger between America Online Inc. and Time Warner Inc. isn't about broadband services, or at least it had better not be. The way I figure it, there's only about a one in six chance that Time Warner's broadband cable TV assets could do AOL much long-term good.

Consider that, for consumers, there are three main high-bandwidth alternatives: telephone DSL-based systems, cable TV networks and, eventually, wireless transmission. But within the cable segment, there are two additional scenarios:

Cable networks will either be open to multiple service providers, or they'll be dominated by owners such as AT&T or Time Warner. Only a belief in the latter scenario would give AOL a real incentive to merge with Time Warner, and even then, the combined company would reach only about 20 percent of U.S. households with cable TV. So the telecommunications part of this story simply isn't compelling.

This tells me that content and distribution strategies are driving the deal.

More specifically, the logic of the merger seems predicated upon one of two possible assumptions: Either AOL's Internet savvy will be sufficient to adapt Time Warner's content to the Web more successfully than would otherwise be the case, or AOL's immense Internet presence will provide Time Warner's content with an important competitive edge.

Of these, the former seems particularly dubious. AOL isn't really a content producer, let alone an expert in migrating from old to new media. It's hard to believe that AOL's management team will suddenly figure out how to make Time magazine, CNN and HBO catch fire on the Web. Indeed, after listening to numerous interviews with Steve Case and Gerald Levin, I could only conclude that their sense of what services consumers will actually want is no clearer than yours or mine.

Consequently, it seems to me that - other than making a lot of insiders even more rich and even more self-important - this largest of all media mergers is based almost entirely upon the view that the synergy between Time Warner's content and AOL's distribution will strengthen both companies' competitive positions. It's a result of the familiar faith in the power of vertical integration and economies of scale.

Historically, of course, there has been ample evidence to support this position. Radio and TV broadcasters once dominated radio and TV programming, just as moviemakers once controlled many movie theaters - until the federal government stopped them. Who knows what content AT&T would have run along its wires if the government hadn't intervened there also. Clearly, during the 20th century, the bundling of content and distribution was often effective, with distribution emerging as a major source of media market power.

But I expect that the 21st century will prove different. Distribution should shift from a scarce resource to a surplus resource, making vendor monopolies the exception, not the rule. Additionally, even though the transmission of telephone, television and Internet signals will eventually converge, the content that runs on top of this platform will increasingly evolve into a distinct and independent industry.

Thus, although these two great companies present many interesting possibilities, their merger seems based more on the distribution-dependent patterns of the past than on the audience-driven models of the future. As we all know, the history of IT industry mergers and acquisitions hasn't been pretty. Unfortunately, AOL/Time Warner seems destined to be yet another example of how one plus one winds up equaling one and one-half.

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