A New Media World Order

No corporate merger in recent history has tweaked the public's imagination like last week's bombshell announcement that America Online and Time Warner will become one. And while the merger's size and scope are breathtaking, its power to fascinate and enrage is in many ways symbolic:

It appears to portend the end of the Internet as an alternative realm outside the bounds of traditional media.

To critics, that's what makes this combined creature a Tasmanian devil, carelessly destroying everything in its path. Some of the critics' arguments are undeniable. Look at the most-trafficked news and information sites on the Net, as measured by Media Metrix: AOL Time Warner would own six of the top 15.

That kind of concentration has become familiar in, say, TV, but for the still young and ostensibly democratic Internet, it's a distressing milestone.

To the merger's boosters, that's what makes AOL Time Warner a brilliant invention - the best of both worlds, now working in tandem. The merger will, its fans say, allow for previously unimaginable combinations of video and interactivity, and will so accelerate the adoption of broadband Net access that top officers Gerald Levin and Steve Case are actually heralding the merger as a boon to society.

For a moment, investors appeared to agree, sending both companies' stocks north. One especially satisfied group was Time Warner's employee shareholders; the day the merger was announced, they were told that their stock options were immediately vested.

But by the middle of the week, the stock boost - touted within both companies as one of the primary motivations for the deal - had dissolved; the value of the combined entity was less than the sum of its parts. Despite AOL COO Robert Pittman's optimistic mantra that "this is the perfect one-plus-one-equals-three opportunity," one-plus-one might equal about 1.8.

The stock value obviously is subject to change. But why did shareholders and the investment community treat this deal so coolly? In part, shareholder skepticism reflects the now familiar sense of entitlement that infects owners of Internet stock. There is a layer of stock-value pixie dust that rests atop Net companies, especially ones like AOL that actually generate profit. No merger with any traditional media company - no matter how vast, prestigious or strategically appropriate - could match the rocketlike growth that AOL shareholders have come to expect.

One can dismiss such expectations as unrealistic and naive (and within Time Warner, many do). But the skepticism does not seem entirely unfounded. Why are Time Warner shareholders being given 1.5 shares in the new company for every share they currently own, while AOL shareholders get only one for one - especially since AOL's market cap is higher than Time Warner's? In the boardrooms, there may be convincing answers to that question - Time Warner's fixed assets are more valuable, its infrastructure for global growth more advanced - but in the chat rooms, the sense of being snookered is palpable.

It's unlikely the merger will be rejected, but given that the consolidation may drag on for months, the situation has the unmistakable echo of the Lycos-USA Networks merger, which unraveled after Lycos' stock deflated over several months.

There are practical questions, too, that have gone unanswered in the first week after the merger's opening salvo. Where do the company's strategies go from here? Who will answer to whom?

None of the mid- to high-level employees contacted last week at the two companies could even begin to answer those questions. AOL is clearly on top, but it's not a company known for brilliant management. Kara Swisher's book AOL.com chronicles America Online's fall and rise, and even through the book's tale of triumph one can't help noticing hints of the Keystone Kops. The company's phenomenal growth and market domination are undeniable, and Case certainly deserves credit for embracing controversial business models, hiring key personnel and making the American masses comfortable with complicated technology.

And yet, the very flexibility that allowed AOL to triumph may be exactly what it now has given up. It's impressive that Case could engineer 180-degree managerial tacks when he commanded a few thousand souls in Dulles. So far, though, no corporate ship with 80,000 deckhands and decades of corporate baggage has demonstrated the ability to consistently sail on Internet time.

AOL has taken over a company that is notoriously overpopulated with extremely intelligent, headstrong and entrenched lieutenants. The ethos projected during the elaborate Jan. 10 press conference was high-fives and hugs. But Time Warner's engagement with the Net over the years has used some very different body language: shrugs, kicks, even the occasional middle finger.

"I don't care about the friendship between Steve Case and Gerald Levin," says analyst Jonathan Haller of Current Analysis. "The culture clash will [take place] at the other layers, including senior executives who are jostling for power, and ultimately at the middle-management level." The fact is, for better or worse, Time Warner and Turner have never entirely merged, except on the balance sheet. For all the hype about synergies among units, it'll take more than sheer executive will to create real partnerships - at least on the Internet. Indeed, last year, Time Warner's top honchos kept bragging that the company was about to exorcise the Pathfinder ghost by rearranging its far-flung Web offerings into five vertical "hubs": news, sports, entertainment, lifestyle and money. But the new millennium is here, and only the entertainment hub, Entertaindom, has launched. And while Levin singled out that hub as one offering that would definitely carry over into the AOL era, the company remains tight-lipped on the status of the other hubs; some employees suggest they've been abandoned altogether.

Can being managed by a Net-savvy firm like AOL shake Time Warner out of its torpor? Perhaps, assuming AOL cares about Time Warner's Web content. At its core, this deal is not about Bugs Bunny; it's about Road Runner. Yes, AOL is ecstatic about the prospect of tapping into Time Warner's vast storehouses of content, past and future. But most of Time Warner's Net-ready content is currently available to AOL. Whether it's People or InStyle, or some of the more elaborate entertainment material available via Entertaindom, AOL has always been well positioned to grab Time Warner's content.

Some attractive Time Warner offerings have yet to hit the Net - notably, streaming video and downloadable music. Those may become popular and lucrative parts of this deal. But such bandwidth-sucking applications are largely useless without fast Internet access. It's frustrating enough to surf the Web through an AOL connection; downloading and watching a video would exhaust the patience of a saint.

Hence AOL's urgency to get on a broadband platform. Having spent the past year yelling about open access into the indifferent ears of cable-modem providers, AOL simply did the expedient thing: It went out and bought one.

Now more than ever, AOL is a company betting its future on a specific and largely unproven technology, which raises the question: Is there a burning consumer desire for broadband access? So far, the answer has been no. Fewer than 2 million U.S. households, and very few small businesses, currently have high-speed Internet access. A joint study released last week by McKinsey and Sanford Bernstein disclosed that two-thirds of Americans already online declare themselves uninterested in high-speed Net access.

Of course, successful U.S. industries rarely balk at selling people products they don't know they want. Indeed, the study indicates that consumers' passion for broadband grows rapidly once they've seen what it can do. That bodes well for AOL Time Warner, as does the finding that cable technology has significant advantages as a household broadband provider, although small businesses are seen as more likely to choose digital subscriber lines.

Overall, the McKinsey-Sanford Bernstein report predicts that there will be 30 million broadband subscribers by 2004. The chances are good that AOL Time Warner will have to remain technology-agnostic in order to grow with that market. Consumer groups, and some members of Congress, have correctly warned that AOL Time Warner could be positioned to close off its pipes, a move that would be dangerous as well as hypocritical. But broadband technology is tricky; in many regions of the U.S., the only providers are local phone companies.

Considerable market pressure will thus be put on AOL to keep up the good relationships it now has with regional companies like SBC Communications and Bell Atlantic.

Through its cable experience, Time Warner knows that territory all too well. If it tried to use its cable clout to muscle in unpopular products it owns - such as CNNfn - to the exclusion of the far more popular CNBC, it would be committing economic suicide. At least for now, there is a strong incentive for AOL Time Warner's stated commitment to open pipes.

As with the broadband question, the merger's global impact is powerful, but unclear. AOL's experience abroad has been daunting. It partnered with Bertelsmann to set up ISPs in Britain and much of Europe; that partnership is now kaput, thanks to the merger with Time Warner. Moreover, the movement toward free Net access in Europe has caught fire over the past year, and singed a hole in AOL's business model.

By contrast, Time Warner is a genuinely worldwide company. Approximately 20 percent of its revenue comes from outside the U.S.; CNN has greater influence with some heads of state than does the U.S. government. It seems likely that AOL Time Warner will want to use CNN's clout and its sales force to grow the Internet abroad, under the aegis of AOL Time Warner.

That could have profound implications. In the U.S., the Internet business matured quite deliberately apart from the world of big traditional media, and functioned in some important ways as its alternative. That era is over in this country and quite possibly abroad, especially if other old media and Net companies deem it necessary to join forces.

Does that make Internet firms abroad more likely to mirror the offerings of traditional media? Does it make it harder or easier for, say, the Yahoo of Yemen or the Drudge of Denmark to grow online? It's too early to know for certain, but for many, the Internet is now stamped not only with an indelible "Made in USA" tag; it's also another arm of the established media order.

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