AOL, Time Warner tout broadband future, synergy

With Internet access, broadband cables, content and subscribers, the two companies offer complementary parts of high-tech puzzle
Written by Larry Dignan, Contributor

America Online found a cable strategy and Time Warner found its Internet strategy as the pair merged Monday in a stock swap valued at $350bn (£217bn). (See: AOL and Time Warner to merge)

The deal, which is expected to close by the end of 2000, will create a company with $40bn in revenue in its first year of operation and encompass properties ranging from ICQ to the WB television network.

The AOL-Time Warner deal is likely to have broad ramifications in the Internet sector. AOL and Time Warner will be the largest marriage of an Internet darling and a traditional media company.

Disney acquired Infoseek; NBCi was formed as NBC merged its Net properties with Xoom.com and Snap.com; USA Networks and Lycos were engaged but scrapped the deal. None of those deals had the scope of AOL and Time Warner.

The AOL-Time Warner deal could force competitors such as Yahoo! to hook up with a traditional media company. Yahoo officials have said the company wasn't interested in a media merger.

Under the terms of the merger, Time Warner shareholders will receive 1.5 shares of AOL Time Warner for each share of Time Warner stock they own. America Online shareholders will receive one share of AOL Time Warner stock for each share of America Online stock they own.

The exchange rate is fixed because of the volatility of AOL shares, said Case, who approached Time Warner about a merger in October. When the swap is completed, AOL shareholders will own about 55 percent of AOL Time Warner and Time Warner will have the remaining 45 percent. The stock will trade on the NYSE under the AOL ticker. The new company will be called AOL Time Warner.

AOL said the deal will be immediately accretive to earnings. AOL financial chief J. Michael Kelly said the combined company will achieve $1bn in annual savings. AOL Time Warner will amortise goodwill over a 20 year period related to the purchase.

Officials, however, were focused on growth. "This is a combination of the number one Internet and number one media company," said AOL chief Steve Case. "There is strength in every link of the media chain."

AOL operating chief Bob Pittman said the deal "blows the roof off" advertising and e-commerce potential.

Case will be chairman of AOL Time Warner with Time Warner chief Gerald Levin taking the reins as CEO. Ted Turner, vice chairman of Time Warner, has agreed to vote his nine percent stake of Time Warner in favour of the merger. Turner will remain vice chairman of the merged company.

Among other key executives, AOL's Pittman will be co-chief operating officer of AOL Time Warner with Time Warner president Richard Parsons. Kelly, CFO of AOL, will become the new company's CFO.

With the deal, AOL gains access to Time Warner's significant cable assets. AOL, which already has digital subscriber line (DSL) access and a satellite deal with GM's Hughes Electronics, was missing the cable pipes.

The companies said AOL would provide Time Warner's Road Runner service with AOL brands such as AOL Instant Messenger, Digital City, AOL Search and AOL MovieFone.

Levin, Time Warner CEO, said the company's cable distribution will accelerate broadband access. "In the cable industry when something works it spreads like wild fire," he said.

Time Warner cable has access to 20 million homes and gives AOL the last piece of its broadband strategy.

On the open access issue, AOL Time Warner "will be committed to ensuring consumer choice of ISPs and content and that they hope this merger will persuade all companies operating broadband platforms to provide consumers with real choice."

That statement was an obvious reference to AT&T and Excite@Home. Excite@Home has exclusive access to AT&T. AT&T, however, plans to open up access.

The struggles of Time Warner's Internet aspirations are well known. The company was among the first on the Web with the Pathfinder portal, but has struggled to find a way to monetise its key brands on the Web.

Time Warner officials said the company would have taken decades to be a Net player because it lost its first-mover advantage. "It's damn hard on the Net," said Richard Parsons, president of Time Warner. "We could have worked a decade and may not be competitive. We would never recapture that first mover advantage."

Case said the deal "shifts the landscape a bit" because AOL can use its Net experience to leverage Time Warner's properties. "Time Warner has great brands but hasn't been a factor on the Internet," said Case.

AOL, which has mostly been a service that aggregates content, will now be firmly in the content business with some of the most prominent media properties such as CNN, People and Entertainment Weekly in the fold. The new company's "incomparable portfolio of global brands" will have everything from Time Warner's music division to Bugs Bunny under one roof.

Some of the content and e-commerce synergies touted on Monday include:

  • Linking AOL TV and MovieFone on Time Warner cable systems and Warner Bros. movies

  • Teaming AOL with Time Warner's roster of music talent
  • Giving CNN more distribution on AOL
  • Combining AOL Instant Messenger with Time Warner's ability to offer local telephony over cable
  • AOL discs will also be distributed in Time Warner stores and in mailings.

    Separately, AOL and Time Warner announced e-commerce and content pacts that will expand previous agreements.

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