Merger marks milestone in evolution of Internet

Date: 16/03/2000

By Tim Jones

IT WAS one of those tide-changing moments that experts predict after the event.

The acquisition of Time Warner - owner of CNN, Warner Brothers, People, Sports Illustrated, Cartoon Network, Warner Music Group, Fortune, Entertainment Weekly, and Looney Tunes - by America Online (AOL) and its stable of CompuServe, Netscape, ICQ instant messaging and Digital City shook the entire entertainment industry to its core.

Olivetti's audacious take-over of its much bigger rival, Telecom Italia, had caused the mergers and acquisitions rulebooks to be rewritten but this was something else again; this was the sale of the world's largest media company to a firm that simply lets people onto the Internet.

On the face of it, the merger turned market logic on its head. AOL has a mere fifth of Time Warner's revenue and an eighth of its workforce. However, the gold rush into Internet-related stocks - a stampede which had momentarily valued online bookseller Amazon above General Motors even though it had never reported a profit - had swollen AOL's book value to predatory proportions.

The temptation for AOL boss Steve Case to cash in some of his chips was too great. "For the first time, magic money is being used to buy real assets, and on a grand scale," said Financial Times' Lex commentators. "AOL is using its Internet currency to purchase a vast collection of media and entertainment assets - from Bugs Bunny to CNN - that generate real cash and real earnings."

The merged firm, to be headed by Case, will bestride the old and new media. Time Warner's vast catalogue of programmes, films and music can go onto AOL's proprietory service while AOL will win access to Time Warner's cable-television network to offer high-speed Internet access.

"By joining forces with Time Warner, we will fundamentally change the way people get information, communicate with others, buy products and are entertained," said Case as he announced the deal.

This snug fit made market participants look elsewhere for the next tie-up. Who else is jam-packed with 'content' but lacks the infrastructure to deliver it efficiently to PCs, multimedia televisions and the next generation of mobile phones?

Speculation is swirling around British publisher Pearson, Germany's Bertelsmann and France's Havas but potential partners are much harder to identify. There is nothing in the world quite like AOL.

It is a proprietory service and therefore needs content. Other Internet service providers would get less out of the deal. The other ISP with global reach and the incentive to buy in content - Compuserve - already belongs to AOL.

More likely is a link-up between Internet search-engine Yahoo! and Rupert Murdoch's News Corporation. The two companies are apparently talking about a loose alliance which would provide Yahoo! with access to the Fox News Channel, The Times of London and The New York Post and give News Corporation extra brain-muscle in its bid to use its satellite networks to deliver Internet services.

The convergence of publishing, online access services and entertainment is causing headaches for regulators on both sides of the Atlantic. The anti-trust rules dreamt up to deal with the creation of potential monopolies in a goods supply chain sit awkwardly with a world of downloadable music and movies on mobiles.

At first glance, the AOL/Time Warner deal need not worry European Commission officials but it depends how the 'relevant market' for investigation is defined. Instead of looking merely at the whole media sector, officials are expected to examine the market for provision of content over the Internet and whether the planned tie-up forecloses competition in a still-nascent industry.

In the event of competition problems, companies may be more tempted to take the News Corporation/Yahoo! route and form alliances rather than spend money. Indeed, some AOL shareholders were sceptical about the need to buy Time Warner when content is so easy to licence and access to broadband technology can be negotiated with telecoms operators.

The only people not questioning the wisdom of the deal are the lucky few who held Time Warner shares the day before the deal was announced.

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