The Great Irony Of Aol Time Warner

Whatever else it may be, the megamerger between America Online and Time Warner is highly ironic. Celebrated as the victory of the new digital economy over the old, the first big conglomerate of the Internet era is actually an industrial-age corporate model of vertical integration based on ownership rather than a Net-centric virtual model based on partnerships. Trumpeted by many as the wave of the future, the merger's logic and valuation are in fact being viewed with reserve and caution in the stock market. Hyped as the revenge of the high-tech nerds, the leading executives in the giant deal are in fact conventional mass-marketers to Middle America. At this point, no one knows whether their business model is the right one for the Net age.

What is certain is that AOL has been able to leverage its high-flying stock into ownership of extremely valuable assets. On the distribution side, AOL will soon be able to tap into Time Warner's vast cable system. This comes at a time when high-speed broadband access to homes is clearly the next step in the evolution of the Net. On the content side, AOL purchased many top-quality brands, including Time magazine, CNN, and Warner Bros. Better brands could mean more eyeballs on the Net, and more eyeballs should mean more advertising.

What is equally certain is that Time Warner failed in its own attempt to leverage its magazines, music, and movies into a major Internet business. To plug into the Net, it had to give up control to AOL and accept inflated Net stock for its assets. True, Time Warner was able to get rid of $18 billion in debt and cash out at a significant premium, but the price for playing the Internet game came high.

So why is Wall Street skeptical, as evidenced by the sharp decline in the market value of the newly combined company? At one point, on Jan. 12, the combined market value of the two companies was actually lower than before the merger announcement. One explanation may be that the Street is wondering whether AOL is abandoning what made it so successful in the first place--amazing growth stemming from a nimble management style that showed a willingness to link up with anything, from anywhere on the globe, that might attract customers.

Then there is the competition. AOL is paying a high multiple to gain access to broadband cable just as broadband telephone, satellites, and wireless are heating up. Telephone companies are rolling out high-speed DSL lines even as Time Warner puts in its cable-modem connections. Wireless mobile access may pose the greatest challenge by allowing people to connect to the Net with their cell phones or Palm Pilots. Investors may be wondering where the logic is in AOL paying a high price for just one platform that reaches only a fraction of the U.S.

In many ways, the creation of a huge vertically integrated conglomerate challenges the entire ethos of Net corporate culture. The new AOL Time Warner, with its vast production facilities and widespread distribution systems run by mass marketers, has more in common with Standard Oil of the 1920s and General Motors of the 1950s than with Yahoo! It may very well be that, in the pell mell rush to the Information Age future, a corporate model of the industrial past proves most successful. But that will be partly decided in the months ahead as Wall Street weighs the true value of AOL Time Warner and compares it to rivals who choose partnership over ownership to compete in the Internet era. It's hard to imagine a more exciting start to the new millennium.

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