In January 2000, AOL and Time Warner announced a record setting $166 Billion Dollar merger. Referred to as "the Deal of the Century" the talk immediately centered on the potential synergies the new company would realize. Steve Case, announced as Chairman, championed the idea of AOL/Time Warner as the "Wal-Mart" of the media and entertainment industry - a one-stop shop marketplace for advertisers to reach their audience. Case envisioned fully integrated advertising campaigns with bundled AOL/Time Warner products. The idea was simple enough: through a single point of contact, a marketer like Pepsi could get product placement in a major event movie, run a sweepstakes promotion on the web with the winner appearing in a Warner Brothers sitcom, sponsor a Warner Music artist's concert tour and distribute a national print and television branding campaign.
Investors applauded. AOL/Time Warner's scale & scope would give it a clear advantage over stand alone competitors. Furthermore, with the integration of Time Warner, AOL, the leading ISP, with 40% of the US market, would be able to differentiate its products with proprietary content from such established brands as People Magazine and Sports Illustrated. Time Warner executives, in turn, saw AOL as a new distribution pipeline into consumer households that could be used to promote and extend their collection of brands. The deal seemed to make sense for both sides. So what went wrong? The big question these days is: Should Time Warner sell AOL? Is the company stronger together or apart? Over the past year, analysts, investors and company executives have grappled with this issue.
Since it helps to understand a company's past when making a decision about its future, we have structured this presentation in the following format: First we will briefly review AOL & Time Warner's market positions as separate companies. Second we will cover the complex merger issues that concerned federal regulators. And third, we will take a look at the period directly following the merger's approval. Finally, once we have painted the full picture of the merger and its results, we will conclude with our recommendation for the company's future.
Prior to merging with AOL, Time Warner, was itself the result of two successful mega mergers. The first was in 1989 when Time-Life, a print media company, merged with Warner Communications, an entertainment company with interests in movies and music. This was subsequently followed up with the merger of Turner Broadcasting Systems, Ted Turner's Atlanta based company with cable properties like TNT and CNN. These two mergers had created a powerful, vertically and horizontally integrated media company but still, something was missing. Beginning with the Netscape IPO in '95, the fervor over Internet companies had crescendo ed into an earsplitting roar. The Internet had rapidly penetrated into American homes and it didn't seem like it would be long before it would be the dominant medium for communications and entertainment.
Time-Warner saw its stock price lag in comparison to Internet companies that had done nothing but lose money. The company appeared dangerously out of step with the so called new economy. Time Warner, it seemed, needed to make a radical move just to survive. The company on the other side of the table, AOL, was launched in 1985 as Quantum Computer Services. The company struggled for a few years before breaking through with a proprietary deal with Apple Computer.
Early on, Steve Case recognized that if the World Wide Web was to ever reach a mass audience it would need to be simplified. So Case put all of AOL's focus on developing an easy and accessible interface. This customer friendly approach would prove to be a brilliant stroke and was the driving force behind AOL's remarkable growth. Between August of 1994 and November of 1997 the company's subscriber base grew at an unprecedented rate, from 1 million to 10 million users.
By the turn of the century, AOL was synonymous with the Internet for most Americans. AOL's dominant position in the market allowed it to charge a higher access fee than its competitors but Case feared that the very reason for its success could ultimately lead to its demise. AOL specialized at introducing unsophisticated users to the Internet but the longer these users were online, the more they might learn they didn't need AOL. Case knew that as long as the Internet was growing rapidly, any defections would be outweighed by new customers but once the market matured there could be problems. And so in late 1999 with Time Warner looking to diversify into the Internet and AOL executives privately fretting over subscriber erosion the two companies entered into negotiations to merge.