Aol Time Warner Merger example essay topic

AOL Time Warner On December 14, 2000, the Federal Trade Commission approved the planned merger of AOL and Time Warner after both companies pledged to "protect consumer choice" both now and in the future. The AOL Time Warner merger was approved by the Federal Communications Commission on January 11, 2001, and is the biggest merger in corporate history, then estimated at a total market value of $350 billion. The merger created a 'powerhouse' of new and traditional media. AOL Time Warner has led the union of the media, entertainment, communications and Internet industries. Throughout the years the face of media and entertainment industries has changed drastically as a result of increased technology. The popularity of newspapers gave way to other forms of media and entertainment such as magazines, television, cable, music, and most recently the Internet.

The Internet boom of the 1990's gave rise to the popularity of America Online AOL and Time Warner saw themselves at a crossroads where old and new media would become one. The histories of both AOL and Time Warner are extensive and have not always been successful. Time Warner itself was created by two mega-mergers. The first merger was in 1989 between Time Inc., publisher of many magazines such as Time Magazine, and Warner Communications.

Both companies have histories stretching as far back as 75 years or so. In 1996, this company merged with Turner Broadcasting, which brought CNN with its founder Ted Turner. These two mergers created a company ready to lead in any form of media. The company launched the HBO television network. Time Warner, headquartered in New York, had $27.3 billion in revenues in 1999 and a market value of $112.6 billion. On the other side of the merger there is new media giant AOL, today the biggest, richest, and most successful internet company in the world.

It was founded in 1985 as Quantum Computer Services and by 1994, after changing its name, had a million subscribers. In its early years, it almost fell because of the problems associated with introducing unlimited access for a fixed monthly fee. As its number of users increased, so did its capacity problems, which made many customers angry because they could not get a connection. The problem was solved when AOL made a deal with MCI WorldCom, which led merge with its rival CompuServe. In 1998, AOL acquired Netscape for $4 billion in a deal that knocked off its rival Microsoft.

The company also had to keep away others, the largest of which was AT&T, which tried to take over AOL before it bought the cable company. AOL's marketing campaign, sending CDs to millions of homes, paid off as subscribers steadily increased. In 2000, it had 24 million US subscribers, 2.8 million CompuServe subscribers, and 4.4 million international subscribers. Its revenues in 2000 were $6.89 billion, its profits $1.2 billion, and its market value $133 billion. During the 1998 Christmas season, AOL raked in $2.5 billion in online sales through its website, twice that of 1998 and 60% of all online Christmas shopping. AOL Time Warner's enormous size could prove to be a disadvantage as well.

Because the company is so big, its reaction time will be slower than that of smaller companies. This is a significant weakness because the nature of the Internet changing so quickly. In addition to its appealing user-friendly software and extensive customer support, AOL's success is due to a combination of first-mover advantage and network effects. A network effect can be defined as situations when a consumer's value from using the product depends on the number of other people who are using that same product (Oster 79). The network effects associated with AOL's Instant Messaging service are a large part of why the Federal Communications Commission (FCC) imposed an order ruling that AOL Time Warner make Instant Messenger available to users with Internet service providers other than AOL (Bird and Faulhaber, p. 2). Loyal Instant Messenger customers may be more likely to purchase AOL as their Internet service provider, knowing that the Instant Messenger service comes as part of the AOL package.

Therefore, even though AOL Time Warner cannot make money from Instant Messenger on its own, it is still in the firm's best interest to maximize the use of the product (Bird and Faulhaber, p. 14). Economies of scope exist when the cost of doing something is lower when two units are joined rather than when they exist individually (Oster 186). The size of the new company would also allow it to take risks that smaller companies would not be able to handle. AOL Time Warner believed that as one, they would generate new opportunities for growth in entertainment, news, online services, publishing, music, film distribution, and the delivery of exciting communications and information services. Sources Bird, James R. and Faulhaber, Gerald R. "Network Effects in Antitrust Analysis Oster, Sharon. Modern Competitive Analysis.

Oxford University Press, New York 1999. "Public Interest Statement" to the Federal Communications Commission. web February 11, 2000. AOL AND TIME WARNER.