The Overview: America Online to Buy Time Warner for $165 Billion

January 11, 2000

THE OVERVIEW

America Online to Buy Time Warner for $165 Billion

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By SAUL HANSELL

merica Online, the company that brought the Internet to the masses, said yesterday that it had agreed to buy the largest traditional media company, Time Warner, for $165 billion in what would be the biggest merger in history and the best evidence yet that old and new media are converging.

SIZING UP A NEW GIANT
The merger of AOL and Time Warner will combine elements of traditional media and new media to create a company with holdings in a broad range of industries.
Internet
AOL is the Internet’s leading service provider, reaching more than 22 million members through AOL and Compuserve. Those members spend on average nearly an hour online every day. Its ICQ and A.I.M. instant messaging services are use by 100 million people. AOL purchased Netscape, creator of the original Internet browser, in the fall of 1998.
Cable Systems
The country’s second largest operator of cable television systems, Time Warner Cable has 13 million customers. More than 80 percent of these are in the 33 markets shown below.
Publishing
Time Warner’s stable of 33 magazines had 120 million readers last year, and accounted for 21 pecent of all consumer magazine advertising revenue in 1998. It sold $1.1 billion worth of books through Book-of-the-Month Club and Time Life and Little, Brown and Warner Books in 1998.
Magazines
Time
People
Sports Illustrated
Fortune
Life
Money
Parenting
In Style
Entertainment Weekly
Cooking Light
Baby Talk
Coastal LIving
Health
Progressive Farmer
Southern Living
This Old House
Teen People
Wallpaper
Books
Book-of-the-Month Club
Little Brown
Warner Books
Time Life
Sunset Books
Oxmoor House
Leisure Arts

By agreeing to give up its independence in return for an ample premium on its stock price, Time Warner is acknowledging that the Internet is central to its music, publishing and TV businesses and that its own efforts to create online operations have been lackluster. Under the direction of its 41-year-old chairman and chief executive, Stephen M. Case, America Online, despite the occasional stumble, has surged far ahead of its online competitors, largely on the strength of its marketing skill and ability to make technology easy to use.
America Online, in turn, would gain access to Time Warner's entertainment and information empire. And of more immediate importance would be that the company -- whose 22 million paying subscribers now use modems and telephone lines to go online -- would get access to Time Warner's cable television systems.
Those systems, which now serve 13 million subscribers, would enable America Online to start offering much speedier Internet and interactive television services. Until this deal, no major cable company would carry America Online's services.
The new offerings might include Internet versions of Time Warner's media properties, like news from CNN or movies from Home Box Office, combined with a range of features more sophisticated than the Web sites, chat rooms and e-mail services that are now staples of America Online.
The earliest impact might come in music, where America Online is already developing technology for a digital jukebox that could store and play songs from Warner Music and other labels.
And for consumers generally, whether they now or ever subscribe to America Online or Time Warner services, yesterday's announcement is very likely to portend other mergers and alliances that could hasten the development of and availability of high-capacity information and entertainment networks.

The deal, which was negotiated with such secrecy that it took the industry by surprise, also brought a new realization about the extraordinary stock-market values that America Online and other Internet companies have reached the last 18 months. Although analysts have long predicted that the stars among the Internet upstarts would wind up part of larger media empires, the deal indicates that it could be the Internet companies that do the buying and the old media that sell out.
"The dot-com guys have sort of won," said David B. Readerman, an analyst with Thomas Weisel Partners, a San Francisco brokerage firm. "AOL was able to serve up its stock and buy Time Warner, walking away with incredible media assets."

Richard Parsons, president of Time Wartner, top; Robert Pittman, president and chief operating officer of America Online, middle; and Ted Turner, vice chairman of Time Warner.

Another winner is Mr. Case, who is to become the chairman of the new company, which would be called AOL Time Warner. Time Warner's current chairman and chief executive, Gerald M. Levin, 60, would serve under Mr. Case as the new company's chief executive.
With a market value of $342 billion, based on yesterday's closing stock prices, the combined corporation would be the fourth-most-valuable company in the country, after Microsoft, General Electric and Cisco Systems. And its stock market value would roughly be equal to the gross domestic product of Mexico.
Besides requiring the approval of both companies' shareholders, the combination will face the usual review by antitrust regulators as well as a complex web of local reviews as cable television franchises are transferred into America Online's name. It will also require review by Federal antitrust regulators. The Clinton administration has not yet decided whether to refer the matter to the Justice Department, which has examined America Online's past acquisitions, or to the Federal Trade Commission, which approved the merger between Time and Warner Communications 10 years ago.
Although some consumer groups and members of Congress called for careful scrutiny of the merger, the companies said they did not expect any problems because their businesses do not overlap and neither company dominates its respective markets. No other Internet-access provider, however, has more than about a tenth as many customers as America Online. The companies said they hoped to close the deal by the end of the year.
Mr. Case was already a billionaire but not the instant sort created by some of the newer Internet companies -- many of which, unlike America Online, have never achieved a profit. America Online became profitable in 1998 and has earned $879 million in the last four quarters, on sales of $5.2 billion, far more than any other Internet company. Mr. Case worked for 15 years, through obscurity and ridicule, to achieve his vision that chatting on a computer screen would become as important a communications medium as the telephone or television.
It was Mr. Case who proposed the combination last October to Mr. Levin, winning an initial hearing by offering him the chief executive's title in the combined company. After much haggling over the financial terms, the deal was cemented at a five-hour meeting at Mr. Case's house in Northern Virginia on Thursday night.
As measured by its revenue in the last 12 months of $27.7 billion, Time Warner is already the largest of the conventional media companies. (But the Time Inc. publishing division, on which Henry Luce founded the company with Time magazine nearly 70 years ago, would represent less than 15 percent of AOL Time Warner's revenue.) If the merger is completed, the new company would be an even more powerful player in a wide range of industries.
AT&T, which is in the process of becoming the largest owner of cable television systems, would face a more formidable America Online, which had been trying to gain access to AT&T's cable systems. And Microsoft would be contending with an even bigger rival as computer software continues to evolve into Internet-based services -- a field in which America Online has excelled.
Indeed, in light of yesterday's announcement, analysts and executives were quick to predict that more media and technology companies would run to the altar.
"The combination of old and new media companies will happen far faster because of this," said George Bell, the president of Excite@Home, the company controlled by AT&T that offers high-speed Internet services over cable systems. "Fundamentally, Time Warner has something AOL doesn't have: great media brands built up over decades. The time isn't there for Internet companies to build that content. Time just won't hold still."
By the same reasoning, other media companies might see the virtue in finding a partner with Internet competence -- as did Time Warner, whose decision to sell out is a tacit admission that the biggest and most talented publishers and studio executives have been at a loss to figure out how to apply their talents to new media. Time Warner was an early player in interactive television, through the Full Service Network, an expensive prototype it introduced in Orlando, Fla. And its Pathfinder service, one of the pioneering sites on the World Wide Web, was never able to turn the company's substantial brands like Time and Sports Illustrated into a major force.
Few of the other media companies have done any better online. Only Walt Disney, with its Go Network, is among the 10 top Internet services.
The big cable operators, including AT&T and Time Warner, have long wanted to be the exclusive Internet providers on the systems they own. But America Online has been calling for open access -- the ability to offer a high-speed service over any cable system just as it offers its current service through the wires of any telephone company.
In yesterday's announcement, Time Warner pledged to support open access to its cable systems by any Internet provider. In practice, neither of the merger partners would have much business incentive to deal exclusively only with each other. Were America Online to restrict itself only to Time Warner's 13-million-subscriber cable systems, it would be missing the opportunity to serve the tens of millions of other people already on the Internet who might be willing to sign up for a new, high-speed AOL.
The man who started CNN two decades ago, was Ted Turner, Time Warner's 61-year-old vice chairman and its largest shareholder. Yesterday, Mr. Turner explained his support for the merger.

"When I cast my vote for 100 million shares, I did it with as much excitement as I felt the first time I made love some 42 years ago," Mr. Turner said. "I voted for it because we will have a stronger company that will create value. It's not so easy to go out and recreate AOL. No one has been able to do it so far."