News Analysis: A Mass Medium for Main Street

January 11, 2000

NEWS ANALYSIS / THE STRATEGY

A Mass Medium for Main Street

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By STEVE LOHR

he merger of America Online and Time Warner represents not only the triumph of the Internet as the irresistible force in business, but a vision of the Web as a mass-marketed, middle-of-the-road medium for Main Street America.

Angel Franco/The New York Times
Stephen M. Case, left, chief of America Online; Gerald M. Levin, chief of Time Warner; Ted Turner, vice chairman of Time; Robert Pittman, chief operating officer of AOL; Richard Parsons, president of Time; and J. Michael Kelly, chief financial officer of AOL, at Monday's news conference.
AOL-TIME WARNER DEAL

Also in Tuesday's Times
The Gambler: Leading Time Warner's Digital Makeover
The Bets: Everything New Is Quickly Newer
The Deal: The Online Generation Courts the Media's Old Guard
The Winners: For Holders Big and Small, an Explosion of Riches
The History: Luce's Magazine Was First Information 'Portal'
The Empire: Potentially Big Effect Seen on Varied Units of AOL Time Warner
The Journalists: Does Deal Signal Lessening of Media Independence?
Advertising: Deal Changes Everything for Movers and Buyers in Media Circles
Europe: Takeover May Increase U.S. Control of Internet Abroad
Market Place: Merger Poses Some Tough Questions for Shareholders
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A Look at the Merger
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Join a Discussion on the AOL-Time Warner Deal

Though top executives of both companies presented the deal as a "merger of equals," it was in fact a victory for Stephen M. Case, the 41-year-old billionaire who built America Online from a fledgling dial-up service in the mid-1980's to an Internet powerhouse able to acquire the world's largest media company.
"America Online is clearly dominant," David Readerman, managing director of Thomas Weisel Partners, a San Francisco investment firm, said. "The nerds have won. This deal really validates the Internet."
Even more so, it would appear to validate AOL, whose strategy was to market the freewheeling, global, often chaotic Internet as the suburbs of its online service. Techies long derided America Online as a lowbrow medium. They called it "training wheels for the Internet," suggesting it was not the real thing.
But Mr. Case, who once developed new pizza offerings for Pizza Hut, always held his ground. He insisted that the online business was less about technology than about consumer marketing. His vision has proved on target so far, making America Online by far the biggest online service with 20 million subscribers. Just where the combined AOL Time Warner is headed is hard to predict, but the emphasis is certain to be the same -- a mass-market consumer service that is easy to use and hides the intimidating technology.
"It's not about technology, it's about making this a mass medium and becoming part of the everyday habits of ordinary consumers," Mr. Case said yesterday.
The measure of America Online's rapid rise and its current stature was evident on Wall Street yesterday. A few years ago, it was thought that America Online might indeed merge with a media company. Disney or Time Warner, it was said, might buy America Online, which was then regarded as a promising upstart. But yesterday it was the shares of Time Warner, with its storied legacy reaching back to Henry Luce, that leapt in celebration, like some neglected waif rescued by a wealthy benefactor.

"I accept that something profound is happening in the Internet space -- I believe that," said Gerald M. Levin, the chairman and chief executive of Time Warner. "The new media stock-market valuations are real -- not in every case, of course. But what AOL has done is get first position in this new world. Its valuation is real, and I am attesting to that."
Yet the America Online-Time Warner deal is more than a striking testimonial to the Internet as mainstream medium. The proposed merger is also a big gamble for both companies, as well as an admission by each that they need one other.
America Online's weakness is its lack of access to high-speed Internet services over television cables, which its online rivals AT&T and Microsoft have. Once in place, these high-speed, or broadband, networks -- provided over upgraded cable or phone lines -- open the way to the digital distribution of new services for interactive entertainment, information and e-commerce through everything from desktop computers to handheld devices to television sets.
Time Warner, with its vast cable networks serving more than 13 million subscribers, gives America Online assured access to the high-speed networks required for these new mass-market Internet services.
"The biggest threat to AOL over the next three years was getting locked out of broadband," said David B. Yoffie, a professor at the Harvard Business School. "And this deal certainly helps solve that problem."
But that solution, by joining its fate with Time Warner, could come at a high cost for America Online. The online leader has been a favorite on Wall Street because it is regarded as a fast-growing Internet company. Now, it is melding its business with a slower-growing, though far larger, media company whose properties range from Time magazine to Warner Brothers films to CNN.
"There's not a prayer that the combined company can grow at anything like AOL's historical rates of growth," Mr. Yoffie said.
Reflecting that concern, America Online's stock price slipped a bit today, closing down $1 1/8 to $72 5/8 a share, while Time Warner's shares jumped $25.25, to $90.
Mr. Case said he expected the far higher valuations given to Internet companies than to media companies to decline. But he held that view, he added, not so much because he thought investors had bid up Internet shares to outlandish heights but more because traditional media companies would be revived if they got their Internet strategies right.
"Traditional media assets have a vibrant future if they can be catapulted into the Internet age," Mr. Case said.
By linking with Time Warner, Mr. Case is also betting there are advantages to owning those media brands, not just distributing them through the America Online service. With Internet access expanding beyond the personal computer -- with people increasingly tapping onto the Net by phone, TV and handheld devices -- Mr. Case feels consumers will want an easy-to-use service that works on all those machines.
America Online, in short, wants to be a one-stop service for the Internet of the future. "We don't want AOL to be a place people go through to get someplace else," Mr. Case said. "We want to be able to create an integrated consumer space. That's why, ultimately, the ownership of media brands will be important."
At Time Warner, the deal is seen as a fast track to the Internet -- "the digital transformation of Time Warner," in Mr. Levin's terms. In trying to make that shift on its own, Time Warner had struggled badly. Its Internet site, Pathfinder, which offered online versions of most Time Inc. magazines, for example, was abandoned after four years and millions of dollars in losses. Each publication, including Time, Fortune, People, Sports Illustrated and Entertainment Weekly, has its own site now.
And while Road Runner, the company's high-speed Internet service, has more than 320,000 clients, it has not grown as rapidly as Time Warner had hoped. And it is clearly not the online brand America Online is.
"Time Warner sees all its media properties going to the Internet -- movies, television, print and music, which is already well on its way," said Harold Vogel, who heads a New York media investment firm. "And the company has been frustrated in not being able to exploit its cable and media assets more effectively in the Internet arena."
The people behind the merger -- perhaps even more than the strategy -- will determine whether the combination works. At the New York news conference yesterday, there was no shortage of smiles and back-slapping and much warm talk of the "shared vision" of the top executives of America Online and Time Warner. Mr. Levin went out of his way to appear informal, wearing a sport coat and no tie; Mr. Case, renowned for his khakis -- he once appeared in a Gap ad -- and rarely donning a coat, went out of his way to look formal, wearing a suit.
But the blunt-spoken Ted Turner, who is Time Warner's largest shareholder with 100 million shares, acknowledged a key issue in all large mergers. Mr. Turner said that the new executive team would be filled with "strong personalities," meaning there was "potential for some friction," though he said he did not expect clashes to slow the new AOL Time Warner.
Outsiders were even more skeptical. "Sorting out these businesses is going to be a task of monumental proporations," said Mr. Yoffie of Harvard.
That chore, apparently, will fall mostly on the shoulders of Mr. Levin, who is to be the new company's chief executive and who is a more seasoned manager than Mr. Case.
"I'll focus on the things I'm best at -- strategy, technology, policy and running the board," Mr. Case said. "Gerry will run the company."