Aol Time Warner Merger Essay, Research Paper

Mergers: AOL/Time Warner’s effect on Business

By Jason M. Rusk, Business 100 September 3, 2001

The bottom-line to all the hype and talk about the AOL/Time Warner merger is that “Everyone” is running scared. Because, with the merging of companies that control massive amounts of access to the public, and hardware to get their product into your house, there is less and less choices for the American public. And there is even less chance for a smaller company to compete with the “Mega-Media” companies that have been formed in the wake of the telecommunications bill which allows broadcast, cable, and telephone companies to enter each other’s markets, deregulate rates, and permit companies to have much larger monopolies.

The best description of the situation as stated by Jeff Kagan, (telecommunications analyst) is that “Everything is being rewritten from a sub-atomic level”. Everyone from AT&T to ZDnet, has something at stake here with a union of such magnitude.

Ten years ago no one would have thought that a startup Internet company (AOL Time-line) would have the power, clout, or cash to make the move to acquire The Media Giant Time- Warner for 106 billion dollars. (This number changes through different phases of research due to the fact that it was an all stock deal, which the stock was worth 183 billion when the deal was struck, but since the announcement of the proposed merger, the FCC took much longer then expected to come to their decision and the stock prices dropped as time went on before the merger was approved.)

With a lot of skepticism and concern AOL and Time Warner announced their intentions to conduct the largest acquisition in history. The last merger of this magnitude was when Viacom Inc. acquired the CBS Corporation for $80 billion, and with that became the world’s leading company in the production, promotion and distribution of entertainment, news, sports and music. And before that Disney acquired ABC for $19 billion.

In 1982, Ben Bagdikian wrote The Media Monopoly, an examination of the growing concentration of media ownership. At the time, he calculated that 50 corporations controlled half or more of the media business. He predicted then that eventually this number would fall to about half a dozen companies. This was greeted with skepticism at the time. When the last edition of the Media Monopoly was published by Beacon in 1993, the number had fallen to less then 20. Since then, and the numbers are still falling. The fear is that a few media giants are slowly dominating the Internet where the top 100 web sites attract nearly half of all page views.

In fact, web surfers now spend almost 20% of their online time visiting only the top 10 sites. This is a major concern for smaller startups that don?t get the exposure needed to compete on the internet.

The significance of the AOL/TimeWarner merger is that AOL has been the leading advocate of the Open Access debate allowing Internet Service Providers (ISP?s) access to cable lines. AOL has been a vocal proponent of forcing AT&T to open up its cable lines to other high-speed access providers. Now that AOL has teamed up with Time Warner’s roughly 20 million cable subscribers, some industry observers think AOL may change its tune. Giving them the ability to control what the first screen consumers see when the first log onto the Internet and who gets to bill them for the service. AOL/Time Warner Chairman Steve Case assures its partners in the Open Access debate that it will continue the charge, and allow other ISP?s the same access over it?s own newly acquired cable systems, but that remain?s to be seen.

Another great concern to the public and journalists is the massive control that these few media Giants will have over the news that is put out. No different then the way CNN or the New York Times controls what it publishes, these companies will decide what is put out to the public. With more and more dominance of the airways or “Cableways” there is less opportunity for the smaller independent news reporters to get their message out. In a statement by the International Federation of Journalists (IFJ), General Secretary Aidan White. The IFJ warned, “The merger of Time Warner and America Online could threaten democratic values and freedom of speech unless editorial independence was protected. This merger may redefine the worlds of entertainment, communication and commerce, but it may also threaten democracy, plurality and quality in media”. Both the Consumers Union and Consumers Federation of America worry that the concentration of media and Internet power will “hurt the public”. Gene Kimmelman, of the Consumers Union in the United States, says his organization was “enormously concerned about possible harm to consumers”, when the merger was announced a year ago. Potentially, the deal could have shut out competitors – depriving consumers of choice – and ultimately drive up prices. To address these concerns, regulators like the FCC imposed a number of restrictions, focusing on four areas:

? AOL Time Warner should allow consumers to choose their own ISP from among those carried on Time Warner’s cable lines

? The combined company must allow any participating ISP to determine the contents of its subscribers’ first screen.

? The firm must let each ISP have control over its billing arrangements.

? AOL’s next generation of instant messaging must be made accessible to competitors.

Public opinion is a major factor especially for a media company that has deep roots in services that probe into the homes of their customers. Which is why this is such a tricky deal, since Wall street has already started to treat the new company with a different view. The new AOL/Time Warner combination is not a hot, fast moving Internet company that is doubling its profits every year. It is now a massive conglomerate of “Brick and mortar” businesses that are slow to turn a profit, coupled with online companies that can become unstable at a moments notice as seen last year with the dramatic fall of Internet stocks.

A huge hurdle to be overcome by any company in the media business is the Federal Communications Commission (FCC). The FCC is an independent United States government agency, directly responsible to Congress. The FCC was established by the Communications Act of 1934 and is charged with regulating interstate and international communications by radio, television, wire, satellite and cable. The FCC’s jurisdiction covers the 50 states, the District of Columbia, and U.S. possessions. After the FCC published its approval of the AOL/Time Warner merger the Chairman of the FCC release his own separate statement regarding his view of the merger. “Our review process has fundamental problems. It is increasingly morphing the FCC into an antitrust authority, duplicating the analysis of other more competent authorities. Of course, we have independent authority to review these combinations, but we have wide latitude to decide how searching and how broad such a review need be and I believe we have moved much too far into the domain of other government institutions, namely the Antitrust Division of the Department of Justice and the Federal Trade Commission“.

The problem this presents to the business community is that when mergers of this size are approved it sets a standard that is very hard to turn around in future decisions. Which creates a situation where more and more companies are merging to compete with huge mega-merged-media companies that control more and more of the assets that are out there. Rumors are already flying around that Yahoo is talking to media companies about possible mergers. But the company has denied rumors that it plans to buy a media company to compete with rival AOL.

Under those circumstances the business community will suffer due to the lack of diversity in the market. In a situation where a company controls 65% of a market, opposed to a company that only control 10%. For consumers there would be a lack of competition would leave no incentive to lower prices and for the competition they would have less access to consumers.

The Federal Trade Commission (FTC) (as stated on their website at www.ftc.gov) enforces a variety of federal antitrust and consumer protection laws. The Commission seeks to ensure that the nation’s markets function competitively, and are vigorous, efficient, and free of undue restrictions. The Commission also works to enhance the smooth operation of the marketplace by eliminating acts or practices that are unfair or deceptive. In general, the Commission’s efforts are directed toward stopping actions that threaten consumers’ opportunities to exercise informed choice. Finally, the Commission undertakes economic analysis to support its law enforcement efforts and to contribute to the policy deliberations of the Congress, the Executive Branch, other independent agencies, and state and local governments when requested.

This is the agency that will analyze and decide the merger of AOL and Time Warner will hurt consumers or competition. “In the broad sense, our concern was that the merger of these two powerful companies would deny to competitors access to this amazing new broadband technology,” said Robert Pitofsky, Chairman of the FTC. “This order is intended to ensure that this new medium, characterized by openness, diversity and freedom, will not be closed down as a result of this merger.” There are three major concerns that the FTC has with regards to the merger, Access by other broadband companies to the Time-Warner cable system, Interference of content of non-AOL/Time Warner companies on their system, and access to Digital Subscriber Line (DSL) services to the Time-Warner broadband cable market which would keep AOL interested in pursuing the development of the DSL technology.

These restriction will allow some companies time to develop strategies to compete with the new competition, but there are still concerns worldwide. For example, AOL Europe is the second-largest ISP in both Britain and Germany and is the third most popular provider in France. AOL has been slipping in its ratings in Europe but some Telecommunications analysts believe that the merger will give it an advantage over European based ISP’s. Europe leads America in the wireless technology and GSM. But with the broadband technology and TV based online services that AOL/Time Warner is developing they will be primed to take control of the European market with these technologies on fully implemented.

There are those that stand firm to the belief that Europeans do not want to go online for American content, so this might be a mute point. But with alliances like the one AOL has with Germany’s Bertelsmann, which partnered up for AOL Europe, they will have the advantage by having a local company provide the content they need. Bertelsmann is really on the edge of competition with Time Warner but Bertelsmann states that “It sees its partnership with AOL Time Warner unchanged following the merger, saying new media startups are its real concern.

Concerns are more founded here at home though, with the possible losers list growing here are some examples of who and why companies have much to fear of Mega-Mergers in general but in particular the AOL/Time Warner merger.

Excite@Home had exclusive rights to AT&T cable access until mid-2001, which gave them enough time to build up their broadband service and content to go it on their own. Now that AOL has the jump on them with the broadband access and massive amounts of great content of their own, now coupled with Time Warner’s content including cartoons, music, and video on demand. Excite can’t compete with the resources of the combined company.

Yahoo, who up till now has not been interested in a mega-media merger, and has not been bothered about any rumblings that AOL has tried to create. Yahoo’s earning has continued to be steady but they are going to be forced to at least talk about strategy in dealing with the new kid on the block. According to Abhishek Gami, an analyst with Nesbitt Burns Securities, Yahoo is probably the only remaining Net player that could go it alone because it’s brand is strong. However, Yahoo may be pushed into smaller deals to acquire proprietary content. Yahoo has typically outsourced content to keep costs down. Yahoo has the power to make the same kind of move as AOL, with CBS, NewsCorp or even GE but they are standing firm that they are not interested in any media companies. That will remain to be seen.

Lycos who up to now has trailed Yahoo is running out of options if it wants to get into the new wave of media purchases.

The AOL Time Warner deal forces the hands of those other networks. Fox, CBS, NBC and Disney have to make their Net creations work, and fast. Sure they’ve all taken baby steps, but the AOL Time Warner deal will make them sprint. “They all have made Web moves, but no one has knocked the cover off the ball,” said Gami.

Even though they are at odds with each other over cable subscribers and competing services, AT&T and Microsoft did a huge favor for AOL/Time Warner when they sold to Time Warner their stakes in the Road Runner Cable modem service that has exclusive marketing rights in the Time Warner Cable systems until the end of 2001. This enabled Time Warner, which controlled only 40% of Road Runner to end the exclusivity immediately. This was also stopping AOL from having any dealings with Road Runner. Of course AT&T did not do this out of the goodness of their heart, they needed to get rid of their stake in Road Runner in order to get government approval for their acquisition of Media One cable.

AT&T has been trying to get rid of their 25% stake in Road Runner for months but have been unable to come up with an agreement on the price. There are a lot of companies involved in the Road Runner deal that are trying to maneuver in or out of the deal. Microsoft and Compaq computer each invested $212.5 million a piece for a 10% stake in the company. So even though there are major rivalries here they seen to be willing to make some concessions to each other in order to be in a better position and also they don’t want to be seen as a spoiled sport, drawing attention from the FTC as someone who is blocking the open access to the cable systems that is all the rage.

There is no love loss between AOL and Microsoft which have been building alliances to compete with each other, AOL with Time Warner and Compaq Computer, and Microsoft with AT&T, and Gateway Computers. Microsoft has been trying to gain a foothold into the Content service that AOL has dominated for a decade, and analysts believe that Microsoft should stick to software development since that have not had the success they were hoping for, at least as it relates to competition for AOL.

One of the main fights between the two have been the Instant messaging debate, which was a major factor in the approval of the AOL/Time Warner merger. Microsoft’s first punch to AOL was a $5 billion investment into AT&T trying to gain control of the Internet. AT&T’s purchase of TCI cable was a move to control a significant portion of the cable industry.

The Time Warner merger was AOL’s first major counterattack to the Microsoft/AT&T alliance. While AOL also moved in and acquired Netscape Communications (a major competitor of Microsoft’s browser market). AOL is committed to remain in the content business.

Microsoft has beefed up its MSN site but remains committed to using the site to promote its software and services, which will prove to be a better business plan since it has historically lagged behind its competitors Yahoo and AOL in content and AOL in access. An interesting point to make is that AOL being content heavy has kept its Netscape Communicator (Browser) division on but has not done much in promoting development of that technology. With Microsoft being the only other major browser developer, AOL has effectively paved the way for Microsoft to dominate the browser market by taking Netscape browsers out of the picture. It’s well known that AOL has no intention to confront Microsoft in browser technology development; furthermore AOL uses Microsoft’s Internet explorer in it’s own software. It is strange to see them acquire and shelve the only competition that Microsoft had in that arena, rather then use it in their software.

Microsoft has a lot at stake here, do to the fact that they are still fighting the justice department against a possible breakup of the company. But if you think about it, Microsoft would benefit from this whole merger, since it is such a huge move, and there are so many people worried about it’s “possible” ability to dominate the broadband market among others that Microsoft might be aloud to remain an intact company, since they can’t approve the Mega-Merger fueling a media monster that will control access to millions of subscribers and then turn around and tell Microsoft that they have to break up because they might be doing the same thing.

It is amazing how the landscape can change in such a short period of time. At one time AT&T was the biggest suppliers of telephone service to the country, and with the intervention of the government they were broken up into smaller companies in order to promote competition, slowly AT&T built itself back up to a major player in the Long distance, Internet access, Wireless communications and broadband Cable services. Now in a very risky move to AT&T went on a buying spree of small cable companies in an attempt to dominate the broadband cable services, with that they incurred a huge debt, leaving themselves in a very weak position, with the possibility of having to sell off some of its parts in order to compete effectively with the new AOL/Time Warner combination. If that were to happen the smaller AT&T companies would not be able to keep the acquisition vultures away and would leave them very vulnerable to takeovers from rich and fast moving Internet companies that could use their assets. Which would leave us in a world where the AT&T name would be nothing but a memory.

I think that the main impact this will have on every industry is that is sets standards. This will pave the way for bigger mergers that will limit the choices that we have as consumers, also it will limit the growth of new companies in areas that in the early 90’s the large companies like AT&T, Time Warner and Disney only dreamed of getting a part of.

It is hard to compare the AOL/Time Warner merger with other big mergers of the past. Historically mergers have been done between companies of similar markets and haven’t directly affected the numbers of people that this will affect. As stated before this will reshape the information and entertainment industry. How information delivered, the speed at which they will be able to get there content to the public, and the amount of revenue they will be able to bring in as a result of this acquisition is unparalleled and will probably remain that way for years to come unless other large companies decide to follow the leader and create similar mega-corporations that will be able to compete. I am sure that AOL will continue to pursue the fight for open access but as they have stated themselves, they want to bring the debate into the market rather then let the government have a hand in coming up with a solution.

Which makes sense, there is no regulation in the open market, as there are within the government channels where personalities might swing the opposite way of supporting there plans for the future, as with Microsoft’s dealing with the Justice department. There is no way around it when a company gets as big as AOL/Time Warner with possible assets of $350 Billion dollars, they will have a big say in what goes on in our lives. A company with the kind of resources as this is very hard to change. As seen with the break up of AT&T and the long drawn out process with Microsoft. And they didn’t have the control of the media that AOL will. They will have all the money needed and all the access to the public to sway opinion they need if there was ever a question of unfair practices or business moves that might harm other businesses or consumers.

Hopefully conscience will prevail and the new mega corporation will remain true to its subscribers and to consumers at large when they plan there business strategy. We stand to inherit a lot of new technology that would have taken years to come, if left to smaller companies with smaller research and development budgets.

If I had a say, I would limit the size of companies that are involved with access to the public, and control over media resources to the country. When you think about the structure of our society, it is based on public opinion and the democratic process. When there is one entity that can control the flow of information to that then there stands the possibility of loosing the effectiveness of that process.

Bibliography

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