Exploring The Digital Age: Aol And Time Warner Merger Essay, Research Paper

On January 10, 2000, the largest merger in history was conducted between Time Warner and American Online. On a surface level, this merger could be seen in light of its combined resources, or even its large market value. However, the merger between these two companies has repercussions in the life of every person who uses the Internet. Undoubtedly, the Internet has emerged as a leading technology poised to change the way the world will revolve. The Internet has ushered in the Digital Age where information is king and mass customization is possible. Even the current economy, investors have recognized this and are heavily investing in companies that are a part of this Information Technology Industry.

The logic of any merger is that with its combined resources, the new company would be able to exploit opportunities that by itself it would not be able to. Many companies in history have missed these opportunities and have paid dearly for it. IBM, for instance, lost its position as a market leader when it failed to understand the potential of the personal computer. Xerox did not recognize the potential of a graphical user interface. Both these companies are examples of successful firms that missed the imminent arrival of a technology, and the prospect of taking advantage of the opportunities created by it. However, AOL made significant steps to acquire Time Warner, and through its strategic moves, it has shown clearly that it understands the significance of the emerging Internet technology. The merger of AOL Time Warner is still currently in the process of being fulfilled. Through the analysis done of the merger, and of the individual organization and their past mergers, it is likely that the AOL Time Warner merger will, in time, prove to be a successful move by both companies.

America Online?Context, Structure, Performance

In order to predict the outcome of the merger, it is important to look at each organization separately. America Online incorporated under its original founding name, Quantum Computer Services, in May of 1985. After its first online service, “Q-Link” was launched on Commodore business machines, AOL went on to launch America Online for DOS, Macintosh, Apple II, and Windows. Over the next decade, it went on to acquire many Internet-related companies, from developers of Internet applications to Internet publishers. AOL also launched its services in Australia, Japan, the UK, and many other countries across the world. By March of 2000, America Online?s membership surpassed 22 million.

America Online?s most recent business strategy, “AOL Anywhere,” is to make AOL’s industry-leading brands, services, and features available to consumers across a range of products and devices. Through its services, millions of consumers will be able to access popular AOL features whenever and wherever they need them: from the Web, the television, Internet-ready phones, handheld computers, and others personal wireless devices.

However, America Online?s position in the industry is felt mainly through its presence on the Internet. This medium for AOL is growing exponentially. As of 1999, there were over 150 million subscribers. Thousands of businesses have moved online, and the information technology industry alone represents more than one-third of the real economic growth in the US over the last five years.

In terms of size, AOL is the world’s leading interactive service. It has over 22 million members worldwide, 1.2 million peak simultaneous users, 110 million e-mails daily, 200 million stock quotes daily, 5.2 billion Web URLs served daily, and 63 minutes online per member daily. (www.corp.aol.com) It has become the world’s first $4.7 billion multi-brand new media company.

Despite being part of the rapidly changing Internet movement, America Online is not a typical Internet based organization. Because of their sheer size, 12,100 employees, AOL is a highly bureaucratic firm. Their workers have traditional titles like manager, senior manager, and senior vice president. These workers help make up an organization with distinct boundaries between business entities.

The two major lines of business within the company divide into four product groups. The first line of business, the Interactive Online Services business, is comprised of the Interactive Services Group, the Interactive Properties Group and the AOL International Company. The other line of business, Enterprise Solutions, is comprised of the Netscape Enterprise group. Functioning as separate entities, these product groups together form the largest Internet service provider in the world.

Though having a largely bureaucratic system and entities acting separate from each other, AOL can also be seen as very entrepreneurial. To keep up with the fast paced industry, America Online feels they need resources in order to grow and be successful. Thus far, AOL has effectively been fulfilling their needs by diversifying and acquiring companies such as Netscape and CompuServe.

In terms of performance, AOL is having record earnings. For example, they earned $271 million this quarter, up from $104 million the previous year. Operating income for the quarter jumped more than 155% since last year?s quarter to $383 million. Revenue rose to $1.8 billion, and advertising commerce and other revenues climbed about 103% over this quarter. In 1999, AOL added 1.7 million members worldwide while CompuServe and Gateway.net increased their customer base as well. In total, AOL and its subsidiaries added 2 million members, ending with 25.8 members. (America Online?s Annual Report 1999).

“This quarter’s results underscore the tremendous strength of America Online’s operations, and demonstrate that we are on a clear path to continued strong growth and increased profitability. Since we announced our landmark merger with Time Warner, we haven’t missed a beat.”

- Steve Case, Chairman and CEO (www.corp.aol.com)

Through its new “AOL Anywhere” campaign, AOL is moving to utilize the technology of Netscape to bring the power of the Internet into the hands of their consumers anywhere they go. In providing this service, AOL is positioning itself in the industry with key allies. For example, with key alliances with companies like Motorola, AOL is looking to provide its services wirelessly. In hoping to establish dominance in the market, AOL is looking to become stronger in the fields of wireless and broadband content and to offer its services through other mediums besides the computer.

America Online?Past Mergers

In many ways, America Online has built their success through its corporate acquisitions. As with many mergers, the larger organization?s culture (in this case AOL) dominated the newly acquired company?s culture. In several cases, America Online bought another company to gain a brand name or product image, rather than to hire the talented individuals working for it. As for the acquisition of Netscape, this was exactly the case. This quickly became apparent to former Netscape employees when AOL failed to convert its 11 million subscribers to the Netscape browser software. In November 1998, AOL and Sun Microsystems purchased Netscape in a three-way deal. Sun took over the business software division, while AOL took over the browser software and the Netcenter website. (Zaret)

Before AOL, Netscape?s employees had a strong sense of loyalty to the company and to the product that they had created. One ex-employee said “[At Netscape], you really believed in the vision that [was] laid out and you had a great feeling about your company.” (Zaret) Apparently, that feeling was not the same at AOL. They failed to recognize this aspect, or chose to ignore it. The Netscape browser development program has since been pushed under piles of bureaucratic correspondence and slowed tremendously. It was apparent to many former Netscape workers that AOL purchased the company for its brand name, and even more importantly, for its Netcenter portal. Since the acquisition, many of these employees cashed-out their options and left to start new companies in search of the spirit that they felt when working for Netscape.

America Online acquired CompuServe in early 1998 and now offers two different online services under the two brand names. At the time of the acquisition, AOL was known as the “dumbed-down” or consumer friendly Internet service provider. CompuServe, on the other hand, was considered the technology oriented Internet service provider with consumers who were very technology and Internet savvy. Much criticism came from both sides when AOL and CompuServe announced their acquisition decision. AOL fans feared that their user-friendly interface would be corrupted and CompuServe users feared that AOL would attempt to simplify their service and take away the freedom. However, management realized the concerns and did not hamper the services offered to either provider. Instead, they kept the two separate providers separate.

In comparison, AOL is more bureaucratic, while CompuServe?s corporate culture is far more relaxed. AOL did not remove major players in CompuServe?s operational structure because they realized the value of running a business that catered to the more advanced Internet users, even if this was merely a ploy to improve AOL?s image. After the merger, the operational divisions of Web Development and System Support were kept separate, while most corporate support functions were taken over by AOL.

Time Warner?Context, Structure, Performance

Time Warner, Inc. began in 1990 with a merger between Time, Inc. and Warner Communications, Inc. It is now the world’s leading media company and operates in the cable television, publishing, film, and music industries. The company has established a history of developing and utilizing the newest innovations. Time Warner strives to deliver sustainable growth and offer superior returns to its stakeholders. To achieve this, it offers world-class brands such as Time and People Magazines, CNN, HBO, and Warner Brothers, and utilizes demographics, globalization, and technology in order to segment its markets. Presently, Time Warner has found opportunities in digital communications and the Internet that will help the company reach its digital audiences and to contend with its top competitors, Viacom and Disney. It is also looking to expand into the local phone business by partnering with AT&T to offer local phone service over cable networks.

With employees numbering almost 70,000, this organization is managed as a rational system. The company operates much like its competitors, existing with a hybrid organizational structure consisting of an executive board followed by essential operations and a divisional structure descending from this top level of the organizational chart. The five original divisions (Cable Networks, Publishing, Filmed Entertainment, Music, and Cable Systems) exist independently from one another in most situations. Recently (Summer 1999), a new division called Time Warner Digital Media was created to cross some boundaries between these divisions by exploring the possibilities of cross-platform products and new Internet opportunities for the company. Time Warner is a structured organization but lacks a strong cultural element. In the past, they have attempted to evoke a feeling of personal ownership in the organization by offering stock options as incentives for its employees. However, the sheer size of the company makes it difficult for the company to shed its bureaucratic culture. Currently, the management of Time Warner is undertaking methods to identify and implement the values that they wish to stress most within the company.

This company has been a successful holding company and has increased earnings each quarter for several years. Time Warner has been on the cutting edge of technological breakthroughs. For instance, they were quick to adapt to the introduction of DVDs. The introduction of their high-speed Internet access, called Road Runner, launched a service that currently has 70+ million cable subscribers.(www.timewarne.com/corp) The company is the most advanced business as far as digital cable goes; rolling out its first phase in early 1999. Time Warner commands a very high CPM(cost per minute per thousand homes) from its advertisers buying spots on its cable networks. With this high CPM and other performance measures, Time Warner is considered the market leader in the Media Conglomerates industry.

Time Warner?Past Mergers

The original merger between Time Inc. and Warner Communications Inc. was anything but ideal. In an article written about the merger, it was described as “years of personality clashes, turf battles, financial burdens, and business missteps that have hampered the combined companies? ability to make its sum worth more than the parts.” (Hofmeister, D1) For one, Time Warner Inc. had a hard time leveraging its assets, which led to the question of whether or not the assets had become unmanageable. With a structure that is complicated and confusing, investors often stayed away from buying shares because they had neither the time nor the expertise to understand the company.

Even before these issues were resolved, Time Warner decided to acquire Turner Broadcasting System, Inc. In many ways, this acquisition was strikingly similar to the first. It combined a bureaucratic company with a company of entrepreneurial concern. In addition, the merger with Turner led to an “intersection of interests”. Not only were personalities conflicting, but there was also a duplication of operations. This resulted in job reductions at both Turner Broadcasting and Time Warner in an effort to eliminate any overlapping operations that took place with the merger. In order to alleviate the chaos that had just grown even larger, Levin believed the best way to organize was to “impose a tougher but simpler structure” in which he believed would “be very streamlined and focused”. (Hofmeister, D1)

Although Time Warner?s top management had good intentions in addressing these problems, they failed to take control and get involved in divisional problems. Critics and supporters have often said that CEO Jerry Levin would let divisions fight it out among themselves instead of taking control and smoothing out the differences.(Okren, 42) In addition, the upper management of the company has always been considered extremely passive.

The Merger of AOL and Time Warner

Having covered the individual histories and background of AOL and Time Warner, the historic merger of these two companies on January 10, 2000 posed a question to the world. Will the largest merger in history prove to lead the world into the digital age? Or will the difference and tendencies of the past hamper the merger to be largely ineffective? No one can deny the fact AOL Time Warner has amazing potential to influence the future of the Internet. Even as this research is being done, the details of the merger is unfolding. Therefore, only a speculative analysis could be done to predict how the merger will unveil. Based on the research that was done through this paper, the merger was analyzed through a couple different observations. Mergers in history have always come together because there were always some advantages that could be gained through the combined resources of the two or more firms. However, there were also always some disadvantages or drawbacks to the mergers. Undoubtedly, the merger of AOL and Time Warner would have certain advantages and disadvantages.

Advantages of the Merger

One of the advantages of having these two companies merge is the great potential for the combined asset of these companies. The combined company will have close to $40 billion in revenue and $300 billion in market value. This makes them the fourth most valuable company behind Microsoft, GE, and Cisco Systems.(Holstein, 36) As shown in this research paper, AOL?s profits have been soaring before the merger, while Time Warner has always experienced steady profits. During the past four quarters, AOL earned $715 million on $5.25 billion in sales, while Time Warner earned nine times as much, $6.4 billion, on $23.5 billion in sales.(Holstein, 38) With the merger of two successful companies, the resources generated from before the merger will only serve to give the combines company, AOL Time Warner, the ability to execute its strategic plans.

The merger between these two companies will give the company increased advantages in their current markets. AOL Time Warner will have access to numerous media types such as print and cable in addition to its Internet service. As a result, there are many opportunities for not only cross selling, but cross-promotion, cross marketing, and product tie-ins. Since the new company will offer several different products and services throughout a wide range of markets, it will be able to take advantage of advertising across each niche. For instance, the new movie U-571, which is being heavily promoted on many television networks, is a Time Warner film. At the end of the preview, the ad exclaims, “go to AOL Keyword U-571″ for more information on this movie. This provides a prime example of how AOL and Time Warner will be able to work in unison to help promote its products and services.

As well, the merger will provide AOL Time Warner to attain greater market share in its perspective industries. The merger signifies its beliefs that a new market or industry will form due to impending technology, primarily broadband technology. Broadband technology is the technology that is developing to provide the higher speeds for the Internet. This technology will enable the Internet to be at least 100 times faster than today.(Holstein, 38) Since AOL and Time Warner are dominant in their perspective industries, namely the Web-portal market and the media and entertainment market, the merger could provide two distinct ways for greater market share. One path to greater market share lies in the merging of two enormous subscription based companies. Both have large shares of the industry?s consumer base and thus, through promotional and marketing efforts, they will have the opportunity to influence their subscribers to extend their relationship to other services provided by the merger. Secondly, while the broadband technology is developing, AOL Time Warner is in a strategic position, that when the technology affords the beginning of a new industry, specifically, an interactive Internet industry, they can exploit this industry to gain a large market share. Thus, the merger provides the two companies to not only exploit current opportunities, but imminent opportunities afforded by the development of the Internet. As quoted by Time Bajarin, head of Creative Strategies,

“What Steve Case has in mind is integrating the whole issue of video, animation, 3-D and stereo sound as well s text and graphics into more interactive immersive experience. He now has the best foundation of anybody to deliver massive next-generation Internet content.” (Holstein, 39)

It is quite obvious that the Internet is ready to influence the world in such a way that in time, a world without the Internet would be thought unimaginable. With the merger of AOL and Time Warner, the advantages of merging a content company(Time Warner) and a carrier company such as AOL will have immense possibilities to exploit the impending environment.

Drawbacks of the Merger

There are, however, a couple drawbacks to the merger. Possible conflicts could arise between the two companies? goals. AOL is a rapidly expanding company, while Time Warner strives to deliver sustainable growth and offer superior returns to its stakeholders. One of Time Warner?s major goals is to use demographics, globalization, and technology in order to segment its markets. It is possible that AOL is just another “piece of technology” that Time Warner wishes to use. Time Warner has traditionally been a structured organization and has only recently started to stress a culture in which teamwork and innovation are encouraged. AOL, on the other hand, stresses innovation and entrepreneurial ideas to keep up with the fast paced industry and may feel impeded by Time Warner’s limited vision. The merger will force compromise between the two companies and each will possibly have to sacrifice a former goal for the greater good.

As with most mergers of this size, the new divisional structure will be highly problematic. Although both AOL and Time Warner currently utilize a divisional structure successfully, the new company will face difficulties in implementing an effective structure. Both companies currently utilize their divisions as separate autonomous companies, free to make their own decisions. For example, currently Time Warner?s divisions are headed by separate presidential positions. Many of the benefits suggested by the merger hinge of the effectiveness of former AOL divisions using their technologies with former Time Warner divisions, or vice versa. For example, in order for AOL to successfully market any of Time Warner?s media productions online, the associated Time Warner division must give up some autonomy. Inter-departmental communication will be essential for any of these projects.

Conclusions about possible troubles in this merger can be drawn from past mergers. The original merger between Time, Inc. and Warner Communications, Inc. provided problems that turned out to plague the company for years. The company had more assets than it could manage, the leadership was lacking, and the cultures did not coordinate. As if these problems were not enough, Time Warner then acquired Turner Broadcasting Services to add to the chaos. This history of problematic mergers may prove detrimental to the success of AOL Time Warner. If Time Warner did not learn anything from its past mergers, history might repeat itself. It is important that the new company recognizes these challenges and avoids a situation where there are too many divisions under relaxed leadership.

One more drawback that needs to be mentioned is the disadvantages that could be created for the users of the Internet. With the vast influence that AOL Time Warner has in controlling the future of Internet content, some have expressed worry that the control of content may go against the very core idea of the Internet. The freedom that users have to explore the vast assortment of ideas and beliefs presented on the Internet, might be hindered by the seemingly “corporatization” of the Internet. To counter these claims, however, is to understand that by moving to offer specific content, users of the Internet will be able to access a more customized and more efficient web process that in turn will move to mainstream web activity. (Holstein, 36)

Genral Conclusions and Predictions

This union came about through a desire on AOL?s side to build their assets and content, and from Time Warner recognizing the need for an established “new economy” component. The key to the success of this merger lies in the hands of management from both ends. AOL has always been considered aggressively managed, while Time Warner is much more passive at the upper levels of management. This relationship works well because AOL is the marketing and coordinating organization while Time Warner is a successful holding company with varied businesses.

As stated earlier, Time Warner has acquired companies at too rapid of a pace and in some cases, at the expense of the organization?s effectiveness. AOL on the other hand has successfully acquired small to medium sized companies at lightning speed using them for their image, technical expertise, or marketing advantage. The companies need to develop a consolidated business plan before the merger is finalized. Managers in the operational divisions of the two companies should continue running their businesses as they have in the past, because all divisions of the two companies have been highly successful individually. What the combined company lacks is a cross-functional element, and this can be seen clearly from Time Warner?s history of acquisitions. AOL is very good at integrating across different product lines and services and the cross-selling advantage mentioned earlier will reach across Time Warner?s businesses as well. Perhaps a new division headed by AOL?s upper management, created specifically to span the various businesses and exploit the opportunities that lie in the economies of scale, needs to emerge. As with all mergers this large, there are sure to be organizational conflicts due to redundancies in functions, however, this is expected and has been handled well by AOL in the past.

AOL management is essentially a large marketing firm integrating across various products and services and must take a control position within the newly formed company if the organization is to be successful. The new company will be called AOL Time Warner Inc. and AOL will clearly be providing the direction of the organization while Time Warner will play a somewhat passive role in the management and conduct business within the divisions as usual. AOL?s highly skilled marketing will allow the new company to exploit the advantages within the numerous media types the organization will hold. With proven business plans individually, the emerging company under AOL?s management with a history of well thought-out mergers, a strong cultural element, and an aggressive management team will have great opportunities.

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