AOL Time Warner: A Closer Look at the Largest Media Merger in History America Online has been confounding its critics since its initial launch in 1989. Silicon Valley programmers laughed at its cheerful user-friendliness, some even nicknaming it, “America on training wheels” (Borrus). When free Internet service providers entered the market, many industry analysts predicted it would be the end of AOL, which charges a monthly subscription fee of $21.95, but they were wrong. AOL survived the dot-com meltdown and has more subscribers then ever, while many of its competitors were forced to close their doors or began charging subscription fees of their own. The company is one of the hottest companies to emerge from the Internet, and with its acquisition of Time Warner, Inc., AOL has become one of the world’s most powerful media companies. When the all-stock transaction was announced January 10, 2000 it was the biggest merger in corporate history, a marriage of old-and new media-titans. A lot has changed since the two companies announced the deal. From the wealth perspective, the merger was worth $183 billion on the day of the announcement. Over the past year, the combined companies have dropped in value to $112 billion, as stock prices of both companies declined (Guardian Newspapers). Wall Street analysts blame the evaporation of investor confidence in the Internet revolution and the rapid deceleration of the U.S. economic growth for taking some of the “gloss” off the deal. Still, the merger “represents a seminal event in corporate marriages” bringing together the world’s dominant Internet service provider with about 29 million subscribers worldwide, and the 1 venerable Time Warner brands, including Time magazine, CNN, HBO, Warner Brothers films and the nation’s second-largest cable provider (Guardian Newspapers ). After more than a year of battling with bureaucrats, competitors, and Internet advocates on both sides of the Atlantic, AOL Time Warner cleared its last regulatory January 11, 2001, when the FCC officially approved the merger. That may have been the easy part – now they’ve got to make it work. The media giant faces the daunting task of making good on its promise to dramatically transform the advertising and media landscapes – in the words of AOL Time Warner’s chairman, Steve Case, “lead the convergence of the media, entertainment, communications and Internet industries” (CNNfn Staff Reporters). Although most agree the mega-merger has tremendous potential, many obstacles remain. When AOL agreed to take over Time Warner the dot-com world had not yet melted down, advertisers had not started withdrawing from AOL’s Web sites, Turner Broadcasting’s cable networks, and Time Inc.’s magazines, and spending on developing businesses was still considered a good thing. “A year ago all you saw were the opportunities,” said an executive at one Time Warner division. “Now you see all kinds of downsides” (McConnell and Higgins). AOL Time Warner is under tremendous pressure to show positive results almost immediately. With a softening economy, aggressive goals for revenue and profit growth, impending layoffs, and the watchful eyes of the media and business communities, AOL Time Warner certainly has a tough task. But perhaps the biggest challenge for the new company will be its ability to convince two companies with very different corporate cultures to work together as a cohesive team. I will explore the merger in depth by 2 examining the reasons behind the union, as well as some of the challenges the new company faces – particularly in the area of successfully integrating two separate corporate cultures. I will use one of the mega media mergers of the 1980’s, Sony’s acquisition of Columbia Pictures, to illustrate just how difficult this type of integration can be. Finally, I will discuss the results of the merger so far, and the potential implications it has on the way business is conducted in the future. Countless articles have been written about the merger – most discussing the deal’s strategic benefits. These benefits are real – the merger took place because each company had something the other wanted. Time Warner realized that the future of an infotainment company was in digital technology, but its attempts establish a dominant presence on the Internet were unsuccessful. AOL provided Time Warner with a Net presence to serve up movies, music and information, as well as a connection with the world’s premier Internet brand. For AOL, the opportunity to use Time Warner’s cable-TV wires to carry high- speed “broadband” access to millions of subscribers was one they did not want to pass up. “Time Warner’s unique combination of content, great brands and cable assets are a perfect fit with AOL,” according to Mike Kelly, AOL Time Warner’s CFO (Sloan). Together, the new company has unprecedented control over the flow of information and entertainment. AOL Time Warner delivers magazines to more than 200 million readers a week, and will be able to target subscribers on the Internet with AOL’s MovieFone, news from CNN, and music clips from Warner’s Music Group. But critics say there is a real danger in one company trying to be all forms of content and delivery. “That’s a shaky premise on economic grounds,” says Eli Noam, professor of finance and 3 economics at Columbia Univeristy. “The old Time Warner was hard enough to manage. Now you add AOL to the mix and I’m not sure that’s the way to go” (Walsh). To prevent a management nightmare, “don’t seek a concensus,” says Linda McCutcheon, former president of Time Inc.’s New Media. “It will be genetically impossible” (Walsh). That warning addresses what some predict could be the undoing of the merger – getting all of the companies divisions to work together. AOL Time Warner officials groan each time the phrase “culture clash” comes up saying it’s an invention of the media, but to many, the chemistry seems lethal. On one side are the hard-driving, khaki-wearing “masters of the networking universe” who emerged in the 1990’s as the “kings of the Internet domain” (Walsh). On the other side are the more conservative media masters who’ve been around for almost 80 years, and deep down, may feel like they’re behind the times. “This merger has created a really big company,” says Bill Saporito, Time magazine’s business editor, “and the history of big mergers in other industries is that they really don’t work well. So the success of this one is far from guaranteed” (Karon). Sony knows just how complicated integrating two very different companies. Although the electronics giant established itself in the 1990’s as one of the world’s most powerful media and entertainment companies, it has been a difficult and expensive process. Sony waltzed into Hollywood in the 1980’s with dreams of synergy and a fistful of dollars. It acquired a motion picture company, and hired two legendary “hucksters” to run its studios. What followed was a slow-motion, $3.2 billion dollar catastrophe. 4 The decision to become a major media player was made by Akio Morita, the founding chairman of Sony. Morita was a historic figure in Japan’s postwar economic recovery, and was responsible for introducing the transistor radio, Trinitron color television, the Walkman, and the Watchman to the world. However, by the mid 1980’s, the company whose motto had been “something new, something different,” was growing bloated and bureaucratic (Klein, Hollywood). Along with the rest of the Japanese electronics industry, Sony hadn’t come up with a big new hit in years. Japan’s consumer-electronics industry had begun to saturate the world markets by the mid 1980’s. As a result of slowing growth rates, Sony executives were concerned future revenues would not be sufficient to pay for the mounting costs of research and development and capital investments. What’s more, the electronics giant had suffered a costly and humiliating defeat a few years earlier when its Betamax videocassette recorder was trounced by the VHS format promoted by its arch-rival, Matsushita. Akio Morita viewed the defeat of the Betamax videotape technology as a humiliating setback, and was looking for ways to jump-start his company. The Sony chairman believed the next electronics war would be fought on a vast global scale over direct satellite broadcasting and high definition television. Expanding TV markets in Asia and Europe desperately needed software, and Morita wanted to make sure his company had the software that would make consumers buy Sony’s hardware. He believed that Sony stood on “the threshold of a new wave of consumer electronics products driven by digital video technology – direct satellite broadcasting, digital videotapes, digital videodiscs” (Klein, Tycoon). Morita was convinced the best way to 5 achieve an exponential hardware-software synergy was through the ownership of entertainment companies. Sony purchased CBS records in 1988, then set its sight on a motion picture company. Other cash-rich Japanese companies had put up money to make some movies in the past, but Morita wanted Sony to be the first Japanese company to own a Hollywood studio lock, stock, and barrel. Not all of Sony’s top executives were convinced purchasing a studio would be beneficial for the company. To some, Morita’s argument for a “software-hardware synergy” sounded less than totally convincing, especially after Sony’s chairman decided to purchase the Columbia Picture group for $3.4 billion for the studio, which some people in Hollywood estimated was $1 billion more than Columbia was worth. A struggling studio like Columbia, which had less than a 10 percent share of the domestic market in the 1980’s, hardly had the power to drive the sale of Sony’s hardware.